Long-time readers know that I have a particular interest in the SEC whistleblower program. I have been interested in it since it was first put into effect now almost ten years ago. One reason I was interested in it from the very outset is that I thought that a pattern might emerge in which whistleblowers submitted their reports to the SEC, the SEC launched an investigation or enforcement action, and then company shareholders filed related securities class action lawsuits based on the circumstances revealed in the whistleblower’s report.


By and large, the third step in this anticipated pattern has not emerged. As far as I am aware, there have not been private securities suits filed after SEC whistleblower reports triggered SEC investigation or enforcement actions – until now, that is. On January 28, 2021, a plaintiff shareholder filed a securities class action against Exxon Mobil relating to news reports that the SEC has launched an investigation of the company based on whistleblower reports questioning the company’s asset valuations of its Permian basin oil fields. A copy of the plaintiff’s complaint can be found here.


The Lawsuit

On January 28, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of Texas against Exxon Mobil and certain of its officers. The complaint purports to be filed on behalf of investors who purchased Exxon Mobil securities between November 6, 2019 and January 14, 2021. The plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.


The complaint refers briefly to the company’s various filings with the SEC during the class period. However, the centerpiece of the complaint is the January 15, 2021 Wall Street Journal article entitled “Exxon Draws SEC Prove Over Permian Basin Asset Valuation” (here). The article reported that the SEC had launched an investigation of the company “after an employee filed a whistleblower complaint last fall alleging that the energy giant overvalued one of its most important oil and gas properties.”


The article goes on to report that “several people involved in valuing a key asset in the Permian Basin, currently the highest-producing oil field, complained during an internal assessment in 2019 that employees were being forced to use unrealistic assumptions about how quickly the company could drill wells there to arrive at a higher value, according to a copy of the complaint, which was reviewed by the Wall Street Journal.” The article also reports that at least one person who complained was fired last year, according to a person familiar with the matter.


The article reports that the SEC began investigating the claims after receiving the complaint, adding that the current status of the investigation is unknown. The article quotes an Exxon spokesperson as saying that if asked about the 2019 assessment, Exxon would provide information that shows Exxon’s actual performance exceeded the drilling estimate.


The larger context for the Permian basin asset valuation includes March 2019 statements by Exxon CEO Darren Woods that Exxon would increase oil and gas production in the Permian basis to one million barrels a day as early as 2024, up from previous estimates of 600,000 by 2025. According to the Journal, the whistleblower alleges in the whistleblower complaint that “No one I knew in the organization thought this was possible; the pressure to deliver on Woods’s promise to the market permeated the organization.”


The key to the company ramping up production in the Permian acreage was the development of an area called the Delaware Basin. Some Exxon managers had initially put the net present value of the Delaware Basin at about $60 billion, but some employees involved in the company’s annual development planning in summer 2019 estimated the area’s net present value closer to $40 billion. The Journal reports that according to the whistleblower complaint, the lower estimate reflected in part that it took longer than expected to drill wells in 2018. The employees involved alleged were instructed to provide revised figures using “different assumptions’; one employee reportedly submitted the revised estimates in a file named “This is a Lie.” The planners ultimately estimated the net present value as $50 billion.


The securities class action complaint alleges that the statements in the company’s SEC filings concerning its asset valuations were materially false and misleading because defendants made false and/or misleading statements and/or failed to disclose that “(i) Exxon forced its employees to use unrealistic assumptions regarding the timelines for well drilling in the Permian Basin; (ii) the foregoing assumptions served to artificially inflate the value of the Company’s well operations in the Permian Basin; (iii) the foregoing conduct, when revealed, subjected Exxon to a heightened risk of regulatory investigation and oversight; and (iv) as a result, the Company’s public statements were materially false and misleading at all relevant times.”


The complaint also alleges that the company’s share price declined 4.81% after the publication of the January 15 Journal article.



As I noted at the outset, this new lawsuit against Exxon Mobil represents the first instance of which I am aware in which the allegations in an SEC whistleblower complaint resulted in a securities class action lawsuit. But while this complaint shows that it can happen that an SEC whistleblower complaint results in a securities suit, that doesn’t mean that now we are going to see a flood of these kinds of lawsuits following on SEC whistleblower complaints. For starters, there is nearly ten years of experience in which there haven’t been – as far as I am aware – any prior securities class action lawsuit based on SEC whistleblower complaint.


There is also the unusual circumstance involved here, which is that the whistleblower complaint became public while the whistleblower’s allegations are still under investigation. Although it is not entirely clear how the Journal got a copy of the whistleblower complaint, the impression from the Journal article is that the whistleblower provided the newspaper with a copy of the complaint. That is an unusual circumstance that has not been widespread with respect to prior whistleblower complaints. The whistleblower’s hope of recovering a whistleblower bounty certainly gives the whistleblower a substantial incentive to try to raise the profile of his or her whistleblower complaint, which the Journal article certainly seems to have done.


The other thing about this situation that is relevant is that while the whistleblower has filed a whistleblower complaint with the SEC, the whistleblower’s allegations are still under investigation. There is nothing that says that the whistleblower’s allegations will be substantiated or that the investigation will result in an enforcement action against the company.


Not only has the plaintiff here filed a lawsuit while the allegations are still under investigation, but the complaint has been filed based on relatively modest share price decline. The share price drop of 4.81% following the publication of the Journal article is not the sort of precipitous price drop on which the plaintiffs’ lawyer typically rely on in securities suit complaints to try to make the argument that the revelations complained of “shocked the market.” Exxon’s share price has been under pressure for many years now, based on a cascade of bad news. This share price decline is only one of many the company has experienced in recent months, for a host of reasons, as discussed in a longer Journal article in September 2020 (here).


All of that said, it still is interesting (to me, at least) that this lawsuit has arisen based on allegations in an SEC whistleblower report. This is an interesting development in the evolution of the SEC whistleblower phenomenon, and whether or not this sequence – that is, SEC whistleblower complaint then securities class action lawsuit – will become widespread will be interesting to watch. If nothing else, this development does show that it is important to watch events as they unfold, even if they unfold over years’-long time frames.