Press release: 23 September 2019

Germany’s RWE under scrutiny over market manipulation claim

Lawyers have referred major utility RWE to Germany’s federal financial regulator over a market disclosure it made last year that wiped over €1bn off its market value.

ClientEarth claims that the company overstated the impact of a 2018 court ruling suspending its plans to clear the Hambach Forest for lignite mining.

The lawyers have asked Germany’s Federal Financial Supervisory Authority (BaFin), to investigate the misleading and potentially unlawful statement. International law firm Hausfeld are acting for ClientEarth in the complaint.

ClientEarth lawyer Peter Barnett said: “The profitability of RWE’s lignite fleet is in decline, but not because of last year’s court decision. The claim that the Hambach ruling would affect the company’s bottom line in the amount notified to the market does not withstand scrutiny.

“We have notified the regulator to ensure a proper investigation into RWE’s claims – investors must be given correct information with which to make decisions.’’

The Higher Administrative Court Münster suspended RWE’s forest clearance on 5 October 2018. On the news, RWE, a leading player in Germany’s lignite industry, told investors the ruling would affect its earnings in “the range of a low three digit million Euro amount per year”, due to the projected reduction in output from its Hambach mine. Its share price dropped dramatically following the ruling and subsequent announcement.

However, an independent report by energy consultancy Energy Brainpool, cited in ClientEarth’s referral to the regulator, suggests that this was a vast overstatement and the ruling would not have had a significant impact on RWE’s earnings. RWE’s lignite demand was going to reduce anyway: the company, as part of German coal phase-out scheme the ‘lignite reserve’, had already agreed to mothball five power plant units, collectively burning around 11 million tonnes of coal per year, by 2019.

Barnett added: “The profitability of the German lignite fleet is collapsing. RWE needs to be upfront with its investors about this – not make unfounded claims that present a false picture to the market.

“As the German government considers phase-out compensation for coal operators, it is in everybody’s interests – and legally imperative – that accurate numbers are being discussed. This is why we are calling on BaFin to investigate.’’

Hermann Ott, head of ClientEarth’s Germany office, said: “There are huge questions around the future direction of Germany’s energy market. RWE’s attempts to push back the coal phase-out and its claims for large compensation payments ignore the economic reality of coal’s decline.

“It would be a gross dereliction of duties if the government were to give a golden handshake to a dying industry.”

ClientEarth has called on the financial regulator to carry out a formal investigation, if necessary imposing an administrative fine and reporting any matters that indicate a criminal offence to the public prosecutor’s office.

ENDS

Notes to editors:

• Read the legal letter to German financial regulator BaFin.

In it, the lawyers refer to “an apparent false and misleading ad hoc disclosure by RWE AG giving rise to potential offences under the Securities Trading Act”.

• The letter summarises the complaint as follows, referring to Energy Brainpool’s report:

“For the reasons given in this letter and its enclosures, we believe that RWE has contravened Article 15 (market manipulation) and Article 17 (public disclosure of inside information) of the Market Abuse Regulation (MAR), giving rise, if wilful or grossly negligent, to administrative and criminal offences under the Securities Trading Act.”

• The Higher Administrative Court Münster suspended RWE’s forest clearance activities on 5 October 2018. In an ad hoc disclosure to the market, RWE claimed the ruling would negatively affect EBITDA “in the range of a low three digit million Euro amount per year.”
• Following the ruling, the share price rapidly reduced, as reported in the letter to BaFin:

“RWE’s share price closed at €20.43 on 4 October 2018. On 5 October, it closed 8.5% down at €18.69. This share price drop alone represented a loss of market capitalisation of over €1 billion. It continued to decline over the following days, closing at €17.11 on 10 October 2018.”

The drop is represented in this table, from RWE:

• In the week after the market announcement was issued, the North Rhine-Westphalia arm of environmental group BUND (Friends of the Earth Germany) released analysis pointing out that the number of tonnes of coal RWE claimed the court case cost it was very similar to the number of tonnes it had sacrificed to the lignite reserve.

BUND suggested that RWE’s intentions in blaming the court case rather than the lignite reserve for the output drop were to deceive the public and influence the government and the courts.

• The claimed substantial impact on 2019 earnings has also failed to eventuate. RWE’s results for the first half of the year were released in August, and first half 2019 earnings in the lignite and nuclear segment remained largely flat.
• Investors are increasing pressure on companies to rapidly eliminate coal, with a broad coalition publishing a letter outlining their expectations in the Financial Times at the end of 2018.
• Lignite plants in Germany account for seven of the EU’s top ten biggest polluters, according to recent research by the European Commission.
• Lignite’s falling profitability – particularly in Germany – was explored by market experts at Sandbag, in their recent report ‘The cash cow has stopped giving: Are Germany’s lignite plants now worthless?’

About ClientEarth

ClientEarth is a charity that uses the power of the law to protect people and the planet. We are international lawyers finding practical solutions for the world’s biggest environmental challenges. We are fighting climate change, protecting oceans and wildlife, making forest governance stronger, greening energy, making business more responsible and pushing for government transparency. We believe the law is a tool for positive change. From our offices in London, Brussels, Warsaw, Berlin and Beijing, we work on laws throughout their lifetime, from the earliest stages to implementation. And when those laws are broken, we go to court to enforce them.