Could New York’s Suit Against Exxon Help Undermine the Law Behind It?
Posted November 2, 2018 4:30 p.m. EDT
An editorial in The Wall Street Journal this year called New York’s Martin Act “the worst law in America.” But despite courting controversy, it remains a useful way for the state’s attorney general to hold corporations accountable. Its latest high-profile use, though, may ultimately undermine it.
Last week, the New York attorney general, Barbara D. Underwood, used the Martin Act to sue Exxon Mobil based on claims that it misled investors about the value of its oil and gas assets, by discounting the likely impact of new climate change regulations.
New York enacted the Martin Act in 1921 to combat fraud on Wall Street, years before the federal government adopted the securities laws used so frequently today. The statue makes it a crime for a person or a company to engage in “deception, misrepresentation, concealment, suppression, fraud, false pretense or false promise.” Unlike federal securities laws, which necessitate showing that a defendant had an intent to defraud or at least acted recklessly, this provision can be proved if a defendant acted negligently. That is a much lower standard of proof.
At the center of the Exxon case is the claim that the company engaged in a “long-standing fraudulent scheme” about the risks climate change regulations pose for the company. According to the lawsuit, Exxon took the position that new regulations created little risk to the value of its assets, using a “proxy cost” analysis to evaluate the potential impact on its reserves. Underwood alleges that the company’s representations “were materially false and misleading because it did not apply the proxy cost it represented” to the public.
The Martin Act allows Underwood to inquire whether Exxon was less than fully transparent with its disclosures and the valuation of its assets. That makes the case more about the impact on the company’s financial position than the validity of estimates of global warming, even though that is at the heart of the case.
Exxon has been fighting other investigations about its response to global warming, including a lawsuit it filed in U.S. District Court to stop inquiries in New York and Massachusetts. That claim was rejected by Judge Valerie E. Caproni in Manhattan, who found the argument to be based on “extremely thin allegations and speculative inferences.”
The company issued a statement after Underwood’s office filed the new lawsuit, asserting that “these baseless allegations are a product of closed-door lobbying by special interests, political opportunism and the attorney general’s inability to admit that a three-year investigation has uncovered no wrongdoing.”
That statement suggests there is little common ground for the two sides to reach a settlement. But the power of the Martin Act is such that it may be difficult for Exxon to successfully defend itself when all the state has to prove is negligence. Any false statement, or even a failure to disclose relevant information, could be enough to show a violation.
The Martin Act has been used in high-profile cases before. Maurice R. Greenberg, a former chief executive of American International Group, finally settled a lawsuit last year that rested on the law. Initially filed in 2005 by Eliot Spitzer when he was attorney general of New York, the case related to two transactions that inaccurately portrayed AIG’s financial results over four years. The settlement required Greenberg to pay $9 million, which represented the bonuses he received during the period the transactions took place.
Greenberg’s dislike for the Martin Act did not end with the settlement. He joined with the U.S. Chamber of Commerce to support legislation that would effectively prohibit states from pursuing fraud claims involving corporate disclosures, as The New York Times reported in April. “I fought two wars for my country,” he said. “This is another war.”
The bill, introduced this year by Rep. Tom MacArthur, R-N.J., would require that all securities fraud claims be filed in federal court. That would mean that only federal anti-fraud provisions applied.
The legislation also stipulates that “no law, rule, regulation, judgment, agreement, order or other action of any state or political subdivision thereof shall regulate securities fraud with respect to an issuer.” That would prevent states from adopting provisions to address fraud involving companies operating within their jurisdiction unless those laws were based on the same requirements as the federal securities laws.
This approach is consistent with laws passed by Congress in the 1990s to require that most private securities fraud lawsuits be filed in the federal courts rather than state courts and impose heightened standards for proving a violation. These laws effectively limit the authority of states to use their own courts to pursue fraud claims against corporations.
MacArthur’s bill has not moved forward, but there is a chance Congress will adopt it after the midterm elections, especially if the Republicans lose control of the House. That would largely undermine the power of the state attorneys general to police corporate conduct and leave it to the Securities and Exchange Commission or private investors to pursue cases. And the SEC has not been focused on corporate disclosure (unless a chief executive takes to Twitter and makes highly publicized statements that turn out to be false).
The lawsuit against Exxon shows that the Martin Act retains its vitality as a means to police corporate conduct. A case like this can become a lightning rod for those who want to keep the states from using their authority to get involved in corporate disclosure. It remains to be seen if that might generate the attention required to help MacArthur’s bill advance.