Industry in the crosshairs
State and national officials take aim at energy sector
BRANDT LEIBE, KING & SPALDING LLP, HOUSTON,
WILLIAM S. MCCLINTOCK, KING & SPALDING LLP, ATLANTA
THE ENERGY SECTOR plays a unique and highly visible role in the national and global economies. As a result, energy companies have found themselves at the forefront of several emerging trends in federal and state government enforcement. Recent investigations by state attorneys general into climate change-related securities disclosures, a growing federal emphasis on social and political issues in the securities disclosures sphere, and recent anti-corruption trends all present significant challenges for energy companies and their legal counsel.
On Dec. 17, 2015, King & Spalding LLP hosted an energy forum in Houston to discuss these trends and recommendations for how energy companies should respond to them. The panelists included former Wisconsin Attorney General J.B. Van Hollen, as well as King & Spalding partners Christopher Wray, Dixie Johnson, Jeff Stein, and Brandt Leibe. This article summarizes and distills the key takeaways from that discussion.
STATES: THE IMPORTANCE OF BEING PROACTIVE
In late 2015, New York Attorney General Eric Schneiderman garnered public attention based on his investigations into the disclosures of two energy companies related to climate change. On Wednesday, Nov. 4, Schneiderman's office issued a subpoena to Exxon Mobil, requesting documents that address the company's research into climate change and the effect it could have on the company's business. Several days later, prominent coal company Peabody Energy announced that it had settled Schneiderman's two-year investigation into the company and had agreed to make more comprehensive disclosures about the financial risks to its business associated with climate change.
Although investigations into such disclosures may sound benign, the laws under which those investigations have been pursued allow state AGs like Schneiderman considerable discretion to take enforcement action against other companies. The Exxon and Peabody investigations were pursued under a New York anti-fraud law called the Martin Act. Unlike the federal securities fraud laws, the Martin Act and several other state anti-fraud statutes require no proof of scienter - or intent to defraud - considerably easing the burden on the state enforcement authorities to prove violations and leaving companies targeted by investigations without many usual defenses.
The Exxon and Peabody investigations serve as illustrative examples of the changing role of state attorney general investigations under these laws. In recent years, state AGs have significantly enhanced their investigative and enforcement efforts, and have increasingly focused on issues at the center of prominent public policy debates. As explained by Attorney General Van Hollen, since most state AGs are elected politicians, their behavior is inevitably influenced by political considerations. Accordingly, some state AGs have responded to public pressure encouraging them to tackle high-profile policy issues like climate change with enforcement actions.
To prepare for potential investigations launched by state AGs, energy companies should engage with state AGs to develop positive relationships before they are under in investigation. Attorney General Van Hollen suggested that companies have not historically been proactive enough in affirmatively developing positive rapports with state AGs' offices prior to investigations beginning. Companies that cultivate relationships with state AGs' offices and develop reputations for cooperativeness and forthrightness are better positioned to engage with state AGs when issues arise and are more likely to resolve potential investigations without formal demands for documents or enforcement actions.
In a similar vein, Chris Wray added that many energy companies will be "repeat players" in that they will interact with government enforcement agencies on a variety of matters over the course of time. As a result, the reputation a company develops with state AGs (and other enforcement agencies) could affect the authorities' perceptions of the company and their actions toward the company for years to come.
If a company develops a positive relationship with state AGs before problems arise, the AGs will be far more likely to give the company the benefit of the doubt and to handle matters involving the company amicably - picking up the phone to have an informal discussion instead of firing off a subpoena and launching a formal investigation.
A GROWING FOCUS ON SOCIAL AND POLITICAL ISSUES
Beyond the specific examples of state AGs' investigations, broader trends in the securities disclosure arena also have affected energy companies. On the federal level, the approach of the Securities and Exchange Commission to the disclosures it requires public companies to make has evolved over time to emphasize disclosure of different types of information. Initially, the SEC's requirements focused on market integrity and the financial protection of investors; during this period, disclosures related primarily to corporate structure, expenditures, and operations. As the SEC's expectations evolved, it required companies to disclose prospective "trends and uncertainties" that management believed could affect the company's business.
