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Donald P. Foley, On Behalf of Himself and All Others Similarly Situated v. Transocean Ltd.

March 20, 2012

DONALD P. FOLEY, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
TRANSOCEAN LTD., STEVEN L. NEWMAN, AND ROBERT L. LONG, DEFENDANTS.



The opinion of the court was delivered by: Naomi Reice Buchwald United States District Judge

MEMORANDUM AND ORDER

This securities class action against Transocean Ltd. ("Transocean") and its current and former Chief Executive Officers ("CEOs") follows in the wake of the tragic accident on the Deepwater Horizon on April 20, 2010. Lead Plaintiff Danica Pension A/S ("Lead Plaintiff") brings the action on behalf of a putative class of investors who purchased or otherwise acquired shares in Transocean between August 5, 2009 and July 23, 2010 (the "Class Period").

Presently before the Court is defendants' motion to dismiss the Consolidated Class Action Complaint ("CAC") pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, defendants' motion is granted.

BACKGROUND

The following facts are drawn from the CAC and statements or documents attached to the CAC or incorporated into it by reference, which may be considered on a motion to dismiss. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002). In particular, we rely on the report of the Chief Counsel to the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling (the "Chief Counsel's Report"), which is cited extensively throughout the CAC.*fn1

I.The Defendants

Transocean is the "world's largest offshore drilling contractor." (CAC ¶ 3.) As of March 31, 2010, Transocean owned and operated 140 mobile offshore drilling units, primarily located in the Gulf of Mexico and the North Sea. (Id. ¶ 35.)

Defendant Robert L. Long ("Long") served as Transocean's CEO and was a member of its Board of Directors from October 2002 until February 28, 2010. (Id. ¶ 37.) Defendant Steven L. Newman ("Newman") replaced Long as the company's CEO on March 1, 2010, having previously served as Transocean's Chief Operating Officer ("COO") from May 2008 until November 2009 and again from December 2009 to February 2010. (Id. ¶ 38.) Newman has also been Transocean's President since May 2008 and has been a member of its Board of Directors since May 14, 2010. (Id.)

II.Transocean's Drilling Operations

In addition to owning and leasing drilling rigs, Transocean provides equipment and personnel for its rigs' operations. (Id. ¶ 45.) Transocean provides trained personnel to "perform the important tasks [it] is responsible for as rig owner, including well control." (Id. ¶ 48.) "Although the rig lessee retains the right of inspection and approval of the work performed on its behalf, the actual performance and supervision of the work is normally Transocean's ultimate responsibility." (Id.)

Among the equipment that Transocean provides and maintains is a rig's blowout preventer ("BOP"). (Id. ¶ 46.) The BOP serves as both a drilling tool and a backstop device to control wellbore pressures.*fn2 (Chief Counsel's Report at 16.) The BOP is a "giant assembly of valves" that latches onto the well structure just above the seafloor. (Id.) Once the BOP and its accompanying apparatus are put into place, all subsequent drilling operations run through this system. (Id. at 17.)

The BOP is equipped with multiple means of controlling well pressure. Of particular importance, the BOP contains various "rams" that can be activated to prevent hydrocarbons from flowing up the wellbore. (Id. at 21.) One of these rams -- the blind shear ram -- is the BOP's emergency line of defense against an oil spill. The blind shear ram consists of two metal blocks with blades on the inner edges. (Id. at 16.) It is designed to be able to cut through the drill pipe that runs through the wellbore, allowing the ram to entirely seal off the well and thus prevent any upward movement of hydrocarbons. (Id.)

III.The Deepwater Horizon

The Deepwater Horizon was a "dynamically-positioned, semi-submersible deepwater drilling vessel" owned by Transocean and leased to BP. (CAC ¶ 56.) It was first put into service in February 2001 and was later moved to the Macondo prospect site in the Gulf of Mexico. (Id.) The rig cost $350 million to build and had an insured value of $560 million. (Id. ¶ 49.) As of March 24, 2010, the Deepwater Horizon had drilled the deepest depth of any oil and gas well in the world, having drilled to a vertical depth of 35,050 feet at the Macondo site. (Id. ¶ 56.)

Transocean leased the Deepwater Horizon to BP for a daily operating rate of $533,495. (Id. ¶ 58.) Lead Plaintiff notes that under the terms of Transocean's contract with BP, Transocean was required to "maintain well control equipment and use all reasonable means to control and prevent fire and blowouts." (Id. ¶ 55.) Lead Plaintiff further notes that on the day of the Macondo accident, 79 of the 126 employees on the Deepwater Horizon were Transocean employees, while only 7 of the 126 individuals were employees of BP. (Id. ¶ 54.)

