By Karen Savage
The New York attorney general’s office said in the closing arguments of its climate fraud case against Exxon it is dropping two of the four fraud charges it had levied against the company. The announcement came as a surprise and drew the ire of Exxon’s lead attorney, who said the state should have dropped the chargers much earlier.
“Your honor, we did not come to this trial … to have them stand up after the evidence had been presented and after I gave my summation, to stand up and say they are not pressing the two claims that have caused in most respects the most severe reputational harm,” said Theodore V. Wells, who added that Exxon employees who testified are now left with a “cloud over their heads.”
To prove the charges of equitable fraud and common law fraud, the AG would have to show Exxon intentionally defrauded investors, something the state indicated it doesn’t think it has done. Instead, the state is concentrating on violations of the Martin Act, New York’s powerful anti-fraud statute that does not require the AG to prove intent. To earn a conviction on those charges, the AG needs to prove only that investors were deceived by the company.
Wells said he wanted a stipulation from the AG’s office stating that there had been no intentional misconduct by Exxon.
“Well I don’t think they’re going to give you that stipulation,” New York Supreme Court Judge Barry Ostrager said, adding he will dismiss the two charges with prejudice, meaning the charges can’t be refiled later.
The late morning fireworks notwithstanding, closing arguments revealed little new information. Both sides recounted their arguments, with the AG’s lawyers alleging that Exxon violated the Martin Act by failing to disclose it used two different sets of numbers to assess climate risk, one for shareholders and the other for its own internal calculations.
Over the course of nearly three weeks, the court heard testimony by Exxon employees, accountants, auditors and experts, and saw documents offering a glimpse into the inner workings of the oil giant, including a look at several versions of its DataGuide, an internal, previously confidential planning document that guides the company’s investment planning.
Exxon hasn’t denied that it used different numbers, but said it has made adequate disclosures and did not deceive investors.
The company said it used a proxy cost of carbon, which it for years has disclosed in its annual Outlook for Energy, to determine how climate-related regulations might affect the future demand for energy. It said it uses a greenhouse gas (GHG) cost, as first disclosed in its 2014 Managing the Risks report, to calculate the costs climate-related regulations might have on potential projects.
Managing the Risks, along with Energy and Climate, was released by Exxon in exchange for the withdrawal of a shareholder proposal asking the company to disclose how it is managing climate risks, including a report on whether any of their assets are at risk of being stranded.
Witnesses for the attorney general have testified the disclosure was deceptive and raised more questions than it answered about how Exxon was managing the risks of climate change.
No one is disputing that climate change exists and must be addressed, Wells said in his closing arguments.
“But just because there’s a serious problem about climate change … does not mean a regulator can bring a meritless case that hurts peoples’ reputations,” Wells said.
Wells said regardless of what investors understood, Exxon employees have testified that the proxy cost of carbon is embedded in Exxon’s cash flow models and therefore is incorporated in its planning and budgeting for potential new investments.
“This is not a case where we said one thing to the public externally, but then ignored it internally,” Wells said.
Wells reminded the court that Exxon’s financial expert Allen Ferrell on Wednesday told the court that stock prices remained unchanged after the report was issued.
“That confirms no one cares and confirms it didn’t happen,” Wells said.
Wells concluded by saying the attorney general’s case “changed from theory to theory to theory” before settling on the subject of disclosures that he said Exxon is confident it has made.
“We said put up or shut up—we will try this case, we will not settle because we have done nothing wrong,” Wells told the court.
Jonathan Zweig, an attorney for the attorney general’s office, said the case is not about whether Exxon used two sets of numbers—which it has for years—but whether Exxon made deceptive statements that would sway a reasonable investor in making decisions about investing. Zweig reminded the court that the AG does not have to prove Exxon intentionally deceived investors.
He reviewed internal memos which revealed that the company aligned the two numbers, which initially had different values, shortly after the release of the reports.
In talking points attached to a slide presentation given to the company’s management committee, one rationale given for the update was that “we have implied that we use the [Energy Outlook] basis from proxy cost of carbon when evaluating investments.”
Testimony and documents presented by both sides reveal shareholders weren’t the only ones confused, Zweig said.
An internal email showed William Colton, Exxon’s former vice president of corporate strategic planning, made edits to the Managing the Risks report, including changing “proxy cost” to “GHG cost.”
“We need to be more precise in how we talk about applying CO2 costs in project evaluations,” Colton wrote in an email to Robert Luettgen, secretary of Exxon’s management committee.
That wasn’t just an isolated incident.
Richard Auter, head of Exxon’s auditing team at PricewaterhouseCoopers testified that he used the terms greenhouse gas cost and proxy cost interchangeably in memos written prior to 2017.
Both sides agree that Ostrager’s decision could hinge on a single sentence nestled on the 18th page of Managing the Risks and whether it constitutes adequate disclosure.
“Perhaps most importantly, we require that all our business segments include, where appropriate, GHG costs in their economics when seeking funding for capital investments,” Exxon said in the report.
Exxon contends the words “where appropriate” clearly signals to readers a transition from a discussion of its proxy cost of carbon, to the disclosure of something new— that it considers GHG costs when evaluating potential future investments.
Exxon employees have testified that the value of the GHG cost is proprietary, but have not explained why they didn’t explicitly state that in the report. They have also not explained why the report carefully distinguished between its proxy cost and a “social cost of carbon,” but did not clarify the difference between its proxy cost and its GHG cost.
Investors have testified that the wording in Managing the Risks was deceptive and made even more so because of its placement below a map depicting CO2 “proxy” costs.
Documents show Exxon used the terms “GHG costs,” “proxy cost,” “cost of carbon” and “proxy cost of carbon” in Managing the Risks and used the terms “GHG gas proxy cost,” “proxy cost,” “proxy cost of carbon,” “cost of carbon,” in Energy and Climate.
“Climate change risk may well be the defining risk for oil and gas companies like Exxon for the coming decades,” Zweig said, adding that Exxon is free to assume governments will back down and not impose climate-related regulations and the AG’s case is not questioning the accuracy of those predictions.
“All the Martin Act requires is that ExxonMobil be honest and not mislead its investors,” Zweig said. “That’s not too much to ask.”