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How a Gulf Settlement That BP Once Hailed Became Its Target

New York Times April 26, 2014

NEW ORLEANS — Four years ago the Deepwater Horizon oil rig caught fire and exploded, killing 11 men, spewing millions of barrels of oil into the Gulf of Mexico and staining, seemingly indelibly, the image of BP, the international energy giant responsible for the well.

Its reputation in free fall, the company set aside billions of dollars and saturated the airwaves with contrite pledges to make thousands of businesses and workers whole, from shrimpers to hotel owners to charter boat operators.

Four years on, BP is no longer on the defensive. In March, the federal government allowed the company, after a period of exile, to bid for oil and gas leases in the gulf. On April 15, BP announced the end of active shoreline cleanup with so much fanfare that the Coast Guard quickly reassured the public that the operation was far from over.

In an op-ed article this month in Gulf Coast newspapers, John Mingé, the chairman of BP America, highlighted the coast’s record tourism numbers, emphasized the $27 billion BP had spent and dismissed environmentalists skeptical of the gulf’s recovery as advocates using the spill “to raise money for their causes.”

But perhaps nothing has been as drastic as the company’s change in attitude toward the process it helped set up in 2012 to settle hundreds of thousands of economic damage claims. In full-page newspaper ads, interviews and a gusher of court filings, BP officials have insisted that their good intentions are being hijacked by greedy lawyers and underhanded claimants.

As hundreds of millions of dollars were spent on claims with no apparent connection at all to the spill — including a Florida escort service, a corporate law firm and businesses hundreds of miles from the gulf — BP warned of a dangerous precedent.

“I think there are really bad public policy ramifications to what’s happening to BP,” said Geoff Morrell, senior vice president for communications and government affairs at BP America, in his office in Washington. “It’s not just bad for this company that illegitimate, dubious claims are being paid to the tune of hundreds of millions of dollars; it is bad for, dare I say, America.”

But opposing lawyers, many legal experts and even some federal judges have said BP is denouncing the legitimate outcomes of a deal that its top-notch legal team not only helped create, but also fought for and hailed. They point out that the aggressive public and legal campaign by BP, which essentially seeks to shift the attention away from BP and onto trial lawyers and claimants, took hold as estimates of the deal’s price tag began to soar and the company’s bargaining position improved.

While BP has won some arguments in court, its fundamental point — that the settlement has been brazenly misinterpreted to pay claims with no evidence linking them directly to the spill — was batted away in a recent decision in the United States Court of Appeals for the Fifth Circuit.

“There is nothing fundamentally unreasonable about what BP accepted,” Judge Leslie H. Southwick wrote, “but now wishes it had not.”

Yet as the fight has slogged on in recent months, thousands of claims have been indefinitely delayed and new rules have been drawn up, while scrutiny of both individual claims and the overall process has intensified. Many on the gulf are beginning to wonder if holding out for compensation is still worth the trouble.

“It’s going to be difficult for many people,” said Joel Waltzer, a lawyer in Harvey, La., describing how new requirements and continuing delays would affect his clients, many of them Vietnamese and Native American fishermen and small-business owners.

“In that sense,” he said, “I believe BP is winning.”

An Unusual Agreement

The oil rig fire and the nearly unstoppable fountain of oil that followed at the Macondo Prospect on April 20, 2010, was the largest marine oil spill in the nation’s history. The oil poured into the gulf for 87 days, fouling an estimated 68,000 square miles of waters and almost 500 miles of coastline from Louisiana to Florida.

With complex ripple effects and lingering uncertainty about the health of the gulf, the economic impact remains nearly impossible to quantify. But BP, exceeding its obligations under the federal Oil Pollution Act to compensate victims, set up a multibillion-dollar program and turned to Kenneth R. Feinberg, an expert in administering complicated programs like the Sept. 11 victims compensation fund, to run it.

“In the beginning they was all real nice,” said Barry Labruzzo, a 35-year-old shrimper from Slidell, La.

