14 Va Envtl J225 Green Balance Sheet

Bagby, Murray & Andrews, How Green Was My Balance Sheet?
: Corporate Liability
And Environmental Disclosure, 14 Va. Envtl. L.J. 225 (Winter, 1995)
How Green Was My Balance Sheet?: Corporate Liability And Environmental Disclosure,
Bagby, John W., * Paula C. Murray, ** Eric T. Andrews ***
14 Va. Envtl. L.J. 225 Winter, 1995 (53271 words)
* Professor of Business Law, Penn State University.
** Associate Professor, Legal Environment of Business, Univ. of Texas at Austin.
*** Student, Duke University School of Law.
SUMMARY:
... From the beginning of modern environmental regulation, there has been controversy
over the best method to attain reasonable environmental pollution control. ... With its
broad definition of who can be included as a PRP and its draconian liability standard, the
enormous cleanup costs of CERCLA serve as a major incentive for environmental
compliance. ... Because CERCLA fails to provide a regular mechanism by which
environmental liability is disclosed to the investing public, CERCLA remains ineffective
as a market-based incentive for corporate environmental compliance. ... Once again, the
investor or stockholder looking for a particular company's environmental disclosure
information must know where to look as well as have a fairly good idea of what they are
looking for. ... The prevailing environmental disclosure regimen permits considerably
more management discretion than many other financial disclosure matters. ... In contrast,
an optional forward-looking disclosure might involve the anticipation of more stringent
environmental legislation or a forecast that an insurer will be successful in excluding
coverage of the registrant's CERCLA cleanup expenses. ... Three years later, the EITF
revisited environmental disclosure by addressing whether the registrant can reduce the
gross estimated contingent environmental liability by any related potential claim for
recovery from other responsible parties. ... Additionally, a registrant's disclosure of
environmental improprieties may encourage the assertion of environmental liability
claims as yet unasserted against the registrant. ...
I. Introduction
From the beginning of modern environmental regulation, n1 there has been controversy
over the best method to attain reasonable [*227] environmental pollution control. n2
Those groups opposing extensive regulation have predicted dire economic consequences
from the prohibitively high costs of compliance and cleanup. n3 Indeed, the cost of
environmental cleanup alone may run between an estimated $ 100 billion in 1988 n4 to
nearly $ 1 trillion in 1993. n5 The Environmental Protection Agency's (EPA) estimates of
an average $ 25 million for a typical toxic dump site cleanup suggest that the impact of
these costs on individual companies may be severe. n6 Compliance with environmental
regulation comprises an estimated 2.5% of the gross domestic product (GDP) annually or
nearly half of all [*228] the costs of government regulation. n7 If these estimates are
close to accurate, then a substantial number of publicly-traded corporations have
considerable potential environmental liabilities, most of which remain undisclosed. n8
Title I of the National Environmental Policy Act (NEPA) mandates an overarching
"national policy for the environment," obligating the federal government to:
Bagby, Murray & Andrews, How Green Was My Balance Sheet?: Corporate Liability
<XTS>[co-operate] with State and local governments, and other concerned public and
private organizations, to use all practicable means and measures ... to foster and promote
the general welfare, to create and maintain conditions under which man and nature can
exist in productive harmony, and fulfill the social, economic, and other requirements of
present and future generations of Americans. n9
<XTF>Congress directed that all policies, regulations, and public laws of the United
States be harmonized with the newly announced environmental policy. n10 Furthermore,
federal agencies must, to the fullest extent possible, systematically employ
interdisciplinary [*229] approaches to assure the integration of natural and social
sciences in environmental policy-making and implementation. n11
NEPA marked the shift from prior regulation, which was predominantly a private
remedial method based on the existing common law of torts and property (e.g., nuisance),
n12 to the beginning of a national, comprehensive environmental policy. In subsequent
major federal environmental laws n13 Congress chose a primarily command and control
regulatory method, n14 illustrated in statutes such as the Resource Conservation and
Recovery Act (RCRA). The shift to mandatory pollution standards and enforcement
mechanisms has been only partially successful, however.
Uncertain and soaring compliance costs and rampant non-attainment has prompted
experiments with market-based economic incentive approaches to assist in implementing
environmental policy. Examples of market-based incentive approaches include trading of
sulfur dioxide pollution rights authorized in the 1990 Clean Air Act (CAA) Amendments,
n15 new pollution sources offset through obtaining reductions in existing sources under
the CAA's non-attainment provisions, n16 the EPA's "bubble" concept under the CAA
that permits combining all sources of pollution at a single facility under an imaginary
regulatory "bubble," n17 and tax incen [*230] tives. n18 Furthermore, from the outset,
concerned environmental organizations have pressured various federal agencies to
implement the national environmental policy more aggressively through a number of
methods, including expansion of market-based economic incentives to encourage more
complete attainment. n19
Market-based incentives rest on the assumption that free markets operate efficiently only
when participants are fully informed. n20 Asymmetric information causes market failure
by undermining rational choice. With the "greening" of America, environmental issues
are in the forefront of most political, economic, and legal discussions. When the
frequency and extent of individual firms' polluting activities are publicly known, market
forces will pressure polluters to attain an equilibrium that balances a sustainable natural
environment with comfortable economic progress in order to capture the investment
dollars of green investors. Thus, complete disclosure of environmental liability will
provide a fully informed public, enhancing the effect of market-based incentives. To date,
such disclosures have been provided by specific environmental statutes, the EPA's
disclosure policy, and financial disclosures of publicly-traded firms.
Existing environmental legislation and the EPA's disclosure policies unfortunately serve
as inadequate market-based incentives for more complete environmental protection
because of their episodic and limited distributional framework. Financial disclosures of
environmental liabilities, on the other hand, serve as a more effective market-based
incentive because of their more regular and widespread distributional framework.
Accordingly, this Article examines how the use of greater financial disclosure of
environmental liability can more effectively achieve attainment of national environmental
policy goals. Part II examines the disclosures required under the various environmental
laws, demonstrating the virtual impossibility of widespread dissemination of the
disclosed [*231] information because of the morass of environmental regulation and the
lack of a centralized reporting center. Part III examines the use of financial statements to
disclose environmental liabilities, illustrating how such financial disclosure is more
regular and widespread and can thus achieve its role as market-based incentive for greater
environmental compliance. Part IV analyzes the way economic incentives adjust as
environmental liabilities become more widely known.
II. Disclosures Required Under Environmental Laws
Environmental statutes and the EPA's existing disclosure policies do not serve as
effective market-based incentives or encourage greater corporate environmental
compliance. While information on federal environmental compliance does reach
Securities and Exchange Commission (SEC) staff members, n21 mechanisms do not exist
for the disclosure of clear, comprehensible information to the investing public. Without
this information, market-based incentives cannot fully achieve their goal. Section A
discusses the failings of incentives for disclosure under federal environmental statutes;
Section B examines the effectiveness and potential problems with environmental
auditing, and its failure as a substitute for a comprehensive disclosure scheme.
A. Disclosure Through Existing Environmental Statutes
The economic costs of environmental cleanup and compliance are skyrocketing, n22 and
these costs will have a staggering impact on corporate America as current environmental
statutes force corporations to pay not only for the cost of the cleanup and compliance but
also for ongoing liability insurance. Indeed, corporate America is extremely worried
about the potential increased scrutiny of environmental compliance. A nationwide survey
of more than 200 corporate general counsel revealed that only thirty percent believed that
full compliance with both federal and state environmental laws was possible. n23 [*232]
Consider, for example, a hypothetical manufacturing company. Emissions from the
factory's smokestacks and other vents are regulated by the CAA; n24 their wastewater
discharges must be permitted and regularly disclosed under the Clean Water Act (CWA);
n25 disposal of the company's solid hazardous waste must comply with the requirements
of RCRA; n26 and if the storage facility to which the company sends its waste becomes a
Superfund site, the company can be named a potentially responsible party (PRP) and
become liable for cleanup costs under the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA). n27 Furthermore, the company must
publicly disclose its use of toxic chemicals under the Emergency Planning and
Community Right-to-Know Act (EPCRTKA) n28 and how it plans to reduce, reuse, or
recycle those chemicals under the Pollution Prevention Act (PPA). n29 In addition to the
cost of complying with these statutes, non-compliance with any one of these myriad
regulations can lead to administrative, civil, and criminal sanctions.
Despite these massive potential costs, most companies fail to disclose these liabilities to
their investors. n30 In fact, a February 1994 survey of investor relations professionals at
200 publicly-held corporations revealed that many of the companies planned to include
environmental information in their annual reports; only nine percent, however, indicated
that the information would be given significant attention. n31 [*233]
In an effort to scrutinize more closely disclosure by securities issuers, the EPA and the
staff of the SEC are working together to increase the flow of information between the two
agencies. The EPA regularly sends the SEC lists of those companies barred from
government contracts under the CAA n32 or the CWA n33 ; companies named as PRPs
for the cleanup of hazardous waste sites; and names of those companies involved in any
criminal or civil proceeding under federal environmental laws. n34 In spite of these
attempts to increase the flow of information between the agencies, SEC Commissioner
Richard Roberts has voiced his concern over the lack of environmental liability
disclosure on corporate financial reports. n35
Disclosure through existing environmental legislation fails as an adequate market-based
incentive for mainly two reasons. First, most disclosures only reach the regulating
agencies - such as the EPA and SEC - rather than the persons who most need to be
informed - the investing public. Moreover, when such disclosures are available to the
public, they are often difficult to obtain. Second, most disclosures are not made on a
regular basis. Accordingly, this Section examines specific environmental statutes and
how they fail as market-based incentives.
1. National Environmental Policy Act (NEPA)
The National Environmental Policy Act (NEPA) n36 was enacted in 1969
to declare a national policy which will encourage productive and enjoyable harmony
between man and his environment; to promote efforts which will prevent or eliminate
damage to the environment and biosphere and stimulate the health and welfare of man; to
enrich the understanding of [*234] the ecological systems and natural resources
important to the Nation ... n37
NEPA requires all federal government agencies to integrate environmental issues into
their decision-making processes through the preparation of an Environmental Impact
Statement (EIS). n38 Federal agencies must evaluate the environmental impact of any
proposal for legislation or other major federal action. n39
NEPA requires more than a cursory review of environmental considerations. The D.C.
Circuit, in Calvert Cliffs' Coordinating Committee v. United States Atomic Energy
Commission, n40 held that "NEPA requires that an agency must - to the fullest extent
possible under its other statutory obligations - consider alternatives to its actions which
would reduce environmental damage. That principle establishes that consideration of
environmental matters must be more than a pro forma ritual." n41 Following Calvert
Cliffs', the courts have made it clear that NEPA requires federal agencies to take
environmental considerations seriously, "to the fullest extent possible," in agency
decision-making. n42 [*235]
NEPA's role as a market-based incentive is indirect, at best. Because NEPA is directed at
federal agencies and not corporate America, the statute imposes no duty on firms to take
into account the environmental impact of their actions - let alone disclose their
environmental liability. Thus, NEPA's influence on corporate disclosure is limited to its
requirement that the SEC consider environmental issues when it regulates corporate
disclosure. n43 Nevertheless, NEPA was the first environmental statute to begin the trend
of disclosure of environmental issues to the public.
2. Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA)
The Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA) n44 was enacted in 1980 as a quick response to the Love Canal disaster. n45
Congress wanted to empower the federal government immediately to clean up any release
of hazardous substances, imposing the cost of cleanup on the parties responsible for the
release. n46 CERCLA authorizes the federal government to take "response" actions for
removal or remediation of any actual or threatened release of a hazardous substance. n47
Funds to pay for response actions are provided by the [*236] Hazardous Substance
Superfund (Superfund). n48 CERCLA also authorizes the federal government to bring
actions against parties responsible for the hazardous contamination to recover the costs of
the cleanup, thus reimbursing the Superfund. n49 In the alternative, CERCLA allows a
private party who is responsible for cleanup costs to conduct a response action at a
facility that has released hazardous substances, n50 and to seek to recover those costs
from other responsible parties. n51 Thus, a corporation's expenditures under CERCLA
could either occur because of a voluntary cleanup effort or because the corporation is
named as a defendant in a lawsuit brought by the EPA or by another responsible party for
reimbursement of cleanup expenses. [*237]
a. Potentially Responsible Parties
Section 107(a) of CERCLA establishes four categories of potentially responsible parties
(PRPs) who are liable for the cleanup of a site: owners and operators of the site, former
owners and operators of the site, persons who arranged for hazardous substances to be
placed at the site, and persons who transported hazardous substances to the site. n52 The
term "person" is defined broadly to include not only individuals but also corporations and
partnerships. n53 As a result of broad definitions and court interpretations, CERCLA's
liability net goes beyond the traditional notions of owners or operators and includes
parent and successor corporations; n54 shareholders, directors, officers, and trustees; n55
and lenders. n56
i. Parent and Successor Corporation Liability
Because CERCLA contains no provisions dealing with parent corporation liability, courts
apply state corporation law. Traditionally, the doctrine of limited liability held that the
parent is not liable for the actions of its subsidiary, unless the court decides to "pierce the
corporate veil" between the parent and subsidiary. n57 Courts have devised many multifactored tests to determine whether or not to "pierce the corporate veil," n58 and the
essence of [*238] the courts' inquiry is the level of control the parent has over the
subsidiary. n59 Although some courts have departed from the "corporate veil" language,
n60 most still pursue the same inquiry with regard to parent-subsidiary liability. The
more control the parent has over the subsidiary, the more likely the parent will be
considered the "alter-ego" of the subsidiary and will be held liable for the latter's actions.
For example, in United States v. Kayser-Roth Corp., n61 the court found the parent liable
because the parent exercised substantial control over the subsidiary's operations. n62
However, at least one court would only hold a parent liable for the subsidiary's costs if
"the corporate entity is used as a sham to perpetrate a fraud or avoid personal liability."
n63 Thus, currently there is wide diversity among courts as to when a parent corporation
may be liable for the cleanup costs of its subsidiary. [*239]
Successor corporation liability generally arises when (1) a consolidation or de facto
merger occurs, (2) the purchaser agrees to assume the seller's liability, (3) the purchaser is
merely a continuation of the seller, or (4) the transaction is a fraud to escape liability. n64
In the case of consolidation, or actual merger, courts have not been hesitant to find the
successor corporation liable under CERCLA. n65 The more problematic case is when
one corporation purchases the assets of another corporation. The mere acquisition of
assets does not automatically lead to liability. n66 If the court recharacterizes the sale of
assets as a de facto merger, however, liability will follow. n67
ii. Officer, Director, and Shareholder Liability
Under traditional corporate law, the officers of a corporation are not liable for the debts
of a corporation; however, they are liable for their own actions and cannot hide behind
the corporate structure. n68 Under CERCLA, courts have consistently held corporate
officers liable for cleanup costs as "operators" or "arrangers" when the individuals
participated in some way in the discharge of hazardous materials. n69 Even when an
officer has decision-making authority but does not personally participate, courts have
shown a [*240] willingness to hold the officer liable. n70 Employees of the corporation
may be liable under CERCLA if they have actual authority to influence the activities
leading to the release. n71 Individual shareholders of the corporation are unlikely to be
personally liable under CERCLA for the corporation's hazardous releases if the
individual is merely an equity participant in the corporation.
iii. Lender Liability

