Will BP Be Freed of Bogus Damage Claims?

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Three years from the halting of BP's monstrous Gulf of Mexico Macondo oil gusher, it appears that the company may gain a way to "Freeh" itself from a mountain of baseless damage claims tied to the tragedy.

With all manner of bogus suits being submitted in an effort to tap a company facility established to compensate those actually damaged by the spill, U.S. District Judge Carl Barbier of New Orleans this week called in Louis Freeh, a former FBI director, to separate the wheat from the chaff among the claimants. Freeh is fresh from heading up an investigation into the sex crimes scandal that recently swept through the Penn State football program.

Barbier has ultimate authority over the settlement program. Unfortunately for BP, he's also presiding over an ongoing non-jury trial in New Orleans that's intended to assess federal environmental penalties against the company. So, incurring his wrath could be dangerous. Depending on the degree of culpability that's tied to the company in precipitating the spill, BP could be forced to cough up as much as $17.5 billion in fines and penalties to the Obama administration.

Others in the gun sights
That trial also involves Transocean and Halliburton . The former, of course, owned the Deepwater Horizon rig, which exploded and sank, killing 11 crewmen south of New Orleans three years ago.

Halliburton was responsible for cementing the Macondo well. BP maintains that both companies were at fault in causing the conflagration. The second-largest member of the oil-field services sector, Halliburton has tangled with Barbier during the trial, allegedly for being dilatory in turning over documents requested by the court.

Crazy contentions
But it's the private claims, generated by citizens, businesses, and municipalities in Texas, Louisiana, Mississippi, Alabama, and Florida, that'll leave you shaking your head. A number of the checks already written by BP to make whole "victims" of the biggest oil spill in U.S. history bear little, if any, relationship to crude unleashed by the gusher. Further, the use of the funds paid out by the company has often been questionable, as well.

As Bloomberg Businessweek pointed out in an excellent article recently:

  • A construction company located in northern Alabama, a couple hundred miles from the Gulf, pocketed $9.7 million, despite doing no work near the coast. 
  • A law firm in central Louisiana managed to rake in $3.3 million, even though its profits actually grew in 2010.
  • A minor league baseball stadium will be built in Biloxi, Mississippi, with funds commandeered from BP. 
  • Alabama will build an $85-million conference center and hotel with monies similarly obtained.
  • An alligator farm some 50 miles northwest of New Orleans received $1.2 million, an amount that exceeded the business's profits in 2010.

Far too easy
Businessweek quotes a Houston trial attorney who says that BP is getting its comeuppance for not being tough enough, and cutting "a bad deal." Specifically, in its determination to make nice with those in the Gulf region and thereby avoiding a public relations disaster, it began paying against claims before the spill had even been contained.

Foolishly, as the Texas lawyer says, it "failed to demand a cap on its total payout." Indeed, as you wil likely recall, with crude still gushing from the Gulf's floor and no apparent end in sight, the company promised President Obama that it would set up a fund with $20 billion for cleanup costs, and dealing with damage claims.

That approach differed meaningfully from ExxonMobil's stance two decades earlier, when the Exxon Valdez oil tanker ran aground in Alaska's Prince William Sound, resulting in a another big spill. Rather than figuratively groveling in an act of contrition, as BP effectively did, management of the biggest integrated company fought hard in the courts for 20 years to absolve itself, as much as possible, of liability.

Foolish takeaway
I must admit to owning both BP and Transocean. The latter clearly is less directly in litigious crosshairs than the London-based operator. And while Louis Freeh's entrance onto the scene represents a new adult presence in Macondo matters, I'd note that, while I consider BP an appropriate buy for Foolish energy investors, that assessment is only for those with more than a pound of patience.

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The article Will BP Be Freed of Bogus Damage Claims? originally appeared on Fool.com.

Fool contributor David Smith owns shares of BP p.l.c. (ADR) and Transocean. The Motley Fool recommends Halliburton. The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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