Chevron's Side of the Ecuadorian Legal Battle

Since acquiring Texaco in 2001, Chevron (CVX 0.44%) has been embroiled in a legal battle related to Texaco's operations in Ecuador in the 1960s. The Fool discussed the background of the case, which revolves around environmental contamination due to an oil spill, in the article, "Exclusive Fool Interview: A Look at Both Sides of Chevron's Nightmare Legal Battle." To learn firsthand how this case has evolved and where it stands today, we conducted interviews with both parties to the case -- plaintiffs and defendants. The following interview took place on Feb. 12, 2013 with defendants from Chevron. 

James Early (The Motley Fool): Hi, I'm James Early, and as you likely know, Chevron is an Income Investor recommendation that's been embroiled in a drawn-out legal battle over pollution in Ecuador caused by Texaco, which Chevron bought in 2001. We recently heard from Graham Erion, an attorney for the Ecuadorian plaintiffs, and this month we're joined by Kent Robertson and Jeff Gustafson from Chevron. Kent is a litigation public affairs manager and Jeff is the general manager of Chevron's investor relations department. Guys, thanks very much for joining us today.

Kent and Jeff: Pleasure, James. Thank you.

James: OK, let's start with what both sides agree on here, and that is that this is a huge and fairly messy case. So this first question might actually be the hardest. For someone minimally familiar with the case at large, how would you summarize the key issues?

Kent Robertson (Chevron): Well, this is Kent. I would start with the historical background. Texaco operated in Ecuador for a time in a joint partnership with Ecuador's state-owned oil company, Petroecuador. Texaco's involvement in the operations ended in the early '90s. Oil operations have continued to this very day in the region. The intensity of the operations has more than doubled over that time period. Parallel with this time period, there has been litigation that was first brought against Texaco in the United States. Ultimately, that was dismissed. And after the Chevron/Texaco transaction, Chevron was sued in Ecuador over claims of damages to public lands.

We've had an extensive amount of litigation on this issue, and there are two almost mirror images of the outcomes of those litigations so far, as your readers and listeners probably know. There is a judgment against Chevron coming out of courts in Ecuador. Courts outside of Ecuador have seen the dispute a little differently. In the United States, there have been seven different federal judges that have made fraud findings related to the plaintiffs' conduct in the case, and over the course of legal activities in the United States, Chevron has amassed a mountain of evidence demonstrating that the trial in Ecuador has been tainted by the plaintiffs' misconduct from the very beginning.

James: So Ecuador scores fairly poorly on corruption measures, and I think the average person listening might understand or might well believe that there could be corruption perhaps on both sides even. But either way, if as you mentioned, the plaintiffs first brought suit in the U.S., the plaintiffs' attorney says that Chevron pushed to have the case moved to Ecuador. Why would Chevron do that?

Kent: Well, first off, recall that Chevron wasn't involved in the initial litigation; Texaco was the defendant. Texaco argued that the personal injury and personal damages claims that were brought in the United States were better heard in Ecuador. That's where the plaintiffs were, that's where the evidence is, and that's where people exist that have firsthand knowledge of the regulations that governed the operations. A number of federal judges who looked at the issue in the United States agreed with that. They said this has nothing to do with the United States; this has everything to do with Ecuador. Plaintiffs, take your case to Ecuador. It was dismissed.

What was ultimately filed against Chevron in 2003 was a completely different lawsuit. The personal injury/personal damages claims disappeared and it became this kind of murky collective action for damages to public lands. Not long after the lawsuit was filed in 2003, the current president in Ecuador was facing an impeachment proceeding, and as a defensive measure, he essentially liquidated Ecuador's Supreme Court, so for several years in Ecuador, there was no Supreme Court at all and that kind of marked the beginning of the end for any sort of judicial reforms that were under way in Ecuador. It has been well documented since then: Ecuador's judiciary has become increasingly politicized, and so too has our case.

James: What would you guys say are some of the key barriers or key reasons you didn't get a fair trial in terms of the fraud? What are kind of the key elements?

Kent: Get ready -- there are a lot of them. It goes as far back as the very beginning of the trial, what we've learned over the course of the last two years and through discovery in the United States, the plaintiffs' lawyers were manufacturing expert reports from the very outset. One of their lead consultants testified under oath that reports filed in his name did not reflect his findings, did not reflect his conclusions, and had been fabricated with full knowledge of the plaintiffs' lawyers.

