(CN) - The 9th Circuit on Thursday reinstated a securities-fraud class action accusing BP of lying about the condition of Alaskan pipelines responsible for two spills in 2006.
On March 2, 2006, a leak in one of BP's Alaskan pipelines spilled 200,000 gallons of oil onto the North Slope oil field in Prudhoe Bay. BP suggested that the spill was an anomaly, but the discovery of a second leak five months later forced the company to temporarily halt operations in the region.
About two weeks after the first spill, the U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration gave BP Exploration (Alaska) Inc. three months to properly inspect its three pipelines in Prudhoe Bay.
BP missed the deadline by more than a month, and when it finally inspected the pipelines it found significant corrosion. The company chose to bypass certain parts of the pipeline instead of fixing them, according to the ruling.
The second leak was found in early August 2006.
Shareholders filed a federal class action in 2008, claiming the second spill and shutdown caused BP's share price to drop 4 percent. They accused the nation's largest oil and gas producer of knowingly, or with "deliberate recklessness," leading the public to believe that the pipelines were in better condition than they actually were.
Investors argued in an amended complaint that BP and its executives misled the public about the likelihood of a second leak in the wake of the first spill.
A federal judge dismissed the amended complaint on the basis that the alleged wrongdoing "more closely resembles corporate mismanagement than actionable securities fraud."
But the federal appeals court in Seattle largely disagreed.
"While we agree that BP's actions exemplify corporate mismanagement, the pleadings also charge that BP is a company that has publicly shirked responsibility for its role in causing the Prudhoe Bay spills at every step of the way," wrote Senior U.S. District Judge Raymond Dearie, who was designated to sit on the three-judge panel.
At issue were comments by Maureen Johnson, the unit leader for the Greater Prudhoe Bay area, who said that corrosion was occurring at a low and manageable rate, and that the March spill was "unique."
"The revelation that BP ignored red flags would portend serious corporate mismanagement, a portent that would be detrimental both to BP and to Johnson personally, as head of the Prudhoe Bay Unit responsible for the spill," Dearie wrote. "In common parlance, if anyone knew of the flawed monitoring program and the likelihood of failures in the pipeline system, Dr. Johnson did."
BP also likely knew that its reassurances, in its 2005 annual report, that the company was "in material compliance with applicable environmental laws," were untrue.
"[I]n light of the significant, public nature of the potential compliance issues, we find it most unlikely that top management was unaware of facts undermining its belief in compliance," Dearie wrote.
Investors also took issue with then-CEO John Browne's claim at a press conference that the first spill occurred "in spite of the fact that we have both world-class corrosion monitoring and leak detection systems."
These statements "appear to be false based on the results of later investigations revealing that the pipelines were under-inspected, under-maintained, and subject to severe risk of corrosion-related failure," the 9th Circuit ruled.
However, the panel said it wasn't clear from the complaint that Browne knew about the problems. His press conference was on April 25, 2006 -- about a month after the spill and 10 days before BP's board received a detailed update about the spill, the court noted.
The court reinstated the shareholder class action, adding that "after six years of preliminary litigation, the allegations must now be tested on the merits."
Along with BP, defendants include BP Exploration Alaska Inc., Browne and Johnson.
In October 2007, BP pleaded guilty to a misdemeanor violation of the Clean Water Act and agreed to pay a $20 million fine to settle federal and state criminal violations. In the plea agreement, BP admitted that it had not cleaned the line since 1998, eight years before the first leak, or the second line since 1990, 16 years before the second leak.
In 2011, BP Alaska settled separate claims with the Department of Justice and the state of Alaska by agreeing to shell out $25 million in civil penalties and make $60 million in improvements to its Alaskan pipelines.