By Neil King, Jr., The Wall Street Journal
8 April 2009
Big public pension funds are raising concerns about an impending court judgment that could hold Chevron Corp. liable for billions of dollars in alleged environmental damages in the Ecuadorian jungle.
The funds, which together hold $1 billion in Chevron shares, are worried that the oil giant could face as much as $27 billion in damages in the 15-year-old class-action case, which was filed by a U.S. law firm on behalf of thousands of indigenous Ecuadorians.
The lawsuit, being tried in the Amazonian town of Lago Agrio, alleges that Texaco polluted waterways and wells across a vast area of Ecuador by dumping billions of gallons of oil waste into leaky pits during 20 years of operations there. Chevron acquired Texaco in 2001 for about $30 billion.
The potential damages in the case, which were tallied by a court-appointed expert, could dwarf the $3.5 billion Exxon Corp. had to pay for cleanup, fines and damages after the 1989 Valdez oil spill.
Chevron has said the lawsuit is baseless, and has attacked the assessment of its potential damages as flawed.
The long legal fight has spilled over into Washington. Chevron is pushing the U.S. Trade Representative's office to strip Ecuador of a range of trade preferences. It says the Ecuadorian government and state-owned oil company PetroEcuador haven't lived up to agreements indemnifying Chevron against future liabilities in the case. The USTR hasn't acted on Chevron's requests, the most recent of which came in a letter last month.
Eric Bloom, a lawyer who represents Ecuador in Washington, dismisses the Chevron petitions as "an attempt to use political muscle to shut down a legal case."
Others have urged the trade agency to stay out of the matter, including then-Sen. Barack Obama, who wrote a letter to the Bush administration in 2006 saying the Ecuadorian plaintiffs "deserve their day in court."
President Obama is a former Harvard Law School classmate of Steven Donziger, the top U.S. plaintiffs' lawyer in the case. Mr. Donziger says the letter was written after he brought the case to Mr. Obama's attention. The White House didn't immediately respond to a request for comment.
The public-employee pension funds of New York City, as well as those of the states of New York, Maryland and Pennsylvania have asked company directors to clarify how Chevron planned to protect itself in the event of an unfavorable verdict in the case.
Maryland Comptroller Peter Franchot said in his letter to Chevron that the Maryland pension system was "particularly concerned that a potential liability in Ecuador...represents a significant threat to shareholder value." The New York City Comptrollers office recently urged Chevron to consider a settlement.
"This is an epic case," says Sean Hecht, director of the University of California at Los Angeles's Environmental Law Center. "The sheer size of the money involved also explains why a company like Chevron will continue to fight this as long as possible."
In a filing with the Securities and Exchange Commission, Chevron had sought to omit any mention of the pension funds' concerns about the case from its proxy statements for this year's annual meeting. Late last month, however, the SEC overruled that request. Chevron now must put those concerns before its shareholders at the May 26 meeting.
The original lawsuit in the case was filed against Texaco in 1993 in New York federal court by plaintiffs led by the Philadelphia-based law firm of Kohn Swift & Graf. Mr. Donziger, with funding from the firm, has worked on the case for more than 15 years.
A New York judge eventually ruled in 2002 that the case should be tried in Ecuador.
The current case was filed in the town of Lago Agrio six years later, this time against Texaco's new owner, Chevron. A judge is expected to rule on the case in coming months.
Chevron disputes the lawsuit's allegations, saying Texaco spent $40 million on government-approved clean-up work before pulling out of Ecuador in 1998. The San Ramon, Calif.-based company blames PetroEcuador, which took over Texaco's wells in 1990, for a range of environmental damages in the area since then.
Mr. Bloom, who also represents PetroEcuador, says the issue in the case is what happened when Texaco was the main operator, not what has happened subsequently.
Chevron has blasted the court-ordered estimate of its potential damages, filed in November, calling it the "result of fraud, gross errors and conflict of interest." The $27 billion figure, which includes $9.5 billion for unidentified cancer victims and $8.4 billion for alleged "unjust enrichment," would top Chevron's total profits last year of $24 billion. Chevron says that Texaco's profit from its years in Ecuador was $490 million, while the plaintiffs say the company made closer to $30 billion.