By Jon Hood

July 11, 2010
The directors of Transocean, the offshore drilling company implicated in the disastrous oil spill in the Gulf of Mexico, are facing a class action lawsuit from the company's shareholders, who claim the directors artificially inflated the company's stock price by making rosy statements about its safety record.

The suit, brought this week in Harris County, Texas, says that between August 2009 and now, the directors claimed "they had remedied the company's past safety problems and were closely monitoring the company's operating equipment," an unfortunate choice of words given what occurred on April 20.

The suit also says the directors inaccurately claimed that Transocean's blowout preventers (BOPs) -- which have since been implicated in the spill -- were operating normally, and that past BOP-related problems were "anomalies."

BOPs are designed to forestall a catastrophic explosion by closing off pipes when they develop an uncontrollable pressure buildup. The BOPs on the Deepwater Horizon failed to work properly, worsening the massive oil spill that continues to this day.

"Over the last ten years, defendants have -- on several occasions -- been apprised of the serious hazards associated with Transocean's use of certain BOPs on ultra-deepwater drilling engagements," the suit says. "Despite these warnings and defendants' knowledge that a BOP failure would likely result in scores of fatalities and millions of gallons of oil being released into the surrounding waters, defendants concealed their knowledge of these known hazards."

The suit contains a litany of warning signs that it says Transocean failed to heed. According to the complaint, in 2000 BP issued a "notice of default" relating to problems with the BOPs installed on Transocean's Discovery Enterprise rig. Then, in 2003, a Transocean director co-wrote a study "warning...that the industry was not taking the time necessary to find and fix the problems that commonly plagued BOPs," according to the suit.

Additionally, in 2005 and 2006, Great Britain's Health and Safety Executive issued two citations to the company for BOP-related deficiencies. Finally, the suit cites a 2008 paper, co-written by a Transocean manager, warning that "BOP shear rams may also have difficulty shearing today's high-strength, high-toughness drillpipe."

The suit notes the serious toll that the disaster has taken on Transocean's stock. "As the truth about the full extent of this disaster was absorbed by the market over the two weeks following the explosion and oil spill, Transocean shares fell by $25.69 per share, closing at $66.34 on May 10, 2010," the complaint reads, adding that "[t]he Company's reputation continues to be materially harmed" and that Transocean stock "currently trades for around $50 per share."

The defendants include Transocean President and COO Steven Newman, Chairman of the Board Robert Rose, and ten of the company's directors. The suit charges them with breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets.

The suit is just the latest bad news for Transocean. The company already faces dozens of other suits related to the Deepwater Horizon disaster, and Moody's Investor Service on Thursday downgraded its credit outlook from "stable" to "negative." Although the company isn't currently paying any of the cleanup-related costs, it may be forced to do so in the future.