1 00:00:03,520 --> 00:00:07,040 Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every 2 00:00:07,120 --> 00:00:09,680 Speaker 1: day we bring you insight and analysis into the most 3 00:00:09,720 --> 00:00:12,200 Speaker 1: important legal news of the day. You can find more 4 00:00:12,240 --> 00:00:16,160 Speaker 1: episodes of the Bloomberg Law Podcast on Apple podcast, SoundCloud 5 00:00:16,280 --> 00:00:20,040 Speaker 1: and on Bloomberg dot com slash podcasts. There's a storm 6 00:00:20,120 --> 00:00:24,280 Speaker 1: of litigation against energy companies over climate change. The first 7 00:00:24,360 --> 00:00:26,720 Speaker 1: major one to go to trial is New York's one 8 00:00:26,800 --> 00:00:30,639 Speaker 1: point six billion dollar case against Exxon Mobile. The x 9 00:00:30,760 --> 00:00:34,920 Speaker 1: ON case is actually a landmark securities fraud case. The 10 00:00:34,960 --> 00:00:38,559 Speaker 1: New York Attorney General says x On defrauded investors by 11 00:00:38,680 --> 00:00:41,600 Speaker 1: lying about how the oil company planned for the financial 12 00:00:41,720 --> 00:00:46,040 Speaker 1: risks of climate change, something it's former CEO, Rex Tillerson, 13 00:00:46,240 --> 00:00:49,120 Speaker 1: denied in court this week. Joining me is Pat Parento, 14 00:00:49,280 --> 00:00:53,120 Speaker 1: professor of environmental law at Vermont Law School. Pat explained 15 00:00:53,159 --> 00:00:56,400 Speaker 1: New York's case against x in here. So this is 16 00:00:56,400 --> 00:01:00,400 Speaker 1: a question of whether XNS communications about the they were 17 00:01:00,480 --> 00:01:06,080 Speaker 1: valuing the risks of climate change regulation on their business plan. Basically, 18 00:01:06,080 --> 00:01:10,720 Speaker 1: their promotion of fossil fuel development violates the State of 19 00:01:10,760 --> 00:01:14,400 Speaker 1: New York's Martin Act, which is the strongest securities law 20 00:01:14,440 --> 00:01:18,120 Speaker 1: in the country, and so the allegation is that Exxon 21 00:01:18,200 --> 00:01:22,319 Speaker 1: has committed a securities fraud by using these two different 22 00:01:22,400 --> 00:01:26,520 Speaker 1: types of pricing carbon, and under the Martin Act, all 23 00:01:26,560 --> 00:01:29,480 Speaker 1: that the state has to show is that the effect 24 00:01:30,040 --> 00:01:34,319 Speaker 1: of Exxon's use of these two confusing different prices of 25 00:01:34,400 --> 00:01:40,080 Speaker 1: carbon caused investors to invest in Exxon stock when it 26 00:01:40,160 --> 00:01:43,640 Speaker 1: was riskier than what the investors were being told. So 27 00:01:43,840 --> 00:01:47,360 Speaker 1: pat how did this turn into a trial basically about 28 00:01:47,480 --> 00:01:50,720 Speaker 1: numbers and accounting. So this all has to do with 29 00:01:50,800 --> 00:01:55,080 Speaker 1: the effect of Exxon's campaign to so doubt about the 30 00:01:55,120 --> 00:01:59,160 Speaker 1: effects of climate change despite what xn new, we're real risk, 31 00:01:59,240 --> 00:02:03,720 Speaker 1: serious risk from climate change, and in so doing delay 32 00:02:03,760 --> 00:02:09,240 Speaker 1: any effective action to address climate change mitigation and adaptation 33 00:02:09,520 --> 00:02:14,160 Speaker 1: through reduction of carbon emissions, promotion of alternative fuel sources 34 00:02:14,160 --> 00:02:19,120 Speaker 1: and energy sources, letting