I’ve been fascinated by the efforts of various state attorneys general to investigate Exxon for securities fraud on the ground that its climate change denial misleads investors about the risks of investing in the company.  Exxon has filed a lawsuit in Texas to halt the inquiries, arguing that they infringe on its free speech rights, and Congressman Lamar Smith, head of the House science committee, has subpoenaed the attorneys general involved, to determine if this is a coordinated political attack on the company.  The dispute has even made it into the Democratic party platform, which states that “All corporations owe it to their shareholders to fully analyze and disclose the risks they face, including climate risk. …  Democrats also respectfully request the Department of Justice to investigate allegations of corporate fraud on the part of fossil fuel companies accused of misleading shareholders and the public on the scientific reality of climate change.”

An investigation by the Virgin Islands was dropped; as far as I know, both the New York and Massachusetts investigations continue, and investigations by other states.  Exxon’s lawsuit remains pending.

It’s not a new idea, to claim that securities regulation impinges on free speech rights – the DC Circuit struck down part of the SEC’s conflict minerals rule on just that ground – but usually these arguments are aimed at rules that require issuers to speak, or prohibit issuers from making truthful statements.  The Exxon case is unusual because it comes in the context of, well, false statements.

At the same time, though, one cannot help but suspect that the real concern isn’t investors, but the nature of Exxon’s participation in public political debates.

[More under the jump]

The closest analogy might be Kasky v. Nike, where the plaintiff accused Nike of misleading its own consumers by falsely denying the existence of abusive working conditions for its overseas workers.  Nike lost that battle before the California Supreme Court, and the US Supreme Court ultimately refused to hear Nike’s appeal.

Just a few months ago, Elizabeth Warren accused financial firms of misleading investors because they publicly claimed that the Department of Labor’s new fiduciary rules would not harm their businesses, while simultaneously writing comment letters to Labor claiming that the rules would be devastating.  And it’s true, companies have gotten in trouble before for falsely denying to investors that new regulations would harm their business (see Helwig v. Vencor, 251 F.3d 540 (6th Cir. 2001)), but here – as in the Exxon case – you can’t help but suspect that the investors are not the true object of the Warren’s concern.  For one thing, I doubt Warren thinks the financial companies were lying to their investors; I’m assuming she believes they were lying to the Labor Department.

Professor Merritt Fox recently argued that the accusations against Exxon are an abuse of antifraud statutes, because any climate change misstatements could not have been material.  His theory is that the matter is the subject of public debate, and scientists independent of Exxon have long been sounding the alarm.  Thus, any investor concerned about these issues has ample access to truthful information.  (h/t Stephen Bainbridge)

But that’s not really a satisfying argument.  The basic accusation that’s been leveled at Exxon and other fossil fuel companies is that they seed the public debate with unwarranted doubts – so that public information cannot fully offset any misstatements they make.  Moreover, it’s not clear that public information can completely enlighten investors as to the precise risks that Exxon itself faces, because investors don’t have enough information about Exxon’s internal operations.  Indeed, Eric Schneiderman – presumably recognizing how carefully he has to tread – has recently clarified that his concern is that Exxon is overstating its oil reserves, by not taking into account the impossibility of using the oil without burning the entire planet.   If Exxon’s reserves are misreported for that reason, it’s not clear exactly what public knowledge is detailed and specific enough to offset the effect of the misstatements.

Remember, the SEC is cracking down on companies for misleading non-GAAP financial reporting even when the GAAP figures are right there in the same document – so the argument that truthful information has completely counteracted false information is, shall we say, malleable.

Anyway, it’s a hard question, and it’s not obvious to me where the line should be drawn.

And now for something completely different …

Just wanted to drop a quick plug for Professor Walter Effross’s video, Nine Approaches to the Business Associations BA Course, available here.  Basically it’s an intro for students who don’t really know what Business Associations is about, and starts with a pitch to students who are perhaps more interested in social justice issues and don’t view Business as relevant to their interests (with, I was amused to see, some serious shade thrown at the calculus professors of the world).   The video describes the types of topics covered in the class, and the questions raised.