BP Mismanagement Led to Drilling Rig Explosion, Gulf Spill, Lawsuit Claims

Officers and directors of BP Plc, pursuing cost-cutting over safety, ignored “red flags” that could have prevented the explosion of the Deepwater Horizon drilling rig in the Gulf of Mexico, lawyers for investors said.

The Louisiana Municipal Police Employees’ Retirement System and other investors claim BP executives and directors breached their fiduciary duties to the company by ignoring safety and maintenance for years before BP’s Macondo well exploded April 20. The investors seek reforms in BP management and damages from the executives and board members to be paid to the company.

“Despite repeated guilty pleas, warnings, employee deaths and injuries, and criminal and civil penalties imposed on the company by numerous federal and state regulators, the defendants continued to systematically cut budgets,” the investors’ lawyers said in a court filing yesterday. “The defendants’ decisions and deliberate inaction caused one of the largest environmental disasters in the history of the U.S.”

The investors’ suit, a so-called derivative claim brought on behalf of the company, is combined with other shareholder actions in federal court in Houston. The Louisiana pension fund initially filed the derivative lawsuit in May, within weeks of the explosion, and was joined by similar claims by other investors. Lawyers for the investors filed a combined amended complaint, adding details to their claims.

Hundreds of Lawsuits

The lawsuit is among hundreds filed in U.S. courts after the well explosion and sinking of the Deepwater Horizon in April, which set off the largest offshore oil spill in U.S. history. Injury, economic loss and environmental claims are combined before a federal judge in New Orleans.

U.S. District Judge Keith P. Ellison in Houston is overseeing three categories of BP investor claims consolidated in his court -- derivative suits brought on behalf of the company, shareholder securities fraud suits claiming diminished share value and claims by BP employees alleging losses from mismanagement of their retirement savings funds.

Daren Beaudo, a BP spokesman, didn’t immediately return e-mail and voice-mail messages after regular business hours yesterday.

The lawsuit names as defendants current and former executives and board members including Chief Executive Officer Robert W. Dudley, former CEO Anthony B. Hayward and Chairman Carl-Henric Svanberg. The plaintiffs include the City of New Orleans Employees’ Retirement System and the Southeastern Pennsylvania Transportation Authority.

‘Reputational Harm’

The executives and board members pursued or allowed BP to pursue a reckless course that led to the Deepwater Horizon incident, the investor lawyers said. “In addition to the tragic loss of life, the disaster is anticipated to cost the company at least $40 billion in damages, permanent reputational harm and intense government scrutiny.”

BP continued cost-cutting policies that pre-dated the explosion at its Texas City refinery in 2005 that killed 15 workers, despite findings by multiple reports linking this strategy to the blast, the investors’ lawyers said.

“In 2009 alone, defendants cut BP’s operational costs by 15 percent,” according to the complaint. “This reduction in budgets and manpower further undermined the company’s ability to operate safely as personnel were stretched even thinner and resources that should have been devoted to maintenance, monitoring and addressing crucial safety failures in every aspect of the company’s operations were diverted.”

‘Next Catastrophe’

“Any reasonable director sitting on the BP board before the Deepwater Horizon disaster would have recognized that when it came to the next catastrophe, the question was not ‘if,’ but rather ‘when’ and ‘how bad.’”

The lawyers contend that a series of events and regulatory fines since the Texas City explosion should have convinced executives and managers of the need for policy changes. BP’s neglect of company pipelines in Alaska caused a March 2006 rupture that spilled 267,000 gallons of crude oil at Prudhoe Bay and led to $20 million in civil and criminal fines against BP, according to the complaint.

The company’s internal study into problems at the Alaskan pipeline operations, by Booz Allen Hamilton in March 2007, found that “BP’s top-down budget targets provided a ‘budget box’ in which activities, materials and projects had to fit,” according to the complaint.

Safety Violations

Federal safety regulators fined BP more than $5 million for “willful” safety violations at its Ohio refinery from 2006 to 2010, the investor lawyers said. Federal regulators and prosecutors fined BP more than $150 million in combined civil and criminal penalties for safety and environmental violations at the Texas City plant and the company’s failure to bring the site into compliance after the fatal 2005 blast, according to the complaint.

The investors are seeking reimbursement of costs for pursuing the lawsuit, including attorneys and experts’ fees, along with unspecified damages to be paid to BP by the individual directors and executives for the company’s losses as a result of the alleged breaches of fiduciary duty.

The lawsuit also asks that the defendants account for profits and benefits, including salaries, bonuses and stock options, obtained through their alleged misconduct. Any money recovered would be placed in a trust for the company’s use.

The case is In re BP Shareholder Derivative Litigation, 4:10-cv-03447, U.S. District Court, Southern District of Texas (Houston).

By Margaret Cronin Fisk, at mcfisk@bloomberg.net; Laurel Brubaker Calkins laurel@calkins.us.com.

Source: Bloomberg