On November 3, 2015, Exxon Mobil announced that they had received a subpoena from the New York Attorney General’s Office seeking a “wealth of documents related to research on causes and effects of climate change, how the information was used in business decisions, financial projects and analysis, and communications with trade groups.” The probe’s goal is to determine whether the oil giant lied to both investors and consumers, or withheld information about the effects of climate change. This comes after years of energy companies claiming that it was “uncertain,” “difficult,” or “not possible” to reasonably predict possible effects of the climate change-related regulations in public reports.
Eric Schneiderman, the Attorney General, is able to bring this investigation forward under New York’s Martin Act. The Martin Act was enacted in 1921 to deter fraud in the sale of securities and commodities. In 1926, an appellate court ruled that it covers “all deceitful practices contrary to the plain rules of common honesty.” Unlike in federal court, where prosecutors must show that a defendant intended to defraud and that the investors relied of these misstatements or omissions, under the Martin Act, New York prosecutors must merely show false statements or omissions, not intent. This makes it much easier to bring a case in New York. So, Schneiderman needs to find a false statement or a possible omission made by Exxon in their disclosures regarding their climate-related costs. Showing that Exxon possibly did not provide all the information it had in its reports, however, might not be enough to satisfy the Martin Act. According to James C. Spinder, a law professor at the University of Texas, “The big issue for Exxon here is what’s material, assuming they did have some research they didn’t disclose, that would be an omission.” However, if the investors already knew the information that was not disclosed, then it is not material and would not fit under the Martin Act.
The outcome of this subpoena would most likely not be a case, but rather a settlement. Large settlements have mostly come under the Martin Act. For example, “The law was used by Eliot Spitzer, a former New York attorney general, to help win a $100 million settlement with Merrill Lynch in 2002 over broker conflicts of interest, as well as a $1.4 billion accord with 10 of the country’s largest securities firms over stock research.” This has worked well for Schneiderman, whom recently settled with Peabody Energy Corporation, the United States’ largest coal-miner. The situation with Peabody is similar to Exxon. Schneiderman found that after a two-year investigation into the company, Peabody had “provided incomplete information to investors by stating in public reports that it is ‘not possible’ to ‘reasonably predict’ the impact such laws or regulations might have on its finances.”
A major concern around the energy community is whether or not other companies will soon be targeted by Schneiderman. Although it is unclear whether or not he will, it is quite possible it will expand, especially now that Peabody has reached a settlement. This subpoena has put energy companies on notice. As Tom Sanzillo, director of finance for the Cleveland-based Institute for Energy Economics and Financial Analysis and a former first deputy comptroller for New York State, states, “they avoid the climate question at their peril at this point. What this is showing the companies is that they, if they are not disclosing appropriately to the investors, are going to find increasing problems.” Hal Harvey, chief executive officer of clean energy consultancy Energy Innovation, said that this probe reminds him of “the tobacco CEOs holding up their hands in congress and swearing that smoking doesn’t harm your health.” At this point, energy companies are cautiously waiting for the outcome of this investigation.
Bloomberg Business, Everything You Need to Know About the Exxon Climate Change Probe, http://www.bloomberg.com/news/articles/2015-11-10/everything-you-need-to-know-about-the-exxon-climate-change-probe (last visited November 14, 2015)
Bloomberg Quicktake, The Martin Act: New York’s Big Hammer for Financial Fraud, http://www.bloombergview.com/quicktake/martin-act (last visited November 14, 2015)
Bloomberg Business, Peabody Energy Resolves N.Y. Probe Into Climate Disclosures, http://www.bloomberg.com/news/articles/2015-11-09/peabody-energy-resolves-new-york-probe-into-climate-disclosures (last visited November 14, 2015)