states and municipalities plan for the 35 00:02:19,120 --> 00:02:22,520 Speaker 1: effects of sea level rise, and the other things that 36 00:02:22,600 --> 00:02:25,960 Speaker 1: are happening. So the climate connection here is as a 37 00:02:26,040 --> 00:02:32,320 Speaker 1: result of Exxon's alleged deception, we lost valuable decades during 38 00:02:32,360 --> 00:02:34,959 Speaker 1: which we could have been taking steps to reduce these 39 00:02:35,040 --> 00:02:39,880 Speaker 1: dangers and deal with the effects. Judge Barry Ostregor, New 40 00:02:39,960 --> 00:02:43,639 Speaker 1: York State Supreme Court judge is presiding over the case. 41 00:02:44,080 --> 00:02:47,120 Speaker 1: Why a judge instead of a jury. That was up 42 00:02:47,160 --> 00:02:50,799 Speaker 1: to Exxon. They could have demanded a jury trial, they 43 00:02:50,840 --> 00:02:53,920 Speaker 1: opted for a bench trial. I think it's fair to 44 00:02:54,400 --> 00:02:58,600 Speaker 1: infer that Exon feared having a case like this tried 45 00:02:58,639 --> 00:03:02,720 Speaker 1: before a jury of ordinary citizens. Some of the documents 46 00:03:02,760 --> 00:03:05,720 Speaker 1: and statements that are coming out in the trial look 47 00:03:05,800 --> 00:03:09,520 Speaker 1: pretty damning. Certainly to the average person. It looks like, 48 00:03:09,720 --> 00:03:14,120 Speaker 1: at a minimum, XXN was sloppy and confusing with the 49 00:03:14,200 --> 00:03:17,440 Speaker 1: kinds of information they were using, and perhaps even worse, 50 00:03:17,639 --> 00:03:21,680 Speaker 1: were deliberately deceiving people. Now, the Martin Act doesn't require 51 00:03:21,760 --> 00:03:25,960 Speaker 1: proof of actual intent to defraud investors. It just means 52 00:03:26,120 --> 00:03:29,400 Speaker 1: that the way that you handle the information confused and 53 00:03:29,520 --> 00:03:34,920 Speaker 1: misled investors. That's enough as long as it causes material 54 00:03:34,960 --> 00:03:38,480 Speaker 1: harm to the investors. Meaning if they had this information, 55 00:03:38,800 --> 00:03:41,200 Speaker 1: they could have made better decisions about where to invest 56 00:03:41,240 --> 00:03:44,240 Speaker 1: their money. What's xns defense. They have a very high 57 00:03:44,240 --> 00:03:48,720 Speaker 1: profile lawyer, Ted Wells. What's their defense. Their defense is 58 00:03:48,760 --> 00:03:52,400 Speaker 1: that any reasonable person should have understood that Exxon used 59 00:03:52,400 --> 00:03:55,760 Speaker 1: two different prices for two different purposes. One that they 60 00:03:55,840 --> 00:03:59,680 Speaker 1: called the proxy cost of carbon regulation, which was much 61 00:03:59,760 --> 00:04:01,320 Speaker 1: high here and this is the one that they were 62 00:04:01,360 --> 00:04:04,920 Speaker 1: communicating to the public and to their investors, and that 63 00:04:05,000 --> 00:04:07,920 Speaker 1: price was to rise up to something like eighty dollars 64 00:04:08,360 --> 00:04:11,120 Speaker 1: per ton of carbon. It's what we call the social 65 00:04:11,160 --> 00:04:16,000 Speaker 1: cost of carbon, the damage that carbon pollution causes. Whereas 66 00:04:16,040 --> 00:04:19,000 Speaker 1: for their own business decisions on whether to invest in, 67 00:04:19,080 --> 00:04:24,839 Speaker 1: for example, really polluting fuels like the oil sands in Canada. 