Calif. Climate Plaintiffs Did Not Mislead Bond Investors, Former SEC Official Says

Five coastal communities suing oil companies in California did not mislead potential investors in their bond offerings as Exxon alleges, according to a new report by the former chief of the Securities and Exchange Commission’s municipal bonds division.

“There is no inconsistency or conflict between the allegations in the complaints filed by the Municipal Governments in connection with their respective civil tort claims against Exxon and other fossil fuel companies regarding sea level rise and the disclosures made by such governments in their respective disclosure documents,” wrote Martha Mahan Haines, who directed the SEC’s municipal bonds division from 2001-11.

In an April 27 letter to the SEC, representatives of the five communities—the counties of San Mateo, Marin and Santa Cruz, and the cities of Imperial Beach and Santa Cruz—said the report rebuts “inaccurate and meritless allegations” by the oil companies.

The communities are suing Exxon in California state court. They are part of a wave of suits seeking to hold oil companies accountable for sea level rise and other impacts of climate change (two other cases, by San Francisco and Oakland, have been moved to federal court). To push back, Exxon filed a petition in a Texas district court in January, claiming that the communities were misleading in what they disclosed about climate change-related risks in their municipal bond offerings. “The stark and irreconcilable conflict between what these municipal governments alleged in their respective complaints and what they disclosed to investors in their bond offerings indicates that the allegations in the complaints are not honestly held and were not made in good faith,” according to the petition.

Since then, oil industry allies have picked up on the theme in their campaign against the communities. A trade group, the National Association of Manufacturers (NAM), sent a letter to the SEC in March asking it to investigate the communities involved in climate liability suits. This followed a similar letter from the Competitive Enterprise Institute a few weeks earlier.

A review of the bond documents showed that many of the communities involved in climate suits did indeed disclose details about climate change risks in their bond offerings, and did not offer misleading claims. The communities decided to strengthen their argument by retaining the former SEC official to review their documents.

In her report, Haines analyzed each of the municipal bond disclosure documents mentioned in Exxon’s petition one by one. In some of the cases, she wrote, “the maturity of the securities was so short that it was not reasonable to foresee any impact on their timely repayment from long-term sea level change.” In others, the bonds were secured by lease payments on land “at no risk from sea level change prior to the maturity date of the securities,” she wrote.

“Information that does not yet exist or is unknown necessarily cannot not be disclosed,” she wrote. For example, Exxon’s petition argues that it is inconsistent for Marin County to cite a study in its suit connecting sea level rise projections, yet leave those projections out of disclosures for a set of bond issues in 2010. Yet at that time, Haines noted, there were no specific projections available on the impact of sea level in Marin County.

Marin County counsel Brian Washington called the complaints about different language in the lawsuit and bond offerings, “a wrongheaded comparison. We include climate change in the suit because, in the long run, sea level rise is going to cost the county and the taxpayers money, and we need to recover some of that.

“Our bond disclosures have a shorter window. Our civic center and our ability to repay creditors is not going to be impacted by sea level rise during the life of the bond,” he said.

Haines agreed, writing: “It is not reasonably foreseeable that the issuers would ignore the risks of sea level rise once known to them, fail to take steps to adapt to and mitigate its impact and, as a result, allow their respective financial conditions to deteriorate to the extent that they would default on their repayment obligations decades in the future.”

Experts say the SEC would not be likely to investigate, since municipal bonds are primarily regulated through the Municipal Securities Rulemaking Board (MSRB), and the SEC tends to get involved in cases of deliberate wrongdoing.

“The complaint was clearly wrong, and we thought that it was important to set the record straight,” Washington said of Marin County’s decision to participate in the review. “It’s important that the financial markets know that we stand by our disclosures.”