By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.
New York State Attorney General (AG) Letitia James takes Exxon to trial this week, for alleged climate fraud.
Her action is brought under the state’s tough Martin Act statute, enacted in 1921, and most recently and successfully used by former state AG Eliot Spitzer against the financial industry. California and Massachusetts have similar statutes in place.
As I wrote in June in Climate Change: Judge Allows New York’s Martin Act Lawsuit Against Exxon to Proceed:
Beginning with the Clinton-era tobacco litigation, state attorney generals evolved into a more formidable force taking up a small bit of the slack as the Department of Justice and other federal regulators have shied away from taking tough prosecutorial stances against corporate misconduct (on the tobacco issue, see this summary of the Master Settlement Agreement by the Public Health Law Center).
In this action, according to Climate Liability News in Exxon Faces Nation’s Strongest Anti-Fraud Law in New York Trial:
James alleges Exxon committed fraud, deceiving investors by using one set of numbers to calculate climate risk to shareholders while it used different numbers to privately plan how to invest the company’s own funds.
The statute allows criminal charges to be brought, but New York has only filed civil charges.
New York Supreme Court Judge Barry Ostrager has scheduled the trial for three weeks and Ostrager intends to hand down his decision within 30 days of the end of the trial.
The financial stakes for the company are high. According to Climate Liability News:
The AG’s office has asked the court to hold the company liable for between $476 million and $1.6 billion in shareholder losses, and that’s only a preliminary estimate. The suit also asks the court to order an examination of Exxon’s past and future accounting methods and to appoint an independent monitor to supervise the process. Exxon has also been forced to turn over years of internal documents, which could also be used by others to bring more civil suits.
James alleges “this fraud reached the highest levels of the company” to include former chief executive Rex Tillerson, who left the company in 2017 to become President Trump’s first Secretary of State, and current chief executive Darren Woods.
The lawsuit arises as investors press for a better understanding of the risk of their fossil fuel investments. According to Climate Liability News:
Over the years, as the catastrophic effects of climate change became better understood, investors have grown concerned about how regulation and other climate policies might affect their investments. Increasingly, shareholders have pressed Exxon and other fossil fuel companies to divulge how they calculate those risks.
Like other companies, Exxon uses a proxy cost of carbon, or number to represent its best estimate, to determine what those costs could be in the future. In order to be useful, the proxy cost of carbon, or greenhouse gas (GHG) proxy, must be consistently applied and communicated to shareholders, something James’ office alleges Exxon failed to do.
The suit claims Exxon deceived investors by using one GHG proxy cost internally to make those projections, while it used a separate GHG proxy cost to communicate those projections to shareholders.
The problem of estimating potential climate change risk extends beyond Exxon per se and was a subject of significant discussions last week’s meetings of the International Monetary Fund, according to Reuters:
The International Monetary Fund is examining the impact of climate on the world’s financial markets and whether it is priced into market valuations, the head of the global lender’s markets division said on Saturday.
“We are doing work on the pricing of climate risks and to what extent it is priced into stock and bond markets,” Tobias Adrian, financial counselor and director of the IMF’s monetary and capital markets department, told Reuters. “We are going to look at stock markets country by country, then by sector.”
“People are more and more aware of this – there’s a certain urge around climate that is new,” Adrian said. “It’s very hopeful that people focus on it, but the reason they focus is that they’re worried. The fact that this really has become a big topic at the IMF speaks for itself.”
Massachusetts Moves Forward
Meanwhile, Bloomberg reports that Massachusetts attorney general Maura Healey is also moving forward with a separate lawsuit against Exxon that she has threatened to bring for three years, notifying the company by letter on October 10 of her intention to charge it with violations of the Massachusetts Consumer Protection Act.
That timing is no accident.
As Bloomberg notes:
Exxon is accusing Healey of attempting to distract the company while it’s getting ready for a separate climate-related trial in New York, which begins Oct. 22.
“The timing of the Attorney General’s threat is no coincidence,” company lawyers told a state court on Oct. 17, calling it “an intentional and cynically transparent ploy to distract ExxonMobil from its trial preparations” and get media attention.
As Climate Liability News reports in Massachusetts Close to Filing Climate Fraud Suit Vs. Exxon:
Healey served Exxon with a Civil Investigative Demand (CID) in April 2016 as part of an investigation into whether the company deceived Massachusetts shareholders by failing to divulge potential climate change-related risks to their investments. Healey has also investigated whether the corporation violated Massachusetts consumer protection laws by misleading consumers on the impacts of its products on climate change.
Exxon has tried for years to shake the investigation, contending that Healey lacks jurisdiction, is violating its First Amendment rights and that the examination is politically motivated. Those premises have been rejected by both state and federal courts, which have ruled that Healey has the authority to conduct the examination. The Supreme Court declined to hear Exxon’s appeal.
One appeal—of a New York court’s ruling that Healey has the authority to issue the CID—is still outstanding before the Second Circuit and Healey agreed to pause her efforts to enforce the CID until that ruling.
Exxon’s lawyers are trying to delay the Massachusetts proceedings until after the New York trial is completed. According to Bloomberg:
Exxon is asking the Superior Court of Suffolk County to force Healey’s team to slow down.
Under state rules, the company is entitled to meet with the attorney general’s office before a lawsuit is filed. Johnston pushed Exxon lawyers to meet Oct. 16 or Oct. 17.
Exxon wants the state court to require Healey to give the company until mid-November—when the New York trial is expected to conclude—to confer about the lawsuit threat.
But Healey is having none of it. As Bloomberg reports:
Healey’s office responded Oct. 18 to Exxon’s bid to delay legal action, calling it “absurd” and “blatantly obstructionist.”
“The Emergency Motion seeks unprecedented relief without legal basis and should be denied,” lawyers for her office told the state court.
The parties are set to discuss the issue in a hearing Oct. 24.