25.10.2018

Classic legal strategies in the climate litigation: New York State sues Exxon Mobile Corporation for misleading investors on climate change

The New York state has tried a different strategy to attack the fossils giant, Exxon Mobil Corporation,  through the enforcement of the anti-fraud law. After three years of investigation, Barbara D. Underwood, the New York attorney general, brought the lawsuit before the Supreme Court of the State of New York under the Martin Securities Fraud Act. Unlike the previous recent cases, the suit does not charge Exxon with playing a role in contributing to climate change. Instead, it represents one of the classic shareholder fraud suits, which proven to be successfully prosecuted under Martin act, the toughest anti-fraud statute in the US, that gives the attorney general significant investigative powers to prosecute securities fraud. The lawsuit says the company engaged in a “longstanding fraudulent scheme” to deceive investors, analysts and underwriters “concerning the company’s management of the risks posed to its business by climate change regulation.”

According to the claim, "Exxon provided false and misleading assurances that it is effectively managing the economic risks posed to its business by the increasingly stringent policies and regulations that it expects governments to adopt to address climate change. Instead of managing those risks in the manner it represented to investors, Exxon employed internal practices that were inconsistent with its representations, were undisclosed to investors, and exposed the company to greater risk from climate change regulation than investors were led to believe. For years, and continuing through the present, Exxon has claimed that, although it expects governments to impose increasingly stringent climate change regulations, its oil and gas reserves and other long-term assets face little if any risk of becoming stranded (i.e., too costly to develop or operate) due to those regulations, and reassured investors that it would be able to profitably exploit those assets well into the future. In particular, to simulate the impact of future climate change regulations, Exxon has claimed that, since 2007, it has rigorously and consistently applied an escalating proxy cost of carbon dioxide (CO2) and other greenhouse gases (together, “GHGs”) to its business, including in its investment decisions, business planning, company oil and gas reserves and resource base assessments, evaluations of whether long-term assets are impaired (i.e., have net present value lower than book value), and estimates of future demand for oil and gas. Exxon’s proxy cost representations were materially false and misleading because it did not apply the proxy cost it represented to investors", for whom accurate representation of the climate change regulatory risk and climate change disclosures were important for taking their (de)-investment decisions.   

The claim says, that "Exxon frequently deviated from its public representations by: (i) applying a lower, undisclosed proxy cost based on internal guidance; (ii) applying even lower costs based on existing regulations and holding those costs flat for decades into the future, in lieu of applying an escalating proxy cost; or (iii) applying no cost associated with GHG emissions at all {...} As a result, Exxon’s securities are overvalued, and investors purchased or held Exxon securities at artificially inflated prices". The New York State has requested: awarding restitution of all funds obtained from investors in connection with or as a result of the fraudulent and deceptive acts complained; awarding damages caused, directly or indirectly, by the fraudulent and deceptive acts and repeated fraudulent acts and persistent illegality complained of herein, and applicable pre-judgment interest, other material relieves. 

To date, this case represents the most significant legal effort yet to establish that a fossil fuel company misled the public on climate change and to hold it responsible for longstanding fraudulent practices. Keep an eye on our follow up reviews of the case. To be continued...

By Katsiaryna Serada

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