NEW ORLEANS (CN) – A federal judge in Houston was correct to call pipeline spills unremarkable and investors should take them as no surprise either, an attorney for a pipeline company told a Fifth Circuit panel Wednesday.
“It is not an industry that you’re not going to have spills, or leaks in, and in fact, Plains makes that very clear in their filings,” attorney Michael Holmes, a partner in shareholder litigation and enforcement at Vinson & Elkins in Dallas, told the three-judge panel.
A class of retirement funds led by IAM National Pension Fund appealed a Houston federal judge’s dismissal of the securities portion of their lawsuit against Plains All American Pipeline LP after a California jury last year found the company guilty of criminally negligent conduct for a May 2015 pipeline rupture that sent tens of thousands of gallons of oil into the Pacific Ocean.
The securities lawsuit alleged the pipeline company “falsely claimed to have a comprehensive, effective environmental and regulatory compliance program to prevent oil spills” and said the company “repeatedly violated regulatory mandates” all the while having a compliance program that “was close to non-existent.”
U.S. Circuit Leslie H. Southwick, an appointee of George W. Bush, appeared skeptical Wednesday during Holmes’ arguments about the inevitability of spills.
“I don’t think that’s what Judge Rosenthal had in mind,” Southwick said, referring to U.S. District Judge Lee Rosenthal’s dismissal of the securities violations claims.
Holmes argued that Plains All American was not misleading investors when the company said it has implemented regulatory and safety measures that go above and beyond.
In fact, he said, some of the issues the retirement funds raised in their lawsuit had been identified by the company in a previous document filed with the Pipeline and Hazardous Materials Safety Administration, an agency of the Transportation Department.
“There is no recklessness here,” Holmes said. “I think that’s how Judge Rosenthal was looking at it.”
Holmes went on to say that in looking at a shareholder contract with a pipeline, the investor can’t simply interpret the terms as they wish because the statements in such contracts are actually for underwriters.
Judge Southwick still appeared unconvinced.
Holmes continued, “It isn’t that there aren’t any regulatory violations” made by Plains All American, but “there are no regulatory violations that could be reasonably expected to lead to a material adverse effect.”
Robin Wechkin, an attorney with Sidley Austin in Seattle who represents the underwriters, told the Fifth Circuit judges Wednesday that the plaintiff shareholders could not have reasonably expected to take everything in the shareholder contract at face value.
“The idea that you could base liability on a contract would vastly destroy” the relationship between investors and underwriters, she said.
Judge Rosenthal had analyzed Plains All American’s statements to its shareholders “in context,” Wechkin said.
“There would be a huge disincentive for underwriters to represent clients,” if they knew that absolute statements could be used against them, she said.
But Susan Alexander, a partner at Robbins Geller Rudman & Dowd in San Francisco representing the class of retirement funds, said Plains All American is “absolutely liable for false statements” made to its investors.
“Safety and maintenance of these pipelines is of the utmost importance, and investors want to know,” Alexander said.
The shareholders’ appellate brief says that considering Plains All American’s failure to maintain the safety of its pipelines and comply with laws and regulations, all the while telling investors its pipelines are top of the line, “it is genuinely remarkable that defendants persist in asserting fact-bound materiality arguments.”
The plaintiffs also say the company realized its pipeline was visibly corroded and had been for 10 years at least before the oil spill in California.
“Plains had concealed the data necessary to calibrate its measuring tools so that the pipeline had at least one area with “actual metal loss [of] 89%’” the brief states.
The filing continues, “Reasonable investors would have wanted to know the truth: that Plains was ‘knowingly engaging in or causing the discharge or spill of oil into the waters of the state.’”
The oil spill occurred May 19, 2015, near Santa Barbara when Plain All American’s badly corroded pipeline broke, sending – by the company’s own estimates – 3,400 barrels of crude oil into the Pacific Ocean. The company knew of the rupture but did not alert authorities of the spill for more than three and a half hours.
Judge Southwick was joined on the panel by Chief U.S. Circuit Judge Carl Stewart, an appointee of Bill Clinton, and U.S. Circuit Judge Kurt Engelhardt, another George W. Bush appointee.
The judges did not indicate when they will rule on the matter.
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