So that's a pretty shaky foundation to begin litigation on, and you just move forward from there. We know that at least one judge was blackmailed by the plaintiffs' lawyers. We know that a court expert has been bribed. We know that the plaintiffs' representatives have ghostwritten allegedly independent reports that were submitted to the court. And even the judgment itself reflects proprietary plaintiff information and data that wasn't part of the court record. We have not seen a plausible explanation from the other side yet, how their private files ended up in the court's judgment.

James: And this came out in the discovery?

Kent: This came out in the discovery -- you're absolutely right. All of that conduct is what leads us to having filed a fraud and racketeering case in New York, trying to hold the plaintiffs' lawyers accountable for their misconduct.

James: So a typical person just seeing the news might see some articles -- there have been some recently -- about Chevron's scorched-earth legal tactics, if you will. You guys are saying that's necessary because of this embedded corruption or fraud.

Kent: You know, James, the people who characterize it as "scorched earth" are the people whose fraud is being exposed. I would certainly hope that our stakeholders view it as an appropriate response to a $19 billion fraud.

James: In terms of the contamination evidence, there are positions on both sides saying their expert witnesses are not good or so-and-so contaminated the evidence. If you guys, if Texaco did pollute, did not line the waste pits, what is sort of official acknowledgment or official position from Chevron on what the worst of the environmental damage is vs. what is claimed by the plaintiffs?

Kent: I would caution you from putting too much stock in some of the assertions about the technology that was employed. It's undeniable that there are impacts with any industrial operation, oil operations included. Obviously, there were impacts in Ecuador; Texaco agreed to a remediation. The work that Texaco did was successful, scientifically documented by independent experts working for the Republic of Ecuador, and Texaco was granted a full release.

There has been a considerable amount of activity in the region subsequent to Texaco's departure on the part of Petroecuador. They have an abysmal environmental record. Anybody going to this region of Ecuador, if they look hard enough, they can find impacts. Texaco hasn't been there for more than 20 years now. If you see fresh oil on the ground, it's just common sense tells you that Texaco didn't put that there.

But let's take one step back and apply a little more common sense to this as well. If there really was any merit to the plaintiffs' claims, they wouldn't need to be doctoring evidence, manufacturing evidence, fabricating reports from the very beginning of the trial. That's not what lawyers with a winning case do.

James: Interesting. Just step back a little bit more here, so I think a crux issue for many readers and many listeners is they see all this and it certainly looks messy. They might wonder, in the sense of being a good neighbor, or like a lot of companies these days, adhering to SRI -- socially responsible investing, which entails trying to help the world or going above and beyond the law. So, Chevron's position here, they might not see Chevron as appearing to be big-hearted, based on what they've read in the media. But Chevron's position, it sounds like you're stating very clearly, is that the remediation was accurate, was adequate. It was enough. It's not like Chevron would be more sympathetic were this not in a legal battle. You feel it's done with.

Kent: I think I understand where you're headed. Chevron has always been open to a constructive dialog, has been open to constructive resolution. The challenge has been figuring out how to advance something like that. And what it really kind of boils down to is an honest conversation about the conditions in the region.

The primary problem in this region of Ecuador really isn't all that different than other parts of Ecuador. It's a lack of adequate infrastructure. You've got hundreds of thousands of people living in the region, and you have no sewage treatment plants anywhere. Some of the cities have water treatment for drinking water supply, so the water that is consumed by residents is moderately clean. But anything that is kind of, pardon the phrase, coming out the back end just goes back into the rivers untreated and flows downstream for the next village to enjoy. And that really is the primary problem.

Chevron is in a position to help. The litigation is a barrier to that assistance, and the government of Ecuador's intransigence is a problem as well. The government is in a position to partner in some sort of solution, but right now they've been quite outspoken in their support for the litigation. There's been at least one representative of the government that's said that the government expects to capture 90% of any award that ultimately goes against Chevron.

James: Wow. So you're actually saying that Chevron would be open to doing things differently if the whole situation were different and weren't like it is now?

Kent: It's not a matter of doing things differently. Our position is that Texaco was a responsible operator, and its departure from Ecuador was the way it should have been done. The question becomes what are the real challenges that face people in the region? It's a lack of access to medicine, health care, clean drinking water, things that we take for granted here but are a challenge in many places in Ecuador and, frankly, many places around the world, with or without oil being in the equation.

