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Exxon’s Expert Witness Knocks N.Y.’s ‘Circular’ Trial Claims


By Erik Larson

(Bloomberg) Exxon Mobil Corp.’s expert witness — a Harvard Law School professor — challenged New York’s claim in a securities-fraud trial that investors lost as much as $1.6 billion after authorities accused the company of hiding the financial risks of climate change, calling the argument “a tad circular.”Allen Ferrell, who’s also a senior consultant at Compass Lexecon, said it was somewhat convenient for an authority to cite news about its own fraud investigation as the cause of a company’s losses.“You don’t shoot the arrow and then draw a bulls-eye around it,” Ferrell, the last witness in the three-week trial in Manhattan, said under questioning from Exxon’s lawyer, Daniel Toal.

New York Attorney General Letitia James alleges Exxon intentionally misled investors about the way it planned for the expected future impact of climate change on its business. According to the complaint, investors lost between $476 million and $1.6 billion when the alleged scheme was exposed.

The complaint points to three news events that allegedly resulted in Exxon’s stock dropping, including New York’s June 2017 claim that it uncovered evidence of a “sham.” The other news events used by New York to calculate the alleged losses relate to climate probes in 2016 by the California attorney general and the U.S. Securities and Exchange Commission.

“The evidence will show that when the deception uncovered by the state’s investigation and related investigations was revealed, Exxon Mobil’s stock price fell, injuring investors who must now be made whole,“ New York said in a pre-trial memorandum.

Irving, Texas-based Exxon says there weren’t any losses from the alleged scheme because there was no deception. Even so, Exxon’s stock did dip on the days of the three news events, and the state’s calculation of losses would become crucial if it wins the trial.

New York claims former Exxon Chief Executive Officer Rex Tillerson spearheaded a plan to dupe investors into thinking it was applying a high “proxy cost” for carbon to its investment decisions, while secretly using a lower figure to evaluate projects including those in the Alberta oil sands. Tillerson last week testified the allegations were false.

Ferrell’s testimony aimed to undermine two expert witnesses who had testified for the state: Eli Bartov, an accounting professor at New York University, and Peter Boukouzis, an assistant professor of business management at the University of Saint Katherine in San Marcos, California.

Bartov previously testified that Exxon had inflated its stock by lying to concerned investors starting in 2014, while Boukouzis testified about the resulting stock drops tied to the news events.

Ferrell said Bartov’s study of Exxon’s share-price movements hadn’t controlled for fluctuations in the energy industry, and that Boukouzis wrongfully cited two news-related stock movements that don’t qualify as statistically significant.

What Bloomberg Intelligence Says

The likeliest outcome, in our view, is Exxon agrees to disclose changes in future public filings and pays a nominal sum, but only after years of legal process.

— Brandon Barnes, Senior Litigation Analyst

During his cross-examination, Ferrell was asked to explain why he believed the three news events had no impact on the energy firm’s stock, as New York claims, particularly a Los Angeles Times story about the California probe that ran on Jan. 20, 2016.

One reason, Ferrell said, is that the article cast doubt on Exxon’s historical public disclosures about climate change science rather than the narrower claims that emerged in New York’s lawsuit — namely Exxon’s alleged misuse of the proxy cost for carbon.

New York Justice Barry Ostrager, who will decide the case without a jury, interrupted the exchange with a question of his own.

“What else would account for the decline of Exxon shares on Jan. 20?” he asked.

Ferrell said he didn’t have an explanation for the price movements but testified later that there are numerous reasons why a stock can move on any given day.

“As I said, there’s something circular about proving damages in a case by reference to the fact that you filed a case,” Ferrell said.

Closing arguments are scheduled for Thursday.

The case is People of the State of New York v. Exxon Mobil, 452044/2018, New York State Supreme Court (Manhattan).



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