More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
British oil company BP agreed Thursday to pay $4.5 billion to the U.S. government in fines and other charges, including $525 million to the SEC–the third largest penalty ever assessed by the SEC–over the oil spill in the Gulf of Mexico.
Criminal charges account for $4 billion of that amount, according to a company statement, and BP also agreed to plead guilty to 14 criminal charges. Eleven people died in the Deepwater Horizon oilrig disaster, which flooded the gulf with millions of gallons of oil and contaminated beaches. Three BP employees also faced criminal charges from the Justice Department.
The Securities and Exchange Commission charged BP with misleading investors by significantly understating the flow rate of the oil gushing into the gulf in multiple reports filed with the SEC. Although BP repeatedly indicated in public statements that the flow rate was estimated at 5,000 barrels per day, its own internal data indicated that potential flow rates could be as high as 146,000 barrels of oil per day.
BP executives also made numerous public statements after the filings were made in which they stood behind the flow rate estimate of 5,000 barrels of oil per day even though they had internal data indicating otherwise. In fact, they criticized other much higher estimates by third parties as scaremongering.
According to the SEC’s complaint filed in the U.S. District Court for the Eastern District of Louisiana, BP stated that the flow rate was estimated to be 5,000 barrels of oil per day (bopd) in three separate Forms 6-K filed with the SEC following the Deepwater Horizon oil rig explosion on April 20, 2010. In a 6-K filed on April 29, BP stated in part, “[e]fforts continue to stem the flow of oil from the well, currently estimated at up to 5,000 bopd[.]” BP filed another report the next day similarly referencing “[e]fforts to stem the flow from the well, currently estimated at up to 5,000 barrels a day are continuing[.]”
The SEC alleges that when the company made those statements, BP possessed at least five different flow rate calculations, estimates or data indicating a much higher flow rate. BP did not possess or generate any piece of data suggesting that 5,000 bopd represented a ceiling for the rate of oil flowing into the Gulf of Mexico or was the best estimate. The failure to disclose the existence of these higher estimates rendered BP’s statements in its Reports on Form 6-K materially false and misleading.
According to the SEC’s complaint, BP issued another 6-K on May 4 that stated, “Accurate estimation of the rate of flow is difficult, but current estimates by the U.S. National Oceanic and Atmospheric Administration (NOAA) suggest that some 5,000 barrels (210,000 US gallons) of oil per day are escaping from the well.”
The SEC alleges that BP omitted from its disclosure the material fact that, by this date, it possessed at least six estimates, calculations and data indicating that the oil flow rate far exceeded 5,000 bopd. Therefore, it was no longer accurate to suggest that 5,000 bopd was the best estimate or that the NOAA estimate was the current estimate.
The SEC’s complaint further alleges that BP executives made numerous public statements in May 2010 supporting the 5,000 bopd flow rate estimate and criticizing other estimates despite internal evidence showing that flow rates were likely well in excess of 5,000 bopd. Eventually, on Aug. 2, the Flow Rate Technical Group, consisting of government and academic experts tasked with reaching a final official flow rate estimate, announced that the flow rate estimate was actually more than 10 times higher at 52,700 to 62,200 bopd. BP never corrected or updated material misrepresentations and omissions it made about the flow rate in SEC filings for investors.
The SEC plans to establish a Fair Fund with the BP penalty to provide harmed investors with compensation for losses they sustained in the fraud. The SEC announced the case jointly with the announcement by attorney general and other senior officials at the Justice Department of criminal action against BP.
While the penalties agreed to on Thursday are massive, they do not resolve all liability for the firm, which still faces other fines and penalties including federal civil claims, claims for damage to natural resources and fines under the Clean Water Act–which could amount to billions more. The Clean Water Act assesses fines based on the number of barrels spilled, at a rate of $1,100–$4,300 per barrel. A New York Times report put the upper end of that penalty at a possible $21 billion, in addition to the $4.5 billion already agreed to.
In addition, the Justice Department could also fine the company based on provisions of the Oil Pollution Act, which could result in another assessment of up to $31 billion–although the company could deduct that penalty from its taxes. There is also the matter of a separate class action suit on behalf of over 100,000 individuals and businesses who suffered harm from the spill. A preliminary amount approved for that settlement is $7.8 billion, although it is being contested by thousands of members of the class.
The SEC’s investigation is continuing as well.