In re BP p.l.c. Securities Litigation: Some 10(b) Claims Spawned by Deepwater Horizon Disaster Survive Motion to Dismiss

In In re BP p.l.c. Securities Litigation, No. 4:10-md-2185 (S.D. Tex. Feb. 13, 2012), defendant BP p.l.c. (“BP”) moved to dismiss, under Rule 12(b)(6), securities claims brought by purchasers of BP ordinary shares and American Depository Shares (“ADS”).  The district court, following Morrison v. National Australia Bank, granted dismissal of all the claims of the holders of the ordinary shares; it also dismissed some claims of the purchasers of the ADS, while allowing others to go forward.

The suit arose in the aftermath of the well-known 2010 explosion of the Deepwater Horizon rig and the ensuing “blowout” of BP’s Macondo well, which caused a disastrous oil spill in the Gulf of Mexico. Plaintiffs, acquirers of BP ordinary shares and ADS between January 16, 2007 and May 28, 2010, asserted that BP violated Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission by issuing false or misleading statements before and after the incident.

According to the court, to adequately plead a 10(b) claim for misrepresentation under the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”), a plaintiff must “(1) specify each statement alleged to have been misleading; (2) identify the speaker; (3) state when and where the statement was made; (4) plead with particularity the contents of the false representation; (5) plead with particularity what the person making the misrepresentation obtained thereby; and (6) explain the reasons why the statement is misleading, i.e., why the statement is fraudulent.”

The court held that Plaintiffs pled with sufficient particularity that BP made false or misleading statements regarding the following: BP’s implementation of specific recommendations from an independent safety panel (the “Safety Panel”), BP’s Initial Exploration Plan (“IEP”), BP’s Oil Spill Response Plan (“OSRP”), BP’s ability to respond to a Gulf oil spill (including definite amounts of recoverable barrels per day), post-blowout estimates of spill size, and the Deepwater Horizon rig’s safety record. In contrast, the court held that Plaintiffs did not plead with sufficient particularity that general statements about BP’s “commitment to safety” and “safety culture” were false or misleading.

The pleadings sufficiently alleged a “strong inference” of scienter for only two of the individual defendants: Tony Hayward, the CEO, and Douglas Suttles, the COO for Exploration and Production. According to the complaint, Hayward admitted he was responsible for BP’s “process safety” and spoke publicly about measurable safety improvements that addressed the Safety Panel’s findings. Thus, the inference that Hayward was highly involved in, and thus aware of, operational safety was stronger than the opposing inference that he was only pretending to be involved but was unaware of operational safety problems. Similarly, the inference that Suttles — who was in charge of BP’s spill response team — knowingly provided public spill estimates lower than BP’s internal estimates was stronger than the opposing inference that he was unaware of the internal estimates.

With respect to corporate scienter, the claims involving the IEP and OSRP met the Tellabs II bar: misleading announcements “so dramatic” as to have been approved by officials who knew they were false. Indeed, the court noted that the numbers in the plans “appeared to have been invented out of thin air” and were so egregiously erroneous that a finding of corporate scienter was appropriate.

Ultimately, although many of the ADS holders’ claims failed to meet the heightened pleading standard of the PSLRA, a number of claims established and pled with particularity the requisite elements of securities fraud, and thus survived the motion to dismiss.

The primary materials for this case may be found on the DU Corporate Governance website.

Jeremy Liles