Mr. Labruzzo received an emergency payment from Mr. Feinberg’s operation in the early days of the spill, while also putting in a claim for lost business revenue. He was confident he would be paid quickly. “They would tell us we don’t even need a lawyer,” he said.

Mr. Feinberg required proof that damages were directly caused by the spill, a rigorous standard reflected in the fact that he approved only 550,000 of the 1.2 million claims he received.

But in meeting halls and boardrooms along the gulf, Mr. Feinberg’s compensation program was criticized as being confusing and unpredictable.

“I can’t tell you how many times we did our financials,” said Michael Hinojosa, the owner of Midship Marine, a boat building company in Harvey. “They always asked for more documentation. They kept asking for more and more, and we kept giving it to them.”

With anger and criticism mounting, BP and a committee of plaintiffs’ lawyers began to work out, over nearly 150 negotiating sessions, a broad settlement that could help the company limit the scope of any coming litigation. Negotiators envisioned a program very different from Mr. Feinberg’s. The new claims process was intended to be accessible, and the explicitly stated goal was to help claimants get the largest amount for which they qualified.

Both sides agreed on a claims administrator: Patrick Juneau, a laid-back Louisiana lawyer and a veteran administrator of major settlement funds, including the one resulting from lawsuits over the painkilling drug Vioxx.

A central element of the agreement, however, would prove to be a time bomb. Instead of having claims calculators contend with different kinds of arguable evidence to prove that damage was linked to the spill, the negotiators came up with a formula that relied solely on financial data for proof of harm. If a business was in a certain region and could prove that its income dropped and rose again in a specific pattern during 2010, that would be enough to establish a claim.

To David A. Logan, the dean of the law school at Roger Williams University in Rhode Island, this was a creative way to avoid endless minitrials. “The whole idea is to make this proceed without laborious technical findings on causation,” he said.

The deal covered a broad array of businesses in the gulf states, stretching all the way to the Tennessee state line. It offered those claiming damages the potential of maximizing compensation. For BP, it promised to sharply reduce the number of litigants it would face.

The agreement was unusual in another critical way: There was no limit on the overall payout. Aside from a fund for the seafood industry capped at $2.3 billion, BP had agreed not to turn off the spigot as long as there were legitimate claims to pay.

Elizabeth Cabraser, a member of the group of lawyers representing damage claimants, described the deal, which runs to more than a thousand pages including exhibits, as “the most detailed, highly defined settlement agreement that I’ve ever seen.”

“It was a model,” she said. “Up until the day it wasn’t.”

A Frenzy of Claims
The agreement followed a trend in BP disaster settlements, including one after a deadly 2005 explosion at a refinery in Texas, that has been referred to as “overpaying for peace.” Aside from their share of their clients’ awards, plaintiffs’ lawyers in the spill case stood to earn a collective $600 million as part of the agreement, while BP would earn valuable certainty and closure.

When BP announced the deal on March 2, 2012, it estimated the cost would reach $7.8 billion.

Plaintiffs’ lawyers believed that this figure, as one lawyer, Samuel Issacharoff, would later say in court, “was erroneous from the very beginning.”

Lawyers all along the Gulf Coast tell the same story: of taking a casual look at the agreement, reading it with increasing disbelief and then immediately encouraging their partners to read it, too. Accountants were hired, chambers of commerce were contacted, and clients — doctors, nonprofit organizations, just about any type of enterprise — were urged to gather financial documents. Law firms, also eligible for claims under the deal, began to look at their own account books.

One lawyer in Tampa, Fla., sent out a mass mailing, later highlighted in court filings by BP, saying that “the craziest thing about the settlement is that you can be compensated for losses that are UNRELATED to the spill.”

The liberality of the settlement was apparent not only to Gulf Coast law firms. In court filings, Halliburton, a co-defendant involved in the Deepwater Horizon drilling operation, protested the deal and its “attempt to bypass any actual establishment of causation.”

