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The NY AG’s Golden Sombrero

NY Attorney General Letitia James.
Letitia James in 2017. Photo by Alec Perkins.

When a baseball player strikes out four times in a single game, he is said to have taken a “golden sombrero.” It’s an offensive piece of stereotyping, which is why I am going to stop using it in all baseball references, effective immediately.

But this blog post is not about baseball, or sports, or anachronistic references that persist in popular culture. This is about the parade of tin-pot dictator-wannabes who occupy the New York attorney general’s office, and an overbroad state “fraud” statute that they can invoke without any actual fraud present. It is about how the recent occupants of that office brought four charges against Exxon Mobil in a publicity-seeking climate change case and whiffed on all four of them.

Congratulations, Attorney General Letitia James, on your golden sombrero. Wear it in the best of political health.

James actually accomplished her feat as a pinch-hitter, which makes her golden sombrero truly exceptional. The case against Exxon Mobil was originally brought by James’ predecessor, Barbara Underwood, a utility player who was appointed to the office as a replacement for Eric Schneiderman. The Exxon Mobil case was effectively a continuation of Schneiderman’s long investigation, whose focus kept shifting over time. Schneiderman, you may recall, was the crusading lawman who resigned as attorney general after several of his former girlfriends accused him of nonconsensually slapping, hitting and choking them during romantic encounters, something Schneiderman described as role-playing. (Schneiderman did not face criminal charges.)

Schneiderman was preceded by New York’s current Gov. Andrew Cuomo. Cuomo is nobody’s idea of a teddy bear, but he is not known for smacking people around or bringing his sex life into the public sphere. Not so for Cuomo’s predecessor, Eliot Spitzer. As attorney general, Spitzer famously availed himself of Martin Act prosecutions to extract fat settlements from Wall Street firms, even as he also availed himself of the paid sexual services of prostitutes, for which he ultimately resigned as governor.

There is nothing so personally tawdry in the case James recently prosecuted against Exxon Mobil. Legally, however, it was a lot less honest than a straightforward cash-for-sex transaction. The case claimed that Exxon Mobil lied to the public, and thus to those who bought and sold its shares, about the ultimate corporate costs of climate change.

Except that Exxon Mobil did not lie, as state Supreme Court Justice Barry Ostrager ruled in a bench trial. (In New York, trials are held by “justices” in the Supreme Court, while the highest state court is the Court of Appeals, whose members have the title of “judge.” This is another way in which justice in New York marches to its own idiosyncratic beat.)

Exxon Mobil told investors what it knew in its securities filings. It wasn’t much: only that the ultimate costs of climate change and the regulatory responses to it could have a material impact on the company at some point in the future. Internally, on a project-by-project basis, Exxon quantified hypothetical climate-related costs as part of its analysis about whether to make specific investments. All companies engage in such analysis, none of which is ever of concern to investors. Investors care about the company’s aggregate position and results. Ostrager found that New York built its entire case on the conflation of the information investors expected from the company and the information the company developed for its own internal use. They were two entirely different things.

The state’s case boiled down to this: Exxon Mobil produces fossil fuels. Fossil fuels are a cause of climate change. Climate change is bad. Thus, Exxon Mobil is bad, and it should be punished.

New York has given its attorneys general a large club with which to bludgeon corporate targets. This club is the Martin Act. A law unique among the states, the Martin Act allows the attorney general to subpoena documents and witnesses without court supervision, for any reason or virtually no reason at all, and then to bring suit for “fraud” that is not fraud.

Ordinarily, fraud requires the deliberate use of a misstatement, with the intent to wrongfully deprive someone else who relies on that misstatement of money or property. But for the attorney general to win a case under the Martin Act, there need not be an actual misstatement, only something that may “tend to mislead” someone. No actual person needs to be misled. Nobody actually needs to lose money. The alleged offending statement need not have been made with intent to deceive. And the standard of proof – the burden the attorney general must carry – is not “beyond a reasonable doubt,” as in criminal cases against individuals. It is not even the lesser standard of “clear and convincing evidence.” It is the lowest standard courts ever accept, a “preponderance of the evidence.” In other words, 50.1% in the attorney general’s favor is good enough to get a finding of liability.

Companies almost never fight Martin Act suits on such a tilted playing field; they settle. But Exxon Mobil didn’t settle.

At the end of the trial, the state threw in the towel on two of the four counts it brought against the company. Ostrager then ruled in favor of Exxon Mobil on the remaining two counts. Even given the low bar provided by the Martin Act, the state couldn’t make a convincing case. It was a true golden sombrero, a shutout (I can still use the baseball term “goose egg”) of the state’s lawyers.

Not that James was apologetic, or even clearly aware that she lost the case, in her comments following the decision. “We will continue to fight to ensure companies are held responsible for actions that undermine and jeopardize the financial health and safety of Americans across our country, and we will continue to fight to end climate change,” she said in a statement reported by Bloomberg.

James’ post-trial statement might be the most honest thing the attorney general ever said about the case. Her office used a fraud statute – one whose use of the word “fraud” is, itself, fraudulent – to prosecute a nonexistent financial offense in a case that was ultimately not about finances at all, but about climate.

That’s how they play the game in New York. As for me, I am looking forward to enjoying spring training in sunnier climes.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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