A Climate Change Trial That May Set the Pace

ON case is actually a landmark securities fraud case. The New York Attorney General says x On defrauded investors by lying about how the oil company planned for the financial risks of climate change, something it's former CEO, Rex Tillerson, denied in court this week. Joining me is Pat Parento, professor of environmental law at Vermont Law School. Pat explained New York's case against x in here. So this is a question of whether XNS communications about the they were

valuing the risks of climate change regulation on their business plan. Basically, their promotion of fossil fuel development violates the State of New York's Martin Act, which is the strongest securities law in the country, and so the allegation is that Exxon has committed a securities fraud by using these two different types of pricing carbon, and under the Martin Act, all that the state has to show is that the effect of Exxon's use of these two confusing different prices of

carbon caused investors to invest in Exxon stock when it was riskier than what the investors were being told. So pat how did this turn into a trial basically about

numbers and accounting. So this all has to do with the effect of Exxon's campaign to so doubt about the effects of climate change despite what xn new, we're real risk, serious risk from climate change, and in so doing delay any effective action to address climate change mitigation and adaptation through reduction of carbon emissions, promotion of alternative fuel sources and energy sources, letting states and municipalities plan for the effects of sea level rise, and the other things that

are happening. So the climate connection here is as a result of Exxon's alleged deception, we lost valuable decades during which we could have been taking steps to reduce these dangers and deal with the effects. Judge Barry Ostregor, New York State Supreme Court judge is presiding over the case. Why a judge instead of a jury. That was up to Exxon. They could have demanded a jury trial, they opted for a bench trial. I think it's fair to infer that Exon feared having a case like this tried

before a jury of ordinary citizens. Some of the documents and statements that are coming out in the trial look pretty damning. Certainly to the average person. It looks like, at a minimum, XXN was sloppy and confusing with the kinds of information they were using, and perhaps even worse, were deliberately deceiving people. Now, the Martin Act doesn't require proof of actual intent to defraud investors. It just means that the way that you handle the information confused and

misled investors. That's enough as long as it causes material harm to the investors. Meaning if they had this information, they could have made better decisions about where to invest their money. What's xns defense. They have a very high profile lawyer, Ted Wells. What's their defense. Their defense is that any reasonable person should have understood that Exxon used

two different prices for two different purposes. One that they called the proxy cost of carbon regulation, which was much high here and this is the one that they were communicating to the public and to their investors, and that price was to rise up to something like eighty dollars per ton of carbon. It's what we call the social

cost of carbon, the damage that carbon pollution causes. Whereas for their own business decisions on whether to invest in, for example, really polluting fuels like the oil sands in Canada. In Alberta, they were using a much lower proxy cost of about forty per ton, And the difference between these so called proxy costs is the difference between investing in resources that are really risky and run the risk of being stranded because of what the climate science is saying

we need to do to reduce those emissions. That difference in price makes all the difference between whether or not the investment is risky or not. At the first week of trial, there is an example of why it's so different to try a case before a judge. Judge aust I appeared to lose patients with some of the questioning, and he said, what are you trying to elicit from this witness? This is a Martin Act case. Intent is

not an element of the Martin Act case. So just explain how it's so different to have a judge hearing a case. Yes, and this judge in particular because Judge Ostroger was formally in a major law firm in New York doing securities law, so he really knows the financial markets, he knows how the Martin Act works. He's probably even at one point defended or potentially advised clients on compliance with the Martin At. So this is a judge who really is, in some ways I suppose ideally suited to

hear a highly technical case like this. He really understands what these different reports are that are being referred to, and the way in which corporations make decisions and the way they communicate those decisions to investors. So he's a sort of expert judge in these matters with the Martin Act. Do you need a smoking gun to come out in

this case? For the judge to find for the State of New York, you really don't need a smoking gun, Although the New York AG's Office has at times represented that they were going to demonstrate that there were more than one smoking gun, and that even though they didn't have the burden of proving intent, they were going to show the judge that these decisions and actions that XN took were deliberate and that Xon new or should have known they were confusing and we're designed actually to mislead.

So I don't know why the state chose to take on that burden. The judge has said, you don't have that burden in this case. So maybe we'll see as the trial progresses some modification and some change in the New York AGS strategy here. How much money is at stake for x Well, the state has said that billions are at stake, both in terms of the damage that they're going to claim were caused by misleading the investors. That's gonna be difficult to prove, but that's what the

state is is shooting for. The other type of damage

is disgorgement of profits. So from the time that Exxon began using these dual bookkeeping, the state is going to try to show that Exxon was continuing to make large profits, which of course they were, and that if they had actually been using proper pricing mechanisms for carbon, they would not have been making some of the risky investments in some of these oil sands, for example resources in Canada, and that that has now put the stockholders at risk

of future stranded assets. And some of these reserves in Canada cost billions of dollars to extract. This is really energy intensive oil extraction technologies that are required. So those are some of the kinds of profits that Exxon has gained. But in the long term, it's the shareholders who are going to be left holding the bag, so to speak. Rex Chillers and obviously the star witness how important his testimony.

I think his testimony is very important. He was the CEO of Excen during the critical period of time that the New York KG is alleging that Excellon came up with these two different bookkeeping methods on proxy costs for carbon, and he's the one who went to the shareholders meeting in two thousand and sixteen to reassure investors that Exxon was using the sort of state of the art accounting for carbon risks. And so his testimony is critical. And

is he basically holding to the company line. Yes, he is. He's saying, we used two different proxy costs, and we did so for different purposes, and we didn't mislead our investors in any way. That's exactly what you would have expected him to say, we have this whole question of what happened to all the emails under the pseudonym that

he was using Wayne Tracker. Those emails have quote disappeared, and there's lots of questions about what was in them where references to these proxy costs discussed, was climate change risks discussed? Why were they destroyed? And so forth? Will this case parallel or be a bell weather for any

other cases, Yes, I would say so. There are fifteen different lawsuits pending across the country against Exxon and the other oil companies for damages from climate change, brought by cities in California, for example, and New York City municipalities. States like Rhode Island have brought lawsuits. Baltimore City has brought a lawsuit. All of these lawsuits are seeking compensation from the oil companies to deal with the effects of

climate change, from sea level rise and other impacts. These are public nuisance cases, and there are other theories as well,

products liability, failure to warn kinds of cases. And so the documents and the information that x on knew that's coming to light in the New York case, those documents and statements are going to find their way in to these other nuisance cases because one of the key elements of proving a nuisance is the defendant new of a danger and failed to disclose it, failed to warn about it to its customers and others. So that's a central part of these other climate liability cases. That's Pat Parento

of the Vermont Law School. Thanks for listening to the Bloomberg Law Podcast. You can subscribe and listen to the show on Apple Podcasts, SoundCloud, and on Bloomberg dot com slash podcast. I'm June Grosso. This is Bloomberg Ye.