Mr. Juneau’s office also raised the issue in September 2012, not long after the new claims process formally began. Michael Juneau, Patrick Juneau’s son and a special counsel for the claims center, presented BP with a hypothetical case in which a business might have numbers that fit the formula, but have experienced losses in 2010 for a variety of reasons, some “clearly unrelated to the spill,” such as the illness of an employee.

Mark Holstein, the managing lawyer for BP America, replied: If the financial data is accurate and fits the framework, then any losses are “presumed to be attributable” to the spill — even, he continued, if “nonfinancial data indicates that the decline was attributable to a factor wholly unrelated to the oil spill.” In a case this complex there may be some “false positives,” he wrote, but they should be “relatively rare.”

BP’s eagerness to settle was understandable at the time. Negotiations with the federal government over civil penalties stemming from the spill had derailed. States along the gulf were threatening ever higher demands in lawsuits of their own. That November, after BP pleaded guilty to federal criminal charges and agreed to pay more than $4 billion in fines, the Environmental Protection Agency suspended the company from bidding on federal oil and gas leases in the gulf.

When Judge Carl J. Barbier of Federal District Court in New Orleans finally approved the settlement in December, a BP spokesman described it as “good for the people, businesses and communities of the gulf” and “in the best interests of BP’s stakeholders.”

By early 2013, a frenzy was developing. Funeral parlors in Florida filed claims, as did farmers in Mississippi, construction companies in Alabama and law firms in many places in between.

George Morris owns Reasons, a high-end shoe store in Sarasota, Fla. He acknowledged that “there was no oil anywhere near Sarasota,” and that Chie Mihara pumps have no obvious connection to a well blowout, but said his business had suffered an abnormal drop after the spill.

He signed on with Henry N. Didier Jr., an Orlando lawyer who created one of the many companies to sprout along the gulf dealing exclusively with BP claims. Mr. Morris, who received a five-figure award, said the disaster’s effects had spread through a community just pulling out of the recession.

“Businesses as seemingly unrelated as automobile dealers felt another decline after the oil spill happened,” he said. “The guy who runs the grocery store. The gasoline pumps, the people who grow and supply food. I don’t know who escapes it.”

In an interview, Patrick Juneau insisted that the claims center, which he described as “a beehive on steroids,” was judicious. By this month, roughly 65,000 of the 268,000 claims had been approved and 54,000 denied.

“I didn’t negotiate it or write it, or was asked to give input into the consummation of this agreement,” Mr. Juneau said of the settlement. “It was given to me as a completed document, and I was asked to implement it. And we’ve done quite a job, in my humble opinion.”

The frenzy of claims the settlement led to did not surprise many who had experience in mass litigation. What puzzled them was that BP seemed surprised.

“I think they underestimated how much law firms would go out and solicit clients,” said Brent Coon, a lawyer in Texas with spill clients and a longtime critic of the settlement. “I cannot believe they didn’t appreciate that risk. Either they got really bad legal advice, or they were willing to have several different strategies in play.”

The first target of BP’s frustration was a matter that had been raised but not resolved before the settlement was finalized.

Most businesses along the gulf simply record cash as it comes in and is spent. There are more sophisticated accounting methods, but this cash-based accounting is common among small enterprises, and even some large law firms. BP argued that this method was leading to falsely inflated losses, as the ordinary ebb and flow of revenue could look — or was being made to look — like actual financial damage.

In a policy later affirmed by Judge Barbier, Mr. Juneau dismissed BP’s objection, saying the settlement nowhere specified any accounting method. BP appealed to the Fifth Circuit. But first, in March 2013, BP demanded that the payment for “nonexistent, artificially calculated ‘losses' ” be halted, and sued Mr. Juneau. Judge Barbier dismissed the suit.

The sticker price had been climbing rapidly. In a quarterly report released in February 2013, BP had raised its estimate of the costs of litigation to $8.5 billion. By July, that estimate had jumped to $9.6 billion, with a caveat that the end cost could be “significantly higher.” At one point in the spring or summer of 2013, the claims center gave BP its own projection of the final cost: $19.5 billion.

