Having discussed the views of Congress and of retail investors on Monday and Tuesday in relation to the Security and Exchange Commission (SEC) climate risk rule proposal, today, we’ll turn our attention to the potential for shareholder litigation in response to the rule, if adopted.
Did anyone ask plaintiffs’ attorneys?
Perhaps not, but the SEC’s largest and most complex disclosure rulemaking in years—decades?—will certainly provide a target‐rich environment for private actions. Recent reporting by the Wall Street Journal suggests that the corporate bar is already alerting its clientele to this eventuality. “The underlying premise is simple: Make a company talk more—on the record, in their mandatory disclosures like annual reports—and you are more likely to catch it in a mistake that could prove lucrative for the aggressive plaintiffs’ lawyers that earn a living suing companies after bad news.”
Maybe so. While the Journal’s reporting is sound—lawyers are talking about this—I wonder whether bringing and winning (or at least wresting settlements) in cases arising from this rule will be so straightforward. The judicially created implied private right of action under the Exchange Act is held to have six elements: (i) a material misrepresentation or omission; (ii) scienter; (iii) a connection with the purchase or sale of a security; (iv) reliance; (v) economic loss; and (vi) loss causation. As early as 2010, the SEC already exhorted public companies to disclose their “material” risks associated with climate change and climate regulation. Yet there seems to have been no ensuing glut of securities litigation premised on the claim that public issuers have omitted to disclose material side effects of, say, rising sea levels or extended growing seasons. One suspects that the reason might be that proving that there is a causal connection between the issuer’s fraudulent behavior and a plaintiff’s resultant financial losses—i.e., establishing loss causation—might be particularly difficult to prove when dealing with essentially frivolous disclosures that have nevertheless been given official imprimatur as “material.”
The SEC wishes to have public companies publicly acknowledge their manifold sins and wickedness in the matter of greenhouse gas emissions. Most, if not all, effects of global warming are anticipated to fall toward the end of the 21st century. Some, like the UN Intergovernmental Panel on Climate Change, have been wont to advocate a series of swifter timetables from time to time. But even the most perfervid climate Cassandra does not believe that a secular rise in global mean temperatures is likely to have a discernible effect on a public company’s bottom line next fiscal quarter, or even the next fiscal year. Call it “short‐termism,” but U.S. securities disclosure simply does not operate on the sort of global, climatological time scale implicated by global warming. Consequently, this author is dubious that plaintiffs’ attorneys will be successful in showing that, for example, a public company’s omission to state that its widget subcontractor exhales prodigious quantities of carbon dioxide and methane made me lose money when it came to light.
In case you missed it, click here for part 1 and part 2 of the impromptu questions.
