By Karen Savage

NEW YORK—Using his state’s powerful anti-fraud statutes, New York Attorney General Eric Schneiderman is taking a deep dive into Exxon’s climate change accounting and its communication with investors.

At issue is whether Exxon defrauded investors by using two different accounting methods to project climate change-related risks the corporation will eventually have to absorb.

In a recent filing, John Oleske, lead attorney for Schneiderman’s office, said his team has “uncovered significant evidence of potentially materially false misleading statements by Exxon about its application of a proxy cost of GHGs [greenhouse gas emissions] to its investment and impairment decisions.” Oleski want on to suggest the exercise used to inform investors may be a “sham.”  

A corporation’s future profitability is calculated using by an estimate—or proxy cost—to represent the price the corporation must pay for potential future climate change-related regulations implemented by local governments, such as those put in place to reduce greenhouse gas emissions. A proxy cost is also used to determine future energy demand. But while the proxy costs can vary based on use and geographical location, those costs must be consistently applied in both internal and external communication.

John Oleske, lead attorney for the attorney general’s office, alleges that documents produced by Exxon indicate the corporation utilized two different proxy costs from 2010 through June 2014, using one proxy cost internally, while communicating another externally to investors.

“Exxon represented to investors and the public that it was incorporating higher costs of GHG [greenhouse gas] regulation into its business decisions than documents indicate that it actually was using, thereby potentially misleading investors and the public about the extent to which it was protecting its business from regulatory risks related to climate change,” said Oleske in a June 2 court filing.

Schneiderman is not the only one to see potential problems.

“The attorney general has far more access than we do into the books and records of the company but his findings seem consistent with our deductions made from reading 10Ks and transcripts,” said Tom Sanzillo, author of “Red Flags on ExxonMobil,” a 2016 report published by the Institute for Energy Economics and Financial Analysis (IEEFA). Sanzillo, director of finance for IEEFA, is a former deputy comptroller of New York State, a role that included overseeing a $156 billion pension fund and $200 billion in municipal bonds.

In the Red Flags report, Sanzillo predicted that Exxon, like other fossil fuel companies, will become smaller as countries transition to other energy sources to combat climate change. The report outlines several indicators that Sanzillo says predict a decline in Exxon’s profitability. He said Exxon has a responsibility to be transparent with its shareholders

“These are irregularities in the reporting which require deeper investigation and those investigations appear to be taking place,” said Sanzillo.

Exxon lead attorney Theodore V. Wells said there’s nothing in the documents to back up Schneiderman’s claims or to warrant further investigation.

In a June 9 filing, Wells said there’s nothing improper with Exxon’s reporting and said documentation “actually confirms that ExxonMobil is doing what it says it is doing: incorporating a proxy cost of carbon into its energy demand outlook and GHG costs into its project economics.”

Wells went on to say the corporation uses proxy carbon cost estimates two different ways: when assessing the impact of greenhouse gas regulation on global energy demand and when assessing the cost of regulations on specific projects.

“Considering the different purposes of those two exercises (assessing potential global energy demand over time on the one hand, and evaluating likely economics of specific projects on the other), it is unsurprising that different figures would be used,” wrote Wells, who added that Exxon has never claimed “it relied on one set of figures for all purposes, and a reasonable investor would not draw such a conclusion from ExxonMobil’s public statements.”

But Schneiderman’s investigation focuses on the potential discrepancy between figures Exxon used internally and those it disclosed to investors.

Oleske noted that based on emails, “the discrepancy was known at Exxon’s highest levels” and “Exxon’s Corporate Greenhouse Gas Manager acknowledged as early as 2010 that the publically disclosed proxy cost figures were ‘more realistic’ than those Exxon actually used.”

According to Oleske, Exxon has not produced evidence indicating that it used a consistent proxy cost analysis for internal and public communication and said even Exxon employees lacked awareness of the corporate proxy cost policy.

“Exxon failed to apply the proxy-cost analysis to its impairment decisions prior to 2016,” said Oleske.

Impairments are assets that have a lower market value than what the corporation lists on its books.

Corporations often devalue—or write-down—impaired assets, something Exxon has historically been reluctant to do.

Generally-accepted accounting principles (GAAP) require a corporation to follow certain steps to determine if an asset is impaired. Oleske said a key requirement is that the corporation use the same proxy cost used in its other business decisions, something he says Exxon did not do.

