Ninth Circuit Halts Securities Fraud Claims Against BP Stemming from Prudhoe Bay Oil Spill

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Christina DeIasi | Bloomberg Law Reese v. BP Exploration (Alaska) Inc., No. 10-35128, 2011 BL 171695 (9th Cir. June 29, 2011) Before the Deepwater Horizon explosion and resulting oil spill in the Gulf of Mexico, BP p.l.c. (BP) was embroiled in the fallout from a spill of more than 200,000 gallons of oil that leaked from a pipeline in Prudhoe Bay, Alaska. BP Exploration (Alaska) Inc. (BPXA) discovered the spill on March 2, 2006, in the Western Operating Area of Prudhoe Bay. Five months later, BPXA discovered a pipeline leak in the Eastern Operating Area and temporarily shut down its oil production in the Bay. BPXA pled guilty on October 24, 2007, to one count of violating the Clean Water Act. Thereafter, plaintiff filed a securities fraud class action claiming that "as a consequence of the leaks and the shutdown of BPXA's operations in Prudhoe Bay, BP p.l.c.'s stock price fell, and investors lost billions of dollars in market capitalization." The district court granted in part and dismissed in part BPXA's motion to dismiss. On an interlocutory appeal, the U.S. Court of Appeals for the Ninth Circuit held that "BPXA's breach of a contractual promise of specific future conduct, even though the contract is filed in conjunction with U.S. Securities and Exchange Commission (SEC) reporting requirements, was not a sufficient foundation for a securities fraud action."

BPXA's Alleged Fraud

As the Court explained, plaintiff challenged two categories of statements in his complaint. The first category included three comments by a BPXA executive about the conditions of the company's pipelines. The district court dismissed without prejudice plaintiff's securities fraud claims as to these statements, ruling that he did not satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995. The Ninth Circuit declined to hear plaintiff's challenge to this ruling. Instead, the Court limited itself to the specific issues that the district court certified for interlocutory appeal. Those issues concerned the second category of alleged misstatements made through contracts attached to the SEC filings of the BP Prudhoe Bay Royalty Trust (Trust). The Trust was created, the Court explained, to distribute royalty interests derived from oil production at Prudhoe Bay. BPXA entered into a Trust Agreement that required it to provide information to the Trustee that would be included in SEC filings. BPXA also executed an Overriding Royalty Conveyance agreement (ORC Agreement), under which it agreed to operate Prudhoe Bay according to a "Prudent Operator Standard." Plaintiff claims that the Trust attached both agreements to each of its quarterly filings during the class period. Through the Trust's repeated filing of the ORC Agreement with the SEC, BPXA allegedly represented to the public that it was in compliance with the Prudent Operator Standard. This representation was false and misleading, plaintiff claimed, because BPXA did not disclose that the Prudhoe Bay pipelines were "under-inspected, under-maintained, and subject to a severe risk of corrosion-related failure; that BP had been warned that its pipelines were severely corroded; and that BP had not taken corrective action despite warnings." As to this second category of alleged misstatements, the district court held that plaintiff stated (1) securities fraud claims against BPXA under Section 10(b)of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and (2) control person claims against BP and three individual executives under Exchange Act Section 20(a). Nonetheless, because there was "inadequate precedent squarely on point," the district court granted BPXA's motion for interlocutory appeal.

Forward-looking Contract

The Ninth Circuit rejected plaintiff's contention that the Trust's filing of the ORC Agreement would give a reasonable investor the impression that BPXA was in current and ongoing compliance with the Prudent Operator Standard. The Prudent Operator Standard provision, the Court explained, is "'forward-looking' and not a misrepresentation of current fact." Moreover, courts around the country are in agreement that "the breach of a contractual promise of future performance typically does not constitute a misrepresentation that will support an action for fraud." The Court further noted that the Prudent Operator Standard provision is broad and evolves along with the industry. It is just one section of a large and detailed contract, which the Trust filed with the SEC "to fulfill unrelated regulatory requirements." Accordingly, the Court concluded that a reasonable investor likely would have viewed the Trust's filing of the ORC Agreement as a statement of the Trust's rights, not as a certification of BPXA's compliance with its terms. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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