Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, February 13, 2014

Suit against BP over 2006 Alaska oil spill revived

By Matthew Garza, J.D.

A panel of the Ninth Circuit U.S. Court of Appeals reinstated some claims against BP p.l.c. stemming from statements made by the company after an oil spill in Alaska’s Prudhoe Bay oil field in 2006. BP made statements indicating that the spill was an anomaly, but discovered a second leak five months later in the same area. That spill and the resultant shutdown of operations in the region caused a 4 percent drop in BP’s share price (Reese v. Malone, February 13, 2014, Dearie, R.).

The District Court for the Western District of Washington found that although some of BP’s statements were false or misleading, the plaintiffs did not plead facts sufficient to show that the statements gave rise to a strong inference of scienter. The district court concluded that the allegations showed a company that “poorly understood the challenges it faces in Prudhoe Bay,” but not a company that engaged in securities fraud. The Ninth Circuit panel disagreed, finding after applying a “holistic analysis” that the plaintiff’s scienter allegations combined to create a strong inference that BP was deliberately reckless when it made the public statements. “After six years of preliminary litigation, the allegations should now be tested on the merits,” said the court.

Oil leak. The leak was discovered in a pipeline on March 2, 2006, after it had gone undetected for five days. The spill, caused by a quarter-inch wide hole in the pipeline resulting from internal corrosion, dumped approximately 200,000 gallons of oil onto the Alaska tundra. A different pipe leaked about 1,000 gallons on the opposite side of the bay about five months later. After discovering the second spill, BP shut down operations in the Prudhoe Bay oil field, which produces 8 percent of total U.S. oil production.

Misleading statements. The class, consisting of purchasers of BP common stock and ADRs between June 30, 2005, and August 4, 2006, focused on five statements or types of statements made by the company: (1) a statement by a vice president (VP) that recent data showed corrosion in the pipeline was occurring at a low and manageable rate; (2) two statements by the same VP that the first spill was an anomaly, and conditions in the pipeline differed from other Prudhoe Bay pipelines; (3) a statement by BP’s CEO that the first spill occurred despite the “world class corrosion monitoring and leak detection systems” used by the company; (4) a statement in BP’s 2005 annual report that management believed BP was in compliance with all applicable environmental laws and regulations; and (5) statements in the 2004 and 2005 annual reports about environmental best practices followed by the company.

With regard to the first statement, the court found that falsity was adequately established by internal company documentation on the pipeline that showed the corrosion rate to be high. In considering whether scienter was sufficiently pleaded, the court weighed the plausible competing inferences of fraudulent and non-fraudulent intent and found that the VP’s statement indicated fraudulent intent. The VP was highly qualified and made the statement “in the wake of a crisis that has the potential to repeat itself,” the court said. She had access to BP’s corrosion monitoring information on the pipeline, referenced the data directly, and had “every reason” to consult the information so she could assess the possibility of future leaks. Evidence of high levels of corrosion would be central to this inquiry. As head of the unit responsible for the spill, she also had a motive to misrepresent the levels of corrosion. The court said the two statements made by the VP claiming the first pipeline was an anomaly were also plainly false and misleading. After considering the “totality of the circumstances,” the court disagreed with the district court and found scienter to be sufficiently pleaded.

Scienter allegations regarding the CEO’s statement that BP employed “world class” leak detection and corrosion monitoring fell short because the shareholders did not allege facts showing that the CEO knew about the problems when he made the statement. But, the court found that statements contained in the company’s 2005 annual report were actionable. Falsity was established because the court found it “most unlikely that top management was unaware of facts undermining its belief in compliance,” and considering the fact that BP had been aware of corrosive conditions in the pipelines for over a decade, and intentionally adopted corrosion monitoring practices that deviated from industry standards to cut costs, the inference that BP was at least deliberately reckless in making the statements was at least as compelling as any opposing inference.

Deepwater Horizon. A separate oil spill caused by an explosion on BP’s Deepwater Horizon oil rig on April 20, 2010, killed 11 crewmembers and created an oil leak into the Gulf of Mexico that resulted in a $525-million settlement with the SEC, one of the largest fines the SEC has ever assessed. In that matter, BP was accused of understating the rate of oil flow into the Gulf in SEC filings and public statements (SEC v. BP plc, November 15, 2012).

This is case No. 12-35260.

Attorneys: Javier Bleichmar (Labaton Sucharow LLP) for City of Edinburgh Council as Administering Authority of the Lothian Pension Fund, Bankinter Gertion de Activos SGIIC, Frankfurt Trust Investment - Gesellschaft MBH, Frankfurter-Service Kapitalanlage-Gesellschaft MBH, Pipefitters Local Union #537 Trust Funds. Patrick Barrett Berarducci (Sullivan & Cromwell LLP) for John Browne, BP p.l.c., and BP Exploration, Inc.

Companies: Lothian Pension Fund; Bankinter Gertion de Activos SGIIC; Frankfurt Trust Investment-Gesellschaft MBH; Frankfurter-Service Kapitalanlage-Gesellschaft MBH; Pipefitters Local Union #537 Trust Funds; BP plc; BP Exploration, Inc.

MainStory: TopStory FraudManipulation AlaskaNews WashingtonNews CaliforniaNews HawaiiNews NevadaNews OregonNews MontanaNews IdahoNews ArizonaNews

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.