Global Markets: New York Sues ExxonMobil For Investor Fraud

The New York attorney general is suing ExxonMobil, arguing that the oil major misled investors regarding its risks related to climate change.

The case amounts to an allegation that Exxon defrauded its investors by downplaying the financial risks the company faces regarding climate regulation. The New York attorney general’s office has already investigated the oil company for several years.

Unlike other lawsuits, this one does not focus on Exxon’s role in contributing to climate change. Other cases hinge on Exxon’s contribution, as one of the largest oil companies in the world, to the burning of fossil fuels. In this case, the NY AG is focusing on investor fraud, which hinges on the company knowingly misleading investors as to the risks related to climate regulation.

As the New York Times reports, ExxonMobil has assured investors that it can handle a carbon-constrained world and that it will continue to operate along as business-as-usual trajectory. The company is continuously reducing emissions in its operations, Exxon argues, and is investing more in fuels like natural gas that are comparatively cleaner and should thrive even in a world of more stringent regulation.

Exxon’s investments have been guided by a “proxy cost” to account for likely forthcoming regulations or taxes on carbon. After factoring in that shadow cost of carbon, if a project still made economic sense, Exxon could justify the investment as one that would still do well in the future, even if governments cracked down on carbon.

However, New York’s attorney general argues that Exxon had “discounted the potential future costs of climate policies,” as the New York Times puts it, which means that it was telling investors that it isn’t as financially exposed to potential regulation as might actually be the case. It minimized the proxy cost, using two sets of accounting figures, the suit alleges, which amounted to defrauding shareholders. Ultimately, if the real proxy cost is much higher – if likely future costs from regulations and/or taxes are much steeper than Exxon let on – then the company may not actually be able to produce all of the oil and gas that it says it can.

Or, put more simply, the company’s value is not what it says it is. Thus, the attorney general says, it is ripping off shareholders.

The suit cites the case of an oil sands investment in Canada. Exxon did not apply an appropriate proxy cost, which led to the company understating the long-term impact on cash flow by $25 billion.

“Exxon built a facade to deceive investors into believing that the company was managing the risks of climate-change regulation to its business when, in fact, it was intentionally and systematically underestimating or ignoring them, contrary to its public representations,” New York Attorney General Barbara Underwood said in a statement.

“Investors put their money and their trust in Exxon, which assured them of the long-term value of their shares, as the company claimed to be factoring the risk of increasing climate change regulation into its business decisions,” she said. “Yet as our investigation found, Exxon often did no such thing.” The case alleges that former Exxon CEO Rex Tillerson was involved in these practices. The NY AG’s lawsuit was filed in the New York Supreme Court.

A spokesman for Exxon argues that the New York attorney general has “doubled down on its tainted, meritless investigation by filing a complaint against Exxon Mobil.” The company says that the case is baseless, and the more than three years of investigating has turned up nothing.

The U.S. SEC had been looking into the company a few years ago, pursuing a case that was somewhat similar. That case was based on the notion that Exxon refused to write down its oil and gas reserves, even though oil prices had crashed in the years following the 2014 market meltdown. Much of the rest of the oil industry had written down assets, acknowledging that some reserves couldn’t be produced in such a poor pricing environment. The SEC was investigating whether or not Exxon’s refusal to do so amounted to fraud as well. The case was dropped under the Trump administration.

There are a handful of other separate lawsuits against the oil majors, some of which have failed to advance. Some cities and counties have sued oil companies for damages related to the expenses they will incur over sea level rise. Also, a group of young people are suing the U.S. government over its failure to adequately address climate change, which violates their “fundamental constitutional rights to freedom from deprivation of life, liberty, and property.” This case was just delayed by Supreme Court Chief Justice John Roberts.

It is unclear if the latest case from the New York Attorney General will prove more dangerous for ExxonMobil. At a minimum, it will tie the company up in court and add new legal expenses.

More important is the reputation damage that Exxon will continue to incur, which is not a trivial matter, as Liam Denning of Bloomberg Opinion points out. Oil companies are not the darlings of Wall Street in the way they used to be, so investors could grow increasingly wary of the sector. Divestment campaigns have already inflicted a toll in terms of reputation, but as time goes on, the oil industry will become increasingly targeted. Moreover, the more reputational damage a highly visible company like ExxonMobil receives, the more politically viable future climate regulation becomes. At some point, investors will abandon ship. By Nick Cunningham of Oilprice.com

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