The Southern District of Texas recently discussed the line between representations that give rise to a securities fraud action and statements that are not actionable. Applying the U.S. Supreme Court's Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) decision, the court also determined that American purchasers of foreign-traded shares could not maintain a Section 10(b) action.
The standards for actionable representations espoused and applied by Judge Ellison in In re BP p.l.c. Securities Litigation, No. 4:10-md-2185 (S.D. Tex. Feb. 13, 2012) are useful for any practitioner who reviews and approves public statements made by corporate representatives:
- "Vague, optimistic statements" that do not contain "specific facts" are not actionable.
- "Corporate cheerleading" and "puffery," such as general statements about corporate culture, are not actionable.
- Projections of future performance are not actionable unless worded as guarantees.
- "General statements" concerning "corporate progress" are "too squishy" and "untethered to anything measurable" to be actionable. Statements about "progress" that are linked to statistical metrics, however, may be actionable.
- Generic statements that a company is "committed to safety," holds safety as a "priority," or "desires" to become a "leader" in safety are not actionable. Statements concerning actual safety-related capabilities or specific safety records, however, are actionable.
- Statements about the adequacy of a company's crisis-response operations and capabilities may be actionable if the speaker knows, or should know, that the company is inadequately prepared for a possible crisis.
- Statements that "lowball" internal estimates are actionable.
Of course, the devil is in the details, as the court illustrated in applying these standards to 46 alleged representations made by BP and its representatives before, during, and after the April 2010 explosion of BP's Deepwater Horizon rig in the Gulf of Mexico, a disaster that allegedly cost BP $20 - 40 billion in losses and caused a 48 percent drop in BP's stock price in five weeks. The court rejected claims related to most of the 46 alleged representations, which were culled from press conferences, annual reports, analyst calls, strategy presentations, company reports, Congressional testimony, statements made at industry conferences, and statements made during interviews and speeches. Several of the alleged representations, however, satisfied the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act.
Overall, the court explained that plaintiffs could not state a securities fraud claim based on allegations that "what BP represented it would do was not good enough." Rather, a valid securities fraud claim requires allegations that "BP did not do what it represented."
Alleged Representations Concerning Risk Exposure
Plaintiffs alleged that "BP misrepresented its exposure to risk by failing to disclose that it was unprepared to contain an oil leak in its Gulf operations." The court rejected the adequacy of allegations related to general statements about BP's "commitment" to managing risk because such representations, rather than hide BP's risk exposure, actually highlight BP's awareness that oil rigs are a risky enterprise. Thus, the following alleged representations, among others, were held not actionable:
- "By taking and managing risks in frontier regions we have established an unrivalled asset base in some of the world's most prolific basins."
- "BP America is committed to safety, and the expectation of our management is that budget guidelines should never result in a compromise in safety performance."
The court acknowledged, however, that alleged "[s]tatements about the adequacy of risk management operations and capabilities may be false and misleading where the speaker knows, or should know, that such operations are inadequate to manage the risks a company faces." According to plaintiffs, prior to the Deepwater Horizon explosion, BP had allegedly released precise statistics concerning its ability to respond to a Gulf disaster, many of which were allegedly proved false in the weeks following the explosion. Thus, the following alleged statements, among others, were deemed actionable:
- BP's estimate that the "total worst case discharge" was between 28,033 barrels and 250,000 barrels of oil per day.
- BP's statement that it and its subcontractors "could recover approximately 491,721 barrels of oil per day (or more than 20.6 million gallons) in the event of an oil spill in the Gulf."
Alleged Representations Concerning Safety
The court rejected the sufficiency of alleged statements "about BP's 'commitment to safety,' prioritization of 'process safety performance,' headway in making 'real progress' in the process safety arena, and desire to become a 'world leader in process safety.'" "General progress," the court concluded, is "too illusory a metric." On these grounds, the following alleged statements, among others, were held not actionable:
- "BP America is in the midst of a comprehensive effort to improve its safety culture and to strengthen and standardize process safety and risk management programs at all BP-operated facilities."
- "Safety remains our number one priority and we can see clear progress."
- "2008 was another year of progress on our number one priority of safe and reliable operations."
- "The BP operating management system (OMS) turns the principle of safe and reliable operations into reality by governing how every BP project, site, operation and facility is managed."
- "Providing an integrated and consistent way of working, the OMS helps ensure that a rigorous approach to safe operations continues to be taken."
The court distinguished these generic statements from more specific alleged representations concerning BP's progress in rectifying deficiencies uncovered in a series of pre-Deepwater reports and investigations. Additionally, precise statements regarding the safety record of BP's rigs were found sufficient, if proven false and misleading, to be actionable. Thus, the following alleged statements, among others, were deemed actionable:
- "In the months and years since these violations occurred [at a refinery], we have made real progress in the areas of process safety performance and risk management."
- "We are making good progress in addressing the recommendations of the Baker Panel and have begun to implement a new [Operating Management System] across all of BP's operations."
- "[The Deepwater Horizon rig] had handled some of the industry's greatest technical challenges, and her safety record had been excellent and had recently won awards."
Alleged Representations Concerning Retaliation Towards Whistleblowers
The court found actionable alleged misrepresentations concerning BP's whistleblower policy. BP allegedly stated that it "does not tolerate retaliation against workers who raise safety concerns." According to plaintiffs, however, BP terminated employees who reported safety issues. While general statements about corporate culture are not actionable, the court found that these alleged specific statements about BP's policy of non-retaliation, if proven false, would be actionable.
Alleged Representations Concerning Budget Priorities
The court dismissed claims related to alleged representations that safety would take priority over budget constraints. These statements, the court found, were either too vague to be actionable or were not false. For instance, the following alleged representations were deemed not actionable:
- "By the way, let me add that managing costs down does not mean BP will be skimping when it comes to ensuring our operations remain safe, reliable and compliant in the years ahead."
- "There is one important caveat: safe and reliable operations always come first, whatever cost efficiency measures we undertake."
As with statements concerning the risk profile of BP's business, the court found that these representations indicate that BP was "forthcoming" regarding its budget cuts. Further, plaintiffs failed to allege that any of these statements were false, and they did not draw a sufficient connection between budget cuts and BP's safety profile.
Alleged Representations Concerning the Magnitude of the Disaster
The court also found actionable statements made in the wake of the explosion that allegedly differed from BP's internal assessment of the magnitude of the disaster. According to plaintiffs, BP was "lowballing" the rate at which oil was spilling into the ocean to ameliorate its declining stock price. Because BP representatives allegedly made public statements regarding the spill rate with knowledge that internal reports estimated a higher spill rate, the court found such representations actionable.
Court Dismisses Foreign Exchange Claims Under Recent Morrison Decision
Applying the Supreme Court's recent decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), the court dismissed all Section 10(b) claims brought by American purchasers of BP's ordinary shares, which are traded on the London Stock Exchange. As Judge Ellison explained, the Supreme Court in Morrison "determined that section 10(b) does not provide a cause of action for 'f-cubed' claims, that is, claims where foreign plaintiffs sue foreign defendants for misconduct in connection with securities traded on foreign exchanges." Although the BP shares at issue were registered on the NYSE, the registration was simply for regulatory purposes, and the shares were never traded on a U.S. exchange. Further, based on Justice Steven's Morrison concurrence and other district court decisions to have considered the issue, the court held that the citizenship of the purchaser is irrelevant to the Morrison analysis. Thus, the court held that Section 10(b) applied only to claims related to BP's American Depositary Shares, which are actually traded on the NYSE.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.