Investor Lawsuit Calls Out Pipeline Co.
In the aftermath of an oil spill caused by a corroded pipeline, a Houston pipeline transportation and storage firm finds itself the target of a lawsuit filed by one of its own shareholders.
An investor securities class action suit was filed against Plains All American Pipeline on Aug. 17, U.S. District Court for the Central District of California, according to securities class action watchdog Shareholders Foundation.
The action comes on the heels of a massive pipeline spill that occurred in Santa Barbara on May 19 in which inspection records were called into question. More than 100,000 gallons of heavy crude was spilled off the coast of Santa Barbara when Plains’ Line 901 ruptured.
The suit brings allegations that Plains made false and misleading statements about the integrity of its pipelines to investors who purchased shares in either Plains All American Pipeline, L.P., or Plains GP Holdings, L.P., between Feb. 27, 2013, and Aug. 4, 2015.
Summary of Allegations
In a summary of the lawsuit posted Aug. 19 by Shareholders Foundation, the plaintiff claims Plains senior executives violated provisions of the Securities Exchange Act of 1934 by misinforming investors regarding its pipeline monitoring, maintenance and spill response measures, and compliance with federal regulations governing its pipeline operations.
The suit specifically states: “Among other things, Plains All American Pipeline, L.P., told investors and regulators that it was in compliance with regulations governing its pipeline operations, and that its Line 901 pipeline and operations off the coast of Santa Barbara, California were ‘state of the art’ and therefore a spill was ‘extremely unlikely.’”
The suit also cites post-spill investigations in which regulators reported extensive corrosion in Line 901 and an adjoining pipeline, in addition to noting that earlier inspections “had shown a worsening of pipeline integrity.”
It is also alleged that Plains officials misrepresented both the extent and severity of the spill, telling investors that a “worst case” situation was that 2,400 barrels had been released.
On Aug. 5, however, Plains reported that the spill was much greater than initially indicated and that the U.S. Department of Justice had initiated a criminal investigation into the spill.
|Refugio Response Joint Information Center|
Left image shows pipeline release site during early excavation in May. Right photo shows same location post-excavation, June 3.
The plaintiff also made claims that, at the time of the spill, Plains did not notify the National Response Center within 30 minutes of its discovery, as required. Rather, the suit alleges the NRC was notified via a 911 call to the local fire department.
Inspection in Question
Two weeks before the pipe burst, Plains Line 901 showed four areas of "anomalies requiring immediate investigation and remediation" according to a May 5 inspection of the line reported from the federal Pipeline and Hazardous Materials Safety Administration (PHMSA).
At the time, Plains indicated it had not received results of the inspection until several days after the pipe failed.
The company also said, however, that its testing showed thicker pipe walls than federal officials found. And the company’s 1,200-page spill response plan called the odds of a rupture in the line “extremely unlikely.”
In a June 3 amendment to its report, PHMSA cited “active external corrosion” and “general external corrosion” of the 10.6-mile pipeline. PHMSA reported that nearly half of the pipeline’s wall had corroded in the area of the break, leaving just one-sixteenth of an inch thickness.
A rupture six inches long in the bottom quadrant of the pipe was evident at the failure site. According to PHMSA, the pipe wall was thinner than found in the inspection two weeks earlier and the line had been repaired near the failure site three times since a 2012 inspection.
As a result of those findings, PHMSA was demanding more answers from the company about the failed Line 901 and the nearby Line 903.
|Bruce Reitherman / Santa Barbara County|
Plains told investors that it was in compliance with regulations governing its operations and that its Line 901 pipeline was ‘state of the art’ and therefore a spill was ‘extremely unlikely,’” according to the suit.
PHMSA called for immediate corrective action for Line 901 “without prior notice and opportunity for a hearing” due to the “likelihood of serious harm to life, property, or the environment.”
The PHMSA requested disclosure of all ILI (inline inspection) features found in the May 5 inspection; non-destructive testing analysis of any feature or anomaly cited under either federal standards or Plains' integrity management plan, “whichever is more stringent”; and magnetic particle or other testing of weld areas for stress corrosion cracking.
Corrosion data from previous inspections was deemed “inconsistent” by PHMSA and a new review was ordered, as well as adding pressure restrictions to both Lines 901 and 903 and requiring additional employee training.
The spill-response plan Plains filed with the state, obtained by the Associated Press at the time of the accident under the state's public records act, called the chance of a spill remote.
Federal regulators endorsed the plan in 2014, but the AP reported that the company faced questions “about whether it followed its own blueprint, or if it was outdated or inadequate.”
The spill assessment “was initially conducted in 1994 and 1995, although sections have been modified as recently as last year,” the report said.
The Financial Picture
According to Shareholders Foundation, Plains’ annual total revenue increased from $37.8 billion in 2012 to more than $43.5 billion in 2014. Its net income rose from $1.1 billion to more than $1.4 billion in that same period.
Shares on the New York Stock Exchange grew from about $49 per share in Dec. 2013 to a high of $60 per share in Sept. 2014. However, the figure declined to a low of $33 on Aug. 19.
The deadline for others to join the class action suit is Oct. 16, 2015.
The cleanup process has been recorded on the Refugio Response Joint Information Center website.