Claude Reese v. Robert Malone
747 F.3d 557
9th Cir.2014Background
- In March 2006 a BP-Alaska Prudhoe Bay oil transit line (WOA) leaked ~200,000 gallons due to internal corrosion; a second leak in August 2006 occurred in a different line (EOA), prompting a regional shutdown and share-price decline.
- Plaintiffs are ADR holders who sued under §10(b), §18(a), §20(a) and Rule 10b-5, alleging BP and executives made materially false and misleading statements about pipeline condition, corrosion monitoring, pigging practices, and regulatory compliance.
- Investigations and regulatory actions (PHMSA Corrective Action Order, DOJ criminal plea, state civil suit, congressional hearings) revealed BP under-used smart pigging, relied on inferior monitoring (ultrasonic checks and corrosion coupons), and had known inspection gaps and high corrosion rates.
- Key defendants include Maureen Johnson (BP‑Alaska SVP responsible for Prudhoe Bay operations) and CEO John Browne; plaintiffs allege particular false statements by Johnson and Browne after the first spill and in BP’s 2005 annual report.
- The district court dismissed the complaint with prejudice for failure to plead scienter with the required particularity; Ninth Circuit reversed in part and affirmed in part, finding scienter adequately alleged as to several statements but not as to Browne’s “world class” systems remark.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Falsity of Johnson’s March 15, 2006 statement that corrosion was at a “low manageable” rate | Johnson’s statement concealed contemporaneous inspection data showing very high/localized corrosion (e.g., 32 MPY) that contradicted “low/manageable” | Statement was incomplete or referred to overall average conditions; isolated readings did not render the characterization false | Falsity and materiality adequately pled; plaintiffs also adequately pled scienter as to Johnson’s March 15 statement |
| Falsity of Johnson’s statements distinguishing WOA and EOA (March–May 2006) | BP knew the lines were similar and susceptible to microbiologically induced corrosion; later disclosures and internal documents contradict the uniqueness claims | Statements reflected preliminary assessments subject to change and did not assert final conclusions | Falsity and materiality adequately pled; court found particularized facts creating a strong inference of scienter as to these statements |
| Browne’s April 25, 2006 statement that BP had “world class corrosion monitoring and leak detection systems” | Statement was false given under-inspection, inadequate pigging, and known monitoring deficiencies | Browne lacked actual knowledge; timing and Board updates do not show he knew the contrary when he spoke | Statement may be false, but plaintiffs failed to plead facts giving rise to a strong inference Browne knew it was false — claim against Browne affirmed dismissed on scienter grounds |
| 2005 Annual Report statement that “management believes… activities are in compliance in all material respects with applicable environmental laws” | Given the March spill, PHMSA CAO, subsequent guilty plea and regulatory findings, management could not reasonably hold that belief; plaintiffs allege contemporaneous awareness by top management | Language is qualified ("management believes" and "material respects") and vague; defendants argue no strong inference of deliberate recklessness | Falsity and materiality adequately pled; plaintiffs sufficiently alleged that the issue was prominent and management was aware — scienter pleaded for the Annual Report statement |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (holistic Tellabs test for evaluating competing scienter inferences)
- Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011) (court must review scienter allegations holistically)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality test — whether omitted fact would have altered the total mix of information)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (PSLRA falsity and scienter pleading standards)
- Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008) (core‑operations/absurdity inference can support scienter when the fact is prominent)