68 00:04:24,920 --> 00:04:28,559 Speaker 1: In Alberta, they were using a much lower proxy cost 69 00:04:28,600 --> 00:04:32,360 Speaker 1: of about forty per ton, And the difference between these 70 00:04:32,400 --> 00:04:36,120 Speaker 1: so called proxy costs is the difference between investing in 71 00:04:36,800 --> 00:04:40,560 Speaker 1: resources that are really risky and run the risk of 72 00:04:40,600 --> 00:04:44,080 Speaker 1: being stranded because of what the climate science is saying 73 00:04:44,120 --> 00:04:47,279 Speaker 1: we need to do to reduce those emissions. That difference 74 00:04:47,320 --> 00:04:50,520 Speaker 1: in price makes all the difference between whether or not 75 00:04:50,600 --> 00:04:53,920 Speaker 1: the investment is risky or not. At the first week 76 00:04:53,920 --> 00:04:56,560 Speaker 1: of trial, there is an example of why it's so 77 00:04:56,640 --> 00:04:59,839 Speaker 1: different to try a case before a judge. Judge aust 78 00:05:00,000 --> 00:05:03,000 Speaker 1: I appeared to lose patients with some of the questioning, 79 00:05:03,279 --> 00:05:06,120 Speaker 1: and he said, what are you trying to elicit from 80 00:05:06,120 --> 00:05:09,160 Speaker 1: this witness? This is a Martin Act case. Intent is 81 00:05:09,200 --> 00:05:12,440 Speaker 1: not an element of the Martin Act case. So just 82 00:05:12,560 --> 00:05:16,679 Speaker 1: explain how it's so different to have a judge hearing 83 00:05:16,720 --> 00:05:20,839 Speaker 1: a case. Yes, and this judge in particular because Judge 84 00:05:20,880 --> 00:05:23,680 Speaker 1: Ostroger was formally in a major law firm in New 85 00:05:23,760 --> 00:05:29,080 Speaker 1: York doing securities law, so he really knows the financial markets, 86 00:05:29,080 --> 00:05:31,960 Speaker 1: he knows how the Martin Act works. He's probably even 87 00:05:32,000 --> 00:05:36,799 Speaker 1: at one point defended or potentially advised clients on compliance 88 00:05:36,839 --> 00:05:38,760 Speaker 1: with the Martin At. So this is a judge who 89 00:05:38,800 --> 00:05:42,760 Speaker 1: really is, in some ways I suppose ideally suited to 90 00:05:42,880 --> 00:05:46,960 Speaker 1: hear a highly technical case like this. He really understands 91 00:05:47,400 --> 00:05:50,800 Speaker 1: what these different reports are that are being referred to, 92 00:05:51,360 --> 00:05:54,599 Speaker 1: and the way in which corporations make decisions and the 93 00:05:54,640 --> 00:05:58,520 Speaker 1: way they communicate those decisions to investors. So he's a 94 00:05:58,560 --> 00:06:02,320 Speaker 1: sort of expert judge in these matters with the Martin Act. 95 00:06:02,400 --> 00:06:04,080 Speaker 1: Do you need a smoking gun to come out in 96 00:06:04,120 --> 00:06:07,320 Speaker 1: this case? For the judge to find for the State 97 00:06:07,320 --> 00:06:09,880 Speaker 1: of New York, you really don't need a smoking gun, 98 00:06:10,040 --> 00:06:14,760 Speaker 1: Although the New York AG's Office has at times represented 99 00:06:14,800 --> 00:06:17,120 Speaker 1: that they were going to demonstrate that there were more 100 00:06:17,120 --> 00:06:19,960 Speaker 1: than one smoking gun, and that even though they didn't 101 00:06:19,960 --> 00:06:22,200 Speaker 1: have the burden of proving intent, they were going to 102 00:06:22,200 --> 00:06:26,320 Speaker 1: show the judge that these decisions and actions that XN 103 00:06:26,400 --> 00:06:29,320 Speaker 1: took were deliberate and that Xon new or should have 104 00:06:29,440 --> 00:06:33,800 Speaker 1: known they were confusing and we're designed actually to mislead. 