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(Alison Frankel is a Reuters columnist. The opinions expressedare her own.)
By Alison Frankel
NEW YORK, Oct 17 (Reuters) - When Matthew Mustokoff ofKessler Topaz Meltzer & Check walked out of oral argumentsbefore U.S. District Judge Keith Ellison of Houston lastNovember, he wasn't at all sure that his case - a suit byindividual pension funds claiming to have been duped by BP -would survive BP's motion to dismiss.
The judge had expressed sympathy for holders ofLondon-listed BP common shares, whose federal securities claimsare barred by the U.S. Supreme Court's 2010 ruling in Morrisonv. National Australia Bank. Mustokoff and co-counsel from JasonCowart of Pomerantz Hufford Dahlstrom & Gross were attempting toplead around Morrison by asserting fraud and misrepresentationclaims under state and common law.
But Judge Ellison seemed to be very interested in a novelconstitutional argument BP's lawyers at Sullivan & Cromwell hadcrafted in response to the pension funds' Morrison-dodging.BP said that the funds' case violated the dormant CommerceClause as it applies to international commerce because statelaws may not exceed the bounds of federal law. Funds couldn'tassert claims under state law, according to BP, when parallelfederal-law claims were barred. Ellison was so intrigued byS&C's Commerce Clause argument that at least half of the hearingon BP's motion to dismiss the funds' two related suits,Mustokoff told me, was dedicated to that defense.
But when Ellison entered his 97-page opinion on the docketof the BP multidistrict securities litigation last Thursday, hisanalysis of the Commerce Clause argument was reduced to afootnote. The judge entirely side-stepped the question ofwhether state or common law can give U.S. investors rights theydon't have under federal law by concluding that English law -and not American common law - applies to the pension funds'claims.
ELLISON'S RULING
BP had asked the judge to choose English law, but it alsowanted him to find that an English court is the preferable forumfor a matter of English law. Instead, Ellison said that he'sperfectly capable of applying English law on fraud, which"shares so many strong similarities with U.S. law due to acommon heritage." And since the conduct at issue in the pensionfunds' case involves BP's U.S. operations - and since he'salready overseeing a class action by holders of BP AmericanDepository Shares, who are raising arguments similar to those ofthe pension funds - Ellison said it makes sense for him to hearthe funds' suits.
Ellison's ruling, as Kevin LaCroix at D&O Diary notedTuesday, is an extremely rare example of shareholders of aforeign-listed stock finding a way around Morrison. But beforethe securities class action bar starts boning up on English lawon fraud (or, as it's known over the pond, "deceit,"), there area couple things to keep in mind.
First, this case isn't a class action. It's two suits bynine pension funds that had large enough BP holdings to make itworth their while to pursue individual actions. Second, Ellisonbased his decision to retain jurisdiction on some factors thatmight not figure in other investor fraud suits. And third, BPand Sullivan & Cromwell will get at least one more chance topresent their dormant Commerce Clause argument, which couldstill erase investor claims.
'DIE-HARD BELIEVERS'
If the nine pension funds represented by Kessler Topaz andPomerantz had filed a class action instead of individual suits,their case would have been precluded by the SecuritiesLitigation Uniform Standards Act. In fact, Judge Ellisonpreviously tossed just such a class action, in which BP commonshareholders tried to evade Morrison by asserting state-lawfraud claims against the company. The pension funds, however,were determined to bring their own suits. "These people aredie-hard believers that Morrison was decided wrongly," saidMustokoff, who told me his firm has been courting funds thatwanted to try a Morrison work-around.
Mustokoff said that the pension funds also benefited frombringing both federal securities claims (as holders of ADS thattrade on U.S. exchanges) and common-law claims. Two ofMustokoff's clients opted out of the ongoing class action by BPADS holders, but asserted very similar claims in theirindividual suits; in ruling that the funds could proceed withsome of their federal securities claims as ADS holders, Ellisonrelied heavily on his previous opinion in the ADS class action.
Since those federal claims are not covered by English fraudlaw, if the judge had decided to move the funds' fraud claims toEngland, he would have had to bifurcate the suit to permit thefederal claims to move forward in Houston. But since he'soverseeing the parallel ADS class action, he said, judicialefficiency is served by him keeping the funds' case as well. "IfI had simply brought common-law claims, he may have dismissedthe case in favor of London," Mustokoff said.
His co-counsel, Jason Cowart of Pomerantz, said that the BPinvestors' case could provide a route to recovery for othershareholders with significant holdings in foreign-traded stock,but only if their claims - like those of the pension funds -have a significant connection to the United States. The parallelADS class action was one important tie between the funds' caseand U.S. courts, Cowart said, but it was also important thatsome BP statements at issue were made in the U.S. and thatclaims involved BP's safety record in its U.S. operations.
"To the extent that similar factors are in play in othercases, we would hope that a court would follow the rationale ofJudge Ellison," Cowart said.
OTHER WRINKLES
The pension funds will still have to show the falsity ofmore than a dozen alleged BP misstatements. They'll also have toshow that they relied on the misstatements when they purchasedBP shares, since there's no fraud-on-the-market presumption ofreliance in an individual action, as opposed to a securitiesclass action.
Moreover, they may not have seen the last of S&C'sgroundbreaking Commerce Clause argument. In a separate opinionon BP's motion to dismiss claims by an Ohio pension fundasserting Ohio securities laws, the judge suggested that the oilcompany would have a chance to revisit its challenge to theconstitutionality of claims that extend state law beyond thebounds of federal law. (The Ohio case includes state-law as wellas common-law claims.) If Ellison ends up deciding that theCommerce Clause bars state-law claims on securities, you canexpect BP to attempt to revive the argument with regard tocommon-law claims as well, even if they're now proceeding underEnglish law.
Ellison acknowledged that the funds' case is going to be abit of an experiment, and that he may have to consult experts onthe state of the UK's Financial Services and Markets Act of2000. There are all sorts of other wrinkles he'll have to workout, including the right to a jury and, of course, whetherEngland's loser-pays rule applies. Mustokoff told me he'sconfident that it does not.
"It's a procedural rule, not a matter of substantive law,"he said. "It's not applicable in U.S. courts."
BP counsel Darryl Libow of S&C declined to comment.
(Reporting by Alison Frankel; Editing by Ted Botha)