James: So, let's shift to the legal stuff itself. We have the $19 billion suit coming out of Ecuador. We have now some plaintiff-favorable suits in Argentina and Brazil. The plaintiffs are working in Canada, yet you've pointed out that, in different communications, that the plaintiffs aren't going after Chevron in the U.S. Can you explain that a little bit more?

Kent: Happy to. For years, the plaintiffs promised anyone who would listen that as soon as they had a judgment, they were going to be bringing it back to the United States to enforce it here. And soon as U.S. courts really started figuring out what the plaintiffs' lawyers were up to and started making fraud findings, the plaintiffs' appetite for enforcement in the United States disappeared.

So now, as you mentioned, they are pursuing enforcement outside of the U.S. We are prepared to oppose enforcement, primarily on the basis of jurisdiction. What happened in a trial in Ecuador linked to Texaco's activities from the '70s, '80s, and '90s really has no bearing on Chevron's operations in Brazil, for instance. And the plaintiffs are actually having a hard time getting their enforcement to take root, getting Brazil to the forefront, for instance. They filed that enforcement action six or seven months ago, and we have yet to be served with that enforcement action because Chevron Corporation does not exist in Brazil, so they're going through a diplomatic process now to bring the claim back to the United States, and it just demonstrates how frankly ridiculous it is for all this activity to be occurring outside of the United States when Chevron Corporation resides here and we're more than happy to litigate that issue in the U.S. Now, of course, the plaintiffs have to overcome a number of fraud findings and are getting confronted by evidence of their misconduct, but that's the bed they made and they need to sleep in it.

James: In terms of the next legal steps, you guys are moving forward with international arbitration, is that correct?

Kent: That's correct. We filed a claim against the Republic of Ecuador in 2009. A good way to kind of synthesize what's going on there, the first half of the arbitration claim, it seeks to enforce contracts that were signed by the Republic of Ecuador in 1995 and 1998, basically settlement and release agreements that led to Texaco's remediation work as well as the ultimate release Texaco received. And then the other half of the claim is the denial of justice claim. We're asking an international tribunal to look at the denial of due process and the overall breakdown of Ecuador's judiciary.

James: Let's shift to an investing perspective now. The plaintiffs and frankly a number of other people in the investment community feel that Chevron downplayed or didn't emphasize enough the magnitude of this legal risk overall. What's your response to that?

Jeff Gustafson (Chevron): I'll take that one. This is Jeff. So we have provided all the necessary disclosures under securities laws related to the case. So, if you'll look at our publicly available filings, our 10-Q, 10-K filings going back a number of years, we provided a full, very lengthy disclosure, which has grown over time, and we're constantly reviewing that and constantly adding to that as needed.

We also talked very openly, like we are right now, about the case. Public forums such as this on earnings calls going up to some of our top executives. So we're very open in addressing any investor concerns related to the Ecuador litigation.

James: Guys, in terms of reserving, though, from an accounting sense, what was your stance on that, your thinking behind that?

Jeff: So, per the accounting requirements around loss contingencies, such a loss has to be probable. In other words, more likely than not, and it also has to be estimable. These are rules that have been set in stone for quite some time. We don't think that either of those applies here, for one on the probability, as Kent has described, we don't see any fault on Chevron's behalf in this case.

The whole litigation itself is tainted with fraud, which has been found in a number of different jurisdictions, and we have no intention to settle the case. We haven't reserved anything physically to settle the case. We're not holding on to cash unnecessarily in case there's a need for that in this case. So there's no intent for us to settle, so per the accounting standards, there's no need for us to accrue or to reserve for anything in our books.

James: But if your assets get seized to some degree, that's obviously a loss that shareholders would experience.

Jeff: So, we don't have any assets in Ecuador, but we would take those on a case-by-case basis. So, of course, we're aware of the fact, and we've made our investors aware of the fact, that we have met the plaintiffs, are trying to enforce judgment in some of these other jurisdictions, and we're, as Kent said, fighting each of those one by one.

So, in each of those, we would take a look at those assets in the country and see if there was a risk of an impairment of the value of those assets, which we currently have on the balance sheet. So far, this all goes back to the actual case in Ecuador, and as Kent said, any jurisdiction out there that respects the rule of law, we think will find in our favor, so there's really no need for us to reserve for anything in those other jurisdictions as well.

