Exclusive Fool Interview: A Look at Both Sides of Chevron's Nightmare Legal Battle

A boy stands on an oil pipeline in the rainforest near Lago Agrio, Ecuador. Source: Lou Dematteis/Redux.

At The Motley Fool, we're not just about buying stocks -- we're about buying businesses. And we believe the best businesses serve all of their stakeholders in the process of turning a profit. This includes investors, customers, employees, and, more generally, the world. Not too long ago, we revealed our favorite stakeholder-friendly companies, but we've also written about those that came up a bit short.

Last summer, we discussed an instance of irresponsible corporate behavior at Dow Chemical  (NYSE: DOW  ) . For years, Dow has fought tooth and nail to separate itself from the Bhopal, India, chemical spill, a tragedy that took place at the hands of its subsidiary in 1984. As a financial media outlet, it is our responsibility to bring attention to these types of company issues. For this reason, we decided to dig into a similar case recently -- a decades-old Ecuadorian oil spill linked to energy giant Chevron  (NYSE: CVX  ) . We mentioned this case briefly in our Dow article:

In Ecuador, beginning in the 1960s, Texaco discharged billions of gallons of oil waste directly into the Amazon rainforest, creating an oil spill that ruined the lives of countless indigenous people. Chevron, after acquiring Texaco (and its liabilities!) in 2001, has refused to pay the $18 billion* fine ordered by Ecuadorian courts, claiming fraud. In a company statement, Chevron argues that PetroEcuador, the state-owned oil company that took over Texaco's facilities after 2001, should be held responsible. 

Similar to Dow, Chevron was not directly involved in the accident in the Amazon. However, the acquisition of Texaco should have transferred any liabilities onto its books, much like buying a car with an "as-is" label. This legal concept is referred to as "successor liability," but it failed to occur because of complex legal maneuvers and an assortment of jurisdiction issues.

Chevron argues that Texaco actually settled this case once before in the 1990s, admitting its missteps and complying with a remediation clean-up program. However, the settlement failed to address all of the parties that were victims of the spill.

So, a new trial commenced -- this time in Ecuador -- where mounting evidence shows the playing field might have been tilted against Chevron. The company points to instances of fraud in the Ecuadorian trials that have been noted by the International Arbitration Panel at the Hague and several U.S. judges. Just last Friday, in fact, a key environmental expert in the trial against Chevron completely disavowed its original testimony, noting the process was "fatally tainted." This comes on top of the admission earlier this year by an Ecuadorian judge who claims he was bribed by the plaintiffs. Both sides continue to exchange blows, with each exchange leaving investors more perplexed about the potential outcome.

And the stakes couldn't be much higher. As mentioned above, Chevron could be on the hook for an $19 billion fine, which amounts to more than 85% of the $22 billion in cash on its balance sheet. To try to get to the bottom of the matter, the Fool decided to talk to Chevron and its adversaries recently. We realize we can’t possibly uncover and present all of the details of this convoluted legal case in a single article, but perhaps the best thing we can do is provide a platform to allow investors to hear from both sides. Furthermore, Chevron is currently a recommendation in one of The Motley Fool's premium newsletters, so understanding the ins and outs of this case is of the utmost importance to us.

My colleague James Early, who runs our Income Investor service, sat down with one of the plaintiffs' attorneys and Chevron's own representatives. Their discussion, which took place prior to the most recent revelations of foul play, reveals the complex nature of international litigation. At the same time, as James said in a recent newsletter, "the "legal" requirements do not always equate with what is ethically "right," so companies -- and investors -- need to make their own decisions. And sometimes the hardest part is not the ethics but knowing whose story to believe in the first place."

*The $18 billion fine has since increased to $19 billion.


Read/Post Comments (7) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2013, at 12:22 PM, damilkman wrote:

    This is a completely different situation from DOW and Bhopal. in the former case the authors were arguing that even though DOW was not legally obligated to pay additional penalties that they were morally obligated. The FOOL authors were crucified because the choice of a moral decision is up to the stock holders not an outsider who has no stake in the matter. Charity and Morality outside of the stated law is a choice not an obligation. if it is forced on you then it is no longer a moral obligation but an additional judgement. We can put any label we want on the DOW board. But it is their choice and the stock holders made their choice by not being vocal to give up their dividends for something else.