CERCLA protects secured creditors by excluding from the definition of "owner or
operator" any person "who, without participating in the management of a ... facility, holds
indicia of ownership primarily to protect his security interest in the vessel or facility."
n72 Much of the controversy over lender liability focuses on what "participating in
management" entails, and the courts have settled into two competing interpretations. The
first interpretation, represented by United States v. Mirabile, n73 focuses on the lender's
participation in the actual day-to-day operations of the borrower, particularly with regard
to waste management. n74 [*241]
The second interpretation, represented by United States v. Fleet Factors Corp., n75
focuses on whether the creditor's "involvement with the management of the facility is
sufficiently broad to support the inference that it could affect hazardous waste disposal
decisions if it so chose." n76 Because Fleet Factors required the borrower to secure its
approval before shipping goods to customers, set prices for certain goods, made
employment decisions for the borrower, and controlled access to the facility, the court
found that it held sufficient influence over the borrower to control waste disposal
decisions and thus was held liable. n77
The EPA in April 1992 issued regulations for lender liability that specifically defined the
term "participation in management." n78 However, barely before the ink was dry, these
regulations were challenged. In February 1994, the D.C. Circuit Court of Appeals struck
down the regulations holding that the EPA went beyond the [*242] scope of its authority
in enacting these regulations. n79 Thus, at this time, the current status of lender liability
under CERCLA is uncertain.
b. Liability: Strict, Joint and Several
The liability scheme of CERCLA and the broad definition of responsibility under the Act
is of great concern to corporate America. The liability standard of CERCLA has been
interpreted to be strict, joint and several. n80 This type of liability was deemed necessary
if the government was to have any chance to recover the costs of cleanup. n81 Under a
strict, joint and several liability standard, there is a very real possibility that a corporation
who has done very little to cause the hazardous release could be stuck with the "orphan's
share" of the cleanup costs because the other PRPs have become insolvent. n82 [*243]
Insolvent PRPs are not the only threat posed by the joint and several liability scheme. If
one or more insolvent PRPs choose to settle with the EPA for less than their share of the
cost of total cleanup, the non-settling PRPs may still be jointly and severally liable for the
remainder of the cleanup costs, and only have a right to sue for contribution from other
non-settling PRPs. n83 Furthermore, the EPA has been successful in arguing that joint
and several liability is triggered regardless of the amount of hazardous substance. n84
CERCLA's liability standard is tempered somewhat by the concept of divisibility adopted
by several courts.
If the harm is divisible and if there is a reasonable basis for apportionment of damages,
each defendant is liable only for the portion of harm he himself caused ... In this situation,
the burden of proof as to apportionment is upon each defendant ... On the other hand, if
the defendants caused an indivisible harm, each is subject to liability for the entire harm.
n85
In addition to reducing liability, several courts have allowed defendants to use divisibility
to avoid CERCLA liability completely. n86 Thus, there is clearly a growing trend among
courts "to be taking a harder look at the EPA's conduct under CERCLA and, [*244]
when this conduct does not meet basic standards of fairness and effectiveness, finding
ways to overturn and in some cases repudiate the actions of the EPA." n87 Although
these trends are not a panacea for corporate America's joint and several liability woes,
they do indicate a move toward fairness and equity in the imposition of that liability.
CERCLA does provide for limited statutory defenses to liability. The first two, a release
caused by an "act of God" n88 or an "act of war," n89 are extremely rare. The third
defense, an act of a third party, has been litigated extensively. Liability under CERCLA
is eliminated if the release is "caused solely by ... an act or omission of a third party other
than an employee or agent of the defendant, or than one whose act or omission occurs in
connection with a contractual relationship, existing directly or indirectly, with the
defendant ...." n90 Congress expanded the third party defense in 1986 to include the
"innocent landowner," but the use of this defense is extremely limited. n91 [*245]
c. CERCLA as a Market-Based Incentive
With its broad definition of who can be included as a PRP and its draconian liability
standard, the enormous cleanup costs of CERCLA serve as a major incentive for
environmental compliance. Because CERCLA does not require public disclosure of its
liability, CERCLA's effectiveness as a market-based incentive is questionable.
The only explicit disclosure requirement under CERCLA is that companies must notify
the EPA's National Response Center whenever there is a release of a reportable quantity
of a hazardous substance. n92 This disclosure is inadequate to inform the relevant
investing public for two reasons. First, the disclosure is made to the EPA, not directly to
the public. Thus, the public is dependent upon either the EPA or the responsible party for
subsequent disclosure of the release. Second, the disclosure normally states only that a
release has occurred; n93 it does not indicate who the PRPs are [*246] or how much the
cleanup costs will be - information necessary for a potential or existing investor to make
rational investment decisions.
In addition to the explicit disclosure requirements under CERCLA, a company may need
to make extensive disclosure of its activity at a site when it asserts either an innocent
landowner defense or the divisibility defense. However, these disclosures almost always
occur in the course of litigation. Thus, the disclosures are made only to EPA or
Department of Justice (DOJ) litigators. If the case settles, the disclosures will usually not
be available to the general public; if the case goes to trial, the interested investor must
burrow through the mountain of documents typically produced in such litigation. Because
CERCLA fails to provide a regular mechanism by which environmental liability is
disclosed to the investing public, CERCLA remains ineffective as a market-based
incentive for corporate environmental compliance.
3.Emergency Planning and Community Right-to-Know Act (EPCRTKA)
Congress passed the Emergency Planning and Community Right-to-Know Act
(EPCRTKA) n94 to ensure that the public has adequate information regarding the
chemical hazards in their community. EPCRTKA requires corporations to disclose their
hazardous and toxic chemical use through the filing of Material Safety Data Sheets
(MSDSs), n95 Emergency and Hazardous Chemical Inventory Forms (EMHCIFs), n96
and Toxic Chemical Release Forms (TCRFs). n97 In addition, EPCRTKA requires that
state and local governments develop emergency response plans to deal with hazardous
chemical releases, and to provide the general public and local governments with
information concerning chemical risks. n98
A company must file MSDSs with the appropriate state agency for each of the hazardous
chemicals it uses, handles, manufactures, or disposes. n99 The MSDS must describe the
chemical's characteristics (including carcinogenicity and health hazards), the primary
routes of entry, the permissible exposure limits, appropriate pre [*247] cautions, first aid
procedures, and the address and telephone number of the manufacturer. n100
In addition to the MSDS, companies must file annually an EMHCIF. n101 The EMHCIF
must contain an estimate of the maximum and daily average amounts and general
location of all hazardous chemicals in the company's facility. n102 If requested by the
appropriate state agency, the form must report information concerning specific hazardous
chemicals. n103
Companies that manufacture, process, or otherwise use toxic chemicals must annually
file a TCRF with the EPA. n104 For each toxic chemical present at a facility, the TCRF
must contain i) a general description of that chemical's use at the facility, ii) an estimate
of the maximum amount of the chemical at the facility, iii) the waste treatment or
disposal method used for the chemical, and iv) the annual amount of the toxic chemical
entering the environment. n105 The EPA must maintain a national toxic release inventory
(TRI) on a computer database, based on the TCRFs filed. The TRI must be available to
the public through computer telecommunication. n106
All information required to be reported under EPCRTKA is available to the public
through the TRI or the state or local emergency planning committees. n107 Although this
information is publicly available, only those members of the public who are specifically
aware of the statute and the disclosure or reporting requirement have ready access to the
information. In some cases, even if one is aware of the availability of the information and
where to get it, the information may not be easy to access. As one commentator has
noted:
[EPCRTKA] places primary responsibility on state and local governments which do not
have the funds to finance the [*248] [management of the data and the preparation of
communities for hazardous substance accidents]. While computerized services are
developing, many local emergency planning committees cannot afford to study their own
needs nor establish the connections that would allow them to function. Instead, they are
opting to take the data in hard copy, where it often sits in boxes unused. n108
Because this data is largely inaccessible, investors cannot gain information on
environmental compliance under EPCRTKA. EPCRTKA, therefore, lacks adequate
environmental disclosure mechanisms for creating market-based incentives.
4. Pollution Prevention Act of 1990 (PPA)
The Pollution Prevention Act of 1990 (PPA) n109 is "a first step to maximize voluntary
reduction of hazardous wastes and other pollutants created during the manufacturing
process by improving the quality of informationavailable to industry, states, and local and
Federal officials." n110 The PPA declares it to be "the national policy of the United
States that pollution should be prevented or reduced at the source whenever feasible."
n111
Section 13106(a) requires each owner or operator of a facility that is required to file an
annual TCRF under section11023 of EPCRTKA n112 to file a Toxic Chemical Source
Reduction and Recycling Report (TCSRR) for each toxic chemical used during [*249]
the preceding year. n113 The data collected by the EPA from the filing of these reports
must be available to the public. n114
In addition to requirements for industry disclosure, the PPA directs the EPA to consider
the effects of existing and proposed regulations on source reductions and to coordinate
with other federal agencies to promote pollution prevention activities. n115 The EPA has
already begun incorporating the Act's policy of pollution [*250] prevention into many
areas, including its enforcement settlement policy n116 and joint EPA-industry
initiatives. n117
Because the disclosure requirements under the PPA essentially parallel the requirements
under the EPCRTKA, the PPA suffers the same failures with regard to effective
disclosure.
5. Resource Conservation and Recovery Act (RCRA)
The Resource Conservation and Recovery Act (RCRA) n118 is a comprehensive,
national regulatory scheme designed to provide "cradle-to-grave" control of hazardous
waste by setting certain management practices on generators n119 and transporters n120
of hazardous waste, as well as owners and operators of treatment, storage, and disposal
10
(TSD) facilities. n121 One of the basic emphases of [*251] RCRA is the development
of a record-keeping, manifest, and reporting system that will trace the waste from
generation to disposal. n122
Generators are the first step in the record-keeping and reporting system. The generator
regulations focus on record-keeping and labeling requirements for anyone transporting
hazardous waste off-site. n123 Any site on which hazardous waste is generated must
obtain an EPA identification number. n124 A hazardous waste shipping document called
a "manifest" must be created for any waste transported off-site. n125 The generator must
also file biennial reports describing its production of hazardous waste for the previous
year. n126 Biennial reports must outline efforts taken to minimize production of
hazardous waste. n127 Transporters also must secure an EPA identification number, n128
and may only accept properly manifested shipments. n129 The transporter must make
sure that the manifest accompanies the waste to its disposal site and that the waste
reaches the primary TSD facility. n130
RCRA imposes extensive requirements on TSD facility owners and operators. All
facilities must obtain a permit to treat, store, or dispose of hazardous waste. n131 The
EPA established a comprehensive set of regulations dealing with all aspects of a TSD
facility, [*252] including location, design, operation, and closure. There are regulations
for every type of TSD facility. n132 The TSD facility owner or operator must keep an
extensive log that describes the quantity and location of each hazardous waste received,
methods and dates of treatment, results of waste analyses, results of groundwater
monitoring, and reports of any incidents. n133 All records must be made available to the
EPA, the state, and the general public. n134 The TSD owner or operator must also submit
a report to the EPA on each even-numbered year disclosing the nature and quantity of
wastes, methods of treatment, disposal, and storage, and other monitoring data. n135
The EPA can seek civil or criminal penalties for violations of RCRA. Any person not in
compliance with RCRA is liable for a civil penalty of up to $ 25,000 per day n136 from
the date of the violation. n137 The Act imposes criminal sanctions for intentional
violations of RCRA. Penalties include a fine of up to $ 50,000 per day for each day of the
violation and imprisonment for up to two years. n138 RCRA also provides for citizen
enforcement suits as long as the plaintiff can establish that she sustained an "injury in
fact." n139
RCRA is an extremely detailed statute; one court called analysis of the statute a "mindnumbing journey." n140 The EPA regulations implementing the statute are even more
detailed, requiring hun [*253] dreds of pages in the Code of Federal Regulations. n141
Even a brief treatment of RCRA illustrates that only someone with a fairly complete
understanding of the Act would be able to find a particular corporation's disclosure
information. Certainly the information is not widely available to potential investors and
stockholders; moreover, a sophisticated analysis of the available information will be
required before the information can be used in the marketplace. The difficulty of
accessing and processing information under RCRA prevents potential investors from
11
making informed investment decisions. RCRA, therefore, fails as an effective marketbased incentive.
6. Toxic Substances Control Act (TSCA)
The Toxic Substances Control Act (TSCA) authorizes the EPA to regulate the
manufacture, use, distribution, and disposal of chemical substances and mixtures. n142
TSCA requires manufacturers of chemical substances to (1) submit a premanufacture
notice (PMN) before manufacturing any new chemical not on the EPA' s TSCA
Inventory list or any chemical to be manufactured for a significant new use; n143 (2)
avoid manufacturing PCBs; n144 (3) maintain records and submit the data regarding the
adverse health and environmental risks associated with the chemicals; n145 (4) submit to
EPA inspections; n146 and (5) certify compliance with TSCA on importation of
chemicals. n147
Section 8 contains TSCA's reporting and record-keeping requirements. Although
manufacturers must keep records of "significant adverse reactions" to health and the
environment allegedly caused by a chemical substance, this information does not have to
be reported to the EPA unless requested. n148 Manufacturers must also submit to the
EPA any information that "reasonably supports the conclusion that the chemical
substance or mixture presents a substantial risk of injury to health or the environment."
n149
The EPA has developed several policies that provide incentives for voluntary disclosure
of this information. On February 1, 1991, [*254] the EPA announced a Compliance
Audit Program under section 8(e). n150 Several companies regulated under section 8(e)
signed an administrative consent agreement with the EPA under which they agreed to
conduct a compliance audit and disclose the results to the EPA within 180 days. n151 In
addition, the EPA agreed to stipulate penalties for previously undiscovered violations and
to cap total civil liability at $ 1 million. n152 The EPA also developed a TSCA Civil
Penalty Policy, under which it will adjust a proposed penalty downward by up to fifteen
percent if the violator made a "good faith" effort to comply with the regulations,
promptly began corrective action, and assists the EPA in minimizing the harm caused by
the violation. n153 Thus, the EPA, under TSCA, recognizes the benefit of a voluntary
self-audit. n154 Clearly, manufacturers will correct more violations if manufacturers are
rewarded for self-policing and voluntarily correcting any discovered problems.
For "knowingly or willfully" violating TSCA, a manufacturer may be imprisoned for up
to one year and fined up to $ 25,000 for each day of the violation. n155 TSCA also
authorizes private citizens to bring actions against any manufacturer alleged to be in
violation of the Act or against the EPA to force the performance of any nondiscretionary
act. n156
TSCA has extensive disclosure and reporting requirements. The problem, however,
remains the same - although the information is available to the public, it is difficult to
acquire. For example, the EPA issues Status Reports of its review of section 8(e) reports
12
submitted by manufacturers who believe that a chemical may pose a "substantial risk" to
health or the environment. These Reports are available to the public, but only in the OTS
Public Reading Room at EPA Headquarters in Washington, D.C. n157 Once again, the
investor or stockholder looking for a particular company's environmental disclosure
information must know where to look as well as have a fairly good idea of what they are
looking for. [*255]
7. Clean Air Act (CAA)
The Clean Air Act (CAA) was enacted to "protect and enhance the quality of the Nation's
air resources so as to promote the public health and welfare and the productive capacity
of its population." n158 The CAA requires the EPA to establish national ambient air
quality standards (NAAQSs) for pollutants that the EPA has determined "may reasonably
be anticipated to endanger public health or welfare." n159 The NAAQSs are
implemented by source-specific emission limitations established by the states; these state
implementation plans (SIPs) are to be designed to assure that each air quality control
region in the state will come into compliance with the NAAQSs by a specified date. n160
Although these programs vary from state to state, the states must require emission
monitoring and reporting by existing, individual sources. This information is to be made
available to the public by the states. n161 In states that do not attain the NAAQSs, all
new sources or modifications of existing sources of non-attainment pollutants must
obtain a permit to construct the new or modified source and must demonstrate that the
new emissions will be "offset" by emission reduction at other existing sources. n162
Major new sources, or a "major modification" of an existing major source, in a NAAQSs
attainment area are also required to obtain a "prevention of significant deterioration"
(PSD) permit prior to construction. These sources must show that their emissions will not
cause or contribute to "significant deterioration" of air quality. n163 The applicant must
submit continuous ambient air quality monitoring data for each pollutant it would emit,
for one year prior to the application. n164 This information is available to the public
because the public has the right to participate in a hearing on the permit. n165 [*256]
The 1990 amendments to the CAA authorize the EPA Administrator to bring
enforcement actions against violators without going through the Department of Justice
(DOJ) or the courts. The Administrator may impose administrative penalties of up to $
200,000. n166 The Act also allows private citizens to seek civil penalties for violations of
the Act. Any penalties assessed in a citizen suit will be deposited into a fund to help
finance the EPA's enforcement actions. n167 In addition, the EPA is authorized to pay a
"bounty" of up to $ 10,000 for anyone providing information that leads to a criminal
conviction or civil penalty. n168 The criminal penalties under the CAA are substantial. A
knowing violation of the Act is a felony offense, and can be enforced against anyone
involved in the violation. The fines are $ 25,000 per day per violation and up to five years
in prison. n169 In addition to these penalties, corporations also face the high costs of
complying with the CAA.
13
In light of the serious civil and criminal liability, and the huge compliance costs under the
CAA, companies regulated under the Act would be well-advised to establish voluntary
self-auditing programs. Such programs enable companies to detect environmental
violations resulting from emissions from smokestacks early enough to correct the
problem and notify the EPA or state agency, thus avoiding or mitigating liability. A
shareholder, director, or officer of a corporation should insist on such a program, not only
to mitigate or avoid potential fines, but also to avoid individual liability. n170 Potential
investors and stockholders of a corporation should have easy access to this information,
rather than having to dig through hundreds of pages of environmental regulations to
determine how to find the data.
Although the CAA does not require extensive public disclosures, all sources of public
welfare- or health-endangering pollutants must comply with the NAAQSs. All of the
reporting required under the CAA and the SIPs is available to the public. [*257] Civil
and criminal penalties for noncompliance can be tremendous. Although a self-auditing
program can enable a company to avoid or mitigate liability under the CAA, it does not
ensure that the investing public will be fully apprised of this information. Only the
requirement of full disclosure will assure the effective operation of market-based
incentives and a more fully informed public.
8. Clean Water Act (CWA)
The objective of the Clean Water Act (CWA) n171 is to "restore and maintain the
chemical, physical, and biological integrity of the Nation's waters." n172 The CWA
establishes several specific national goals including: reaching a level of water quality for
the protection of fish and wildlife, as well as recreation; discontinuing the discharge of
pollutants into surface water; and prohibiting the discharge of toxic pollutants. n173 The
Act is designed to achieve these goals through a complex regulatory system. The basic
framework of this system includes the following elements: a permit program to regulate
discharges; prohibition of all discharges not authorized by the CWA; a system for
preventing and responding to unauthorized discharges; encouragement of public
treatment facilities; and a strong enforcement mechanism. n174
Under section 402 of the CWA, a National Pollution Discharge Elimination System
(NPDES) permit is required for new and existing discharges of pollutants into surface
water. n175 The permit application notifies the EPA or the state of the nature and
circumstances of the anticipated discharge. The information in the application allows the
permit issuer to set permit requirements that minimize the discharge, and to set
monitoring and reporting requirements. n176 The monitoring requirements are set out in
section 308 of the Act and allow the EPA to require the owner or operator of any point
source to establish and maintain records; to make reports; to install, use, and maintain
monitoring equipment; to take effluent samples; to provide any information the EPA may
reasonably require; and to allow the EPA to enter the premises and [*258] inspect the
records and/or take samples. n177 All the data obtained is available to the public except
as necessary to protect trade secrets. n178 More than half of the states have NPDES
14
permitting programs that have been approved by the EPA; these programs may require
more data submission than the EPA's. n179
Industrial facilities that discharge into publicly-owned treatment works (POTWs) must
meet pretreatment standards under section 307(b) of the CWA. n180 New or existing
industrial dischargers are required to file reports demonstrating that they are meeting the
applicable pretreatment standards. Extensive record-keeping and monitoring are required
to demonstrate compliance with the pretreatment standards. n181 These records must be
kept for three years and must be available for inspection by the EPA, the state, or the
POTW. n182
The EPA's authority to impose penalties for discharges and violations of the CWA was
broadened in 1990. The EPA can now seek administrative penalties of up to $ 125,000
for discharges or violations of the regulations. n183 Civil penalties under section 311 are
up to $ 25,000 per day for a discharge or up to $ 1,000 per barrel discharged. These
penalties may be tripled for a discharge caused by gross negligence, with the minimum
penalty of $ 100,000. n184 Criminal penalties are also quite harsh. Penalties for a
negligent [*259] discharge are up to one year in prison and a $ 25,000 fine; for a
"knowing" discharge, up to three years in prison and a $ 50,000 fine; for a discharge
which resulted in placing others in imminent danger of serious bodily injury or death, up
to fifteen years in prison, and a $ 250,000 fine for an individual, $ 1 million for a
company. n185 In addition, section 505 of the CWA authorizes any person "having an
interest which is or may be adversely affected" to bring a civil suit against a discharger
for violation of the Act or against the EPA for failure to enforce the Act's provisions.
n186
The scope of criminal and civil enforcement under the CWA is extremely broad,
particularly because negligent conduct is now included. A thorough self-auditing
procedure is the best defense against civil or criminal penalties. n187 Section 309(d) sets
out several factors for the court to weigh in assessing the proper civil penalty. They
include: the seriousness of the violation; any history of violations; any good faith effort to
comply with the regulations; the economic impact of the penalty on the violator; and any
other factors justice may require. n188 A company that is proactive in pursuing its selfauditing program may not only avoid potential enforcement actions, but may also
mitigate any fines or penalties for actual violations. In addition, a self-auditing program
demonstrates a company's commitment to the environment and to its own pollution
control program.
The CWA, like the CAA, has extensive reporting requirements in order for a facility to
acquire and maintain a permit under the statute. Although this information is available to
the general public, it is scattered and difficult to obtain. Certainly, a facility is welladvised to conduct self-audits regularly to determine compliance levels; however, neither
the reporting requirements under the CWA nor the results of self-audits meet the goal of
fully informing the public. Only through extensive financial disclosure of environmental
liabilities will the market-based incentives actually work. [*260]
15
B. Environmental Auditing
Environmental noncompliance and resulting cleanup can produce a staggering liability
for a corporation. Companies often search for ways to cut and contain environmental
costs. One of the best ways to contain costs is through the use of an environmental audit.
The EPA defines an environmental audit as "a systematic, documented, periodic and
objective review by regulated entities of facility operations and practices related to
meeting environmental requirements." n189 The audit is not only a means for verifying
environmental compliance, but also an invaluable tool to assist management in cost
cutting, risk assessment, and planning for growth. n190 In addition, environmental audits
can increase environmental awareness throughout an organization, reduce fines and
enforcement actions, and enhance the reputation of the organization with investors and
the public. n191 Because environmental audits are most effective when confidential,
however, they are unable to serve as vehicles for public disclosure.
Environmental audits are of two basic types - compliance audits and management audits.
The compliance audit is an independent assessment of the corporation's compliance with
environmental statutes and regulations. The management audit examines the
corporation's systems and procedures to assure environmental compliance. n192 Thus,
through the use of both types of audits a corporation can minimize the risk of releases of
hazardous substances and save potentially millions of dollars. Perhaps most importantly,
a comprehensive environmental audit can be the best insurance against regulatory
sanctions and potential criminal liability. n193 [*261]
The EPA defines a successful auditing program as including (1) explicit top management
support for environmental auditing and the commitment to follow up on the findings; (2)
an environmental auditing function independent of audited activities; (3) adequate auditor
training and staffing; (4) explicit audit program, objectives, scope, resources, and
frequency; (5) a process which collects, analyzes, interprets, and documents information
sufficient to achieve audit objectives; (6) a process which includes specific procedures to
prepare promptly candid, clear, and appropriate written reports on audit findings,
corrective actions, and schedules for implementation; and (7) a process which includes
quality assurance procedures to verify the accuracy and thoroughness of such audits.
n194 Although the EPA initially considered requiring auditing programs and requiring
external auditors to certify compliance, the regulated community strongly objected to
what it perceived as another layer of regulation. n195
Even though the benefits of environmental auditing are widely recognized, there are risks
as well. Once the genie is out of the bottle, there may be reporting violations, n196 costly
remediation, n197 negative publicity, and litigation by regulatory agencies, the general
public, and/or shareholders. n198 Ignoring the findings of an audit can lead to criminal
prosecution for knowing and willful violations. n199 The audit may also lead to a higher
standard of care [*262] against which environmental compliance will be measured.
n200 The environmental audit produces a paper trail of a corporation's environmental
16
noncompliance, inadequate supervision, and managerial decision-making. The question
then becomes whether the audit is confidential. The EPA has encouraged voluntary audits
n201 and has pledged not to request access to the audit except
where the Agency determines it is needed to accomplish a statutory mission, or where the
government deems it to be material to a criminal investigation. EPA expects such
requests to be limited, most likely focused on particular information needs rather than on
the entire report, and usually made where the information needed cannot be obtained
from monitoring, reporting or other data otherwise available to the Agency. n202
The corporation certainly wants to keep the internal document confidential; government
agencies could use the written product as a basis for investigation of violations, and
private parties may seek discovery of the documents to use as a basis of civil lawsuits.
n203 Several legal doctrines may potentially shield the audits from disclosure (e.g., the
attorney-client privilege and attorney work-product doctrine), but these arguments have
met with little success. n204 However, one recent case, Olen Properties Corp. v.
Sheldahl, Inc., n205 held that an environmental audit report prepared by internal
environmental affairs personnel was protected by the attorney-client privilege because it
had been "prepared for the purpose of securing an opinion of law" from the corporation's
attorney. The court relied on the statement of the person who wrote the report that he was
gathering information for the company's attorneys to assist them in evaluating the
company's environmental compli [*263] ance. n206 Thus, it appears that if properly
structured the environmental audit can be shielded from discovery by the attorney-client
privilege.
Increasingly it has been argued that there should be a self-evaluative privilege to protect
environmental audits from disclosure. The basis for this privilege is the public policy
benefit of encouraging environmental audits without fear of disclosure. This privilege has
been used in other industries to encourage internal investigations. In Flynn v. Goldman,
Sachs & Co., n207 the court held that a "self-critical analysis privilege" applied to a
report done by an outside consultant for the company to determine possible gender bias in
the company. n208 Although the privilege appears to have validity in the environmental
audit context, no court has yet applied the doctrine in that area.
The EPA must continue to work to develop a program that rewards the regulated
community for self-auditing and responding to the information that the audit reveals.
Many industry insiders have called on the EPA to create a safe harbor for those
corporations that voluntarily conduct self-audits and begin corrective programs. n209 The
Department of Justice (DOJ) has indicated that if a corporation self-audits and corrects
any violations or harm caused thereby, the Department will consider the corporation's
actions as mitigating factors in evaluating criminal prosecutions. n210 In addition, the
EPA's Director of Criminal Enforcement issued a guideline on January 12, 1994
specifying that the EPA will not pursue criminal enforcement against companies who
self-audit and reme [*264] diate any violations. n211 Nevertheless, many industry and
corporate insiders believe a stronger guarantee is needed. n212
17
In July 1994, the EPA held public hearings regarding its environmental audit policy; the
comments from the public hearing will be considered by an EPA work group that is
developing recommendations for changes to the environmental audit policy. n213 Four
states have enacted legislation that creates a "self-evaluative" privilege for audit reports,
but the EPA has consistently opposed the state-by-state legislative approach primarily
because of the fear of weakening the state enforcement programs. n214 Therefore, it
appears that these state "self-evaluative" privilege statutes and the growing [*265]
interest by other state legislatures in adopting such statutes will force the EPA to revise
its audit policy and, at a minimum, promulgate regulations adopting the "safe harbor"
concept.
Despite the ability of environmental audits to improve environmental awareness and
compliance within an organization, environmental audits are not a viable means of public
disclosure. Clearly, the environmental audit is a valuable tool for management to control
costs and mitigate damage. The audit, however, should not be viewed as a substitute for
full public disclosure of environmental liabilities. Market-based incentives only work if
there is complete access to all available financial information. An environmental audit is
an internal corporate document not designed for general public viewing. Whether or not
there should be some element of confidentiality with regard to environmental audits, the
fact remains that once management knows the information, certain disclosures are
required. n215 While the audit should enable companies to lessen environmental
liabilities, it must not be viewed as an acceptable alternative to financial disclosure. For
market-based incentives to work effectively, there must be more complete disclosure of
environmental liabilities on corporate financial statements and other corporate
documents. The next Part of the Article addresses these issues.
III.Financial Disclosure of Environmental Liabilities
Publicly-traded firms' financial disclosures can serve to effectively inform the public
about environmental liabilities, allowing the public to use their investment dollars to
promote corporate attainment of national environmental goals. Financial disclosures of
environmental liabilities can thus provide market-based incentives for corporations to
comply with environmental laws.
Financial disclosures come in a variety of formats. For example, disclosure of
environmental liabilities in annual reports is mandatory. Annual reports are distributed
directly to shareholders and are filed with the SEC, making them available as public
documents. Some abbreviated financial information is also distributed on a quarterly
basis directly to shareholders in reports that are also publicly available as SEC filings.
Such filings are reprinted and widely distributed by various financial information
vendors, both in print and in electronic formats. This financial information is used widely
by investors and generally becomes part of analyst reports, [*266] which eventually
impacts and becomes incorporated into each registrants' market price.
The financial disclosure of environmental liabilities covers a wide range of problems,
sometimes appearing to overlap the environmental law disclosures discussed above. The
18
policy favoring mandatory financial disclosure of environmental liabilities has been
evolving over nearly twenty-four years. It did not mature until long after
environmentalists pressured the SEC to give the matter close attention. At most, the
current policy is only tenuously related to those efforts. The prevailing environmental
disclosure regimen permits considerably more management discretion than many other
financial disclosure matters. Section A discusses the historical development of SEC
policy concerning disclosure of environmental liability, while Section B addresses the
current policy.
A.Development of Securities and Exchange Commission Policy
The federal securities laws mandate disclosure by public reporting companies to further
the goal of improving the operation of the public securities markets. n216 Disclosure is
the "keystone of the entire structure of federal securities legislation." n217 The Securities
Act of 1933 is specifically intended to "provide full and fair disclosure of the character of
securities ... to prevent frauds in the sale thereof, and for other purposes." n218 The
courts have interpreted this mission to optimize corporate financial and non-financial
disclosures and thereby provide investors with adequate information to make reasonable
trading decisions. n219 The SEC is empowered to provide detailed guidance on the form
and content of disclosure to optimize several factors n220 as the SEC deems "necessary
or appro [*267] priate in the public interest for the protection of investors." n221 The
SEC itself is sometimes willing to expand beyond this purpose of advancing "informed
investor trading" by recognizing "that appropriate publicity tends to deter questionable
practices and to elevate standards of business conduct," n222 a position echoed by
distinguished commentators. n223 However, the SEC's experience in addressing the
disclosure of environmental liability exhibits greater emphasis on the former goal even as
it appears that its recent disclosure mandates would support the latter. n224
After NEPA's passage, most federal agencies provided at least a cursory review of their
regulations and processes for consistency with the "national policy for the environment."
n225 This process was also inspired by President Nixon's order to implement NEPA's
policy mandate in Executive Order No. 11,514 requiring that "federal agencies shall
initiate measures needed to direct their policies, plans, and programs so as to meet
national environmental goals." n226 The SEC failed to comply in a timely manner with
the Executive Order's requirement that all agencies review their regulatory programs and
report their corrective action to the Council on Environmental Quality (CEQ) by
September 1970. n227 The SEC was initially pressured into taking at least some action
on June 1, 1971, when the Natural Resources Defense Council, Inc. (NRDC) led a
coalition of public interest groups to file a rulemaking petition. n228 The NRDC's
petition proposed that the SEC should adopt [*268] extensive corporate disclosure
regulations to reveal detailed information, arguably amounting to the detail found in an
environmental impact statement (EIS). n229
The SEC quickly responded with an Interpretive Release in July 1971 entitled
Disclosures Pertaining to Matters Involving the Environment and Civil Rights. n230 It
provided little new guidance on the existing law, which already required a description of
19
the registrant's business and disclosure of any material n231 impact of litigation. The
SEC was probably seeking to preempt pressures for any radical alteration in the existing
disclosure regimen. However, this release simply underscored the requirement for
disclosing material compliance efforts with various laws, including environmental laws,
that might "necessitate significant capital outlays, may materially [*269] affect the
earning power of the business, or may cause material changes in the registrant's business
or intended business." n232 This release also required disclosure for pending or
contemplated litigation. n233 Registrants were reminded of their duty to disclose material
legal proceedings by using particular environmental and civil rights laws as examples.
n234 Any decision to omit information that the registrant designated as immaterial could
trigger an SEC Division of Corporate Finance request for supplemental information
describing and justifying the omission. n235
In December 1971, the SEC issued an order declining to revise its disclosure rules as the
NRDC-led group had requested, but promising to "actively consider amendments ... in
the near future." n236 The SEC initiated just such a rulemaking proceeding in February
1972, soliciting comments for proposed environmental disclosures to amend registration
and periodic report forms. n237 However, the proposal was largely unresponsive to the
NRDC petition because the impact of environmental compliance was merely added as a
specific example of the types of previously mandatory disclosures covering the business
description and litigation. n238 Another proposed change involved a de minimis
standard. Before the notice, a company did not have to release information if the claim
for damages in pending litigation was lower than fifteen percent of current assets. The
proposal lowered this threshold to [*270] ten percent of current assets. n239 The NRDC
became impatient with the SEC's delay and the refusal to propose the more revealing
disclosures or to require more exhaustive preparation and analysis. n240 The NRDC first
sought judicial review of the SEC's refusal order in the D.C. Circuit, but this petition for
review was dismissed. n241 In March 1973, the NRDC commenced its first trial court
challenge to the SEC's failure to propose the more stringent rules (NRDC I). n242
This litigation threat apparently coerced the SEC to promulgate disclosure amendments
in April 1973, n243 superseding the 1971 guidelines. n244 However, the final rules "in
no way enlarged, and in some respects retreated from, those changes which the SEC had
proposed." n245 The 1973 rulemaking requires disclosure only of the "material effects
which compliance with environmental laws and regulations may have upon the on capital
expenditures, earnings and competitive position" n246 and the disclosure of "material"
environmental litigation. n247 Government proceedings not meeting the [*271]
economic materiality thresholds needed only to be grouped together for "generic
description." n248
The SEC steadfastly refused further administrative process beyond its promise to monitor
periodic disclosures, assuring further controversy. One side in this debate was
represented by critics charging that the SEC's new environmental disclosure rules were
an unwarranted expansion that would require a deluge of confusing disclosures about
immaterial governmental environmental proceedings. n249 Environmentalists decried the
SEC's recalcitrance in pursuing only a narrow construction of the investor information
20
goal to the exclusion of assisting the market in regulating corporate conduct. n250 At this
time, the SEC staff issued another policy n251 requiring disclosure of compliance with
foreign environmental regulations resulting in an economically material impact on the
company's financial condition or business. n252 [*272]
1. NRDC I
The NRDC pushed ahead in Natural Resources Defense Council, Inc. v. Securities &
Exchange Commission n253 (NRDC I), seeking a mandatory injunction compelling the
SEC to modify corporate disclosure standards so the public could access SEC public
files. Such standards would enable the public to make socially responsible investment
decisions and to further public education. The NRDC sought to require that registrants
disclose the effect of corporate activities on the environment and to reveal statistics about
equal employment practices. n254 The NRDC claimed the SEC's 1971 Interpretive
Release made only minor modifications to satisfy the NEPA mandate, and provided
insufficient regulatory procedure because the SEC failed to address the NRDC's specific
environmental disclosure goals.
The district court remanded to the SEC, ordering it to take the procedural steps it had
omitted, specifically to provide public notice to increase the participation of interested
parties, n255 as required under the Administrative Procedure Act (APA). n256 Without
such input, the SEC could scarcely give deliberate, informed, and reasoned consideration
to rule changes mandated by NEPA through APA rulemaking procedures. n257
Additionally, the SEC failed to provide an adequate statement of the basis and purpose
for the rulemaking, thereby depriving a reviewing court of a sufficient record for review.
n258 [*273]
The District Court's remand directed the SEC to provide a more complete "general
statement" to better determine: (1) what the SEC views as its statutory obligation to the
public under the securities laws and under NEPA; (2) what rulemaking alternatives it
actually considers; and (3) the reasons for excluding any "substantial alternatives" such as
proposals by the NRDC and other interested parties. n259 The SEC was also directed to
develop a better rulemaking record to enable review of two overriding factual issues.
First, the SEC could more effectively conduct policy-making if it understood the extent
of the "ethical investor" interest in the environmental and equal employment disclosures
NRDC sought. n260 Second, more facts were needed to determine what avenues of
action are available to ethical investors and which avenues might tend to eliminate
practices that citizen groups might find objectionable. n261 A legislative-type hearing
was suggested as possibly suitable, and the SEC was strongly urged to more forthrightly
and imaginatively exercise its authority and expertise to address the concerns of the court.
n262
2. The SEC Remand
Without appealing NRDC I, the SEC began its reconsideration just two months later by
soliciting participation in legislative hearings. A Notice of Hearing on Environmental and
21
Social Matters solicited the views of interested parties on a variety of matters of social
concern. n263 The notice was widely disseminated with an apparent SEC motive to
dispel any misimpression from the litigation that the agency's standard notice and
comment process limits reasonable participation or that its informal rulemaking process
fails to elicit thorough responses. n264 The legislative hearing was [*274] clearly
designed to satisfy the court's mandate for the collection of more diverse views and to
address specific issues. n265 However, the SEC also signaled its disagreement with the
court's conclusions about the sufficiency of its processes and about the substance of its
environmental disclosure program. n266 The SEC may have influenced the debate by
framing the issues consistent with its original proposal. For example, the comment
solicitation characterized the environmental disclosures sought by the NRDC as
"information that does not necessarily have direct and immediate economic significance
[but] might nevertheless be the type of information that a reasonable investor would wish
to have in making an investment decision or giving a proxy." n267 The SEC's statements
indicated only limited support for such disclosures because it believed that only "certain
members of the public may find environmental and other socially-significant disclosures
of importance in making their investment decisions [and the SEC has primary
responsibility to the] investing public generally [so it must avoid requiring] disclosure
documents to be excessively technical or obscure." n268
Comments were sought regarding when such "socially significant" matters might be
viewed as material, what authority the SEC had to require "disclosure of matters
primarily of social concern [*275] but of doubtful economic significance," and what
impact, if any, such disclosure might have on corporate behavior. n269 The NRDC's
original proposals were also offered as possible additional disclosures separately
discussing the impact of each major activity or product on: (1) pollution or natural
resources; (2) current feasibility for reducing such pollution; (3) the prospects for
improving existing technology; (4) existing and projected expenditures for pollution
abatement; (5) legal requirements, including licenses, permits, outstanding court or
administrative orders; and (6) pending or threatened litigation, governmental and private.
n270 Other proposals included requiring disclosure of the registrant's overall
environmental policy statement and a discussion of how the registrant made changes to
advance environmental values. n271 Criteria were also requested concerning the level of
detail appropriate for different classes of registrants n272 and as to which disclosures
should be distributed to the public rather than merely archived in an SEC public file.
n273
There was considerable public interest in the hearings which lasted for nineteen days
during April and May of 1975. Fifty-four oral presentations were made and 353 written
comments received into the record. Together with exhibits and transcripts, the record
comprised over ten thousand pages. n274 The responses were predictably polarized
between public and environmental interest groups on one side advocating the disclosures
n275 and various enti [*276] ties representing corporate interests denying the utility of
disclosures on numerous grounds. n276 After five months of evaluating this deluge of
information, the SEC concluded that no further [*277] mandatory disclosures were
necessary but proposed a few minor environmental disclosure changes in the October
22
1975 release, Conclusions and Proposed Environmental Disclosures. n277 The SEC
claimed n278 it had evaluated five disclosure proposals: (1) comprehensive EIS-style
disclosures; n279 (2) disclosure of non-compliance with environmental regulations; n280
(3) disclosure of all environmental litigation; n281 (4) declaration of the corporation's
environmental policy; n282 and (5) disclosure of capital expenditures and expenses for
environmental purposes. n283 The SEC took great pains to justify its unwavering
reluctance to broaden environmental disclosures, first with a detailed analysis of the
limits to its statutory authority. n284 Numerous sources of rulemaking authority were
cited from the Securities Act of 1933, n285 Securities Exchange Act of 1934, n286
legislative history, n287 and Supreme Court interpretations. n288 These were used to
justify the limit of its disclosure rulemaking authority to matters of economic
significance, which the SEC interpreted as relating primarily to the registrant's financial
conditions and per [*278] formance and predominately for the economic decisions to
buy, hold, or sell. n289
The SEC concluded that its broad discretion to regulate disclosures was limited to the
economic and investment market protection contexts of the securities laws. The SEC
maintained that any expanded mission dictated by NEPA merely forced agencies like the
SEC to consider environmental values while performing their primary mission under
their organic statutes. n290 Further, the SEC maintained that a broader view of NEPA
requiring agencies to implement disclosures like those proposed by the NRDC was
simply unsupported by congressional intent. n291 In addressing the court's factual
demands, the SEC found only mild interest by a small segment of investors that it never
quite labeled a "fringe" element. n292 Furthermore, sufficient alternative avenues were
arguably available to influence corporate social policies. n293 The SEC declined to
reinforce the machinery to assist those shareholders who might use the "disclosure
scheme ... as a weapon to influence, if not control, most of the activities in the private
sector which have an impact on the environment." n294 The SEC was also influenced by
the costs of producing the information, the potential for confusion should investors
become inundated with technical information, and its belief that the environmental
disclosures sought by the NRDC could not produce benefits outweighing the costs. n295
The SEC proposed requiring disclosure of environmental compliance reports indicating
when the registrants had failed within the previous twelve months to meet an applicable
environmental stan [*279] dard established pursuant to any federal statute. n296 It also
proposed amending the registrant's description of its business to include any material
estimated capital expenditures for environmental control facilities for the remaining and
succeeding fiscal year. n297 Only this latter rule was adopted in the May 1976
Rulemaking on Environmental Disclosure. n298
The SEC again characterized this new rule as simply reinforcing the existing disclosure
scheme because such information was already "required under the general wording of
existing requirements [but such information] has not been provided by all registrants for
similar periods." n299 The proposed disclosures were deemed too potentially misleading
because most users would not have sufficient environmental expertise to use the
information in meaningful comparisons between registrants, nor could they likely
23
distinguish de minimis violations from significant violations. n300 Believing that this
final administrative action was insufficient, the NRDC sought judicial review a second
time in NRDC II. n301
As the NRDC II litigation began, the SEC initiated its first environmental disclosure
enforcement action against a public registrant. The SEC alleged that Allied Chemical
Corporation ("Allied") failed to disclose the extent of its contingent liability to private
parties and government environmental enforcers for its alleged kepone releases into the
James River. n302 Allied settled, without admitting or denying the charges, by
consenting to a permanent injunction against disclosure violations and agreeing to other
undertakings: to investigate other environmental violations; to maintain, review, and
provide information to the SEC on Allied's current environmental policies, practices and
procedures; and to disclose known environmental risks. n303 The gravamen of the
[*280] complaint was not nondisclosure of Allied's fixed environmental liabilities.
Rather, the SEC asserted that registrants like Allied must disclose known environmental
liabilities serious enough to be material to security holders even before detection by
regulators or other parties. n304
3. NRDC II
The court's review of the SEC's further rulemaking process again revealed procedural
errors. Although the court refused to hold that NEPA requires the SEC to impose
substantial environmental disclosures, n305 it held the SEC's 1975 Conclusions n306 and
1976 Rulemaking n307 were arbitrary and capricious because the SEC failed to consider
relevant factors and failed to act based on its own record. n308 After extensive review of
the SEC's administrative record to determine the agency's "transitions from its facts to its
ultimate conclusions," n309 the court again found the "Commission's decisionmaking
process as a whole was marred by serious and fundamental defects and that its rejection
of certain specific disclosure alternatives was not rationally based ... [and its reasons
were] not sustainable on the present administrative record." n310 As examples, the court
criticized the agency's cost/benefit analysis for failing to consider environmental
disclosures in alternative media or through alternative scopes of distribution, n311 and
for failing to support adequately the projected costs of the proposed disclosure on
registrants and the costs of the SEC's own formulation of disclosure guidelines. n312
Furthermore, the SEC's failure to make any serious [*281] attempt to develop these
guidelines violated NEPA's mandate to work with the Council on Environmental Quality
(CEQ). n313 The court again remanded to the Commission, directing the SEC "to engage
in reasoned decisionmaking" based on "an adequately developed administrative record
and to undertake further rulemaking." n314
4. NRDC III
The SEC refused to accept this second remand and found a sympathetic forum in the
D.C. Circuit in NRDC III. n315 The appeals court permitted the case to proceed and held
that the SEC was given broad discretion in its choice of policymaking processes and in its
rulemaking. n316
24
The court concluded that the SEC's failure to adopt the proxy disclosure proposal was not
arbitrary and capricious. Supporting its conclusion, the court noted that NEPA does not
require consideration of alternatives with consequences indistinguishable from other
alternatives already explicitly considered and rejected. n317 Full compliance with NEPA
is tempered by judicial deference to agency discretion to structure its own proceedings.
n318
A more deferential review was given to the substantive rationality underlying the
decision not to adopt the proposed regulations. n319 The proposed disclosures were
inappropriate for judicial review because they were policy laden and were based on a
huge record untested by the rules of evidence or the "refining fire of adversarial
presentation." n320 This absence of firm data gives an [*282] agency great leeway
when "required to make a quasi-legislative policy judgment ... in previously uncharted
territory." n321 A lack of hard scientific proof does not invalidate agency decisionmaking made ""on the frontiers of scientific knowledge' [because often] agency
rulemaking decisions must occur before such proof is available." n322 Because none of
the usual factors demanding closer scrutiny were present, n323 the SEC's decision was
not arbitrary and capricious under the generally subjective factors usually applicable to
judicial review. n324 NRDC III seemed finally to put to rest pressures from
environmental groups for such disclosures, leaving the SEC to make its own way to a
modern environmental disclosure.
5. Post-NRDC Litigation Developments
Following the NRDC litigation, the SEC continued the environmental disclosure
philosophy it had developed over the prior decade. In 1979, the SEC instituted
proceedings in In re United States Steel Corp. n325 under administrative powers granted
in section 15(c)(4) of the Securities Exchange Act, n326 a favored source giving the SEC
a powerful enforcement tool against misleading disclosures. n327 As the steel industry
came under increasing environmen [*283] tal pressure, U.S. Steel participated in
industry-wide studies and conducted internal estimates of compliance costs for the CAA
n328 and CWA. n329 Throughout the 1970s, its pollution control cost projections varied
somewhat but usually aggregated in the $ 3/4 to $ 2 billion range. U.S. Steel's
management believed pollution standards for the steel industry were unreasonable and
"technologically unattainable, inconsistent with applicable legal requirements, or of little
environmental value." n330 As a result, U.S. Steel steadfastly opposed such pollution
standards in the political forum while minimizing and delaying its actual capital
expenditures for pollution controls. Meanwhile, U.S. Steel frequently missed
environmental deadlines and was often cited with Formal Notices of Violation of the
CAA. n331 Despite frequent updates to its pollution cost estimates, U.S. Steel's periodic
financial reports between 1973 and 1976 merely reported past pollution abatement
expenditures and expected expenditures for the ensuing two years. U.S. Steel's SEC
filings stated: "U.S. Steel has pledged to confront and resolve its environmental problems
as effectively and efficiently as technology, time and money permit." n332
25
The SEC's findings in In re United States Steel Corp. suggest that a corporation may be
required to disclose more than capital expenditures for the ensuing two years if it
possesses estimates showing material capital expenditures for periods beyond two years.
n333 These estimates may be required to ensure that the disclosures are not misleading.
U.S. Steel's disclosures were facially accurate but misleading because U.S. Steel studies
revealed future material additional expenses. The SEC's findings support its position that
partial disclosures can be misleading because compliance with "specific environmental
disclosure rules does not necessarily constitute full compliance with the disclosure
requirements of the federal securities laws." n334 When costs are expected to be
materially higher beyond the two year horizon, the registrant may be obligated to develop
and disclose estimates, sometimes revealing [*284] the estimate's source, underlying
assumptions, and the uncertainty of those expenditures. n335
The SEC also found that U.S. Steel's announced environmental pledge was inconsistent
with its avowed policy of recalcitrance. n336 While a corporation is not generally
obligated to disclose its environmental policy, voluntary disclosures of its policy must be
accurate. n337 In addition, other disclosures may be required so that the voluntary
disclosures are not misleading. n338 Furthermore, policies like U.S. Steel's "minimizing
and delay" orientation that are reasonably likely to result in substantial fines, penalties, or
other significant effects may require disclosure of the probability and magnitude of such
penalties to prevent the overall disclosures from being materially misleading. n339
As a result of the proceeding, U.S. Steel agreed to an environmental audit by an
independent consultant, pledged to cooperate with the consultant, and agreed to make
disclosure of previously omitted environmental matters. n340 The SEC emphasized the
general applicability of the environmental disclosure principles of U.S. Steel by issuing
an interpretive release, the 1979 Environmental Disclosure Requirements. n341
In another Section 15(c)(4) proceeding, In re Occidental Petroleum Corp., n342 the SEC
settled charges that Occidental Petroleum (Oxy) made inadequate disclosures about its
environmental litigation, the financial impact of its environmental compliance, and its
contingent liabilities for toxic waste dump leachate. n343 Most of Oxy's domestic
environmental problems were limited to its Hooker Chemical subsidiary, which it
acquired in 1968. n344 Oxy was subject to at least ninety government proceedings
between 1974 [*285] and 1976 concerning excessive or illegal emissions at various
facilities. n345 For example, Oxy failed to disclose Hooker's civil and criminal
environmental liabilities for effluent discharges into the Suwannee River at White
Springs, Florida; groundwater contamination in Lathrop, California; discharge violations
necessitating a plant shutdown in Montague, Michigan; and the infamous toxic dump
leachate at Love Canal, New York and other nearby Niagara-area sites. n346 The
Occidental Petroleum nondisclosures included both financially material and arguably
immaterial pollution problems. The Occidental Petroleum settlement required an
environmental audit and disclosure of omitted environmental matters without Oxy
admitting or denying the SEC's allegations. By recounting some of its examples of
arguably immaterial unasserted environmental claims, the SEC signaled a toughening of
its stance to broaden disclosure. Although consistent with the SEC's 1970s environmental
26
disclosure policy, the Occidental Petroleum proceeding signals that the SEC expects
disclosure of material unasserted or nascent claims, even before they ripen into actual
proceedings. n347
At the turn of the 1980s, the SEC undertook an analysis of a decade of environmental
disclosures during the 1970s, n348 collected information about the relevance of
environmental disclosure on shareholder voting, n349 and the SEC Division of
Corporation Finance recommended environmental disclosure in its Staff Report on
Corporate Accountability. n350 Separately, the strong deregulatory political forces that
swept Ronald Reagan into the presi [*286] dency also manifested as political and legal
pressure on agencies to reduce regulatory costs. This included the Regulatory Flexibility
Act n351 and Executive Order 12,291, n352 both requiring cost-benefit/analysis of new
regulations. n353
The SEC chose to revisit environmental reporting with a 1981 rule proposal, Disclosure
of Environmental Proceedings. n354 This release proposed rescinding the per se
materiality rule n355 for government proceedings, replacing it with a three part
materiality threshold for requiring disclosure of environmental litigation: (1) all material
environmental proceedings, (2) damage actions or governmental proceedings involving
charges, fines, damages, or capital expenditures exceeding ten percent of current assets,
and (3) all government proceedings unless the registrant reasonably believes resulting
fines will be less than $ 100,000. n356 The SEC justified its proposed elimination of the
per se materiality rule for governmental proceedings by citing its experience that
registrants used excessive detail in describing minor governmental proceedings, which
obscured more significant litigation. n357 The SEC concluded that the costs that a per se
materiality rule imposes on registrants are not overcome by benefits to security holders
because of the difficulty in distinguishing significant from insignificant environmental
proceedings. n358
The $ 100,000 threshold was adopted as part of the 1982 "integrated disclosure system."
n359 This represented a sea-change to integrate theretofore separately administered
registration disclosures from the periodic reporting rules. n360 The integration was
intended to minimize costs from the duplication of disclosures and [*287] harmonize the
differences between disclosures under the 1933 Act and those under the 1934 Act. In
1980, the SEC also converted the Management Discussion and Analysis ("MD&A"), now
defined by Regulation S-K standards, from a mechanistic recitation of easily computed
financial changes into management's more meaningful qualitative assessment of financial
condition and projected future performance. n361
Overall, these new structures establish the basic foundation for the current SEC
environmental disclosure standards, and represent a trend toward requiring more useful
public disclosure of environmental liabilities. By more fully informing the public about
such liabilities, the disclosures can act as market-based incentives to promote the
attainment of national environmental goals.
27
B. Contemporary Environmental Disclosure Regulations

