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May 18, 2012
Is Chevron in Violation of Securities Law?
by Robert Kropp
New reports on Chevron's liabilities relating to environmental damages in Ecuador assert that while
the company's legal options have narrowed significantly, its public filings repeat the same
arguments made in 2008. First of a two-part series.
The legal decisions continue to fall against Chevron, as the $18 billion judgment against it for
environmental degradation in Ecuador has been upheld in appeals courts. In March of this year, "An
Ecuadorian appellate court declared the $18 billion judgment for the company's contamination of
soil and water final and enforceable, giving the plaintiffs the right for the first time to collect
on the judgment," writes Simon Billenness of the Unitarian Universalist Association (UUA) in a new report.
Furthermore, Billenness continues, "The US Second Circuit vacated in its entirety a
preliminary injunction from a US District Court that purported to bar the Ecuadorian plaintiffs
from enforcing the judgment against Chevronís assets anywhere in the world."
"Chevron's defenses to enforcement actions have greatly narrowed," Billenness observes. The
question for investors is, have Chevron's disclosures kept pace with the many legal decisions
Not at all, according to a second report, entitled Chevron's
Misrepresentations in Public Filings Regarding its $18.1 Billion Environmental Liability in
Ecuador. Written by Graham Erion, an attorney for the rainforest communities, the report states
bluntly in its opening sentence, "Chevron's management is publishing false or materially misleading
information regarding its $18.1 billion judgment in Ecuador for causing environmental damage."
In its 2011 10K filing, for example, Chevron stated merely that it expected the plaintiffs to
seek enforcement of the judgment against it, but did not disclose what the impact of such
enforcement might be. However, in a statement to
the US District Court, Chevron Deputy Comptroller Rex Mitchell asserted that asset seizures "would
disrupt Chevron's supply chain and operations," and "damage Chevron's business reputation as a
"Defendants' campaign to seek seizures anywhere around the world and
generate the maximum publicity for such acts would cause significant, irreparable damage to
Chevron," Mitchell continued.
SocialFunds.com spoke with Erion, who said, "When things
happen, you have to adjust what you're telling investors. That's what Chevron hasn't been doing.
This company said nothing about Ecuador until its 2008 10K, and if you look at what they said then
they've been saying the same thing for three years. Yet there's been an enormous change in the
"They're disclosing what their spin is," Erion continued. "That's not
what a 10K is for. It's probably the most heavily regulated and scrutinized document that a company
puts out. How Chevron is managing this risk is information that investors are looking for. It's
precisely the information that's supposed to be in a 10K."
The list of Chevron's
misrepresentations continues throughout the ten pages of Erion's report. It notes also that the
company "appears to be breaching securities regulations" by refusing to provide an estimated range
of possible losses due to the case.
"They've lost the case in Ecuador, and they've lost
it on appeal," Erion told SocialFunds.com. "They have two preliminary routes to their defense, one
of which is the injunction they got from their favorite judge in New York, which has just been
thrown out. The second is trying to rely on an international arbitration panel. But the Ecuadorian
courts have ruled four times that the plaintiffs are not party to arbitration between Chevron and
the country of Ecuador."
"Once you have an $18 billion judgment that's been upheld on
appeal, then you have a number," Erion continued. "But Chevron still says that management doesn't
believe it's possible to calculate a range of loss. They know what the risk of enforcement is to
them, and they know what the range of loss is."
In every 10K filing since Chevron first
disclosed its liability, it has repeated the exact same arguments in favor of its argument that the
case lacks legal merit. It has contended that the Ecuadorian courts lack jurisdiction; that a 1999
law cannot be applied retroactively; that the claims are excluded by the statute of limitations;
and that Texaco was given a release of liability by the government of Ecuador.
assertions advanced by Chevron in its public filings are either demonstrably false of misleading,"
the report asserts.
Erion said, "In securities law, they have to say that they lost the
decision. You have to give investors enough important information to make investment decisions.
When they just say the jurisdiction doesn't apply to them, when they don't say that courts have
ruled otherwise, that's a lie."
"Maybe it's time to tell the investors of the risks of
enforcement that is not a single sentence," he continued.
Shareowners have not stood aside
while Chevron's poor corporate governance threatens the long-term prospects for the company. A
resolution filed with the company this year calls for the separation of the positions of Chair and
CEO, widely considered to be an essential corporate governance reform.
handling of the case in Ecuador, and the lack of board oversight in this area, highlights the
dangerously poor level of corporate governance at Chevron," Billenness told SocialFunds.com in
December. "Having a board of directors where the CEO is also the Chair means that he is basically
overseeing himself. You see the results of this poor corporate governance in the utter inability of
the board to oversee management in these critical areas. These are the bitter fruits of poor
"Shareholders may be losing confidence in management," Erion said.
"The new CEO, John Watson, was responsible for the diligence with the takeover of Texaco. He was
warned at the time that this company had liabilities, and ignored it. Now, he's trying to continue
whatever view he had in 2001. But the victories for the plaintiffs, and the losses for Chevron, are
A coalition of shareowners, led by UUA, has also sent a letter to the Securities
and Exchange Commission (SEC), requesting that it investigate what the coalition describes as
"evidence that the company is violating securities laws." The letter, as well as Erion's report on
the implications of an SEC investigation, will be described in the second article in this series.
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