Court finds no misleading climate change disclosures in ExxonMobil case

All NYAG’s claims dismissed with prejudice: “[T]his is a securities fraud case, not a climate change case.”  

In a complete rejection of the New York Attorney General’s (“NYAG”) case, a New York state court has dismissed with prejudice all the NYAG’s claims that ExxonMobil made misleading climate change-related disclosures in violation of New York’s antifraud laws. The Supreme Court of the State of New York (the state’s trial court) held that the NYAG could not show that the company’s disclosures were misleading or that the disclosures were material to investors.

The NYAG case centered on allegations that ExxonMobil had violated New York’s Martin Act and Executive Law § 63(12) in connection with public disclosures concerning how the company accounted for climate change risks.1 The main allegation was that ExxonMobil had fraudulently misrepresented to investors that it had fully considered the risks of climate change regulation, and factored those risks into its business operations.

The Martin Act is the New York state securities fraud law and is perceived by many to be the most harsh “blue sky” law in the country. Enacted in 1921, the Act was largely dormant until used by then-Attorney General Eliot Spitzer to bring cases against Wall Street firms. Unlike Section 10(b) under the US Securities Exchange Act of 1934, the main federal securities anti-fraud statute, the Martin Act does not require proof of fraudulent intent, reliance or damages. Instead, to establish ExxonMobil’s liability, the NYAG only had to prove by a preponderance of the evidence that the company made material misrepresentations or omissions that would have been viewed by a reasonable investor as having significantly altered the “total mix” of information made available.2 Fraudulent acts that violate the Martin Act also violate Executive Law Section 63(12) if they are repeated or persistent.

Over the years, ExxonMobil has made various public filings, presentations and statements in response to questions regarding how the company factored climate change risks and regulations into its business decisions, and issued two reports in 2014 addressing these concerns. A key issue was ExxonMobil’s "proxy costs,” which the NYAG argued was important to investors both as a concrete metric of how the company was managing the risk of climate change, and as a means for it to avoid investment decisions that would be economically unsound in a world of increasingly stringent climate change regulation. The NYAG alleged that ExxonMobil had used one set of proxy costs for its public disclosures, but actually operated under much lower proxy costs (or none at all), because applying the higher proxy costs would have threatened the economics of some of the company’s largest projects. Use of the lower proxy costs made the company’s assets appear significantly more secure than they really were, the NYAG argued, and thus had a material impact on its share price.

Ultimately, the court concluded that the NYAG had not established liability under the Martin Act or the Executive Law because ExxonMobil’s statements were not misleading, and any alleged misrepresentations were not material to investors. The key findings cited by the court in making its decision include:

  • There were no allegations or proof that ExxonMobil acted or failed to act in a way that affected its balance sheet, income statement or any other financial disclosure. The court noted that the SEC had looked into the company’s disclosures and dropped the investigation without requiring the company to amend any of its financial disclosures. 
  • “Tentative and generic” statements that emphasize the complex, evolving regulatory environment faced by a corporation cannot be material, according to the U.S. Second Circuit Court of Appeals. The court found that ExxonMobil only provided conceptual information about how it managed the risks of climate change in its business planning, which were not intended to enable investors to conduct meaningful economic analyses of its internal planning assumptions. It held that no reasonable investor would have made investment decisions based on speculative assumptions of costs that may be incurred decades later with respect to unidentified future projects.
  • The court found the ExxonMobil witnesses to be credible, and that there was no evidence that there was any scheme on the part of ExxonMobil to mislead investors about the way it managed climate risk.
  • A Wells Fargo analyst testifying in support of the NYAG’s case said he did not find the representations in ExxonMobil’s 2014 reports significant.
  • The NYAG offered no testimony from any investor who claimed to have been misled, even though it said that it would call such witnesses.
  • The NYAG’s expert witnesses did not demonstrate materiality. 

As the judge made clear, the case was about securities law violations – whether ExxonMobil made misleading disclosures in connection with the offer and sale of securities – and not about tort or public trust doctrine claims. While the case presents major challenges to key elements of claims against fossil fuel companies based on federal or state antifraud laws, it may have little bearing on other climate change related actions, such as the one by Rhode Island, which is suing such companies (including ExxonMobil) for infrastructure costs due to damage from global warming, or by Massachusetts, which is relying on a state consumer protection law. 

1. The NYAG’s equitable fraud and common law fraud claims were dropped during trial. However, the court also concluded that ExxonMobil would not have been held liable on any fraud-related claims.
2. The Martin Act has adopted a similar standard of materiality as under the US federal securities laws.