Judge Refuses to Dismiss Suit Alleging ExxonMobil Defrauded Investors regarding Estimated Future Cos

A group of investors filed a securities fraud case against ExxonMobil, Ramirez v ExxonMobil.  The investors base some of the allegations on ExxonMobil’s public statements that, by using a proxy cost of carbon, it accounted for the economic effect of future government climate-related controls in valuing its assets.  In these statements, ExxonMobil claimed to use $60 per ton in 2030 as the proxy cost of carbon.

The investors allege ExxonMobil inflated the value of its assets by publicly identifying $60 per ton as the proxy cost of carbon but using only $40 per ton internally.  A lower proxy cost would lower projected costs to use assets (such as oil and gas reserves) and thus raise the estimated value of those assets.  The investors claim ExxonMobil’s stock price fell when the public learned ExxonMobil used the lower proxy value instead of the higher value appearing in ExxonMobil’s public statements.  District Judge Kinkeade, a George W. Bush appointee, refused ExxonMobil’s request to dismiss the suit.

Securities Fraud Suits Require Specific Factual Pleading
To maintain a securities fraud suit, investors must allege significant facts to indicate key managers actually knew of materially false statements.

The judge determined the investors alleged sufficient facts.  As one example, the judge characterized a 2010 email as appearing to demonstrate ExxonMobil employees knew the publicly stated $60 proxy cost was likely more realistic than the internally applied proxy cost of $40 per ton.  The investors also alleged ExxonMobil’s management team received in-depth information on the proxy cost of carbon in reviewing and preparing the public statements while at the same time knowing it was using the lower number internally.

Allegations Are Not Proof
The judge’s ruling came at an early stage, with no attempt to determine the truth of the allegations.  In requesting dismissal, ExxonMobil argued the proxy cost stated in the public statements was fundamentally different than the proxy cost used internally.  The judge rejected that argument but made clear ExxonMobil will be able to assert that and other arguments at a later stage.

Companies Should Be Consistent regarding Significant Consequences of Regulations
According to this judge, if the investors prove the alleged facts, a reasonable jury could find ExxonMobil committed securities fraud by knowingly using a lower internal proxy cost than what it told the public and investors it used in making investment and business decisions.  Environmental regulations can have serious business consequences, as can inconsistent representations to investors regarding the effects of those regulations.

Upcoming Continuing Education Event
Darlene Smith, a colleague and shareholder at Crain Caton & James, will present at the Texas Bar’s 7th Annual Course on Firearms Law:  What Every Texas Lawyer Needs to Know 2018.  Darlene, whose practice emphasizes probate, trust, and guardianship matters, will discuss the administration of estates that contain firearms.  The live presentation will be held in San Antonio, September 20-21 at the Norris Conference Center – Park North.  Attendees will receive 11.25 MCLE credits including 2 hours of ethics.

For more information, please go to http://www.texasbarcle.com/materials/Programs/3734/Brochure.pdf

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