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May 25, 2011
Trillium Asks SEC to Investigate Chevron Disclosures
    by Robert Kropp

Discrepancies in assessing the impact on the company of an $18 billion judgment in Ecuador raise questions about the disclosures included in SEC filings.

At today's annual meeting, Chevron shareowners will vote on a proposal submitted by Trillium Asset Management and the New York State Common Retirement Fund, calling for an independent candidate for the company's Board of Directors who has a high level of expertise and experience in environmental matters. In 2010, the resolution won 26.8% of the shareowner vote.

However, facing a shareowner vote on the resolution may turn out to be the least of Chevron's worries. On Monday, Trillium wrote to the Securities and Exchange Commission (SEC), requesting that it undertake a review of "whether Chevron has appropriately disclosed to shareholders the scope and magnitude of financial and operational risk from a recent adverse legal judgment in Ecuador."

In February of this year, a court in Ecuador found in favor of plaintiffs in a lawsuit filed against Chevron, and awarded them damages totaling $18 billion. According to the lawsuit, originally filed in 1993, Texaco—which was acquired by Chevron in 2001—dumped billions of gallons of waste byproduct from oil drilling in the rainforest, and burned hundreds of millions of cubic feet of gas and waste oil into the atmosphere.

Despite having requested in 2003 that the case be moved from the US to Ecuador, Chevron chose to dispute the judgment before the US Second District Court, where it obtained a preliminary injunction. The plaintiffs have appealed, and, in a memo code-named Invictus, described a plan to attach Chevron's assets by filing lawsuits in more than 100 countries.

The discrepancies in Chevron's disclosures to which Trillium has called the attention of the SEC are detailed in a recently published repor t co-authored by Simon Billenness and Sanford Lewis. The report reveals that in his testimony before the US court, Chevron's Deputy Comptroller Rex Mitchell asserted that the asset seizures outlined in the Invictus memo "would disrupt Chevron's supply chain and operations," and "damage Chevron's business reputation as a reliable supplier."

"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.

However, as the letter to the SEC, signed by Lewis and Jonas Kron of Trillium, points out, "While the company has disclosed that enforcement actions may be anticipated…the company did not disclose management's concern about the potential for apparently severe damage to the company's operations, relationships and reputation indicated in the Comptroller's testimony."

Referring to "a number of questionable statements about the court case" included in Chevron's annual report and 10-K filing, the letter continued, "Many investors might have reasonably expected the company to disclose this additional information regarding magnitude that was known to the company regarding these risks."

Trillium's letter argues that Chevron's disclosures "could create the misleading perception that the Ecuadorian lawsuit is fraudulent and without merit. The reality is that these are disputed issues on which Chevron holds a position, which is not the same as the position held by the plaintiffs or the Ecuadorian court."

"There's a dramatic difference in what you see in the company's SEC disclosures and what you see in the Comptroller's testimony," Lewis told "It's the kind of material that you would want as an investor who is trying to make an investment decision. The issues raised in the report should be relevant to the SEC, and we thought it was important to put these issues before SEC staff to consider."

"I am confident that the Commission will look at this issue and ask the company some hard questions," Lewis continued. "If they find that the company needs to do more, one possible result is that they will send a letter to the company telling them to spell out more on the litigation. Ultimately, you often see revisions in the public disclosure."

If the SEC finds that there were violations in Chevron's disclosures, it can pursue civil or administrative penalties, Lewis said.

"It would be an accomplishment for the SEC to require Chevron to improve its disclosures," he added.

Lewis referred to an effort undertaken last year by the Financial Accounting Standards Board (FASB) to have companies provide enhanced disclosures in their financial statements. According to FASB's Exposure Draft, the proposed amendments would enhance "current qualitative disclosures…by requiring additional disclosures, for example, in the case of litigation contingencies, disclosure of the contentions of the parties and how users can obtain additional information about the litigation."

The proposed amendments were opposed by many companies, Lewis observed, including Chevron. In a letter to FASB, an Assistant Comptroller at Chevron argued that such disclosures were neither operational nor auditable, and wrote, "SEC has already promulgated disclosure rules for material legal proceedings that are calibrated to give investors relevant, material information about specific contingencies."

"FASB also proposed that companies provide in their disclosures links to key court documents," Lewis said. "If investors had that, they would have a better idea of how some of these issues are being treated in the courts."

Referring to the concerns raised in Trillium's letter to the SEC, Lewis said, "What really jump out about that Comptroller's testimony are the magnitude, severity, and potential imminence of the impact on the company."

Trillium has been engaging with Chevron on issues relating to the legal situation in Ecuador since 2003. Shelley Alpern, Vice President and Director of Environmental, Social and Governance (ESG) Research & Shareholder Advocacy at Trillium, told, "While I can't say the conversation has ever been totally broken off, it's never been satisfying. We never got more than the official line that remediation in Ecuador was complete."

"In recent years, Chevron has become more and more aggressive in painting the plaintiffs as the corporate equivalent of ambulance chasers," she said.


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