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The Next Wave of Securities Fraud Lawsuits Will Involve Climate Change

November 13, 2019 Blog
  • Climate change is affecting companies
  • Liability for fires and environmental damage should be disclosed to shareholders
  • Investment fraud climate cases are being filed

As fires rage in California and companies dump “forever chemicals” into the environment, the next wave of investment fraud lawsuits will likely involve the impact and disclosure of climate change issues.

In California, bondholders of Pacific Gas & Electric, PG&E, are wondering whether they will be on the hook for the recent Kincade fire, which burned 78,000 acres in Northern California.

PG&E, which is the first utility that has filed for bankruptcy as a result of climate change issues and potential liability from fires. Many distressed debt hedge funds such as Elliott Management Corporation have traded billions of dollars worth of the bonds as the company fights to pay out wildfire claims and commitments contingent on a provision regarding damages from the recent fires.

Since the Kincade fire started last month and was contained on November 6, about $4.4 billion of PG&E bonds changed hands. Holders of the bonds took paper losses of $2.4 billion in one week, then gained a $1 billion only to see them fall further.

That’s just the tip of the rapidly melting iceberg for investors.

Exxon is on trial in New York in a case brought by New York regulators, who claim that Exxon Mobil “kept a secret set of financial books that seriously underestimated the costs of potential climate change regulation while claiming publicly that it was taking such factors into account,” according to the New York Times.

A verdict against Exxon could have a major effect on its stock and bonds.

Earlier this year, 3M shareholders filed a securities class action in New Jersey claiming that the company concealed the truth about its exposure to legal liability associated with per- and polyfluoroalkyl substances, or PFAS.

PFAs are chemicals that do not break down in the environment and hence are given the nickname “forever chemicals.”

That investor complaint harkens all the way back to 2010 when the State of Minnesota sued 3M for environmental damage caused to the state.

The securities lawsuit complaint alleges that on the eve of trial in the Minnesota lawsuit, 3M settled the suit for $850 million, the third-largest natural damage claim settlement in history, behind only the Deepwater Horizon/British Petroleum and Exxon Valdes oil spill settlements.

Furthermore, a recent Wall Street Journal opinion piece questions the value of municipal bonds and their interest rate payments based on U.S. mayors’ “climate alarm” charges.

According to the Journal, various U.S. mayors have declared that impending eco-dangers represent an “existential threat” and that significant portions of their cities will be submerged without swift and dramatic action.

But do municipalities disclose these perilous environmental risks to potential bondholders, the Journal asked.

The Journal concluded that if climate change is the existential threat that mayors claim, “then why aren’t municipal-bond holders being rewarded with higher interest rates for taking greater risks?”

While climate change is certainly a problem for government regulators like the Environmental Protection Agency, it is also a grave concern for stock owners and bondholders invested in companies and municipalities with values affected by climate change and concomitant disclosures.

Beware of climate change affecting your 401(k) portfolios.