The climate change debate has taken a new turn with the recent revelations from New York Attorney General Eric Schneiderman’s office. Last Monday, the Attorney General announced what he called an “unprecedented” settlement with Peabody Energy over its climate change disclosures. Calling it a “first-of-its-kind investigation,” Schneiderman asserted that Peabody had violated New York’s Martin Act and Executive Act by publicly denying that it could predict the impact that climate change regulations would have on its business. Peabody, in turn, agreed to file revised disclosures concerning the financial risks of climate change and regulatory reform. Schneiderman’s predecessor, Andrew Cuomo, also had investigated several companies for their climate change disclosures. And just days before Schneiderman announced the settlement with Peabody, The New York Times reported that the Attorney General had also subpoenaed documents from ExxonMobil concerning climate change risks.

Senator Sheldon Whitehouse recently compared fossil fuel companies to the tobacco companies from years past, and advocated that the federal government launch a civil RICO investigation against the fossil fuel companies for allegedly misleading the public about climate change...

Other fossil fuel companies may soon find themselves in the Attorney General’s crosshairs. Earlier this month, The New York Times cited “people with knowledge of the case” as saying that Schneiderman’s investigation could expand to other companies. Moreover, the climate change debate has become increasingly politicized, with politicians and environmental activists calling on regulators to investigate companies’ climate change disclosures. Senator Sheldon Whitehouse, for instance, recently compared fossil fuel companies to the tobacco companies from years past, and advocated that the federal government launch a civil RICO investigation against the fossil fuel companies for allegedly misleading the public about climate change. Given this environment, it seems likely that the investigation will expand to other companies.

Whether Schneiderman focuses on a handful of companies or the entire fossil fuel industry, he seems focused – at least for the time being – on whether climate change disclosures violated the Martin Act. This blue sky law can create greater risks for those engaged in the issuance, purchase, or sale of securities because it allows the government to seek to impose civil and criminal liability for misrepresentations involving the purchase or sale of securities even where there is no evidence of an intent to defraud purchasers. In recent years, New York’s Attorneys General have used this blue sky law to investigate a number of potential misrepresentations involving securities. Most famously, Eliot Spitzer launched a number of high-profile investigations into potential Martin Act violations in the early 2000s. His successors have continued that approach. For instance, Schneiderman sued Bank of New York Mellon Corp. in 2012, alleging that the bank’s foreign currency trading violated the statute.

A public company’s obligation to disclose climate change risks under federal and state securities laws has been a hot topic for years. In February 2010, the Securities and Exchange Commission issued release nos. 33-9106 and 34-61469, which provided interpretative guidance about how the SEC’s existing disclosure rules apply to climate change matters. In response to a request earlier this year from the G20, the Financial Stability Board (an association of national and global banking regulators) just proposed that a task force establish a comprehensive framework for climate change disclosures. If a given issuer is obligated to discuss climate change issues in its risk disclosures, an investigation into the adequacy of those disclosures is not unforeseeable.

...these investigations cannot be viewed in isolation from the broader public discussion about climate change.

That being said, these investigations cannot be viewed in isolation from the broader public discussion about climate change. Traditional and nontraditional media are scrutinizing fossil fuel companies’ position on climate change, and their reports can help drive the regulatory agenda. Schneiderman himself has linked the Martin Act to the broader policy debate. When announcing the Peabody settlement, Schneiderman claimed that “full and fair disclosure by Peabody and other fossil fuel companies will lead investors to think long and hard about the damage these companies are doing to the planet.” This suggests that Schneiderman’s perspective is not limited to the narrow question of the securities laws, but also is influenced by the policy issues raised by climate change generally.

Given the history of prior Martin Act investigations and the current political environment, any climate change investigations that Schneiderman pursues are likely to be expansive. Climate change has been an important subject for many years. Schneiderman appears likely to focus on fossil fuel companies’ internal documents to see what climate change research they were funding and whether their internal predictions matched up with their public statements.

There is also a strong possibility that other state and federal regulators will follow Schneiderman's lead and explore the possibility of opening their own investigations of fossil fuel companies. Environmental groups and high-level politicians have been pressing the SEC and DOJ to launch their own investigations. Regulators in other states could also decide to begin investigations under their own blue sky laws or other state laws. This risk is greatest in jurisdictions such as California that have a robust record of environmental activism. And, of course, there’s also a strong chance that legislatures could hold public hearings on the issue.

Should any investigations lead to significant fines or other government action that impacts a fossil fuel company’s stock prices, it may well also engender a wave of private litigation. As with any significant regulatory proceeding, investors are likely to file shareholder class actions and derivative lawsuits alleging that the company engaged in misconduct that deceived the shareholders and harmed the company. But here, the universe of potential litigants is much broader. Plaintiffs might bring class actions on behalf of consumers, environmental organizations, or other allegedly aggrieved groups. In that vein, several environmental groups sent letters to the boards of a number of fossil fuel companies last year, warning them that they might face personal liability for allegedly disseminating misleading information on climate change risks.

...the universe of potential litigants is much broader. Plaintiffs might bring class actions on behalf of consumers, environmental organizations, or other allegedly aggrieved groups.

Whether any of these claims will succeed is an entirely different matter. Fossil fuel companies’ research on climate change has frequently agreed with mainstream scientific views. Plaintiffs may also have difficulty showing that a fossil fuel company’s allegedly-inadequate climate change disclosures harmed the company or its shareholders. The reality is that the climate change debate is occurring on a public stage, the scientific community’s views on climate change are constantly evolving, and investors have had ample access to information from a variety of sources on the subject. Investors (and other potential plaintiffs) could have considerable difficulty showing exactly when a particular company should have changed its disclosures or how they were harmed because of that company’s public perspective on climate change.

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[Noelle M. Reed heads Skadden's Houston litigation practice. She has extensive experience representing clients in complex litigation in state and federal trial and appellate courts and arbitrations. Also based in Skadden's Houston office, Wallis Hampton's principal areas of focus include defending companies and their directors and officers in securities and fiduciary duty cases (principally in securities fraud and takeover situations), class actions, SEC and governmental investigations, internal investigations, and commercial disputes.]

