WEBVTT - A Climate Change Trial That May Set the Pace 0:00:03.520 --> 0:00:07.040 Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every 0:00:07.120 --> 0:00:09.680 day we bring you insight and analysis into the most 0:00:09.720 --> 0:00:12.200 important legal news of the day. You can find more 0:00:12.240 --> 0:00:16.160 episodes of the Bloomberg Law Podcast on Apple podcast, SoundCloud 0:00:16.280 --> 0:00:20.040 and on Bloomberg dot com slash podcasts. There's a storm 0:00:20.120 --> 0:00:24.280 of litigation against energy companies over climate change. The first 0:00:24.360 --> 0:00:26.720 major one to go to trial is New York's one 0:00:26.800 --> 0:00:30.639 point six billion dollar case against Exxon Mobile. The x 0:00:30.760 --> 0:00:34.920 ON case is actually a landmark securities fraud case. The 0:00:34.960 --> 0:00:38.559 New York Attorney General says x On defrauded investors by 0:00:38.680 --> 0:00:41.600 lying about how the oil company planned for the financial 0:00:41.720 --> 0:00:46.040 risks of climate change, something it's former CEO, Rex Tillerson, 0:00:46.240 --> 0:00:49.120 denied in court this week. Joining me is Pat Parento, 0:00:49.280 --> 0:00:53.120 professor of environmental law at Vermont Law School. Pat explained 0:00:53.159 --> 0:00:56.400 New York's case against x in here. So this is 0:00:56.400 --> 0:01:00.400 a question of whether XNS communications about the they were 0:01:00.480 --> 0:01:06.080 valuing the risks of climate change regulation on their business plan. Basically, 0:01:06.080 --> 0:01:10.720 their promotion of fossil fuel development violates the State of 0:01:10.760 --> 0:01:14.400 New York's Martin Act, which is the strongest securities law 0:01:14.440 --> 0:01:18.120 in the country, and so the allegation is that Exxon 0:01:18.200 --> 0:01:22.319 has committed a securities fraud by using these two different 0:01:22.400 --> 0:01:26.520 types of pricing carbon, and under the Martin Act, all 0:01:26.560 --> 0:01:29.480 that the state has to show is that the effect 0:01:30.040 --> 0:01:34.319 of Exxon's use of these two confusing different prices of 0:01:34.400 --> 0:01:40.080 carbon caused investors to invest in Exxon stock when it 0:01:40.160 --> 0:01:43.640 was riskier than what the investors were being told. So 0:01:43.840 --> 0:01:47.360 pat how did this turn into a trial basically about 0:01:47.480 --> 0:01:50.720 numbers and accounting. So this all has to do with 0:01:50.800 --> 0:01:55.080 the effect of Exxon's campaign to so doubt about the 0:01:55.120 --> 0:01:59.160 effects of climate change despite what xn new, we're real risk, 0:01:59.240 --> 0:02:03.720 serious risk from climate change, and in so doing delay 0:02:03.760 --> 0:02:09.240 any effective action to address climate change mitigation and adaptation 0:02:09.520 --> 0:02:14.160 through reduction of carbon emissions, promotion of alternative fuel sources 0:02:14.160 --> 0:02:19.120 and energy sources, letting states and municipalities plan for the 0:02:19.120 --> 0:02:22.520 effects of sea level rise, and the other things that 0:02:22.600 --> 0:02:25.960 are happening. So the climate connection here is as a 0:02:26.040 --> 0:02:32.320 result of Exxon's alleged deception, we lost valuable decades during 0:02:32.360 --> 0:02:34.959 which we could have been taking steps to reduce these 0:02:35.040 --> 0:02:39.880 dangers and deal with the effects. Judge Barry Ostregor, New 0:02:39.960 --> 0:02:43.639 York State Supreme Court judge is presiding over the case. 0:02:44.080 --> 0:02:47.120 Why a judge instead of a jury. That was up 0:02:47.160 --> 0:02:50.799 to