February 8, 2013 · 0 Comments
By Jeffrey R. McCord of The Investor Advocate
February 7, 2013
Note to readers: Parts of the following story were first published in TruthOut on February 5.
The BP Macondo well catastrophe in the Gulf of Mexico was caused “not as some have suggested by a coincidental alignment of disparate technical failures,” but by the “overarching failure of management,” concluded the National Commission on BP’s Deepwater Horizon Oil Spill.
Among BP managers’ many failures were alleged lies to investors and regulators about the size of the well’s leakage and the company’s ability to contain it. The explosion and destruction of BP’s Deepwater Horizon oil rig and break in its pipeline to its Macondo well pumped 62,000 barrels of crude oil per day into the Gulf in the early days following the explosion. Yet, in the same period, BP told the US Coast Guard that Macondo was leaking a paltry 1,000 barrels per day, despite internal BP expert estimates that the leak was actually pumping between 60,000 and 140,000 barrels per day.
Internal e-mails to be filed as evidence in a civil trial later this month reportedly demonstrate that BP managers knowingly lied about the size of the oil leak to regulators, the public and, ultimately, investors. (See Daily Mail, Dec. 8, 2012)
Although BP has since pled guilty to 14 related federal criminal charges – including 11 counts of manslaughter in the deaths of its rig workers – and agreed to pay $4 billion in penalties, and separately settled with the families of its dead workers and others harmed by the disaster, one important group of victims has yet to receive justice: the shareholders who actually own BP and were allegedly misled by their managers about the extent and quality of the company’s safety and risk management programs and its ability to contain the Deepwater Horizon catastrophe.
Shut-out of Fed Courts, U.S. Public Employee Retirement Systems Challenge BP Management on Pattern of Criminal Negligence and Deceit in State Court
In yet another example of the damage done by the Supreme Court’s anti-US investor, pro-fraud defendant Morrisondecision, a lower federal court cited it in a ruling that US BP shareholders who purchased their securities on the New York Stock Exchange could proceed with claims in federal court. At the same time, however, US BP investors who purchased their shares on the London Stock Exchange cannot use federal courts — even though they, too, are US citizens or pension funds and the allegations concern wrongdoing in US waters. By limiting the rights of US citizens to seek justice in US courts when foreign entities defraud them, the Supreme Court in Morrison turned on its head more than 50 years of American jurisprudence.
Excluded from federal court, the Alameda County Employees’ Retirement Association of California, the Employees’ Retirement System of the City of Providence, Rhode Island and State-Boston Retirement System filed lawsuits in a Texas court alleging they lost millions of dollars during the period November 29, 2006 through June 25, 2010 due to false and misleading statements made by BP managers. A Commission appointed by President Obama concluded the Deepwater Horizon disaster was preventable and due to a BP culture of negligence (recently determined to be criminal), which extended over many years.
Deepwater Horizon was neither BP’s first preventable disaster nor its first guilty plea to violations of federal law. In 2002, for instance, another BP controlled Gulf drilling rig (Ocean King) experienced a gas blowout its crew could not contain. The rig was abandoned, exploded and caught fire causing more than $2 million of damage. A U.S. Department of Interior investigation found BP had installed non-compliant equipment contributing to the explosion and its engineers had ignored foreknowledge of the very gas pocket they were drilling through when the explosion occurred, the shareholder complaint explains. (See BP-Owned Rig Had Two Blowouts Within Six Months in 2002, Daniel Goldstein)
Three months after Ocean King, another leakage of gas and mud occurred in the Gulf when BP failed to successfully seal a well. The next year (2003), another BP Gulf well leaked gas when the drilling rig drifted away from the well, severing the pipe. Safety equipment failed to staunch the flow, shareholders say.
