Thwarting Morrison, BP shareholders win right to proceed in Texas
When Matthew Mustokoff of Kessler Topaz Meltzer & Check walked out of oral arguments before U.S. District Judge Keith Ellison of Houston last November, he wasn’t at all sure that his case – a suit by individual pension funds claiming to have been duped by BP – would survive BP’s motion to dismiss. The judge had expressed sympathy for holders of London-listed BP common shares, whose federal securities claims are barred by the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank. Mustokoff and co-counsel from Jason Cowart of Pomerantz Hufford Dahlstrom & Gross were attempting to plead around Morrison by asserting fraud and misrepresentation claims under state and common law. But Judge Ellison seemed to be very interested in a novel constitutional argument BP’s lawyers at Sullivan & Cromwell had crafted in response to the pension funds’ Morrison-dodging. BP said that the funds’ case violated the dormant Commerce Clause as it applies to international commerce because state laws may not exceed the bounds of federal law. Funds couldn’t assert claims under state law, according to BP, when parallel federal-law claims were barred. Ellison was so intrigued by S&C’s Commerce Clause argument that at least half of the hearing on BP’s motion to dismiss the funds’ two related suits, Mustokoff told me, was dedicated to that defense.
But when Ellison entered his 97-page opinion on the docket of the BP multidistrict securities litigation last Thursday, his analysis of the Commerce Clause argument was reduced to a footnote. The judge entirely side-stepped the question of whether state or common law can give U.S. investors rights they don’t have under federal law by concluding that English law – and not American common law – applies to the pension funds’ claims. BP had asked the judge to choose English law, but it also wanted him to find that an English court is the preferable forum for a matter of English law. Instead, Ellison said that he’s perfectly capable of applying English law on fraud, which “shares so many strong similarities with U.S. law due to a common heritage.” And since the conduct at issue in the pension funds’ case involves BP’s U.S. operations – and since he’s already overseeing a class action by holders of BP American Depository Shares, who are raising arguments similar to those of the pension funds – Ellison said it makes sense for him to hear the funds’ suits.
Ellison’s ruling, as Kevin LaCroix at D&O Diary noted Tuesday, is an extremely rare example of shareholders of a foreign-listed stock finding a way around Morrison. But before the securities class action bar starts boning up on English law on fraud (or, as it’s known over the pond, “deceit,”), there are a couple things to keep in mind. First, this case isn’t a class action. It’s two suits by nine pension funds that had large enough BP holdings to make it worth their while to pursue individual actions. Second, Ellison based his decision to retain jurisdiction on some factors that might not figure in other investor fraud suits. And third, BP and Sullivan & Cromwell will get at least one more chance to present their dormant Commerce Clause argument, which could still erase investor claims.
If the nine pension funds represented by Kessler Topaz and Pomerantz had filed a class action instead of individual suits, their case would have been precluded by the Securities Litigation Uniform Standards Act. In fact, Judge Ellison previously tossed just such a class action, in which BP common shareholders tried to evade Morrison by asserting state-law fraud claims against the company. The pension funds, however, were determined to bring their own suits. “These people are die-hard believers that Morrison was decided wrongly,” said Mustokoff, who told me his firm has been courting funds that wanted to try a Morrison work-around.
Mustokoff said that the pension funds also benefited from bringing both federal securities claims (as holders of ADS that trade on U.S. exchanges) and common-law claims. Two of Mustokoff’s clients opted out of the ongoing class action by BP ADS holders, but asserted very similar claims in their individual suits; in ruling that the funds could proceed with some of their federal securities claims as ADS holders, Ellison relied heavily on his previous opinion in the ADS class action. Since those federal claims are not covered by English fraud law, if the judge had decided to move the funds’ fraud claims to England, he would have had to bifurcate the suit to permit the federal claims to move forward in Houston. But since he’s overseeing the parallel ADS class action, he said, judicial efficiency is served by him keeping the funds’ case as well. “If I had simply brought common-law claims, he may have dismissed the case in favor of London,” Mustokoff said.
His co-counsel, Jason Cowart of Pomerantz, said that the BP investors’ case could provide a route to recovery for other shareholders with significant holdings in foreign-traded stock, but only if their claims – like those of the pension funds – have a significant connection to the United States. The parallel ADS class action was one important tie between the funds’ case and U.S. courts, Cowart said, but it was also important that some BP statements at issue were made in the U.S. and that claims involved BP’s safety record in its U.S. operations. “To the extent that similar factors are in play in other cases, we would hope that a court would follow the rationale of Judge Ellison,” Cowart said.
The pension funds will still have to show the falsity of more than a dozen alleged BP misstatements. They’ll also have to show that they relied on the misstatements when they purchased BP shares, since there’s no fraud-on-the-market presumption of reliance in an individual action, as opposed to a securities class action.
Moreover, they may not have seen the last of S&C’s groundbreaking Commerce Clause argument. In a separate opinion on BP’s motion to dismiss claims by an Ohio pension fund asserting Ohio securities laws, the judge suggested that the oil company would have a chance to revisit its challenge to the constitutionality of claims that extend state law beyond the bounds of federal law. (The Ohio case includes state-law as well as common-law claims.) If Ellison ends up deciding that the Commerce Clause bars state-law claims on securities, you can expect BP to attempt to revive the argument with regard to common-law claims as well, even if they’re now proceeding under English law.
Ellison acknowledged that the funds’ case is going to be a bit of an experiment, and that he may have to consult experts on the state of the UK’s Financial Services and Markets Act of 2000. There are all sorts of other wrinkles he’ll have to work out, including the right to a jury and, of course, whether England’s loser-pays rule applies. Mustokoff told me he’s confident that it does not. “It’s a procedural rule, not a matter of substantive law,” he said. “It’s not applicable in U.S. courts.”
BP counsel Darryl Libow of S&C declined to comment.