Exxon. They could have demanded a jury trial, they 0:02:50.840 --> 0:02:53.920 opted for a bench trial. I think it's fair to 0:02:54.400 --> 0:02:58.600 infer that Exon feared having a case like this tried 0:02:58.639 --> 0:03:02.720 before a jury of ordinary citizens. Some of the documents 0:03:02.760 --> 0:03:05.720 and statements that are coming out in the trial look 0:03:05.800 --> 0:03:09.520 pretty damning. Certainly to the average person. It looks like, 0:03:09.720 --> 0:03:14.120 at a minimum, XXN was sloppy and confusing with the 0:03:14.200 --> 0:03:17.440 kinds of information they were using, and perhaps even worse, 0:03:17.639 --> 0:03:21.680 were deliberately deceiving people. Now, the Martin Act doesn't require 0:03:21.760 --> 0:03:25.960 proof of actual intent to defraud investors. It just means 0:03:26.120 --> 0:03:29.400 that the way that you handle the information confused and 0:03:29.520 --> 0:03:34.920 misled investors. That's enough as long as it causes material 0:03:34.960 --> 0:03:38.480 harm to the investors. Meaning if they had this information, 0:03:38.800 --> 0:03:41.200 they could have made better decisions about where to invest 0:03:41.240 --> 0:03:44.240 their money. What's xns defense. They have a very high 0:03:44.240 --> 0:03:48.720 profile lawyer, Ted Wells. What's their defense. Their defense is 0:03:48.760 --> 0:03:52.400 that any reasonable person should have understood that Exxon used 0:03:52.400 --> 0:03:55.760 two different prices for two different purposes. One that they 0:03:55.840 --> 0:03:59.680 called the proxy cost of carbon regulation, which was much 0:03:59.760 --> 0:04:01.320 high here and this is the one that they were 0:04:01.360 --> 0:04:04.920 communicating to the public and to their investors, and that 0:04:05.000 --> 0:04:07.920 price was to rise up to something like eighty dollars 0:04:08.360 --> 0:04:11.120 per ton of carbon. It's what we call the social 0:04:11.160 --> 0:04:16.000 cost of carbon, the damage that carbon pollution causes. Whereas 0:04:16.040 --> 0:04:19.000 for their own business decisions on whether to invest in, 0:04:19.080 --> 0:04:24.839 for example, really polluting fuels like the oil sands in Canada. 0:04:24.920 --> 0:04:28.559 In Alberta, they were using a much lower proxy cost 0:04:28.600 --> 0:04:32.360 of about forty per ton, And the difference between these 0:04:32.400 --> 0:04:36.120 so called proxy costs is the difference between investing in 0:04:36.800 --> 0:04:40.560 resources that are really risky and run the risk of 0:04:40.600 --> 0:04:44.080 being stranded because of what the climate science is saying 0:04:44.120 --> 0:04:47.279 we need to do to reduce those emissions. That difference 0:04:47.320 --> 0:04:50.520 in price makes all the difference between whether or not 0:04:50.600 --> 0:04:53.920 the investment is risky or not. At the first week 0:04:53.920 --> 0:04:56.560 of trial, there is an example of why it's so 0:04:56.640 --> 0:04:59.839 different to try a case before a judge. Judge aust 0:05:00.000 --> 0:05:03.000 I appeared to lose patients with some of the questioning, 0:05:03.279 --> 0:05:06.120 and he said, what are you trying to elicit from 0:05:06.120 --> 0:05:09.160 this witness? This is a Martin Act case. Intent is 0:05:09.200 --> 0:05:12.440 not an element of the Martin Act case. So just 0:05:12.560 --> 0:05:16.679 explain how it's so different to have a judge hearing 0:05:16.720 --> 0:05:20.839 a case. Yes, and this judge in particular because Judge 0:05:20.880 --> 0:05:23.680 Ostroger was formally in a major law firm in New 0:05:23.760 --> 0:05:29.080 York doing