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New York's 'ill-conceived' lawsuit against Exxon is rejected by judge

State Court

By Daniel Fisher | Dec 10, 2019

Ostrager
Ostrager

NEW YORK (Legal Newsline) - The flagship lawsuit of the #ExxonKnew climate litigation campaign was sent to the bottom today after a New York judge rejected all claims brought by the office of Attorney General Letitia James, including fraud charges the state’s lawyers unexpectedly dropped at the close of trial.

In a critically worded 55-page decision that wasn't exactly a surprise and at one point referred to the case as “an ill-conceived initiative of the Office of the Attorney General,” Supreme Court Judge Barry Ostrager said New York failed to prove ExxonMobil misled investors about the impact of climate change even under the state’s extraordinarily loose Martin Act, which doesn’t require proof a company acted with bad intent or that investors relied on what the company said. 

Even under that standard, Judge Ostrager wrote, New York failed to prove that “ExxonMobil made any material misstatements or omissions about its practices and procedures that misled any reasonable investor.”

The judge didn’t limit his ruling to the Martin Act claims. He also ruled that the state failed to prove the two fraud claims New York dropped in its closing arguments, saying because the state couldn’t prove liability under the Martin Act, “the decision in this case, perforce, establishes that ExxonMobil would not have been held liable on any fraud-related claims which the Office of Attorney General discontinued.”

ExxonMobil had asked Judge Ostrager to rule on the dropped fraud charges, saying it was unfair for New York to accuse its executives of committing intentional fraud in court and in repeated statements to the media only to withdraw the allegations at the end of trial. The decision could have some impact on copycat litigation by other government lawyers, including a case Massachusetts Attorney General Maura Healey filed shortly before the New York trial began in what ExxonMobil has called a deliberate attempt to disrupt its defense efforts in that case. Massachusetts doesn’t have the equivalent of the Martin Act with its loose standards of proof.

New York AG James, in a statement after the verdict, refuted the judge’s findings and said her office had shown that “Exxon made materially false, misleading, and confusing representations to the American people about the company’s response to climate change regulations.” She didn’t say whether the state intends to appeal the decision. There was no immediate comment from ExxonMobil. 

The verdict, if it stands, represents an embarrassing setback for a movement widely believed to have been launched at a 2012 conference in La Jolla, California, where environmental activists and plaintiff lawyers devised a strategy to sue energy companies to obtain internal documents they thought would show executives hid what they knew about climate change, much like the litigation assault on tobacco companies in the 1990s.

The strategy unraveled after then-New York AG Eric Schneiderman launched his investigation into ExxonMobil in 2015, leaking details of his subpoenas to the New York Times for extra impact. After pulling millions of documents from ExxonMobil and interviewing dozens of witnesses, New York was forced to abandon its initial theory that the company accepted global warming internally but denied it to the public. 

The state’s theory switched before trial, with lawyers arguing ExxonMobil told the public it was preparing for climate change but failed to consistently apply estimates of future costs associated with greenhouse gas emissions in its internal planning.

Judge Ostrager, an experienced securities litigator before he became a judge, said the state failed to prove its claims even under the loose standard of preponderance of the evidence. Under the Martin Act, the state had to prove ExxonMobil made misstatements that had a material impact on its stock. 

But there was no evidence the company’s reports in 2014 about how it was planning for global warming raised its stock price, the judge found, and no evidence the company later admitted they were wrong in what securities lawyers call a “corrective disclosure.” 

The only stock-price impact the state’s expert witness could show was when ExxonMobil shares fell following a leaked report to the Los Angeles Times that then-California AG Kamala Harris was investigating the company’s climate-related statements. That probe apparently ended with no action taken, the judge said, and “common sense dictates that the announcement of a government investigation may have a negative, but not necessarily corrective, effect on stock prices.”

The judge was particularly harsh toward the state’s expert witnesses including Eli Bartov, a New York University accounting professor who also works for plaintiff lawyers in securities fraud cases and charged the state some $500,000 at $1,050 an hour for "rambling" testimony. Judge Abramason said their testimony was “eviscerated on cross-examination” and the work of expert Peter Boukouzis was “fundamentally flawed.”

After its initial theory fell apart, New York focused on what it said were inconsistencies in how the company applied a “proxy cost” of carbon in its internal forecasting. The state seized upon the fact ExxonMobil used a proxy cost of $80 a ton by 2040 in developed economies to forecast future prices and demand for hydrocarbon fuels but lower costs in some internal projections of the operating costs for anticipated projects.

ExxonMobil argued the state was confusing two concepts and that it used precise numbers when it could, such as applying a known tax on carbon emissions to its Canadian tar-sands operations instead of the unknowable future cost of emissions it built into its price and demand forecasts. 

Judge Ostrager agreed the state got it wrong, saying “it would be manifestly inappropriate” for the court to rule that ExxonMobil had to apply uniform costs across all of its planning for future projects that were never disclosed to the public and thus couldn’t have had a material impact on its stock. 

“No reasonable investor... would make investment decisions based on speculative assumptions of costs that may be incurred 20+ 30+ years in the future with respect to unidentified future projects,” the judge wrote. He said what the trial did show is that “ExxonMobil has a culture of disciplined analysis, planning, accounting and reporting.”

The judge didn’t directly address ExxonMobil’s frequent complaint that New York’s lawsuit was a political attack on its business, although he noted Schneiderman’s “politically motivated statements” about his investigation. He said his opinion wasn’t “intended to absolve ExxonMobil from responsibility for contributing to climate change.”

“ExxonMobil does not dispute either that its operations produce greenhouse gases or that greenhouse gases contribute to climate change,” he wrote. “But ExxonMobil is in the business of producing energy, and this is a securities fraud case, not a climate change case.”

New York’s defeat comes after federal courts in New York and California dismissed lawsuits accusing ExxonMobil and other energy companies of causing a public nuisance through the sale of their products. Other cases are still pending, however, including a lawsuit by the City of Baltimore that a federal judge remanded to state court and a similar case pending in Colorado. 

The lawsuits are opposed by the Manufacturers’ Accountability Project, which said in a statement

“Today’s ruling makes clear that politically-motivated investigations and legal actions against energy manufacturers over the shared global challenge of climate change have no place in the courtroom — whether they target one company or an entire industry. It was obvious at trial that the AG’s office was trying to impose liability on ExxonMobil for its viewpoints and for taking positions in policy debates with which it disagreed.”

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