Wells said Exxon followed all GAAP requirements, adding that Exxon is not required to use the same proxy costs for impairment decisions it uses for estimating oil and gas reserves or for estimating global energy demand.

“ExxonMobil’s use of different metrics, in different circumstances, to accomplish different goals evinces prudent financial stewardship, applying appropriate assumptions in appropriate cases. There is nothing untoward or surprising about any of this,” Wells said.

According to Oleske, Exxon further mislead investors in a 2014 report in which it states it was “confident that none of [its] hydrocarbon reserves now or will become ‘stranded’.”

An Exxon email regarding the report indicates an Exxon vice president for investor relations suggested removing a footnote using the word “impairment” because “that word gives the folks on the third floor heartburn.”

Exxon did not respond to a request for comment and a representative from the attorney general’s office declined to comment. In a recent hearing, Wells said Exxon has “moved heaven and earth” to produce documents and called the investigation a “political witch hunt.”

Sanzillo said Exxon’s handling of the investigation is “seriously defective” and the company’s attempts to dismiss the investigation as politically motivated could alarm shareholders.

“The political strategy being followed by the company is not likely to solve the disclosure problem, get to a path for a working consensus on climate or contribute to a new financial plan that improves company profit,” he said.

Exxon’s strategy is also unlikely to appease Schneiderman, who wants more information.

In a hearing on June 16, Oleske, said the attorney general’s office is  “deeply unsatisfied” with documents he says Exxon “begrudgingly gave” in response to the investigation.

Oleske said although Exxon has produced nearly 3 million pages of documents, the corporation has shown nothing indicating it incorporated “a proxy cost of GHGs into the economic models of cash flows used in determining whether a trigger for impairment testing existed or whether Exxon’s assets were actually impaired prior to 2016”—the year after the investigation began.

By Karen Savage

New York – New York Attorney General Eric Schneiderman said over the past 18 months, ExxonMobil has produced nearly 3 million pages of documents in response to his investigation into how it calculates and communicates the risks of climate change to shareholders.

Schneiderman alleges the documents prove Exxon used two methods of climate accounting— one for public disclosure to investors and one for private internal use—central to his argument that the company is potentially defrauding investors. Also revealed in the massive pile of documents is the existence of the now-famous Wayne Tracker email account, an alias used by former chief executive Rex Tillerson.

Now, after admitting that more than a year’s worth of Tillerson’s secret emails may have been deleted, Exxon is trying to explain why the former CEO’s account was connected to another employee and its attorneys are trying to explain why more wasn’t done to preserve those emails.

During an investigative examination—a process similar to a deposition—Exxon attorney Michele Hirshman admitted she knew about Tillerson’s second account in early 2016, but said she wondered if Schneiderman’s investigators would notice them because of the sheer volume of documents.

Hirshman, along with lead attorney Theodore V. Wells, is one of several attorneys from Paul, Weiss, Rifkind, Wharton & Garrison who are representing Exxon.

During the examination, which was granted by Judge Barry Ostrager in response to New York’s allegation of irregularities during the production process, Hirshman said her office forwarded documents from the Wayne Tracker account to the attorney general’s office, but admitted she didn’t specifically notify them of the existence of the account.

“Because I knew about them and I read them and I said, well, this will be an interesting test of whether the Attorney General’s office is reading the documents,” Hirshman said during the May examination.  

Hirshman said beyond turning over the documents, she did not believe Exxon had an obligation to inform the attorney general’s office of the existence of Tillerson’s second email account.

After further questioning, Hirshman reconsidered, saying she “didn’t think it was a test,” but it was evidence that “the production was appropriately focused on the right custodians, that those e-mails were being produced because Rex Tillerson was a custodian.”

In this context, a custodian is the individual whose email account may hold documents requested by Schneiderman.

But according to John Oleske, senior enforcement counsel in Schneiderman’s office, documents from Tillerson’s account were not produced until the end of 2016. Documents from the Tracker account—which his office first received on Feb. 20, 2016—“were produced from the custody of non-Management Committee Custodians who incidentally had communicated with Mr. Tillerson and the Tracker account.”.

Non-management committee custodians are Exxon employees who are not senior members of management, meaning the documents could not have been produced from Tillerson’s Tracker account. Because he was CEO, Tillerson is considered part of the Managerial Committee.

After Oleske pointed that out, Hirshman again backtracked. “I think that—you are correct to point out that the document that I may be thinking about may have come from a different custodian’s files,” she said.

