Institutional investors step off sidelines to sue BP for fraud
A spate of U.S. pension funds, including Bank of America’s private pension plan and funds for public workers in Maryland, Louisiana and Texas, filed suits Friday accusing BP of defrauding investors in its statements about the Deepwater Horizon oil spill in April 2010. Piling on just ahead of the statute of limitations, several foreign institutions, such as Norges Bank and Deka Investment, also brought cases Friday against BP. In all, the oil company is now facing individual securities suits by at least 20 institutional investors, all of which claim that their investment managers relied on the company’s supposed misrepresentations when they decided to buy BP shares.
That’s a big headache for BP, of course, but it’s also worrisome for other foreign-based companies with significant operations in the United States. Since 2010, those businesses have been virtually immune from securities fraud claims in U.S. courts, thanks to the U.S. Supreme Court’s ruling in Morrison v. National Australia Bank.
In Morrison, the Supreme Court held that American securities laws don’t apply outside of our borders. Trial courts have interpreted the decision to mean that companies listed on foreign exchanges can’t be sued for fraud under the Exchange Act of 1934. (There’s one loophole: Federal-law claims by investors who traded American Depository Shares are viable despite Morrison, but those suits can only recover losses in a defendant’s U.S. float.)
Shareholder lawyers have tried all kinds of creative ways to re-animate securities litigation against companies listed on non-U.S. exchanges — including suits brought under state fraud laws rather than federal law — but to little avail. Whether holders of common shares tried to sue as a class or as individuals, Morrison was a cloak of invincibility for foreign-listed companies.
Last year, in litigation against BP, a handful of public pension funds poked a tiny hole in that cloak. In 2012, BP won the dismissal, on Morrison grounds, of a U.S. class action by holders of its common shares. But the pension funds’ lawyers at Kessler Topaz Meltzer & Check and Pomerantz filed separate suits, outside of the class action, that attempted to get around Morrison by claiming BP had committed fraud under state and common law. BP’s lawyers at Sullivan & Cromwell devised a very shrewd constitutional defense, arguing that under the Commerce Clause, state laws may not confer rights beyond those granted under federal law. Nevertheless, U.S. District Judge Keith Ellison of Houston, who is presiding over all of the BP securities cases, ruled in October that the funds could proceed with their cases.
His reasoning? British fraud law governs the funds’ claims against BP, a British company, so the U.S. Constitution doesn’t apply. But Ellison also said that the shareholder suits should move forward before him, in federal court in Texas, rather than in England.
Ellison was the first judge since the Morrison decision to find that he has jurisdiction over a shareholders suit against a non-U.S. listed company based on foreign laws. Shareholder lawyers, including those in securities litigation against Toyota for alleged misstatements about sudden acceleration defects, had previously attempted to sidestep Morrison by asserting claims for common share holders under foreign fraud or securities laws. Judges presiding over class actions uniformly rebuffed those attempts.
The BP cases weren’t class actions, though — and it was actually BP that argued for the application of British fraud law, anticipating that the judge would also find that England is the proper forum for claims under British law and dismiss the U.S. suits. Instead, the judge held that the U.S. is the right place for the litigation because the cases involve BP’s U.S. operations. U.S. and British fraud laws have a common heritage, Ellison said, so he’s perfectly capable of overseeing the suits.
Ellison’s decision was interesting in its own right, but the onslaught of cases filed Friday against BP signals that his ruling could be more than a quirky footnote of securities litigation. The new suits, brought by prominent shareholder firms Bernstein Litowitz Berger & Grossmann, Grant & Eisenhofer and Kirby McInerney (in addition to filings on behalf of new clients of Kessler Topaz and Pomerantz), all claim that BP violated British fraud and securities laws when it misrepresented its safety record and the magnitude of the Deepwater Horizon spill to investment managers who decided to buy common stock based on those allegedly false statements.(The newly filed suits also bring claims under U.S. securities laws for losses based on the purchase of American Depository Shares; Judge Ellison denied class certification to ADS holders last December but heard a renewed motion for certification on Monday.)
Some of the institutional investors that have sued BP, including the Louisiana public pension fund, are known for vigorously pursuing securities fraud claims as lead plaintiffs in class actions. Others, though, aren’t frequently found in class action captions. They’re class members, after all, whether they lead cases or not. And suing outside of a class action or even leading a case can be expensive and time consuming.
What’s notable in the BP litigation is that so many funds have decided to assume the downside risk and enter the litigation directly. Clearly, they all lost enough in their investment in BP common shares to justify the expense of suing the company — and Judge Ellison’s decision on his jurisdiction gave them a vehicle to bring their own claims in the U.S.
If other judges follow Ellison’s lead, foreign issuers may turn out to be liable to shareholders in the U.S. after all, albeit only in certain circumstances. “This could signal broader trends,” said Matthew Mustokoff of Kessler Topaz, who filed a new suit against BP for Maryland’s public pension fund on Friday. “Judge Ellison kept the case because BP has significant ties to the U.S. You could think of lots of examples of foreign companies with major operations here … These cases could be a blueprint for how to bring claims against them.”
And if the institutional investors end up collecting anything from BP for their losses in common shares, pension funds in the U.S. are going to have to start paying a lot more attention to potential individual claims against foreign issuers. They have fiduciary duties to beneficiaries, after all, so they can’t neglect potential recoveries for securities fraud. In fact, depending on how the Supreme Court decides the pending securities class action case Halliburton v. Erica P. John Fund, public pension funds may look back at the BP litigation as a model of how they must evaluate potential securities claims against even U.S. companies.
I reached out to BP counsel at Sullivan & Cromwell but didn’t hear back. A BP representative declined to comment.
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