The fundamental contemporary disclosure standards for most publicly-traded registrants
are located in three basic regulations. First, Regulation S-K n362 defines the preparation
and presentation format for non-financial, qualitative disclosures that must be included in
prospectuses and registration statements for initial offerings of new securities, as well as
in periodic SEC filings and periodic reports distributed directly to shareholders. The
following subsection discusses how Regulation S-K addresses the nature and certainty of
nonfinancial matters which registrants must disclose, with particular emphasis on the
description of environmental liabilities. Second, Regulation S-X n363 requires the
preparation and formatting of quantitative financial information made in these same
disclosure documents to the SEC and shareholders. Subsection 2 discusses the
preparation and formatting of quantified environmental liabilities under Regulation S-X
in publicly disclosed financial statements. Third, a less onerous disclosure regimen under
Regulation S-B combines many of the features of both Regulations S-K and S-X.
Regulation S-B governs the disclosure of environmental liabilities by many small
business issuers. n364 [*288]
Disclosure obligations are also established or modified by professional accounting
standards, SEC enforcement interpretations, and caselaw. Material misstatements or
omissions can result in liability under the general antifraud provisions of the securities
laws. The antifraud provisions impose liability for damages in criminal, civil
enforcement, and private security holder litigation when disclosure fraud is proven under
Regulation S-K, accounting standards, or Rule 10b-5. n365 In addition, the SEC has
reduced some specific environmental disclosure obligations for foreign issuers with
securities traded on U.S. markets. n366 Although the SEC has reduced these obligations,
nondisclosure of environmental liabilities by foreign issuers may be inadvisable. n367
These obligations will be discussed in Subsection 3.
1. Regulation S-K
Regulation S-K contains three vehicles through which the disclosure of information is
regulated. Item 101 (Description of Business) n368 and Item 103 (Legal Proceedings)
n369 require rather specific responses describing particular factual events and conditions.
In contrast, Item 303 (Management Discussion and Analysis) n370 is considerably more
qualitative, permitting greater management discretion in the amount, manner, and format
of information presented. These disclosure regulations are tempered somewhat by the
concept of materiality, which generally requires disclosure of particular events or
conditions only when specifically mandated [*289] or when the facts would assume
sufficient significance to affect decisionmaking by reasonable investors. n371
a. Item 101 - Description of Business
Regulation S-K, Item 101 n372 requires a general description of the registrant's business,
n373 financial information about its industry segments, n374 a narrative description of its
28
business, n375 and financial information about foreign and domestic operations and
exports. n376 The following provision is expressly applicable to environmental
disclosure:
Appropriate disclosure also shall be made as to the material effects that compliance with
Federal, State and local provisions which have been enacted or adopted regulating the
discharge of materials into the environment, or otherwise relating to the protection of the
environment, may have upon the capital expenditures, earnings and competitive position
of the registrant and its subsidiaries. The registrant shall disclose any material estimated
capital expenditures for environmental control facilities for the remainder of its current
fiscal year and its succeeding fiscal year and for such further periods as the registrant
may deem material. n377
This passage essentially codifies the principles outlined in U.S. Steel n378 and explained
in a 1979 SEC interpretive release. n379 The focus on material impact of environmental
regulations on "capital expenditures, earnings and competitive position" n380 is
sufficiently broad to require disclosure of compliance costs such as installing and
maintaining pollution control equipment, or the shutdown of plants or partial curtailment
of operations deemed too costly for efficient retrofitting. Item 101 disclosures should also
include cleanup costs under CERCLA or other costs of noncompliance [*290] under
remedial legislation. n381 These costs are classified as expenses or capital expenditures,
not penalties, even if they result from a remedial agreement with the EPA. n382
Item 101(c) also requires the registrant to identify the business segment(s) for which
there are material environmental liabilities. n383 Business segments are not precisely
defined, although guidelines are provided in Financial Accounting Standard (FAS) No.
14 n384 and the SEC has coordinated its line-of-business requirements with this
Generally Accepted Accounting Principles (GAAP) standard. n385 Segmentation can be
based on several factors, including internal profit centers, recognized subdivisions,
subsidiaries, or geographic divisions. n386 For example, Oxy should have disclosed its
cleanup and abatement cost liabilities by specifically identifying the segment from which
these material costs emanated: either from its Hooker Chemical subsidiary or from its
chemical operations. n387
Some commentators argue that Item 101 does not account for the great uncertainty the
registrant faces when estimating future [*291] pollution control costs. n388 Since the
1970s, environmental laws have steadily become more stringent, requiring more
expensive and technologically advanced equipment. In some instances, the EPA has been
slow to issue definitive new regulations to implement new legislation, making estimates
of the timing and amount of costs for new pollution control equipment rather conjectural.
For example, regulations to implement the mandatory schedule in the Clean Air Act
Amendments of 1990 n389 have taken considerable time to develop. SEC Commissioner
Richard Roberts has reported, however, that the EPA believes most registrants already
know the best available technology, as required under the Act, and can therefore estimate
worst case compliance costs. n390 Nevertheless, it may be best for many registrants to
disclose the basis for their estimates to avoid under- or over-estimating compliance costs
29
whenever there is uncertainty about emission performance standards or the availability of
satisfactory technology. n391
b. Item 103 - Legal Proceedings
The second explicit environmental disclosure standard under Regulation S-K requires a
description of material pending legal proceedings, other than ordinary routine litigation
incidental to the business, including proceedings that a registrant knows governmental
authorities are contemplating. n392 The registrant must state the date when any material
proceedings were initiated against itself [*292] or its subsidiaries and include the name
of the court or agency, the principal parties, the alleged facts, and the relief sought. n393
The most notable feature of Item 103 is that the regulation creates specific materiality
thresholds in addition to the general materiality threshold. n394 The first specific
materiality threshold presumes insignificance of routine litigation. Businesses that
experience litigation as a normal part of day-to-day activities are relieved from disclosing
details about "ordinary routine litigation incidental to the business." n395 For example,
most casualty insurers have constant exposure to liability in negligence litigation that,
particularly when aggregated, could be quantitatively material. n396 Excessive detail
about such recurring litigation is presumed immaterial to investors, relieving registrants
of those disclosure costs. There is a similar presumption of immateriality in the
exemption for private damage claims that do not exceed ten percent of current assets,
although multiple actions arising from the same facts must be combined to determine
materiality. n397
The second specific threshold presumes greater significance for material insolvency
proceedings, n398 and a third, more sensitive threshold exists for litigation with insiders.
n399 The fourth specific materiality threshold favors disclosure of potential
governmental litigation by requiring registrants to "include similar information as to any
such proceedings known to be contemplated by governmental authorities." n400
Underlying the distinction between non-governmental and governmental proceedings are
the implied [*293] assumptions that governmental litigation is less often frivolous than
private litigation, that the expected value of government fines, penalties, or other
payments is higher than private damage claims, and/or that governmental litigation more
often reveals broader underlying wrongdoing or management malfeasance than does
private litigation.
These specific materiality thresholds extend to environmental litigation. However,
environmental materiality is modified by three additional thresholds. n401 The disclosure
duty is triggered whenever environmental proceedings satisfy general materiality or are
immaterial but nevertheless fall within one of the following specific thresholds. The first
threshold prohibits registrants from using the routine litigation exemption to avoid
disclosing material environmental proceedings. n402 Second, disclosure of private
damage environmental litigation is not required unless the amount sought exceeds ten
percent of the registrant's consolidated current assets (the 10% test). n403
30
Finally, the per se materiality rule for governmental environmental legal proceedings was
repealed and replaced with the $ 100,000 threshold originally proposed in 1981 (the $
100,000 test). n404 Under the $ 100,000 test, disclosure is not required for environmental
litigation in which government regulators seek less than $ 100,000 in [*294] sanctions,
or where potential sanctions could exceed $ 100,000 but the registrant has a reasonable
belief that the resulting sanctions will be less than $ 100,000. n405 Although the
reasonable belief must exist when the disclosure document is filed, the duty to update or
correct requires registrants to monitor the progress of litigation. n406 A change in
circumstances making imposition of sanctions more likely would generally require the
registrant to revisit a previous determination that the proceedings were immaterial or
failed the 10% or $ 100,000 tests. n407 Disclosure of the previously omitted
environmental proceeding may then be required in the next regular periodic report. n408
These specific materiality thresholds pose some important definitional issues, the
interpretation of which could trigger or relieve the disclosure duty. For example, the
registrant must determine which governmental proceedings are disclosable, what
constitutes sanctions and costs, and how similar litigation should be combined or
aggregated, if at all. The division of enforcement responsibilities under environmental
laws among local, state, federal, and multinational enforcement panels further
compounds these definitional problems. n409
In some cases, the SEC has attempted to clarify the scope of the materiality thresholds.
For example, the agency has broadly interpreted the term "government proceeding" to
include internal administrative proceedings, agency administrative orders, and Notices of
Violation issued by the EPA. n410 The SEC believes that [*295] potentially disclosable
proceedings arise whenever the government is a party, regardless of whether the
government or the registrant initiates the proceeding. n411 "Proceedings" also include
orders that do not literally follow a government proceeding because the registrant might
consent to or negotiate the order under the threat of litigation. n412
Designation as a potentially responsible party (PRP) under CERCLA n413 has created
some anxiety among registrants. PRP status essentially raises two issues: whether a PRP's
potential for partial or complete responsibility to clean up a contaminated site constitutes
an agency's contemplation of a proceeding and whether cleanup costs constitute
sanctions. n414 The SEC has concluded that PRP status alone does not provide
knowledge that a government agency is contemplating a proceeding. Thus, PRP status
does not trigger disclosure under Item 103. n415 Likewise, the term "sanction,"
triggering disclosure of government proceedings, does not include designation as a PRP.
n416 Costs incurred in a Superfund cleanup also fail to qualify as "sanctions" under Item
103 Instructions 5(B) or 5(C). n417 Instead, such remedial costs are treated as current
charges to income or as capital expenditures. n418 A reasonable estimate of reportable
costs may be reduced by contributions from other PRPs under joint and several liability,
by indemnification from insurers, n419 and by amounts for which government agen
[*296] cies have a contractual reimbursement duty. n420 The registrant's assessments of
such claims against third parties must separately consider the facts of each expected
indemnification or contribution. n421 The reliability of such reimbursement amounts
31
may be affected by matters such as the periods in which such claims are realized, the
likelihood that third parties will contest the claims, and the third parties' financial
condition. The disclosures made must be sufficiently specific to enable a reader to
understand the scope of the contingent environmental liabilities. n422
Item 103 also addresses the issue of when it is appropriate to aggregate numerous
litigation proceedings. The aggregation of claims affects reporting requirements because
the materiality threshold is quantitative. Aggregation of litigation could be based on the
forum or jurisdiction (state, federal or foreign); the type of proceeding (civil, criminal, or
administrative); or the type of law or regulator (tort, environmental, or securities law). In
the Item 103 context, aggregation has three meanings: (1) combining all pending or
threatened litigation of all types; (2) grouping all "similar" proceedings; n423 and (3)
combining all proceedings arising from the same facts and circumstances. The method of
aggregation may ultimately depend on the underlying purpose, of which there are several.
It is possible to aggregate litigation for purposes of: (1) combining separate but factuallyrelated suits for comparison with the specific materiality tests (e.g., 10%, $ 100,000)
because the aggregate better reflects the total risk exposure from a particular incident; (2)
requiring only "generic explanation" of groups of similar proceedings to reveal the
significance of different litigation [*297] classes while minimizing disclosure costs and
avoiding the confusion and obscurity of disclosing excessive details; (3) grouping
government proceedings to reveal the extent of potential lawbreaking; (4) grouping
environmental or other social concern litigation to signal the registrant's commitment to
such matters; and (5) disclosing total litigation exposure to reveal the extent of litigation
risks.
The routine litigation exemption recognizes that the combination or aggregation of
litigation may improperly heighten the financial significance of the litigation. n424 The
resulting contingent liability amount would often appear economically material, despite
the uncertainty in the amounts for which the registrant will ultimately be responsible. The
resulting damages and fines average far less than claimed in civil proceedings, less than
charged in criminal proceedings, and even less than the amount initially ordered or
agreed to as remediation in administrative proceedings. Even the seemingly unlimited
potential for punitive damages is moderating. n425 Therefore, it may be reasonable not to
require disclosure of material aggregate litigation liabilities precisely because they are
probabilistic and contingent and their disclosure has a greater potential to mislead than to
inform. Nevertheless, the SEC staff believe it may be appropriate to disaggregate
discussion of accrued and reasonably likely losses at particular cleanup sites if they are
individually material. n426
The SEC's 1970s environmental disclosure experience suggests that the aggregation of
environmental litigation may be desirable to reveal the risk exposure that differs in kind,
not just degree, from other types of litigation. For example, in distinguishing sanctions
from capital expenditures, the SEC has stated that "proceedings involving fines ... may be
more indicative of possible illegality and conduct contrary to public policy." n427 On a
micro level, costs, damages, and sanctions for multiple proceedings arising from the same
conduct, facts, or circumstances are aggregated to determine if these contingent liabilities
32
meet the 10% test. n428 There is no such requirement for the $ 100,000 test. n429
"Similar" [*298] proceedings can be grouped together for generic description with
issues stated only generally and descriptions given of groups of proceedings rather than
describing each proceeding individually. n430 Some commentators argue the specific
materiality thresholds will produce more disclosure than sole reliance on a general
materiality standard. n431 Nevertheless, variable materiality thresholds, when considered
with the aggregation concepts discussed above, produce a political compromise that the
SEC probably believes satisfies the NEPA mandate. n432 The provisions requiring
disclosure of the personal litigation involving top management suggests another area
where aggregation of environmental litigation is appropriate. This area has received little
attention, however, in either environmental disclosure policymaking or litigation. The
registrant is required under Items 401f and 401g to make limited disclosure of top
managers' litigation concerning specified financial matters and criminal prosecutions.
n433 The registrant must give a description of litigation experience for the past five years
for directors, board nominees, executive officers, promoters, and control persons if the
registrant believes it would be material to investor decisionmaking in their evaluation of
the manager's ability and integrity or in voting on other matters. n434 Covered
proceedings generally include insolvency, criminal convictions, bars from participation in
financial markets or business practices, or violations of securities or commodities laws.
n435 Although such matters involve the registrant's environmental litigation only
tangentially, amendments proposed by the SEC would broaden these management
litigation disclosures enough to possibly implicate some environmental matters in the
future. n436 Arguably, if a registrant has numerous top managers [*299] with
substantial environmental litigation exposure, these facts could be material to
shareholders' prediction of the registrant's future environmental performance, and thus
disclosable.
c. Item 303 - Management Discussion and Analysis
The third major Regulation S-K area requiring environmental disclosures is the Item 303
Management Discussion and Analysis (MD&A). n437 The MD&A provides "investors
[with] an opportunity to look at the registrant through the eyes of management by
providing a historical and prospective analysis." n438 The MD&A requires a
management narrative describing the qualitative implications of its own retrospective
analysis of performance on several measures with a future impact. As such, the MD&A is
fast becoming the primary disclosure vehicle for management to relate its unique insider's
critique of the registrant's financial performance and operations to help predict future
performance.
Traditional financial disclosures may be insufficient for investors "to judge the quality of
earnings and the likelihood that past performance is indicative of future performance."
n439 Accordingly, the MD&A has evolved considerably since the mid-1970s, when it
merely required a mechanistic recitation of numeric changes in [*300] financial
measures. n440 The MD&A is a hybrid of retrospective and prospective interpretations
reflecting management's insight on the registrant's current and future performance in its
product and factor markets. The MD&A specifically addresses measures of financial
33
performance, results of operations, and other information not readily determined from the
financial statements. To provide this analysis, management must identify and
continuously evaluate the key quantitative variables and qualitative factors peculiar to its
industry as necessary to evaluate its performance. n441
The MD&A requires disclosure of management's economic judgments and predictions in
a far more ambiguous context than nearly any other type of disclosure under the
securities laws. There is greater flexibility in MD&A disclosures than under the rigid
computation and formatting specifications of the Regulation S-X financial disclosures.
n442 This inherent ambiguity and flexibility has probably permitted significant nondisclosure. n443 Therefore, the MD&A may well "eclipse many of the other carefully
balanced line item disclosure requirements" in importance as the SEC increases
enforcement attention on the MD&A. n444 This ambiguity directly affects environmental
matters because the MD&A imposes a separate duty on management to disclose its
interpretation of the impact of environmental regulation on the registrant's operations and
performance.
The SEC's 1989 MD&A Interpretive Release establishes an analytical framework for the
MD&A disclosure duty by requiring three assessments. n445 First, the MD&A requires
an annual and interim (quarterly) discussion of the registrant's existing and [*301]
changing financial condition, n446 liquidity, n447 capital resources, n448 and the results
of its operations. n449 Liquidity and capital resources both relate to the registrant's ability
to command sufficient [*302] resources for expected expenditures. n450 Liquidity
specifically refers to the registrant's ability to generate cash needed for cash outflows.
n451 Capital resources focus more narrowly on the registrant's expected financing
sources to meet existing commitments for capital expenditures (e.g., property, plant, or
equipment). n452 Given the SEC's insistence that most environmental costs are not
penalties but rather expense items or capital expenditures, n453 liquidity and capital
resource discussions will clearly be applicable to environmental abatement expenses and
cleanup costs. For example, a discussion must address cash sources or capital resources
to fund material installation of pollution control equipment in new plants, material
pollution control retrofitting in existing plants, or material cleanup expenses.
The mandatory discussion of how the results of operations affect income, sales, or
revenues also implicates environmental matters. For example, pollution abatement and
cleanup may constitute "significant components of expense" n454 affecting the results of
operations. Environmental enforcement would commonly represent "unusual or
infrequent events or transactions" with a material effect on reported income. n455 Trends
or uncertainties in environmental standards may have a "material favorable or
unfavorable impact on [the registrant's] income" or a "material change in the relationship
between costs and revenues." n456 Increases in revenues must be attributed to some
cause, such as the decision of the registrant to pass on the costs of higher environmental
compliance to its customers. n457
Second, the MD&A requires the registrant to assess whether this known impact is likely
to come to fruition. Disclosure is excused if the impact is "not reasonably likely to
34
occur." n458 The basic MD&A [*303] disclosure duty arises whenever management
presently knows of a "trend, demand, commitment, event or uncertainty ... [that will]
have material effects on the registrant's financial condition or results of operation." n459
In other words, the regulation requires prospective disclosure whenever knowledge of
past or current events or conditions are expected to affect the future. Such mandatory
forward-looking disclosures are distinguishable from optional forward-looking
disclosures because the former are based on "currently known trends, events, and
uncertainties that are reasonably expected to have material effects." n460 On the other
hand, prospective disclosure is optional when management is merely "anticipating a
future trend or event or anticipating a less predictable impact of a known event, trend, or
uncertainty." n461
Both types of predictions would clearly encompass environmental disclosures. For
example, current knowledge of more stringent environmental regulations, the registrant's
designation as a PRP, or the insolvency of all other PRPs for the particular site would
trigger a mandatory MD&A discussion if material. A discussion would also be required
for currently known uncertainties about the stringency or application of forthcoming
pollution regulations, whether other PRPs are solvent or must contribute to clean up a
site, or the availability of government or insurance cleanup indemnity. In contrast, an
optional forward-looking disclosure might involve the anticipation of more stringent
environmental legislation or a forecast that an insurer will be successful in excluding
coverage of the registrant's CERCLA cleanup expenses.
Third, disclosure is required if the projected impact will be material. n462 The MD&A
provisions impose a specific materiality threshold that differs from the general materiality
standard enunciated in TSC Industries v. Northway n463 and refined in Basic, Inc. v.
Levinson. n464 "[The] MD&A mandates disclosure of specified forward-looking
information ... [if it is] reasonably likely to have a material [*304] effect." n465 The
specific MD&A materiality concept lowers the threshold, erring on the side of more
disclosure and requiring disclosure earlier than would typically be required under the
Basic standard. n466
The SEC applied this materiality standard to a hypothetical registrant designated as a
PRP. n467 Traditional analysis under the general materiality standard would not trigger a
disclosure duty until management determined that the PRP status would have a material
effect. The specific MD&A materiality standard requires disclosure of PRP status
immediately, even before the registrant can investigate the accuracy of its PRP
designation, the total extent of cleanup costs, the availability of contribution by other
PRPs, or the reliability of indemnification. This specific materiality standard effectively
shifts the burden of proof to the registrant to prove a negative (i.e., that the registrant's
PRP status has no material impact) before excusing MD&A disclosure. n468
Some commentators denounce the specific MD&A materiality threshold because of the
following problems: (1) difficulties in determining the correctness of the EPA's
designation of PRP status and potential liability; (2) difficulties in quantifying the
potential liability; and (3) uncertainties with respect to contribution and indemnification.
35
n469 However, the MD&A materiality threshold operates similarly to the Item 103
materiality thresholds. n470 The [*305] governmental proceedings, the 10% test, and
the $ 100,000 tests under Item 103 each reach a compromise in the utility of the
disclosure that balances the potential for misinterpretation with specific societal policies,
including environmental matters. There is a fine line between misleading favorable
disclosures and misleading but unfavorable disclosures; indeed, nearly all accurate
quantitative and qualitative disclosures can easily risk overstatement or understatement
unless the underlying matters are carefully researched, documented, prepared, and
presented. The major difference between Item 103's specific materiality thresholds and
the MD&A specific materiality threshold is the required disclosure of nascent claims that
have such a negative effect on investor confidence that the disclosure becomes a selffulfilling prophecy, whereby the disclosure leads to reinforcement of the negative
reaction. n471 Recent SEC enforcement emphasis on MD&A disclosure strongly
suggests that many registrants should immediately give MD&A disclosures more careful
consideration. n472
2. Financial Statement Treatment
In addition to SEC Regulation S-K, mandatory environmental disclosure in financial
statements is governed by SEC Regulation S-X. n473 Within the Regulation S-X
framework, generally accepted accounting principles (GAAP) are used to derive the
relevant data. n474 The SEC has long yielded control over promulgation of GAAP to the
accounting profession, n475 exercising oversight of accounting standards through
occasional moral suasion and infre [*306] quent modifications of professionallyestablished GAAP. n476 When such interpretations emerge they often appear as opinions
of the staff from the SEC Division of Corporation Finance and the Office of the Chief
Accountant. n477
GAAP has established the loss contingency as the primary accounting concept affecting
the treatment of environmental liabilities in the financial statements. Disclosure is
required for "an existing condition, situation, or set of circumstances involving
uncertainty as to possible ... loss ... to an enterprise that will ultimately be resolved when
one or more future events occur or fail to occur." n478 The basic disclosure framework in
Statement of Financial Accounting Standards (SFAS) No. 5 requires accrual n479 of a
loss contingency, such as a contingent environmental liability, with a charge to income
n480 when (1) "information available prior to issuance of the financial statements
indicates that it is probable that an asset has been impaired n481 or a liability has been
incurred at [*307] the date of the financial statements" and (2) "the amount of loss can
be reasonably estimated." n482 Both conditions must be met.
A contingent environmental liability such as a site cleanup, adverse environmental
litigation, potential indemnification for another's liability, or installation of pollution
controls clearly constitutes an "existing condition, situation, or set of circumstances"
under the broad reach of SFAS No. 5. n483 Resolution of many environmental matters is
frequently contingent upon future events such as the action of environmental regulators,
the outcome of litigation, or the resolution of uncertainties such as allocation of CERCLA
36
responsibility. SEC Staff Accounting Bulletin No. 92 generally addresses loss
contingencies and gives particular emphasis to contingent environmental liabilities,
providing clarification to GAAP and to interpretations the accounting profession has
given SFAS No. 5. n484
SFAS No. 5 directs registrants to classify the probability of each contingency's
occurrence as probable, n485 reasonably possible, n486 or remote. n487 If the
contingency involves litigation, the registrant must consider the following factors in
determining the likelihood of occurrence: the nature of the litigation, claim or
assessment; the progress of the case; the opinions or views of legal counsel or other
advisors; the registrant's experience with similar cases; the experiences of other
enterprises; and management's intended response (e.g., aggressive opposition, out-ofcourt settlement). n488
Reasonably estimable losses from environmental sources that the registrant classifies as
probable must be accrued and included as a charge reducing reported income on the
financial statements. n489 The mere filing of a lawsuit or formal assertion of a claim
[*308] or assessment does not automatically require accrual. n490 A footnote disclosure
n491 is, nevertheless, required if the environmental contingency is either not probable or
cannot be reasonably estimated but is at least reasonably possible. n492 Footnote
disclosure is not normally required for unasserted, nascent claims if the potential
claimants have not yet brought their claims. Footnote disclosure is required, however, if
the registrant believes that the assertion of nascent claims is probable and an unfavorable
out [*309] come is reasonably possible. n493 Neither accrual nor footnote disclosure is
required for remote loss contingencies. n494
Measurement of the loss contingency that forms an estimate must be based on available
evidence including the registrant's prior remediation experience, other companies'
cleanup experiences, and EPA data. This information is considered within the constraints
of existing technology and existing environmental laws. Inflation and other societal and
economic factors must also be considered. n495 A supporting footnote explanation of an
accrual is suggested by GAAP n496 and expected by the SEC staff. n497 This should
include the nature of the accrual, the accrual amount, and detailed disclosures about the
judgments. n498 The footnote should also include assumptions underlying recognition
and measurement of the liabilities. n499 These explanations help prevent the financial
statements from being misleading and inform readers of the range of possible outcomes.
If only a range of estimates can be determined, FASB Interpretation No. 14 requires
accrual of the better estimate of the loss within the range. n500 If none of the amounts
within the range represent a better estimate, then the minimum quantity should be
accrued. When an amount below the range maximum is accrued, then a clarifying
footnote disclosure is also required indicating how much additional loss exposure is
reasonably possible beyond the best estimate accrued. n501 Registrants should explicitly
indicate when no reasonable estimate can be made, or if the estimate is immaterial. n502
Disclosures should be updated as later events [*310] require adjustments to the
contingent loss estimates in the period of the change in accordance with GAAP. n503
37
The registrant must make forthright efforts to investigate and evaluate all necessary
information to arrive at reasonable estimates. n504
This procedure for evaluating the range of likelihood is strikingly similar to the
probability/magnitude calculus required under Basic v. Levinson. n505 This might reflect
the fact that the uncertainties involved in the merger context are analogous to those
present in the environmental context. The Basic calculus effectively discounts the
magnitude of the uncertain future event by the probability of its nonoccurrence to
determine materiality. n506 By contrast, SFAS No. 5 applies accounting materiality to
the result of the estimation process given the registrant's determination of the event's
probability of occurrence within one of the three discrete levels of likelihood.
GAAP and SFAS No. 5 may require additional financial statement treatments for
contingent environmental liabilities. A reserve for remediation costs should be accrued as
products or services are made if the registrant produces pollutants that it knows must be
immediately or eventually remediated. n507 More stringent environmental regulations
may impair assets not otherwise intended for immediate disposal. If such assets are
rendered technically obsolete more quickly than expected, it may be necessary to reduce
the asset's useful life or reduce the asset's value as carried on the books. n508 For
example, a piece of machinery may become technically obsolete more quickly than
expected because its continued use would violate increasingly stringent environmental
standards. A reduction of the asset's useful life, or its carrying value, would be necessary
when such technical obsolescence is primarily due to an inability to retrofit for lower
emissions and when the asset's replacement with more effective, modern technology is
required before expiration of the existing asset's functional life. n509 [*311]
Not all contingent environmental liabilities must be immediately expensed. The SEC
believes that there are circumstances when it may be appropriate to capitalize
environmental remediation costs. n510 In 1990, the FASB Emerging Issues Task Force
(EITF) suggested that a registrant may capitalize remediation expenses, such as CERCLA
cleanup costs, if any one of the following three conditions are met:
i. the treatment extends the life, increases the capacity or improves the safety or
efficiency of existing property;
ii. the treatment mitigates or prevents environmental contamination that has yet to occur
and that otherwise may result from future operations or activities; or
iii. the treatment is made to prepare the property for sale. n511
Public utilities and other rate-regulated registrants, which have historically posed some of
the greatest environmental threats, and have been a focus of several environmental
debates and statutes, are subject to their regulating bodies' decisions regarding reporting
standards. However, one should note that the uncertainty associated with a regulatory
decision does not permit the registrant to delay recognition of a probable and estimable
environmental liability. n512
38
Three years later, the EITF revisited environmental disclosure by addressing whether the
registrant can reduce the gross estimated contingent environmental liability by any
related potential claim for recovery from other responsible parties. n513 Such claims
should be evaluated independently from the registrant's environmental liability.
Disclosure of the related claim is legitimate only when the registrant's receipt of that
claim from third parties is probable. n514 It is inappropriate to show a net amount on the
balance sheet except where a direct right of setoff exists as permitted under GAAP. n515
The SEC staff has further refined the contribution problem by permitting registrants to
accrue only their propor [*312] tion of liability if jointly and severally liable with other
PRPs. n516 However, the registrant must accrue additional costs beyond its proportionate
liability to the extent other PRPs are not expected to fully pay their apportioned
liabilities. n517 A separate note may be necessary discussing the uncertainties
surrounding joint and several liability of other PRPs, including PRP solvency, indemnity,
cost sharing arrangements, and any reasonably possible additional loss if the other
sources are depleted before payment.
The EITF also reached consensus on the propriety of accruing discounted future
environmental liabilities. Only those future payments for which there are detailed sitespecific plans should be discounted to present value reflecting the time value of money.
n518 Discounting is appropriate only when the aggregate amount and payment timing are
known with certainty or can be reliably determined. n519 The SEC staff believes that the
applicable discount rate is one that produces an amount at which the liability could be
settled in an arms-length transaction with a third party. n520 When such rates are not
readily determinable, however, the rate used should not exceed the risk-free rate, such as
that obtainable on U.S. Government securities with maturities matching the
environmental liability's cash flows. n521 The financial statement footnotes must also
disclose several aspects of the discounting process. n522 Undiscounted cash flows must
also strictly follow the site-specific plans, be adjusted for inflation, and use explicit
assumptions capable of third-party review. [*313]
When registrants sell, dispose of, or abandon a polluted site, there are known site
restoration or exit costs. These can include assessment and cleanup expenses, monitoring,
and other post-closure expenses which must be discussed in the financial footnotes. n523
These costs may be accrued as an expense over the asset's useful life consistent with the
accounting practices used in the industry. This may be particularly appropriate because
certain exit costs increase with continued use of the asset. When remediation is required
before sale, development, or as a condition to the sale, the footnote should also describe
how these expenses were considered in assessing the asset's net realizable value. The
registrant's remediation liability for an asset or business previously sold must also be
disclosed unless the likelihood of a materially unfavorable outcome is remote. n524 A
purchaser of assets or a business in a business combination must allocate the acquisition
costs to the assets acquired and liabilities assumed, including contingent environmental
liabilities n525 based on the fair values of the liabilities as of the date of acquisition. n526
For loss contingencies without a fair value on the acquisition date, the acquiring company
must accrue the environmental liabilities consistent with the general procedures discussed
39
above. n527 Disclosure is also required while contingencies are assessed before
acquisition of an enterprise. n528 The disclosure should indicate that the purchase price is
preliminary, describe the nature of the contingency, and furnish additional information
necessary to enable a reader to understand the potential effects on the final allocation and
on post-operating results. n529
Overall, the generally accepted accounting principles outline the mandatory disclosures
for financial statements pursuant to Regulation S-X. Both Regulation S-K and Regulation
S-X, discussed [*314] above, form fundamental components of the SEC's policy of fully
informing the public about liabilities which could affect its interests. As such, the
Regulations act as market-based incentives: by fully informing the public about corporate
environmental liabilities, the public can use its investment dollars to promote the
attainment of environmental goals.
3. Misstatement and Omission Liability Under Antifraud Provisions
In addition to the periodic environmental disclosures specified under SEC rules and
professional accounting standards, the antifraud provisions of the Securities Acts of 1933
n530 and 1934 n531 impose a more indeterminate disclosure duty prohibiting
manipulative and deceptive devices. The Acts imply general duties to avoid the omission
or misstatement of facts concerning any material matter when the registrant
communicates to the public. Even when a specific environmental disclosure is not
immediately required under Regulation S-K, Regulation S-X, or under GAAP, a
registrant may nevertheless be liable under general antifraud provisions if false or
misleading statements are made about environmental matters in connection with the
purchase or sale of a newly registered or secondarily traded security, in a proxy
solicitation, or in a tender offer. Significant federal antifraud provisions applicable to
environmental disclosure include: section 11 registration statement fraud, n532 section
12(2) initial public offering sales literature fraud, n533 section 18(a) disclosure fraud in
SEC filings, n534 section 14(a) proxy fraud, n535 and the general prohibition of fraud in
section 10(b), as discussed in the next section. [*315]
a. Rule 10b-5
Section 10(b) n536 of the 1934 Act, along with its implementing SEC Rule 10b-5, n537
provide the predominant antifraud prohibition, a broad, catch-all provision designed to
deter any inaccurate disclosures, including those about environmental matters. Rule 10b5 applies to press releases, disclosures to analysts, corporate environmental policy
statements, periodic financial reports, and any other communication reaching investors. It
is also the primary basis for prohibiting insider trading, n538 including non-public,
market-moving information possessed by corporate insiders concerning environmental
matters. With limited exceptions for insider trading and the duty to correct, n539 Rule
10b-5 imposes no general duty to volunteer disclosures about environmental matters.
n540 Absent a triggering event, registration statement filing, or periodic report, the
manage [*316] ment usually has discretion to withhold internal information between
periodic reports. n541
40
In the few Rule 10b-5 environmental disclosure cases that have arisen, the courts have
applied existing Rule 10b-5 jurisprudence n542 consistent with other disclosure fraud
caselaw.
i. Misstatement or Omission
As in other disclosure contexts, Rule 10b-5 is violated when there is either a material
misrepresentation or material omission concerning environmental matters. n543
Registrants risk liability for affirmative misstatements of their environmental liabilities
made in required disclosure filings, in voluntary public announcements, or in revelations
to analysts. For example, in AES Corp. Securities Litigation, n544 the plaintiffs' claims
of direct misstatement survived the defendant's motion to dismiss. n545 Employees
allegedly falsified wastewater discharge reports made to the Florida Department of
Environmental Regulation, giving the appearance of environmental compliance pending
its public securities offerings. n546
It is risky to omit the admission of environmental liabilities in three instances: (1) when
required in mandatory reports, n547 (2) when literal truths create a misleading
impression, n548 or (3) when other disclosures are rendered misleading by half-truths. In
the latter two instances, an omission is actionable only if related to an affirmative
statement that is rendered misleading by the omission. n549 For example, the Second
Circuit affirmed the dismissal of claims in Union Carbide Class Action Securities
Litigation n550 where plaintiffs made only vague assertions that the registrant created a
false and misleading impression. The plaintiffs failed to allege any specific statements
that were rendered misleading by Union Car [*317] bide's omission of safety and
environmental irregularities at the methyl isocyanite plant in Bhopal, India. n551 Even
when plaintiffs allege that specific statements were rendered misleading by an omission,
these must be so closely related that the omission renders them misleading to a
reasonable person. For example, in Levine v. N.L. Industries, Inc., n552 there was no
duty to disclose the registrant's operation of a Department of Energy's (DOE) uranium
processing facility allegedly in violation of environmental laws. N.L. Industries'
favorable disclosure of its environmental performance and litigation n553 were not
considered misleading because the DOE promised indemnification of environmental
liabilities at the Fernald, Ohio facility. n554
When a claim of misrepresentation is based on an omission, the plaintiffs can proceed
past a motion to dismiss even if the defendant omitted information that was available
elsewhere. For example, in Endo v. Albertine, n555 stock purchasers alleged that Fruit of
the Loom's prospectus was deficient in a March 1987 offering of common stock and two
classes of notes. n556 Liabilities were inherited from its previous acquisition of Velsicol
Chemical. n557 Fruit's financial footnotes disclosed that: "the Company and its
subsidiaries are parties to certain legal proceedings and have retained certain liabilities
with respect to the sale of certain discontinued operations, including "Superfund' and
other environmental liabilities. The Company believes that these matters will not have a
material effect on its business or financial condition." n558 Three press reports indicated
41
that the Superfund liabilities inherited with the acquisition of Velsicol Chemical might
run as high as $ 60 million. The court believed that three isolated newspaper accounts
[*318] could not, as a matter of law, transform the mere general and imprecise reference
to potential Superfund liability into an immaterial omission. n559 In ruling on the motion
to dismiss, the court reasoned that it was possible that a reasonable investor would
consider it important that the $ 60 million liability was not embraced when Fruit of the
Loom's disclosure simply stated that it "retained some Superfund liabilities." n560
Thus, omissions are not generally rendered immaterial if available otherwise to the
public. Even more widely disseminated articles would probably not render the omission
immaterial. To avoid becoming a material omission, the matter must be publicly
transmitted with the degree of intensity and credibility sufficient to counterbalance the
misleading impression of the insider's one-sided representations. n561
ii. Materiality
The antifraud provisions parallel common law fraud by generally prohibiting only
material misrepresentations and omissions, thereby excluding liability for trivial
mistakes. n562 Materiality is probably the most significant concern in triggering the duty
to disclose environmental matters in both structured and unstructured disclosure contexts.
Except where specific materiality thresholds like those in Regulation S-K apply, n563
TSC Industries v. Northway, Inc. n564 and Basic v. Levinson n565 establish the general
materiality standard in the antifraud context.
Under TSC Industries, an omitted fact can be judged material if "there is a substantial
likelihood that a reasonable shareholder would consider it important in deciding how to
vote ... [or] the omitted fact would have been viewed by the reasonable investor as having
significantly affected the "total mix' of information made available." n566 In Basic v.
Levinson, n567 the court applied the TSC Industries materiality standard beyond the
proxy fraud context to [*319] Rule 10b-5 disclosure fraud. n568 Basic is of particular
interest in the environmental disclosure context because it adopted the
probability/magnitude calculus to assess the materiality of contingent or speculative
events. n569 Such events become material as the probability of their occurrence rises and
the magnitude of their financial impact increases; essentially, this means that the
estimated magnitude of the event is discounted by the probability of its nonoccurrence.
n570 The speculative nature of the merger negotiations addressed in Basic is also a
fundamental characteristic shared with environmental liabilities. This strongly suggests
that the Basic probability/magnitude materiality formula should also apply to
environmental disclosures. n571 Therefore, if it is reasonable to project continued
political pressure from environmentalists, increased tightening of environmental
regulations, rising costs of pollution control, and growing cleanup costs, then under
Basic's probability/magnitude test environmental liabilities will often be material. Given
that contingent environmental liabilities are often large, the Basic test makes them
material even when their occurrence is rather uncertain.
42
While the application of the materiality standard to environmental disclosures is still in
its beginning stages, the cases discussed above apply it rather predictably. Materiality is a
mixed question of law and fact n572 permitting courts to rule on materiality as a matter
of law. A fraud complaint will survive a motion to dismiss where the facts, if proven,
would present information material to reasonable investors. n573 In AES Corp. Securities
Litigation, the undisclosed risk that AES planned an unnecessary cogeneration plant
coupled with allegations that AES falsified its emissions reports and fraudulently
obtained site certification survived a motion to dismiss. n574 By contrast, fraud claims
can be dismissed as immaterial when the court finds the misstatement or omission is "so
obviously unimportant to a reasonable investor that reasonable minds could not differ on
the question of their importance." n575 For [*320] instance, Union Carbide's failure to
detail the environmental and safety dangers of methyl isocyanite production at Bhopal,
India, was similar to the lack of details given by other producers of dangerous chemicals.
n576 It is probably justifiable to withhold disclosure of minutiae to avoid overwhelming
investors with scientific and administrative facts not conducive to informed
decisionmaking. n577 Similarly, the DOE's agreement to indemnify NL Industries for
environmental problems at the Fernald, Ohio, facility rendered NL's omission immaterial
because "there was no plausible way that NL's shareholders could suffer financially from
the consequences of the alleged environmental violations." n578
It is questionable, however, whether indemnification agreements should automatically
render contingent liabilities immaterial. The reliability of federal guarantees is becoming
more uncertain. n579 Guarantees made by state or local governments and those from
private insurers are subject to the solvency of the guarantor and various exclusions.
Therefore, although federal guarantees may be "nearly" certain, guarantees made by state
or local governments and by private insurers are never totally assured. Therefore, the
quality of the indemnification should be factored into the Basic materiality calculus at the
probability phase of analysis. n580 Courts addressing the materiality of environmental
misstatements and omissions will likely continue applying materiality case law consistent
with antifraud precedents.
iii. Scienter
Since the watershed case of Ernst & Ernst v. Hochfelder, n581 scienter has been an
element of some antifraud provisions, n582 particularly Rule 10b-5. Environmental
disclosure plaintiffs must prove [*321] one of the following: the misstatement or
omission was made with "a mental state embracing intent to deceive, manipulate, or
defraud," n583 the defendant had actual knowledge of the environmental problem, n584
or the defendant acted in reckless disregard of the truth. n585 Such proof may often be
available given the extensive monitoring, environmental auditing, recordkeeping, and
reporting requirements under the environmental laws. Modern environmental regulatory
oversight requires corporations to generate a factual record likely to provide evidence for
discovery and thereby support allegations that will satisfy the scienter element. Various
employees and executives of the registrant are likely to possess knowledge of underlying
operational facts that amount to the registrant's knowledge of an environmental liability
or violation. n586 For example, the results of environmental tests, the registrant's PRP
43
status, or the known unreliability of a toxic waste transporter or disposal facility would
evince scienter. The disclosure of the registrant's PRP status acknowledges scienter of a
contingent cleanup liability. n587
Evidence supporting recklessness as a form of scienter may actually reinforce antifraud
liability because a jury may equate it with reckless and irresponsible environmental
stewardship. One question that arises with regard to recklessness is in whom or where
within the registrant's organization the knowledge or recklessness may reside to
constitute sufficient scienter. Even lower level employee knowledge may be imputed to
upper management if [*322] there is inadequate supervision. The environmental
disclosure cases acknowledge that the scienter requirement can be satisfied by the
registrant's knowledge of adverse test results. n588 Although recklessness is a form of
scienter, it cannot be inferred absent adequate proof. n589
iv. Causation and Justifiable Reliance
Causation and reliance are complex and evolving elements of Rule 10b-5 that apply to
environmental disclosures. Courts initially relaxed the common law fraud requirements
because disclosure fraud in the public securities markets raised serious proof difficulties.
Because proving reliance on omitted material facts is difficult, there is a presumption of
reliance on omissions for face-to-face transactions. n590 This presumption was extended
to impersonal, anonymous market transactions in Shapiro v. Merrill Lynch, Pierce,
Fenner & Smith. n591 However, criticism that such a presumption opened the floodgates
of litigation and would lead to "draconian liability" n592 reinforced the need for a
genuine reliance requirement in misstatement cases brought by private plaintiffs.
Recent opposing pressures about the causation element have both broadened and
narrowed Rule 10b-5. First, the "fraud on the market" theory from Basic v. Levinson
n593 relaxed the plaintiff's burden of proving reliance in public trading. Basic essentially
collapsed the "transaction causation" into the reliance test when the misstatements or
omissions are embedded in visible market prices and the plaintiff was led by market
conditions to trade at that [*323] price. n594 Reliance was also found from omitted and
overstated environmental compliance in Grossman v. Waste Management, Inc. by
application of the fraud on the market theory. n595 However, reliance must be
reasonable; a sophisticated plaintiff or investor with superior access to the truth is not
justified in relying on the misstatement or omission. For example, in Professional Service
Industries, Inc. v. Kimbrell, n596 the plaintiff's reckless indifference to the EPA's true
enforcement posture towards an environmental policy negated the claim that a
sophisticated buyer justifiably relied on the selling shareholder's misrepresentation of
environmental matters.
On the other hand, lower courts increasingly require proof of "loss causation," essentially
the equivalent of "but for" causation. n597 For example, the causation element requires
proof that the plaintiff would not have purchased or sold the security nor suffered
economic injury but for the plaintiff's exposure to the disclosure which misstated or
omitted the hidden environmental matter. Under this stronger limiting principle, plaintiffs
44
cannot ignore the underlying conditions about which there is an alleged misstatement or
omission. Loss causation prevents recovery for losses that would have been suffered even
without the fraud due to other, usually macroeconomic, conditions, and could become a
difficult barrier to private securities fraud suits if courts apply the concept strictly. n598
v. Additional Rule 10b-5 Elements
There are several additional prerequisites to a Rule 10b-5 action. First, the fraud must be
perpetrated "in connection with the purchase or sale of a security." n599 Courts have
construed the "in connection with" language of the requirement liberally to permit suits
where the plaintiff suffered injury resulting from "deceptive [*324] practices touching"
a sale. n600 However, more recent cases require a somewhat more direct connection akin
to causation. n601 Nevertheless, the limitation to purchases or sales does not bar either
SEC administrative actions or criminal prosecution by the Justice Department. n602
Second, only those private plaintiffs who traded contemporaneously with the
misstatement or omission have standing. Third, security holders suffering unrealized loss
from an environmental misstatement or omission have no right of action. Finally, the
"interstate commerce" jurisdictional requirement should be easily satisfied in
environmental disclosure cases particularly where a misstatement is included in periodic
reports mailed to the SEC or shareholders, delivered through the press or wire services,
communicated by telephone, or the purchase or sale involves "a facility of a national
securities exchange," even if the contact is wholly intrastate. n603
b. Other Securities Fraud Provisions
Rule 10b-5 and its jurisprudence often overlaps antifraud provisions in other securities
laws. In many cases, n604 Rule 10b-5 claims often accompany damage claims for fraud
in initial public offerings or a private placement n605 under section 11 n606 or section
12(2) n607 of the 1933 Act. [*325]
In addition, plaintiffs have brought claims under SEC Rule 14a-9 n608 and section 14(a)
of the 1934 Act. n609 There have been several environmental proxy omission suits
addressing materiality of environmental matters brought under these provisions. In
Goldsmith v. Rawl, n610 the Basic materiality rule was applied to Exxon's alleged failure
to disclose the pending Valdez oil spill litigation in its proxy solicitation. Exxon's motion
for summary judgment was denied because the District Court would not rule the omission
immaterial as a matter of law. n611
In United Paperworkers International Union v. International Paper Co., n612 a
shareholder claimed that the registrant misconstrued a shareholder proposal to adopt the
Valdez Principles. The misstatements and omissions were not cured by other disclosures
contained in public press releases or the registrant's Form 10K because "a reasonable
investor who was interested in the Valdez Principles and had read both the Proxy
Statement and the annual report would have received no indication that additional
information pertinent to the Valdez Resolution was available in the 10K Report." n613
The "total mix" of information relevant to materiality in a proxy solicitation does not
45
include sporadic news reports, particularly where they were "few in number, narrow in
focus, and remote in time" from the context of the proxy solicitation, n614 nor is
information contained solely in a Form 10K part of the "total mix" if not reiterated in the
proxy materials.
The International Paper holding appears to abandon existing "total mix" interpretations
unless limited to its facts. Previous cases had included in the "total mix" assorted
documents outside [*326] the proxy solicitation package if readily accessible to all
shareholders, including past annual reports, n615 trade press articles and announcements,
n616 and other publicly filed documents. n617 However, the context of International
Paper may be distinguished from prior interpretations on three grounds. n618 First, the
information excluded in International Paper from the "total mix" was offered to cure
omissions rather than to counter misstatements. n619 Second, the proxy solicitation
addressed a subject matter not directly in security holders financial interest. n620 The
Valdez Principles concerned a policy matter limiting security holders' incentive to ferret
out the truth from the other, "readily accessible" sources. n621 Finally, there is an
increasing environmental sensitivity among security holders suggesting more forthright
disclosure of environmental matters in proxy solicitations. n622
The plaintiffs' claims in In re Browning Ferris Industry, Inc. Shareholder Derivative
Litigation n623 were dismissed even though the registrant allegedly omitted
environmental and other information in a proxy solicitation. The Schedule 14A proxy
statement is intended to offer only information relevant to board elections. The SEC's
"expert view of the types of involvement in legal proceedings that are most likely to be of
concern to shareholders in a proxy contest" is highly influential in determining
materiality for a proxy statement. n624 The failure to disclose past, settled environmental
litigation is irrelevant to particular nominees running for the board. Even the failure to
disclose pending environmental litigation is irrelevant because the Schedule 14A
regulations have a nearly [*327] exclusive list of relevant litigation which does not
include environmental matters. n625 The unsettled requirements for environmental
disclosures in the proxy context suggest more significant risks than in disclosures under
Regulation S-K, Regulation S-X, or Rule 10b-5.
c. Application of Antifraud Provisions to Forward-Looking Projections
Financial projections and other forward-looking predictions have the potential to
influence investors, particularly when they consist of management's own earnings
expectations. n626 The SEC once presumed that projections were inherently misleading
and it prevented investor exposure via strict enforcement. n627 For example,
management has an incentive to withhold bad news longer than is optimal while it can be
expected to quickly release or even fabricate good news.
Forward-looking disclosures can have an irresistible appeal to investors, but provide
perverse incentives to management. First, projections made by insiders who have
intimate financial and operational insights may provide false credibility, particularly
when made under the auspices of an SEC filing. n628 Second, various projections,
46
particularly of earnings, are generally available in the investment community, further
accentuating the perceived value of management's projections. Third, management has
added incentive to manipulate all disclosures because this can affect stock prices to
management's benefit. n629 For example, management is generally retained while stock
prices are steady or rising. By contrast, management generally feels pressured and fears
displacement when stock prices languish or fall. Optimistic projections [*328] tend to
prop up prices, until management loses credibility, and pessimistic projections depress
prices.
These factors have combined to lower the credibility of projections in the eyes of
regulators and the courts. However, by the 1970s, n630 the SEC acquiesced to pressures
n631 that it shift its disclosure expectations from a predominant focus on historical or
"hard" financial data n632 to a combination including potentially more meaningful
forward-looking disclosures, theretofore considered "soft" and unreliable. n633
Forward-looking statements can address diverse subjects and are delivered through
various outlets. Management often generates internal financial projections regarding the
registrant's product or factor markets and the aggregate financial performance. These can
include predictions of financial variables such as revenue, costs, income, loss, earnings
per share, dividends, or any other internal or macroeconomic factors with an impact on
financial variables. Management's plans are forward-looking and can be stated as capital
spending plans, prospective acquisitions, new market strategies, discontinuance of
operations, or may appear as generalized comments on trends and uncertainties in the
MD&A. Forward-looking statements with an environmental impact may include any of
these matters in addition to expectations about the political, legal, or regulatory matters
involving changes in environmental law or environmental litigation. [*329]
In Virginia Bankshares, Inc. v. Sandberg, n634 the Supreme Court held that forwardlooking, knowingly false statements can be actionable under the antifraud provisions.
n635 Projections about these subjects or appearances in these outlets may nevertheless
have limited protection from antifraud liability under the safe harbor discussed in Part
III.B.3.c.ii. n636 Registrants can seek to minimize liability risk by distinguishing between
mandatory and optional projections.
i. Optional vs. Mandatory Forward-Looking Statements
The administrative interpretations and caselaw overlay additional difficulties regarding
prospective statements because the SEC and federal courts take varying approaches to
mandating projections. The SEC imposes rigorous projection requirements consistent
with the spirit of its MD&A rules. These standards were applied in the U.S. Steel release
to require projections of environmental costs and to provide support for those projections
with clear, reasonable statements of the underlying assumptions and prediction methods
used. n637 The 1992 administrative hearing In re Caterpillar, Inc. n638 is now viewed as
a turning point in enforcement rigor by generally requiring MD&A projections of how
external economic and political events could affect a registrant. n639 For this reason, In
47
re Caterpillar, Inc. is criticized as an invitation to private plaintiffs to scour prior MD&A
reports for omitted predictions of adverse macroeconomic trends. n640
Unlike MD&A projections, the federal courts have generally been reluctant to impose a
duty to predict under Rule 10b-5, although the various approaches taken among the
circuits suggest a duty to predict is developing with the attendant antifraud liability.
[*330] Under the traditional view, registrants have no duty to make predictions despite
the federal courts general deference to SEC rule interpretations. n641 This view seems to
persist in the D.C., n642 Second, n643 and Seventh Circuits. n644 Some of these courts
would restrict any prediction duty to the context of SEC disclosure regulations relating
only to firm-specific information so there is no duty to predict general macroeconomic
trends. n645 The Fourth n646 and Ninth n647 Circuits would require projections only
where the information is "reasonably certain" and the Sixth Circuit n648 when there is
"substantial certainty," reasoning that predictions are not mandatory n649 and should be
left to management's reasonable business judgment. The Third Circuit used an ad hoc
analysis to weigh the potential benefits and harms to investors from a case involving asset
appraisals omitted from a tender offer disclosure. n650 This approach would require
prediction after consideration of several factors: the underlying facts and assumptions, the
preparer's qualifications, bias in the preparation, the importance to investors, and the
projection's uniqueness or availability elsewhere. n651 Liability can be limited when the
projection is supplied with adequate cautionary warnings. n652 The Fifth Circuit has
refrained from implying [*331] a duty to predict, yet would consider several factors
important if it were to do so: (1) the balance of the statutory policy interests of disclosure
vs. non-disclosure, (2) the nature of the particular undisclosed information at issue, and
(3) the impact of surrounding circumstances on the information's importance and
reliability to investors. n653
The Item 303 MD&A discussions of environmental trends and the Item 103 discussion of
environmental litigation are inherently forward-looking. Given the SEC's message in
SAB No. 92 requiring forthright environmental projections, n654 the clear trend in SEC
policy to require more projections, and the courts slow evolution toward requiring some
predictions, it can no longer be assumed that environmental predictions are optional.
ii. Safe Harbor Rule for Projections
The capstone to the SEC's policy reversal on projections was to encourage forwardlooking disclosure under a new safe harbor rule. n655 The safe harbor rule deems that
certain projections or reaffirmations of previous projections by or on behalf of a
registrant are not "fraudulent statements" n656 within the various antifraud provisions of
the 1933 or 1934 Acts when made on a reasonable basis and in good faith. n657 The safe
harbor should assuage registrants' anxiety that unfulfilled predictions might trigger
antifraud suits. However, the rule's limitations have made it less effective than expected.
n658 [*332]
For example, protection is offered only for statements made in SEC filings (e.g., 10K,
10Q, and registration statements) and in annual reports to shareholders. Oral statements
48
to the press or to analysts, and written disclosures made outside of SEC filings are not
protected unless reaffirmed in an SEC filing. n659 Registrants must be in compliance
with the periodic disclosure requirements n660 and the safe harbor is inapplicable to
investment companies. n661 The forward-looking statements protected are limited to: (1)
projections of revenues, income (loss), earnings (loss) per share, capital expenditures,
dividends, capital structure or other financial items, n662 (2) statements of management's
plans and objectives for future operations, n663 (3) predictions of future economic
performance in the MD&A, n664 and (4) the assumptions underlying any of the
foregoing. n665 The SEC is currently reviewing the safe harbor to address complaints
that it fails to moderate uncertainty about liability for projections, that it provides scant
procedural protection from frivolous lawsuits, that the duty to correct is vague, and that
the registrant's relations with securities analysts remain uncertain. n666 [*333]
The lack of adequate interpretations of the reasonable basis and good faith standards may
also contribute to uncertainty over the safe harbor's effectiveness. While few courts have
directly inter [*334] preted these factors, several principles are emerging. First, estimates
are "bound to be wrong," so the fact that a prediction is not realized does not alone
suggest it was made without a reasonable basis. n667 Second, registrants use a reasonable
basis when predictions are based on the best information available in making predictions.
n668 Third, it is probably reasonable to use historically accurate prediction methods so
long as there are no indications that they will become inaccurate in the future. n669
Fourth, slight differences between internal and disclosed predictions do not render the
basis for the disclosures unreasonable. n670 Fifth, the registrant should both genuinely
believe the prediction and be unaware of any undisclosed facts seriously undermining the
prediction's accuracy to be in good faith. n671 These principles bode well for the
protection of environmental predictions.
Environmental disclosures are inherently forward-looking, particularly those projecting
future compliance costs, contingent cleanup liability, or the impact of relaxed or
toughened environmental standards or enforcement. Most environmental projections and
their underlying assumptions are probably protected under the safe harbor as capital
expenditures, "other financial items," management's objectives or plans, and/or MD&A
future economic performance statements. Although few cases directly address
environmental projections, the SEC's U.S. Steel release tracks the safe harbor factors.
n672 There must be a reasonable basis for any environmental cost estimates and the
disclosure must "set forth the source of the estimates, the assumptions and methods used
in reaching the estimates, and the extent of uncertainty" to avoid being misleading. n673
Such projections are clearly in a safer position than non-disclosure given the emerging
attitude of the SEC and the courts.
It is often said there is a duty to correct or update prior disclosures that later events render
misleading. n674 While there is support [*335] for this view in caselaw, n675 dicta,
n676 and SEC regulations, n677 few successful omission cases have been based on the
update/correction duty theory. n678 Nevertheless, a duty to correct or update previous
environmental disclosures probably arises when a prediction becomes materially
misleading due to subsequent events or the prediction is later found to have been false
49
when originally made. The failure to correct a projection probably negates the good faith
required for safe harbor protection.
iii. Bespeaks Caution
If the safe harbor appears ineffective to protect registrants from liability for
unconsummated projections, then perhaps the emerging "bespeaks caution" doctrine may
be a reasonable substitute. n679 Projections of environmental matters seem naturally
suited for protection by this limiting principle. The bespeaks caution doctrine requires
that disclosures be understood in their context so that when "an offering statement, such
as a prospectus, accompanies statements of its future forecasts, projections and
expectations with adequate cautionary language, those statements are not actionable as
securities fraud." n680 Economic projections are not actionable if they bespeak caution
because "economic prognostication, though faulty, does not, without more, amount to
fraud." n681 [*336] This prevents "fraud by hindsight," an attempt to impose liability
for unrealized economic predictions. n682
However, the bespeaks caution approach will not protect management from boilerplate
generalizations merely describing the investment as "speculative," nor will a blanket
disclaimer that the investment is "risky" suffice. n683 Adequate warnings must
accompany and directly contradict the unfulfilled projections to offer refuge from fraud
liability. n684 The bespeaks caution doctrine has been most successfully used in new
securities offerings and by new ventures brought under Rule 10b-5 n685 and sections 11
n686 and 12(2) n687 of the Securities Act of 1933.
Eight U.S. Circuits have either adopted or strongly supported the bespeaks caution
doctrine. n688 Its widening acceptance should provide registrants with some relief when
making both mandatory and optional forward-looking environmental disclosures. To be
effective, the environmental cautionary language should directly address the risks for
which financial impact is projected and address the sources of uncertainty in those
predictions. Bespeaks caution has been successfully pled most often in pre-trial dismissal
motions to shield optimistic predictions rather than pessimism. Because many
environmental disclosures will be the pessimistic revelations by publicly-traded
companies for their expected future expenses or liabilities relating to pollution control or
toxic dump site cleanup, the bespeaks caution doctrine may offer only a partial shelter
from the alleged backlog of undisclosed contingent environmental liabilities. For
example, In re AES Corp. Securities Litigation illustrates that the language used to
caution investors about contingent environmental liability must directly address the
alleged material omissions to provide the desired protection. n689 In all likelihood, the
reasonable basis and good faith factors from the safe harbor will eventually merge with
the bespeaks caution doctrine to produce a single, hybrid antifraud defense judged in the
context of [*337] reasonable investor behavior and the total mix of available
information.
In sum, the bespeaks caution doctrine and safe harbor rule provide some relief to
corporations, protecting their disclosures of environmental liabilities from potentially
50
broad antifraud liability in some circumstances. This protection furthers the goal of fully
informing the public about environmental liabilities, which promotes market efficiency,
ultimately enhancing corporate compliance with national environmental goals.
IV. Conclusion: The Economic Impact of Environmental Disclosure
The market-based incentive models for environmental protection are effective only when
the underlying conditions and assumptions for efficient markets hold. Market participants
are likely to avoid adverse selection and optimize their choices only while well-informed.
The disclosure regimen of the environmental laws has failed to adequately inform
investors, making the markets inefficient with respect to contingent environmental
liabilities precisely as these matters are becoming material.
However, the integration of environmental disclosure into the long-standing and rather
effective securities law disclosure regimen should ease this information asymmetry,
permitting more efficient securities pricing. Environmental liabilities have grown to such
immense proportions that they are important to most investors' decisions to buy, sell, or
hold, and in their pricing of securities. This disclosure integration has an added bonus that
furthers the goals of environmental regulation. Broader environmental disclosure focuses
market pressures on management and industry, providing additional incentive to
minimize their exposure to environmental liabilities.
The environmental disclosure regimen required by the environmental laws has been
relatively ineffective to shift environmental attainment incentives away from primary
reliance on the command and control framework to market-based economic incentives.
The environmental laws require only fragmented filings in non-centralized locales and
lack public distribution of company-specific environmental compliance information.
Even the most diligent investor would have a difficult task uncovering useful
environmental information concerning a particular firm. [*338]
Although the environmental disclosure requirements of the federal securities laws do not
share these shortcomings, non-compliance probably restrains any meaningful evolution
toward incentives imposed by a fully informed financial market. Recent trends, however,
may suggest that market-based economic incentives may soon fulfill their promise to
provide efficient environmental attainment. n690 First, regulator cooperation between the
EPA and the SEC should improve the SEC's environmental disclosure enforcement
program. Second, the SEC's disclosure enforcement crackdown should increase the
financial reporting of registrant-specific environmental information.
Increased disclosure by registrants should provide the least-cost source of information on
environmental liabilities, reducing the environmental information asymmetry between
registrants and the financial markets. n691 Investors will then be better able to
incorporate environmental compliance cost information into securities prices. n692 As
prices adjust, each firm's cost of capital changes - it should rise for firms with substantial
environmental liabilities as investors bid down stock price to reflect future environmental
expenditures, and it should fall as investors bid up the prices of non-polluting firms.
51
Managers tend to minimize their cost of capital and should be expected to reduce
environmental liabilities and uncertainties. In the past, any environmental discount to
stock prices probably affected entire industry groups that the financial markets suspected
were facing uncertain future cleanup and abatement costs. However, as more firmspecific information becomes reliably available, the price impact should shift to only
those individual firm stock prices and be based on their disclosures. Individual firms that
are able to control and reduce their environmental problems may experience stock price
increases if they were previously lumped together in an industry suspected to have
environmental problems. Firm-specific disclosures should have the benefit of rewarding
companies with a responsible environmental record, [*339] while steering investment
away from companies with looming environmental problems.
This process may be further augmented by the so-called "ethical" investment movement
among individuals who personally make "green" investments or who participate in
"green" mutual funds. n693 They will tend to withdraw capital from firms with
substantial environmental liabilities, leaving a smaller pool of capital available for
polluters. n694 Although the green investor was once thought of as an individual wildeyed, tree-hugger with little real power to influence corporate America, today groups of
these investors are banding together to create the kind of economic clout to which
corporate executives listen. One such group, the Coalition for Environmentally
Responsible Economics (CERES), an alliance of environmentally concerned investment
groups including the New York City Employees Retirement System (NYCERS), has filed
shareholder resolutions at hundreds of corporate proxy meetings to advance corporate
environmental responsibility by increasing shareholder awareness. n695 Although most
of these resolutions never reach the voting stage, those that do usually garner between
five and twelve percent of shareholder support. n696 While this is not a majority of
shareholders, it is a significant and growing minority. Corporate America should take
heed.
Even the credit markets may be affected as lenders become wary of firms with significant
environmental liabilities. Clearly, lenders whose investment is secured by mortgages or
deeds of trust have already begun to avoid extending credit to firms with environmental
problems due to the very real potential for environmental liability. This information
effect will probably be greatest on publicly-traded firms. The effect may be less
pronounced on private financiers and venture capitalists because the medium-size,
privately-held firms they finance disclose less information than the securities [*340]
laws require for public companies. There should be even less impact on owner/managerfinanced privately-held firms which make no disclosure under the federal securities laws.
However, today's commercial lenders are well aware of the necessity to examine the
environmental record of every potential borrower, and avoid lending to any firm that an
environmental assessment reveals to have a problem.
Another mechanism linking the disclosure of environmental information to
environmental compliance is corporate governance. Shareholders may be expected to
pressure management to avoid environmental liabilities by instituting stronger
environmental policies, such as mandatory internal and external environmental audits.
52
There is growing evidence of such activism among institutional investors, e.g., pension
funds, mutual funds, and insurance companies. n697 This activism may be implemented
through proxy contests for board candidates pledged to environmental missions and in
shareholder proposals addressing environmental issues, such as the Valdez Principles. In
addition, as firms publicize their commitment to environmentally sound policies, the
"green" investors and their investment advisors will arguably lead the migration to invest
in environmentally sensitive corporations.
It is also reasonable to expect that more complete environmental disclosures will affect
other markets in which the registrant operates. Such disclosures may affect the markets
for the registrant's products or services, the employment markets, and supply markets.
The proliferation of "green" products illustrates how customers may prefer suppliers with
high environmental standards. n698 Many companies tout their environmental
commitment in the recruiting of new employees. Even suppliers may find it less risky to
service industrial customers with strong environmental goals. However, these pressures
may actually reinforce some companies' environmental indifference if suppliers and
customers with weak environmental views are attracted to deal with like-minded
customers or suppliers. The benefits of these pressures are also limited where the
decisions resulting in environmental liabilities were made long ago and are incurable in
the short term. The market incentives [*341] may have widespread impact only if the
connection between environmental disclosure and market pressure gains high visibility.
Another economic impact of increased environmental disclosure may be the selffulfilling prophecy problem - the disclosure of bad news depresses stock prices and
injures customer markets, eventually compromising environmental initiatives. n699 For
example, the disclosure of high cleanup costs raises the cost of capital, thereby causing a
stock price decline and raising the debt service burden as a percent of cashflow,
impairing the registrant's financial flexibility. Additionally, a registrant's disclosure of
environmental improprieties may encourage the assertion of environmental liability
claims as yet unasserted against the registrant. n700
Nevertheless, the head-in-the-sand approach to environmental problems is clearly
counterproductive to the policy goal of voluntary environmental cleanup and the use of
the most environmentally friendly processes available. In the short term, bad
environmental news may lead to a temporary downturn, but a corporation, by dealing
head-on with the problem, can avoid a much more costly situation down the road. The
EPA is much more likely to deal leniently with voluntary compliance than forced
compliance. In any event, stockholders and potential investors are entitled to full
disclosure of all material information concerning the financial position of public
companies. To continue to allow corporations to avoid disclosure of environmental
liabilities undermines the operation of the free market by preventing participants from
making fully informed decisions.
Without better organization and coordination of public access to environmental
disclosures, the EPA and state environmental agencies are unlikely to contribute to
improving the market efficiency of the financial, factor, and customer markets to pressure
53
for optimal pollution control. Disclosure under the environmental laws and regulations is
episodic and too poorly publicized to effectively embed the information in economic
markets. By contrast, the securities law disclosure system is much better developed and
publicized. Investors and analysts expect that securities law disclosure will continue as a
major source of information impacting prices. By working together, the EPA and the
SEC will be able to merge their respective disclosure systems and provide the investing
public with much more accurate financial information concerning public [*342]
companies. The shifting focus of the SEC and the courts to require more forthright
environmental disclosures bodes well for supplementing command and control
environmental regulation with market-based incentives based on better informed market
mechanisms.
54
FOOTNOTES:
n1. For the purposes of this Article, the major initial legislation espousing a
comprehensive environmental policy in the modern era is the National Environmental
Policy Act (NEPA) signed by President Nixon in 1969. Pub. L. No. 91-190, 83 Stat. 852
(codified as amended at 42 U.S.C. 4321-4370d (1988 & Supp. V 1993)). Of course,
numerous other state and federal laws predate NEPA with specific private pollution
restrictions. See, e.g., the Federal Water Pollution Control Act, ch. 758, 62 Stat. 1155
(1948) (codified as amended at 33 U.S.C. 1251-1387 (1988 & Supp. V 1993)), amended
once prior to NEPA in 1956 (Water Pollution Control Act Amendments of 1956, 70 Stat.
498) and several times since.
n2. Commentators advocating more stringent governmental environmental controls
include, inter alia, Theodore Sonde & Harvey L. Pitt, Utilizing the Federal Securities
Laws to "Clear the Air! Clean the Sky! Wash the Wind!", 16 How. L.J. 831 (1971);
James Marshall, Who's Responsible for Pollution?, 57 A.B.A. J. 21 (1971); Arnold W.
Reitze & Glenn Reitze, Tax Incentives Don't Stop Pollution, 57 A.B.A. J. 127 (1971);
Robert E. Lutz, II & Stephen E. McCaffrey, Comment, Standing on the Side of the
Environment: A Statutory Prescription for Citizen Participation, 1 Ecology L.Q. 561
(1971); Richard J. Maddigan, Comment, Quo Warranto to Enforce a Corporate Duty Not
to Pollute the Environment, 1 Ecology L.Q. 653 (1971); J. Durwood Felton, III, Note,
NEPA: Full of Sound and Fury ... ?, 6 U. Rich. L. Rev. 116 (1971); John R. Sandler,
Note, The National Environmental Policy Act: A Sheep in Wolf's Clothing?, 37 Brook.
L. Rev. 139 (1970). Commentators discussing mandatory environmental regulations
include, inter alia, Harry E. Wilmarth, Pollution Liability - What Are The Insurance
Companies Doing In This Area?, 21 Fed'n. Ins. Couns. Q. 18 (1971) (providing overview
of insurance companies' liability for pollution); Kenneth R. Reed, Note, Economic
Incentives for Pollution Abatement: Applying Theory to Practice, 12 Ariz. L. Rev. 511
(1970) (suggesting charges to force internalization of emissions costs).
n3. See, e.g., Daniel W. Cannon, Industry and the Environment, 21 Fed'n. Ins. Couns. Q.
71 (1971) (arguing that pollution laws are too burdensome, leading to U.S. industry
becoming internationally noncompetitive and to environmental litigation, which is a
suboptimal resource allocation). Allegedly, no other industrial nation has imposed as
costly environmental regulation on its domestic industries as has the United States. If
true, this places U.S. industry at a competitive disadvantage because those foreign
producers not subject to such costs can pass the savings on, undercut prices of U.S.
producers, and/or increase their profits, enabling them to attract capital more easily.
However, environmentalist managers counter that cutting-edge environmental technology
requires beneficial modernization of plant and equipment. Additionally, firms in the
environmental vanguard are less susceptible to other costs suffered by firms less
committed to environmental concerns (e.g., tarnished goodwill, higher although
postponed cleanup costs, bankruptcy).
55
n4. Amal K. Naj, See No Evil: Can $ 100 Billion Have "No Material Effect' On Balance
Sheets? Huge Toxic-Waste Cleanup Will Burden Many Firms; SEC Questions
Disclosure: Death Beneath the Weeds, Wall St. J., May 11, 1988, at 1.
n5. See Marianne Lavelle, Deductions Mulled For Environmental Cleanup Expenses,
Nat'l L.J., Dec. 20, 1993, at 15, 18 (citing study by KPMG Peat Marwick which estimates
the 1993 cost of cleaning up solely the nation's 37,000 known toxic dump sites to be $ 1
trillion).
n6. Id.
n7. See E. Donald Elliot, Environmental Law at a Crossroad, 20 N. Ky. L. Rev. 1, 1
(1992); Robert W. Hahn & John A. Hird, The Costs and Benefits of Regulation: Review
and Synthesis, 8 Yale J. on Reg. 233, 272 (1991).
n8. In a recent Price Waterhouse survey, nearly 63% of the publicly-traded respondents
admitted their financial reports did not fully reflect the known environmental problems
that could have financial impact. Price Waterhouse, Accounting for Environmental
Compliance: Crossroad of GAAP, Engineering, and Government, A Survey of Corporate
America's Accounting for Environmental Costs 10-11 (1992).
n9. 42 U.S.C. 4331(a) (1988). The statute enumerates NEPA's ends, which are that the
nation may:
<XFS>(1) fulfill the responsibilities of each generation as trustee of the environment for
succeeding generations;
(2) assure for all Americans safe, healthful, productive, and aesthetically and culturally
pleasing surroundings;
(3) attain the widest range of beneficial uses of the environment without degradation, risk
to health or safety, or other undesirable and unintended consequences;
(4) preserve important historic, cultural, and natural aspects of our national heritage, and
maintain, wherever possible, an environment which supports diversity and variety of
individual choice;
(5) achieve a balance between population and resource use which will permit high
standards of living and a wide sharing of life's amenities; and
(6) enhance the quality of renewable resources and approach the maximum attainable
recycling of depletable resources.
<XFF>Id. 4331(b).
n10. Id. 4332(1).
56
n11. Id. 4332(2)(A). The Joint Conference Report underscores this as a separate and new
obligation on all federal agencies unless expressly prohibited by existing law applicable
to the agency or unless the agency's full compliance would be impossible under other
applicable laws. The conferees explicitly stated that the language ""to the fullest extent
possible' shall not be used by any Federal agency as a means of avoiding compliance ...
The language ... is intended to assure that ... no agency shall utilize an excessively narrow
construction of its existing statutory authorizations to avoid compliance." Conf. Rep. No.
765, 91st Cong., 1st Sess. (1969), reprinted in 1969 U.S.C.C.A.N. 2767, 2770. President
Nixon further directed implementation of the pervasive federal policy in Exec. Order No.
11,514, 3 C.F.R. 104 (1970), reprinted as amended in 42 U.S.C. 4321.
n12. See generally Comment, America's Changing Environment - Is the NEPA a Change
for the Better?, 40 Fordham L. Rev. 897, 898-901 (1972) (providing a historical account
of pre-NEPA environmental remedies). But c.f. Refuse Act of 1899, 33 U.S.C. 407
(1970); Federal Water Pollution Control Act, id. 1151-1175 (1970); Clean Air Act, 42
U.S.C. 1857 (1970) (pre-NEPA regulation).
n13. See infra notes 24-29 and accompanying text.
n14. See, e.g., Celia Campbell-Mohn et al., Environmental Law: From Resources to
Recovery 130-32 (1993); Robert V. Percival et al., Environmental Regulation: Law,
Science, and Policy 1 (1992).
n15. 42 U.S.C. 7651b (Supp. V 1993); see Adam J. Rosenberg, Note, Emissions Credit
Futures Contracts on the Chicago Board of Trade: Regional and Rational Challenges to
the Right to Pollute, 13 Va. Envtl. L.J. 501 (1994).
n16. 42 U.S.C. 7502 (1988).
n17. See Chevron v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
n18. See Joint Comm. on Taxation, Survey of Existing Tax Provisions Affecting the
Environment (1990). Libertarian, free-market advocates would argue that tax policies are
hardly "market-based" economic incentives. Of course, none of the economic incentive
approaches mentioned qualify as "pure" market solutions in libertarian utopia. These
methods depend, at least in part, on government commands for attainment to encourage
trading pollution rights or control emissions within the bubble area. Nevertheless, the
hybrid envisioned by combining command and control with market-based economic
incentives permits harnessing market forces to achieve regulatory goals, so it seems
appropriate to claim these as examples of market-based economic incentives.
n19. See infra part III.A.
n20. Jerry R. Green & Jean-Jacques Laffont, Incentives in Public Decision-Making 160
(1979).
57

