The New York Attorney General, Eric T. Schneiderman, created a stir this month by opening an investigation of Exxon Mobil Corp. pursuant to the Martin Act (New York’s “Blue Sky” Statute). Various Congressmen, Senators and environmental groups also asked SEC Chairman Mary Jo White and Attorney General Loretta Lynch to start similar investigations, but to this point only the NYAG has responded. The exact scope of this investigation is unclear (which is entirely understandable at this stage), but it appears to relate to charges, widely announced in the press in recent weeks, that Exxon “lied” about climate change, allegedly stressing the “uncertainty” of existing research when its own research confirmed to it the true severity of the risks. Much emphasized in these stories has been the alleged fact that Exxon contributed heavily to researchers and advocacy groups who expressed skepticism about climate change (or at least about the impact of fossil fuels on it). In this view, the asserted fraudulent conduct consisted, at least in part, of supporting and subsidizing those who took a stronger position (either scientifically or politically) than Exxon, itself, believe to be justified. But is this really fraud? More generally, to what extent is Exxon required to disclose risks and dangers which its activities aggravate (even if only to a statistically trivial degree)?
The reaction to the announcement of this investigation has been symptomatic and polarized. Those who pushed for an investigation argue that this episode parallels the tobacco industry’s long campaign to deny the adverse health effects of tobacco (which eventually contributed to a nationwide, multibillion dollar settlement between the tobacco industry and the state attorneys general). Conversely, the Wall Street Journal has editorialized that the NYAG’s investigation amounts to “Prosecuting Climate Dissent” and denounced it as a “dangerous new escalation of the left’s attempt to stamp out all disagreement on global warming science and policy.”
Obviously, this debate will continue, often in an overheated and rhetorical fashion, with neither “politically correct” environmentalists nor conservative “ideologues” pausing to define where the point is at which a robust political debate turns into a “fraudulent” effort to suppress the truth. But locating that point is critical if we are not to chill free speech. Adding further to the potential confusion is the fact that the Attorney General Schneiderman is relying on the Martin Act, a unique and antique blunderbuss of a statute that does not require any proof of fraud or scienter. On this basis, Exxon arguably faces liability if it made even an innocent, but material, misrepresentation or omission in (i) expressing uncertainty or doubt (over a lengthy time period) about the reliability of scientific research on climate change, or (ii) subsidizing researchers or advocacy groups who took a stronger position than Exxon, itself, believed justified by the evidence.
The problem with remaining cool-headed when others are throwing a hissy fit is that you will alienate both sides. With this prospect in view, this column will nonetheless attempt a dispassionate assessment that considers, first, what needs to be shown to support such a cause of action (and why the Martin Act may need to be re-interpreted in line with the Supreme Court’s decision this year in Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund) and, second, whether the failure to disclose support for advocacy or lobbying groups can be deemed material under existing standards of materiality. Finally this column will raise the question of whether the First Amendment limits the ability of regulators to insist that corporate participants in a public policy debate disclose their support for advocacy groups or other researchers. Can the corporation be required to disclose that its own research reaches different conclusions than have those that it supported? The question here is whether mandating such disclosure inherently chills free speech.
- A Closer Look at the Allegations
The key articles leading up to the current investigation appeared in the Los Angeles Times and a specialized environmental publication, Inside Climate News, in October of this year. The Los Angeles Times article noted that Exxon earned “a public reputation as a pioneer in climate change research in the 1980s,” but then became a skeptic in the 1990s, taking out ads “contending that climate change science was murky” and that “regulations aimed at curbing global warning were ill-considered and premature.” These stories further alleged that Exxon’s management believed that global warming was coming, but feared that if a public consensus was reached to this effect, it would “lead to financially burdensome policies.” To slow such policies, the company, it alleged, formulated the “Exxon Position” that more science was needed before regulations could be safely implemented. The Inside Climate News Blog similarly stressed that “Exxon sowed doubt about climate science for decades by stressing uncertainty,” adding that by “collaborating with the Bush-Cheney White House, Exxon turned ordinary scientific uncertainties into weapons of mass confusion.” Stripped to its essentials, the core allegation here is that Exxon lobbied against legislation and policy changes it thought were harmful to its interests. Should that surprise investors? Would investors truly want Exxon to have been passive when its interests were implicated?
To the extent that the Martin Act is concerned with investor protection, and not saving the environment, an issue arises as to its scope. A close reading of these articles suggests that Exxon was essentially stating its own opinions (which may have been biased), but it was not asserting objectively false facts. Calling the state of climate science “murky” and regulatory proposals “premature” seem inherently statements of opinion (which may or may not be sincere). When is an opinion a misrepresentation? This question raises the dichotomy next discussed between facts and opinions, which is well understood by the federal securities laws, but does not appear to have been yet addressed by New York courts in the context of the Martin Act.
