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BP wins round in investor fraud case Federal appeals court sides with oil company, reverses lower court in class action stemming from 2006 Prudhoe Bay pipeline leaks Wesley Loy For Petroleum News
A federal appeals court has dealt a setback to a stock market investor’s securities fraud case against BP.
The case centers on the 2006 pipeline leaks in the Prudhoe Bay field and losses the investor, Claude A. Reese, contends he suffered due to misrepresentations about the soundness of BP’s operations in Alaska.
After BP moved for dismissal of the suit, the district court in Seattle ruled the case could proceed based on Reese’s argument that BP made false filings with the U.S. Securities and Exchange Commission indicating the company was complying with the “prudent operator standard” at Prudhoe Bay.
BP appealed to the 9th U.S. Circuit Court of Appeals in San Francisco, and in a 22-page opinion rendered June 29, a three-judge panel reversed the lower court ruling.
Legal fallout Reese’s suit was part of the legal fallout from leaks on major lines within the Prudhoe Bay field in 2006. One of the leaks, discovered on March 2, 2006, resulted in a spill of 212,252 gallons of sales grade crude oil, while a second leak the following August led to a partial field shutdown — an event that briefly rattled oil markets.
Reese sued on behalf of a class of purchasers of BP shares during the period March 31, 2005, through Aug. 4, 2006. In court papers filed with the original suit in 2007, Reese certified that during the class period — on May 26, 2006, to be exact — he bought 11 shares in BP p.l.c. at $71.62 per share.
Reese, according to the 9th Circuit opinion, argued that as a consequence of the leaks and the shutdown of Prudhoe, operated by BP Exploration (Alaska) Inc., parent company BP p.l.c.’s stock price fell and investors lost billions of dollars in market capitalization.
“According to Reese, the August 2006 leak occurred despite BPXA’s reassurances to investors that the corrosion leading to the earlier leak was an anomaly and that BPXA was taking necessary precautions to avoid another accident,” the opinion says. “The suit alleges that Defendants knew about corrosion in the Prudhoe Bay pipelines but did not take corrective action or disclose ‘the foreseeable risk’ that BPXA would need to curtail its oil production as a result. Reese claims to have suffered economic loss and damages as a result of purchasing overpriced shares of BP p.l.c., in reliance on Defendants’ misleading statements and omissions about BPXA’s Prudhoe Bay operations.”
Case isn’t dead The district court found that Reese could use certain quarterly filings the BP Prudhoe Bay Royalty Trust made with the SEC as evidence of BP’s misleading statements. Specifically, the filings routinely attached to a document containing a “prudent operator standard” provision.
Created in 1989, the trust holds an overriding royalty interest on a portion of daily Prudhoe crude production. Its shares trade on the New York Stock Exchange.
Reese argued SEC filings suggesting BP was abiding by the prudent operator standard were misleading because the company didn’t disclose “that the pipelines at Prudhoe Bay were under-inspected, under-maintained, and subject to a severe risk of corrosion-related failure,” the 9th Circuit opinion says.
To bolster his complaint, Reese cited BPXA’s guilty plea to an environmental crime in connection with the leaks.
But the 9th Circuit judges, in reversing the lower court, disagreed that the SEC filings would mislead a “reasonable investor.”
Read literally, the prudent operator provision “was ‘forward-looking’ and not a misrepresentation of current fact,” the 9th Circuit opinion says. The judges added they did not view the periodic SEC filings “as the sort of traditional fraudulent misrepresentation of fact that could induce investors mistakenly to buy securities.”
The ruling does not necessarily kill Reese’s case, as the 9th Circuit remanded it back to the district court.
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