105 00:06:33,920 --> 00:06:37,120 Speaker 1: So I don't know why the state chose to take 106 00:06:37,200 --> 00:06:39,400 Speaker 1: on that burden. The judge has said, you don't have 107 00:06:39,560 --> 00:06:42,680 Speaker 1: that burden in this case. So maybe we'll see as 108 00:06:42,720 --> 00:06:46,680 Speaker 1: the trial progresses some modification and some change in the 109 00:06:46,680 --> 00:06:49,760 Speaker 1: New York AGS strategy here. How much money is at 110 00:06:49,800 --> 00:06:53,599 Speaker 1: stake for x Well, the state has said that billions 111 00:06:53,640 --> 00:06:56,120 Speaker 1: are at stake, both in terms of the damage that 112 00:06:56,160 --> 00:06:59,599 Speaker 1: they're going to claim were caused by misleading the investors. 113 00:07:00,000 --> 00:07:02,000 Speaker 1: That's gonna be difficult to prove, but that's what the 114 00:07:02,040 --> 00:07:05,280 Speaker 1: state is is shooting for. The other type of damage 115 00:07:05,279 --> 00:07:09,320 Speaker 1: is disgorgement of profits. So from the time that Exxon 116 00:07:09,440 --> 00:07:12,480 Speaker 1: began using these dual bookkeeping, the state is going to 117 00:07:12,600 --> 00:07:17,320 Speaker 1: try to show that Exxon was continuing to make large profits, 118 00:07:17,360 --> 00:07:19,600 Speaker 1: which of course they were, and that if they had 119 00:07:19,640 --> 00:07:24,080 Speaker 1: actually been using proper pricing mechanisms for carbon, they would 120 00:07:24,080 --> 00:07:26,840 Speaker 1: not have been making some of the risky investments in 121 00:07:26,920 --> 00:07:30,200 Speaker 1: some of these oil sands, for example resources in Canada, 122 00:07:30,560 --> 00:07:34,080 Speaker 1: and that that has now put the stockholders at risk 123 00:07:34,160 --> 00:07:38,120 Speaker 1: of future stranded assets. And some of these reserves in 124 00:07:38,240 --> 00:07:42,120 Speaker 1: Canada cost billions of dollars to extract. This is really 125 00:07:42,320 --> 00:07:47,320 Speaker 1: energy intensive oil extraction technologies that are required. So those 126 00:07:47,360 --> 00:07:51,120 Speaker 1: are some of the kinds of profits that Exxon has gained. 127 00:07:51,360 --> 00:07:53,600 Speaker 1: But in the long term, it's the shareholders who are 128 00:07:53,600 --> 00:07:55,880 Speaker 1: going to be left holding the bag, so to speak. 129 00:07:56,200 --> 00:08:00,960 Speaker 1: Rex Chillers and obviously the star witness how important his testimony. 130 00:08:01,040 --> 00:08:03,320 Speaker 1: I think his testimony is very important. He was the 131 00:08:03,360 --> 00:08:06,120 Speaker 1: CEO of Excen during the critical period of time that 132 00:08:06,160 --> 00:08:08,680 Speaker 1: the New York KG is alleging that Excellon came up 133 00:08:08,720 --> 00:08:12,200 Speaker 1: with these two different bookkeeping methods on proxy costs for carbon, 134 00:08:12,680 --> 00:08:15,720 Speaker 1: and he's the one who went to the shareholders meeting 135 00:08:15,720 --> 00:08:18,720 Speaker 1: in two thousand and sixteen to reassure investors that Exxon 136 00:08:18,880 --> 00:08:21,720 Speaker 1: was using the sort of state of the art accounting 137 00:08:21,760 --> 00:08:25,560 Speaker 1: for carbon