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  • 2016

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Two New Class Action Complaints Against Exxon Allege Climate Fraud

In November, two class action complaints were filed against Exxon Mobil — Ramirez v. Exxon in the Northern District of Texas and Fentress v. Exxon in the Southern District of Texas. Ramirez is a purported class action for purchasers of Exxon common stock, while Fentress alleges class action claims under Employee Retirement Income Security Act (“ERISA”) on behalf of current and former Exxon employees who participated in an employee stock option plan during the class period. Both of these cases rest upon a very similar set of factual allegations,1 and are significant as the potential beginning of a new type of climate change litigation.

Factual Allegations in the Complaints

Both the Ramirez and Fentress complaints broadly allege that Exxon engaged in fraud that artificially inflated its stock prices by failing to properly account for the risks of climate change and write-down certain assets. The complaints allege that:

Exxon’s public statements were materially false and misleading when they failed to disclose

(a) that Exxon’s own internally generated reports concerning climate change recognized the risks caused by global warming and climate change;

(b) that, given the risks associated with global warming and climate change, the Company would not be able to extract the existing hydrocarbon reserves Exxon claimed to have, and therefore, a material portion of Exxon’s reserves were stranded and should have been written down; and

(c) that Exxon employed an inaccurate “price of carbon” — the cost of regulations such as a carbon tax or cap-and-trade system to push down emissions — in evaluation the value of certain of its future oil and gas prospects in order to keep the value of its reserves materially overstated.2

In both cases, the Plaintiffs rely upon a combination of securities filings, analyst meeting transcripts, company reports, and news articles to allege that, while Exxon’s internal documents clearly demonstrate knowledge of climate change and the risks it posed to the company’s business, Exxon committed fraud by failing to write-down its reserves.

Plaintiffs cite a series of drops in Exxon’s stock price as the result of various media reports, statements by the New York State Attorney General, and ultimately Exxon’s October 2016 disclosure that it might be forced to write down 20% of its assets as the source of their harm. Plaintiffs allege that Exxon’s failure to properly account for climate risks resulted in an overstatement of its reserves and overvaluation of its assets prior to October 2016 that constituted fraud.

The Ramirez Complaint

The Ramirez complaint seeks certification of a class made up of all purchasers of Exxon common stock between February 19, 2016 and October 27, 2016. Plaintiffs allege that Exxon and its senior corporate officers engaged in violations of Sections 10 and 20 of the Exchange Act and Rule 10b-5 by making false and misleading statements about the value of the company’s assets. The complaint alleges that these misleading statements caused plaintiffs to pay “artificially inflated” prices for Exxon’s stock and seeks the award of compensatory damages for the same. Specifically, the complaint alleges that Exxon committed a fraud upon the market by making public misrepresentations that “would tend to induce a reasonable investor to misjudge the value of Exxon common stock.”

The Fentress Complaint

The Fentress complaint seeks certification of a class of current and former Exxon employees who were invested in Exxon stock through the company’s retirement plan between November 1, 2015 and October 28, 2016. Plaintiffs allege that Exxon and certain individual corporate officers who act as trustees of the employee retirement plan violated ERISA by failing to prudently manage the purported class’ retirement assets. According to the complaint, the defendants knew or should have known that Exxon’s stock price was artificially inflated due to a failure to properly account for climate change and a failure to write down assets.

Plaintiffs allege that the defendants, who are the trustees of the employee retirement plan (1) knew or should have known that Exxon’s stock had become an imprudent investment due to Exxon’s failure to disclose material information, which artificially inflated the stock price; and (2) should have taken action to effect disclosures to correct the fraud or restrict additional employee purchases of Exxon stock. The Fentress plaintiffs allege that, as a result of these actions by the defendants, they have lost a significant portion of their retirement investments. The source of this loss is the decrease in Exxon’s stock pried that occurred during the class period.

While the complaints against Exxon may be somewhat unusual in that they rely, in part, on information from the highly publicized and controversial New York Attorney General investigation of Exxon’s climate disclosures under the Martin Act, they do raise important questions about potential liabilities arising from alleged inadequacy of climate disclosures. As information regarding climate change and its impacts has evolved over time, many public companies have re-evaluated the impacts of climate change on their businesses. If plaintiffs in either the Ramirez or Fentress case are successful, it will raise important questions about how companies’ statements and disclosures on climate risks could be a source of liability.



1 In fact, of the first 59 paragraphs of the Ramirez complaint, which set out its key factual allegations, 34 are repeated in identical or minimally altered form in the Fentress complaint.

2Ramirez ¶ 3; Fentress ¶ 4.

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Author

Margaret E. Peloso

Margaret E. Peloso Counsel

Margaret’s areas of practice are environmental law and climate change. With respect to climate change, she handles a variety of matters, including advising on climate change risk management, with a particular emphasis on the changing regulatory environment, and climate change adaptation issues. View Full Bio