James: I guess, just thinking aloud, it could be argued that your stock price didn't really move a lot when this verdict was announced. Disclosure or not, the investment community had priced something in either way. Looking forward, how would you assess, if I'm sort of an agnostic investor who really doesn't align himself or herself with either side here, just says, "OK, I just want to kind of think about the financial ramifications, regardless of the ethics, regardless of fraud or no fraud, I'm just all about the money. If that's somebody listening today, how would you assess the pure financial impact in the future? Obviously, there are assets that could be seized in these nations; some of the recent court battles have not gone in Chevron's favor. Is this something that could impact investors further?

Jeff: I guess I'd go back to the root argument in the case, that we think it's a fraudulent judgment. We have no intention of settling it. We have no plans to settle it. Of course, there is a cost incurred in going through the litigation, not only in Ecuador but in these other jurisdictions. That's something that we're very open about. We continue to disclose all available information, regardless of whether we've reserved anything on the books. You can read through the disclosures in our Q and K. You can always call me or other members of our investor relations group. Executives are always open to respond to inquiries from investors, so we're being transparent about what we're facing here.

But going back to the other aspect of booking, of a contingent loss, it's not possible for us to estimate what the outcome will be here. We don't think this will be a financial detriment to the company at large, and I think the investment community has seen that over the past five- and 10-year periods, and this lawsuit, as you know, goes back well beyond that. All the way back to the Texaco acquisition. We've led the peer group in total shareholder return across both those time periods, five and 10 years, and almost every time period in between.

James: It's certainly been a good returning stock on our Income Investor's scorecard too, I can say that.

Kent: This is Kent. There are kind of third-party voices out here that do bring some credibility to the debate that I think should be notable for investors. If you look at what has come out of any number of courts in the United States, the western district of North Carolina maybe put it best when they said that, While this court is unfamiliar with the practices of the Ecuador judicial system, the court must believe that the concept of fraud is universal, and that what has blatantly occurred in this matter would be in fact considered fraud by any court. If such conduct does not amount to fraud in a particular country, then that country has larger problems than an oil spill. That was a federal judge. Who better to pass judgment on what has transpired here? And that's just one of seven fraud findings that have come from seven different federal courts in the United States. I think that that really should not be lost in how people are viewing the dispute.

James: Gotcha. Just starting to wrap up here, I read in a December New York Times article that 40 shareholders managing I think it was $580 billion in total assets, wanted to meet with Chevron to talk about this, but Chevron refused to talk to them. Is that true, first of all, and what would the logic be there?

Kent: I'm not entirely sure that that's entirely accurate. I've seen that a couple of times from the plaintiffs' camp, which is kind of an interesting origin for claims like that to come from. I think, James, you might want to be a little careful with the numbers and how this stuff is being characterized.

James: Yeah, just to be clear, again, it's from The New York Times; it's not my number. I haven't talked to anyone. I'm just asking you guys if that's true.

Kent: We see these things said and we see these things put out in press releases. You may want to take a grain of salt with that.

James: So, in theory, if these guys wanted to meet with you, you actually would?

Kent: We've met with any number of stakeholders specific to the Ecuador case. In some instances, people who have come to us wanting to meet are actually in the employ of the plaintiffs. They didn't disclose that, even when we were meeting with them. We have to evaluate these things on a case-by-case basis and do our due diligence.

There are people out there who have legitimate concerns and we're happy to have conversations with them, but I'm just a little hesitant with these kinds of broad claims, giving you kind of a flat response, because it's a complicated issue and that not always people are coming to the issue with the clearest of intentions.

Jeff: And like I said, James, this is Jeff again -- we do speak to our investment base regularly about this issue. And if anyone called and wanted to talk about it or sent a request to the investor relations department here and wanted to discuss it, we'd be happy to do that. We do that regularly with much larger shareholders than the ones that you mentioned here just recently.

James: I see, gotcha. OK, so if I'm listening and I want to learn more from you guys about these allegations of fraud, about what your stance has been throughout this, would Chevron.com be the best place for me to go?

[Unclear, Chevron]: I'd recommend people to visit Chevron.com/Ecuador or another website that we maintain called TheAmazonPost.com.

James: Excellent. It's a big issue, guys, and we know it's obviously a difficult issue, so I certainly thank you both very much for your time today, for taking the time to explain and talk about this with our members. Thanks a lot.

Jeff and Kent: Sure, James. Thank you.