Anything Goes AGs Target Corporate Independence

The Martin Act in New York is a pretty broad mandate, perfectly suited for an AG who wants to attack a politically unpopular company—or an entire industry.

There’s an old story about a Southern cop pulling over a motorist with out-of-state plates. When asked why, the cop shrugs and says: “If I follow you long enough, I’m gonna get you for something.”

In New York, that cop is the attorney general. And the AG’s most powerful weapon is the Martin Act, a Swiss Army knife of statutes that allows New York’s top prosecutor to subpoena documents, grill executives and bring charges against companies for “any deception, misrepresentation, concealment, suppression, fraud, false pretense or false promise.”

That’s a pretty broad mandate, perfectly suited for an AG who wants to attack a politically unpopular company—or an entire industry. Former New York AG Eliot Spitzer used the Martin Act to go after American International Group’s pugnacious former chairman, Maurice “Hank” Greenberg, as well as Salomon Smith Barney and Merrill Lynch. Soon after Spitzer let fly with a press release in April 2002 calling Merrill’s behavior a “shocking betrayal of trust by one of Wall Street’s most trusted names,” the stock shed $11 billion in value.

Now ExxonMobil is in the crosshairs. And the convoluted history of New York’s investigation of the oil giant demonstrates how an overly broad law in the hands of a relentless AG can leave a company in the same position as a driver with New York plates in a small Alabama town.

Acting New York AG Barbara Underwood filed suit on Oct. 24, accusing ExxonMobil of misleading investors by publicly disclosing a “proxy cost” of future taxes on carbon emissions but using much lower costs in internal evaluations of oil and gas projects.
“These deviations between Exxon’s public representations and its internal Corporate Plan had a material impact on Exxon’s investment decisions and business planning,” AG Underwood said in the 97-page complaint filed in state court in New York.

What the complaint didn’t mention was that this was a 180-degree shift from the original premise of the probe started by Underwood’s predecessor, Eric Schneiderman, who was forced to resign in May 2018 after being accused, like his predecessor Elliot Spitzer, of sexual improprieties. Schneiderman fired off his first salvo of subpoenas at ExxonMobil the evening of Nov. 4, 2015, with news mysteriously appearing in The New York Times the next morning. His theory then was that ExxonMobil was publicly downplaying the costs of global warming while using much higher internal estimates.

Three years, hundreds of thousands of pages of documents and scores of witness interrogations later, the theory flipped. Now ExxonMobil was telling the truth to the public and lying to itself. The AG’s revelation made no impression on investors: ExxonMobil shares went up the day the suit was filed and rose more than 6 percent within a week.

ExxonMobil says this is because the AG’s suit is based on a complete misunderstanding of oil and gas accounting. Reserves are valued on a project-specific basis using a complex equation that includes the expected future price of hydrocarbons, which is driven partly by estimates of the impact of future carbon taxes—the proxy cost the AG says ExxonMobil ignored.

A separate set of calculations estimates future operating costs for each project, ExxonMobil says, using only known or reasonably expected tax and regulatory expenses. It’s a more conservative approach than the AG would prefer, but avoids wide swings in reported value due to changes in the political environment. For New York’s cop on the securities beat, apparently, that’s fraud. For investors, so far at least, it’s just good business.

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