Exxon Climate Accounting Fraud Trial Begins Today in NYC

Photo: PBS

The Attorney General (AG) of New York state sued Exxon Mobil last fall after a four-year investigation into the question of whether the company misled investors on the costs to the company of future regulation of the industry that would be needed to curb greenhouse gas emissions.  The state alleges that “Exxon’s internal calculations didn’t match its public representations,” and that those misrepresentations caused investors to pay more for the stock than they should have — to the tune of  “between $476 million and $1.6 billion.”

Why This Matters:  This is the definition of a “bet the company” lawsuit — maybe even a “bet the industry” case since they all would be guilty by association.  Of the many lawsuits brought against big oil and gas companies (by kids, cities, states and fishers) this one has the biggest potential to burn them.  Investor disclosure laws are strict — and the government alleges that the decisions regarding what they did not disclose went all the way up to Exxon’s CEO at the time, Rex Tillerson, who is expected to testify.  If NY wins, there will be a slew of additional lawsuits to join the other similar ones pending in New Jersey and Texas.  If the company wins, it will insulate the company and the industry from further climate change legal challenges.

What NY State Argues

As Inside Climate News explains, “[f]or years, Exxon had been using something called a proxy cost of carbon to estimate what stricter climate policies might mean for its bottom line. But as pressure from shareholders grew, a problem came sharply into focus: An internal presentation warned top executives that the way the company had been applying this proxy cost was potentially misleading. That’s because Exxon didn’t have one projected cost of carbon. It had two.”

NY State intends to show that the company disclosed one set of these projected carbon costs to investors, telling investors that it was taking into account the full future costs of regulations it expected governments to adopt in response to climate change.  But internally, The Wall Street Journal explains, the company was low balling the costs — for example, the NY AG says that for the oil-sands projects in Alberta, Canada, Exxon understated the costs of future government regulation by $25 billion.  Inside Climate News reported that the “effect of using these dueling estimates, the attorney general says, was that Exxon hid tens of billions of dollars in potential costs, downplaying the risk to investors and inflating the company’s value.”

Exxon’s Argument

In essence, the Company argues it was impossible to know — they did the best they could to estimate the cost of future regulations.  So in the Alberta tar sands example above the Company argues that “regulation in Alberta ‘has been and remains in flux, with rival political factions enacting and repealing climate regulations regularly.'”

To Go Deeper:  Read the Inside Climate News story here.