Scandal-battered electric utility now faces lawsuits
Ohio’s largest CLEVELAND — electric utility, its reputation battered by scandal, has been besieged by more than a dozen lawsuits filed by angry shareholders who include some of the country’s biggest institutional investors.
And, if history is a guide, FirstEnergy Corp. and its insurers could find themselves paying millions to settle those complaints, as the company did more than 15 years ago when confronted by lawsuits for lying about a dangerous hole in a reactor head at a nuclear power plant and for contributing to the largest blackout in U.S. history.
FirstEnergy and insurers for its corporate officers and board of directors paid out more than $100 million to settle lawsuits in 2004. It is far too early to estimate what settlements of the new lawsuits might total, but the potential payouts could far exceed those from 2004, given the losses shareholders claim to have suffered.
The latest lawsuits were filed as FirstEnergy became a central figure in what has been called the biggest corruption scandal in state history. Thecompanyisaccused of secretly funding a $60 millionbriberyschemeaimedat winning a $1 billion legislative bailout in 2019 for two Ohio nuclear plants operated at the time by awholly owned FirstEnergy subsidiary.
FirstEnergy’s stock price quickly plummeted around 40% afterU.S. AttorneyDavid
DeVillers announced July 21 that then-Ohio House Speaker LarryHouseholder and four others had been arrested on suspicion of having roles in the bribery scheme.
Powers six states
Thefirst lawsuitswere filed within aweek and nowtotal more than a dozen. The bulk have been filed in federal court inColumbus, with several filed in state court in Akron, where FirstEnergy is based.
The company is one of the largest electric utilities in the U.S., providing power to customers in parts of six states.
Darren Robbins, an attorney for the firm Robbins GellerRudman& Dowd, said stockholder losseshave been estimated at $10 billion.
“It’s a very ugly situation where a lot of people have been hurt very very badly in Ohio and aroundtheworld,” Robbins said. “From what we know, there’s a deeply troubling pattern and practice of misconduct at and around FirstEnergy and those affiliated with it. It’s not very often you have facts compelling enough for the speaker of a statehouse to be taken into custody.”
Robbins’ firm has been named byU.S. District Judge Algenon Marbley as lead counsel for five shareholder class-action lawsuits naming current and former FirstEnergy executives as defendants. The lawsuits seek damages to be paid by the company itself for having misled investors about its involvement in the bribery
scheme.
Nine federal complaints are known as shareholder derivative lawsuits, which are technically filed on behalf of FirstEnergy against some executives and members of its board of directors who stand accused of breaching their duty to protect shareholders and the company’s reputation.
Both types of lawsuits have been consolidated separately under one case but have not yet been certified byMarbley as class-action complaints, which is expected to happen in the next several months.
Attorneys for FirstEnergy have not yet responded to allegations made in the lawsuits. FirstEnergy spokesperson Jennifer Young said the company does not comment
on pending litigation.
2003 blackout
Shareholder lawsuits rarely go to trial, Robbins said, with settlementsfunded by targeted companies and insurers who cover executives and corporate officers.
That’s what occurred in 2004, when FirstEnergy settled lawsuits for concealing the hole at its Davis-Besse Nuclear Power Station outside Toledo and for failing to adequately maintain its electrictransmissionsystemprior to the blackout that affected U.S. states and parts of Canada in August 2003.
Ashareholder-class action was settled for $90 million, with insurers paying $72 million and FirstEnergy covering the balance. It settled derivative lawsuits later that year, with insurers paying $25 million to the company and FirstEnergy agreeing to reformitscorporatestructure.
Simon Peck, a business professor at Case Western Reserve University in Cleveland, said members of the board of the directors are supposed to be “a check on nefarious activities by insiders.”
“They are the guardians of the shareholders’ money,” Peck said. “I think it’s a legitimate question to ask how effective are these individuals in monitoring inside executives.”
Boardmembersareelected by stockholders during annual meetings, which FirstEnergy held this year in May. FirstEnergy board members on average are paid around $250,000 in fees and stock options for a year’s service.
“If I was an angry stockholder, I would vote not to reelect board members,” Peck said.
FirstEnergy’s potential problems extend beyond the civil realm intothe potential criminal.
The company is being investigated by the U.S. Justice Department, the U.S. SecuritiesandExchangeCommission and the Ohio Secretary of State’s Office. It also has been sued by the Ohio Attorney General’s Office.
Some of the same board membersbeing suedare conducting their own internal investigation.
FirstEnergy CEO Chuck Jones and two other executiveswere fired in late October, with the company saying they “violated certain FirstEnergy polices and its codeofconduct” but not providing details. Two of its top attorneyswere dismissed in November.
Beyondthefirings, FirstEnergy reported in November in aquarterly earnings report that unnamed executives in early 2019 had improperly paid $4 million to end a consulting contract in place since 2013 with an unnamed individual.
Thedescriptioninthefiling matched Samuel Randazzo, then the chair of thepowerful PublicUtilitiesCommissionof Ohio and the Ohio Power SitingBoard. Randazzoresigned Nov. 20, four days after the FBI searched his Columbus home and the day after the FirstEnergy filing.
Randazzo did not return telephone messages seeking comment.