An appeals court ruling Thursday rekindles a shareholder lawsuit that alleges BP executives intentionally made false or misleading statements about the condition of North Slope pipelines before two spills in 2006.
The investors sued BP and top executives in 2008, asserting that public statements after the first spill were intentionally misleading as were statements in BP annual reports asserting the company was in compliance with environmental laws and that touted its "environmental best practices."
In March 2006, a leak from corroded pipe spilled more than 200,000 gallons of oil onto the tundra -- the biggest spill ever on Alaska's North Slope. That August, there was a smaller leak from a second line. Oil production at Prudhoe Bay was shut down during repairs. Investors say the shutdown caused a 4 percent drop in BP's stock price.
BP pleaded guilty in 2007 to negligently discharging oil after admitting it knew of corrosion in its pipelines and that it had failed to monitor the aging pipe system for corrosion. It paid a $20 million fine to settle the criminal charges.
A federal judge in Seattle originally threw out the proposed class action lawsuit alleging securities fraud. The judge found that while some of BP's statements were false, the allegations "portray a company that poorly understood the challenges it faced in Prudhoe Bay, not one that engaged in securities fraud."
A three-judge panel of the 9th U.S. Circuit Court of Appeals on Thursday determined the case should go forward. The shareholders will have to prove not only that BP's statements were false and material, but that BP executives made them intentionally or were deliberately reckless.
BP said Thursday in an emailed statement that it hadn't had time to study the decision but that it had improved safety practices since 2006 and now looks regularly for hard-to-find corrosion.
"We have significantly increased spending on corrosion monitoring and prevention, such as in-line smart pig inspections," BP said, referring to a device that checks pipelines for corrosion. "Annually, BP does more than 100,000 pipeline inspections for corrosion under insulation on the North Slope."
The investors contend that Maureen Johnson, then BP Alaska senior vice president and Greater Prudhoe Bay Performance Unit leader, made some of the statements at issue.
For instance, she told the Associated Press about two weeks after the first spill that a September 2005 inspection had found "a low manageable corrosion rate," the appeals court said, referring to the investor allegations.
In fact, BP's internal documents showed a dramatic spike in the rate of corrosion from 2004 to 2005. The investors contend the rate in 2005 was at the highest of three levels in BP's measuring system, according to the opinion.
Even if Johnson wasn't trying to deceive investors about the likelihood of a future spill, her statement was misleading in itself, under the case argued by investors, the court said. And she is an engineer who "had every reason to review the results of BP-Alaska's corrosion monitoring to understand what happened."
At an April 25, 2006 press conference, then-BP chief executive officer John Browne contended the first spill occurred "in spite of the fact that we have both world class corrosion monitoring and leak detection systems, both being applied within regulations set by the Alaskan authorities."
That was proven to be untrue, the appeals court said, though the investors haven't yet shown that Browne knew it at the time.
"To some extent, corporate mismanagement would be a plausible explanation for how misinformation travels to the corporate suite," the appeals court said. "But in this case, facts alleged in the complaint support the conclusion that BP had been aware of corrosive conditions for over a decade, and yet chose not to address them."
The Department of Justice and the state of Alaska also sued over the 2006 spills. In 2011 BP paid a $25 million fine to settle the federal lawsuit asserting water and air pollution violations, and it agreed to set up an inspection and corrosion-monitoring system estimated to cost $60 million. The state, which sued over lost revenue from oil production shortfalls, in 2012 won $255 million from BP, most of it through binding arbitration.
Reach Lisa Demer at email@example.com or 257-4390.