n22. The EPA estimates that the cost of cleaning one average hazardous waste site on its
national priority list is between $ 26 and $ 28 million. Barbara Franklin, Environmental
Liability; SEC's New Battleground: Reporting Future Costs, N.Y. L.J., Apr. 15, 1993, at
5.
n23. Marianne Lavelle, Environment Vise: Law, Compliance, Nat'l L.J., Aug. 30, 1993,
at S1. Many of the corporate legal counsel cited in the article believe that investments in
environmentally sound products and practices will improve profitability over the long
run, but most believe that the regulatory system is too costly, overly bureaucratic, and
does nothing to reduce pollution. This survey also revealed that one-third of the corporate
general counsels had difficulty meeting the current SEC regulations on disclosing
environmental liabilities. Id.
n24. 42 U.S.C. 7401-7642 (1988).
n25. 33 U.S.C. 1251-1387 (1988).
n26. 42 U.S.C. 6901-6992.
n27. Id. 9601-9675.
n28. Id. 11001-11050.
n29. Id. 13101-13109 (Supp. II 1990).
n30. A Price Waterhouse survey disclosed that almost two-thirds of energy companies
failed to report known environmental liability as a charge against income. Price
Waterhouse, supra note 8.
n31. Survey Shows Most Annual Reports Will Provide Very Little Information on
Environmental Compliance, PR Newswire, Mar. 7, 1994. This survey was conducted by
Annual Reports, Inc., a firm specializing in creating and producing annual reports.
Annual Reports found that while 54% of the respondents indicated that they published an
environmental policy, they gave no indication how such information was disseminated to
the shareholders or investment community. Forty-four percent of the companies indicated
that the mention of the environmental activities of the company would be "moderately
significant," while 47% said the mention would be "not significant." Also, 88% of these
corporations revealed that they had never produced and distributed among shareholders
separate EPA reports as do some public utilities and natural resource companies. Ninetysix percent of the respondents said that they had no plans to do one in the future. Clearly,
these corporations know about environmental issues and compliance, but are in no hurry
to disclose any information to shareholders. Id.
58
n32. See 42 U.S.C. 7606(b) (1988 & Supp. V 1993).
n33. See 33 U.S.C. 1368(b) (1988 & Supp. V 1993).
n34. The SEC may seek to formalize this flow of information by the execution of a
memorandum of understanding (MOU) with the EPA. Sec. L. Daily (BNA) (May 5,
1993) (SEC Commissioner Richard Roberts states the SEC is pursuing a formal MOU
with the EPA).
n35. In April 1993, Commissioner Roberts, in a speech to the New York City Bar
Association, stated, "the large dollar amounts of anticipated environmental liability costs
have produced increased pressure to monitor the adequacy of issuer disclosure." Sec. L.
Daily (BNA) (Apr. 26, 1993).
n36. National Environmental Policy Act of 1969, Pub. L. No. 91-190, 83 Stat. 852 (1970)
(codified as amended at 42 U.S.C. 4321-4370d (1988 & Supp. V 1993)).
n37. 42 U.S.C. 4321.
n38. Section 102 of NEPA states:
The Congress authorizes and directs that, to the fullest extent possible: ... (2) all agencies
of the Federal Government shall ...
(C) include in every recommendation or report on proposals for legislation and other
major Federal actions significantly affecting the quality of the human environment, a
detailed statement by the responsible official on (i) the environmental impact of the proposed action,
(ii) any adverse environmental effects which cannot be avoided should the proposal be
implemented,
(iii) alternatives to the proposed action,
(iv) the relationship between local short-term uses of man's environment and the
maintenance and enhancement of long-term productivity, and
(v) any irreversible and irretrievable commitments of resources which would be involved
in the proposed action should it be implemented.
Id. 4332. NEPA's EIS requirement is triggered by "proposals for legislation" and "major
Federal actions." The majority of litigation centers on the latter clause. Percival et al.,
supra note 14, at 1033-34. See, e.g., Roberson v. Methow Valley Citizens Council, 490
59
U.S. 332, 336 (1989) (noting NEPA mandate that "major Federal actions" must be
preceded by the preparation of an EIS); City of Grapevine, Tex. v. Department of
Transp., 17 F.3d 1502, 1503 (1994) (noting that, as a matter of course, "major Federal
actions" require an EIS).
n39. 42 U.S.C. 4332(2)(C)(i).
n40. 449 F.2d 1109 (D.C. Cir. 1971).
n41. Id. at 1128 (emphasis in original).
n42. See, e.g., Shiffler v. Schlesinger, 548 F.2d 96, 100-01 (3rd Cir. 1977) (holding that
NEPA obligates agencies, in certain circumstances, to give written consideration to
environmental issues); Greene County Planning Bd. v. Federal Power Comm'n, 455 F.2d
412, 420 (2d Cir. 1972) (holding that NEPA requires agencies to consider environmental
values at every stage of process), cert. denied, 409 U.S. 849 (1972); Calvert Cliffs', 449
F.2d at 1128; see also Neil Orloff & George Brooks, The National Environmental Policy
Act: Cases & Materials 354-55 (1980) ("[Calvert Cliffs'] can also be read, not for what it
specifically says about NEPA's major provisions, but for the tone it uses to describe
agencies' and courts' responsibilities under the statute ... The decision was a call to action
- a battle cry. Its tone left no doubt in observers' minds about whether the court would
enforce strict compliance with NEPA's provisions.").
n43. See infra part III.A for a complete discussion of NEPA's impact on SEC regulations
governing environmental liability disclosure.
n44. Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
Pub. L. No. 96-510, 94 Stat. 2767 (1980) (codified as amended at 42 U.S.C. 9601-9675
(1988 & Supp. V 1993)).
n45. In 1953, Hooker Chemical and Plastics Corporation conveyed a 16-acre site to the
Niagara Falls Board of Education for $ 1, acknowledging that although chemicals were
buried on the site, Hooker would not be liable for any injuries that might occur.
Subsequently a school and 100 homes were built on the site now called Love Canal. After
heavy rains in 1978, the chemicals, many of which were carcinogenic, began seeping into
the basements of the homes, ultimately forcing the relocation of 1000 families. Percival
et al., supra note 14, at 288.
n46. H.R. Rep. No. 253(III), 99th Cong., 2d Sess. 15 (1986), reprinted in 1986
U.S.C.C.A.N. 3038, 3038.
n47. 42 U.S.C. 9604(a)(1). This section provides:
Whenever (A) any hazardous substance is released or there is a substantial threat of such
a release into the environment, or (B) there is a release or substantial threat of release into
the environment of any pollutant or contaminant which may present an imminent and
60
substantial danger to the public health or welfare, the President is authorized to act,
consistent with the national contingency plan, to remove or arrange for the removal of,
and provide for remedial action relating to such hazardous substance, pollutant, or
contaminant.
Id.
n48. 26 U.S.C. 9507(a) (1988 & Supp. V 1993) (Superfund Amendments and
Reauthorization Act of 1986).
n49. 42 U.S.C. 9607(a)(4)(A). CERCLA also authorizes the government to order private
cleanups in certain circumstances:
When the President determines that there may be an imminent and substantial
endangerment to the public health or welfare or the environment because of an actual or
threatened release ... , he may require the Attorney General of the United States to secure
such relief as may be necessary to abate such danger or threat.
Id. 9606(a).
CERCLA 107(c)(3) provides that the government may recover punitive damages "at least
equal to, and not more than" three times the amount of the response costs incurred by
Superfund from "any person who is liable for a release or threat of release of a hazardous
substance" and who fails without "sufficient cause" to perform a response action as
directed by the EPA under a 106 order. However, only additional costs incurred as a
result of a party's failure to take the directed action are the basis of such triple damages.
Id. 9607(c)(3).
n50. A facility is defined as:
(A) Any building, structure, installation, equipment, pipe or pipeline (including any pipe
into a sewer or publicly owned treatment works), well, pit, pond, lagoon, impoundment,
ditch, landfill, storage container, motor vehicle, rolling stock, or aircraft, or (B) any site
or area where a hazardous substance has been deposited, stored, disposed of, or placed, or
otherwise come to be located; but does not include any consumer product in consumer
use or any vessel.
Id. 9601(9).
n51. Id. 9607(a)(4)(B), 9613(f)(1); see also Dedham Water Co. v. Cumberland Farms
Dairy, Inc., 889 F.2d 1146, 1150 (1st Cir. 1989) ("The statute specifically provides for a
private right of action."); Cadillac Fairview Cal., Inc. v. Dow Chem. Co., 840 F.2d 691,
693 (9th Cir. 1988) (section 107 "expressly creates a private claim against any person
who owned or operated a facility at the time hazardous substances were disposed of at the
facility for recovery of necessary costs of responding to the hazardous substances").
61
n52. 42 U.S.C. 9607(a) (1988 & Supp. V 1993).
CERCLA has also been interpreted to impose liability on generators of hazardous
substances. Percival et al., supra note 14, at 322; see also United States v. Aceto Agric.
Chem. Corp., 872 F.2d 1373 (8th Cir. 1989) (imposing liability on generator of released
pesticide, and stating that any other result "would allow defendants to simply "close their
eyes' to the method of disposal of their hazardous substances, a result contrary to the
policies underlying CERCLA").
n53. 42 U.S.C. 9601(21).
n54. Id. 9601(35)(c) (not including on its face the relationship of parent and successor
corporations within the "contractual relationship' defense).
n55. Id. (not including on its face shareholders, directors, officers, and trustees within the
"contractual relationship' defense).
n56. Id. 9601(20)(A)(iii) (1988).
n57. Frank B. Cross, Federal Environmental Regulation of Real Estate <psign>
2.03[1][c] (1993).
n58. The court in United States v. Jon-T Chems., Inc., 768 F.2d 686, 691-92 (5th Cir.
1985), cert. denied, 475 U.S. 1014 (1986), in determining whether to pierce the corporate
veil, considered whether
(1) the parent and the subsidiary have common stock ownership; (2) the parent and the
subsidiary have common directors or officers; (3) the parent and the subsidiary have
common business departments; (4) the parent and the subsidiary file consolidated
financial statements and tax returns; (5) the parent finances the subsidiary; (6) the parent
caused the incorporation of the subsidiary; (7) the subsidiary operates with grossly
inadequate capital; (8) the parent pays the salaries and other expenses of the subsidiary;
(9) the subsidiary receives no business except that given to it by the parent; (10) the
parent uses the subsidiary's property as its own; (11) the daily operations of the two
corporations are not kept separate; and (12) the subsidiary does not observe the basic
corporate formalities, such as keeping separate books and records and holding
shareholder and board meetings.
Id.
n59. See generally Lynda J. Oswald, Bifurcation of the Owner and Operator Analysis
Under CERCLA: Finding Order in the Chaos of Pervasive Control, 72 Wash. U. L.Q.
223, 244-56 (1994) (discussing courts' application of doctrines to pierce corporate veil in
CERCLA cases, identifying the degree of control the parent exercises over the subsidiary
as a primary factor).
62
n60. See CPC Int'l, Inc. v. Aerojet-General Corp., 777 F. Supp. 549, 572-73 (W.D. Mich.
1991) (holding that parent corporation may be held directly liable as an operator as an
alternative to common law veil piercing).
n61. 910 F.2d 24 (1st Cir. 1990), cert. denied, 498 U.S. 1084 (1991).
n62. The parent corporation exercised monetary control over the subsidiary, restricted the
budget of the subsidiary, held the right to approve any major expenditures by the
subsidiary, and approved the implementation of the system that caused the release of
hazardous substances. Id. at 27. The degree of control of the parent over the subsidiary is
still the key to finding liability for the subsidiary's cleanup costs. See, e.g., City of New
York v. Exxon Corp., 31 Env't Rep. Cas. (BNA) 1412, 1419-20 (S.D.N.Y. 1990) (noting
that actual participation in, and authority or control over, subsidiary's affairs is key to
liability); Idaho v. Bunker Hill Co., 635 F. Supp. 665, 672 (D. Idaho 1986) (holding
parent liable because "intimately familiar" with hazardous waste disposal practices and
had capacity to control such disposal and releases). But see Wehner v. Syntex
Agribusiness, Inc., 15 Envtl. L. Rep. (Envtl. L. Inst.) 20,346, 20,347 (E.D. Mo. 1985)
(holding that parent retained legal separateness and was not liable for subsidiary's
cleanup costs, even though parent approved appointments and salaries of subsidiary's
executive officers, guaranteed loans, and subsidiary employees participated in parent's
savings plan).
n63. See Joslyn Mfg. Co. v. T.L. James & Co., 893 F.2d 80, 83 (5th Cir. 1990) (emphasis
in original), cert. denied, 498 U.S. 1108 (1991); see also Jacksonville Elec. Auth. v.
Eppinger & Russell Co., 776 F. Supp. 1542, 1545 (M.D. Fla. 1991) ("corporate veil
should be pierced ... when the subsidiary is used as a sham to avoid direct liability"),
aff'd, 996 F.2d 1107 (11th Cir. 1993).
n64. See John S. Boyd Co. v. Boston Gas Co., 992 F.2d 401, 408 (1st Cir. 1993).
n65. See Smith Land & Improvement Corp. v. Celotex Corp, 851 F.2d 86, 92 (3rd Cir.
1988), cert. denied, 488 U.S. 1029 (1989) ("Congressional intent supports the conclusion
that, when choosing between the taxpayers or a successor corporation, the successor
should bear the cost.").
n66. 15 Stephen M. Flanagan et al., Fletcher Cyclopedia of the Law of Private
Corporations 7122 (perm. ed. 1990 & Supp. 1994).
n67. See, e.g., Anspec Co. v. Johnson Controls, Inc., 922 F.2d 1240, 1245-47 (6th Cir.
1991); In re Acushnet River & New Beford Harbor, 712 F. Supp. 1010, 1014-15 (D.
Mass. 1989).
In determining whether an asset purchase is in fact a de facto merger, courts look to such
factors as 1) continuation of enterprise, including continuity of management, personnel,
physical location, assets, and general business operations; 2) continuity of shareholders
resulting from purchaser paying with shares of own stock; 3) the seller corporation ceases
63
its ordinary business operations, liquidates, and dissolves. Id. at 1015; see also United
States v. Vertac Chem. Corp., 671 F. Supp. 595, 615-16 (E.D. Ark. 1987), vacated
without opinion, 855 F.2d 856 (8th Cir. 1988); Ametek Inc. v. Pioneer Salt & Chem. Co.,
709 F. Supp. 556, 560 (E.D. Pa. 1988); Lynda J. Oswald & Cindy A. Schipani, CERCLA
and the "Erosion' of Traditional Corporate Law Doctrine, 86 Nw. U. L. Rev. 259, 321
(1992).
n68. Cross, supra note 57, <psign> 2.03[1][e].
n69. United States v. Carolina Transformer Co., 739 F. Supp. 1030, 1036-38 (E.D.N.C.
1989) (holding that corporate directors and successive presidents of corporation were
liable because they supervised hazardous substance disposal and were aware of the
hazard); United States v. Northernaire Plating Co., 670 F. Supp. 742, 744, 748 (W.D.
Mich. 1987) (finding president and sole shareholder liable because of his role in directing
the handling of hazardous substances).
n70. United States v. Mexico Feed & Seed Co., 764 F. Supp. 565, 571 (E.D. Mo. 1991)
(holding the corporation's president liable because of managerial authority over site).
However, few courts give exact standards of when a non-participatory officer will incur
liability. The court in Kelley v. ARCO Indus. Corp., 723 F. Supp. 1214 (W.D. Mich.
1989), stated the most definitive standard to date:
This Court will look to evidence of an individual's authority to control, among other
things, waste handling practices - evidence such as whether the individual holds the
position of officer or director ... distribution of power within the corporation, including
position in the corporate hierarchy and percentage of shares owned. Weighed along with
the power factor will be evidence of responsibility undertaken for waste disposal
practices, including evidence of responsibility undertaken and neglected, as well as
affirmative attempts to prevent unlawful hazardous waste disposal.
Id. at 1219.
In addition to civil liability, corporate officers have increasingly been prosecuted for
criminal violations. Usually these prosecutions involve directly culpable individuals, but
they may include persons who inadvertently caused or exacerbated the problem. John E.
Osborn, Officers' Liability Examined, Nat'l L.J., Nov. 22, 1993, at 25, 30.
n71. Id. at 463. Thus, even if the employee participated in the release of hazardous
substances, if he did not have authority to direct those activities, he will not be liable.
n72. 42 U.S.C. 9601(20)(A) (1988) (emphasis added). See Patricia A. Shackelford,
Easing the Credit Crunch: A "Functional" Approach to Lender Control Liability Under
CERCLA, 19 B.C. Envtl. Aff. L. Rev. 805, 821-24 (1992) (discussing the legislative
history of the secured creditor exemption in CERCLA).
n73. 15 Envtl. L. Rep. (Envtl. L. Inst.) 20,994 (E.D. Pa. 1985).
64
n74. The court distinguished between management of the borrower's operations and the
management of the borrower's financial affairs - "the [secured creditor exemption's]
reference to management of the "facility,' as opposed to management of the affairs of the
actual owner or operator of the facility, suggests ... that the participation which is critical
is participation in operational, production, or waste disposal activities." Id. at 20,995. In
Mirabile one of the lenders had foreclosed its interest, but was not held liable because it
made no effort to continue the borrower' s operations; it merely protected the property
from vandalism, and showed the property to prospective buyers. The court held that these
activities were protection of the lender's security interest and not participation in
management, and thus the lender was entitled to the security interest exemption. Id. at
20,996. Another lender in Mirabile was denied the exemption because it monitored the
borrower's operations, gave advice on business matters, and regularly visited the
property. Id. at 20,996-97. Thus, this interpretation of the secured creditor exemption is
based on actual participation in the management of the borrower's business.
A number of courts have followed the rationale of Mirabile. See, e.g., In re Bergsoe
Metal Corp., 910 F.2d 668, 672 (9th Cir. 1990) (holding that some actual participation in
management must exist before the exemption is lost); Guidice v. BFG Electroplating &
Mfg. Co., 732 F. Supp. 556, 561-62 (W.D. Pa. 1989) (holding that the lender must
exercise day-to-day control to lose exemption).
n75. 901 F.2d 1550 (11th Cir. 1990), cert. denied, 498 U.S. 1046 (1991).
n76. Id. at 1558. Under this interpretation of the secured creditor exemption, the
distinction between involvement in the financial affairs versus operational affairs is not
important; the actual involvement with the borrower in such a way that the lender could
influence waste disposal decisions is the crucial matter. Id. at 1557-58.
n77. Id. at 1559-60.
n78. 40 C.F.R. 300.1100(c)(1) (1994). The regulations define the following types of
action that constitute participation in management:
A holder is participating in management ... if the holder either:
(i) Exercises decisionmaking control over the borrower's environmental compliance, such
that the holder has undertaken responsibility for the borrower's hazardous substance
handling or disposal practices; or
(ii) Exercises control at a level comparable to that of a manager of the borrower's
enterprise, such that the holder has assumed ... the day-to-day decisionmaking of the
enterprise with respect to:
(A) Environmental compliance or
65
(B) All, or substantially all, of the operational (as opposed to financial or administrative)
aspects of the enterprise other than environmental compliance.
Id.
n79. Kelley v. EPA, 15 F.3d 1100 (D.C. Cir. 1994). The court held: "It cannot be argued
that Congress intended EPA, one of many potential plaintiffs, to have authority to, by
regulation, define liability for a class of potential defendants." Id. at 1107.
n80. Joint and several liability is a common law concept which imposes liability on
individuals who act in concert to cause injury to the plaintiff - each is liable for the entire
injury. W. Page Keeton et. al., Prosser and Keeton on the Law of Torts 46, at 322-23 (5th
ed. 1984). Strict liability imposes liability on an individual regardless of whether that
person was negligent or not. Id. 75, at 534.
The only reference to a standard of liability in CERCLA is in 101, the definitional section
of the Act, which states that liability under CERCLA is to be the standard of liability
under 311 of the Clean Water Act. 42 U.S.C. 9601(32) (1988). Section 311 of the Clean
Water Act provides that owners and operators of vessels and facilities that are in violation
of the Act are strictly liable for the damages caused by the discharges. 33 U.S.C.
1321(b)(3) (1988). See Steuart Transp. Co. v. Allied Towing Corp., 596 F.2d 609, 613
(4th Cir. 1979) (holding that Congress intended the CWA to impose strict liability on
violators).
Courts interpreting CERCLA read 101 to mean strict, joint and several liability. See
United States v. Monsanto Co., 858 F.2d 160, 167 (4th Cir. 1988) (holding that
CERCLA's legislative history and the Act itself show Congress' intent to establish strict
liability standard); United States v. Chem-Dyne Corp., 572 F. Supp. 802, 810 (S.D. Ohio
1983) (holding that 101(32) of CERCLA mandates imposition of strict, joint and several
liability on those defendants who cannot demonstrate divisibility of harm).
n81. See Percival et al., supra note 14, at 302.
n82. See Monsanto, 858 F.2d at 168 ("The plain language of section 107(a)(2) extends
liability to owners of waste facilities regardless of their degree of participation in the
subsequent disposal of hazardous waste."); New York v. Shore Realty Corp., 759 F.2d
1032, 1043-44 (2d Cir. 1985) (current owner who had not generated or transported
hazardous substances not relieved of liability for cleanup); United States v. Stringfellow,
661 F. Supp. 1053, 1063 (C.D. Cal. 1987) ("[Section 107(a)(1)] does not require that the
present owner contribute to the release ...."); see also Lynda J. Oswald, New Directions in
Joint and Several Liability under CERCLA?, 28 U.C. Davis L. Rev. (forthcoming Winter
1994).
Take, for example, a hypothetical Superfund site in which there are 10 known PRPs who
have contributed hazardous waste to the site and many more unknown PRPs. Even
though the identified PRPs were not the sole contributors to the site, CERCLA imposes
66
the full cost of cleanup on all 10 PRPs. The contribution from unknown or known but
insolvent PRPs is referred to as the "orphan share." Under the strict, joint and several
liability standard, if five of the PRPs are insolvent, the remaining five PRPs are still liable
for the full cost of cleanup. If nine of the PRPs are insolvent, the one remaining solvent
PRP is still liable for the full cost.
n83. 42 U.S.C. 9613(f). David Sive, Understanding Superfund's New Calculus, Nat'l L.J.,
Feb. 21, 1994, at 16. During the first 10 years of CERCLA actions, most did not go to
trial because the corporate perception was that the courts would side with the EPA, and
thus, most defendants chose to settle. Id.
n84. See O'Neil v. Picillo, 883 F.2d 176, 178, 183 (1st Cir. 1989) (holding that
defendants are jointly and severally liable for approximately $ 1.4 million of cleanup
costs not covered by settlements even though it was uncontested that defendants only
caused a minute amount of the total release).
n85. United States v. Chem-Dyne Corp., 572 F. Supp. 802, 811 (S.D. Ohio 1983)
(citations omitted). Although it is possible for a PRP to apportion the harm, as a practical
matter, few defendant are successful in doing so. See, e.g., O'Neil, 883 F.2d at 180-82;
United States v. South Carolina Recycling & Disposal, Inc., 653 F. Supp. 984, 994-95
(D.S.C. 1986); United States v. Ottati & Goss, Inc., 630 F. Supp. 1361, 1395-96 (D.N.H.
1985); Chem-Dyne Corp., 572 F. Supp. at 811.
n86. In United States v. Alcan Aluminum Corp., 964 F.2d 252 (3d Cir. 1992), the Third
Circuit held that Alcan was entitled to prove that its wastes, even though commingled
with wastes of other responsible parties, had not caused the government any response
costs. Alcan was allowed to demonstrate divisibility of harm and thus limit its liability.
The court stated that if Alcan could prove that its waste "did not or could not, when
mixed with other hazardous wastes, contribute to the release and the resultant response
costs, then Alcan should not be responsible for any response costs." Id. at 270 (emphasis
in original).
In United States v. Alcan Aluminum Corp., 990 F.2d 711 (2d Cir. 1993) (Alcan II), the
Second Circuit also allowed Alcan to demonstrate not only that its contribution to the site
was divisible but also that the levels of hazardous substances in its releases were lower
than the naturally occurring ambient levels of those substances in the surrounding area.
Id. at 722 ("Alcan may escape any liability for response costs if it either succeeds in
proving that its oil emulsion, when mixed with other hazardous wastes, did not contribute
to the release and the clean-up costs that followed, or contributed at most to only a
divisible portion of the harm."). The court, however, did recognize that its holding may
be a "special exception to the usual absence of a causation requirement, but the exception
is applicable only to claims, like Alcan's, where background levels are not exceeded." Id.
In In re Bell Petroleum Servs., Inc., 3 F.3d 889 (5th Cir. 1993), the Fifth Circuit held, "if
the expert testimony and other evidence establishes a factual basis for making a
67
reasonable estimate that will fairly apportion liability, joint and several liability should
not be imposed in the absence of exceptional circumstances." Id. at 903.
n87. Stephen C. Jones, Courts Show Impatience on CERCLA, Nat'l L.J., Feb. 14, 1994,
at 20, 26.
n88. 42 U.S.C. 9607(b)(1).
n89. Id. 9607(b)(2).
n90. Id. 9607(b)(3). The defense is further limited by a requirement that the defendant
demonstrate
by a preponderance of the evidence that (a) he exercised due care with respect to the
hazardous substance concerned, taking into consideration the characteristics of such
hazardous substance, in light of all relevant facts and circumstances, and (b) he took
precautions against foreseeable acts or omissions of any such third party and the
consequences that could foreseeably result from such acts or omissions ...
Id. The requirements of the third-party defense are so strict that it is only actually
available when the release was caused by a so-called "midnight dumper." See, e.g.,
United States v. Stringfellow, 661 F. Supp. 1053, 1061 (C.D. Cal. 1987) (stating that
defense can be raised only when release was caused solely by a "totally unrelated third
party").
n91. In order to assert the innocent landowner defense, the defendant must show that
(i) At the time the defendant acquired the facility the defendant did not know and had no
reason to know that any hazardous substance which is the subject of the release or
threatened release was disposed of on, in, or at the facility.
(ii) The defendant is a government entity which acquired the facility by escheat, or
through any other involuntary transfer or acquisition, or through the exercise of eminent
domain authority by purchase or condemnation.
(iii) The defendant acquired the facility by inheritance or bequest.
42 U.S.C. 9601(35)(A). The defendant must also show that he had "undertaken, at the
time of acquisition, all appropriate inquiry into the previous ownership and uses of the
property consistent with good commercial or customary practice in an effort to minimize
liability." Id. 9601(35)(B) (emphasis added). This inquiry
shall take into account any specialized knowledge or experience on the part of the
defendant, the relationship of the purchase price to the value of the property if
uncontaminated, commonly known or reasonably ascertainable information about the
68
property, the obviousness of the presence or likely presence of contamination at the
property, and the ability to detect such contamination by appropriate inspection.
Id. The defense also requires that, upon learning of prior contamination, an innocent
landowner must disclose that fact to subsequent purchasers or the defense will be lost. Id.
9601(35)(C). Also, the defense will not protect a landowner "who, by any act or
omission, caused or contributed to the release or threatened release ..." Id. 9601(35)(D).
Thus, it appears that while the innocent landowner defense is somewhat helpful to owners
who did not cause the contamination, it is very difficult to maintain a successful defense.
n92. 42 U.S.C. 9602, 9603(a), (f) (1988); see also Hazardous Substances and Reportable
Quantities, 40 C.F.R. 302.4 (1992) (listing hazardous substances and their reportable
quantities). Criminal penalties are available to any "person in charge" who fails to notify
the EPA "as soon as he has knowledge" or who knowingly submits false or misleading
information. 42 U.S.C. 9603(b)(3). Violations of these reporting requirements can trigger
fines of up to $ 25,000 for a single violation, with "second tier" fines of up to $ 75,000
per day for continuing violations. 42 U.S.C. 9609(a)-(c).
n93. 42 U.S.C. 9603(a).
n94. 42 U.S.C. 11001-11050 (1988 & Supp. V 1993).
n95. Id. 11021.
n96. Id. 11022.
n97. Id. 11023.
n98. Id. 11003.
n99. Id. 11021(a)(1). Appropriate state agencies include the appropriate local emergency
planning committee, the state emergency response commission, and the local fire
department. Id.
n100. Id. 11021(a)(2); 29 C.F.R. 1910.1200(g) (1993).
n101. 42 U.S.C. 11022(a). The EMHCIF is filed to the same agencies as the MSDS. Id.
n102. Id. 11022(d)(1)(B). The information is reported in aggregate terms by hazardous
chemical categories as set forth under regulations promulgated by the Occupational
Safety and Health Administration. Id. 11022(d)(1)(A).
n103. Id. 11022(d)(2). In addition to reporting estimates of the maximum and daily
average amounts and general location of the hazardous chemical, the company, if asked,
must also provide a brief description of how the chemical is stored. Id.
69
n104. Id. 11023(a).
n105. Id. 11023(g)(1)(C).
n106. Id. 11023(j).
n107. Id. 11044(a). Each local emergency planning committee is supposed to publish
annually in the local newspaper a notice that the required forms have been submitted and
are available for public review. Id. 11044(b).
n108. Mary L. Lyndon, Information Economics and Chemical Toxicity: Designing Laws
to Produce and Use Data, 87 Mich. L. Rev. 1795, 1835 (1989).
n109. 42 U.S.C. 13101-13109 (Supp. II 1990).
n110. Percival et al., supra note 14, at 213.
n111. 42 U.S.C. 13101(b).
n112. Id. 11023 (1988); see also supra notes 94-108 and accompanying text (discussing
EPCRTKA and TCRF).
n113. 42 U.S.C. 13106(a) (Supp. II 1990).
Section 13106(b) requires that the TCSRR report contain the following eight items:
1) The quantity of the chemical entering any waste stream prior to recycling, treatment,
or disposal during the calendar year for which the report is filed and the percentage
change from the previous year.
2) The amount of the chemical from the facility which is recycled during the calendar
year, the percentage change from the previous year, and the method of recycling.
3) The source reduction practices used with respect to that chemical. The practices are to
be classified into one of four categories: a) equipment, technology, process or procedure
modifications; b) reformulation or redesign of the product; c) substitution of raw
materials; and d) improvement in management, training, inventory control, materials
handling, or other general operational phases.
4) The amount expected to be reported under items (1) and (2) for the next two calendar
years (expressed in terms of percentage change from the current year).
5) A ratio of production in the reporting year to production in the previous year. This
ratio should try to reflect all activities involving the toxic chemical.
70
6) The techniques used to identify source reduction opportunities, e.g., employee
recommendations, external or internal audits.
7) The amount of toxic chemical released into the environment due to a catastrophic
event or other one-time event.
8) The amount of chemical from the facility which is treated during the calendar year and
the percentage change from the previous year.
n114. Id. 13106(e).
n115. Id. 13103(b).
n116. See David J. Kling & Eric Schaeffer, EPA's Flagship Programs: Existing Programs
Promote Pollution Prevention In Innovative Ways, EPA J., July/Aug./Sept. 1993, at 26.
For example, in June 1993, the EPA and Grumman St. Augustine Corp. settled a $ 2.5
million RCRA violation. Grumman had its penalty fine reduced to $ 1.5 million, with the
other $ 1 million waived, on the condition that it implement several innovative pollution
prevention projects. These projects are expected to reduce the company's use of
methylene chloride and chlorofluorocarbons by about 240,000 pounds of hazardous
emissions and 54,000 pounds of hazardous sludge. $ 6.35m Settlement for Alleged
Disposal Violations, Haznews, June 1993, available in LEXIS, Envirn Library, Curnws
File.
In another settlement agreement, DuPont's Chambers Works plant in Deep Water, N.J.,
agreed to invest $ 6 million in pollution prevention programs that are expected to reduce
the facility's pollution by 50% and save the company $ 15 million a year. Furthermore,
DuPont has also begun initiating these programs in other facilities "where there was no
fine, no EPA, but because pollution prevention is good for business." Minding the
Bottom Line, DuPont Aggressively Pursues Pollution Prevention, Recycling,
Environment Week, Apr. 14, 1994, at 6 (quoting Paul Tebo, Vice President for Safety,
Health and Environment at DuPont).
n117. These initiatives include the recently announced Common Sense Initiative, or
"green sectors" project, EPA Pollution Prevention Project Aimed At Spurring CrossMedia Work, Inside EPA, Nov. 25, 1993, at 10; the EPA's highly publicized "33/50"
Program, EPA Pollution Prevention Accomplishments: 1993 10-11 (EPA Doc. No. EPA100-R-94-002, Spring 1994); and the Great Printer Program, Great Lakes Project for
Printers Touted as Multimedia Model for Other Industries, Daily Env't Rep. (BNA) A-4
(June 6, 1994).
n118. 42 U.S.C. 9601-9675 (1988). RCRA is generally applicable to active hazardous
waste sites; CERCLA was enacted to deal with the enormous problem of cleaning up
inactive and abandoned sites. See supra notes 44-56 and accompanying text.
71
n119. There is no statutory definition of "generator." However, the EPA has defined the
term as "any person, by site, whose act or process produces hazardous waste ... or whose
act first causes a hazardous waste to become subject to regulation." 40 C.F.R. 260.10
(1993).
n120. The EPA defines a "transporter" as "a person engaged in the offsite transportation
of hazardous waste by air, rail, highway, or water." Id.
n121. See generally 42 U.S.C. 6924 (1988 & Supp. IV 1992) (TSD facility
requirements). RCRA was originally enacted in 1976 and was significantly amended by
the Hazardous and Solid Waste Amendments of 1984. Pub. L. No. 94-580, 90 Stat. 2796
(1976) (amended 1980 as Pub. L. No. 96-482, 94 Stat. 2334); Pub. L. No. 98-616, 98
Stat. 3221 (1984).
The policy goals and objectives of RCRA are set out in Subtitle A of the Act. The
primary goal is to reduce or eliminate, as quickly as possible, the generation of hazardous
waste; in addition, any waste generated must be managed so as to minimize the present
and future threat to the environment and to human health. 42 U.S.C. 6902(b) (1988).
The Act also sets out a series of objectives designed to promote the protection of health
and the environment as well as conserve valuable resources. These objectives include
providing financial and technical assistance to state and local governments to aid in the
development of RCRA programs, prohibiting open dumping, promoting research and
development of new waste management techniques, and encouraging the development of
process substitution, recovery, recycling, and treatment as alternatives to disposal. Id.
6902(a).
n122. See, e.g., 42 U.S.C. 6921(b)(3)(B), 6922(a)(5).
n123. Id. 6922.
n124. 40 C.F.R. 262.12 (1993).
n125. The manifest must include the generator's EPA identification number,
identification of the transporter, identity and quantity of the waste, special handling
instructions, and acknowledgement of receipt by the transporter. Id. pt. 262, App. The
generator must keep a signed copy of the manifest on record for three years after
disposal. Id. 262.40.
n126. Id. 262.41(a).
n127. Id. 262.41(a)(6).
n128. Id. 263.11.
n129. Id. 263.20(a).
72
n130. Id. 263.20(c), 263.21(a).