    In this case Chevron may be on the hook for financial penalties because there is contention that Texaco's former failures have not been judged yet. It appears to be a mess. But if Chevron is found to be wrong and the judging court to a reasonable doubt is found to be impartial they have to live with it. If Chevron is found innocent, it is up to Cheveron to decide what their moral obligations are.

    And for individuals who do not like companies they feel are evil or immoral or perhaps just shallow they have the right not to buy their stock and communicate their concerns to others. Perhaps an immoral or shallow board and CEO can be shamed into an action to appease the shareholders.

  • Report this Comment On April 18, 2013, at 12:48 PM, remmdawg wrote:

    This appears to be the ideal scenario requiring the application of some type of statute of limitations. It seems to be somewhat obscene to exend liability out several decades (indeed beyond a decade seems extreme to me) while also extending it to those who were not directly involved in the misconduct. It is hard to understand how business can function in such a legal environment. How can business assess the risks of an acquisition? How is it moral to punish those who were not, in any way, guilty of misconduct?

  • Report this Comment On April 18, 2013, at 4:34 PM, damilkman wrote:

    I also was not pleased that that there were no real hard questions that would put person being interviewed on the spot. You learn a lot more about the position in terms of how the tough question is handled. I may be overly hard on MF as it is possible neither side would be interested in answering an uncomfortable question and made it clear the deal was off if those kinds of questions were made.

  • Report this Comment On April 19, 2013, at 12:42 PM, chris293 wrote:

    Did not PetroEcuador take over the assets and liabilities of Texaco in 2001 in Ecuador. If Ecuador gave away Texaco's interests (assets) to PetroEcuador, what did Chevron ever gain in Ecuador. No assets, no liabilities seems a proper solution to this case at least with the information presented so far.

    Question, were there any contracts between the three oil companies or Ecuador?

  • Report this Comment On April 21, 2013, at 8:12 PM, valari25 wrote:

    In both cases (Union Carbide and Texaco) deals were agreed to by those in charge of making the deals. The legal wrangling is over in India and I would think Ecuador will play out the same way.

    The only difference seems to be that Ecuador is ok with being just openly, blatantly corrupt and greedy while India prefers a more subtle form of corruption and greed.

  • Report this Comment On April 23, 2013, at 5:18 PM, TMFBoomer wrote:

    @ chris293

    PetroEcuador took over operations back in the early 1990s. Some of the damage to the environment and Ecuadorian villages was probably done post-Chevron's involvement. However, the (plaintiffs) contend that the settlement to address the damage done in the early days, by Chevron, was not enough.

    If you haven't yet, take a look at the interviews that present both sides of the case in the links above. They should provide some clarity as to why it's not as cut-and-dry as "no assets, no liabilities". Also, keep in mind this is a case that has been in flux for years. Despite the fact the damage was caused nearly a half-century ago, the parties disagree on what should have been done and what clean-up still needs to take place. What we need is a more evidence-based presentation of the damages and a candid discussion to reach a resolution. Instead, the legal battle seems to have pushed both parties further and further from this optimal resolution. Court cases tend to do that, and this Ecuadorian trial is a prime example. It's disappointing for those affected by the spill. As investors, we have to filter through the information, assess whether the risk of a potential negative outcome is acceptable for our portfolio, and vote with our wallet - or perhaps through a proxy. I highly suggest you give the interviews a listen if you're interested in learning more about this case. Fool on!

    Isaac

    TMFBoomer

  • Report this Comment On April 25, 2013, at 11:58 AM, ikkyu2 wrote:

    Ecuador needs money; that is the only clear fact. PetroEcuador has been far more irresponsible than Texaco ever was, overseeing 1000 spills in the Amazon basin with essentially no cleanup efforts; the Ecuadorian government has not sued PetroEcuador because they *are* PetroEcuador.

    And, in fact, in 2008 Ecuador nationalized all oil reserves, a taking. If I used eminent domain to acquire a leaking sports car, I would be liable for the spot that car left on your driveway; Ecuador, however, has attempted to shirk responsibility.

    Trying to get $18 Billion out of a company that never had operations in Ecuador and has none today amounts to an act of war, in my opinion. The piteous state of the indigenous peoples of the Amazon basin is tragic, but it is not CVX's fault and CVX ought to defend themselves most diligently against plaintiffs who have proven themselves fraudulent and dishonest time and time again.

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