Hirshman also testified that emails in the Wayne Trader account dated between Sept. 5, 2014 and Nov. 27, 2014 were automatically “swept” or deleted and acknowledged the likelihood that up to nine additional months of emails were destroyed.

At a June 16th hearing, Oleske was incredulous. “There are years-worth of destroyed documents that the company still hasn’t accounted for,” he said.

Tillerson’s “Tracker” Emails Swept Away

Schneiderman’s office is trying to figure out exactly what happened to those emails. Thus far, Connie Feinstein, Security and Consulting Manager in Information Technology (IT) Risk Management for Exxon, has provided the most insight.

Feinstein blames the loss of Tillerson’s Wayne Tracker emails on a “file sweep” feature in Exxon’s email system and the company’s failure to put a litigation hold on the  account.

In an affidavit, Feinstein said messages in Exxon’s email system are automatically moved from a user’s mailbox to a recycling bin after 395 days, then eventually removed from the user’s mailbox.

Feinstein said the file sweep program is disabled for individuals whose email must be preserved due to litigation. Individual email accounts connected to Tillerson and other high-level members of Exxon’s senior management were placed on litigation hold on Nov. 6, 2015, two days after the corporation received the initial subpoena.

But that automated process only disabled the file sweep function for Tillerson’s official email account, not the Wayne Tracker account, which was configured as a non-personal account and tied to Exxon IT employee Ramona Helble’s network account.

Feinstein said it was not flagged with a litigation hold in November 2015, when the subpoena from the attorney general’s office was received. The automatic sweeper continued to operate and at least three months of Tillerson’s Wayne Tracker emails were lost.

It is unknown if Tillerson’s Tracker account was placed on a litigation hold during court proceedings related to the Mayflower pipeline spill or other prior legal actions.

Exxon did not respond to a request for comment and a representative from the attorney general’s office declined to comment.

In a March letter, Wells said the Wayne Tracker account was used by Tillerson to communicate with a “limited amount of senior executives.”  However, Feinstein said Tillerson’s administrative assistants were aware of the CEO’s second email address and sometimes moved documents between his two addresses.

Wells also surmised that “If the Wayne Tracker account was used to communicate with other ExxonMobil executives about climate change, those emails would reside in the accounts of the other executives.”

But emails from those executives would only be preserved if those accounts were tied to the other executives. If, as with Tillerson’s Wayne Tracker account, those executives used non-personal email accounts not connected to their identity or network accounts, they are unlikely to have been placed on litigation hold and the file sweep program is likely still enabled, meaning months, if not years of emails could potentially have been lost.

In June, the attorney general’s office received permission from Judge Ostrager to take depositions from several additional Exxon employees—including Helble, who will likely be asked to identify who approved Tillerson’s “Tracker” email address and to explain why Exxon’s former and current CEOs’ pseudo email accounts are tied to her account.

By Lynn Zinser

When an investigative series revealed that Exxon had been seriously studying the science behind climate change for more than 40 years and knew for decades that the crisis was not only happening but also driven largely by fossil fuel use, the company responded with not much more than a shrug.

The reaction everywhere else, however, has turned the question of who bears legal responsibility for climate change on its head. Knowing that the company curtailed that involvement in climate science and instead spent decades pushing climate denial to thwart any government action was the evidence many were seeking to hold the oil giant accountable. 

The series, published by the nonprofit journalism site InsideClimate News in 2015 and followed by a similar investigation by the Los Angeles Times and Columbia University, quickly got the attention of New York Attorney General Eric Schneiderman, who has something most states don’t have at his fingertips: the Martin Act, which gives him broad power to investigate and bring civil or criminal actions against companies for securities fraud. New York, which was quickly followed by Massachusetts,  launched an investigation and the issue divided many lawmakers and state attorneys general neatly into pro-Exxon and anti-Exxon camps.

Schneiderman fired the first shots in what would become a protracted battle when he subpoenaed Exxon in December 2015, seeking documents spanning four decades on what the company knew about climate change and what it told shareholders and the public. The attorneys general of Massachusetts and the U.S. Virgin Islands followed suit in early 2016, although only Massachusetts and its AG, Maura Healey, remains in the fight along with New York.

