Ohio public utility giant FirstEnergy pled guilty June 20 to capturing or at least renting the Ohio state legislature long enough to win passage of financial bailout legislation. The picture below shows how the company used third-parties and cut-outs to hide its campaign to get Ohio’s legislature to do its bidding.
As with all large corruption schemes, several lessons can be learned from its unraveling. One comes from the picture itself: how a well-designed graphic can make a complex, convoluted corruption scheme readily understandable. A second is how savvy prosecutors can craft plea agreements to curb future corruption. A third is a step the Biden Administration could take to make it easier to ferret out those behind some of the dark money now plaguing American politics.
Senior FirstEnergy executives concocted the scheme sometime in late 2016 or early 2017 after recognizing that weak demand for electric power combined with ill-advised investments might drive the company into bankruptcy costing them their jobs. The largest marketer of electric power in Ohio, FirstEnergy’s prices are set by the Ohio Public Service Commission in accordance with Ohio law. The executives figured the fastest and easiest way to save the company and their jobs was a combination legislative and regulatory “fix.”
They cooked up a plan to get the Ohio legislature to enact legislation law allowing the company to raise prices to consumers and to stack the regulatory commission to ensure nothing stood in the way of the increase. The company teamed up with Larry Householder, an ambitious legislator seeking to become speaker. If it helped him become speaker, he would steer the bailout bill through the legislature in return.
Much of what FirstEnergy and Householder planned — contribute to candidates willing to support bailout legislation, run advertisements supporting it – would have been legal had it been done openly. Where the two went wrong was deciding to hide the company’s activities. And when, according to a criminal complaint supported by an FBI affidavit, FirstEnergy got too close to Householder, not only contributing to his campaign in return for his support but paying some of his personal expenses as well. Contributing to a campaign in return for the candidate’s pledge to support the donor’s legislative agenda can be a bribe, but the line is not clear. Picking up a politician’s personal bills in return for their support is.
The diagram displays how FirstEnergy, “labelled Company A-1,” hid the path its $60 million in “dark money” (money whose source is hidden) traveled from it to Householder and accomplices. As the large green arrow at the top shows, the bulk, $59 million plus, was paid to Generation Now, an NGO controlled by Householder and his political strategist Jeffrey Longstreth. The arrows from Generation Now show the non-profit “social welfare organization” in turn passed some of the money to Dark Money Group I, PAC, and Coalition, entities supporting Householder allies’ political campaigns. Other arrows show the rest of the money went to intermediaries that in turn gave it to Householder and accomplices. The arrows at the top of the diagram trace the circuitous paths the remainder of FirstEnergy’s money took on its way to “persuading” Ohio legislators to vote for the legislation.
Lesson One: Victim Compensation
Beyond the value of the graphic, corruption fighters, especially those employed as public prosecutors, can learn much from scrutinizing the plea agreement with FirstEnergy (here). First, half the $230 million FirstEnergy is paying to settle the case will go to victims of FirstEnergy’s wrongdoing, those who have had to pay more for electric power thanks to its connivances. It will go into a fund the Ohio Department of Development runs to help low-income consumers with their electric bill. (Consumers may recover even more thanks to a class action suit for damages wending its way through federal court.)
Lesson Two: Controlling Wayward Employee/Agents
FirstEnergy’s conduct seems to have been prompted at least as much if not more to serve the interests of its senior executives rather than the company’s shareholders. The agreement requires changes to the company’s management aimed at lessening principal-agent disconnects. An “executive director” role for the board will be established to support development of enhanced controls and governance policies and procedures. A new chief legal officer will be hired to oversee the legal and internal audit departments; the functions of chief legal officer and chief ethics/compliance officer will be separated, and the chief ethics officer will report directly to the audit committee of the board and administratively to the chief legal officer. Introducing more senior executives into the decision matrix should increase the likelihood the shareholders’ interests remain paramount.
Lesson Three: Curbing Use of Dark Money Vehicles
Third, Generation Now is what’s called a social welfare organization and is thus exempt from federal income tax under section 501(c)(4) of the U.S. tax code. “C4s” are the now standard way donors funnel money to political candidates and campaigns without revealing their identity, and the case is as a good an example as one can find of the resulting abuses. Prosecutors clearly appreciated this fact, and while it will take changes in federal law (and perhaps in the Supreme Court) to curb them, they included two provisions in the plea agreement to curb future abuses by FirstEnergy.
One, FirstEnergy must disclose all previous contributions it has made to any entity it knows to be “operating for the benefit of a public official, either directly or indirectly,” and for the next three years, it must update the list quarterly with any additional contributions. For each donation, it must disclose the entity’s name and address, the date of the contribution, the amount, and its purpose. The list must be labelled “Corporate Contributions” and posted on FirstEnergy’s webpage.
Two, the company must issue a press release “for broad public distribution” and post it on its website that contains the following statement:
“Central to FirstEnergy’s Corp.’s effort to influence the legislative process in Ohio was the use of 501(c)(4) corporate entities. FirstEnergy Corp. used the 501(c)(4) corporate form as a mechanism to conceal payments for the benefit of public officials and in return for official action. FirstEnergy Corp. used 501(c)(4) entities in this way because the law does not require disclosure of donors to a 501(c)(4) and there is no ceiling that limits the amount of expenditures that can be paid to a 501(c)(4) entity for the purpose of influencing the legislative process. This effort would not have been possible, both in the nature and volume of money provided, without the use of a 501(c)(4) entity.”
The statement will serve as a constant reminder to FirstEnergy executives of the hazards of using dark money to advance the company’s political agenda. It may also help curb abuses by other companies. One can imagine at the annual meetings of other publicly held companies shareholder activists asking whether company executives agree with its sentiments and what internal audit and compliance staff are doing to avoid a disaster like that which befell FirstEnergy.
Lesson Four: A Way to Bring Dark Money to Light?
Although wholesale abuse of “C4s” will require legislative change, the case suggests a step the Biden Administration could take to reduce their misuse. Or at least make it easier to detect.
One of the first to report on the skullduggery involving Generation Now was Kathiann M. Kowalski, a reporter then with Eye on Ohio. In a March 2020 story, Kowalski began to peel back the secrecy surrounding the scheme, getting as far finding that Generation Now was behind a great deal of the spending in support of the FirstEnergy bailout.
She ran into a wall, however, when trying to learn who was behind Generation Now. As a C4, Generation Now files a publicly available tax return, Form 990, each year requiring disclosure of its principal officer. While she got a copy of Generation Now’s latest return, it showed its “principal officer” was JPL & Associates, a for-profit company. She was able to link the company to Householder campaign consultant Longstreth, but that was as far as she could go. The story speculated a connection between Householder and Generation Now, but without more Kowalski was at a dead-end.
Think what progress she might have made had the IRS required that the natural person or persons behind Generation Now be disclosed on its Form 990. Somewhere there it a real natural person running every C4, the equivalent of a for-profit’s beneficial owner. When a C4 opens a bank account, the anti-money laundering rules require that person’s identity be disclosed. Why shouldn’t the IRS require a similar disclosure? It would be nothing to amend Form 990 to require it, and it is easily justifiable as a condition of exempting a C4 from paying taxes on its contribution income.
Those wanting to hide who is really behind a “dark money” C4 might of course pay someone to be a front, but journalists are likely to have better luck sniffing out when someone is acting as a front than when faced with a corporate name on the form. In a world where the value of the disclosure of beneficial ownership is widely recognized, why shouldn’t the same principle apply to C4s?
Pingback: Episode 263 – the Domestic Corruption edition | The Compliance Podcast Network