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May 21, 2012
Shareowners Ask SEC to Investigate Chevron
    by Robert Kropp

Three sustainable investment organizations say that the company's management appears to be covering up the risks associated with an $18 billion legal judgment against it for environmental damage in Ecuador. Second of a two-part series.

Two recently published reports document the mounting legal setbacks to Chevron's attempts to avoid liability for widespread environmental damage in Ecuador, and the company's repeated failure to fully inform investors of the risks associated with an $18.1 billion judgment against it for the damage.

The first report, written by Simon Billenness of the Unitarian Universalist Association (UUA), reports that an appeals court in Ecuador upheld the judgment against Chevron in January, and that a New York federal appellate court recently vacated a preliminary injunction purporting to bar worldwide enforcement of the judgment.

The second, written by Graham Erion, an attorney for the Ecuador's rainforest communities, states in its opening sentence, "Chevron's management is publishing false or materially misleading information regarding its $18.1 billion judgment in Ecuador for causing environmental damage."

Sustainable investors are not standing idly by while poor corporate governance threatens to decimate Chevron's share price and exacerbate the environmental, social, and corporate governance (ESG) risks faced by one of the world's largest companies. Three shareowner resolutions—calling for the appointment of an independent board chair, the appointment of a director nominee with environmental expertise, and the adoption of country selection guidelines—have been filed with the company this year.

Institutional Shareholder Services Inc. (ISS), the influential proxy advisory firm, has recommended a shareowner vote in support of all three proposals.

Furthermore, three sustainable investment organizations—UUA, Zevin Asset Management, and Newground Social Investment—have submitted a letter to the Securities and Exchange Commission (SEC), requesting that it launch an investigation into "evidence that the company is violating securities laws by repeatedly making misrepresentations and material omissions regarding its adverse judgment in Ecuador of $18.1 billion for despoiling the environment."

Referring to Erion's report on Chevron's publication of "false or materially misleading information," the letter states, "It essentially implicates Chevron's management in what appears to be an extensive cover-up of the risks faced by the company regarding this litigation."

"Chevron's continued failure to disclose these risks is potentially harmful to investors and the integrity of the financial markets that your agency is charged with protecting," the letter continues.

This is not the first time that sustainable investors write to the SEC, requesting that it investigate Chevron's failures of disclosure. Last May, Trillium Asset Management wrote to the Commission, expressing its concern over "disclosures and omissions" in the company's annual report.

"We request that the staff review whether Chevron has appropriately disclosed to shareholders the scope and magnitude of financial and operational risk from a recent adverse legal judgment in Ecuador," Trillium wrote.

The recent letter to the SEC from UUA and its partners also noted that a coalition of shareowners representing $158 billion in assets under management wrote to Chevron last year, requesting that the company "pursue an 'equitable negotiated settlement' to end its nearly 20-year legal battle with indigenous populations in the Amazon rainforest."

Chevron never replied to the letter from the investors, the recent submission to the SEC reveals.

Whether the Commission launched an investigation after receiving the investor letter last year—or, for that matter, whether it will do so upon receipt of the more recent submission—remains unknown, as it never publicly comments on an ongoing investigation. However, Erion, who practices securities law, spoke with about the possible measures the Commission might take.

"Depending on what the SEC finds in its investigation, they may go back to the company and ask that they restate their filing," Erion said. "Companies do this rather frequently. Where the SEC finds more egregious violations, they will release a public comment letter that comments on the disclosure. If they believe that Chevron is acting with intent to deceive—in my opinion, Chevron is willfully withholding information from investors—that's when you start getting into SEC fines and potentially even criminal investigations."

"Chevron's worse-case scenario is the SEC telling them they've intentionally withheld information that has falsely inflated its stock price, and a fine for a company of this size could be in the billions of dollars," he continued. "By continuing this course of action of evading regulations and withholding material information, Chevron could face liabilities that surpass the liability they're facing now."


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