BP Stock Drop Suit Dismissed

April 2, 2012 (PLANSPONSOR.com) – A lawsuit against BP Plc North America relating to company stock investments in its retirement plans was dismissed.

A federal district court rejected plan participants’ argument that  their  claim  should  not  be  dismissed  based  on  the  Moench  presumption  because the presumption only applies when the fiduciary is required by the terms of the plan to  invest in company stock; the presumption does not apply on a motion to dismiss; and assuming the presumption  does  apply,  they  have  pleaded  sufficient  facts  to  overcome  it.      

U.S. District Judge Keith P. Ellison of the U.S. District Court for the Southern District of Texas noted that since adopting the presumption of prudence, the 5th U.S. Circuit Court of Appeals made clear that “[t]he Moench presumption logically applies to any allegations of fiduciary duty breach for failure to divest an EIAP or ESOP of company stock.”  See “Reliant Wins 2nd Stock Drop Case Ruling.”  According to Ellison, the application of the Moench presumption does not hinge on the extent to which the plans mandate investment in employer stock—or whether such investment is mandated at all—so long as the plan in question is an eligible individual account plan (EIAP).  

Ellison noted that the circuits were split on the  issue  of  whether  the  Moench  presumption  applies  at  the  motion  to  dismiss  stage. The 2nd, 3rd and 9th Circuits have applied the presumption when considering motions to dismiss; the 6th Circuit has not. However, since Kirschbaum was decided, every reported district court decision in the 5th Circuit addressing fiduciary challenges to employer stock investments dismissed the complaints under Rule 12(b)(6) on the basis of the  presumption.  “This court must side with all the other district courts in this circuit and apply the Moench presumption at the motion to dismiss stage,” Ellison wrote in his opinion.  The 5th Circuit explained that the courts are to look for “persuasive and analytically rigorous facts” to overcome the presumption.  If a plaintiff does not plead such persuasive and analytically rigorous facts, there is no reason for a district court to allow the claim to proceed to discovery.    

Ellison found that the participants’ theory of the case—defendants knew or should have known that BP was not in fact implementing the safety reforms espoused by company representatives; that the failure to make particular safety reforms would result in a catastrophic offshore accident; that BP would be unable  to contain an offshore spill in the Gulf; that the uncontained spill would result in a significant price drop in  BP shares; and that Defendants therefore should have divested the plans of all BP stock—fails to overcome the presumption of prudence because the complaint fails to allege how the fiduciaries knew of the alleged shortcomings in BP’s safety operations and fails to allege sufficient facts to suggest that BP’s underlying operations were indeed in dire straits following the Deepwater Horizon explosion so as to call into question the continued financial viability of the company.

The Case  

Following the issuance of a report in 2007, which provided a series of ten recommendations intended to reform BP’s safety performance, BP representatives made repeated public promises to reform the company’s safety programs. According  to  the participants who filed the lawsuit, these promises demonstrated that defendants were aware of the “red flags” the company faced, cognizant of the need for reform of the company’s safety culture, and on notice of the potential consequences of a failure to implement required reforms. The participants contend that the public promises about BP’s progress in improving its safety programs were false and constituted “misleading and inaccurate statements.”    

The participants alleged that the continued lack of reform in BP’s safety and risk management culture “represented a calculated decision by its leaders—many of whom served as fiduciaries to the plans—to place profits over safety and to conceal material information about its reckless management and deceptive practices.”  These failures to implement adequate safety measures in BP’s operations made the Deepwater Horizon disaster and the subsequent losses in value of the plans predictable, the participants argued.    

According to the court opinion, BP’s stock price suffered a loss of almost 55% following the Deepwater Horizon explosion. In January 2007, the BP Stock Fund comprised approximately $3.1 billion of the $9.5 billion in total assets held by the combined plans. Following the drop in share price, the total combined value of the plans’ assets fell to $7 billion, with the value of the BP Stock Fund dropping to $1.25 billion of that total.  

The district court’s opinion is available here.