The United States Court of Appeals for the Fifth Circuit recently reviewed a district court’s decision to certify a class of investors in British Petroleum securities. The case, Ludlow v. BP, P.L.C., No. 14-20420, centers on BP’s alleged misstatements relating to the catastrophic blowout of the Macondo exploratory well off the coast of Louisiana. The plaintiffs, who had brought claims for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5, sought certification of two distinct classes: (i) a so-called “pre-spill” class, comprised of investors who had purchased BP securities in reliance on the company’s statements that ostensibly “portrayed BP’s safety policies as being more advanced on paper than they were in practice”; and (ii) a “post-spill” class, made up of investors who bought the company’s securities on the basis of BP’s representations that the well’s spill rate was far lower than it actually was. The trial court had certified the latter class, but not the former. The Fifth Circuit affirmed.
The court of appeals in Ludlow harkened back to the Supreme Court’s decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), which held that class treatment under Rule 23(b)(3) typically presupposes a link between the plaintiffs’ liability theory and their theory of class-wide damages. For the “post-spill” class, according to the Fifth Circuit, the plaintiffs had formulated a damages model that plausibly traced the artificial inflation of BP’s stock price back to its public statments about the magnitude of the spill. By contrast, with respect to the “pre-spill class,” the plaintiffs failed to distinguish between investors who would have still purchased shares in BP even if the company had not exaggerated its safety protocols and, on the other hand, those more risk-averse members of the putative class that would have invested their money elsewhere.
The lesson in all of this is that BP made a bad situation even worse. After the blowout, BP was naturally inclined toward managing its public image and conducting damage control. These are laudable goals for a publicly traded company. But in its haste to put markets at ease, the company released estimates of the spill rate that, as it turns out, were wildly optimistic. In fact, according to the plaintiffs’ expert witness, BP’s published spill rates understated the actual rate at which oil was escaping the Macondo by a factor of at least twenty and perhaps as much as 100. By circulating these premature estimates, BP opened itself up to expansive liability under the federal securities laws. This additional layer of exposure could have been avoided entirely had the company put stronger filters in place in the wake of the blowout.
In the oil-and-gas sector, even companies with impeccable safety records are at some point or another impacted by serious industrial accidents. This is simply the nature of the beast. But publicly traded energy companies can, ironically enough, do plenty of damage during the remedial act of performing damage control in the court of public opinion. Especially now, as widespread layoffs in the oil patch are adversely affecting the industry’s public profile, compliance and public relations departments should ensure that their companies’ legal woes are not compounded in the aftermath of tragedy by shoot-from-the-hip assurances to the marketplace that later become fodder for enterprising class action lawyers or, worse yet, for the Enforcement Division of the Securities and Exchange Commission.