2. When Are Opinions Actionable?
Although the New York Attorney General need not prove scienter or any similar level of fraudulent intent under the Martin Act, he still must prove that there has been a material misrepresentation or omission. That requires both proof of falsity (i.e., that a statement was objectively wrong) and that it was material (that a reasonable person would have considered it important to that person’s investment decision). Statements of opinion stand on a very different footing from statements of fact. Back in 1991, in Virginia Bankshares, Inc., v. Sandberg, the Supreme Court held that, before a statement of opinion could be actionable as fraudulent, the plaintiff had to prove both that it was objectively false and that it was not subjectively believed by the maker of the statement. This dual standard would require the NYAG to prove that Exxon both made an objectively false statement of opinion and did not, itself, believe its own statement in good faith. In short, an insincere opinion can be fraudulent, but an honestly mistaken one cannot.
This year in its decision in Omnicare, the Court modified the Virginia Bankshares rule marginally (at least in the case of a strict liability provision). In Omnicare, the defendant corporation made the following statement of opinion:
“We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state law.”
In fact, the company was paying illegal kickbacks, and had the statement been cast instead as an assertion of fact, it would have easily been actionable. Nonetheless, Justice Kagan, writing for a seven justice majority of the Court, found that the foregoing statement “will not give rise to liability…because, as we have shown, a sincere statement of opinion is not an ‘untrue statement of material fact,’ regardless of whether an investor can ultimately prove the belief wrong.” She added that the specific statutory provision (Section 11 of the Securities Act of 1933, which, like the Martin Act, creates strict liability for the issuer for misstatements and omissions of material fact) still “does not allow investors to second-guess inherently subjective and uncertain assessments.”
But Justice Kagan did not stop there. Rather, she recognized two theories under which statements of opinions could be materially misleading. First, statements of opinion may contain within them “embedded” statements of fact, which are actionable if untrue. Second and more importantly, she noted that a reasonable investor may “understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view.” If material facts about this process are not stated, “the opinion statement will mislead its audience.” After Omnicare, this type of omission presents the zone where the maker of a statement of opinion faces its greatest risk of liability. For example, the NYAG might argue that Exxon needed to disclose its change in its opinions about the scientific evidence (if in fact it had once considered the evidence strong). At the same time, however, Justice Kagan noted that Omnicare could not be found to have omitted a material fact simply because “a junior attorney” had advised it that certain payments by it were was illegal. In this light, the failure to disclose a warning from an “ice researcher” at a Canadian subsidiary of Exxon (whose alleged warning about thinning ice in the Beaufort Sea was relied upon as a smoking gun in a Los Angeles Times story) would not necessarily create a material omission that made Exxon’s own statement of opinion misleading.
So what is the bottom line? If we assume that Exxon’s recurrent critique of the existing state of research on climate change was basically a statement of opinion, then it is still possible that such a statement of opinion could create liability if either (a) Exxon did not sincerely believe its own statement, or (b) it failed to disclose information about how it had changed its public opinions, or overlooked contrary internal warnings, in order to forestall regulatory policy changes in the 1990s. Nonetheless, internal division at Exxon may or may not be a material fact that needed to be disclosed, depending mainly on how high the disagreement rose.
But the issue still remains: Is it really material to investors in appraising Exxon as an investment to know what Exxon thought about the likelihood (or avoidability) of climate change? After all, the reasonable investor knows that Exxon has a strong self-interest and a likely bias on these issues. Also, the market is well supplied with information on this topic from a variety of sources. On this basis, the “truth on the market defense” may be applicable, even if Exxon’s disclosures omitted material information.
New York has adopted the federal securities laws’ definition of materiality. Hence, it makes sense to look to what disclosures the SEC requires a corporate issuer to make about climate change. The SEC most recently provided “guidance” on this topic in an interpretive release issued in 2010. In Release No. 33-9106, its guidance focused not on what the corporation was doing to the environment, but on what existing environmental legislation and rules (and in some special cases proposed legislation and rules) were doing to the company. For example, in the case of MD&A disclosure under Item 303 of Regulation S-K, the SEC indicated that if any enacted climate change legislation or regulation is reasonably likely to have a material effect on the company’s financial condition or results of operations, its likely impact should be disclosed. In the case of pending legislation or regulations, the SEC recommended that a two-step procedure should be followed. First, the company must assess whether the pending legislation or regulation is reasonably likely to be enacted or adopted. Second, unless the company can determine that the legislation or regulation is not reasonably likely to be adopted, the company must assume the worst and assess whether the legislation or regulation, if enacted or adopted, will likely have a material effect on the company, its financial condition or results of operation.