securities law, so he really knows the financial markets, 0:05:29.080 --> 0:05:31.960 he knows how the Martin Act works. He's probably even 0:05:32.000 --> 0:05:36.799 at one point defended or potentially advised clients on compliance 0:05:36.839 --> 0:05:38.760 with the Martin At. So this is a judge who 0:05:38.800 --> 0:05:42.760 really is, in some ways I suppose ideally suited to 0:05:42.880 --> 0:05:46.960 hear a highly technical case like this. He really understands 0:05:47.400 --> 0:05:50.800 what these different reports are that are being referred to, 0:05:51.360 --> 0:05:54.599 and the way in which corporations make decisions and the 0:05:54.640 --> 0:05:58.520 way they communicate those decisions to investors. So he's a 0:05:58.560 --> 0:06:02.320 sort of expert judge in these matters with the Martin Act. 0:06:02.400 --> 0:06:04.080 Do you need a smoking gun to come out in 0:06:04.120 --> 0:06:07.320 this case? For the judge to find for the State 0:06:07.320 --> 0:06:09.880 of New York, you really don't need a smoking gun, 0:06:10.040 --> 0:06:14.760 Although the New York AG's Office has at times represented 0:06:14.800 --> 0:06:17.120 that they were going to demonstrate that there were more 0:06:17.120 --> 0:06:19.960 than one smoking gun, and that even though they didn't 0:06:19.960 --> 0:06:22.200 have the burden of proving intent, they were going to 0:06:22.200 --> 0:06:26.320 show the judge that these decisions and actions that XN 0:06:26.400 --> 0:06:29.320 took were deliberate and that Xon new or should have 0:06:29.440 --> 0:06:33.800 known they were confusing and we're designed actually to mislead. 0:06:33.920 --> 0:06:37.120 So I don't know why the state chose to take 0:06:37.200 --> 0:06:39.400 on that burden. The judge has said, you don't have 0:06:39.560 --> 0:06:42.680 that burden in this case. So maybe we'll see as 0:06:42.720 --> 0:06:46.680 the trial progresses some modification and some change in the 0:06:46.680 --> 0:06:49.760 New York AGS strategy here. How much money is at 0:06:49.800 --> 0:06:53.599 stake for x Well, the state has said that billions 0:06:53.640 --> 0:06:56.120 are at stake, both in terms of the damage that 0:06:56.160 --> 0:06:59.599 they're going to claim were caused by misleading the investors. 0:07:00.000 --> 0:07:02.000 That's gonna be difficult to prove, but that's what the 0:07:02.040 --> 0:07:05.280 state is is shooting for. The other type of damage 0:07:05.279 --> 0:07:09.320 is disgorgement of profits. So from the time that Exxon 0:07:09.440 --> 0:07:12.480 began using these dual bookkeeping, the state is going to 0:07:12.600 --> 0:07:17.320 try to show that Exxon was continuing to make large profits, 0:07:17.360 --> 0:07:19.600 which of course they were, and that if they had 0:07:19.640 --> 0:07:24.080 actually been using proper pricing mechanisms for carbon, they would 0:07:24.080 --> 0:07:26.840 not have been making some of the risky investments in 0:07:26.920 --> 0:07:30.200 some of these oil sands, for example resources in Canada, 0:07:30.560 --> 0:07:34.080 and that that has now put the stockholders at risk 0:07:34.160 --> 0:07:38.120 of future stranded assets. And some of these reserves in 0:07:38.240 --> 0:07:42.120 Canada cost billions of dollars to extract. This is really 0:07:42.320 --> 0:07:47.320 energy intensive oil extraction technologies that are required. So those 0:07:47.360 --> 0:07:51.120 are some of the kinds of profits that Exxon has gained. 0:07:51.360 --> 0:07:53.600 But in the long term, it's the shareholders who are 0:07:53.600 --> 0:07:55.880 going to be left holding the bag, so to speak. 