On July 10, 2009, the Alaska Electrical Pension Fund (“Fund”) filed a class action in the U.S. District Court for the Southern District of New York against the Kerr-McGee Corporation (“Kerr-McGee”) and several of its officers and directors. (See Complaint, Alaska Electrical Pension Fund v. Kerr-McGee Corp., 2009 Civ. 6220 (S.D.N.Y. July 10, 2009).)
The Fund alleges that Kerr-McGee made false and misleading statements in a public offering incident to the spin-off of Tronox Corporation (“Tronox”), which at the time of the offering was a wholly-owned subsidiary of Kerr-McGee. (Id. at 5.) The registration statement for Tronox stated:
As of September 30, 2005, our financial reserves for all active and inactive sites totaled $239.4 million, $160.6 million of which are classified as noncurrent liabilities. We believe we have reserved adequately for the reasonably estimable costs of known environmental contingencies. However, additional reserves may be required in the future due to the previously noted uncertainties.
The complaint alleges that: (1) Kerr-McGee knew these estimates materially underestimated actual environmental liability because an internal investigation had determined that Tronox’s environmental liabilities were at least $400 million and perhaps as high as $900 million; (2) Kerr-McGee purposefully chose not to reveal these estimates to investors, thereby allowing Kerr-McGee to profit significantly from Tronox’s inflated stock price; and (3) Tronox operated as an independent company for only a short period before earnings losses due to negative environmental assessments caused stock prices to plummet. Tronox filed for bankruptcy in January 2009.
Lawsuits of this type are likely to become more common in tough economic times, as environmental costs contribute (or are perceived to contribute) to declines in stock price. Great care is necessary to accurately disclose environmental risks in public offerings and to make such disclosure consistent with internal assessments so that disclosure cannot be second-guessed with the benefit of 20-20 hindsight.
- Read more about issues of failure to disclose climate risk in corporate filings