Those familiar with the SEC’s approach to MD&A disclosure will recognize that this is the SEC’s traditional two-step approach. But this approach is entirely different from that favored by environmental activists who believe that fossil fuel producers must disclosure the extent to which they are destroying the environment. That is overbroad. The SEC is not the unfettered champion of the public interest; rather its more modest role is to protect investors (not the environment itself) by requiring issuers to disclose the impact of environmental laws, rules, and charges on them.
Activists may respond that had Exxon disclosed that it was destroying the environment (in their simplified view), there would have been a reduced demand for its products, and investors would have known to reduce the percentage of fossil fuel stock in their portfolios. Perhaps that advice will prove correct in the very long-term (say, another century), but it has little to do with the current view of Exxon’s securities. Investors are not well informed by such apocalyptic disclosures, because their concern is more with contemporary valuation. The price of fossil fuel stocks is not down today because of environmental liabilities, but because fracking, the end of sanctions against Iran, and other developments are flooding the market with a superabundance of fossil fuels. It is less that demand has fallen than that supply has risen (and it is now cheaper to produce some fossil fuels today).
Ultimately, if existing disclosure rules are re-interpreted to require issuers to disclose their social impact, the slope becomes very slippery. Must distillers disclose that alcohol is harmful to their consumers’ health? Must Coca-Cola disclose the latest evidence on the effects of sugar? These impacts may be even more harmful to humans than climate change.
Of course, it is possible that the NYAG could read the concept of materiality differently from the SEC. But little suggests that that is about to happen. On November 8, 2015, the NYAG entered into an important settlement with Peabody Energy Corporation, another major fossil fuels company, about its own disclosures with respect to climate change. At the core of their dispute was a disagreement over whether Peabody had adequately sought to assess the impact of environmental restrictions on its business. Peabody had stated in its 2011, 2012, 2013 and 2014 SEC Form 10-Ks that “Enactment of law or passage of regulations regarding emissions from the combustion of coal by the U.S. or some of its states or by other countries… could result in electricity generators switching from coal to other fuel sources.” But, although this possibility was conceded, Peabody repeatedly claimed that it was “not possible for [Peabody] to reasonably predict the impact that any such laws or regulations may have on Peabody’s results of operations, financial condition, or cash flows.” This is exactly what the SEC’s 2010 release on climate change would require Peabody to do in its MD&A. Moreover, the NYAG discovered an apparent smoking gun: namely, that “Peabody has in fact made market projections about the impact of potential climate change regulatory actions” but did not reveal these projections in its SEC filings.
In overview, the NYAG was here enforcing the SEC’s own climate change standards and not breaking new ground. Also, it appears to have caught Peabody in a misstatement, as (at least in the NYAG’s view) Peabody had in fact calculated the impact that it claimed it could not predict. Satisfying as this outcome should be for the NYAG, this settlement does not imply by any means that corporations will be held liable under the Martin Act because they have not fully revealed the impact that they are having on the environment. Rather, under investor protection laws, the focus of disclosure is on the impact on the corporation.
3. Disclosure of Funding?
In the recent journalist critiques of Exxon’s disclosures, one theme has been repeatedly stressed as proof of culpability: Exxon appears to have made donations to a large number of advocacy groups (apparently more than 40) who collectively lobbied against (or otherwise opposed) climate change regulation. Does this conduct require disclosure under either the federal securities laws or the Martin Act? For the sake of argument, let us assume that many of the public statements made by these groups were “over the top” and went beyond anything that Exxon would publicly say under its own name.
As a matter of traditional securities law, Exxon is not the “maker” of the advocacy group’s statements and could not be held liable in a private action for them. Nor does Exxon seem potentially liable as an aider or abetter simply because of a donation or fee paid to the advocacy group. By analogy, I might contribute money to the ACLU but agree with no more than two thirds of the positions they take.
Conceivably, the Martin Act might be read differently, but the case for doing so seems weak. Exxon’s financial support to these groups could not have been financially material to Exxon. The only basis for deeming such donations to be material is that they would show the donor to be willfully distorting the truth. But the problem with that rationale is that it is uneven and uniquely penalizes one side. Also, it requires us to judge history at midstream before the public debate has played out. In any robust debate, both sides are likely to engage in overstatement and hyperbole. If only the corporation had to disclose its donations and to explain when it believed its advocates or funded researchers had overstated (and the activist side did not), there is an imbalance, and the result is to chill one side’s ability to attract or make donations. That is in essence chilling free speech and, after Citizens United v. FEC, this raises serious First Amendment issues. Perhaps Congress or New York State could still draft a carefully tailored statute requiring disclosure of some types of advocacy donations, even after Citizens United, but this much is clear: the Martin Act does not do this.
This column has examined only the use of the federal securities laws and the Martin Act to deal with public relations disclosures and political lobbying by corporations. Other critics are urging the Department of Justice to use RICO to sue Exxon for the same conduct. That is beyond the scope of this column, but it involves even more problematic legal theories. Ultimately, if statutes lose their moorings and become vehicles by which regulators can become knights on horseback, dispensing justice as they see fit, the rule of law is imperiled. That has not happened yet. But stay tuned!
