HOUSTON - U.S. District Judge Keith Ellison cured conflict among BP shareholders in national securities fraud litigation by splitting them into two groups.
On Dec. 28, the judge for the Southern District of Texas in Houston picked public pension trustees of New York and Ohio as lead plaintiffs alleging five years of fraud, and he picked a separate group alleging barely one year
"Absent class members could be prejudiced by New York and Ohio's manner of drafting a consolidated complaint, defending motions to dismiss, and conducting discovery," Ellison wrote.
He found it particularly important at the early stage of the case to avoid appointing a lead plaintiff who could not fully and fairly represent absent members.
"The court expects the lead plaintiffs to work together as needed to prevent inefficiencies in discovery and other stages of the litigation," he wrote.
"For example, the court expects that no witness should need to be deposed more than once simply because of the presence of multiple lead plaintiffs," he wrote.
He gave each group 45 days to file a complaint.
Ellison presides over seven securities fraud complaints that BP shareholders filed after the April 20 explosion of Deepwater Horizon offshore oil rig in the Gulf of Mexico.
He presides over eight other shareholder actions under federal retirement law.
He operates separately from U.S. District Judge Carl Barbier of New Orleans, who handles almost all other Deepwater Horizon damage claims from federal courts.
In Ellison's securities fraud cases, pension funds in Ohio and New York jointly moved for appointment as lead plaintiffs.
They claimed losses on common stock and "American depository shares."
Each depository share represents six shares of common stock, but securities laws that don't apply to common stock apply to American depository shares.
Plaintiffs Robert Ludlow, Peter Lichtman, Les Nakagiri and Paul Huyck, who bought American depository shares from March 2009 to last April, jointly sought appointment.
In October, New York and Ohio argued Ellison should appoint them because they proposed the longest class period.
Their lawyer, Paul Yetter of Houston, wrote that they lost more than $200 million.
He wrote that courts are loath to determine a class period on a lead plaintiff motion.
He wrote that courts are concerned about extinguishing rights of tens of thousands who would never obtain recovery where a lead plaintiff refuses to pursue their claims.
A niche appointment for Ludlow's group invited chaos, Yetter warned.
He designated Cohen Milstein Sellers & Toll and Berman DeValerio as lead counsel, writing that New York's counsel and Ohio's attorney general would oversee them.
"In contrast, the Ludlow plaintiffs tell us nothing about themselves: who they are, how they came together as a group, why they decided to function as a group in pursuing this lawsuit, their experience, or how they will oversee counsel and direct the prosecution of this action."
For Ludlow's group, Richard Mithoff of Houston responded that BP concealed internal warnings in 2009 and 2010.
He wrote that New York and Ohio profited from trades in American depository shares in 2009 and 2010.
Expanding the period back to 2005 would create conflicts among class members and dilute their strongest claims, he wrote, because it would subject them to causation defenses based on the Texas City explosion in 2005, the Prudhoe Bay leak in 2006 and BP's criminal pleas to both.
BP didn't buy the well until 2008, Mithoff added.
Joseph Cotchett, Mark Molumphy and Jordanna Thigpen, all of Burlingame, Calif., placed their names below Mithoff.
For New York and Ohio, Yetter answered that the bulk of the stock drop occurred after investors learned BP lied about its commitment to safety.
He wrote that Ludlow's group impeded recovery by failing to include market reaction.
Mithoff answered that damage calculations of an expert for New York and Ohio can't withstand serious scrutiny.
He wrote that the expert aggregated losses of five funds from May 4, 2009, to June 1, 2010, but only one fund had a loss from transactions.
In addition, the loss was based on purchases in May, after the explosion, Mithoff wrote.
Ellison held a hearing on Dec. 16, and reached a decision 12 days later.
He found that courts select a lead plaintiff with the longest class period unless the allegations supporting the period are obviously frivolous.
The standard discourages manipulation of the period but substantially avoids the merits of the claims, he wrote.
"It is clear from the briefing and from oral argument that New York and Ohio's theory of the case differs significantly from that of the Ludlow plaintiffs," Ellison wrote.
He wrote that New York and Ohio focused on fraud committed after April 20.
"Because of these divergent theories, New York and Ohio might not have an interest in vigorously pursuing the claims central to the Ludlow plaintiffs' shorter class period, in favor of emphasizing arguments about fraud based on conduct before and after the Ludlow plaintiffs' 13 month window," he wrote.
He wrote that if he appointed Ludlow's group to represent all class members, he would create another potential conflict of interest.
"The court is confident that the lead plaintiffs themselves will control the litigation and represent their classes fully," he wrote.
"The court is also confident that the presence of a subclass will not prevent the parties from efficiently and civilly pursuing all viable claims and proceeding through the discovery process."
Ellison reserved the right to collapse the class and subclass into one class or to choose a different class period.