Mr. Morrell, the BP spokesman, dismissed the figure as unreliable, since BP did not know “just how many dubious claims have been paid.”

In July, BP placed full-page ads in The Wall Street Journal, The Washington Post and The New York Times, asserting that the settlement was being misinterpreted and that lawyers were “encouraging the submission of thousands of claims for inflated losses, or losses that do not even exist.”

Nineteen similar ads appeared in the following months in the newspapers of the Northeastern corridor, some presenting the claims process as a threat to the way business is done in the United States.

Several outlined specific awards that BP suggested were dubious: $60,000 to a surgical practice 300 miles from the gulf; $5 million to a corporate law firm that specialized in representing hedge funds; and $173,000 to an “escort service” in Florida. Mr. Morrell ticked off several more in the interview, including a farmer far from the coast who did not plant crops in 2010 and a Pontiac dealer who, he said, suffered a loss when GM stopped selling Pontiacs.

Lawyers disputed most of these in court, pointing out that many of the awards had been upheld on appeal and saying the examples were misleading. (The car dealer, one said, had switched to other GM brands months before the spill.) Given the settlement’s strict confidentiality rules, it remains unclear whether such claims were truly fraudulent, only appeared to be so in these broad descriptions or constituted the “false positives” that BP’s lawyers had acknowledged as inevitable.

By fall 2013, BP’s lawyers were appealing one of every five claims that could be appealed under the settlement’s rules, and had begun balking at paying the budget requests for the claims center.

Still, Mr. Morrell rejected the notion that BP had performed an about-face. “We do not feel buyer’s remorse,” he said. “We don’t have sticker shock.” Verifying a link between claims and the spill, beyond just the financial formula, he said, is “inherently” part of the administrator’s job.

Other lawyers argue that nothing should be considered inherent in a 1,000-page negotiated settlement.

David M. Uhlmann, director of the environmental law and policy program at the University of Michigan law school, said, “BP, with all the lawyers in the world, struck what appears to be a bad deal.”

Suspicions Raised

Inevitably, in a case this sprawling, there have been situations seen by all parties as questionable: from small-time cheats to a top lawyer, Mikal Watts, who resigned from the plaintiffs’ lawyers committee after allegedly claiming thousands of people as clients who were either unwitting or did not, in fact, exist. But the most consequential allegation of fraud, which would fuel BP’s efforts to have the claims center overhauled, came from the claims center’s investigation of itself.

Last spring, the center’s fraud prevention director alleged that one of the center’s senior lawyers had received an undisclosed fee from a claim he monitored.

The lawyer, Lionel Sutton, who had come to the center from his private practice, resigned, and his wife, who also worked at the center, was fired. BP’s lawyers demanded further scrutiny, so they, the lawyers committee and the judge agreed to bring in the Freeh Group, a firm headed by Louis J. Freeh, the former F.B.I. director, to investigate.

Again, BP sought to halt claims payments. But Judge Barbier appeared to be losing patience, dismissing the request, condemning the company’s “massive public media campaign” and warning it against “personal attacks” on Mr. Juneau.

In September, Mr. Freeh released a 98-page report, expanding on the initial investigation — finding that Mr. Sutton had received a $40,000 fee, undisclosed to Mr. Juneau, upon resolution of a claim by one of his former clients — but also questioning the legitimacy of several other claims involving Mr. Sutton and Andry Lerner, a law firm in New Orleans. The report went further, too, laying bare office politics and raising suspicions about other employees.

In a second report in January, Mr. Freeh found that David Duval, the center’s appeals coordinator, had improperly forwarded an email with confidential information. He also looked into allegations made in a BP ad that two senior employees had taken colleagues to a strip club that had received a claim payment. Mr. Freeh found no indication of malfeasance but judged such an outing “inappropriate.”