n131. 42 U.S.C. 6925(a). There are limited exceptions for certain hazardous waste
injection wells and wastewater treatment plants regulated by the Clean Water Act. 40
C.F.R. 260.10(a).
n132. See J. Gordon Arbuckle et al., Environmental Law Handbook 429-31 (11th ed.
1991).
n133. 40 C.F.R. 264.73, 265.73.
n134. 42 U.S.C. 6926(f), 6927(b).
n135. 40 C.F.R. 264.75, 265.75. The TSD owner or operator must also submit manifest
waste reports, reports of releases, fires, and explosions, and groundwater contamination
reports. Id. 264.77, 265.77.
n136. 42 U.S.C. 6928(g).
n137. In addition the violator may have its permit suspended or revoked. See United
States v. Vineland Chem. Co., 692 F. Supp. 415 (D.N.J. 1988).
n138. 42 U.S.C. 6928(d). For certain offenses, the maximum prison term is five years.
Such offenses include knowingly transporting or causing to be transported a hazardous
waste to an unpermitted facility, as well as knowingly treating, storing, or disposing of a
hazardous waste without a permit, in knowing violation of a permit, or in knowing
violation of an interim status regulation or standard. If a violator "knowingly" engages in
conduct that may place another person in "imminent danger of death or serious bodily
injury," the fine is $ 250,000 and up to 15 years in prison. An organization that violates
this provision is liable for up to $ 1 million. Id. 6928(e).
n139. Id. 6972(a); see also Association of Data Processing Serv. Orgs. v. Camp, 397 U.S.
150, 152 (1970) (requiring that a person must show "injury in fact" and that the injury
was to an interest in the zone of interests regulated by the statute).
n140. American Mining Congress v. EPA, 824 F.2d 1177, 1189 (D.C. Cir. 1987).
n141. See 40 C.F.R. 260-271 (1993).
n142. 15 U.S.C. 2601-2692 (1988).
n143. Id. 2604.
n144. Id. 2606.
73
n145. Id. 2607.
n146. Id. 2610.
n147. Id. 2612.
n148. Id. 2607(c).
n149. Id. 2607(e).
n150. Registration and Agreement for TSCA Section 8(e) Compliance Audit Program, 56
Fed. Reg. 4128 (1991).
n151. Id. at 4129.
n152. Id. at 4130.
n153. TSCA Civil Penalty System, 45 Fed. Reg. 59,773 (1980).
n154. See infra part II.B for further discussion of the benefits of self-auditing.
n155. 15 U.S.C. 2615(b) (1988 & Supp. V 1993).
n156. Id. 2619.
n157. Arbuckle et al., supra note 132, at 383.
n158. 42 U.S.C. 7401(b)(1) (1988).
n159. Id. 7408-7409 (the so-called "criteria pollutants").
n160. Id. 7410.
n161. Id.
n162. Id. 7501-7508. These requirements are quite complex and are beyond the scope of
this Article.
n163. In order to receive a PSD permit the source owner or operator must show that the
source will 1) achieve air quality levels designed to prevent air quality deterioration (the
PSD "increments"), and 2) employ "best available control technology" (BACT) for each
pollutant it will emit in significant amounts. 40 C.F.R. 52.21 (1982).
n164. 42 U.S.C. 7475(e)(2).
n165. Id.
74
n166. Id. 7413(d)(1).

