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From Securities Regulation Daily, March 30, 2018

Exxon can't deflect heat from AGs' climate change investigations

By John M. Jascob, J.D., LL.M.

The Southern District of New York has dismissed a suit by Exxon Mobil alleging that state attorneys general are pursuing bad faith investigations of Exxon’s climate change disclosures in violation of the company’s constitutional rights. Judge Valerie Caproni found that the extraordinary relief requested by Exxon—to stop state officials from conducting duly-authorized investigations into potential fraud—rested on thin allegations concerning statements made by the AGs at a single press conference and in meetings with climate-change activists. As nothing in those statements could fairly be read to constitute declaration of a political vendetta against Exxon, she dismissed the complaint with prejudice (Exxon Mobil Corp. v. Schneiderman, March 29, 2018, Caproni, V.).

State investigations. In November 2015, New York Attorney General Eric Schneiderman served Exxon with a subpoena seeking documents related to its historical knowledge of climate change and its communications on the topic with interest groups and shareholders. The subpoena was issued in connection with an investigation under New York’s blue sky statute (the Martin Act) concerning whether Exxon’s historical securities filings were misleading because they failed to disclose Exxon’s internal projections regarding the potential costs to Exxon of climate change and likely climate change-related regulations. In the fall of 2016, Schneiderman requested additional documents relevant to whether Exxon’s past disclosures of the value of its oil and gas reserves may have been overstated because Exxon did not account for the potential impact of "stranded assets" resulting from new regulations designed to reduce harmful emissions.

About six months after the New York AG served his first subpoena on Exxon, Massachusetts Attorney General Maura Healey served Exxon with a civil investigative demand (CID) to pursue a similar fraud theory under the Massachusetts Consumer Protection Law. Like the New York subpoena, the CID demanded internal Exxon documents regarding climate change going back to the 1970s. Exxon then filed suit against the AGs in June 2016, alleging that the subpoena and the CID were part of a conspiracy to "silence and intimidate one side of the public policy debate on how to address climate change." In seeking an injunction to halt or limit the investigations, Exxon charged that the defendants had engaged in a conspiracy to deprive Exxon of its constitutional rights to free speech and to be free from unreasonable searches. Exxon also argued that state laws authorizing the investigations were preempted to the extent that they conflict with applicable SEC regulations. Exxon subsequently filed related lawsuits in Massachusetts state court and the federal Northern District of Texas, seeking to block the investigations.

Res judicata. After finding that Massachusetts AG Healey was subject to personal jurisdiction in New York, the court dismissed the claims against her on res judicata or claim preclusion grounds. The court concluded that Exxon’s claims could have and should have been raised in the Massachusetts proceeding. The court observed that it was irrelevant that the precise causes of action asserted by Exxon were not raised in the Massachusetts proceeding. Claim preclusion applies to transactionally-related claims that could have been raised but were not, and there was no dispute that Exxon could have raised its federal constitutional claims in the Massachusetts proceeding.

Failure to state a claim. The court next found that that Exxon failed to state a claim because the complaint did not plausibly allege that either attorney general was proceeding in bad faith, motivated by a desire to impinge on Exxon’s constitutional rights. The court noted that the centerpiece of Exxon’s allegations involved a press conference held by the AGs with former Vice President Al Gore and others in New York on March 29, 2016, where the AGs’ statements allegedly evinced their intent to discriminate against other viewpoints regarding climate change. Read in context, however, Schneiderman’s comments suggested only that he believed that an investigation was justified in light of news reports regarding Exxon’s internal understanding of the science of climate change. Although Schneiderman’s remarks at the press conference could be considered hyperbolic, the court found that none of the comments supported Exxon’s allegation that the New York AG was pursuing an investigation even though he did not believe that Exxon may have committed fraud.

Healey said even less at the press conference, and her remarks likewise did not evidence any actionable bias, the court found. And although the complaint presented the press conference as the culmination of a campaign by climate change activists to encourage elected officials to exert pressure on the fossil fuel industry, it did not plausibly allege facts to permit the court to infer that the activists—to say nothing of the AGs—did not believe that there was a reasonable basis to investigate Exxon for fraud.

Dormant commerce clause and federal preemption. Exxon’sarguments thatthe investigations either violated the dormant commerce clause or were preempted by federal law fared no better. Although Exxon contended that the subpoena and CID impermissibly regulated interstate commerce because they were intended to "regulate" the market for political speech, the pleadings did not explain how the AGs’ document demands discriminated against out-of-state businesses. And while Exxon argued that SEC regulations regarding the reporting of estimated and proved reserves preempted any inquiry into the AGs’ "stranded assets" theory, the company pointed to no provision of the SEC regulations that purports to prohibit the AGs from requesting documents related to the accounting for reserves. Accordingly, Exxon’s constitutional tort and state law cognate claims were dismissed with prejudice.

Schneiderman statement. "I am pleased with the court's decision to dismiss Exxon's frivolous, nonsensical lawsuit that wrongfully attempted to thwart a serious state law enforcement investigation into the company," AG Schneiderman stated in a news release. "At every turn in our investigation, Exxon has tried to distract and deflect from the facts at hand. But we will not be deterred: our securities fraud investigation into Exxon continues."

The case is No. 1:17-cv-02301-VEC.

Attorneys: Ralph H. Duggins (Cantey Hanger LLP) for Exxon Mobil Corp. Leslie Byrne Dubeck, New York State Office of the Attorney General, for Eric Schneiderman. Christophe Courchesne, Massachusetts Attorney General's Office, for Maura Healey.

Companies: Exxon Mobil Corp.

MainStory: TopStory Enforcement FederalPreemption FraudManipulation PublicCompanyReportingDisclosure MassachusettsNews NewYorkNews

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