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New York Struggles to Show Exxon Misled Investors on Climate

Erik Larson

(Bloomberg) -- New York rested its securities-fraud case against Exxon Mobil Corp. after nine days of trial testimony without appearing to produce any definitive evidence that the oil company intentionally misled investors about how it accounted for climate-change risks.

Exxon began presenting its first witnesses on Friday and may wrap up its defense late next week. The company is expected to call employees, accountants and experts to the stand to stave off claims that it lied to the public about the way it plans for future climate regulations.

For the second time during the three-week trial, climate protesters, most of them young people, picketed outside the courthouse, though the group was almost outnumbered by police. They held signs reading #ExxonKnew with variations on claims the company lied about climate change -- which isn’t really what the case is about.

It hinges on Exxon’s use of a “proxy cost” for carbon to account for decreasing demand for fossil fuels and a separate greenhouse gas (GHG) cost applied to specific project proposals based on local taxes.

New York claims Exxon publicized a conservative proxy cost as high as $80 per ton by 2040 to appease investors while secretly using a lower GHG cost to analyze its carbon-intensive oil sands projects and other investment opportunities. Exxon says the state is trying to show a false discrepancy by conflating two carbon metrics that serve different purposes.

Read More: Exxon Climate Plan Wasn’t Fake, Tillerson Says In N.Y. Trial

New York Justice Barry Ostrager, who’ll decide the case without a jury, has shown impatience with the state, at one point calling the questioning of a witness repetitive and “agonizing.” But he could still find that New York prevailed, even without hard evidence of an intentional scheme, since intent isn’t required to show a violation of its powerful Martin Act.

Richard Auter, a director at PricewaterhouseCoopers who performed audits of Exxon for 13 years, took the stand Friday as the energy producer’s first witness. Auter testified that he wasn’t aware of any attempt by Exxon to conceal or manipulate the two costs. He also said proxy costs don’t have a material impact on Exxon’s financial health and aren’t required by law.

“They were part of management’s planning and budgeting process, but they do not reflect real costs in many situations,” said Auter, who is based in Dallas.

New York’s attorney general, Letitia James, alleges that Exxon and former chief executive officer Rex Tillerson intentionally crafted a scheme to defraud investors.

But no hard evidence of such a plan was presented at trial. Instead, the state showed internal documents demonstrating a few instances of potential confusion about the higher proxy cost and the lower GHG cost, and whether they were supposed to be the same.

Read More: How the Exxon Climate Change Trial Became a Battle Over Numbers

Still, Auter admitted he accidentally used the two costs interchangeably himself for an internal memo in 2017 that was part of PwC’s audit workpapers.

“You used them interchangeably after two separate conversations with Guy Powell” on the topic, said Jonathan Zweig, a lawyer for New York, referring to Exxon’s corporate greenhouse gas manager.

“That is correct,” Auter said. He said he “did not appreciate the distinction” until later.

Back in 2016, Exxon had tried unsuccessfully to block PwC’s audit documents from being admitted as evidence by arguing that its communications with its accountant were protected as confidential under the law.

New York also presented documents that Exxon prepared for activist investors in 2014 that the state claims were used to falsely suggest the company was using the higher proxy cost to analyze investment decisions. And James produced two expert witnesses who claimed, among other things, that one of Exxon’s assets would have been impaired if the company had used the proper GHG cost.

Read More: N.Y. Doesn’t Need a Smoking Gun to Win the Exxon Climate Trial

(Updates with PwC evidence dispute in 14th paragraph. An earlier version of this story corrected a description of a 2017 PwC memo.)

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Peter Jeffrey, Peter Blumberg

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