Below is a timeline of those investigations and the related legal maneuvers that have happened since:

March 2016: A group of 17 state attorneys general, calling themselves AGs United for Clean Power, staged a press conference and pledged to hold fossil fuel companies accountable for their conduct involving climate change. Former Vice President Al Gore called it “the best, most hopeful step in years,” and said, “What these attorneys general are doing is extremely important. These brave members of this coalition are doing their job like they did in the tobacco case.”

April 2016: Exxon filed a lawsuit to halt the Virgin Islands’ investigation. The USVI attorney general, Claude Walker, responded to Exxon’s pressure by eventually withdrawing his subpoena. He had demanded documents from Exxon and the Conservative Enterprise Institute, the libertarian think tank supported by Exxon that is known to have funded and promoted climate denial campaigns.

May 2016: Rep. Lamar Smith, Republican chair of the House Science Committee, requested documents from the 17 AGs as well as a number of NGOs, which he accused of conspiring to stage a politically motivated attack on Exxon. None of the AGs or groups would comply, so in July, Smith issued subpoenas and called a Congressional hearing on the issue.

June 2016: Exxon filed a lawsuit in Texas federal court to block Massachusetts’ investigation and later added New York, even though it had already turned over more than a million pages of documents to Schneiderman’s office.

After the suit was filed, 11 Republican attorneys general filed a brief supporting Exxon, while 13 Democratic AGs filed in support of Healey and Schneiderman. Both groups have since filed the same briefs in the New York federal court where the case was eventually transferred.

October 2016: U.S. District Court Judge Ed Kinkeade initially ruled in Exxon’s favor, ordering Healey to submit to a deposition by Exxon’s lawyers. Kinkeade said that Healey may have acted in “bad faith” in launching her investigation. Kinkeade made clear his sympathy for the company’s argument that Healey’s moves are political. In November, the company said it was considering widening its deposition to include the other AGs in the coalition as well as the green groups that met with them.

August 2016: Scheiderman’s office issues a subpoena to Exxon’s accounting firm PriceWaterhouse Coopers, demanding documents related to the company’s assessment of climate risks. The accounting firm was so slow in turning over documents, that Schneiderman asked New York Judge Barry Ostrager to compel compliance with the subpoena. PriceWaterhouse Coopers appealed Ostrager’s ruling that the accounting firm must comply.

December 2016: Healey filed an appeal with the Fifth Court Court of Appeals to block her deposition. But before the court issued its decision, Judge Kinkeade canceled his order that required Healey submit to questioning.

March 2017: New York’s investigators found an alias “Wayne Tracker” email account that Rex Tillerson used while chief executive of Exxon. Schneiderman’s office demanded the company turn over all of the emails in that account, accused the company of withholding them and demanded to know what happened to ones that are missing. The AG’s office said a year’s worth of those emails have not been turned over.

A New York judge then ordered Exxon to turn over the emails and explain why they were not included in the documents turned over to the attorney general.

March 2017: Kinkeade made the surprise move of ordering the Exxon case transferred to New York, because the press conference staged by the AGs that is at the heart of Exxon’s charges occurred in New York. U.S. District Judge Valerie E. Caproni promptly threw the case out, told Exxon it would need to re-file it in her courtroom. In the first hearing, she quickly indicated she would not be as sympathetic to Exxon’s arguments as Kinkeade.

May 2017: Exxon shareholders passed a first-ever resolution that calls on the company to disclose the risks climate change poses to its business. Investors have been proposing similar resolutions for decades and had not previously garnered more than 38 percent of the vote. This time, 62 percent voted for the measure, which was vigorously opposed by the company’s management.

May 23, 2017: A New York State appellate court rejected the appeal of Exxon’s accountant, PriceWaterhouse Coopers, and ordered the firm to turn over the documents related to climate risks that Schneiderman’s office had subpoenaed.

June 2017: As New York’s investigators continue to pore over documents, they have also been questioning Exxon employees in investigative examinations, which are similar to depositions. In those, Exxon employees involved in the attempted recovery of the “Wayne Tracker” emails reveal that as much as seven years worth of those emails may have been deleted.

June 2017: Schneiderman reveals in court filings that Exxon used two sets of calculations in its account of greenhouse gas emissions and climate change. One set was shared with the public and shareholders and the other was used internally. That led Schneiderman’s spokesperson to call the dual accounting “a substantial basis to suspect that Exxon’s proxy cost analysis may have been a sham.” Exxon’s response did not specifically address the different sets of numbers, but the company claimed it has been consistent in addressing climate risks.