risks. And so his testimony is critical. And 138 00:08:25,800 --> 00:08:29,760 Speaker 1: is he basically holding to the company line. Yes, he is. 139 00:08:29,840 --> 00:08:33,120 Speaker 1: He's saying, we used two different proxy costs, and we 140 00:08:33,160 --> 00:08:36,440 Speaker 1: did so for different purposes, and we didn't mislead our 141 00:08:36,480 --> 00:08:39,080 Speaker 1: investors in any way. That's exactly what you would have 142 00:08:39,080 --> 00:08:41,600 Speaker 1: expected him to say, we have this whole question of 143 00:08:41,640 --> 00:08:45,080 Speaker 1: what happened to all the emails under the pseudonym that 144 00:08:45,120 --> 00:08:49,199 Speaker 1: he was using Wayne Tracker. Those emails have quote disappeared, 145 00:08:49,679 --> 00:08:52,040 Speaker 1: and there's lots of questions about what was in them 146 00:08:52,040 --> 00:08:56,319 Speaker 1: where references to these proxy costs discussed, was climate change 147 00:08:56,480 --> 00:09:00,280 Speaker 1: risks discussed? Why were they destroyed? And so forth? Will 148 00:09:00,320 --> 00:09:03,680 Speaker 1: this case parallel or be a bell weather for any 149 00:09:03,720 --> 00:09:06,960 Speaker 1: other cases, Yes, I would say so. There are fifteen 150 00:09:07,040 --> 00:09:10,720 Speaker 1: different lawsuits pending across the country against Exxon and the 151 00:09:10,760 --> 00:09:14,240 Speaker 1: other oil companies for damages from climate change, brought by 152 00:09:14,520 --> 00:09:19,240 Speaker 1: cities in California, for example, and New York City municipalities. 153 00:09:19,280 --> 00:09:22,679 Speaker 1: States like Rhode Island have brought lawsuits. Baltimore City has 154 00:09:22,679 --> 00:09:26,240 Speaker 1: brought a lawsuit. All of these lawsuits are seeking compensation 155 00:09:26,880 --> 00:09:29,640 Speaker 1: from the oil companies to deal with the effects of 156 00:09:29,679 --> 00:09:33,280 Speaker 1: climate change, from sea level rise and other impacts. These 157 00:09:33,280 --> 00:09:36,960 Speaker 1: are public nuisance cases, and there are other theories as well, 158 00:09:37,400 --> 00:09:41,760 Speaker 1: products liability, failure to warn kinds of cases. And so 159 00:09:41,840 --> 00:09:45,800 Speaker 1: the documents and the information that x on knew that's 160 00:09:45,840 --> 00:09:50,080 Speaker 1: coming to light in the New York case, those documents 161 00:09:50,080 --> 00:09:52,520 Speaker 1: and statements are going to find their way in to 162 00:09:52,679 --> 00:09:56,680 Speaker 1: these other nuisance cases because one of the key elements 163 00:09:56,760 --> 00:10:00,120 Speaker 1: of proving a nuisance is the defendant new of a 164 00:10:00,240 --> 00:10:03,640 Speaker 1: danger and failed to disclose it, failed to warn about 165 00:10:03,640 --> 00:10:06,559 Speaker 1: it to its customers and others. So that's a central 166 00:10:06,640 --> 00:10:10,640 Speaker 1: part of these other climate liability cases. That's Pat Parento 167 00:10:10,720 --> 00:10:15,559 Speaker 1: of the Vermont Law School. Thanks for listening to the 168 00:10:15,559 --> 00:10:18,960 Speaker 1: Bloomberg Law Podcast. You can subscribe and listen to the 169 00:10:18,960 --> 00:10:22,880 Speaker 1: show on Apple Podcasts, SoundCloud, and on Bloomberg dot com 170 00:10:22,960 --> 00:10:29,679 Speaker 1: slash podcast. I'm June Grosso. This is Bloomberg Ye.