Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every
Speaker 1: day we bring you insight and analysis into the most
Speaker 1: important legal news of the day. You can find more
Speaker 1: episodes of the Bloomberg Law Podcast on Apple podcast, SoundCloud
Speaker 1: and on Bloomberg dot com slash podcasts. There's a storm
Speaker 1: of litigation against energy companies over climate change. The first
Speaker 1: major one to go to trial is New York's one
Speaker 1: point six billion dollar case against Exxon Mobile. The x
Speaker 1: ON case is actually a landmark securities fraud case. The
Speaker 1: New York Attorney General says x On defrauded investors by
Speaker 1: lying about how the oil company planned for the financial
Speaker 1: risks of climate change, something it's former CEO, Rex Tillerson,
Speaker 1: denied in court this week. Joining me is Pat Parento,
Speaker 1: professor of environmental law at Vermont Law School. Pat explained
Speaker 1: New York's case against x in here. So this is
Speaker 1: a question of whether XNS communications about the they were
Speaker 1: valuing the risks of climate change regulation on their business plan. Basically,
Speaker 1: their promotion of fossil fuel development violates the State of
Speaker 1: New York's Martin Act, which is the strongest securities law
Speaker 1: in the country, and so the allegation is that Exxon
Speaker 1: has committed a securities fraud by using these two different
Speaker 1: types of pricing carbon, and under the Martin Act, all
Speaker 1: that the state has to show is that the effect
Speaker 1: of Exxon's use of these two confusing different prices of
Speaker 1: carbon caused investors to invest in Exxon stock when it
Speaker 1: was riskier than what the investors were being told. So
Speaker 1: pat how did this turn into a trial basically about
Speaker 1: numbers and accounting. So this all has to do with
Speaker 1: the effect of Exxon's campaign to so doubt about the
Speaker 1: effects of climate change despite what xn new, we're real risk,
Speaker 1: serious risk from climate change, and in so doing delay
Speaker 1: any effective action to address climate change mitigation and adaptation
Speaker 1: through reduction of carbon emissions, promotion of alternative fuel sources
Speaker 1: and energy sources, letting states and municipalities plan for the
Speaker 1: effects of sea level rise, and the other things that
Speaker 1: are happening. So the climate connection here is as a
Speaker 1: result of Exxon's alleged deception, we lost valuable decades during
Speaker 1: which we could have been taking steps to reduce these
Speaker 1: dangers and deal with the effects. Judge Barry Ostregor, New
Speaker 1: York State Supreme Court judge is presiding over the case.
Speaker 1: Why a judge instead of a jury. That was up
Speaker 1: to Exxon. They could have demanded a jury trial, they
Speaker 1: opted for a bench trial. I think it's fair to
Speaker 1: infer that Exon feared having a case like this tried
Speaker 1: before a jury of ordinary citizens. Some of the documents
Speaker 1: and statements that are coming out in the trial look
Speaker 1: pretty damning. Certainly to the average person. It looks like,
Speaker 1: at a minimum, XXN was sloppy and confusing with the
Speaker 1: kinds of information they were using, and perhaps even worse,
Speaker 1: were deliberately deceiving people. Now, the Martin Act doesn't require
Speaker 1: proof of actual intent to defraud investors. It just means
Speaker 1: that the way that you handle the information confused and
Speaker 1: misled investors. That's enough as long as it causes material
Speaker 1: harm to the investors. Meaning if they had this information,
Speaker 1: they could have made better decisions about where to invest
Speaker 1: their money. What's xns defense. They have a very high
Speaker 1: profile lawyer, Ted Wells. What's their defense. Their defense is
Speaker 1: that any reasonable person should have understood that Exxon used
Speaker 1: two different prices for two different purposes. One that they
Speaker 1: called the proxy cost of carbon regulation, which was much
Speaker 1: high here and this is the one that they were
Speaker 1: communicating to the public and to their investors, and that
Speaker 1: price was to rise up to something like eighty dollars
Speaker 1: per ton of carbon. It's what we call the social
Speaker 1: cost of carbon, the damage that carbon pollution causes. Whereas
Speaker 1: for their own business decisions on whether to invest in,
Speaker 1: for example, really polluting fuels like the oil sands in Canada.
Speaker 1: In Alberta, they were using a much lower proxy cost
Speaker 1: of about forty per ton, And the difference between these
Speaker 1: so called proxy costs is the difference between investing in
Speaker 1: resources that are really risky and run the risk of
Speaker 1: being stranded because of what the climate science is saying
Speaker 1: we need to do to reduce those emissions. That difference
Speaker 1: in price makes all the difference between whether or not
Speaker 1: the investment is risky or not. At the first week
Speaker 1: of trial, there is an example of why it's so
Speaker 1: different to try a case before a judge. Judge aust
Speaker 1: I appeared to lose patients with some of the questioning,
Speaker 1: and he said, what are you trying to elicit from
Speaker 1: this witness? This is a Martin Act case. Intent is
Speaker 1: not an element of the Martin Act case. So just
Speaker 1: explain how it's so different to have a judge hearing
Speaker 1: a case. Yes, and this judge in particular because Judge
Speaker 1: Ostroger was formally in a major law firm in New
Speaker 1: York doing securities law, so he really knows the financial markets,
Speaker 1: he knows how the Martin Act works. He's probably even
Speaker 1: at one point defended or potentially advised clients on compliance
Speaker 1: with the Martin At. So this is a judge who
Speaker 1: really is, in some ways I suppose ideally suited to
Speaker 1: hear a highly technical case like this. He really understands
Speaker 1: what these different reports are that are being referred to,
Speaker 1: and the way in which corporations make decisions and the
Speaker 1: way they communicate those decisions to investors. So he's a
Speaker 1: sort of expert judge in these matters with the Martin Act.