In July 2005, BP narrowly escaped a big Gulf disaster when its giant Thunder Horse rig almost capsized during a hurricane due to the “backwards” installation of a key water valve. Later, serious underwater cracks were discovered in the pipe line of that mile deep well. Also in 2005, an explosion and fire at BP’s Texas City refinery along the Gulf coast killed 15 people and injured more than 100. (See In BP’s Record, a History of Boldness and Costly Blunders, Sarah Lyall)
But, it was a 2006 leak caused by corrosion in BP’s pipeline on Alaska’s North Slope that led the company to plead guilty to federal criminal negligence charges for maintenance and safety failures. (See BP Alaska to Pay $25 Million Penalty for Alaskan North Slope Oil Spill , U.S. EPA)
Bush Aide James Baker Found BP Safety Negligence from “Top to Bottom”
Pressure from US regulators led BP to appoint a study group headed by former Bush family adviser and ex-Secretary of State James Baker to investigate and make recommendations for corporate changes. The shareholders’ lawsuit cited the Baker Panel’s findings (as quoted by the later Presidential Commission investigating the Deepwater Horizon disaster):
“BP management had not distinguished between occupational safety – concern over slips, sprains, and other workplace accidents – and process safety: hazard analysis, design for safety, material verification, equipment maintenance, and process-changing reporting. And the [Baker] Panel further concluded that BP was not investing leadership and other resources in managing the highest risks.” More specifically, the Baker Panel found that: “from the top of the company, starting with the Board and going down . . . BP has not provided effective process safety leadership and has not adequately established process safety as a core value . . . [The company exhibits] a lack of operating discipline, toleration of serious deviations from safe operating practices, and apparent complacency toward serious process-safety risk.”
Soon After Deepwater Horizon Explosion, BP Chose Path of “Deceit”
“Despite this clear pattern of preventable disasters in the years leading to the Deepwater Horizon catastrophe, BP management consistently claimed it was committed to the highest safety standards, could manage its risks and correct any problems, even while its’ corporate culture consistently placed cutting costs above protecting lives and the environment,” explained Jason S. Cowart, Esq. of Pomerantz Grossman Hufford Dahlstrom & Gross LLP, one of the BP shareholder attorneys and secretary of the National Association of Shareholder and Consumer Attorneys.
In an interview with The Investor Advocate, Mr. Cowart continued:
“When the Deepwater Horizon rig exploded in 2010 and its Maconda well was leaking millions of gallons of oil a day, BP managers could immediately come clean about their prior misrepresentations, tell investors everything they knew about the Company’s actual commitment to safety, disclose all the information they had about the seriousness of the disaster, and admit that BP had little or no plan or ability to contain the situation. On the other hand, they could continue misrepresenting the facts in an effort to prop-up the Company’s stock price that was under enormous pressure as investors worried about the impact of the spill on the Company’s profitability. Defendants chose the latter course, doubling down on their campaign of deceit.”
Will the Merits of the Case Matter?
In the retirement plans’ lawsuit against BP, the merits clearly favor the plaintiffs. It remains to be seen, however, whether defendants will succeed in dismissing the case with technical jurisdictional challenges that have nothing to do with the merits. Defendants’ challenges are made possible by the 2010 Morrison Supreme Court decision, and a Congressional “reform” to securities law — the Securities Litigation Uniform Standards Act of 1998 (SLUSA) — which excludes certain investor claims from state courts.
Both Morrison and SLUSA have, in practice, favored fraud defendants over defrauded investors. Later this year, the Supreme Court will hear a separate case, providing the Court an important opportunity to review SLUSA. That case centers upon investors’ allegations in a Texas court that two law firms and an insurance broker who worked for convicted Texas swindler Allen Stanford were enablers of the fraudulent sale of fake CDs associated with an Antigua based bank that were at the heart of Stanford’s $7 billion Ponzi scheme. Stanford is serving a 110-year sentence in federal prison. (See Supreme Court to Hear Stanford Ponzi Lawsuits, Workplace Bias Case, Jonathan Stempel)
Meanwhile, if the BP defendants succeed in blocking shareholders’ claims also filed in Texas court, U.S. retirement funds serving millions of American state and local government workers on both our Atlantic and Pacific coasts will have no way to recover many millions of dollars lost to BP management wrongdoing in U.S. waters.
Congress and the Supremes Should Favor Victims over Fraud Perpetrators
It is long past time for Congress to overturn the pro-defendant, anti-US investor Morrison Supreme Court decision. And, in considering legitimate investor claims, it is time for the Supreme Court to favor fraud victims over fraud perpetrators when it clarifies laws such as SLUSA.
The Court and Congress should provide justice for victims of crimes rather than safe harbors for criminals.
By Jeff McCord