IV.The Macondo Disaster

The events leading up to the fateful explosions on the Deepwater Horizon have been extensively documented through a series of government investigations and reports. Thus, we only briefly recount those aspects of the timeline of events most relevant to the instant claims against defendants.

In April 2010, the crew on the Deepwater Horizon prepared for a process known as "temporary abandonment." Temporary abandonment refers to procedures that are used to secure a well so that a rig can safely be removed from the well site. (Chief Counsel's Report at 127.) BP planned to temporarily abandon the Macondo well and have the Deepwater Horizon replaced by another rig to complete the well construction process. (Id.)

On April 20, 2010, the crew conducted a series of tests as part of the temporary abandonment process. Two of the tests conducted were "negative pressure tests," during which the rig crew reduces the pressure inside the well and then monitors the well for any increase in pressure. (Id. at 146.) Any such increase signals a failed test because it indicates that hydrocarbons may be leaking into the well. (Id.) The Chief Counsel's Report concluded that both of the negative pressure tests conducted on April 20, 2010 should have been treated as failed tests because the crew was unable to reduce pressure on the drill pipe and/or have the drill pipe pressure remain at the reduced levels once it was decreased.*fn3 (Id. at 153-60.) The rig crew conducting the tests, which consisted of both BP and Transocean employees, instead accepted an erroneous theory offered by Transocean's drilling supervisor to explain the anomalous results that they were viewing and did not recognize the likelihood that hydrocarbons were leaking into the well.*fn4

(Id. at 157-60.)

Following the completion of the pressure tests, the crew moved to the next step in the temporary abandonment procedure -displacing the mud and spacer fluid in the well with seawater. (Id. at 174.) The crew overseeing this process again included both Transocean and BP employees. (Id. at 174-75.) The crew began this process shortly after 8 p.m. (Id. at 175.) At 9:01 p.m., a "significant anomaly" occurred when pressure on the drill pipe suddenly began to increase.*fn5 (Id. at 177.) According to the Chief Counsel's Report, this "likely indicated that hydrocarbons were pushing heavier mud up from the bottom of the well against and around the drill pipe." (Id.) However, it was not until almost 9:30 p.m. that the crew recognized the existence of a problem. (Id. at 180.) By this point, the pressure levels inside the well had climbed to extremely anomalous levels. (Id. at 179-80.) Over the next ten minutes, the crew ran diagnostic tests and discussed the situation, but it did not activate the BOP to shut in the well. (Id. at 180-81, 198.)

At roughly 9:40 p.m., mud from the well shot to the top of the derrick and began to pour onto the main deck of the rig. (Id. at 181.) At 9:41 p.m., Transocean's drilling supervisor activated the BOP's annular preventer.*fn6 (Id.) However, the annular preventer failed to shut in the well, and tragically, at 9:49 p.m., the first explosion occurred. (Id. at 182.) Seven minutes after this initial explosion, a Transocean employee attempted to activate the blind shear ram by initiating the rig's emergency disconnect system. (Id. at 197-98.) This attempt failed to trigger the blind shear ram, as did subsequent attempts using a mobile underwater robot in the weeks following the initial explosions. (Id. at 198, 208.) With the BOP unable to shut in the well, oil gushed unabated into the Gulf of Mexico over the next eighty-six days. (CAC ¶ 92.) In total, roughly 4.2 million barrels of oil poured into the Gulf of Mexico, rendering the accident the largest oil spill in history. (Id.)

V.Alleged Misrepresentations and Omissions

It is difficult to discern from Lead Plaintiff's sprawling CAC -- and even its brief in opposition to the motion to dismiss - the specific misrepresentations or omissions that Lead Plaintiff intended to assert as being actionable under the securities laws. However, at oral argument, Lead Plaintiff identified the specific statements that it is pursuing as actionable misrepresentations, and we thus limit our analysis to these statements.*fn7 (Tr. of Oral Arg. at 4:23-5:23, 9:3-10, 17:5-14, 24:1-4, 29:6-15, 32:10-18, 39:17-40:6, 44:2-5.) The alleged misrepresentations are all comments made by Newman in the course of three investor conference calls held during the Class Period.