In recent years, the disclosure emphasis has shifted to a "specific risk" paradigm. Under this approach, the SEC identifies specific risks, usually in connection to particular public crises or policy issues (e.g., prominent cybersecurity breaches, the 2008-2009 financial crisis, and the climate change debate) and requests that companies make disclosures addressing those issues. Most recently, the SEC has requested disclosures about executive-employee pay ratios, the use of "conflict minerals," and other prominent political issues.
The increasing use of securities disclosure requirements to force companies to address issues beyond financial fundamentals has complicated disclosure decisions for public companies. Companies trying to stay ahead of the curve and avoid future enforcement action based on perceived deficiencies in their disclosures must look not just to the SEC's sometimes slow and lagging rulemaking process but also to other indicators to understand the state of the art in disclosure. The panelists recommended that energy companies monitor what industry peers are disclosing in their filings, the types of disclosures required by settlement agreements entered into by the SEC in its enforcement capacity, and the types of disclosures required by state AGs in disclosure-related enforcement actions.
ANTI-CORRUPTION ENFORCEMENT TRENDS
Many energy companies have personnel and operations outside the United States, and are therefore subject to scrutiny under the Foreign Corrupt Practices Act and other anti-corruption statutes. Wray explained that the terms of FCPA settlements are increasingly being used to set forth the government's expectations for corporate anti-corruption compliance efforts. He encouraged energy companies to monitor settlements within their own industry, both to learn what the government expects from similarly situated companies and to identify areas where they should consider improving their compliance efforts. Wray also noted that many foreign governments, observing the success and influence of the FCPA enforcement in the United States, have significantly enhanced their own anti-corruption laws and enforcement regimes. While the rise in international anti-corruption enforcement means that more companies are subject to anti-corruption laws that may be similar to the FCPA - leveling the playing field in some ways - it has also further complicated the efforts of companies subject to the FCPA to comply with the growing number of laws that may apply to them.
The SEC exercises independent enforcement authority over the FCPA, and Dixie Johnson noted that the SEC announced in November 2015 that companies that do not affirmatively report potential FCPA violations in advance of any government investigation will be ineligible for more lenient types of settlements (non-prosecution agreements or deferred prosecution agreements), giving public companies an additional incentive to identify and self-report potential FCPA violations to US enforcement authorities.
CONCLUSION
Enforcement scrutiny of energy companies is unlikely to subside in the foreseeable future, and the Dec. 17 panelists encouraged energy companies to proactively adapt to emerging trends. To navigate the increasingly complex enforcement landscape, energy companies should closely monitor enforcement developments - both in the energy sector and outside of it - to stay in touch with the expectations of federal and state enforcement authorities.
An ounce of prevention is worth a pound of cure: Understanding enforcement authorities' expectations should allow energy companies to tailor their compliance programs to address emerging areas of enforcement interest, allowing them to prevent problems before they arise and remedy issues quickly when they do occur. When there are problems, having an established, positive relationship with the relevant enforcement authorities - a relationship in which the authorities believe that the company operates in good faith and is willing to work cooperatively - will pay dividends and could prevent a minor issue from blossoming into a major investigation.
ABOUT THE AUTHORS
Brandt Leibe is a partner in King & Spalding's Special Matters and Government Investigations Practice Group in the firm's Houston office. He has extensive experience representing and advising energy sector companies in connection with FCPA matters and other types of government investigations. Prior to joining the firm, Leibe served as a law clerk to Justice Clarence Thomas of the United States Supreme Court.
William S. McClintock is an associate in King & Spalding's Special Matters and Government Investigations Practice Group in Atlanta, Ga. His practice focuses on government investigations, white-collar criminal defense, and related civil litigation.