New York AG Eric Schneiderman’s recent settlement with an energy company over statements in its Securities and Exchange Commission (“SEC”) filings regarding the financial risks and potential regulatory responses to climate change has broad implications for the energy industry, utilities, and other publicly-traded businesses that have made representations regarding climate change risk and regulation.
The New York AG’s self-described “unprecedented agreement” with Peabody Energy Corporation resolved allegations that the company misrepresented to the public and investors the financial risks associated with potential climate change regulations, in contradiction of its own internal analyses, and in violation of the Martin Act.
The Martin Act, enacted in 1921 and amended in 1982, gives AG Schneiderman broad power to regulate, investigate, and enforce state securities laws, which includes the authority to take action against companies that make misrepresentations that affect investors. Unlike common law fraud, the Martin Act does not require the AG to show intent, reliance, or damages in order to prevail. Former New York AG (now Governor) Andrew Cuomo used the Martin Act during his tenure to require certain carbon-intensive companies to include an “analysis of material financial risks” from climate change in their SEC filings, although AG Schneiderman’s current assertion of the Martin Act goes substantially further than Cuomo’s.
According to the Assurance of Discontinuance (“AOD”) with Peabody, the company is alleged to have made false statements in its SEC Form 10-K that it could not reasonably predict the impact on its business of future regulations and laws intending to address climate change, when internally the company and its consultants had projected such impacts. Under the terms of the AOD, Peabody’s future SEC filings must include projections on the impact of potential laws and regulations involving climate change on the company.
This settlement is a harbinger for actions to come against the energy and utilities sectors, as well as any business that is part of the overall fossil fuel industry, such as automobile manufacturers, who may have made public statements regarding the risks and effects of climate change and regulation. Another company is already reportedly under investigation by AG Schneiderman over similar allegations, and environmental groups recently have launched a campaign urging AGs across the country to take similar actions in their respective states. Under this new line of attack, businesses who funded climate change research and skeptics are possible targets.
The AG’s unprecedented action also serves as a new playbook for AG scrutiny of any publicly-traded company whose public representations and predictions regarding its business risks and regulatory status do not reflect the true nature of such risks (as defined by the AG).