A.August 5, 2009 Conference Call

On August 5, 2009, Transocean held a conference call with analysts to discuss Transocean's results for the second quarter of 2009. One of the topics under discussion was Transocean's "rig utilization rate" for the quarter, meaning the number of revenue-earning days in the period as a percentage of the total number of calendar days in the period. (CAC ¶¶ 50, 64.) The following exchange occurred between an analyst and Newman with regard to this topic:

[Analyst]: . . . I was wondering if you could comment a little bit, at least in this quarter, about the deepwater revenue efficiency? The utilization, I guess, for all three segments was below my expectations. I was wonder[ing] if you can comment if there is any quarter-specific items that led to the lower unexpected utilizations? [Newman]: . . . The deepwater segment of the fleet, which is the 4500 to 7500 foot segment, 16 rigs in that fleet was the largest underperformer in the second quarter. We had a couple of human error incidents on drill floors on a couple of those rigs and we had a handful of BOP problems. Nothing that I would characterize as systemic or quarter-specific. We did a deep dive on each one of those incidents. We have identified the root causes. We are going back to address them in our management system so they don't happen again. It is uncharacteristic in the second quarter. They were anomalies and I think I would just leave it at that. [Analyst]: Steven, any of those issues, could they impact Q3, these BOP issues that you're citing? [Newman]: No, no, no. They have all been resolved and BOP operations are a complex part of our business. It is something we pay a lot of attention to. All of the BOP incidents that occurred in the second quarter have been resolved and we will continue to keep our eye closely on the performance of our subsea equipment.

(D. Ex. 11 at 7-8.) Lead Plaintiff contends that the answers provided by Newman in this exchange were materially misleading because Transocean was "suffering 'systemic' failures and problems with respect to personnel training, safety, and preventative maintenance," despite Newman's assertions to the contrary. (Id. ¶ 66.)

B.February 24, 2010 Conference Call

Lead Plaintiff next alleges that Newman made material misrepresentations in the course of a conference call on February 24, 2010. Specifically, Lead Plaintiff points to the following exchange between Newman and an analyst:

[Analyst]: In terms of where utilization came in below what you would have expected based on scheduled downtime, were there any issues remotely similar to those that occurred in the second quarter of 2009, where we had both technical problems related to BOPs as well as what was categorized as some human error problems? [Newman]: On the Ultra-Deepwater fleet . . . where we were particularly focused in the fourth quarter - and that differs from where we were in the second quarter of last year, which was on the conventional Deepwater fleet. In the Ultra-Deepwater fleet, we only had one BOP issue and one human error issue. We had a couple of startup issues and we had some equipment failures. But the issues in the fourth quarter were largely dissimilar from what we saw in the second quarter of last year.

[Analyst]: So would it be fair to say then that both the nature and the number of those issues in Q4 was more in line with what you would consider normal, whereas second-quarter 2009 was clearly abnormal? [Newman]: Yes, I wouldn't characterize the fourth quarter of 2009 - I wouldn't characterize the performance on the Ultra-Deepwater fleet as normal, because it was below the historical revenue efficiency for that class. So I don't want to lead you to conclude that that is something we ought to expect going forward. But we have identified the issue, the equipment failure issues. We have addressed the BOP control issue. And the human error issue is something we continue to focus on through our training and competency programs.

(D. Ex. 12 at 16.) Lead Plaintiff alleges that these statements were materially misleading for substantially the same reasons as the statements on the August 2009 conference call - namely that "Transocean was suffering from company-wide failures in safety and preventative maintenance" at the time the statements were made. (Id. ¶ 81.)

C.May 28, 2010 Conference Call

The final misrepresentations alleged by Lead Plaintiff occurred during a May 28, 2010 conference call held by Transocean to update investors on the Macondo accident. Lead Plaintiff contends that the following statement made by Newman during his opening comments was an actionable misrepresentation:

There have been a number of questions raised about the BOP, and so I will try to address them today. The Deepwater Horizon's BOP was tested, just as other BOPs are tested, every week for function and every other week for pressure containment capability. The pressure containment capability of the BOP was tested and it passed those tests on April 10. The function of the BOP was tested on April 17, and the BOP passed those tests as well.

(D. Ex. 14 at 3.) Lead Plaintiff contends that this statement was misleading because the tests referred to by Newman were conducted at pressure levels that were lower than that which is usually required for such tests and lower than the pressure levels at which the BOP ...


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