BP Misled Investors Before Gulf Spill, Lawyers Say

BP Plc investors accused the company of lying about its commitment to safety and inflating company shares for three years before the explosion of the Deepwater Horizon set off the largest offshore oil spill in U.S. history.

BP management claimed the company learned its lesson after an accident at a Texas refinery in 2005 killed 15 workers and injured hundreds, the lawyers said in a lawsuit brought by institutional investors, including Ohio’s pension plan. Investors discovered after the rig explosion that the company didn’t live up to promises to increase its focus on safety and maintenance, the lawyers said yesterday in an amended complaint.

“The truth about BP and its lack of commitment to and implementation of safety processes to avoid preventable incidents began to emerge,” said attorneys for the Ohio and New York state pension funds. “Investors were deceived as to BP’s true risk profile in deep sea drilling.”

The investor securities-fraud suit is among hundreds of claims filed in U.S. courts after the explosion and sinking of the Deepwater Horizon drilling rig last April. Injury, economic loss and environmental suits are combined before a federal judge in New Orleans. The investor suit, which seeks unspecified billions of dollars in lost share value, is combined with other shareholder actions in federal court in Houston.

Securities Law

Investors claim BP violated U.S. securities law by misleading investors before and after the spill. They also claim that BP publicly touted a commitment to safety while cutting budgets and personnel and rejecting internal complaints.

“BP engaged in continuous and systematic retaliation against employees who reported concerns about the safety and integrity of BP’s operations,” investor lawyers said. Beyond terminations, the company’s senior vice president for drilling operations for the Gulf of Mexico resigned over safety concerns in late 2009, the lawyers alleged.

“This latest news continues to make the case for oil-spill legislation,” Senator Robert Menendez, a New Jersey Democrat, said today in a conference call with reporters. He is pursuing a change in the U.S. Oil Pollution Act, which caps damages at $75 million from oil spills, unless gross negligence is found.

This legislation “is essential,” Menendez said. “If you make the mess, you clean up the mess.”

London-based BP fell about 40 percent in the weeks after the explosion, investors said in yesterday’s filing. The drop eliminated billions of dollars in the company’s market value, shareholders’ lawyers said.

Class-Action Suit

The Ohio and New York pension plans are seeking class- action, or group, status for the suit, covering investors in American depositary receipts from Jan. 16, 2007, to May 28, 2010. They also seek recovery of losses over that period for U.S. investors who bought BP ordinary shares on foreign markets.

Daren Beaudo, a BP spokesman, declined to comment on the amended complaint today.

BP investors began filing shareholder lawsuits in May, alleging securities fraud, within weeks of the explosion. Lawyers for the investors added details to their claims in yesterday’s new complaint.

The lawyers said multiple incidents before the explosion reflected flawed company safety and maintenance procedures in the U.S.

BP in 2007 agreed to pay a $50 million criminal fine for a violation of U.S. environmental law related to the explosion at its Texas City, Texas, refinery in 2005. The company was also fined by the U.S. Occupational Safety and Health Administration for safety violations at the plant.

Clean-Water Violation

The company pleaded guilty to violation of the Clean Water Act and agreed to pay $20 million over the 2006 release of more than 200,000 gallons of oil from its Prudhoe Bay oil field in Alaska. The U.S. claimed neglect of company pipelines caused the spills.

BP responded by promising to change its corporate culture, the investors said. The company instead ignored internal concerns and cut back safety and compliance staff, they said.

“Cutbacks and layoffs hit their height in 2009,” the investors said. BP merged its U.S. group compliance office in Houston with its global compliance and ethics office in London, leading to “huge staff reductions,” according to a former company manager, cited as a confidential witness in the complaint.

Compliance Personnel

Houston compliance staffing was cut 33 percent, while that in London was reduced 44 percent, the investors’ lawyers said. The company also cut back staff in its health, safety, security and environment department, according to the complaint.

Cuts in this department “led to resignations and terminations of HSSE managers who complained or raised issues about the cuts,” the investor lawyers said.

Just before the Deepwater Horizon was dispatched to drill the Macondo well, BP’s senior vice president for Gulf drilling operations, Kevin Lacy, resigned “because of disagreements with BP over its lack of commitment to process safety,” the lawyers said.

Lacy was recruited by BP in 2007 to improve and standardize drilling policies and he resigned “because he believed that the company was not adequately committed to improving its safety protocols in offshore drilling” compared with that of its industry peers, investor lawyers alleged.

BP continued to mislead investors after the Gulf spill, downplaying the size as it attempted to cap the well, investor lawyers said yesterday.

‘Recklessly Disregarded’

“BP knew or recklessly disregarded that its statements regarding the size of the oil spill were false and materially misleading when made,” according to the complaint.

U.S. District Judge Keith P. Ellison in Houston is overseeing three categories of BP investor claims consolidated in his court -- derivative suits brought on behalf of the company, shareholder securities-fraud suits claiming diminished share value and claims by BP employees over losses in their retirement savings funds allegedly caused by the mismanagement.

The lawsuit names as defendants the company and current and former executives including Chief Executive Officer Robert W. Dudley and former CEO Anthony B. Hayward.

In December, Ellison appointed the New York and Ohio pension funds as lead plaintiffs in the shareholder fraud claim. The amended complaint was filed by lawyers representing the pension funds from the firms Cohen Milstein Sellers & Toll in Washington, Berman DeValerio in Boston and Yetter Coleman in Houston.

Investor Subclass

Ellison also established a subclass of individual investors who bought BP ADRs from March 2009 to April 20, 2010, the date of the explosion.

The individuals filed a separate complaint Feb. 11. These investors, including California state court Judge Peter D. Lichtman in Los Angeles, claim that BP management represented that the company had the commitment, resources and risk- management procedures in place to safely drill in the deep-water Gulf of Mexico.

“These representations were untrue, and the catastrophic consequences are now manifest in the sullied waters and beaches of the Gulf, the decimated businesses operated by Gulf residents, and the massive losses suffered by BP investors,” their attorneys, Joseph Cotchett and Richard Mithoff, said in the Feb. 11 filing.

“While focusing on marketing itself as being able to achieve substantial revenue growth from new oil exploration in the Gulf of Mexico, BP misled investors that it was conducting such operations in a safe manner,” the lawyers said.

Explosion ‘Predictable’

“The Deepwater Horizon explosion was not the result of unforeseeable forces, but rather the predictable outcome of BP’s intentional decision to disregard repeated warnings,” they said.

Ellison also named interim lead lawyers for claims in consolidated BP securities litigation under the Employee Retirement Income Security Act.

Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP of San Francisco and Milberg LLP of New York were appointed co-lead counsel for ERISA claims by BP employees while Harwood Feffer LLP and Squitieri & Fearon LLP, both of New York, were designated the plaintiffs’ executive committee for this litigation track.

Ajamie LLP and the Lanier Law Firm, both of Houston, were appointed as co-liaison counsel for the BP ERISA claims.

The case is In re BP Plc Securities Litigation, 4:10-md- 2185, U.S. District Court, Southern District of Texas (Houston).

To contact the reporters on this story: Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net; Laurel Brubaker Calkins in Houston at laurel@calkins.us.com.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

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