ExxonMobil goes on trial over accusations it misled investors about climate change costs

Source: By Dino Grandoni, Washington Post • Posted: Tuesday, October 22, 2019

 

An Exxon sign at a gas station outside Chicago. (Reuters/Jim Young)

ExxonMobil is facing one of its biggest legal threats ever as the state of New York takes the oil and gas giant to court over accusations it misled investors about the costs of dealing with climate change.

The case, which is set to start Tuesday in state court in Manhattan, is the culmination of years of investigation by the New York attorney general’s office, which alleges the company’s public estimates of the costs to reduce global warming impact were drastically inflated compared to those used in private discussions among executives.

Should it lose, Exxon faces potentially millions of dollars in penalties as well as a blow to its reputation as it tries to polish its image on climate change. A courtroom defeat may also open the door for more investigations and lawsuits against Exxon and other oil majors over public disclosures about climate change.

“It might encourage other states to pursue similar actions against Exxon,” said Michael Burger, executive director of Columbia Law School’s Sabin Center for Climate Change Law.

But a win by Exxon could stymie efforts by state and local governments to hold oil companies accountable for the damage the use of their products brings to Earth’s climate system.

New York’s lawsuit against Exxon doesn’t deal directly with the rise of Earth’s temperature, or Exxon’s contributions to it. It’s ultimately a case about accounting.

Letitia James, New York’s attorney general, alleges that Exxon keeps two sets of numbers — one presented to investors and another used internally by planners — for calculating how greenhouse gas regulations around the world could cut into the company’s bottom line.

When talking to investors, the company estimated that the regulatory cost per ton of carbon would rise to $80 per ton of carbon by 2040 in certain developed countries, according to New York’s complaint filed in October. But inside the company, when planners were deciding where to invest, they pegged that cost at just $40 per ton.

Using a lower internal cost estimate when making investment decisions made certain extracting and refining projects look more financially attractive than the public-facing numbers would suggest. In the case of 14 oil sands projects in the Canadian province of Alberta, the attorney general’s office says Exxon underestimated the regulatory cost by more than $25 billion.

Exxon is not disputing the fact that it used dual accounting methods, but argues that it was not duping investors by doing so. Company spokesman Scott J. Silvestri dismissed the allegations as “false” and called the investigation “politically motivated.”

“We are confident in the facts and look forward to seeing our company exonerated in court,” Silvestri said in a statement. “The New York Attorney General’s case is misleading and deliberately misrepresents a process we use to ensure company investments take into account the impact of current and potential climate-related regulations.”

New York is invoking a particularly powerful anti-fraud statute called the Martin Act. The 98-year-old state law has a lower standard of proof than most other securities law, including federal law. Under it, New York prosecutors do not need to show that a company intended to deceive investors — only that it misled them about something material to their interests.

“Some people think it’s very heavy-handed,” Pat Parenteau, an environmental law professor at Vermont Law School, said of the Martin Act. “And maybe it is. But the state is really good at enforcing it.”

The Martin Act is so strong that companies often choose to settle with New York rather than go to trial. That is what Peabody Energy did in 2015 after a years-long probe into its disclosures about climate change, though the coal giant ultimately did not have to pay any fines.

Since 2007, Exxon has acknowledged the role people play in accelerating global warming. But that has not always been the case. For decades company executives publicly denied the role their products played in accelerating climate change even as its own scientists in the 1980s did cutting-edge climate research.

The suit alleges that higher-ups within the company, including former chief executive Rex Tillerson, knew about the alleged fraud. Tillerson left his post at Exxon in 2017 to become President Trump’s secretary of state.

The Exxon case will be decided not by a jury but by New York Supreme Court Judge Barry Ostrager, who according to Parenteau as a reputation of being “a real taskmaster.”

New York’s lawsuit against Exxon is hardly the only climate-related court cases with which the oil company is contending. Exxon and several other oil firms are facing a slew of state-level lawsuits from Democrat-led state, county and city governments, which claim the petroleum industry has created a “public nuisance” by peddling products that have led to rising seas, drier weather and other effects that are hurting residents from Rhode Island to California.

The oil companies are asking judges to put those public nuisance cases in federal courts, where past efforts to hold oil firms accountable for the effects of climate change have been dismissed. So far different federal district courts have ruled in different ways, at times dismissing the cases and other times letting them proceed in state court.

In a series of three emergency requests this month, lawyers for Exxon, BP and Suncor Energy have asked the Supreme Court to stall those cases making their way through state courts.