BP Must Face Investors’ Fraud Claims Spurred by Gulf Oil Spill

BP Plc must face fraud claims by investors who said the company lied before and after the 2010 Gulf of Mexico oil spill about its accident response capability, a federal judge said.

U.S. District Judge Keith P. Ellison in Houston yesterday allowed holders of BP American depositary receipts to pursue claims alleging violations of U.S. securities law. He dismissed claims by investors who bought ordinary shares of London-based BP, saying his court has no jurisdiction over them.

The judge rejected the investors’ claim that BP lied about its commitment to safety, while finding the company may have exaggerated its ability to respond to a major spill.

“Plaintiffs have sufficiently pleaded facts to demonstrate that BP misrepresented the size of the spill it was prepared to respond to in the Gulf and misrepresented the company’s general spill response capabilities,” Ellison said in a 129-page decision. “They have sufficiently pleaded actionable misrepresentations related to BP’s ability to respond to an oil spill in the Gulf of Mexico.”

The investors, led by Ohio and New York pension plans, said BP publicly declared a commitment to safety while cutting budgets and personnel and rejecting internal complaints. BP also initially hid the true size of the oil-well blowout to limit the impact on its stock price, the investors alleged.

‘BP Exaggerated’

“Today’s decision is a victory for the plaintiffs and I am grateful that we will be able to move forward with our claims against BP,” New York State Comptroller Thomas P. DiNapoli said in an e-mail. “We believe that BP exaggerated its ability to prevent a catastrophic spill as well as its ability to respond to one should it occur”

Scott Dean, BP spokesman, declined to comment on the ruling.

The company denied fraud or any lack of attention to safety. Investors sought to “transform a matter involving allegedly negligent processes into an action for securities fraud,” the company said in court papers. “A commitment to safety is not a guarantee that no future accidents will occur,” it said.

Investor securities-fraud suits are among hundreds of claims filed in U.S. courts after the explosion and sinking of the Deepwater Horizon drilling rig in the Gulf of Mexico in April 2010. Eleven people were killed in the blast and hundreds of miles of coastline were soiled in what became the largest offshore spill in U.S. history.

Combined Suits

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 before Ellison in federal court in Houston.

Ellison dismissed claims against several executives, including Chief Executive Officer Robert Dudley and BP America Inc.’s chairman and president, Lamar McKay. Ellison allowed claims against former BP Chief Executive Officer Tony Hayward and Douglas Suttles, former chief operating officer for exploration and production.

The investors said Hayward made multiple misrepresentations about his and the company’s commitment to safety. “The court has determined that nine of the nineteen statements attributable to Hayward are actionable,” Ellison said.

The plaintiffs claimed Suttles, who headed BP’s spill response team, understated to the public the amount of oil being spilled. The investors “have alleged facts sufficient to establish that Suttles intended to deceive investors, or was at the very least reckless, in revealing a much lower spill estimate than BP actually possessed at the time of Suttles’s public statements,” Ellison said.

Prior Incidents

The company’s prior incidents or any budget-cutting actions can’t be used against BP in a securities fraud case, Ellison said yesterday.

“Simply citing prior examples of safety failures does not render false or misleading generalized statements about BP’s risk profile or the riskiness of its operations,” he wrote.

The judge said that plaintiffs “must allege more than that BP merged offices, promoted employees, and transferred employees between divisions to allege the falsity of BP’s statements regarding balancing cost-cutting measures with its safety program.”

The Ohio and New York pension plans are seeking to sue on behalf of investors in BP ADRs from Jan. 16, 2007, to May 28,

2010. They also sought to recover losses over that period for U.S. investors who bought BP ordinary shares on foreign markets.

Foreign Shares

The company asked the court to restrict any investor fraud claims to owners of the ADRS, which trade on the New York Stock Exchange. BP said U.S. securities laws don’t apply to holders of foreign shares, such as the company’s common stock, which trades in London. Ellison agreed.

BP shares fell about 40 percent in the weeks after the explosion, investors said in court papers in February 2011. The drop eliminated billions of dollars in the company’s market value, shareholders said.

Ellison has been 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 mismanagement.

Pension Funds

The judge dismissed the derivative suits in September, finding the claims should be filed in the U.K. because BP is based in London. He hasn’t ruled on the retirement savings plan suits.

In December 2010, Ellison appointed the New York and Ohio pension funds as lead plaintiffs in the shareholder-fraud claim. He also established a subclass of individual investors who bought BP’s U.S. shares from March 2009 to April 20, 2010, the date of the explosion.

Yesterday’s ruling dismissed those claims, while allowing the plaintiffs to file an amended complaint. These plaintiffs will file a renewed claim within 20 days, using material gained since the original complaint was filed in 2011, said their attorney, Richard Mithoff.

“Much of what we know now came as a result of recent discovery,” Mithoff said. The new complaint will emphasize safety allegations, he said.

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

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