Multiple cities and counties along the California Coast are suing big oil companies over their role in climate change. Because global warming is raising sea levels, the local governments contend that they will face staggering costs from flooding and/or from measures they will have to take to prevent flooding. To anyone worried about climate change, these fears may seem reasonable, but there is one big fly in the ointment:  when some of these same local governments issued municipal bonds, they did not disclose the rising sea level risk to investors – at least not in the same terms used in their complaints.

Saying one thing to a trial court and another thing to bond investors is a potential violation of Section 17(a) of the Securities Act of 1933, which states in part:

It shall be unlawful for any person in the offer or sale of any securities … to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact…

This law applies both to private sector and public sector securities issuers, and in recent years, the SEC has used it against municipal bond issuers numerous times in the last decade. As I told attendees at a recent Pepperdine School of Public Policy forum on this issue, SEC actions against municipal bond issuers have included complaints against:

The local governments suing big oil are following a model that worked well for state litigants in the 1990s. Back then, state attorneys general reached a settlement with tobacco companies, resolving litigation over their responsibility for extra Medicaid costs. The settlement obliged big tobacco to pay the states billions of dollars annually. To date, big tobacco has paid state plaintiffs a total of more than $100 billion, although annual payments are starting to fall off as smoking rates decline.

If coastal cities and counties can make the case that oil companies are responsible for sea level rise and that this phenomenon will impose large costs, they can repeat the states’ success against tobacco companies.  After all, both oil and tobacco companies, have lots of money and everyone loves to hate them! Further as my co-panelists at Pepperdine pointed out, attorneys are taking their cases on a contingency basis, so the participating cities and counties don’t have to pay legal fees upfront.

But this case is far from a slam dunk for the plaintiffs or their attorneys. Even if we assume that climate change will generate catastrophic impacts, the local government plaintiffs will still have a significant challenge because big oil companies are not solely responsible for climate change. As Professor Anthony Caso told the audience, most greenhouse gas emissions come from other sources including coal as well as oil burned in developing countries, like China, India and Russia, where the major Western oil companies are not a factor.

Francis Menton, the Manhattan Contrarian predicted that the litigation will stretch out over a long period of time, especially in light of Exxon’s recent filing in a Fort Worth, Texas court. The Exxon petition, which requests the right to depose plaintiffs’ attorneys. will not only lengthen the process, but will also give the oil giant a chance to debate climate science in a more friendly venue.

But at some point, plaintiff’s attorneys will have to explain the glaring discrepancies between their court filings and their clients’ municipal bond offering materials. Here is one example of those stark differences (taken from a recent post by Marlo Lewis Jr. at the Competitive Enterprise Institute).

San Mateo’s complaint against ExxonMobil claimed that the county is “particularly vulnerable to sea level rise,” which could “inundate thousands of acres of County land, breach flood protection infrastructure, and swamp San Francisco International Airport (located within the County), among other impacts.” It further stated that, [T]here is a 93% chance that the County experiences a devastating three-foot flood before the year 2050, and a 50% chance that such a flood occurs before 2030. Average sea level rise along the County’s shores are expected to rise by almost three feet by the year 2100, causing multiple, predictable impacts, and exacerbating the impacts of extreme events.”

Yet nearly all of the disclosures San Mateo provided to investors in bond offerings “contain no reference to the risk of rising sea levels.” In the few instances when that topic is mentioned, San Mateo disclaimed any ability to predict whether sea level rise would occur or the costs it might entail. Rather, San Mateo told bidders on bond offerings:

The County is unable to predict whether sea-level rise or other impacts of climate change or flooding from a major storm will occur, when they may occur, and if any such events occur, whether they will have a material adverse effect on the business operations or financial condition of the County and the local economy.

So, while city and county officials may have high hopes for a windfall award or settlement from oil companies, they shouldn’t count – let alone commit – they new money quite yet. They may also have to field some calls from the SEC asking why they failed to share their worst climate fears with investors.


Marc Joffe is a Senior Policy Analyst at the Reason Foundation.  He would like to thank Pete Peterson Dean of the Pepperdine School of Public Policy for organizing the event and Dr. Michael Shires, Associate Professor of Public Policy at Pepperdine, for moderating.