n167. Id. 7604(g).
n168. Id. 7413(f).
n169. Id. 7413(c). There are also fines and jail time for bad recordkeeping. Individuals
who make false statements to the EPA and/or fail to maintain records or file reports are
subject to fines. Higher criminal penalties are also imposed for "knowingly" or
"negligently" releasing air toxics that place another individual in "imminent danger of
death or serious bodily injury." For a knowing release, an individual is liable for fines of
up to $ 250,000 per day and up to 15 years in prison. Corporations may be fined up to $ 1
million for each violation. Id.
n170. See infra part II.B for a discussion of environmental auditing.
n171. 33 U.S.C. 1251-1376 (1988 & Supp. V 1993). The basic framework of the 1972
Act - water quality standards, national effluent limitations, the permit program, and a
publicly-owned treatment works (POTW) construction program - remains in place today.
n172. 33 U.S.C. 1251 (1988).
n173. Id.
n174. Arbuckle et al., supra note 132, at 65-70.
n175. 33 U.S.C. 1342.
n176. Id.
n177. Id. 1318.
n178. Id.
n179. 57 Fed. Reg. 37,163 (1992).
n180. 33 U.S.C. 1317(b).
n181. 40 C.F.R. 403.12 (1982).
n182. Id. The CWA also requires facilities to implement pollution prevention planning
requirements to minimize the likelihood of accidents, mandatory spill notification, and
provides provisions for assessing responsibility for the cost of the spill. 33 U.S.C. 1321.
The facility is required to implement an up-to-date Spill Prevention, Control and
Countermeasure (SPCC) plan if it has total oil storage of more than 1320 gallons above
75
ground or 42,000 gallons underground. 40 C.F.R. 112.1(d). After the Exxon Valdez spill
in Prince William Sound, Alaska, the SPCC requirements became much more strict. With
the passage of the Oil Pollution Act (OPA) of 1990, Pub. L. No. 101-380, 104 Stat. 484
(1990) (codified as amended at 33 U.S.C. 2701-2761 (Supp. V 1993)), the SPCC
planning requirements were extended to tank vessels and offshore and onshore facilities.
Under CWA 311(j)(5), an onshore facility must prepare a SPCC plan if it handles,
transports, or stores oil, and if "because of its location, [the facility] could reasonably be
expected to cause substantial harm to the environment by discharging into or on the
navigable waters, adjoining shorelines, or the exclusive economic zone." 33 U.S.C.
1321(j)(5)(B)(iii). Section 311 of the CWA requires the owner or person in charge of any
vehicle, vessel, or facility to report any spills or any threatened spills to the government.
Failure to report is a criminal offense punishable by up to five years in jail. Id.
n183. 33 U.S.C. 1321(b)(6).
n184. Id. 1321(b)(7).
n185. Id. 1319(c).
n186. Id. 1365. These citizen action suits are another powerful enforcement weapon. In
1989 the Fourth Circuit ordered fines of almost $ 300,000 against a company that had
several years of reporting violations. Chesapeake Bay Found. v. Gwaltney of Smithfield,
Ltd., 890 F.2d 690 (4th Cir. 1989).
n188. 33 U.S.C. 1319(d).
n189. EPA Environmental Auditing Policy Statement, 51 Fed. Reg. 25,004, 25,006
(1986) [hereinafter Environmental Auditing Statement].
n190. William N. Farran, III & Thomas L. Adams, Jr., Environmental Regulatory
Objective: Auditing and Compliance or Crime and Punishment, 21 Envtl. L. Rep. (Envtl.
L. Inst.) 10,239 (1991).
n191. See generally Lawrence B. Cahill, Issues in Environmental Auditing, Petroleum
Independent, Nov.-Dec. 1992, at A2.
n192. Patrick J. Ennis, Environmental Audits: Protective Shields or Smoking Guns? How
to Encourage the Private Sector to Perform Environmental Audits and Still Maintain
Effective Enforcement, 42 J. Urb. & Contemp. L. 389, 395 (1992).
n193. The Environmental Auditing Policy Statement states "in fashioning enforcement
responses to violations, EPA policy is to take into account, on a case-by-case basis, the
honest and genuine efforts of regulated entities to avoid and promptly correct violations
76
and underlying environmental problems." Environmental Auditing Statement, supra note
189, at 25,007.
n194. Id. at 25,009.
n195. Courtney M. Price & Allen J. Danzig, Environmental Auditing: Developing a
"Preventative Medicine' Approach to Environmental Compliance, 19 Loy. L.A. L. Rev.
1189, 1195 (1986).
n196. See, e.g., Emergency Planning and Community Right-to-Know Act, 42 U.S.C.
11,001-11,050 (1988) (requiring industries subject to notification and reporting sections
to make information concerning hazardous and toxic chemicals available to local, state,
and federal officials as well as the general public); id. 6991(a)-6991(i) (requiring
reporting of leaks from underground storage tanks); Federal Water Pollution Control Act,
33 U.S.C. 1251-1387 (1988) (requiring monitoring and reporting of pollutants discharged
into surface waters).
n197. See, e.g., Bethelem Steel Makes $ 32 Million in Improvements, EPA J., May/June
1992, at 3 (stating that Bethelem Steel Corp., in agreement with the EPA and
Pennsylvania Department of Environmental Resources, agreed to spend $ 32 million to
bring itself into compliance with the Clean Air Act and agreed to pay $ 6.7 million in
civil penalties for past violations of the CAA).
n198. Annette T. Crawley, Environmental Auditing and the "Good Samaritan' Doctrine:
Implications for Corporate Parent Corporations, 28 Ga. L. Rev. 223, 229 (1993).
n199. See, e.g., 33 U.S.C. 1319(b)(2) (fines for CWA violations of not less than $ 5000
or more than $ 50,000 per day or up to three years in prison, or both).
n200. Crawley, supra note 198, at 229-30 ("The resourceful plaintiff may use the
environmental audit to allege that the corporation voluntarily assumed a duty of care that
it breached through its negligence." [citations omitted]).
n201. "It is EPA policy to encourage the use of environmental auditing by regulated
entities to help achieve and maintain compliance with environmental laws and
regulations, as well as to help identify and correct unregulated environmental hazards."
Environmental Auditing Statement, supra note 189, at 25,004.
n202. Id. at 25,007.
n203. John S. Guttman, Environmental Reviews Can Be Kept Confidential, Nat'l L.J.,
June 20, 1994, at C12.
n204. See Environmental Auditing Statement, supra note 189, at 25,007 (the EPA has the
authority to request audit reports); United States v. Chevron U.S.A. Inc., No. 88-6681,
1989 U.S. Dist. LEXIS 12267 (E.D. Pa. Oct. 16, 1989) (stating that there is no attorney-
77
client privilege unless communication is between client and attorney and the
communication's purpose is to provide legal assistance).
n205. No. CV 91-6446-WDK(Mcx), 1994 U.S. Dist. LEXIS 7125 (C.D. Cal. Apr. 12,
1994).
n206. Id.
n207. No. 91 Civ. 0035 (KMW), 1993 U.S. Dist. LEXIS 12801 (S.D.N.Y. Sept. 15,
1993).
n208. Id.
n209. Farran & Adams, supra note 190, at 10,240. The authors also state that
the environmental regulatory community is at a critical juncture in the philosophy of
environmental enforcement. A decision must be made whether to influence behavior
primarily through the force of the recently improved arsenal of criminal penalty
provisions or by also creating a legal structure under which self-policing programs can
achieve improved compliance effectively.
Id. at 10,239.
n210. Department of Justice Memorandum, Factors in Decisions on Criminal
Prosecutions for Environmental Violations in the Context of Significant Voluntary
Compliance or Disclosure Efforts By the Violator, July 1, 1991. The factors the DOJ will
consider in exercising its prosecutorial discretion are: voluntary disclosure, cooperation,
compliance programs, pervasiveness of noncompliance, internal disciplinary measures,
and subsequent compliance efforts. Id.
n211. The guideline is entitled The Exercise of Investigative Discretion and sets forth
factors indicating cases requiring criminal investigation. If a corporation conducts an
environmental audit:
Corporate culpability may be indicated when a company performs an environmental
compliance or management audit, and then knowingly fails to promptly remedy the noncompliance and correct any harm done. On the other hand, EPA policy strongly
encourages self-monitoring, self-disclosure, and self-correction. When self-auditing has
been conducted (followed up by prompt remediation of the non-compliance and any
resulting harm) and full, complete disclosure has occurred, the company's constructive
activities should be considered as mitigating factors in EPA's exercise of investigative
discretion. Therefore, a violation that is voluntarily revealed and fully and promptly
remediated as part of a corporation's systematic and comprehensive self-evaluation
program generally will not be a candidate for the expenditure of scarce criminal
resources.
78
EPA Meeting Notice, Restatement of Policies Related to Environmental Auditing, 59
Fed. Reg. 38,455, 38,459 (1994).
n212. See Farran & Adams, supra note 190, at 10,240. The authors recommend that the
EPA and DOJ establish through regulation a safe harbor for companies implementing
self-auditing programs and correcting violations. The safe harbor recommended would
provide:
EPA will not seek, or will reduce, any civil penalty where: (1) the violation is
unintentional; (2) the regulated entity voluntarily reports the violation before the EPA
discovers the problem; (3) the regulated entity takes prompt and effective action to
remediate the problem and prevent its recurrence; and (4) the violation does not result in
any actual harm to human health or the environment. The safe harbor may also preclude
prosecutors from using self-audit information to prove knowledge in criminal
enforcement cases, or it may provide an affirmative defense to companies, allowing them
to reduce or eliminate their civil or criminal liability.
Id.
n213. The comments in the July 28, 1994 hearing ranged from a recommendation that
Congress enact legislation granting limited immunity for information revealed in a
voluntary audit to a recommendation by the Chemical Manufacturers Association that the
EPA through its enforcement procedures establish a "safe harbor" for companies who
voluntarily report violations. Public comments were received through mid- August. 25
Env't Rep. (BNA) 624-25 (Aug. 5, 1994).
n214. The states adopting the "self-evaluative" privilege legislation are Colorado,
Indiana, Kentucky, and Oregon. 59 Fed. Reg. at 38,459 (1994).
n215. See supra part II.A.
n216. The Securities Act of 1933, ch. 38, 48 Stat. 74 (codified at 15 U.S.C. 77a-77bbb
(1988 & Supp. IV 1992)); the Securities Exchange Act of 1934, ch. 44, 48 Stat. 881
(codified at 15 U.S.C 78a-78kk).
n217. SEC, Report of Special Study of Securities Markets, H.R. Doc. No. 95, 88th Cong.,
1st Sess. 1 (1963).
n218. The Securities Act of 1933, Preface; see also Milton H. Cohen, "Truth in
Securities" Revisited, 79 Harv. L. Rev. 1340, 1341-42 (1966).
n219. See, e.g., SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 858 (2d Cir. 1968), cert.
denied, 394 U.S. 976 (1969).
n220. See generally John W. Bagby et al., Management Discussion of Business
Performance: An Analytical and Empirical Evaluation, 26 Am. Bus. L.J. 57, 61-66
79
(1988) (arguing that six factors affect the introduction of new mandatory disclosures or
the revision of existing disclosures: (1) impetus for disclosure, (2) substance of
disclosure's content, (3) form or formatting of the information, (4) timing of release of the
disclosure, (5) the value to users of the information, and (6) the costs of production for
the information disclosed).
n221. 15 U.S.C. 77g (Supp. IV 1992) (registration statement); id. 77j(c) (1988)
(prospectus); id. 78n(a) (proxy solicitation); id. 78(m)(a) (annual and quarterly reports).
n222. SEC, Disclosure to Investors - Report and Recommendations to the Securities and
Exchange Commission From the Disclosure Policy Study (The Wheat Report), [19631972 Special Studies Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 74,601, at 10
(May 9, 1969). In the securities law context, Congress has also recognized that ignorance
and secrecy invite corruption. H.R. Rep. No. 1383, 73d Cong., 2d Sess. 11 (1934).
n223. See, e.g., Louis Loss, Securities Regulation 125 (2d ed. 1961); Louis D. Brandeis,
Other People's Money 92 (1914).
n224. See infra text accompanying notes 362-529.
n225. See supra notes 9-11 and accompanying text. "All agencies of the Federal
Government shall review their present statutory authority, administrative regulations, and
current policies and procedures for the purposes of determining whether there are any
deficiencies or inconsistencies therein which prohibit full compliance with the purposes
and provisions of [the Act]." 42 U.S.C. 4333 (1988). NEPA also requires interagency
cooperation. Id. 4332.
n226. Exec. Order No. 11,514 1, 35 Fed. Reg. 4247 (Mar. 7, 1970).
n227. Id. 1, 2(a), 2(d).
n228. Natural Resources Defense Council, Inc. v. SEC, 389 F. Supp. 689, 694 (D.D.C.
1974) (NRDC I). In addition to the NRDC, the plaintiffs initially included the Project on
Corporate Responsibility, Inc. and the Center on Corporate Responsibility, Inc. The latter
two groups engage "in public interest proxy contests, research, litigation, agency
proceedings, and educational activities, in furtherance of corporate responsibility." Id. at
693. The NRDC proposal was strikingly similar to the one described in an article written
by the SEC's own Assistant General Counsel and Special Counsel. See Sonde & Pitt,
supra note 2, at 880-905. Ironically, Harvey L. Pitt unsuccessfully represented the SEC in
Natural Resources Defense Council, Inc. v. SEC, 432 F. Supp. 1190, 1193 (D.D.C. 1977)
(NRDC II), but successfully defeated the NRDC on appeal in Natural Resources Defense
Council, Inc. v. SEC, 606 F.2d 1031, 1035 (D.C. Cir. 1979) (NRDC III).
n229. NRDC I, 389 F. Supp. at 694. The petition's specific proposals would have
required public companies:
80
to describe with respect to each major activity or product, inter alia (1) the nature and
extent (quantified to the extent feasible) of the resulting pollution or injury to natural
areas and resources, and (2) the feasibility of, and plans for, correcting the same. The
Petition also requested that the SEC require disclosure of whether the registered company
has changed company products, projects, production methods, policies, investments or
advertising to advance environmental values.
Id.; see also Proposed Environmental Disclosures, Securities Exchange Act Release No.
11,733, [1975-76 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 80,310, at 85,716
(Oct. 14, 1975); Reply Brief for SEC at 24, NRDC III, 606 F.2d 1031.
The group also urged adoption of equal employment disclosure rules that would have
required each registered publicly-traded company to provide supporting data for any
public claims made about employment of minorities or women. NRDC I, 389 F. Supp. at
694. The equal employment opportunity proposal would have required that SEC filings
include statistical data for independent verification of each company's equal employment
compliance and efforts. Id. However, most of this statistical data was already required to
be filed with the Equal Employment Opportunity Commission (EEOC). Id. This
information is now generally available as circumstantial evidence for comparison in
disparate impact or pattern or practice discrimination litigation under Title VII of the
Civil Rights Act of 1964, 42 U.S.C. 2000e. Id.
n230. Disclosures Pertaining to Matters Involving the Environment and Civil Rights,
Exchange Act Release No. 9252, [1970-1971 Transfer Binder] Fed. Sec. L. Rep. (CCH)
<psign> 78,150, at 80,487-88 (July 19, 1971).
n231. Materiality under the securities laws has experienced an evolution in meaning
sometimes expressed in per se economic terms but most typically expressed in vague
terms concerning the impact of the omission or misstatement on a reasonable investor.
See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); infra part III.B.3.a.ii.
n232. Exchange Act Release No. 9252, Fed. Sec. L. Rep. (CCH) <psign> 78,150, at
80,487.
n233. Id.
n234. Id. at 80,488. The SEC mentioned as examples, then-effective environmental laws
such as the Rivers and Harbors Appropriation Act of 1899, 33 U.S.C. 401 (1970); Federal
Water Pollution Control Act, 33 U.S.C. 1151-1175 (1970); and Clean Air Act, 42 U.S.C.
1857 (1970); and then-effective civil rights laws such as Title VII of the Civil Rights Act
of 1964, 42 U.S.C. 2000e (1970); and Exec. Order No. 11,246, 3 C.F.R. 339 (19641965), reprinted as amended in 42 U.S.C. 2000e (1970), but also suggested disclosure
under other applicable laws. Id.
n235. Exchange Act Release No. 9252, [1970-1971 Transfer Binder] Fed. Sec. L. Rep.
(CCH) <psign> 78,150 (July 19, 1971). The SEC did not consider such supplemental
81
information as part of the filing. Id. Therefore, supplementary information would not be
part of any publicly released disclosure and arguably would become confidential under
the deliberative process exemption to the Freedom of Information Act, 5 U.S.C. 552
(1988). The implied assurance of confidentiality would seem to encourage more detailed
disclosure and encourage justifying the judgment of immateriality by revealing the
analytical method(s) used to determine why the nondisclosure was immaterial.
n236. NRDC I, 389 F. Supp. at 694.
n237. Proposed Amendments of Forms for Environmental Requirements, Exchange Act
Release No. 9498, [1971-1972 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign>
78,524, at 81,135 (Feb. 16, 1972).
n238. Id.
n239. Id. Current assets are the more liquid assets, generally defined as unrestricted cash
or other assets easily converted into cash within a relatively short time. The usual period
is one year or less, although the time may be longer for some items, such as installment
receivables. Examples of current assets include: cash, temporary investments,
receivables, inventory, and prepaid expenses. Kohler's Dictionary for Accountants 136
(4th ed. 1970); see also Accounting Research Bulletin No. 43, Committee on Accounting
Procedures, American Institute of Certified Public Accountants.
n240. Apparently the NRDC-led group's equal employment disclosure proposals were
denied altogether, because the SEC Amendments to its disclosure rules did not deal with
equal employment. NRDC I, 389 F. Supp. at 695 n.7. The SEC's answer to the NRDC
complaint stresses that the SEC "views its new rules as fully meeting its obligations
under NEPA." Id. The SEC perhaps felt no mandate to aid national civil rights policy in
addition to environmental policy.
n241. Natural Resources Defense Council, Inc. v. SEC, No. 72-1148 (D.C. Cir. Feb. 8,
1973). The NRDC petition for review was dismissed on the ground that the SEC's action
was not final agency action subject to judicial review. NRDC III, 606 F.2d at 1037 n.2.
n242. NRDC I, 389 F. Supp. at 689. See infra part III.A.1.
n243. Compliance with Environmental Requirements, Exchange Act Release No. 3410,116, 3 Fed. Sec. L. Rep. (CCH) <psign> 23,507A (Apr. 20, 1973).
n244. Id. at 17,202.
n245. NRDC I, 389 F. Supp. at 695. Later, in 1979, the SEC implied that the 1971 release
needed clarification with the 1973 and 1979 rulemakings because its monitoring revealed
inadequate disclosures. For example, "many registrants, in response to [the 1971 and
1973] releases, disclosed only prior actual and presently authorized capital expenditures."
However, the SEC later made disclosure of existing estimates for future compliance costs
82
mandatory in order to avoid misleading partial disclosures that implied completeness.
Environmental Disclosure Requirements, Exchange Act Release No. 16,224, 3 Fed. Sec.
L. Rep. (CCH) <psign> 23,507B, at 17,203-05 (Sept. 27, 1979).
n246. Compliance with Environmental Requirements, supra note 243, at 17,202.
n247. Id. The description of Legal Proceedings for registration of initial public offerings
on Form S-1 (Item 12), on Form 10 (Item 10), annual reports on Form 10-K (Item 5), and
quarterly reports on Form 10-8-K (Item 3) require only a brief description of material
pending legal proceedings other than ordinary routine litigation incidental to the business.
The registrant must include, "information "known to be contemplated by governmental
authorities,'" and "a description of the factual basis of the proceedings and the relief
sought." Id. at 17,203.
The instructions to these four nearly identical requirements grant exceptions to
proceedings involving primarily a claim to damages in amounts less than 10% of current
assets. The instructions further withdraw environmental litigation from the "ordinary
routine business litigation" exception, thus requiring disclosure if material to the business
or financial condition of the registrant, or if the litigation involves a damage claim
exceeding 10% of current assets. Id.
n248. Id. Government-initiated proceedings are "deemed material" but may be disclosed
with less detail when grouped generically, including, the number of such proceedings in
each group; a generic description of such proceedings; the issues generally involved; and,
if such proceedings "in the aggregate are material to the business or financial condition"
of the registrant, the effect of such proceedings on the business or financial condition of
the registrant. Id.
n249. See, e.g., Stephen W. Hamilton, Environmental Disclosure Requirements of the
Securities and Exchange Commission, in The McGraw-Hill Environmental Auditing
Handbook 2-110 (L. Lee Harrison ed., 1984) ("As a result, multibillion dollar companies
which were not required to disclose non-environmental litigation involving hundreds of
thousands of dollars were nevertheless required to disclose governmental [initiated
environmental] proceedings involving only hundreds of dollars."). Arguably, the costs of
defending most government initiated environmental proceedings are generally much
higher today than hypothesized a decade ago.
n250. See, e.g., Gerard A. Caron, Comment, SEC Disclosure Requirements for
Contingent Environmental Liability, 14 B.C. Envtl. Aff. L. Rev. 729, 739 (1987); Risa
Vetri Ferman, Note, Environmental Disclosures and SEC Reporting Requirements, 17
Del. J. Corp. L. 483, 494 n.74 (1992).
n251. Air Products and Chemicals, Inc., [1973 Transfer Binder] Fed. Sec. L. Rep. (CCH)
<psign> 79,429 (June 11, 1973).
83
n252. Id. at 83,229. However, non-economic immaterial foreign environmental
compliance need not be disclosed under the per se rule for domestic U.S. government
proceedings. Id. See, e.g., Robert J. Lewis, Note, "Shh! Maybe in My Backyard!" An
Equity and Efficiency-Based Critique of SEC Environmental Disclosure Rules and
Extraterritorial Environmental Matters, 78 Minn. L. Rev. 1045, 1048 (1994) (arguing
hypothetically that the non-extraterritorial impact of a lowered SEC environmental
disclosure materiality threshold could allow companies to understate concerns and
mislead investors).
n253. 389 F. Supp. 689 (D.D.C. 1974).
n254. Id. at 692.
n255. 5 U.S.C. 553 (1988).
Certainly the notice should have been calculated to elicit comment from legal scholars,
public interest groups, foundations, colleges, universities, and other institutions and
individuals who participate in the nation's capital markets and who may want to comment
about what the SEC legally could and should do to fulfill NEPA ... The notice in this case
was not so calculated.
NRDC I, 389 F. Supp. at 700.
n256. 5 U.S.C. 551-576.
n257. NRDC I, 389 F. Supp. at 699.
[This Court is] ready to review the Commission's apparent decision that even in light of
NEPA no reasonable investor in this country wants the type of information which
Plaintiffs seek. But now, the Court must first determine whether the SEC rulemaking
action which resulted in Release No. 5386 [1973 rulemaking] is the result of an informed
decision-making process as provided in the APA. Obviously, it was not!
Id.
n258. Id. at 701. "The "concise general statement of ... basis and purpose' mandated by [5
U.S.C. 553(c)] will enable us to see what major issues of policy were ventilated by the
informal proceedings and why the agency reacted to them as it did." Id. (quoting
Automotive Parts & Accessories Ass'n v. Boyd, 407 F.2d 330, 338 (D.C. Cir. 1968)).
n259. Id.
n260. Id.
n261. Id.
84
n262. Id. at 701-02.
n263. Notice of Hearing on Environmental and Social Matters, Exchange Act Release
No. 11,236, [1974-1975 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 80,110, at
85,109 (Feb. 11, 1975).
n264. The 1975 Hearing Notice recounted SEC "normal practice" of publishing its
releases in the SEC Docket which had a claimed subscriber list of approximately 6500 at
that time. The SEC Docket was described including information on obtaining a
Government Printing Office subscription. The SEC claimed that this notice was
distributed to all registrants consistent with SEC's normal practice. See John Oliver
Cunningham, Environmental Disclosure in Corporate Securities Reporting, 8 B.C. Envtl.
Aff. L. Rev. 541, 563 (1980) (citing NRDC Plaintiffs memo, NRDC II, 432 F. Supp.
1190) ("The true extent of investor interest in the general concept of environmental
disclosures could not be ascertained from the participation in the proceeding alone, since
obviously fewer than all interested investors participated in the proceeding."); a
subsequent additional announcement was made in April 1975 making copies of the
comment solicitation available to any other group or organization whose membership
might be interested in commenting. Securities Act Release No. 6677, 40 Fed. Reg.
16,375 (Apr. 4, 1975).
n265. See Conclusions and Proposed Environmental Disclosures, Exchange Act Release
85,708 (Oct. 14, 1975).
In addition, to assure the fullest possible notice to interested persons, the Commission
provided 500 copies to the Natural Resources Defense Council for distribution. The
Commission itself mailed copies of the release, together with letters inviting comment, to
various interested governmental agencies, to persons who had responded to two earlier
releases requesting comment on certain matters of social significance, and to persons who
commented on [the 1972 Proposed Amendments of Forms for Environmental
Requirements.] [The SEC also separately announced] that it would make available a
reasonable number of copies of [the comment solicitation,] upon request, to any other
group or organization whose membership might be interested in commenting thereon.
Id. at 85,708-09.
n266. Id.
n267. Notice of Hearing on Environmental and Social Matters, Exchange Act Release
85,110 (Feb. 11, 1975).
n268. Id.
n269. Id.
85
n270. Id. at 85,110-11.

n271. Id. at 85,111.
n272. Id. "Certain disclosure might be required only of registrants which, by reason of
their size or business, are considered to have major potential for causing environmental
harm." Id.
n273. Id.
n274. Conclusions and Proposed Environmental Disclosures, Exchange Act Release No.
11,733, [1975-1976 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 80,310, at 85,709
(Oct. 14, 1975). The record eventually comprised nearly 15,000 pages after conclusion of
the comment period leading to the final rulemaking. Rulemaking on Environmental
Disclosure, Exchange Act Release No. 12,414, [1975-1976 Transfer Binder] Fed. Sec. L.
Rep. (CCH) <psign> 80,495, at 86,294 (May 6, 1976).
n275. The tenor of the pro-proposed disclosure was exemplified in a statement by Roger
G. Kennedy, Vice-President for Financial Affairs of the Ford Foundation:
"Our analysts are expected to know and compute the likely economic effects of present
litigation and regulation.
As long term investors, whose positions are large enough to be difficult to trade quickly,
we don't want to be surprised by what EPA or a state legislature, or the EEOC, or a class
action suit or even a court might do. We try to perceive early warning signals. We cannot
afford to wait until a law suit or a regulatory action is already in the courts. We expect
our investment analysts to keep their binoculars on the horizon so that their earnings
estimates, discounted to arrive at estimates of present value, may prudently include the
probable impact of those social forces which a well-informed citizen might observe to be
abroad in the land.
...
Obviously, one cannot vote proxies, or talk intelligently with corporate managers, unless
one knows something about the facts underlying the issues presented. Those facts change
over time. Staying with a problem besetting the assets one owns is old-time investment
religion. So we go back to our analysts, year after year, and back to our independent
inquiries about corporate practice, in an effort to make our voting and our conversations
sensible and current and well-informed.
We have had to do a lot of digging on our own for such information, though we are often
joined in digging by like-minded institutions which share our investment methods. We
would rejoice if you were to make it easier for us to be informed. We could then know
better what to expect of the long-range financial prospects of our stockholdings; we could
86
be better able to act as effective owners. We might even help nudge the managements,
which are, after all, the agents of us owners into ways of behaving which will make our
holdings more prosperous in the long run."
Natural Resources Defense Council, Inc, v. SEC, 606 F.2d 1031, 1038 n.4 (D.C. Cir.
1979) (NRDC III).
n276. The tenor of the those opposing the proposed regulations predicted excessive costs,
shareholder indifference, and marginal benefits. They largely represented publicly-traded
registrants such as those represented by a spokesperson for the National Association for
Manufacturers:
"Even if the Commission had authority to require disclosure of such matters, there are
many reasons why it should not do so. Three reasons seem paramount to us: first, such
disclosure would frustrate the Commission's statutory purposes; second, there is no need
for such disclosure; and third, such disclosure imposes too onerous a burden on U.S.
corporations.
...
Required disclosure of too much detailed information would frustrate the statutory
objective of protecting investors by deemphasizing or obscuring crucial information. The
logic of arguments for required disclosure of documents dealing with equal employment
opportunity would lead to required disclosure of documents on every (1) tax dispute, (2)
contract dispute, (3) patent dispute, (4) OSHA claim, (5) customer complaint, etc.,
involving an issuer. A quagmire of paper would result, from which investors would learn
very little, thereby undermining the statutory function of the Commission.
Several ... "service organizations" publish reports on "socially responsible business
policies and practices" based on their own research...
If such service organizations and specialized reports for "ethical investors" already exist,
what need is there for the costly, onerous, detailed disclosure proposed?
...
In addition to being unlawful, inadvisable, and unnecessary, the proposed disclosure of
socially significant matters would add to the mounting paperwork burden on American
business - a burden whose added costs are passed on to the consumer, thus fueling
inflation.
The magnitude of the minimum total cost of these environmental impact studies can only
be estimated. But a conservative estimate would be in excess of $ 1 billion. Between
1954 and 1967 the number of manufacturing establishments employing 1000 persons or
more held steady at 2000 establishments. Taking our estimate of the cost of
87
environmental impact studies for plants employing 500 persons and multiplying by 2000
establishments produces the $ 1 billion estimate."
Id. at 1038-39 n.5.
11,733, [1975 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 80,310, at 85,726 (Oct.
14, 1975).
n278. Id. at 85,717.
n279. Id. ("Comprehensive disclosure of the environmental effects of corporate
activities."); see supra text accompanying note 229.
n280. Id.
n281. Id.
n282. Id.
n283. Id.
n284. Id. at 85,709-11.
n285. 15 U.S.C. 77g, 77j, 77s(a) (1988).
n286. Id. 78l(b), 78m(a), 78n(a), 78w(a).
n287. S. Rep. No. 792, 73d Cong., 2d Sess. (1934); H.R. Rep. No. 1383, 73d Cong., 2d
Sess. (1934); H.R. Rep. No. 85, 73d Cong., 1st Sess. (1933).
n288. United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975) (holding "economic
realities" underlying transaction triggers jurisdiction of securities laws under "investment
contract" catch-all for "security"). The SEC inferred that Supreme Court dicta stating that
investment, not consumption economic interests only are covered by securities law
supported limiting disclosure requirements to financial performance matters and not to
proxy or shareholder democracy matters which the SEC appeared to narrow to
shareholder proposals; see also SEC v. Chenery Corp., 332 U.S. 194, 209 (1947)
(deferring to agency judgments as the product of specialized expertise).
n289. See, e.g., Conclusions and Proposed Environmental Disclosures, Exchange Act
Release No. 11,733, [1975-1976 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign>
80,310, at 85,721 (Oct. 14, 1975).
n290. Id. at 85,715.
88
n291. Id. (citing Calvert Cliffs' Coordinating Comm. v. Atomic Energy Comm'n, 449
F.2d 1109, 1112 (D.C. Cir. 1971) and H.R. Rep. No. 91-765, 91st Cong., 1st Sess. 10
(1969)) (NEPA is "designed to assure consideration of environmental matters by all
agencies in their planning and decision making - especially those agencies who now have
little or no legislative authority to take environmental considerations into account")
(emphasis in original).
n292. Id. at 85,717, 85,719-25 (concluding "these persons constitute ... an insignificant
percentage of the estimated 30 million U.S. shareholders" and the "mutual funds which
have been formed with specific social objectives" are small or inactive as of 1974).
n293. Id. at 85,722 ("voting on socially-oriented shareholder proposals has often caused a
corporation to alter its behavior even though the proposals are defeated by a wide
margin").
n294. Id. at 85,716.
n295. Id. at 85,712-13.
n296. Id. at 85,726.
N297. Id. at 85,727.
n298. Rulemaking on Environmental Disclosure, Exchange Act Release No. 12,414,
[1975-1976 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 80,495 (May 6, 1976).
The final rule included surplusage requiring disclosure of estimated capital expenditures
for environmental control facilities for such further periods as the registrant deems
material. Id. at 86,291.
n299. Id. at 86,294.
n300. Id. at 86,295.
n301. NRDC II, 432 F. Supp. 1190.
n302. SEC v. Allied Chem. Corp., SEC Litig. Release No. 7811, Civ. No. 77-373
(D.D.C. filed Mar. 4, 1977), excerpted in Chemical Company Enjoined for Failure to
Disclose Pollution's Potential Impact, 393 Sec. Reg. & L. Rep. (BNA) A-17, A-18 (Mar.
9, 1977) (charging that Allied directly and indirectly discharged kepone into the
environment, knowingly harming animal and marine life).
n303. Id.
n304. See, e.g., Caron, supra note 250, at 758-60 (discussing such nascent claims).
89
n305. Natural Resources Defense Council, Inc. v. SEC, 432 F. Supp. 1190, 1198 (D.D.C.
1977) (NRDC II) (citing, inter alia, Calvert Cliffs' Coordinating Comm. v. Atomic
Energy Comm'n, 449 F.2d 1109, 1112 (D.C. Cir. 1971)).
11,733, [1975-1976 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 80,310 (Oct. 14,
1975).
n307. Rulemaking on Environmental Disclosure, Exchange Act Release No. 12,414,
[1975-1976 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 80,495 (May 6, 1976).
n308. NRDC II, 432 F. Supp. at 1205.
n309. Id. at 1204-05 (citation omitted).
n310. Id. at 1205.
n311. Id. ("The Commission failed to consider the possibility of requiring disclosure of
environmental information to shareholders solely in connection with proxy solicitations
... The failure to consider such a possibility is particularly significant in view of the
Commission's own conclusions ....").
n312. Id. "There appears to have been little, if any, effort on the part of the Commission
to work constructively with registrants and with interested individuals and organizations
to develop such guidelines and standards." Id. At least two organizations, the American
Institute of Certified Public Accountants Special Task Force and the Council on
Economic Priorities, testified that environmental disclosure guidelines were feasible. Id.
n.67.
n313. Id. at 1207. "The Commission's decision was not the product of the "imaginative
exercise' of its rulemaking authority envisioned by NEPA and [NRDC I]." Id. at 1208.
n314. Id. at 1212.
n315. Natural Resources Defense Council, Inc., v. SEC, 606 F.2d 1031 (D.C. Cir. 1979)
(NRDC III).
n316. Id. at 1050.
n317. Id. (citing Citizens for Safe Power v. Nuclear Regulatory Comm'n, 524 F.2d 1291,
1301-02 & n.18 (D.C. Cir. 1975)).
n318. Id. at 1055-56 (citing Vermont Yankee Nuclear Power Corp. v. Natural Resources
Defense Council, Inc., 435 U.S. 519 (1978) (upholding Atomic Energy Commission's
choice of proceeding to consider nuclear waste issues); Kleppe v. Sierra Club, 427 U.S.
390 (1976) (upholding Department of the Interior decision to prepare national and local
90
EIS but not regional EIS); Flint Ridge Dev. Co. v. Scenic Rivers Ass'n, 426 U.S. 776
(1976) (upholding Department of Housing and Urban Development decision not to
prepare EIS since other opportunities remained to implement NEPA); Aberdeen &
Rockfish R.R. Co. v. SCRAP, 422 U.S. 289 (1975) (upholding ICC's separating
ratemaking forum from forum for environmental considerations)).
n319. NRDC III, 606 F.2d at 1049.
n320. Id. at 1052.
n321. Id. at 1059.
n322. Id. (citing Industrial Union Dep't v. Hodgson, 499 F.2d 467, 474-75 (D.C. Cir.
1974)).
n323. Id. at 1049 n.23. When the presumption of agency regularity is rebutted, more
exacting review is given, such as when the agency has undue bias toward particular
private interests, see, e.g., Central Fla. Enters., Inc. v. FCC, 598 F.2d 37 (D.C. Cir. 1978);
there is a history of the agency's ad hoc and inconsistent judgments, see, e.g., Local 777
v. NLRB, 603 F.2d 862, 869-71 (D.C. Cir. 1978); there is an identical result after
remand, see, e.g., Food Mktg. Inst. v. ICC, 587 F.2d 1285, 1289-90 (D.C. Cir. 1978); or
the agency departs from longstanding policies and precedents, see, e.g., Office of
Communication of United Church of Christ v. FCC, 590 F.2d 1062, 1068-69 (D.C. Cir.
1978).
n324. NRDC III, 606 F.2d at 1050 (finding that these factors include the intent of
Congress, particularly as expressed in the agency's enabling statute; the needs, expertise,
and impartiality of the agency on the instant issue; the reviewing court's ability to
effectively evaluate the questions posed).
n325. In re United States Steel Corp., Exchange Act Release No. 34-16,223, [1979-1980
Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,319 (Sept. 27, 1979).
n326. 15 U.S.C. 78o(c)(4) (1988).
n327. Section 15(c)(4) is often used to make administrative "findings" without bringing
charges in federal court. Typically, the registrant neither admits nor denies the charges
but immediately consents to entry of an order barring further violations. The SEC is
usually creative in fashioning additional "ancillary" relief in the form of flexible
"undertakings" requiring the registrant change managerial structures believed to underlie
the violations. See William R. McLucas & Laurie Romanowich, SEC Enforcement
Proceedings Under Section 15(c)(4) of the Securities Exchange Act of 1934, 41 Bus.
Law. 145, 171-74 (1985). Such powers are analogous to ancillary relief in equity, raising
questions this form of enforcement practice may exceed SEC powers. See, e.g., Marc I.
Steinberg, Corporate Internal Affairs: A Corporate and Securities Law Perspective 50-55
(1983).
91
n328. 42 U.S.C. 7401-7642 (1988).

