Chevron's (NYSE: CVX ) recent efforts to combat the $18 billion Anguinda v. Texaco verdict for the company's alleged involvement in polluting the Ecuadorian Amazon have taken a new turn – one that targets shareholders.
According to a recent story in the New York Times, the company recently slapped one of its investors, Trillium Asset Management, with a subpoena requiring it to furnish documents related to its shareholder proposals. According to a lawyer representing Chevron, the company is concerned that Trillium is colluding with the Ecuadorean plaintiffs to "get out their false story" and that Chevron wants to obtain the documents so they can "find out the methods of the scheme."
The question is, does Chevron have reason to suspect Trillium's involvement in such a conspiracy? Or is this better understood as a strategy for shutting down shareholder dissent? Before we decide, let's review a few of Trillium's biggest challenges, Chevron's response to them, and some other relevant details surrounding its management of the Ecuador case.
Allegations of material omissions
Last year, Trillium asked the SEC to review Chevron's disclosure of the financial and operational risks associated with the $18 billion Anguinda verdict and its possible enforcement. Trillium's letter complains that the oil giant's 2010 annual report simply claims that Chevron cannot make a reasonable estimate of possible losses associated with the case, and notes that Chevron will contest any enforcement actions.
Trillium complains these disclosures are "low key" compared to Chevron's internal assessments of possible damages associated with the verdict. Trillium's letter points out that Rex Mitchell, Chevron deputy comptroller, testified that the company faces "irreparable damages" associated with supply chain disruptions and damaged business relationships if the plaintiffs succeed in their enforcement plan of seizing Chevron's pipelines, oil tankers, or wells in one or more jurisdictions. According to Trillium, Chevron should have provided this info to investors to indicate the severity of the downside risk associated with the Anguinda lawsuit, because these assessments alter the "total mix" of information, omitting info material to investors.
The most recent judgment of $18 billion – 9% of Chevron's market cap – seems to favor Trillium's point. Trillium also points out that Chevron's $18 billion penalty is the second-largest of its kind, after the recent $20 billion judgment against BP (NYSE: BP ) . The Ecuadorean penalty even dwarfs ExxonMobil's (NYSE: XOM ) payouts for the Exxon-Valdez spill, which some estimate at around $3.5 billion for cleanup, penalties, and punitive damages.
Pressure to settle the Anguinda lawsuit
Trillium was also part of an investor coalition that issued a statement (link opens a PDF) urging Chevron to consider negotiating "a reasonable settlement" to the lawsuit to avoid further reputational harm and other costs resulting from ongoing litigation. The statement also urged Chevron to fully disclose business risks associated with the possibility that the $18 billion Anguinda lawsuit verdict will be enforced.
In addition, Trillium has submitted a number of proposals related to environmental sustainability that reference the Ecuadorian case.
For example, in 2011, it co-sponsored a proposal calling for an independent board member with environmental expertise, which won support from about 25% of shares – a high level.
It was also part of a shareholder group that sponsored a 2009 proposal, which called on Chevron to prepare a report on the "policies and procedures that guide Chevron's assessment of host country laws and regulations with respect to their adequacy to protect human health, the environment and our company's reputation." The idea is to ensure that Chevron meets its own stated commitment "to comply with the spirit and letter of all environmental, health, and safety laws" in the countries where it operates. Trillium, along with the rest of the investors belonging to the group, held about 20 million shares of Chevron stock at that time, which was close to 1% of the 2-billion-plus shares outstanding.
While some critics see Chevron's subpoena of Trillium's records as a strategy to prevent dissent through intimidation and retaliation, Chevron insists its action is a warranted response to its belief that Trillium is colluding with the plaintiffs.
Legitimate dissent, or collusion in a shakedown?
In a letter (link opens a PDF) to its shareholders, Chevron claims that Trillium's dissent is part of a campaign, led by the Anguinda lawyers, to "generate fear in the investment community" and pressure Chevron into an out-of-court settlement due to the lawyers' concern that the $18 billion Ecuador verdict will not be enforceable outside of the country. Chevron has no assets in Ecuador.
The letter alleges that representatives of Trillium, along with another signatory of the 2009 proposal mentioned above, met with the plaintiffs' lawyers in 2003. The letter also suggests that an email memorializing the meeting indicates that Trillium agreed to take the lead in using stockholder proposals to pressure Chevron into a settlement.
Because this letter fails to indicate where the email came from or how Chevron accessed it, it's impossible to determine the accuracy of Chevron's allegations. However, the company's aggressive attempts to gain confidential information, and its history of silencing shareholders who express concern about the Ecuador case, should give investors pause.
Other legal actions
Trillium isn't the only target of Chevron's search for confidential documents. Last month, Mother Jones reported that the company subpoenaed Google, Yahoo!, and Microsoft to gain a wide variety of information about more than a hundred customers logged into their email accounts over the past nine years, including names, mailing addresses, phone numbers, billing information, IP addresses, log-in times, and session durations.
While Chevron representatives claimed that these were "standard" requests to gain information they could use to discover fraud among environmental activists, attorneys, and journalists, civil liberties expert Jennifer Grannick says the request is not standard due to the number of people covered by the request and the fact that the requested data covers individuals who aren't parties to the litigation.
Chevron has also used aggressive tactics in the past to prevent shareholders from voicing their views about the company's responsibility to Ecuadorians. During its 2010 annual meeting, the company prevented 20 legal holders of shareholder proxies from entering the meeting – most of whom traveled from Ecuador, Nigeria, and Burma to criticize Chevron's activities in their countries. Five protestors, all of whom held legal shareholder proxies, were arrested. Four were arrested when they failed to leave Chevron's property after they were refused admission to the meeting. The other was arrested after gaining admission to the meeting, as she was trying to make a statement.
The Foolish bottom line
Without more information about Chevron's evidence and its grounds for acting, it's difficult to conclusively determine whether any one of Chevron's counterattacks is legitimate. However, taken together, the company's activities should worry investors.
Chevron's far-reaching attempts to seek information about individuals who aren't involved in the Ecuador litigation (including its own shareholders), combined with its trend of silencing shareholders who criticize it, suggest the company's interest in limiting shareholders' power to question management's behavior.
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