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From Securities Regulation Daily, June 3, 2016

Opinion triggers $175M settlement over BP’s Gulf oil spill

By Matthew Garza, J.D.

Oil giant BP has agreed to settle an investor lawsuit for $175 million after an opinion issued by the federal district court in Houston found that four of six corrective disclosures about the Deepwater Horizon oil spill could not be reasonably connected to price declines in the company’s American Depositary Shares. The opinion did find that a number of statements made by the company about the rate of oil flowing into the Gulf of Mexico after the April 20, 2010 explosion were actionable, but the case will not proceed to trial. A short statement issued by the company announced the settlement with the class and noted that it would be payable during 2016-2017, but remains subject to court approval. The payment will not settle other securities-related litigation (In re BP p.l.c. Securities Litigation, June 2, 2016, Ellison, K.).

Alleged misstatements. In the days after the explosion, which killed 11 crew members, an organization called the Unified Area Command (UAC) was formed to manage the spill response. The UAC consisted of federal, state, and private sector representatives, including BP. Investors alleged that the BP representatives made several misrepresentations in press appearances on April 24 through May 5 about the company’s internal flow rate estimates. An executive represented that BP’s flow rate estimate was 1,000 barrels per day (bpd), when in fact many of the company’s internal estimates showed that the flow rate could be as high as 100,000 bpd. Investors unsuccessfully moved for summary judgment on the issues of falsity and scienter with regard to these statements, but did present enough evidence to overcome BP’s motion to dismiss.

Opinion or fact? The court said the parties’ first two rounds of summary judgment briefings included lengthy debates about the appropriate standard to apply to the alleged misrepresentations about flow rate, which turned on whether the statements were expressions of opinion or fact. The company argued that they were opinions, to which liability can attach only if the speaker did not in fact hold the opinion. The investors claimed the flow rate was objectively determinable and the representations must be considered statements of fact.

The court said the question was not an easy one, using an example of a statement comparing football teams—“the 2008 Texas Longhorn football team was better than the 2008 Oklahoma Sooner football team.” The statement could be examined as fact based on the Longhorns win over the Sooners in the Cotton Bowl that year, “but few would dispute that the statement is a paradigmatic example of an opinion, however well founded,” said the court. The statements made by BP about the flow rate were estimates and projections, found the court; “classic examples of opinions.”

Omnicare. The court addressed the standard for evaluating the falsity of BP’s stated opinions under the Supreme Court case Omnicare v. Laborers District Council Construction Industry Pension Fund, which analyzed opinion statements under Securities Act Section 11, but has overwhelmingly been applied by courts in analyzing alleged omissions under Exchange Act Section 10(b), which was the basis of the investors’ complaint. “The Court sees no reason to depart from the emerging majority position of these district courts,” wrote Judge Ellison.

Omnicare established that liability for opinions can lie where the speaker omits material facts about the issuer’s inquiry into or knowledge concerning the opinion. The court emphasized that consideration of the context of opinion statements is critical. The statement about a 1,000 bpd flow rate included no hedges, nor did it specify that an unreliable method that focused on surface oil estimates was being used to calculate the low flow rate. Investors presented evidence that the executive knew the number was one of a wide range of potential flow rates, yet provided the specific number “with some degree of certainty.”

The court found the investors’ evidence sufficient to overcome a motion to dismiss, but not sufficient to merit judgment to the investors as a matter of law. The court emphasized that its holding was limited to the “factual contours” of the case and was not a blanket holding that Omnicare requires speakers to disclose the certainty of a given estimate or the methodology that produced it.

Meaningful inquiry. The court next turned to Omnicare’s requirement that facts underlying opinions be based on a meaningful inquiry. The court agreed that the 1,000 bpd statement could reasonably be found to be at least severely reckless because the speaker failed to apprise himself of a type of flow rate estimation being used by the company called “hydraulic modeling,” which predicted a much higher spill rate. The company argued that these were based on incomplete inputs and had little use in estimating the actual flow rate, but the court said that that did not render the model irrelevant. The court said it could not comprehend how the company could castigate the hydraulic modeling method while defending the use of the less reliable surface estimate methodology upon which the statements exclusively relied.

Loss causation. While the falsity of BPs statements and the issue of scienter produced mostly triable issues, the court found that investors had losing arguments that four out of six corrective disclosures issued by the company in fact caused a stock drop. News on April 29 that the company increased its flow estimate from 1,000 bpd to 5,000 bpd could be reasonably found by a jury to have caused a stock price decline, as could news on May 3 that the size of the oil slick had tripled, but BP fared better on connections between declines and news about the failure of a “coffer dam” or “containment dome” on May 10 or failure of a “top kill” method on June 1. The company was granted summary judgment with respect to stock declines on these days, as well as June 9, when news broke regarding a letter sent by members of Congress advising that the company should suspend its dividend, and June 14, when news emerged that the BP board was meeting to discuss dividend payments.

This case is MDL No. 4:10-MD-2185.

Attorneys: Jordanna G. Thigpen (Cotchett, Pitre & McCarthy, LLP) for Robert Ludlow. Scott W. Fowkes (Kirkland & Ellis LLP) and Thomas W. Taylor (Andrews Kurth LLP) for BP PLC and BP America Inc.

Companies: BP PLC; BP America Inc.

MainStory: TopStory FraudManipulation PublicCompanyReportingDisclosure TexasNews

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