 The “Martin Act” refers to New York General Business Law, article 23-A, sections 352-353, which was originally passed in 1921 (but has been subsequently amended).
 In particular, these stories focused on Wei-Hock Soon, a scientist at the Harvard Smithsonian Center for Astrophysics, who claims that variations in the sun’s energy largely accounts for recent global warming. He has received over $1.2 million in grants from the fossil-fuel industry (including Exxon). See Justin Gillis and John Schwartz, “Deeper Ties to Corporate Cash for Doubtful Climate Researcher,” New York Times, February 22, 2015 at A-1. For the record, this author has never been paid, retained, or funded by Exxon or any other company named in this column.
 Exactly this charge of a “misinformation campaign…similar to the tobacco industry’s actions” was made by Senator Bernard Sanders in an October 20, 2015 letter to Attorney General Loretta Lynch, calling for an investigation by her. This analogy has been picked up in much of the newspaper commentary of the Exxon investigation. Nonetheless, as someone who worked with some of the leading plaintiff’s firms in this campaign, I think it is a poor analogy, as the tobacco litigation focused on addiction, alleging that the industry secretly addicted its victims.
 See Editorial, “Prosecuting Climate Dissent,” The Wall Street Journal, November 9, 2015 at p. A-14.
 Beginning long ago with People v. Federated Radio Corporation, 244 N.Y. 33, 38-39 (1926), the Martin Act has been read broadly, and the state has not needed to allege scienter or reliance on damages. See, e.g., State v. Sonifer Realty Corp., 212 A.D. 2d 366, 367 (1st Dept. 1955); People v. Royal Sec. Corp., 165 N.Y.S. 2d 907, 909 (Sup. Ct. N.Y. County 1955); State v. 7040 Colonial Road Assocs. Co., 671 N.Y.S. 2d 938, 941-42 (Sup. Ct. N.Y. County 1998). Surprisingly, this is true even in criminal felony cases, People v. Sala, 258 A.D. 2d 182, 193 (1st Dept. 1999), aff’d 95 N.Y. 2d 254, 258-259 (2000). There is, however, no private right of action under the Martin Act.
 135 S. Ct. 1318 (2015)
 See Katie Jennings, Dino Grandoni, and Susanna Rust, “How Exxon Went from Leader to Skeptic on Climate Change Research,” Los Angeles Times, October 25, 2015 at A-1; David Hasemeyer and John H. Cushman, Jr. “Exxon: The Road Not Taken”, Inside Climate News October 22, 2015.
 See Jennings, Grandoni, and Rust, supra note 6.
 See Hasenmeyer and Cushman, supra note 6.
 501 U.S. 1083 (1991)
 135 S. Ct. 1318, 1323 (1991).
 Id. at 1327
 Id. at 1328.
 Id. at 1329.
 See Sara Jerving, Katie Jennings, Masako Melissa Hirsch and Susanne Rust, “What Exxon Knew About the Earth’s Melting Artic,” Los Angeles Times, October 9, 2015 (describing reports made by Ken Crosdale, “senior ice researcher” for Exxon’s Canadian subsidiary in late 1980s).
 Some journalists allege that Exxon was particularly interested at this point in delaying U.S. adoption of the Kyoto accords (which the U.S. did not do). Of course, the state of the science may have been more tentative at this point also.
 Under the “truth on the market” doctrine, the defendant can rebut a claim that it omitted material information by showing that the information was already in the market. See Ganino v. Citizens Utils. Co., 228 F. 3d 154, 167-168 (2d Cir. 2009); Provenz v. Miller 102 F. 3d 1478, 1492 (2d Cir. 1996). No view here is expressed as to whether this information was then in the market, but it seems a contestable issue.
 State v. Rachman, 71 N.Y. 2d 718, 726 (1988)(quoting and relying on TSC Indus. v. Northway Inc., 426 U.S. 438 (1976).
 Securities Act Release No. 34-9106 (“Commission Guidance Regarding Disclosure Related to Climate Change”)(February 8, 2010). This release was adopted by a 3-2 vote, as the two Republic Commissioners (Casey and Paredes) dissented.
 For a brief review, see J. Coffee, H. Sale & M.T. Henderson, SECURITIES REGULATION: Cases and Materials (13th ed 2015) at pp 204-205. This has been the SEC’s position since at least Securities Act Release No. 6835 (May 18, 1989).
 See In the Matter of Investigation by Eric T. Schneiderman, Attorney General of the State of New York of Peabody Energy Corporation, Assurance of Discontinuance, dated as of November 8, 2015.
 Id. at p. 2
 See Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).
 558 U.S. 310 (2010).
The preceding post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.