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Dec 20, 2000

Source: The New York Times Section: National

The Exxon Mobil Corporation, the nation's largest oil company, was ordered by an Alabama jury to pay $3.5 billion in damages after it found the company guilty of defrauding the state of royalty payments from natural gas wells situated in state waters.

The verdict is one of the largest ever against a company in a case based solely on accusations of financial harm, and it rivals the $5 billion awarded by a jury in Alaska in 1994 against the company for environmental damage caused by the Exxon-Valdez tanker oil spill.

The case against Exxon Mobil was brought last year by the state's Department of Conservation and Natural Resources, which contended that the company had illegally deducted certain expenses from natural gas production royalties paid to the state. The amount of underpayment, the state says, varied from $87 million to $132 million, depending on the accounting.

The award, which came after two hours of deliberation and 11 days of testimony, was immediately denounced as "meritless" by the company, which said it would appeal.

But it won praise from Gov. Donald Siegelman of Alabama. "The verdict is appropriate because it is against a company that attempted to cheat the people of Alabama," he said. "What is even more appalling is that this company stated they believed they could get away with their scheme because the people of Alabama were too inexperienced to understand they were being cheated."

Exxon Mobil said in a statement that it "strongly disagrees" with the verdict. "We have always endeavored to fully comply with the requirements of our leases," it said. "No evidence of fraud was offered at the trial and none was considered by the jury."

Analysts say they expect the verdict to be reduced on appeal. They also say Exxon Mobil, which had revenues of $166 billion last year and has operations throughout the world, has the economic resources to pay a scaled-down award without much financial strain.

"It's a huge, huge verdict," said Thomas Harrison, publisher of Lawyers Weekly USA, a legal industry trade publication. "Will it stand up? No. Verdicts like this are almost always reduced on appeal."

Mr. Harrison, however, said that what was striking about the verdict was that it came over a purely financial issue: whether the state had been adequately compensated for natural gas taken from 13 wells along the Alabama coast. Typically, large jury verdicts over accusations of corporate wrongdoing come over issues of health, as in cases brought against tobacco makers or consumer safety, as in many cases brought against automakers, rather than over what is essentially a contract dispute.

"From a public relations standpoint, this is obviously not good," Mr. Harrison said. "But it's a whole lot better than if they had hurt someone. If you have a huge verdict because some poor people have gotten burned, that has a much more vivid effect than a picture of a gas well."

Mark Flannery, an analyst with Credit Suisse First Boston, a brokerage firm, said that if the $3.5 billion verdict was upheld, it would be a significant event, "even for a company like Exxon. But if the verdict is reduced to an amount in the hundreds of millions of dollars, he said, "at Exxon, no one would notice — the company is that big."

Mr. Flannery said that from a market standpoint the verdict should have little effect on Exxon Mobil's stock price because "the court appeals will have a long way to run and Exxon will fight this hard." Exxon's stock in after-hours trading barely moved when the verdict was announced, which came a few minutes after the 4 p.m. closing of the New York Stock Exchange.

The jury determined, in siding with the state, that the company owed Alabama $87.7 million in compensatory damages. To come up with the $3.4 billion in punitive damages, the jury accepted the argument of the state that Exxon Mobil's decision to underpay the state could have brought $1 billion to the oil company over the next 30 years and awarded punitive damages at least triple that amount.

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