Exxon Urges Denial of Class Certification in Securities-Related Climate Change Suit
Thu May 16th, On Environmental Law, by John Bick
In late April, in the ongoing case Ramirez v. Exxon Mobil Corp., et al., Exxon urged a Texas federal court to deny class certification to investors alleging the company withheld knowledge of climate change costs and misrepresented those costs publicly. Exxon is arguing that the alleged misrepresentations had no significant impact on the share price of the company’s stock and therefore the plaintiffs should be denied class certification because there are no grounds for the presumption of common reliance.
The plaintiffs allege that Exxon misled investors by withholding knowledge of costs relating to climate change and misrepresented the amount of its oil and gas reserves. The suit claims Exxon and certain of its executives made misleading statements about the company’s reserves to improve Exxon’s credit rating prior to a March 2016 public debt offering. The plaintiffs also allege Exxon falsely reported values for the cost of carbon, which differed from the costs Exxon used for internal calculations of investments and business operations. These estimated costs represent future expenses associated with economic risks posed to its business by environmental regulations and policies that it expects governments to adopt to address climate change.
The complaint was filed by the Greater Pennsylvania Carpenters Pension Fund and lead plaintiff Pedro Ramirez Jr. in 2017 as a federal securities class action on behalf of all investors who purchased Exxon stock between March 31, 2014 and January 30, 2017. The suit claims that the misstatements and omissions caused investors to pay artificially inflated prices for shares of the company’s stock. The case is reported to be the first securities class action suit concerning climate change-related allegations.
Previously in the case, in August of 2018, US District Judge Ed Kinkeade denied Exxon’s motion to dismiss the suit, finding the investors had sufficiently pleaded loss causation and had sufficiently alleged a violation of securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Notably, the allegation of loss causation is based not on specific identifiable corrective statements by Exxon and resulting stock price drops, but on the totality of “alleged partial disclosures” in press reports and financial results.
The current question the Texas federal court must answer is whether to grant class certification to the plaintiffs. The grounds for certifying a class action require class members to have common questions of law. The fraud-on-the-market theory developed in Basic Inc. v. Levinson says that in an efficient and developed market, a company’s stock price is a function of all material information available and anyone who purchases the stock can be considered to have done so in reliance on the misrepresentation. Therefore, common reliance of the investors is presumed and justifies class certification.
In Halliburton Co. v. Erica P. John Fund Inc., the defendant, Halliburton Co., argued that if the alleged misrepresentations did not have an effect on the company’s stock price, then the investors could not have commonly relied on the information and should not be granted class certification. Although U.S. Supreme Court Chief Justice Roberts ruled against Halliburton, the court vacated the inferior courts’ holding that Halliburton could not rebut the Basic presumption at the class certification stage and held that “defendants must be afforded the opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.”
Exxon said on April 19th that it has met the standard set in Halliburton Co. v. Erica P. John Fund Inc. that the alleged fraud did not impact the stock price. The company says that “none of the alleged misrepresentations had a statistically significant positive stock price impact” based on the testimony of expert witness Allen Ferrell, a Harvard Law School professor of securities law. Dr. Ferrell’s event study, a regression analysis that seeks to show if the market price of a stock responds to given publicly reported events, showed that “five of the seven alleged corrective disclosures…had no statistically significant negative price impact.” The defendants also provided evidence that the other two alleged corrective disclosures also had no meaningful price impact.
Exxon also noted that the plaintiff’s expert, who cites examples of decreases in the stock’s price following corrective disclosures of losses, did not prove an impact on the stock price. However, in determining class certification the burden of proof falls on the defendant, not the plaintiff, to show whether or not the alleged misrepresentations had an impact on the stock price and thus are grounds for common reliance.
The plaintiffs have until May 24th to reply to Exxon’s opposition to class certification. Exxon has also filed a request for an evidentiary hearing.
Climate change has already lead to increased shareholder litigation against companies whose stock prices are negatively impacted by adverse environmental events such as wildfires, flooding, drought, and violent storms. In California, for example, shareholders of two utility companies — Edison International and Pacific Gas & Electric — filed a securities class actions against the companies alleging that the directors and officers made misrepresentations and omissions regarding fire safety preparedness and potential exposure to wildfires. PG&E shareholders also filed a derivative action against its directors and officers for alleged misrepresentations and omissions regarding the company’s compliance with fire safety requirements, regulations, and preparedness relating to the October 2017 wildfires and the 2018 Camp wildfire. This trend could have significant implications for the insurance industry as well and could increase the cost of D&O policies for corporations. The Exxon case is on the verge of creating important precedent that could have widespread implications for corporations, investors, officers, and insurers.
The California Environmental Attorneys at Bick Law LLP will continue to monitor this environmental litigation and provide updates as it proceeds through the judicial system.