As part of BP's historic $4.5 billion deal Thursday to resolve
criminal and civil charges related to the Deepwater Horizon oil
spill in 2010, the British oil company agreed to pay a $525 million penalty to the Securities and Exchange Commission for
defrauding its own investors. The settlement, which is the
third-largest in SEC history, is based on the agency's claims
that BP violated U.S. securities laws when company executives
filed false reports with the SEC and made false public
statements about how much oil was flowing out of BP's well and
into the Gulf of Mexico. The SEC announced that the money would
be used to compensate investors for their losses by way of a
Fair Fund.
I'm glad the SEC plans to get some money back to the BP
investors who lost billions after the Deepwater Horizon spill
because, at least for the vast majority of holders of BP common
stock, that's their only hope of recovery from BP's (alleged)
violation of federal securities laws. The oil spill took place
in April 2010 and shareholder class actions followed quickly
thereafter. But by the time the BP securities litigation was
consolidated before U.S. District Judge Keith Ellison of Houston
in August 2010, you know what had happened: The U.S. Supreme
Court issued Morrison v. National Australia Bank, which held
that investors have no cause of action under U.S. securities
laws for losses on foreign-traded shares.
In effect, the BP securities class action, at least for
holders of BP common shares, was over before it started. Around
30 percent of BP shares are traded on U.S. exchanges as American
Depository Receipts. ADR holders, whose claims remain alive
after Morrison, are still litigating their class action against
BP in Houston. They've survived BP's motion to dismiss and have
been granted access to the evidence emerging in the consolidated
personal injury litigation against BP in federal court in New
Orleans. According to co-lead class counsel Steven Toll of Cohen
Milstein Sellers & Toll, the ADR holders are fighting with BP's
lawyers at Sullivan & Cromwell over whether investors can add
some more potentially actionable alleged misstatements to their
la t est complaint, which already goes way beyond the SEC's
assertions about oil flow rate misrepresentations. (BP counsel
Richard Pepperman of S&C declined to comment.) But despite the
best efforts of class counsel from Cohen Milstein, Berman
DeValerio and Yetter & Coleman, holders of BP common shares have
no viable federal claims against BP. The lead plaintiffs in the
class action, state pension funds of New York and Ohio, lost
almost $200 million in their investment in BP common shares, yet
they won't recover any of it in the federal case.
Some of the common stockholders still have alternative
routes to BP's wallet. They can't bring classwide claims based
on state fraud laws, but several individual state pension funds
with sizable losses have sued on their own, asserting state
securities and fraud claims. BP has removed those cases to
Ellison's federal courtroom in Houston, where they've just begun
to be litigated. And according to class counsel Steve Toll of
Cohen Milstein and Glen DeValerio of Berman DeValerio, a German
law firm is soliciting BP shareholders for a potential case in
the Netherlands, which permits a form of group litigation by
shareholders. It's way too early to predict whether anything
will come of that effort.
DeValerio and Toll were more resigned than angry when I
spoke with them Thursday about BP's settlement with the SEC and
what might have been in the shareholder class action. "It's
encouraging from the point of view that the SEC's case developed
the way we expected it to. This supports everything that we've
said," DeValerio told me. Toll said that BP's admissions can
only help in the ADR holders' ongoing class action. "I guess it
makes me annoyed in general that Morrison is the law," Toll
said. "It's just terrible for investors."
And just think: If it hadn't been for the drafters of
Dodd-Frank, the SEC wouldn't have a case against BP either.
Morrison knocked out enforcement actions against foreign
companies, but Congress restored the extraterritorial reach of
the SEC and the Justice Department for securities violations
when it passed Dodd-Frank reforms in July 2010, a month after
the Morrison ruling. Dodd-Frank also included a provision
requiring the SEC to present a report on Morrison's impact to
Congress. You may recall that when the SEC issued that report in
April, the commissioners declined to make recommendations about
passing a law to roll back the Supreme Court's ruling.
DeValerio and Toll said no one should expect the BP example
to change minds in Congress -- and they're probably right. But
it should.
(Reporting by Alison Frankel)
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