Photo: Bloomberg Photo By Andrew Harrer.
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New York’s $1.6 billion securities-fraud lawsuit against Exxon Mobil is scheduled to begin a second week of trial Monday, after a series of witnesses didn’t provide any concrete evidence that the oil giant knowingly misled shareholders about its climate change accounting.
Testimony by investors and employees did show a potential lack of clarity as to the difference between two measures of climate costs used by the energy giant. One is a public “proxy cost” for the impact of climate-change regulations on future energy demand, and the other a greenhouse gas (GHG) cost used internally to decide how to spend on new projects like drilling and oil sands.
The “proxy cost,” New York claims, made it look to investors like Exxon had a more sober view of sinking demand and tougher regulations than was actually applied internally.
And under New York law, how things look to shareholders-rather than what Exxon intended-may be what decides the case.
Last week, witnesses were confronted with dozens of internal emails and reports about the two accounting gauges, as well as the company’s communications with shareholders. Those shareholders had demanded as far back as 2013 to know how Exxon was calculating the cost of climate change.
New York has argued that Exxon intentionally misled investors by publicizing a “sham” proxy cost, tricking the market and thus inflating the company’s stock price. Exxon contends that the two costs are used for different purposes, and that New York is conflating them to show a discrepancy where there is none.
“We’re not trying to trick ourselves with our own internal documents,” Robert Bailes, Exxon’s former greenhouse gas manager, testified on Friday. Indeed, none of the documents discussed at trial so far appeared to show an intentional scheme like the one New York Attorney General Letitia James alleges.
To be sure, the state is far from resting its case and the court has yet to hear from several witnesses, including former Exxon Chief Executive Officer Rex Tillerson. It’s also possible that New York could unveil some heretofore unseen email or document that provides evidence of a smoking gun.
The attorney general, however, doesn’t need one.
James sued under New York’s Martin Act, which empowers officials to target a wide range of corporate behavior that may negatively impact shareholders. While New York claims Exxon intentionally misled shareholders, under this securities law it doesn’t have to prove intent to win.
“This is precisely why New York is pursuing Exxon under the Martin Act,,” said James Fanto, a professor at Brooklyn Law School. “New York could prevail if it showed that Exxon’s disclosure had a kind of fraudulent effect in misleading shareholders.”
New York Supreme Court Justice Barry Ostrager, who is presiding over the nonjury trial in lower Manhattan, alluded to this Wednesday when he asked the lawyers if confusion among Exxon’s shareholders was enough to trigger a Martin Act violation.
“Would you agree that if the disclosures that Exxon made confused investors with respect to the utilization of these two different costs, then there would be a Martin Act violation?” the judge asked Exxon’s lawyer Theodore Wells.
“No, your Honor,” Wells responded. “I would state that under the law that there’s a difference between somebody being confused and a statement being misleading. I think you have to look at it in context. I think the concepts are different.”
Kevin Wallace, a lawyer for the attorney general, rejected Wells’ premise, arguing that the case turns on what Exxon disclosed to the public “and what the investors understood.”
“There’s no dispute on the grounds about the existence of the two systems,” Wallace said. “The dispute is in how that was portrayed to the investors.”
The state’s first witness, activist investor Natasha Lamb, testified that she wrote to Exxon in 2013 on behalf of clients who were concerned that climate change posed a financial risk to the company.
She sought a shareholder resolution demanding the company disclose how it was managing those risks, according to a copy of the letter, displayed on large screens in the courtroom.
Exxon ultimately agreed to issue a report on the matter in 2014, which Lamb, a managing partner at Arjuna Capital, testified wasn’t an accurate representation of the financial threats facing the fossil fuel company. Lamb, who helped make Exxon’s proxy cost public, said she didn’t know at the time that Exxon used a different measure, the GHG cost, internally.
“My understanding is they were being used interchangeably,” Lamb testified of the two accounting measures.
But under cross-examination by Exxon attorney Justin Anderson, she was asked whether anyone at the company had told her that the public and internal numbers were interchangeable. “No one said that sentence, no,” Lamb responded, adding “I don’t know how I would understand it in any other way.”
“The dispute is in how that was portrayed to the investors.”
Ostrager expressed some skepticism about New York’s use of Lamb, a frequent Exxon critic, to begin its case on behalf of shareholders, briefly interrupting her testimony to ask her, “why didn’t you just sell your Exxon shares and buy Apple stock?”
But the judge’s displeasure was not necessarily to Exxon’s advantage. Much of the testimony-both Lamb’s and that of earlier witnesses-wasn’t required for New York to prove Exxon violated state law, Ostrager said.
At one point, Ostrager appeared to lose his patience with another lawyer for the state, Jonathan Zweig, as he questioned Exxon executive Guy Powell, a greenhouse gas manager, about alleged discrepancies in the company’s proxy costs.
“Mr. Zweig, before we go through anymore 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?” the judge asked. “This is a Martin Act case. Intent is not an element of the Martin Act case.”