On ExxonMobil: When is a Company Liable for What it Says (or Doesn’t Say) About Climate Change Risks?

By Brandon Kline, Energy Law Fellow

The dust continues to settle from New York Attorney General Eric Schneiderman’s recent announcement that Exxon Mobil Corporation was subpoenaed in an investigation as to whether it intentionally downplayed the risks of climate change. Speaking to PBS Newshour, the Attorney General confirmed, “We have been looking at the energy sector generally for a number of years, and have had several investigations that relate to the phenomenon of global warming, climate change, and the human contribution to it.” 

Prosecuting financial fraud in connection with climate change is seemingly beyond the jurisdiction of most state regulators. However, under the Martin Act, New York’s attorneys general have regularly taken the lead on sweeping enforcement actions with global importance. For example, in May 2005 New York’s AG took action against AIG for misleading regulators and investors in the run-up to the global financial crisis, and in November 2012 took action against Credit-Suisse for misrepresenting the risks of mortgage-backed securities. 

Accordingly, public companies with substantial economic activity in New York are subject to dual-jurisdiction: the New York Attorney General and the federal government (i.e., the Securities and Exchange Commission and the U.S. Department of Justice).

The sweeping provisions of the Martin Act (New York General Business Law Article 23-A, §352) gives New York's top prosecutor wide latitude to pursue corporations engaging in “fraud, deception, concealment” of material information in connection with the advertisement, purchase or sale of any security transaction arising in New York. 

To be sure, ExxonMobil does not owe a duty to share information the company gathers about climate change. On the other hand, the overwhelming majority of liability provisions in securities law (criminal and civil) focus on truthful disclosure requirements. [1] In other words, if the marketplace is to function properly, corporations must tell the truth in light of the information on hand.

Disclosure is the sine quo non of securities regulation. To avert both informational scarcity and overload, the federal securities laws draw the boundary of mandatory disclosure with the concept of “materiality.” Investors must be able to rely upon representations from corporations regarding “material” information – including historical data and forward-looking information – before deciding whether to buy or sell a security. To that end, reports that ExxonMobil made misrepresentations to investors about the risks of climate change have led several lawmakers and others to call on the U.S. Securities and Exchange Commission and the U.S. Department of Justice to open an investigation.

Why is so little known about ExxonMobil's potential liability?

For one thing, we know very little about what ExxonMobil did or didn't say to trigger the Martin Act. That's by design. A Legal Affairs Magazine piece sheds light on how key provisions of the Act operate in practice: “it empowers [New York’s Attorney General] to subpoena any document...from anyone doing business in the state; to keep an investigation totally secret or to make it totally public…” Indeed, since the Martin Act empowers the Attorney General to conduct the investigation almost entirely in secret, little is known about the precise theory of liability. 

Speculation abounds. Some have compared ExxonMobil’s climate travails to those faced by big tobacco companies misleading the public about the risks of cigarettes (i.e. the “tobacco strategy”), causing others to refer to the prosecution as a “witch hunt.” Forbes columnist Daniel Fisher has referred to the action as a display of “creative lawyering.” 

Recent news about Peabody Energy only adds to the speculation. Last week, New York reached an agreement with energy giant Peabody Energy Corporation, upon building a case alleging that the largest publicly traded coal company in the world had violated “New York laws prohibiting false and misleading conduct in the company’s statements to the public and investors regarding financial risks associated with climate change and potential regulatory responses.”  

As part of the agreement concluding the investigation, Peabody will file revised SEC shareholder disclosures that accurately characterize Peabody’s potential exposure from climate-change related risks.  The disclosures affirm that “concerns about the environmental impacts of coal combustion…could significantly affect demand for our products or our securities.”  Peabody has agreed that all future statements to shareholders and the public will be consistent with the terms of its agreement with the Attorney General’s office and the disclosures it will file with the SEC.  The agreement, which is the form of an Assurance of Discontinuance, can be found here.

Although Peabody did not stipulate to any wrongdoing or monetary settlement, the long term problem remains. As the New York Times reports: "Its impact will surely pale in comparison with the other problems Peabody faces as demand for coal plummets, replaced by cleaner-burning natural gas. Shares of Peabody, which is based in St. Louis, have lost more than 90 percent of their value over the last year as the entire industry has been overwhelmed by crippling debts and more stringent regulations on coal burning by electric utilities.” 

In this respect, Peabody and Exxon pose similar risks to investors: the inherent value of the company is being undermined by changing market dynamics and regulatory responses to greenhouse gas emissions. For these reasons, the SEC has released guidance regarding disclosure of climate change risks. 

It remains to be seen what ExxonMobil did or did not know about potential risks. “We unequivocally reject the allegations that Exxon Mobil has suppressed climate-change research,” a company spokesman has asserted to the New York Times. Meanwhile, under New York law, the defendant has 20 days to ponder about responding to the subpoena. 

Two things are clear. First, any agreement that is reached between New York regulators and energy companies is not likely to be the last word on the matter. Because the Martin Act only applies to claims arising under New York law, further liability could loom at the federal level. Second, the next few years are going to be a bumpy ride for energy companies and their investors. No doubt energy executives will be parsing their words in the meantime.

###

[1] A quick legal note about securities law: Securities fraud may be prosecuted under 18 U.S.C. § 1348, the failure of corporate officers to certify financial reports (18 U.S.C. § 1350), and violations of provisions in 15 U.S.C. § 78c(a)(47) and SEC rules, regulations and orders, including the Securities and Exchange Act Fraud in violation of 15 U.S.C. § 78j(b), § 78ff, and 17 C.F.R. § 240.10b-5. It may also be prosecuted under other statutes such as bank fraud, mortgage fraud, wire fraud, FCPA and conspiracy.