Curtain falls on N.Y.’s battle over secret carbon costs

Source: By Jennifer Hijazi, E&E News reporter • Posted: Monday, November 11, 2019

The Empire State’s trial over Exxon Mobil Corp.’s climate risk disclosures has been hailed by some as an opportunity to shine a light on years of deception by the oil major regarding the financial realities of climate change.

But now that People of the State of New York v. Exxon has reached its end, the outcome of the securities lawsuit will hinge on numbers and paperwork.

New York Supreme Court Justice Barry Ostrager’s ruling in the case won’t boil down to a simple win-lose scenario, said Michael Gerrard, director of the Sabin Center for Climate Change Law at Columbia University.

He noted that because this is a bench trial — where a judge, not a jury, makes the decision — the accompanying order could include “many shades of grey” rather than a simple win-lose scenario.

“The impact of this ruling will be affected not only by who wins, but also by how it’s written,” he wrote in an email to E&E News. “A decision based on narrow technical grounds could be much less influential than one that sets forth broad principles, one way or the other.”

Three weeks of technical testimony ended in fireworks after the prosecution unveiled a last-minute switch in its legal strategy.

During closing arguments yesterday, New York Assistant Attorney General Jonathan Zweig scrapped all other claims in the case to focus exclusively on the Martin Act, a wide-reaching state statute that governs securities fraud.

He said the prosecution had done everything necessary to prove that the oil major’s disclosures improperly inflated the value of certain assets, like Canadian oil sands investments.

Theodore Wells, Exxon’s lead attorney, lambasted New York’s “Saturday Night Live” skit of a case and said that New York’s arguments over language in the company’s climate risk disclosures were “trivial and insignificant.”

Wells put up a fight against New York’s eleventh-hour change to its legal strategy and promised to head to the law library to prove that the state’s move wasn’t possible.

“I don’t think you’re going to the library,” Ostrager said. Wells responded, “Fair comment.”

The office of New York Attorney General Letitia James (D) spent the last three weeks arguing its case that Exxon misled its investors in its evaluations of the climate-related financial risks of future investments.

The attorney general’s office said the company shared one set of greenhouse gas “proxy” costs in disclosure reports but made decisions based on a less conservative set of costs.

“The state [attorney general’s] case on the misleading of investors seems strong to me,” Sean Hecht, co-executive director of the Emmett Institute on Climate Change and the Environment at the UCLA School of Law, wrote in an email.

“The facts about the disclosures themselves are pretty much uncontested,” he said. “The outcome seems likely to turn on whether the judge will be convinced by Exxon’s explanation that it was reasonable and diligent, rather than misleading, for the company to evaluate individual projects based on what it calls the ‘greenhouse gas cost’ without disclosing it.”

Even if New York fails to prove that Exxon deliberately defrauded its shareholders, James’ office could still claim victory if Ostrager finds that investors could have been reasonably confused about the company’s public statements.

A win for the state could set fresh legal precedent and spur new efforts to bring similar litigation against Big Oil, though securities experts said a New York victory would have little bearing on market behavior.

“Even if Exxon loses the case, I don’t think this will have a significant impact on other oil and gas companies,” said Michael Biles, a securities litigation expert with the law firm King & Spalding LLP. “I think Exxon was unique in using two different proxy carbon costs — so I don’t think that this case will have broader application.”

Securities litigation like this has also cropped up in New Jersey, Texas and — most recently — Massachusetts (Climatewire, Oct. 25).

Biles said Massachusetts Attorney General Maura Healey’s similar lawsuit, which brings both shareholder fraud and consumer protection laws down on Exxon, is really the case to watch, calling the new complaint “more dangerous to Exxon and the oil and gas industry generally.”

‘Agonizing’ testimony

The trial is the culmination of a yearslong investigation into Exxon’s business practices brought by former New York Attorney General Eric Schneiderman in 2015.

Ostrager has been involved since the beginning, and his frustration with the process bubbled over at some points during the trial.

When New York called Exxon’s former greenhouse gas manager, Guy Powell, to the stand, Ostrager reminded Zweig that intent is not needed to prove a Martin Act violation and wondered where exactly the prosecution wanted to go with its line of questioning.

“Before we go through any more of this agonizing, repetitious questioning about the documents that are not being disputed — the chronology of which are not in dispute — what is it exactly that you are trying to elicit from this witness?” Ostrager asked.

“Exxon doesn’t dispute anything that you’ve adduced from this witness or the prior two witness, as far as I know.”

Indeed, Exxon did not deny that it used two separate costs to evaluate risk. But the company rejected arguments that its use of the costs — and the way the company spoke about them — was misleading to the reasonable shareholder.

Exxon said the two costs were used for different purposes: one “proxy carbon cost” to evaluate global demand and one “GHG proxy cost” to evaluate greenhouse gas costs of specific projects. Exxon chose not to disclose the greenhouse gas costs, partly because the company said they had no effect on investor bottom lines.

The firm said it shared the greenhouse gas costs in a 2014 “Managing the Risks” report, but the prosecution balked at the assertion that a single sentence in the report was sufficient disclosure of the separate cost.

James’ office also produced emails between Exxon employees discussing whether to align the two costs, supporting New York’s bedrock argument that there was confusion, even internally, over the use of the two costs. In later testimony, Exxon’s external auditor, Richard Auter from PricewaterhouseCoopers, said he had even used the two terms interchangeably, though he denied the company was trying to conceal any scheme to mislead.

During his time on the stand, former Secretary of State and Exxon CEO Rex Tillerson said he didn’t remember any internal confusion and that the two figures represented “macro” and “micro” views of the company’s costs.

Using inconsistent costs, as the attorney general claims the company did, wouldn’t make sense because the action would hurt Exxon, Tillerson added.

Material risk?

Investors brought to the stand on the trial’s second day said they felt misled by the language the company used to discuss its use of proxy costs, specifically in relation to potentially risky Canadian oil sands investments.

The emissions-heavy oil sands production is at the heart of the case, and financial expert Eli Bartov from New York University’s Stern School of Business testified that Exxon’s omission of the higher proxy costs it told investors about — in favor of lower internal numbers — cost shareholders hundreds of millions of dollars.

According to Bartov, Exxon’s 2015 impairment analysis — done to evaluate the profitability of risky oil assets — improperly left out the high greenhouse gas proxy costs disclosed to investors, resulting in incorrect assumptions about what those risky assets may have been worth.

According to the second financial expert witness, University of Saint Katherine professor Peter Boukouzis, stock prices also were falsely inflated because of those overly friendly asset values.

But one of Exxon’s final experts, Harvard Law School professor Allen Ferrell, harpooned the state’s “circular” economic analysis as “a logical fallacy.” He claimed that Bartov’s suspect analysis relied on measures that were not statistically significant.

Exxon also called on financial analyst Jason Iwanika to testify again in the trial’s final week. He told the court that a repetitive spreadsheet error in Boukouzis’ oil sands analysis overstates the numbers by billions of dollars.

Ostrager said he would issue his ruling within 30 days of the case’s closure.