Vedder Thinking | Articles In re: BP p.l.c. Securities Litigation
In this matter, the U.S. District Court for the Southern District of Texas returned to the issue of class certification. In its prior decision on December 6, 2013, the court denied class certification to investors suing BP for alleged misrepresentations the company made about the safety of its drilling operations and the massive Deepwater Horizon oil spill in 2010. The court agreed that most prerequisites for class certification under Federal Rule of Civil Procedure 23, including numerosity, commonality, typicality and adequate representation, were met, with the exception of the predominance of classwide damages. The court allowed plaintiffs to supplement their motion and address the deficiencies noted in its prior order.
As a result, the plaintiffs renewed their motion for class certification. Plaintiffs modified their proposed subclasses and articulated differing damages methodologies for each. The subclasses were defined as: (1) the pre-explosion subclass consisting of persons or entities who purchased or otherwise acquired BP American Depositary Shares (BP AD shares) between November 8, 2007 and April 20, 2010, and were injured thereby; and (2) the post-explosion subclass consisting of persons or entities who purchased or otherwise acquired BP AD shares between either April 26 or April 29, 2010 and May 28, 2010 and were injured thereby.
The court presented a two-pronged issue to determine whether the plaintiffs' proposed damages methodologies (1) quantify the injury caused by defendants' alleged wrongful conduct and (2) can be deployed on a classwide basis such that common issues will predominate over those that are individualized. Defendants set forth a number of arguments against class certification, addressing various deficiencies in plaintiffs’ proposed damages methodologies, most of which accused plaintiffs of continuing to seek recovery for theories of liability no longer part of the case, or proposing damages methodologies inconsistent with their liabilities.
After reviewing the briefs and supporting experts presented by the parties, the court denied class certification as to the pre-explosion subclass and granted class certification to the post-explosion subclass. For the pre-explosion subclass, the plaintiffs alleged that the defendants "repeatedly and falsely assured the market that process safety improvements . . . were being rolled out throughout the organization, across the globe." The plaintiffs’ contention was that these misrepresentations lured the market into believing that BP was safer than it really was. The loss methodology calculation involved computing total investment losses caused by fraudulent statements by measuring the decline in stock price on days when "corrective events" entered the marketplace. The plaintiffs set forth eight different "corrective events" in their analysis, and defined these events as stock price declines associated with the market realization that BP could not contain the oil spill. These mistakes were proximate causes of the post-explosion investment losses because plaintiffs were deprived of the opportunity to divest prior to the explosion.
The court stated that this proposed measurement of damages could not be deployed without an "individualized inquiry" into each investor's subject motivations, into what is supposed to be a classwide model of recovery. Plaintiffs' theory suggests that investors determine their own risk thresholds specific to the company at issue. These types of individualized questions would be patently inappropriate for classwide treatment. The court relied on Comcast Corp. v. Behrend, which noted that "a methodology that identifies damages that are not the result of the wrong can provide no assurance that damages resulting from the wrong are capable of measurement and will not require labyrinthine individual calculations."1 As such, the plaintiffs were unable to show that the damages of pre-explosion purchasers could be calculated on a classwide basis consistent with their theory of liability; thus, the predominance requirement of Rule 23 was not met as to the pre-explosion subclass.
The court did find that the damages methodology for calculating the "post-explosion" subclass met the requirements for Rule 23. The court found that none of the defendants' criticisms of the proposed damages methodology were sufficient to deny class certification for the post-explosion subclass. The defendants' first criticism concerned the calculation method and addressed the court's prior rejection of the "constant dollar" approach to damages. Here, the court noted that its concern over using the "constant dollar" approach to calculating damages was relevant to the pre-explosion time frame only and that, having reviewed that methodology in the isolated context of the spill severity misstatements, "the Court perceives no legal or logical impediment to its use."
Despite the other criticisms, the court acknowledged that the damages methodology proposed for the "post-explosion" subclass met the requirements for Rule 23(b)(3) because it attempted to quantify the injury caused by the defendants' alleged wrongful acts and it can be deployed on a classwide basis. Thus, the court certified the post-explosion subclass for class action treatment.
Lastly, the court granted leave to amend pursuant to Rule 15(a)(2), finding that the proposed amendment by plaintiffs to add a fourth spill severity misstatement on April 24, 2010, was clearly not futile. The importance of the amendment could not be overstated, as without it, investors who purchased on three days in the post-explosion time frame would be excluded from the class action. Additionally, $5.26 of the stock price decline that plaintiffs allege was related to the spill severity fraud would be unrecoverable. The court found that neither plaintiffs’ delay in asking for the amendment nor the prejudice that would be visited upon defendants was substantial enough to refuse leave to amend.
Click below to download the complete newsletter featuring this article.
1 Comcast Corp. v. Behrend, 133 S. Ct. 1246 (2013).