n329. 33 U.S.C. 1251-1376 (1988).
n330. In re United States Steel Corp., Exchange Act Release No. 16,223, [1979-1980
Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,319, at 82,381 n.16 (Sept. 27,
1979).
n331. Id. at 82,381.
n332. Id.
n333. Id. at 82,383.
n334. Id. at 82,382. "The Commission's general disclosure rules require disclosure of any
additional material information, beyond that for which disclosure is specifically required,
necessary to make required statements not misleading." Id. at 82,382 n.30 (citing 17
C.F.R. 230.408, 240.12b-20, 240.14a-9 (1993)).
Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,319, at 82,383 (Sept. 27, 1979).
n336. Id. at 82,380-81.
n337. Id. at 82,384.
n338. Id.
n339. Id.
n340. Id. at 82,384-86.
n341. Environmental Disclosure Requirements, Exchange Act Release No. 16,224, Fed.
Sec. L. Rep. (CCH) <psign> 23,507B (Sept. 27, 1979).
n342. In re Occidental Petroleum Corp., Exchange Act Release No. 34-16,950, [1980
Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,622 (July 2, 1980).
n343. Id. Oxy also settled charges of inadequate disclosure about non-environmental
matters: (1) problems with the Libyan government over Oxy's profit participation in
Libyan petroleum operations, and (2) the practice of Oxy's then-president, Dr. Armand
Hammer, in securing signed but undated resignations from numerous Oxy board
members, usually before their initial election. Id. at 83,353-55.
n344. Id. at 83,347-48.
92
n345. Id. at 83,348.

n346. Id. at 83,348-53. Oxy's Form 10-K for the fiscal year 1977 vaguely stated only that:
"in light of the expansion of corporate liability in the environmental area in recent years
... there can be no assurance that Occidental will not incur material liabilities in the future
as a consequence of the impact of its operations upon the environment." Id. at 83,351.
However, Oxy possessed sufficiently definite information about its potential civil and
criminal liabilities for at least the four sites named. Id. See, e.g., Caron, supra note 250, at
756 (arguing general disclosure rules require disclosure of risk exposure from bare
potentiality of unasserted litigation, environmental or otherwise).
n347. Occidental Petroleum, supra note 342, at 83,348-53.
n348. See, e.g., Proposed Amendments to Item 5 of Regulation S-K Regarding
Disclosure of Certain Environmental Proceedings, Exchange Act Release No. 17,762,
[1981 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,867, at 84,285 (May 4,
1981) [hereinafter Disclosure of Certain Environmental Proceedings].
n349. See, e.g., Corporate Governance Release, Exchange Act Release No. 13,901, 42
Fed. Reg. 44,860 (Aug. 29, 1977).
n350. SEC Division of Corporation Finance, Staff Report on Corporate Accountability,
96th Cong., 2d Sess. 323-24 (Comm. Print 1980) (report to the Senate Comm. on
Banking, Housing and Urban Affairs).
n351. 5 U.S.C. 601-612 (1988).
n352. Exec. Order No. 12,291, 3 C.F.R. 127 (1982), reprinted in 5 U.S.C. 601 app. at
473-76 (1988).
n353. See generally John W. Bagby, Regulatory Impact Analyses: Toward a Reasonable
Economic Impact From Federal Regulations, 19 New Eng. L. Rev. 533 (1983-1984); see
also Caron, supra note 250, at 741, 762 (arguing Reagan cost-benefit analysis order
prompted SEC's scaling back costly disclosure standards).
n354. Disclosure of Certain Environmental Proceedings, supra note 348, at 84,284.
n355. The SEC developed the per se materiality rule for government proceedings in
1973. Compliance with Environmental Requirements, Exchange Act Release No. 3410,116, 3 Fed. Sec. L. Rep. (CCH) <psign> 23,507A, at 17,202 (Apr. 20, 1973).
n356. Id. at 84,287.
n357. Id.
93
n358. Id.
n359. Adoption of Integrated Disclosure System, Exchange Act Release No. 18,524, 47
Fed. Reg. 11,380, at 11,388 (Mar. 2, 1982).
n360. See, e.g., James D. Cox et al., Securities Regulation: Cases and Materials 47-48
(1991).
n361. Amendments to Annual Report Form, Exchange Act Release No. 17,114, 45 Fed.
Reg. 63,630 (Sept. 2, 1980) (effective for fiscal years ending after December 15, 1980).
See generally John W. Bagby et al., Management Discussion of Business Performance:
An Analytical and Empirical Evaluation, 26 Am. Bus. L.J. 57, 73-74 (1988) (explaining
that new regulations require more evaluative disclosures).
n362. 17 C.F.R. 229 (1994).
n363. Id. 210.
n364. Id. 228. Regulation S-B's separate Items 101, 103, and 303 are not discussed in
detail here. A "small business issuer" must meet all the following criteria to take
advantage of the Regulation S-B integrated disclosure system: "(1)(i) has revenues of less
than $ 25,000,000; (ii) is a U.S. or Canadian issuer; (iii) is not an investment company;
(iv) if a majority owned subsidiary, the parent corporation is also a small business
issuer." Id. 228.10(a)(1). Public float, the aggregate market value of the issuer's
outstanding securities held by non-affiliates, cannot exceed $ 25,000,000. Id.
n365. Rule 10b-5 prohibits fraudulent misstatements or omissions in connection with the
purchase or sale of a security. Id. 240.10b-5.
n366. See, e.g., id. 249.220f.
n367. See Christopher J. Barry & Charles R. Blumenfield, Practical and Ethical
Considerations in Counselling Clients Concerning Environmental Reporting and
Disclosure, 38 Rocky Mtn. Min. L. Inst. 4-1, 4-12 n.41; cf. Robert J. Lewis, Note, "Shh!
Maybe in My Backyard!" An Equity and Efficiency-Based Critique of SEC
Environmental Disclosure Rules and Extraterritorial Environmental Matters, 78 Minn. L.
Rev. 1045 (1994) (proposing revision to eliminate current disclosure advantage for
domestic U.S. issuers without foreign operations over foreign operators with
environmental problems).
n368. 17 C.F.R. 229.101 (1994).
n369. Id. 229.103.
n370. Id. 229.303.
94
n371. See infra part III.B.3.a.ii.
n372. 17 C.F.R. 229.101 (1994).
n373. Id. 229.101(a).
n374. Id. 229.101(b).
n375. Id. 229.101(c).
n376. Id. 229.101(d).
n377. Id. 229.101(c)(1)(xii).
n378. See In re United States Steel Corp., Exchange Act Release No. 34-16,223, [19791980 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,319 (Sept. 27, 1979); supra
notes 325-41 and accompanying text.
n379. Environmental Disclosure Requirements, Exchange Act Release Nos. 33-6130 and
34-16,224, 3 Fed. Sec. L. Rep. (CCH) <psign> 23,507B (Sept. 27, 1979).
n380. 17 C.F.R. 229.101(c)(1)(xii).
n381. The Second Circuit has held that the disclosure of both compliance costs and
noncompliance costs is contemplated under Item 101. But see Levine v. NL Indus., Inc.,
926 F.2d 199 (2d Cir. 1991) (holding no material omission because a Department of
Energy contract provided NL Industries with complete indemnification for environmental
cleanup).
n382. See Thomas A. Cole, SEC No-Action Letter, [1989 Transfer Binder] Fed. Sec. L.
Rep. (CCH) <psign> 78,962 (Jan. 17, 1989) (suggesting cleanup costs may trigger
material disclosure duties under Items 101, 103, and 303); Joseph Sciarrino, SEC
Interpretive Release (Jan. 17, 1989), reprinted in Janet D. Smith, Environmental
Disclosures Required by Federal Securities Laws, in Environmental Problems of
Financing and Securities Disclosure (PLI Real Estate Law & Prac. Course Handbook
Series No. 596, 1991); Prospective Information, Exchange Act Release No. 26,831, 7
Fed. Sec. L. Rep. (CCH) <psign> 73,193 n.17 (May 18, 1989) (interpreting cleanup costs
not as "sanctions," but as remedial costs that normally constitute either charges to income
or capital expenditures).
n383. "The matters specified in paragraphs (c)(1)(xi) through (xiii) of this section shall be
discussed with respect to the registrant's business in general; where material, the industry
segments to which these matters are significant shall be identified." 17 C.F.R.
229.101(c)(1). Instruction 3 to Item 101 provides that the SEC will entertain written
requests for waivers from disclosing any information required in Item 101 or the
95
substitution of comparable information if this would be consistent with the protection of
investors. Id. 229.101.
n384. Financial Reporting for Segments of a Business Enterprise, Statement of Financial
Accounting Standards No. 14 (Fin. Accounting Standards Bd. 1976).
n385. Industry and Homogeneous Geographic Segment Reporting; Proposed
Amendments of Disclosure Forms and Rules, Securities Act Release No. 5826, Exchange
Act Release No. 13525, [1977-78 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign>
81,153 (May 10, 1977).
n386. Id. There can be no more than 10 segments. See Bagby et al., supra note 361, at 8284 (suggesting a diversified conglomerate like General Motors could be segmented by
product brands, corporate function, or regional zones).
n387. See supra notes 342-47 and accompanying text.
n388. See Elizabeth Ann Glass Geltman, Disclosure of Contingent Environmental
Liabilities by Public Companies Under the Federal Securities Laws, 16 Harv. Envtl. L.
Rev. 129, 151 (1992); Perry E. Wallace, Disclosure of Environmental Liabilities Under
the Securities Laws: The Potential of Securities-Market-Based Incentives for Pollution
Control, 50 Wash. & Lee L. Rev. 1093, 1107 (1993).
n389. 42 U.S.C. 7401-7671g (Supp. 1992).
n390. Richard Y. Roberts Address to Dallas Bar Association, Fed. Sec. L. Rep. (CCH)
No. 1507 (June 17, 1992).
n392. 17 C.F.R. 229.103 (1994). The regulation states:
Describe briefly any material legal proceedings, other than ordinary routine litigation
incidental to the business, to which the registrant or any of its subsidiaries is a party or of
which any of their property is the subject. Include the name of the court or agency in
which the proceedings are pending, the date instituted, the principal parties thereto, a
description of the factual basis alleged to underlie the proceeding and the relief sought.
Include similar information as to any such proceedings known to be contemplated by
governmental authorities.
Id.
n393. Id.
n394. Id. 240.12b-2 (limiting the material disclosure duty "to those matters to which there
is a substantial likelihood that a reasonable investor would attach importance in
96
determining whether to buy or sell the securities registered"); see also infra part
III.B.3.a.ii.
n395. Id. 229.103.
n396. Id. Instruction 1 (exempting businesses from disclosure requirements "if the
business ordinarily results in actions for negligence or other claims ... unless it departs
from the normal kind of such actions").
n397. Id. Instruction 2.
n398. Id. Instruction 3 (requiring description of "any material bankruptcy, receivership,
or similar proceeding with respect to the registrant or any of its significant subsidiaries").
n399. Id. Instruction 4. The regulation states:
Any material proceedings to which any director, officer or affiliate of the registrant, any
owner of record or beneficially of more than five percent of any class of voting securities
of the registrant, or any associate of any such director, officer, affiliate of the registrant,
or security holder is a party adverse to the registrant or any of its subsidiaries or has a
material interest adverse to the registrant or any of its subsidiaries also shall be described.
Id.
n400. Id. 229.103 (emphasis added).
n401. These thresholds essentially codify the SEC's 1970s policy development, as
restated in the 1981 rule proposal. See supra notes 354-58 and accompanying text.
n402. 17 C.F.R. 229.103. The regulation states:
Notwithstanding the foregoing, an administrative or judicial proceeding (including, for
purposes of A and B of this instruction, proceedings which present in large degree the
same issues) arising under any Federal, State or local provisions that have been enacted
or adopted regulating the discharge of materials into the environment ... shall not be
deemed "ordinary routine litigation incidental to the business" and shall be described if ...
such proceeding is material to the business or financial condition of the registrant...
Id.
n403. Id. Instruction 5(B); see also Mark A. Stach, Disclosure of Existing and Contingent
Superfund Liability Under the Reporting Requirements of the Federal Securities Laws,
18 U. Dayton L. Rev. 355, 378-79 (1993) (arguing that the Instruction 5(B) 10% test
presumes significance of environmental litigation while the 10% test of Instruction 2 for
non-environmental litigation presumes immateriality).
97
n404. See supra notes 356-59 and accompanying text. Instruction 5(C) provides that a
registrant must disclose the legal proceeding when:
A governmental authority is a party to such proceeding and such proceeding involves
potential monetary sanctions, unless the registrant reasonably believes that such
proceeding will result in no monetary sanctions, or in monetary sanctions, exclusive of
interest and costs, of less than $ 100,000; provided, however, that such proceedings
which are similar in nature may be grouped and described generically.
17 C.F.R. 229.103.
n405. Disclosure of Environmental Proceedings Rule Proposals, Exchange Act Release
No. 17,762, [1981 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,867 (May 4,
1981).
This proposal would not automatically require disclosure of any proceeding in which the
possible maximum fine which could be imposed is $ 100,000 or more, but rather would
permit registrants to consider both the amount of any potential fine and the probability
that this maximum penalty, as opposed to a lesser fine, actually will be imposed.
Id; see also infra notes 569-71 and accompanying text (outlining the criteria for
calculating estimates of such sanctions).
n406. Disclosure of Certain Environmental Proceedings, supra note 348, at 84,288.
n407. Id. at 84,288 n.27.
n408. Id.
n409. See supra notes 22-29 and accompanying text. For example, many prominent
federal environmental laws, such as the Clean Air Act and Clean Water Act, direct states
to create their own statutes implementing the federal scheme; yet, if the state program
fails to meet federal statutory standards, the EPA can assume responsibility for the state
program.
n410. Administrative orders qualify as proceedings because of their similarity to judicial
consent decrees. Environmental Disclosure Requirements, Exchange Act Release Nos.
33-6130 & 34-16,224, Fed. Sec. L. Rep. (CCH) <psign> 23,507B, at 17,203 (Sept. 27,
1979). One court, however, has held that the disclosure of an EPA Notice of Violation is
unnecessary in a Schedule 14D-1 tender offer statement because Item 103 is inapplicable
under the tender offer rules. Crouse-Hinds Co. v. Internorth, Inc., 518 F. Supp. 416, 47375 (N.D.N.Y. 1980). The district court declined to speculate whether such notices were
material to investors in a corporate control context given the uncertainty in the
enforcement process. Id; see also W. John Moore, Environmental Flags Raised in Merger
Wars, Legal Times, Dec. 13, 1982, at 1, 6-7 (suggesting takeover targets of hostile bids
98
increasingly claim nondisclosure of environmental liabilities to sidetrack unfriendly
mergers).
n411. Environmental Disclosure Requirements, supra note 379, at 17203-b.
n412. Id.
n413. 42 U.S.C. 9607(a)(1)-(4) (1988).
n414. Integrated Disclosure, Exchange Act Release No. 18,524, 47 Fed. Reg. 11,380,
11,389 n.44 (Mar. 16, 1982).
n415. Prospective Information, supra note 382, at 62,844 n.17. If the registrant has
knowledge additional to PRP status that increases the likelihood of litigation, however,
disclosure may be required. Id.
n416. See id.; Cole, supra note 382, at 78,813; Joseph Sciarrino, SEC Interpretive
Release (Jan. 17, 1989), reprinted in Janet D. Smith, Environmental Disclosures Required
by Federal Securities Laws, in Impact of Environmental Regulations on Business
Transactions 105 (1989).
n417. Prospective Information, supra note 382, at 62,844 n.17.
n418. Id.
n419. Cole, supra note 382, at 78,815.
n420. Levine v. NL Indus., Inc., 926 F.2d 199, 203-04 (2d Cir. 1991) (holding that the
contractual cleanup indemnification duty of the Department of Energy renders contingent
environmental liability immaterial).
n421. Accounting and Disclosures Relating to Loss Contingencies, 58 Fed. Reg. 32,843
(1993) (to be codified at 17 C.F.R. 211).
n422. Id. at 32,844. The regulation requires the registrant's discussion of past and
anticipated environmental expenditures to separately describe the following material
items:
(a) recurring costs associated with managing hazardous substances and pollution in ongoing operations;
(b) capital expenditures to limit or monitor hazardous substances or pollutants;
(c) mandated expenditures to remediate previously contaminated sites; and
99
(d) other infrequent or non-recurring cleanup expenditures that can be anticipated but
which are not required in the present circumstances.
Id. at 32,845.
n423. Id. (suggesting the disclosure of contingencies involving large numbers of small
but related individual claims, including the number of claims pending and filed for each
accounting period, resolution of those claims, and the average settlement amount).
n424. 17 C.F.R. 229.103.
n425. See, e.g., Pacific Mut. Life Ins. Co. v. Haslip, 111 S. Ct. 1032 (1991) (approving
establishment of standards that limit unbridled jury discretion in awarding punitive
damages).
n426. Accounting and Disclosures Relating to Loss Contingencies, supra note 421, at
32,845.
n427. Disclosure of Environmental Proceedings, Exchange Act Release No. 17,762,
[1981 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,867, at 84,288-89 (May 13,
1981).
n428. 17 C.F.R. 229.103 Instruction 2.
n429. Id. Instruction 5(C); Integrated Disclosure, supra note 359, at 11,388.
n430. 17 C.F.R. 229.103 Instruction 2.
n431. See, e.g., Caron, supra note 250, at 762.
n432. National Environmental Policy Act of 1969, Pub. L. No. 91-190, 83 Stat. 852
(1970) (codified as amended at 42 U.S.C. 4321-4370d (1988 & Supp. V 1993)).
n433. 17 C.F.R. 229.401(f), (g).
n434. Id.
n435. Id.
n436. Disclosure Concerning Legal Proceedings Involving Management, Promoters,
Control Persons and Others, Exchange Act Release No. 34,923, 59 Fed. Reg. 55,385
(Nov. 7, 1994).
The proposed amendments would force disclosure of any relevant proceedings that
occurred in the previous 10 years, thereby capturing a longer period of litigation
information and making the disclosure more relevant to assessing management's
100
environmental performance. The proposal would eliminate the materiality threshold
except for insolvency matters. The categories of disclosable litigation would be expanded
somewhat and would more clearly include disciplinary actions brought by self-regulatory
organizations, problems at insurance companies, breaches of fiduciary duty, violations of
various fraud provisions, and foreign litigation. The rules would make such disclosures
consistent with the SEC's expanded litigation powers under the Enforcement Remedies
Act, Pub. L. No. 101-429, 104 Stat. 931 (1990).
The existing and proposed management litigation disclosure regulations are unlikely to
provide much additional environmental-related information. The disclosure of further
information under the proposed regimen might be necessary only when a director, board
nominee, or executive officer was involved in previous environmental litigation while at
another company and only when the litigation clearly falls within one of the indicated
categories. Few of the proposed categories directly encompass environmental litigation.
The proposal would likely provide useful information primarily for shareholder
monitoring of upper management integrity, at most permitting speculation about a
management team's propensity for future environmental violations. Tangential
information on prior management litigation could be derived from the manager's
involvement with a company's insolvency due to environmental liabilities or bank
insolvency. Sanctions under environmental law that could restrict a manager from
engaging in a business practice would also be relevant. For example, orders to cease and
desist from environmental violations would trigger such disclosure. Disclosure fraud
litigation concerning environmental matters would also be covered.
n437. 17 C.F.R. 229.303 (1994).
n438. Prospective Information, supra note 382, at 62,852.
n439. Id. at 62,841; see also 17 C.F.R. 229.303(a) Instruction 3 ("the discussion and
analysis shall focus specifically on material events and uncertainties known to
management that would cause reported financial information not to be necessarily
indicative of future operating results or future financial condition").
n440. Interpretive Release Relating to the Securities Act of 1933 and General Rules and
Regulations Thereunder; Amendments to Guide 22 and Guide 1, 39 Fed. Reg. 31,894
(1974).
n442. See infra part III.B.2.
n443. See Management's Discussion and Analysis of Financial Condition and Results of
Operations, Exchange Act Release No. 26,831, 7 Fed. Sec. L. Rep. (CCH) <psign>
72,436 (May 18, 1989); Bagby et al., supra note 361, at 61, 96-98.
101
n444. See Carl W. Schneider, MD&A Disclosure, 22 Rev. Sec. & Comm. Reg. 149, 150
(1989).
n446. 17 C.F.R. 229.303(b). Interim MD&A discussions may update annual and
intervening quarterly MD&A discussions with material changes in line items. Id.
229.303(b). The schedule and content required for interim financial statements vary
according to the registrant. Id. 210.3-01, 210.3-02, 210.10-01.
n447. Id. 229.303(a)(1).
Liquidity. Identify any known trends or any known demands, commitments, events, or
uncertainties that will result in or that are reasonably likely to result in the registrant's
liquidity increasing or decreasing in any material way. If a material deficiency is
identified, indicate the course of action that the registrant has taken or proposes to take to
remedy the deficiency. Also identify and separately describe internal and external sources
of liquidity, and briefly discuss any material unused sources of liquid assets.
Id.
n448. Id. 229.303(a)(2).
Capital Resources. (i) Describe the registrant's material commitments for capital
expenditures as of the end of the latest fiscal period, and indicate the general purpose of
such commitments and the anticipated source of funds needed to fulfill such
commitments.
(ii) Describe any known material trends, favorable or unfavorable, in the registrant's
capital resources. Indicate any expected material changes in the mix and relative cost of
such resources. The discussion shall consider changes between equity, debt, and any offbalance sheet financing arrangements.
Id.
n449. Id. 229.303(a)(3).
Results of Operations. (i) Describe any unusual or infrequent events or transactions or
any significant economic changes that materially affected the amount of reported income
from continuing operations and, in each case, indicate the extent to which income was so
affected. In addition, describe any other significant components of revenues or expenses
that, in the registrant's judgment, should be described in order to understand the
registrant's results of operations.
(ii) Describe any known trends or uncertainties that have had or that the registrant
reasonably expects will have a material favorable or unfavorable impact on net sales or
102
revenues or income from continuing operations. If the registrant knows of events that will
cause a material change in the relationship between costs and revenues (such as known
future increases in costs of labor or materials or price increases or inventory adjustments),
the change in the relationship shall be disclosed.
(iii) To the extent that the financial statements disclose material increases in net sales or
revenues, provide a narrative discussion of the extent to which such increases are
attributable to increases in prices or to increases in the volume or amount of goods or
services being sold or to the introduction of new products or services.
(iv) For the three most recent fiscal years of the registrant, or for those fiscal years
beginning after December 25, 1979, or for those fiscal years in which the registrant has
been engaged in business, whichever period is shortest, discuss the impact of inflation
and changing prices on the registrant's net sales and revenues and on income from
continuing operations.
Id.
n450. Id. 229.303(a).
n451. Id. 229.303(a).
n452. See id. 229.303(a)(2)(i) (303 also requires a description of the commitments along
with their general purpose).
n453. See supra note 382 and accompanying text. In some instances it will be best to
expense these costs immediately. However, capitalization of pollution control equipment
or cleanup costs may be more appropriate when the assets' useful lives are extended and
such expenditures increase the assets' value.
n454. 17 C.F.R. 229.303(a)(3)(i).
n455. Id.
n456. Id. 229.303(a)(3)(ii).
n457. Id. 229.303(a)(3)(iii).
n458. If the likelihood of occurrence is indeterminable, management must assume it will
come to fruition and evaluate the consequences objectively. Prospective Information,
supra note 382, at 62,843.
n459. Id. at 62,842.
n460. Id. (quoting Securities Act Release No. 6349, 52 Fed. Reg. 13,715, 13,717 (Apr.
24, 1987)) (emphasis added).
103
n461. Id. (emphasis added).

n463. 426 U.S. 438, 449 (1976) (holding that the materiality test evaluates whether there
is a substantial likelihood that a reasonable investor would consider the fact important for
voting).
n464. 485 U.S. 224 (1988) (noting that the magnitude of an uncertain event is discounted
by its probability that it will occur). For a discussion of Basic, see infra notes 567-71 and
accompanying text.
n465. Prospective Information, supra note 382, at 62,843 n.14; see also John W. Bagby &
John C. Ruhnka, The Predictability of Materiality in Merger Negotiations Following
Basic, 16 Sec. Reg. L.J. 245 (1988) (discussing the scope and rationale of the Basic
probability magnitude test).
n466. See, e.g., Glass Geltman, supra note 388, at 161-62 (arguing that the MD&A
materiality threshold alters traditional materiality by requiring disclosure unless registrant
can prove immateriality).
n467. Prospective Information, supra note 382, at 62,844. The hypothetical stated the
following:
FACTS: A registrant has been correctly designated a PRP by the EPA with respect to
cleanup of hazardous waste at three sites. No statutory defenses are available. The
registrant is in the process of preliminary investigations of the sites to determine the
nature of its potential liability and the amount of remedial costs necessary to clean up the
sites. Other PRPs also have been designated, but the ability to obtain contribution is
unclear, as is the extent of insurance coverage, if any. Management is unable to
determine that a material effect on future financial condition or results of operations is
not reasonably likely to occur.
Id.
n468. James G. Archer et al., SEC Reporting of Environmental Liabilities, 20 Envtl. L.
Rep. (Envtl. L. Inst.) 10,105, 10,107 (Mar. 1990); Glass Geltman, supra note 388, at 161.
n469. Archer et al., supra note 468, at 10,107; Glass Geltman, supra note 388, at 161.
n471. See Caron, supra note 250, at 756-58.
104
n472. See, e.g., In re Caterpillar, Inc., Exchange Act Release No. 30,532, 7 Fed. Sec. L.
Rep. (CCH) <psign> 73,830 (Mar. 31, 1992) (holding MD&A disclosure deficient
because Caterpillar failed to discuss the uncertainties and risks related to its whollyowned Brazilian subsidiary).
n473. 17 C.F.R. 210 (1994).
n474. Generally accepted accounting principles (GAAP) dictate how and what data is
collected, the methods for computation of entries, and the preparation, organization, and
formatting of financial statements along with supporting schedules and notes.
n475. As early as 1938, the SEC announced its policy of deference to GAAP, by negative
inference, as the primary standards for computing and presenting financial information:
"In cases where financial statements ... are prepared in accordance with accounting
principles for which there is no substantial authoritative support, such financial
statements will be presumed to be misleading...." Administrative Policy on Financial
Statements, SEC Accounting Series Release No. 4 (Apr. 25, 1938). This permitted a
presumption that the evolving GAAP formed the primary and authoritative source of
accounting standards. By 1973, this deference became more positive when the SEC
announced that "principles, standards and practices promulgated by [FASB] will be
considered by the Commission as having substantial authoritative support, and those
contrary to FASB promulgations will be considered to have no such support." Statement
of Policy on the Establishment and Improvement of Accounting Principles and Standards,
SEC Accounting Series Release No. 150 (Dec. 20, 1973).
n476. See Ted J. Fiflis, Accounting Issues for Lawyers 89-90 (4th ed. 1991).
n477. These regulators periodically publish their views in Staff Accounting Bulletins
(SABs) and in other outlets. The SABs do not have the force of law, they are neither rules
nor interpretations by the SEC, and they do not bear the SEC's official approval.
Accounting and Disclosures for Loss Contingencies, 58 Fed. Reg. 32,843 (June 8, 1993)
(to be codified at 17 C.F.R. 211). Rather, they represent practices followed by staff
members in the SEC Division of Corporation Finance and the Office of the Chief
Accountant. Id. Adherence to SABs should be expected, however, as the staff administers
the disclosure requirements of the federal securities laws. See id. The SEC's formal
accounting guidance has the force of law. These pronouncements were formerly
published as Accounting Series Releases until reorganized in the 1980s as Financial
Releases addressing accounting standards and Accounting and Auditing Enforcement
Releases covering disciplinary matters. Codification of Financial Reporting Policies, 47
Fed. Reg. 21,020 (Apr. 15, 1982).
n478. Accounting for Contingencies, Statement of Financial Accounting Standards No. 5,
<psign> 1 (Fin. Accounting Standards Bd. 1975) [hereinafter SFAS No. 5]. Examples of
loss contingencies including receivable collectability, product liability and warranty
obligations, casualty loss of property to fire, explosion and other hazards, expropriation
risks, pending or threatened litigation, actual or possible claims and assessments, insurers'
105
catastrophe losses, debt guarantees, commercial bank's obligations on standby letters of
credit, and receivable repurchase risks. Id. <psign> 4.
n479. Accrual matches revenues with those expenses undertaken to produce the revenue,
thereby generally requiring disclosure of both items within the same accounting period so
that their net result reflects the underlying economic reality (e.g., the profit or loss from
the transaction).
n480. A charge to income records the loss or loss contingency as a reduction of gross
income.
n481. An asset impairment recognizes that an asset's reduction in value or utility, a
requirement for future expenditures, or an assessment of an expected liability will be
made with respect to that asset. See, e.g., SFAS No. 5, <psign> 74.
n482. Id. <psign> 8.
n483. The following examples reinforce the statement's application to environmental
contingencies: "risk of loss or damage of enterprise property by fire, explosion, or other
hazards," Id. <psign> 4(c); "pending or threatened litigation," Id. <psign> 4(e); "actual or
possible claims and assessments," Id. <psign> 4(f); and "risk of loss from catastrophes
assumed by property and casualty insurance companies including reinsurance
companies," Id. <psign> 4(g).
n484. Accounting and Disclosures for Loss Contingencies, supra note 477.
n485. "Probable" means that "the future event or events are likely to occur." SFAS No. 5,
<psign> 3(a).
n486. "Reasonably possible" means that "the chance of the future event or events
occurring is more than remote but less than likely." Id. <psign> 3(b).
n487. "Remote" means that "the chance of the future event or events occurring is slight."
Id. <psign> 3(c).
n488. Id. <psign> 36.
n489. SFAS No. 5 provides that:
The following factors, among others, must be considered in determining whether accrual
and/or disclosure is required with respect to pending or threatened litigation and actual or
possible claims and assessments:
a. The period in which the underlying cause (i.e. cause for action) of the pending or
threatened litigation or of the actual or possible claim or assessment occurred.
106
b. The degree of probability of an unfavorable outcome.
c. The ability to make a reasonable estimate of the amount of loss.
Id. <psign> 33.
n490. Id. <psign> 37.
n491. Footnote disclosures of loss contingencies are primarily textual discussions
indicating the nature of the contingency and giving an estimate of the possible loss, or
range of loss, or indicating that a loss estimate is impossible, along with the basis for the
estimates. The SEC staff suggests that footnotes may be required to clarify environmental
contingent liabilities such as the following:
* Circumstances affecting the reliability and precision of loss estimates.
* The extent to which unasserted claims are reflected in any accrual or may affect the
magnitude of the contingency.
* Uncertainties with respect to joint and several liability that may affect the magnitude of
the contingency, including disclosure of the aggregate expected cost to remediate
particular sites that are individually material if the likelihood of contribution by the other
significant parties has not been established.
* Disclosure of the nature and terms of cost-sharing arrangements with other potentially
responsible parties.
* The extent to which disclosed but unrecognized contingent losses are expected to be
recoverable through insurance, indemnification arrangements, or other sources, with
disclosure of any material limitations on that recovery.
* Uncertainties regarding the legal sufficiency of insurance claims or solvency of
insurance carriers.
* The time frame over which the accrued or presently unrecognized amounts may be paid
out.
* Material components of the accruals and significant assumptions underlying estimates.
Accounting and Disclosures for Loss Contingencies, supra note 477, at 32,845.
n492. SFAS No. 5, <psign> 10. Registrants should not fail to disclose as immaterial a
reasonably possible contingency if the loss will exceed amounts already recognized (i.e.,
accrued) and the additional amount is material to a decision to buy or sell the registrant's
securities. Accounting and Disclosures for Loss Contingencies, supra note 477, at 32,845.
Note that the SEC staff again ignores measuring the materiality of such additional
107
amounts by the decision of a security holder to grant a proxy or otherwise vote on some
matter. See generally Richard Y. Roberts & Karl R. Hohl, Environmental Disclosure and
Staff Accounting Bulletin No. 92, 50 Bus. Law. 1 (1994) (noting many registrants'
unfamiliarity with accounting literature on loss contingencies).
n493. SFAS No. 5, <psign><psign> 10, 38.
n494. Id. <psign> 3.
n495. Accounting and Disclosures for Loss Contingencies, supra note 477, at 32,844.
Whatever information is available must be used even if no detailed remediation study is
available or no remediation strategy determined. Id.
n496. SFAS No. 5, <psign> 9.
n498. Id.
n499. Id.
n500. Reasonable Estimation of the Amount of a Loss, FASB Interpretation No. 14 of
Statement of Financial Accounting Standards No. 5 (Fin. Accounting Standards Bd.
1976).
n501. For example, if CERCLA cleanup costs could range between $ 100,000 and $
500,000 but the most likely cost is $ 300,000, the registrant must accrue the $ 300,000 on
the financial statements and provide a footnote explanation of the additional $ 200,000 as
a possible additional loss exposure. However, the SEC staff believes that a $ 0 estimate
could be difficult to defend. Accounting and Disclosures for Loss Contingencies, supra
note 477, at 32,844.
n502. See Stephen C. Blowers & Sharon Z. Chevalier, Accounting Disclosures Relating
to Loss Contingencies, Insights, Dec. 1993, at 31, 33-34.
n504. Id.
n505. 485 U.S. 224 (1988); see also infra notes 567-71 and accompanying text.
n506. Bagby & Ruhnka, supra note 465.
n507. SFAS No. 5; see also George Zuber & Jeffrey Smith, Disclosing Environmental
Liabilities and Risks, Insights, July 1993, at 3 (discussing examples of several registrants'
1992 reserves for environmental losses).
108
n508. SFAS No. 5, <psign> 31.