Speaker 1: Do you need a smoking gun to come out in
Speaker 1: this case? For the judge to find for the State
Speaker 1: of New York, you really don't need a smoking gun,
Speaker 1: Although the New York AG's Office has at times represented
Speaker 1: that they were going to demonstrate that there were more
Speaker 1: than one smoking gun, and that even though they didn't
Speaker 1: have the burden of proving intent, they were going to
Speaker 1: show the judge that these decisions and actions that XN
Speaker 1: took were deliberate and that Xon new or should have
Speaker 1: known they were confusing and we're designed actually to mislead.
Speaker 1: So I don't know why the state chose to take
Speaker 1: on that burden. The judge has said, you don't have
Speaker 1: that burden in this case. So maybe we'll see as
Speaker 1: the trial progresses some modification and some change in the
Speaker 1: New York AGS strategy here. How much money is at
Speaker 1: stake for x Well, the state has said that billions
Speaker 1: are at stake, both in terms of the damage that
Speaker 1: they're going to claim were caused by misleading the investors.
Speaker 1: That's gonna be difficult to prove, but that's what the
Speaker 1: state is is shooting for. The other type of damage
Speaker 1: is disgorgement of profits. So from the time that Exxon
Speaker 1: began using these dual bookkeeping, the state is going to
Speaker 1: try to show that Exxon was continuing to make large profits,
Speaker 1: which of course they were, and that if they had
Speaker 1: actually been using proper pricing mechanisms for carbon, they would
Speaker 1: not have been making some of the risky investments in
Speaker 1: some of these oil sands, for example resources in Canada,
Speaker 1: and that that has now put the stockholders at risk
Speaker 1: of future stranded assets. And some of these reserves in
Speaker 1: Canada cost billions of dollars to extract. This is really
Speaker 1: energy intensive oil extraction technologies that are required. So those
Speaker 1: are some of the kinds of profits that Exxon has gained.
Speaker 1: But in the long term, it's the shareholders who are
Speaker 1: going to be left holding the bag, so to speak.
Speaker 1: Rex Chillers and obviously the star witness how important his testimony.
Speaker 1: I think his testimony is very important. He was the
Speaker 1: CEO of Excen during the critical period of time that
Speaker 1: the New York KG is alleging that Excellon came up
Speaker 1: with these two different bookkeeping methods on proxy costs for carbon,
Speaker 1: and he's the one who went to the shareholders meeting
Speaker 1: in two thousand and sixteen to reassure investors that Exxon
Speaker 1: was using the sort of state of the art accounting
Speaker 1: for carbon risks. And so his testimony is critical. And
Speaker 1: is he basically holding to the company line. Yes, he is.
Speaker 1: He's saying, we used two different proxy costs, and we
Speaker 1: did so for different purposes, and we didn't mislead our
Speaker 1: investors in any way. That's exactly what you would have
Speaker 1: expected him to say, we have this whole question of
Speaker 1: what happened to all the emails under the pseudonym that
Speaker 1: he was using Wayne Tracker. Those emails have quote disappeared,
Speaker 1: and there's lots of questions about what was in them
Speaker 1: where references to these proxy costs discussed, was climate change
Speaker 1: risks discussed? Why were they destroyed? And so forth? Will
Speaker 1: this case parallel or be a bell weather for any
Speaker 1: other cases, Yes, I would say so. There are fifteen
Speaker 1: different lawsuits pending across the country against Exxon and the
Speaker 1: other oil companies for damages from climate change, brought by
Speaker 1: cities in California, for example, and New York City municipalities.
Speaker 1: States like Rhode Island have brought lawsuits. Baltimore City has
Speaker 1: brought a lawsuit. All of these lawsuits are seeking compensation
Speaker 1: from the oil companies to deal with the effects of
Speaker 1: climate change, from sea level rise and other impacts. These
Speaker 1: are public nuisance cases, and there are other theories as well,
Speaker 1: products liability, failure to warn kinds of cases. And so
Speaker 1: the documents and the information that x on knew that's
Speaker 1: coming to light in the New York case, those documents
Speaker 1: and statements are going to find their way in to
Speaker 1: these other nuisance cases because one of the key elements
Speaker 1: of proving a nuisance is the defendant new of a
Speaker 1: danger and failed to disclose it, failed to warn about
Speaker 1: it to its customers and others. So that's a central
Speaker 1: part of these other climate liability cases. That's Pat Parento
Speaker 1: of the Vermont Law School. Thanks for listening to the
Speaker 1: Bloomberg Law Podcast. You can subscribe and listen to the
Speaker 1: show on Apple Podcasts, SoundCloud, and on Bloomberg dot com
Speaker 1: slash podcast. I'm June Grosso. This is Bloomberg Ye.