Pension funds weigh options from BP stock collapse

Pensions weigh options from BP spill

NEW ORLEANS — The exasperation with BP felt by residents of the Gulf states is spreading to shareholders — and some are taking the oil giant to court.

Since the Deepwater Horizon drilling rig disaster on April 20, BP shares have lost about $85 billion in value. The toll for institutional investors who hold 79 percent of the company — including public and private pension plans — is around $67 billion. BP’s suspension of its quarterly dividend has only exacerbated the damage.

At least five individual investor suits have been filed, BP employees are suing over the slide in value of company stock in their 401(k) plans and the New York state comptroller intends to sue over losses to his state’s public employee pension fund.

Unlike the across-the-board Wall Street meltdown of 2008 that swept away hundreds of billions of dollars, the damage to U.S. pension plans caused by one plunging stock is minimized by the diversification of their investments. The BP individual retirement savings plan has a sizable investment in BP shares, but it’s reasonable compared with the Enron plans that got wiped out in that company’s collapse.

Even so, the plans aren’t happy about the red number BP has dropped on their financial statements.

Last month, New York State Comptroller Thomas DiNapoli pledged to sue BP, alleging the company misled investors about its safety procedures and its ability to respond to an oil spill and therefore inflated the stock’s price in violation of securities laws.

DiNapoli’s office plans to file a motion to join four individual shareholder suits filed in Louisiana and California to form a class action, under which all shareholders, including other pension plans, could join.

The $133 billion New York State Common Retirement Fund, which DiNapoli serves as trustee, held 19 million BP shares at the time of the disaster. The fund has since trimmed its holdings to 14.6 million shares. During that time, BP suspended its dividend, which is attractive to pension plans because of the investment income it provides.

The fund hasn’t released an exact loss from the sale, citing the pending court action. BP has refused to comment.

Feeding the frustration, for both shareholders and Gulf Coast residents, has been BP’s inability to cap its undersea well 40 miles off of Louisiana. Oil has now been gushing for 79 days. BP is drilling two relief wells that are expected to shut off the leak by mid-August.

Analyst Pavel Molchanov, who follows BP for Raymond James Financial Inc., said if that happens, BP would likely reinstate a dividend in 2011, but shareholders should expect less than pre-spill amounts. BP was paying out 80 cents per American depositary share each quarter and about 13 cents on shares bought on the British market. Each ADS represents six of its U.K. counterparts.

As for BP workers, a suit filed in Illinois federal court seeks class action status on behalf of all employees with company retirement accounts. Its complaints echo those raised by DiNapoli.

As of Jan. 1, BP stock made up nearly 30 percent of BP employee accounts, or about $2.45 billion worth of retirement savings, said Mike Alfred, CEO of BrightScope, a San Diego-based firm that rates about 50,000 401(k) plans.

The legal argument likely will center on whether BP workers were allowed to take excessive risk by having too much money in company stock, Alfred said. In perhaps the most high-profile case of this type, Enron Corp. employees received stock that became worth hundreds of millions of dollars — only to see it become worthless as the company fell apart in 2001 amid scandal.

“The amount of the BP stock in those plans is not exceptional,” Alfred said. “There are many more plans that have more company stock.”

Steven Davidoff, a professor at the Ohio State University law school, says history shows that once a class action is granted and large numbers of plaintiffs join in, companies try to settle to avoid the possibility of unmanageable damage awards.

Davidoff said the potential settlement value for BP shareholders likely will be less than in cases where a company has “a record of malfeasance at high management.”

“This is not so much a fraud case as a nondisclosure case,” Davidoff said.

The plans that haven’t sued are still big enough to get management’s attention.

“We do intend to engage BP in a corporate governance discussion at the appropriate time because the shareowner losses are severe given the catastrophic failures related to the oil spill,” says Patricia Macht, a spokesperson for the California Public Employees Retirement System.

Calpers, with $205 billion in assets, said it hasn’t altered its basic five-year “buy-and-hold” strategy — although the value of its BP holdings fell from about $585.7 million on April 20 to $289.2 million on June 30. It’s still just a paper loss — and Calpers retains its shareholder voting power.

That power could be used at annual shareholder meetings to vote against upper management and board directors. But BP’s next annual meeting doesn’t occur until April. Many observers say a shake-up is possible before then, likely involving CEO Tony Hayward.

BP spokesman Mark Salt said the company’s top officials speak regularly with investors on issues such as corporate governance, strategy and performance and its chairman holds one-on-one meetings with investors throughout the year. BP has met with large investors on issues stemming from the spill, Salt said.

Other pension funds, including the $96.7 billion Teacher Retirement System of Texas, the $47 billion Pennsylvania State Employees Retirement System and the $8 billion Louisiana State Employees Retirement System say their BP holdings represent only a tiny fraction of their total investments. None would say what their next action might be.

Alabama’s four state pension dumped their BP stock. The executive director of the Retirement Systems of Alabama, David Bonner, said 6.25 million shares were sold in June. The funds lost just over $4 million overall on the transactions.

But since the funds accumulated $25.9 million in dividends over 15 years, “We’re $21 million ahead,” Bonner said.

BP’s traditional employee pension fund hasn’t lost a dime on BP shares: The fund’s rules forbid it to either buy company stock or make company loans. According to the fund’s 2008 audit, the latest year for which figures are available, its top holding was in rival Royal Dutch Shell with 3.1 percent of its assets invested.