Summary:A look at the lawsuits surrounding Exxon. Did executives commit securities fraud?
For decades, Exxon denied the link between fossil fuel combustion and climate change. Even though their own scientists discovered the link, the company quietly funded groups that deceived the public about the adverse impact of carbon dioxide on the climate. In addition to these failed efforts to deceive the public, did Exxon also deceive investors and commit securities fraud? New York Attorney General Eric Schneiderman currently leads the Exxon investigation.
One of the main issues being investigated is whether there was a material fact that Exxon should have disclosed to the public, or at least to investors, the risks that climate change presented to Exxon’s business and operations. If Exxon executives knew that the adverse effects of climate change presented a material risk to Exxon or its assets, then the failure to disclose that risk to investors could be a material misstatement or omission. With evidence of such deceit, Schneiderman could file a securities fraud claim against Exxon.
New York’s Martin Act arms Schneiderman with the potent tool necessary to probe deep into Exxon’s company records to root out any evidence of fraudulent conduct. The Martin Act is more potent than federal securities laws because it does not have the same intent requirement. That makes it easier for Schneiderman to investigate than even the Securities and Exchange Commission (SEC), which is also investigating the company. A now-former New York attorney general invoked the Martin Act in a similar investigation many years ago. He found that Peabody Energy had indeed deceived investors, which led the company to agree to improve its climate change-related disclosures. The breadth of the Martin Act provides the New York AG with access to documents that others have failed to obtain. Schneiderman’s ability to subpoena a large volume of information speaks to the state’s ability to investigate more rigorously, making it more difficult for Exxon to resist this investigation as it has other state investigations.
Several Exxon scientific reports from the 1970s and later are available to the public, along with the company’s public relations strategy that discredited climate change science. One of the most noteworthy is an Exxon scientist’s report from 1977, which stated that the world had between five and 10 years before difficult choices would need to be made on future energy strategies. Another article in 1980 stated that there was “no doubt” that increased fossil fuel consumption was fueling the problem of increased carbon dioxide in the atmosphere.
In 1983, despite these reports, Exxon abandoned the scientific approach and significantly decreased climate research funding. By 1990, in an effort to combat the theory of climate change, Exxon claimed that scientists did not fully understand the role of greenhouse gases. Throughout the 2000s, Exxon funded climate change denial research to undermine the Intergovernmental Panel on Climate Change (IPCC) and other research stating that burning fossil fuels causes climate change. And in 2015, Schneiderman began his investigation into what Exxon knew—with at least 17 states, along with other federal agencies and municipalities, attempting to bring charges against Exxon.
There are two main groups fighting to defend Exxon: Congress and some state AGs. Congress subpoenaed the state AGs to discover which charges they plan to bring. However, the Supreme Court has held before that Congress must have some legislative intent when issuing subpoenas and that it has no right to interfere with a lawsuit pending in a court of proper jurisdiction. Congress has not yet shown any legislative intent, so their subpoenas may not hold up in court if challenged. Also fighting for Exxon are more than 10 state AGs, who are bringing suit in Massachusetts federal court to stop other state AGs from suing Exxon.
There are several lawsuits filed against Exxon. The Conservation Law Foundation filed suit against Exxon for violation of the Clean Water Act by not preparing an oil facility near Boston for the effects of climate change. It is the first suit by a group challenging a private corporation over its failure to adequately prepare for climate change impacts. In addition, Exxon will face at least two separate class action suits. First, corporate investors claim that Exxon’s public disclosures were false and misleading. Second, former Exxon employees allege that Exxon violated its fiduciary duty by offering its stock in the company’s savings plan knowing that it was artificially inflated due to its own fraud and misrepresentation.
Exxon has filed suit against Massachusetts Attorney General Maura Healey. The complaint raises a variety of challenges, including First Amendment, political influences, abuse of power, and federal preemption. Since the others carry little merit, the most important to analyze is the preemption argument. The National Securities Markets Improvement Act of 1996 (NSMIA) preempted certain aspects of state securities laws. However, Congress specifically did not preempt state anti-fraud investigations. Because this case revolves directly around securities fraud, there is no federal preemption. Furthermore, the courts will likely hesitate to construe the First Amendment in a manner that protects the deceit of investors.
Many have compared Exxon’s role in misleading the public about climate change to that of tobacco companies covering up the health effects of tobacco use. In both cases, the targeted corporations challenged the subpoenas under free speech, specifically focusing on viewpoint discrimination. This First Amendment attack successfully quashed a wide-ranging subpoena issued to Exxon by the U.S. Virgin Islands. However, Exxon cooperated with Schneiderman’s request under the Martin Act before adding him to their complaint against Healey.
As a defendant in Exxon’s case, Schneiderman moved to dismiss for a lack of personal jurisdiction. The Texas federal district court ruled that Exxon may depose both Schneiderman and Healey in December 2016. The first question to answer will be whether the federal district court will allow the state AGs, including New York, to continue their investigations, or if the court will rule in favor of Exxon’s First Amendment claim. Looking ahead, appeals may take the case into higher courts, or they may take the issue to Congress for legislative action. The actions taken by both parties in 2017 will show the public exactly what Exxon knew.