0:07:56.200 --> 0:08:00.960 Rex Chillers and obviously the star witness how important his testimony. 0:08:01.040 --> 0:08:03.320 I think his testimony is very important. He was the 0:08:03.360 --> 0:08:06.120 CEO of Excen during the critical period of time that 0:08:06.160 --> 0:08:08.680 the New York KG is alleging that Excellon came up 0:08:08.720 --> 0:08:12.200 with these two different bookkeeping methods on proxy costs for carbon, 0:08:12.680 --> 0:08:15.720 and he's the one who went to the shareholders meeting 0:08:15.720 --> 0:08:18.720 in two thousand and sixteen to reassure investors that Exxon 0:08:18.880 --> 0:08:21.720 was using the sort of state of the art accounting 0:08:21.760 --> 0:08:25.560 for carbon risks. And so his testimony is critical. And 0:08:25.800 --> 0:08:29.760 is he basically holding to the company line. Yes, he is. 0:08:29.840 --> 0:08:33.120 He's saying, we used two different proxy costs, and we 0:08:33.160 --> 0:08:36.440 did so for different purposes, and we didn't mislead our 0:08:36.480 --> 0:08:39.080 investors in any way. That's exactly what you would have 0:08:39.080 --> 0:08:41.600 expected him to say, we have this whole question of 0:08:41.640 --> 0:08:45.080 what happened to all the emails under the pseudonym that 0:08:45.120 --> 0:08:49.199 he was using Wayne Tracker. Those emails have quote disappeared, 0:08:49.679 --> 0:08:52.040 and there's lots of questions about what was in them 0:08:52.040 --> 0:08:56.319 where references to these proxy costs discussed, was climate change 0:08:56.480 --> 0:09:00.280 risks discussed? Why were they destroyed? And so forth? Will 0:09:00.320 --> 0:09:03.680 this case parallel or be a bell weather for any 0:09:03.720 --> 0:09:06.960 other cases, Yes, I would say so. There are fifteen 0:09:07.040 --> 0:09:10.720 different lawsuits pending across the country against Exxon and the 0:09:10.760 --> 0:09:14.240 other oil companies for damages from climate change, brought by 0:09:14.520 --> 0:09:19.240 cities in California, for example, and New York City municipalities. 0:09:19.280 --> 0:09:22.679 States like Rhode Island have brought lawsuits. Baltimore City has 0:09:22.679 --> 0:09:26.240 brought a lawsuit. All of these lawsuits are seeking compensation 0:09:26.880 --> 0:09:29.640 from the oil companies to deal with the effects of 0:09:29.679 --> 0:09:33.280 climate change, from sea level rise and other impacts. These 0:09:33.280 --> 0:09:36.960 are public nuisance cases, and there are other theories as well, 0:09:37.400 --> 0:09:41.760 products liability, failure to warn kinds of cases. And so 0:09:41.840 --> 0:09:45.800 the documents and the information that x on knew that's 0:09:45.840 --> 0:09:50.080 coming to light in the New York case, those documents 0:09:50.080 --> 0:09:52.520 and statements are going to find their way in to 0:09:52.679 --> 0:09:56.680 these other nuisance cases because one of the key elements 0:09:56.760 --> 0:10:00.120 of proving a nuisance is the defendant new of a 0:10:00.240 --> 0:10:03.640 danger and failed to disclose it, failed to warn about 0:10:03.640 --> 0:10:06.559 it to its customers and others. So that's a central 0:10:06.640 --> 0:10:10.640 part of these other climate liability cases. That's Pat Parento 0:10:10.720 --> 0:10:15.559 of the Vermont Law School. Thanks for listening to the 0:10:15.559 --> 0:10:18.960 Bloomberg Law Podcast. You can subscribe and listen to the 0:10:18.960 --> 0:10:22.880 show on Apple Podcasts, SoundCloud, and on Bloomberg dot com 0:10:22.960 --> 0:10:29.679 slash podcast. I'm June Grosso. 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