Exxon Mobil Facing Retirement Plan Stock Drop Suit

A participant in the Exxon Mobil Savings Plan has filed a complaint on behalf of himself and other similarly situated current and former employees of Exxon Mobil Corporation, or its predecessor companies, alleging plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by continuing to offer company stock when it was no longer prudent to do so.

The action was brought under Section 502 of ERISA to recover “many millions of dollars of damage suffered in their retirement accounts due to breaches of fiduciary duties owed to [participants],” the complaint says.

The plaintiff claims defendants’ breaches of fiduciary duty occurred when they knew or should have known that Exxon’s stock had become artificially inflated in value due to fraud and misrepresentation, thus making Exxon stock an imprudent investment under ERISA and damaging the plan and those plan participants who bought or held Exxon stock.

The complaint states that throughout the class period, Exxon repeatedly highlighted the strength of its business model and its transparency and reporting integrity, particularly with regard to its oil and gas reserves and the value of those reserves.

However, the plaintiff alleges, Exxon’s public statements were materially false and misleading when made because they failed to disclose:

• that Exxon’s own internally generated reports concerning climate change recognized the environmental risks caused by global warming and climate change;
• that, given the risks associated with global warming and climate change, the company would not be able to extract the existing hydrocarbon reserves Exxon claimed to have and, therefore, a material portion of Exxon’s reserves were stranded and should have been written down; and
• that Exxon had employed an inaccurate “price of carbon”—the cost of regulations such as a carbon tax or a cap-and-trade system to push down emissions—in evaluating the value of certain of its future oil and gas prospects in order to keep the value of its reserves materially overstated.

“As a result of the Company’s misrepresentations, the price of Exxon common stock was artificially inflated, reaching a high of more than $95 per share by mid-July 2016. Indeed, Exxon evidently knew that the market price of its common stock was inflated because it cancelled a planned multi-billion dollar stock repurchase program,” the complaint states.

According to the lawsuit, through a series of partial disclosures issued by different news sources between mid-August 2016 and late September 2016, the market learned that federal regulators were actively scrutinizing Exxon’s reserve accounting related to climate change and global warming and the company’s refusal to write down any of its oil and gas reserves in the face of declining global oil prices. On this news, the price of Exxon common stock plummeted to a close of $82.54 per share, down more than 13% from the stock’s class period high, erasing billions of dollars of market capitalization.

On October 28, 2016, before the markets opened, Exxon issued a release announcing its financial results for the quarter ended September 30, 2016. In this release, Exxon disclosed that it might be forced to write down nearly 20% of its oil and gas assets. Specifically, the company acknowledged that it might have to write down 3.6 billion barrels of oil sand reserves and one billion barrels of other North American reserves that Exxon now conceded were not profitable to produce under current prices.

In response to this news, the price of Exxon common stock fell more than $2 per share on October 28, 2016, on unusually high trading volume of more than 19 million shares traded, more than twice the average volume over the preceding ten trading days, erasing billions of dollars in market capitalization, the lawsuit says.

As required by the new pleading standards set forth by the Supreme Court in Fifth Third v. Dudenhoeffer, the plaintiff offered reasonable actions fiduciaries could have taken that could not be believed to do more harm than good.

The complaint says defendants, as the plan’s trustees, could have halted new purchases or investments of Exxon stock. They could also have tried to effectuate, through personnel with disclosure responsibilities, or, failing that, through their own agency, truthful or corrective disclosures to cure the fraud and make Exxon stock a prudent investment again. Defendants also could have directed the plan to divert a portion of its holdings into a low-cost hedging product that would at least serve as a buffer to offset some of the damage the company’s fraud would inevitably cause once the truth came to light.

“Defendants could not reasonably have believed that taking any of these actions would do more harm than good to the Plan or to Plan participants,” the lawsuit states.

Finally, the plaintiff says that as an appointing fiduciary, Exxon was required by law to monitor the trustees to ensure that they were continuing to fulfill their fiduciary duties under ERISA. Exxon’s knowledge of its own fraud cannot be doubted; thus, when Exxon’s fraud began and caused the company’s stock price to rise to artificially high levels, and the trustees failed to take any of the actions discussed above, Exxon should have stepped in as an appointing/monitoring fiduciary and removed the trustees from their roles as fiduciaries with investment management responsibilities.

The complaint in Bobby D. Fentress v. Exxon Mobil Corporation et. al. is here.