n509. See Zuber & Smith, supra note 507, at 5 (discussing asset depreciation under the
1990 Clean Air Act Amendments).
n510. See supra note 382 and accompanying text.
n511. Capitalization of Costs to Treat Environmental Contamination, EITF Bulletin No.
90-8, (Emerging Issues Task Force, Fin. Accounting Standards Bd., May 31, 1990).
n512. Accounting and Disclosures for Loss Contingencies, supra note 477.
n513. Accounting for Environmental Liabilities, EITF Bulletin No. 93-5, (Emerging
Issues Task Force, Fin. Accounting Standards Bd., Feb. 19, 1993).
n515. See Omnibus Opinion, Accounting Principles Board Opinion No. 120, <psign> 7;
Definition of a Right of Setoff, FASB Technical Bull. 88-2 (Fin. Accounting Standards
Bd. 1988); Offsetting of Amounts Related to Certain Contracts, FASB Interpretation No.
39 (Fin. Accounting Standards Bd. 1992).
n517. Id.
n518. Accounting for Environmental Liabilities, EITF Bulletin No. 93-5 (Emerging
Issues Task Force, Fin. Accounting Standards Bd., Feb. 19, 1993).
n519. The discounted cash-flow method uses amounts at the present time of analysis or
disclosure in financial statements that are generally less than the nominal amounts of the
expected actual future cash flow. This is justified because a dollar spent one year hence
has a present value reduced by compound interest that could be earned during the year.
For example, under the discounting approach, only $ .95 need be disclosed today for a $
1.00 expenditure or revenue to be received in a year using a 5% simple interest rate.
n520. Accounting and Disclosures for Loss Contingencies, supra note 477, at 32,844-45.
n521. Id at 32,845; Extinguishment of Debt, Statement of Financial Accounting
Standards No. 76, <psign> 4(a) (Fin. Accounting Standards Bd. 1983).
n522. Accounting and Disclosures for Loss Contingencies, supra note 477, at 32,845. The
financial footnotes must include the following discounting factors: discount rate,
aggregate amount before discounting, expected payments for the next five years,
remaining aggregate undiscounted amount after the five years, a reconciliation between
109
accrued discounted amounts and the expected aggregated undiscounted amount, and an
explanation of material changes in the cash flows since the last balance sheet other than
the obligation's pay-down. Id.
"Appropriate disclosure generally would include the nature of the costs involved, the total
anticipated cost, the total costs accrued to date, the balance sheet classification of accrued
amounts, and the range or amount of reasonably possible additional losses." Id.
n524. The registrant's accounting policies for such costs must also be disclosed in
accordance with GAAP. See Disclosure of Accounting Policies, Accounting Principles
Board Opinion No. 22.
n526. See Business Combinations, Accounting Principles Board Opinion No. 16.
n528. See Accounting for Preacquisition Contingencies of Purchased Enterprises,
Statement of Financial Accounting Standards No. 38 (Fin. Accounting Standards Bd.
1980).
n529. Accounting and Disclosures for Loss Contingencies, supra note 477, at 32,846. The
MD&A should also discuss the impact of unrecognized preacquisition contingencies and
their impact on operating results, liquidity, and financial condition. Id.
n530. 15 U.S.C. 77 (1988).
n531. Id. 78.
n532. Id. 77k.
n533. Id. 77l.
n534. Id. 78r.
n535. Id. 78n. Most proxy fraud litigation arises under SEC Rule 14a-9 which provides as
follows:
No solicitation subject to this regulation shall be made by means of any proxy statement,
form of proxy, notice of meeting or other communication, written or oral, containing any
statement which, at the time made and in the light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or which omits to state any
material fact necessary in order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication with respect to the
110
solicitation of a proxy for the same meeting or subject matter which has become false or
misleading.
17 C.F.R. 240.14a-9(a) (1994). A private right of action under Rule 14a-9 for security
holders was implied in J.I. Case Co. v. Borak, 377 U.S. 426 (1964). But see Royal
Business Group, Inc. v. Realist, Inc., 933 F.2d 1056 (1st Cir. 1991) (rejecting standing for
proxy contests).
n536. 15 U.S.C. 78j (1988).
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of any facility of any national
securities exchange (a) [omitted]
(b) To use or employ, in connection with the purchase or sale of any security registered
on a national securities exchange or any security not so registered, any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public interest or for the
protection of investors.
Id.
n537. 17 C.F.R. 240.10b-5 (1994).
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility of any national
securities exchange:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in the light of the circumstances under
which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate
as a fraud or deceit upon any person, in connection with the purchase or sale of any
security.
Id.
n538. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394
U.S. 976 (1969).
111
n540. Grossman v. Waste Management, Inc., 589 F. Supp. 395, 409 (N.D. Ill. 1984).
n541. See Financial Indus. Fund, Inc. v. McDonnell Douglas Corp., 474 F.2d 514, 518
(10th Cir. 1973), cert. denied, 414 U.S. 874 (1973).
n542. See, e.g., Texas Gulf Sulphur, 401 F.2d at 833; In re Cady, Roberts & Co., 40
S.E.C. 907 (1961).
n543. 17 C.F.R. 240.10b-5(b) (1994).
n544. 825 F. Supp. 578 (S.D.N.Y. 1993).
n545. Id. at 585-93.
n546. Id. at 582-83.
n547. See supra part III.B.1-2.
n548. See, e.g., McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576, 579
(2d Cir. 1990), cert. denied, 501 U.S. 1249 (1991).
n549. See, e.g., Ross v. A.H. Robbins Co., [1978 Transfer Binder] Fed. Sec. L. Rep.
(CCH) <psign> 96,388, at 93,353 (S.D.N.Y. 1978) (omissions from dividend
reinvestment prospectus, registration statements, annuals reports, and quarterly reports).
n550. 648 F. Supp. 1322 (S.D.N.Y. 1986).
n551. Id. at 1326.
n552. 926 F.2d 199 (2d Cir. 1991).
n553. The plaintiffs claimed that the failure to disclose the environmental violations at
the Fernald facility caused several statements in defendant's 1981-1984 annual reports
and Form 10-K filings to be misleading. For example, the 10-K forms made the following
assertions: that all plants were in good operating condition; that implementation of
environmental control programs would ensure compliance; that a list was prepared of
major environmental issues faced by the company, including the resolution of state and
local environmental enforcement actions; and that future environmental regulations could
not be predicted. The plaintiff also alleged that defendant's environmental policy
statement and summaries of pending legal proceedings were inaccurate. Levine v. NL
Indus., Inc., 717 F. Supp. 252, 255-56 (S.D.N.Y. 1989).
n554. See supra note 381 and accompanying text.
n555. 812 F. Supp. 1479 (N.D. Ill. 1993).
112
n556. Id. at 1483.

n557. Id. at 1486-87.
n558. Id. at 1487.
n559. Id. at 1488 (citing In re Apple Computer Sec. Litig., 886 F.2d 1109, 1114 (9th Cir.
1989)).
n560. Id.
n561. Endo, 812 F. Supp. at 1488.
n562. See 17 C.F.R. 240.10b-5(b) (1994); 15 U.S.C. 77k, 77l, 78r (1988).
n564. 426 U.S. 438 (1976) (defining materiality for proxy fraud).
n565. 485 U.S. 224 (1988) (materiality of omitted fact of merger negotiations dependent
on balancing the probability of the occurrence of the uncertain event and the event's
anticipated magnitude in light of the registrant's total activity).
n566. TSC Indus., 426 U.S. at 449.
n567. Basic, 485 U.S. at 238-40.
n568. Id. at 232.
n569. Id. at 238 (citing SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir.
1968), cert. denied, 394 U.S. 976 (1969).
n570. See Bagby & Ruhnka, supra note 465, at 280-82.
n571. See, e.g., Glass Geltman, supra note 388, at 139.
n572. TSC Indus., 426 U.S. at 450.
n573. In re AES Corp. Sec. Litig., 825 F. Supp. 578 (S.D.N.Y. 1993).
n574. Id.
n575. Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985); see also Saxe v. E.F.
Hutton & Co. Inc., 789 F.2d 105, 111 (2d Cir. 1986) (applying similar standard in
commodities fraud context).
113
n576. In re Union Carbide Class Action Sec. Litig., 648 F. Supp. 1322, 1327 (S.D.N.Y.
1986).
n577. Id. at 1327.
n578. Levine v. NL Indus., Inc., 926 F.2d 199, 203 (2d Cir. 1991).
n579. See, e.g., Gordon M. Davidson et al., Contractor Liability Increasing, Nat'l L.J.,
May 23, 1994, at B9, B12 (citing GAO reports that most measures to protect federal
facilities operators are eroded or disappearing altogether).
n580. Indeed, indemnification exclusions, deductibles, and co-payments may also be
relevant in calculating the magnitude phase in the Basic calculus of materiality.
n581. 425 U.S. 185 (1976).
n582. There is no scienter requirement for misstatements or disclosure in private rights of
action or regulatory enforcement actions brought under 1933 Act provisions 11 (15
U.S.C. 77k (1988)), or 12(2) (15 U.S.C. 77l), and there appears to be no scienter
requirement for proxy fraud under 14(a) of the 1934 Act (15 U.S.C. 78n). See Gerstle v.
Gamble-Skogmo, Inc., 478 F.2d 1281, 1301 (2d Cir. 1973); Herskowitz v. Nutri/System,
Inc., 857 F.2d 179, 189-90 (3d Cir. 1988), cert. denied, 489 U.S. 1056 (1989). But see
Adams v. Standard Knitting Mills, Inc., 623 F.2d 422, 431 (6th Cir. 1980), cert. denied,
449 U.S. 1067 (1980).
n583. Hochfelder, 425 U.S. at 193-94 n.12.
n584. See, e.g., Aaron v. SEC, 446 U.S. 680 (1980) (requiring scienter in 17(a) SEC
enforcement context and suggesting in dicta that the SEC must also prove scienter in
Rule 10b-5 enforcement actions).
n585. See, e.g., Sunstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1034 (7th Cir.
1977), cert. denied, 434 U.S. 875 (1977) (quoting Franker v. Midwestern Okla. Dev.
Auth., 428 F. Supp. 719 (W.D. Okla. 1976)). Recklessness is defined as:
(a) highly unreasonable omission, involving not merely simple, or even inexcusable
negligence, but an extreme departure from the standards of ordinary care, and which
presents a danger of misleading buyers or sellers that is either known to the defendant or
is so obvious that the actor must have been aware of it.
Id. at 1045.
n586. Contrast this with the typical underlying fact misstated or omitted in antifraud suits
- some financial or operational condition. In environmental fraud, the registrant may
know the underlying fact is an illegal act such as noncompliance or a prohibited form of
114
pollution. Therefore, environmental disclosures may be similar to the management
integrity disclosure problems of the 1970s.
n587. See Glass Geltman, supra note 388, at 122.
n588. See SEC v. Allied Chem. Corp., SEC Litig. Release No. 7811, Civ. No. 77-373
(D.D.C. filed Mar. 4, 1977), excerpted in Chemical Company Enjoined for Failure to
Disclose Pollution's Potential Impact, 393 Sec. Reg. & L. Rep. (BNA) A-17, A-18 (Mar.
9, 1977).
n589. Professional Serv. Indus., Inc., v. Kimbrell, 834 F. Supp. 1289, 1295-96 (D. Kan.
1993).
n590. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 152-54 (1972).
n591. 495 F.2d 228, 240-41 (2d Cir. 1974).
n592. See, e.g., Fridrich v. Bradford, 542 F.2d 307, 309 (6th Cir. 1976), cert. denied, 429
U.S. 1053 (1977).
n593. 485 U.S. 224, 241-49 (1988). "Fraud on the market" theory presumes that
misinformation or omissions influence market prices because prices in liquid public
markets are set by the efficient market mechanisms which are affected only by available
information. The fraud is incorporated in the price setting mechanism, essentially a
consensus of all who trade. Therefore, the fraud on the market theory presumes market
prices already reflect misstatements or omissions and those who trade at market prices
are sufficiently affected to satisfy reliance.
n594. See Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 381 (2d Cir. 1974); Harris
v. Union Elec. Co., 787 F.2d 355, 366 (8th Cir. 1986), cert. denied, 479 U.S. 823 (1986).
n595. 589 F. Supp. 395, 412 (N.D. Ill. 1984).
n596. 834 F. Supp. 1289, 1303-05 (D. Kan. 1993) (holding that a large, sophisticated
acquiring corporation was not justified in relying on shareholder's assessment of EPA
enforcement position).
n597. Bastian, III v. Petren Resources Corp., 892 F.2d 680, 685 (7th Cir. 1990).
n598. See, e.g., Michael J. Kaufman, Loss Causation: Exposing a Fraud on Securities
Law Jurisprudence, 24 Ind. L. Rev. 357 (1991) (arguing that burden of proof under loss
causation is stringent because proof is necessary that the alleged fraud directly caused
decline in the market price of securities after plaintiff's purchase).
n599. 17 C.F.R. 240.10b-5(c) (1994).
115
n600. Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6 (1971).
n601. See, e.g., Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d Cir. 1984)
(holding that there was insufficient "touching" where the only use of securities were
those of third corporation pledged to collateralize separate transaction tainted by
complained of fraud), cert. denied, 469 U.S. 884 (1984).
n602. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731 (1975).
n603. See, e.g., Myzel v. Fields, 386 F.2d 718, 727 (8th Cir. 1967), cert. denied, 390 U.S.
951 (1968).
n604. Grossman v. Waste Management, Inc., 589 F. Supp. 395 (N.D. Ill. 1984); In re
Union Carbide Class Action Sec. Litig., 648 F. Supp. 1322 (S.D.N.Y. 1986); In re AES
Corp. Sec. Litig., 825 F. Supp. 578 (S.D.N.Y. 1993).
n605. Professional Serv. Indus., Inc. v. Kimbrell, 834 F. Supp. 1289 (D. Kan. 1993).
n606. 15 U.S.C. 77k (1988).
n607. Id. 77l; see also United Paperworkers Int'l Union v. Int'l Paper Co., 985 F.2d 1190
(2d Cir. 1993).
n608. 17 C.F.R. 240.14a-9 (1994).
(a) No solicitation subject to this regulation shall be made by means of any proxy
statement, form of proxy, notice of meeting or other communication, written or oral,
containing any statement which, at the time and in the light of the circumstances under
which it is made, is false or misleading with respect to any material fact, or which omits
to state any material fact necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier communication with
respect to the solicitation of a proxy for the same meeting or subject matter which has
become false or misleading.
Id.
n609. 15 U.S.C. 78n(a).
n610. 755 F. Supp. 96 (S.D.N.Y. 1991). Further, Exxon allegedly failed to disclose the
creation of an independent litigation committee. Id.
n611. Id. at 97.
n612. 985 F.2d 1190 (2d Cir. 1993).
n613. Id. at 1200.
116
n614. Id. at 1199.

n615. Alizac Partners v. Rospatch Corp., 712 F. Supp. 599, 607 (W.D. Mich. 1989). But
see Endo v. Albertine, 812 F. Supp. 1479 (N.D. Ill. 1993) (holding that mere reference to
potential Superfund liability is insufficient and that disclosure by other sources (e.g.,
trade press) is insufficient to affect total mix, thus rejecting registrant's claim of
immateriality and its motion to dismiss).
n616. Beissinger v. Rockwood Computer Corp., 529 F. Supp. 770, 782 (E.D. Pa. 1981).
n617. In re Browning Ferris Indus., Inc. Shareholder Derivative Litig., 830 F. Supp. 361
(S.D. Tx. 1993).
n618. See Stephen Dolan, United Paperworkers International Union v. International
Paper Company: Environmental Disclosure and the "Total Mix" Concept of Materiality,
49 Bus. Law. 1225, 1235-40 (1994).
n619. Id. at 1237.
n620. Id.
n621. Id. at 1237-38.
n622. Id. at 1238-39.
n623. 830 F. Supp. at 361 (alleging nondisclosure of past antitrust and environmental
litigation, past criminal investigation of a director nominee, and inadequate internal
accounting controls).
n624. Id. at 369 (citing GAF Corp. v. Heyman, 724 F.2d 727, 739 (2d Cir. 1983)).
n625. 17 C.F.R. 240.14a-101. Item 7(b), through reference to 17 C.F.R. 229.401, requires
proxy solicitation disclosure of litigation pending during the previous five years if that
pending litigation is material to evaluating the ability and integrity of board nominees,
but only if it relates to: (1) bankruptcy or insolvency, (2) criminal charges or convictions,
(3 & 4) injunction or suspension from securities-related professional activities, (5 & 6)
violation of the securities or commodities laws.
n626. See, e.g., Gregory B. Waymire, Additional Evidence on the Information Content of
Management Earnings Forecasts, 22 J. Acct. Res. 703, 717 (Autumn 1984).
n627. Carl W. Schneider, Nits, Grits, and Soft Information in SEC Filings, 121 U. Pa. L.
Rev. 254, 259 (1972); see also Flynn v. Bass Bros. Enters., Inc., 744 F.2d 978, 985 (3d
Cir. 1984).
117
n628. See Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 514 (7th Cir. 1989).
n629. Management has other incentives to manipulate disclosure of both good and bad
news: (1) to maximize insider trading opportunities, (2) to maximize stock price during
takeovers permitting lower expenditures when bidding or higher deterrence as a target in
a hostile takeover, or (3) to affect price when executive stock option prices are set.
n630. Statement by the Commission on Disclosure of Projections of Future Economic
Performance, Securities Act Release No. 5362, [1972-1973 Transfer Binder] Fed. Sec. L.
Rep. (CCH) <psign> 79,211 (Feb. 2, 1973); Guides for Disclosure of Projections of
Future Economic Performance, Securities Act Release No. 5992, [1978 Transfer Binder]
Fed. Sec. L. Rep. (CCH) <psign> 81,756 (Nov. 7, 1978).
n631. See Public Hearings on Estimates, Forecasts or Projections of Economic
Performance, Exchange Act Release No. 9844, [1972-1973 Transfer Binder] Fed. Sec. L.
Rep. (CCH) <psign> 79,075 (Nov. 1, 1972); Suzanne J. Romajas, The Duty to Disclose
Forward-Looking Information: A Look at the Future of MD&A, 61 Fordham L. Rev.
S245, S250-51 (1993).
n632. See Marx v. Computer Sciences Corp., 507 F.2d 485 (9th Cir. 1974) (unmet
earnings forecast misleading, usually material as summary of financial well-being);
Beecher v. Able, 374 F. Supp. 341 (S.D.N.Y. 1974) (underlying assumptions usually
material to projections); SEC v. Bausch & Lomb, 565 F.2d 8 (2d Cir. 1977) (projections
must be made in good faith).
n633. E.g., Homer Kripke, A Search for a Meaningful Securities Disclosure Policy, 31
Bus. Law. 293 (1975); Homer Kripke, The SEC, The Accountants, Some Myths and
Some Realities, 45 N.Y.U. L. Rev. 1151 (1970); SEC, Disclosure to Investors - Report
and Recommendations to the Securities and Exchange Commission From the Disclosure
Policy Study (The Wheat Report), [1963-1972 Special Studies Transfer Binder] Fed. Sec.
L. Rep. (CCH) <psign> 74,601 (May 9, 1969).
n634. 501 U.S. 1083 (1991).
n635. See also In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989)
(projections and general expressions of optimism may be actionable under the federal
securities laws), cert. denied, 496 U.S. 943 (1990).
n636. See infra part III.B.3.c.ii for a discussion of safe harbor limitations.
n637. See In re United States Steel Corp., Exchange Act Release No. 34-16,223, [19791980 Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,319 (Sept. 27, 1979); supra
notes 325-41 and accompanying text.
n638. Exchange Act Release No. 30,532, 7 Fed. Sec. L. Rep. (CCH) <psign> 73,830
(Mar. 31, 1992).
118
n639. See Romajas, supra note 631, at S258 ("Caterpillar has been termed a "message
case' intended to communicate that the SEC requires "improved disclosures' of known
trends and uncertainties").
n640. John C. Coffee, Jr., Companies' Projections Pose Problems, Nat'l L.J., Feb. 8, 1993,
at 22.
n641. See Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1292-94 (2d Cir. 1973);
Pavlidis v. New Eng. Patriots Football Club, Inc., 737 F.2d 1227, 1233-35 (1st Cir. 1984)
(indicating that there is no duty to predict under former SEC policy discouraging
predictions).
n642. Kowal v. MCI Communications Corp., Civ. A. No. 90-2862 JGP, 1992 WL
121,378 (D.D.C. May 20, 1992), aff'd, 16 F.3d 1271 (D.C. Cir. 1994).
n643. See Mendell v. Greenberg, 612 F. Supp. 1543, 1550 (S.D.N.Y. 1985), rev'd in part,
927 F.2d 667 (2d Cir. 1990). But cf. Folger Adam Co. v. PMI Indus., 938 F.2d 1529 (2d
Cir. 1991) (remanding to determine intentional concealment of "accurate statements" of
subsidiaries' future earnings).
n644. Panter v. Marshall Field & Co., 646 F.2d 271 (7th Cir. 1981), cert. denied, 454
U.S. 1092 (1981).
n645. See Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 515 (7th Cir. 1989);
Kowal, 1992 WL 121,378, at *5.
n646. See Walker v. Action Indus., 802 F.2d 703, 710 (4th Cir. 1986) (indicating that
there is no specific duty to predict financial information in tender offer), cert. denied, 479
U.S. 1065 (1987).
n647. See Vaughn v. Teledyne, Inc., 628 F.2d 1214, 1221 (9th Cir. 1980); In re
Convergent Technologies Sec. Litig., 948 F.2d 507, 516 (9th Cir. 1991).
n648. Starkman v. Marathon Oil Co., 772 F.2d 231, 241 (6th Cir. 1985), cert. denied, 475
U.S. 1015 (1986); Radol v. Thomas, 772 F.2d 244, 252-53 (6th Cir. 1985), cert. denied,
477 U.S. 903 (1986).
n649. Starkman, 772 F.2d at 241.
n650. Flynn v. Bass Bros. Enters., Inc., 744 F.2d 978, 988 (3d Cir. 1984).
n651. Id; see also Hoffman Elec., Inc. v. Emerson Elec., 754 F. Supp. 1070, 1081 (W.D.
Pa. 1991) (finding that a duty to disclose projections was breached under Rule 10b-5 in
limited partnership buyout by applying the Flynn factors).
119
n652. Hoffman, 754 F. Supp. at 1081 n.17; see also infra part III.B.3.c.iii.
n653. Isquith v. Middle S. Utils., Inc., 847 F.2d 186, 206 (5th Cir. 1988).
n655. See Safe Harbor Rule for Projections, Securities Act Release No. 6084, [1979
Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,117 (June 25, 1979) (codified at 17
C.F.R. 230.175, 240.3b-6 (1994)).
n656. 17 C.F.R. 240.3b-6.
(d) for the purpose of this rule the term "fraudulent statement" shall mean a statement
which is an untrue statement of a material fact, a statement false or misleading with
respect to any material fact, an omission to state a material fact necessary to make a
statement not misleading, or which constitutes the employment of a manipulative,
deceptive, or fraudulent device, contrivance, scheme, transaction, act, practice, course of
business, or an artifice to defraud, as those terms are used in the Securities Exchange Act
of 1934 or the rules or regulations promulgated thereunder.
Id.
n657. Id. 240.3b-6(a).
n658. See SEC Commissioner J. Carter Beese, Jr., Investor Protection Through Better
Disclosure, Keynote Address Before Association of Publicly Traded Companies 1994
Government Relations Conference, Washington D.C., June 6, 1994; SEC Member
Suggests Rule to Replace "Safe Harbor," Wall St. J., June 7, 1994, at A4; see also Harvey
L. Pitt et al., Securities Law: To Protect Companies from Litigation, the SEC Is
Considering Revisions to the Safe Harbor Rule on Disclosing "Soft" Information, Nat'l
L.J., Aug. 22, 1994, at B5 (recounting empirical evidence that half the American Stock
Exchange registrants responding cited the threat of shareholder litigation as disincentive
to make forward-looking statements) (citing Ron Kasznik & Baruch Lev, The
Characteristics and Consequences of Corporate Discretionary Disclosures 5 (interpreting
empirical study showing registrants 2.5 times as likely to voluntarily disclose bad news as
optimistic news as evidence of litigation prevention)).
n659. 17 C.F.R. 240.3b-6(b)(1).
n660. Id. 240.3b-6(b)(1)(i).
n661. Id. 240.3b-6(b)(1)(ii).
n662. Id. 240.3b-6(c)(1). Asset appraisals specifically enjoy safe harbor protection from
proxy fraud liability under a separate provision. See id. 241.16833 (citing 45 Fed. Reg.
36,374 (1990)).
120
n663. Id. 240.3b-6(c)(2).

n664. Id. 240.3b-6(c)(3).
n665. Id. 240.3b-6(c)(4).
n666. See Concept Release and Notice of Hearing: Safe Harbor for Forward-Looking
Statements, Exchange Act Release No. 34,831, 59 Fed. Reg. 52,723 (Oct. 19, 1994). The
safe harbor was originally drawn narrowly to deter extravagant forecast claims, but may
be deterring the very forward-looking information investors apparently need. Forecasts
could be much more reliable if made by management because of insiders' unique insight
into the registrant's specific performance. As a result, the SEC has solicited comments
presaging a revision of the safe harbor that will be intended to better encourage legitimate
projections and assuage apprehension about potential liabilities. The SEC sought
comments regarding the comparative advisability of eight alternative safe harbor
formulations.
The first variant is a "seasoned issuer" proposal offered by the Association of Publicly
Traded Companies. It would completely preclude private antifraud suits for faulty
economic projections, plans, objectives, future performances, and their underlying
assumptions.
The second proposal is made by SEC Commissioner J. Carter Beese and is supported by
the Association for Investment Management and Research. See, e.g., J. Carter Beese, Jr.,
Now It's SEC vs. the Lawyers, Wall St. J., Oct. 20, 1994, at A16. This proposal is
patterned after the "business judgment rule" of corporate law. See, e.g., Paramount
Communications Inc. v. QVC Network Inc., 637 A.2d 34, 46 n.17 (Del. 1994). This
formulation would protect the issuer's management from liability unless there is proof of
a conflict of interest, a lack of good faith, or a failure of honest and reasonable belief in
the projection. The burden to show that the projection lacked a factual basis would shift
to the plaintiff if the issuer produced the data underlying the projection. This could permit
early dismissal of frivolous suits, even before discovery.
The third is a "heightened definition" proposal offered by the Business Roundtable and
the National Association of Manufacturers. It would protect information similar to the
existing safe harbor and would apply to both SEC enforcement actions and to private
rights of action. There would be no duty to correct and it would specifically protect both
qualitative and quantitative statements about plans, objectives, and new products or
services. It contains revised definitions for materiality, scienter, and reliance for use in
projection suits.
The fourth variant proposed by Professor John Coffee essentially codifies a variant of the
"bespeaks caution" approach discussed in the next section of this Article.
121
The fifth is a "fraudulent intent" proposal that would permit liability only for projections
made recklessly or with intent to deceive.
The sixth is a "disimplication" theory proposed by a former SEC Commissioner, Stanford
Law Professor Joseph A. Grundfest, who suggests the SEC disimply private rights of
action under Rule 10b-5, or at least redefine it to permit suit only for knowing securities
fraud. See Joseph A. Grundfest, Disimplying Private Rights of Action Under the Federal
Securities Laws: The Commission's Authority, 107 Harv. L. Rev. 961 (1994).
The seventh is a "reasonable basis in fact" proposal made on behalf of the National
Association of Securities and Commercial Attorneys which resembles the existing safe
harbor. It would protect numerous matters unless the projection was not made on a
reasonable basis in fact, was seriously undermined by existing facts, was not genuinely
believed, or was not made in good faith.
The eighth is an "opt-in" proposal made by former SEC officials that would protect
projections from private actions if the issuer opted into a projection regime. See Pitt et al.,
supra note 658, at B4. Projections made in or outside the regime would be protected if
made with an adequate basis, in good faith, and consistent with similar internal
projections the issuer used contemporaneously.
The SEC also solicited comments on the specific constituent elements of an ideal safe
harbor, including: (1) the types of information covered, (2) voluntary vs. mandatory
compliance, (3) required processes inside the issuer before safe harbor protections
become available, (4) issuer-specific criteria for eligibility, (5) various other conditions,
e.g., public filing, opt-in, accompanying cautionary language, shareholder approval of
safe harbor regime, (6) the disclosure of key assumptions, (7) separate definitions of the
securities fraud elements exclusively for projection cases, (8) a duty to update/correct, (9)
a codification of judicial doctrines such as the business judgment rule or the bespeaks
caution doctrine, (10) relevant but withheld information, (11) express vs. implied actions,
(12) SEC enforcement vs. private investor rights of action, (13) arbitration of private
claims, (14) forecasts made outside the MD&A, (15) demonstration of prior forecast
reliability, (16) issuer relations with third-party forecasters, (17) projections by mutual
fund, (18) variable safe harbors depending on issuer's performance or size, and (19)
alternatives to safe harbors that accomplish similar goals. Concept Release, supra.
n667. Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 513 (7th Cir. 1989).
n668. Id.
n669. See Kirby v. Cullinet Software, Inc., 721 F. Supp. 1444, 1453 (D. Mass. 1989).
n670. Roots Partnership v. Lands' End, Inc., 965 F.2d 1411, 1418 (7th Cir. 1992).
n671. In re First Chicago Corp. Sec. Litig., 769 F. Supp. 1444, 1452 (N.D. Ill. 1991).
122
Transfer Binder] Fed. Sec. L. Rep. (CCH) <psign> 82,319 (Sept. 27, 1979); supra text
accompanying notes 325-41.
Transfer Binder] Fed. Sec. L. Rep. (CCH) 82,319, at 82,383 (Sept. 27, 1979).
n674. See, e.g., Dennis J. Block et al., A Post-Polaroid Snapshot of the Duty to Correct
Disclosure, 1991 Colum. Bus. L. Rev. 139.
n675. See, e.g., Ross v. A.H. Robins Co., Inc., 465 F. Supp. 904, 908 (S.D.N.Y. 1979),
aff'd in part, rev'd in part on other grounds, 607 F.2d 545 (2d Cir. 1979), cert. denied, 446
U.S. 946 (1980).
n676. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1115-16 (9th Cir. 1989), cert.
denied, 496 U.S. 943 (1989). But see Panter v. Marshall Field & Co., 646 F.2d 271, 293
(7th Cir. 1981) (holding that there is no duty to update published projections with still
tentative internal estimates), cert. denied, 454 U.S. 1092 (1981).
n677. See 17 C.F.R. 240.14a-9(a) ("No solicitation ... shall be made ... containing any
statement which ... omits to state any material fact necessary ... to correct any statement
in any earlier communication ... which has become false or misleading."); Safe Harbor
Rule for Projections, supra note 655.
n678. See, e.g., Carl W. Schneider, Soft Disclosure Thrusts and Parries When Bad News
Follows Optimistic Statements, 26 Rev. Sec. & Commodities Reg. 33, 41 (1993).
n679. See generally Donald C. Langevoort, Disclosures That "Bespeak Caution," 49 Bus.
Law. 481 (1994) (arguing weak, middling, and strong uses of bespeaks caution doctrine
do not yet provide predictability of its invocation, or perfect consistency with other
securities law policies).
n680. In re Donald J. Trump Casino Sec. Litig., 793 F. Supp. 543, 549 (D.N.J. 1992),
aff'd, 7 F.3d 357 (3d Cir. 1993).
n681. Polin v. Conductron Corp., 552 F.2d 797, 805 (8th Cir. 1977), cert. denied, 434
U.S. 857 (1977).
n682. Sinay v. Lamson & Sessions Co., 948 F.2d 1037, 1040 (6th Cir. 1991) (citing
Schwartz v. Novo Indus., 658 F. Supp. 795, 799 (S.D.N.Y. 1987)).
n683. See Trump, 793 F. Supp. at 553-54.
n684. See id. at 554.
n685. 17 C.F.R. 240.10b-5 (1994).
123
n686. 15 U.S.C. 77k (1988).

n687. Id. 77l.
n688. Romani v. Shearson Lehman Hutton, 929 F.2d 875 (1st Cir. 1991); Luce v.
Edelstein, 802 F.2d 49 (2d Cir. 1986); Trump, 793 F. Supp. at 549; Isquith v. Middle S.
Utils., Inc., 847 F.2d 186 (5th Cir. 1988); Sinay, 948 F.2d at 1040; Polin, 552 F.2d at
797; In re Convergent Technologies Sec. Litig., 948 F.2d 507 (9th Cir. 1991).
n689. In re AES Corp. Sec. Litig., 825 F. Supp. 578 (S.D.N.Y. 1993).
n690. See Perry E. Wallace, Disclosure of Environmental Liabilities Under the Securities
Laws: The Potential of Securities-Market-Based Incentives for Pollution Control, 50
Wash. & Lee L. Rev. 1093, 1124-44 (1993).
n691. See, e.g., Ronald J. Gilson & Reiner H. Kraakman, The Mechanisms of Market
Efficiency, 70 Va. L. Rev. 549 (1984).
n692. See Robert A. Haugen, Modern Investment Theory 634 (3d ed. 1993) (arguing
pressures to adjust securities prices derive from efforts of analysts and traders whose
research of fundamental information about actively-traded stocks drives prices to reflect
"knowable" information about the registrant, its industry, and the general economy).
n693. See, e.g., John C. Harrington, Investing With Your Conscience: How to Achieve
High Returns Using Socially Responsible Investing 227 (1992). But see Richard A.
Posner, Economic Analysis of Law 419-20 (3d ed. 1986) (arguing higher transactions
costs for investment research identifying "green" companies lowers the returns of "green"
portfolios and reduces their diversification).
n694. See Anne Simpson, The Greening of Global Investment: How the Environment,
Ethics and Politics are Reshaping Strategies 129 (1991).
n695. Scott W. Klinger, Social Investing in a Changing World, Best's Rev.-Life-Health
Ins. Ed., Feb. 1994, at 68.
n696. Jeffrey Zack, Are the Valdez Principles Sinking Fast?, Bus. & Soc. Rev., June 22,
1992, at 6. CERES members do not expect to win a majority proxy vote; however, they
do intend to "create a kind of meaningful dialogue, a form of accountability, that can
sometimes lead a company to change." Id.
n697. See, e.g., John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor
as Corporate Monitor, 91 Colum. L. Rev. 1277 (1991).
124
n698. See, e.g., Roger Wynne, The Emperor's New Eco-Logos?: A Critical Review of the
Scientific Certification Systems Environmental Report Card and the Green Seal
Certification Mark Programs, 14 Va. Envtl. L.J. 51 (1994).
n699. See Dennis J. Block et al., Affirmative Duty to Disclose Material Information
Concerning Issuer's Financial Condition and Business Plans, 40 Bus. Law. 1243, 1259
(1985).
n700. Caron, supra note 250, at 751-63.
125

14 Va Envtl J225 Green Balance Sheet

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

14 Va Envtl J225 Green Balance Sheet

Caricato da

Copyright:

Formati disponibili

Bagby, Murray & Andrews, How Green Was My Balance Sheet?

iii. Lender Liability

B. Contemporary Environmental Disclosure Regulations

n21. See infra notes 32-35 and accompanying text.

n130. Id. 263.20(c), 263.21(a).

n166. Id. 7413(d)(1).

n270. Id. at 85,110-11.

n328. 42 U.S.C. 7401-7642 (1988).

n345. Id. at 83,348.

n461. Id. (emphasis added).

n508. SFAS No. 5, <psign> 31.

n556. Id. at 1483.

n614. Id. at 1199.

n663. Id. 240.3b-6(c)(2).

n686. 15 U.S.C. 77k (1988).

Potrebbero piacerti anche