“Improper, unethical” conduct within the center, Mr. Freeh said in the first report, was “pervasive and, at its extreme, may have constituted criminal conduct.” In all, at least five senior officials at the claims center would resign or be fired. Nonetheless, Mr. Freeh concluded that all this had taken place despite “the clear ethical ‘tone at the top' ” set by Mr. Juneau.

Mr. Sutton and other individuals faulted in the reports strongly disputed the allegations, asserting major errors and distortions, but no hearings have been held. The key players in the litigation welcomed Mr. Freeh’s involvement.

However, BP was disappointed in the clean bill for Mr. Juneau, and plaintiffs’ lawyers worried that what Mr. Freeh saw as cronyism was the way the center had been intended to work. A recent post on a local blog includes email exchanges showing that lawyers were at one point even allowed to expedite the claims of some of their clients as an apparent early test of the system.

While this was playing out, BP was having mixed success at the Court of Appeals.

In October, an appeals panel agreed with the company about accounting methods. Judges ordered the creation of a policy requiring all businesses to align revenue and expenses more precisely, a change potentially worth billions of dollars to BP.

Virtually all business claims have been delayed for six months awaiting the drafting of the complex new claims policy, which currently runs to 88 pages.

With a solid victory, BP pressed for the biggest prize of all. Its lawyers argued in Federal District Court that businesses that could not prove their losses had been caused by the spill had no standing to sue. If the court agreed, it would essentially upend the settlement.

Instead, in a blistering order that quoted emails from BP’s own lawyers, Judge Barbier rejected the argument and accused BP of trying to “rewrite” the history of the case.

Last month, a divided three-judge panel of the Court of Appeals rejected BP’s argument as well. Claimants already have to sign a form attesting they were hurt by the spill, Judge Southwick wrote. Although “these requirements are not as protective of BP’s present concerns as might have been achievable,” he wrote, “they are the protections that were accepted by the parties and approved by the District Court.”

BP has appealed that decision to the full Court of Appeals.

Mr. Freeh’s operation has meanwhile grown, with scores of employees now taking over a floor in the office building that also houses the claims center. Members of Mr. Freeh’s team have become more closely involved in the center’s operations, with a senior investigator even considered for the role of the center’s chief executive. (Randall Black, a former chief accounting officer for CitiMortgage, was recently named to the post.)

Close inspections of individual claims have grown widespread, and members of Mr. Freeh’s team have been empowered to take back payments deemed illegitimate. Investigators for the center have interviewed Mississippi restaurant owners about where they buy shrimp and tracked down notaries at their homes to confirm signatures. Multiple audits of the claims process have begun or been completed, two by large private accounting firms; this month, the District Court appointed a separate audit committee to advise the program as well.

BP officials say this scrutiny is long overdue to bring rigor to a process that was poorly managed and ethically suspect. Lawyers along the coast say it is discouraging claims.

“They’ve been very successful in getting people to stop filing,” said Robert Couhig, a New Orleans lawyer. “I think a lot of people now say, ‘I don’t want to be a part of this.’ ”

Mr. Feinberg, the original man in charge of paying claims, has been watching all of this with dismay. That the settlement has been bogged down so much by acrimony, he said, “too easily leads to the conclusion that an alternative resolution doesn’t work, and in an oil spill you’re better off with an Exxon-Valdez, decades-of-litigation approach. That’s a real public policy missed opportunity.”

Mr. Labruzzo, the shrimper from Slidell, is still waiting. He was offered a payment of $14,500, far less than the $188,000 he had expected. The claims center then asked for documentation beyond the multiple years of tax returns, financial statements and shrimping reports he had already handed over.

“They’ve been giving me the runaround,” said Mr. Labruzzo, who has taken out loans to keep his business afloat.

Recently, he reached out to an old contact: Christine Reitano, the wife of Mr. Sutton, who had been fired from the claims center. She gave him advice and made some calls, and things briefly appeared to become unstuck.

But in February he was informed that the process was delayed again. His claim was under investigation.