SEC probing Ohio utility that benefited from tainted taxpayer bailout bill

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The Securities and Exchange Commission is conducting a probe of FirstEnergy Corp. whose former subsidiary’s municipal bonds benefited from Ohio taxpayer bailout legislation at the center of bribery charges that brought down the State House speaker, according to a private lawsuit.

Lawyers for a potential whistleblower report in federal documents show that they’ve been on contact with Brian Fagel, assistant director, division of enforcement for the SEC’s Public Finance Abuse Unit. The documents don’t reveal much about the probe, including when it was launched and don’t directly tie the SEC examination to the bribery scandal. The SEC declined to comment as did FirstEnergy, which is a publicly traded company.

Ohio House Bill 6 provided a ratepayer bailout for two nuclear power plants owned by then-bankrupt FirstEnergy Solutions. The Bond Buyer reported in July 2019 that the legislation, signed by Gov. Mike DeWine in July 2019, bolstered the firm’s restructuring plan and in so doing improved the trading value of some of FirstEnergy's secured municipal bonds that had been dragged into the bankruptcy case.

In July of that year, federal authorities arrested then Republican House Speaker Larry Householder on allegations he violated federal racketeering statutes through honest services wire fraud and received millions of bribes and laundered money. Householder is no longer speaker but retains his seat. He recently entered a plea of not guilty.

The SEC declined to comment at the time of the charges if it was probing the company for securities fraud.

The probe was disclosed in recent federal court documents associated with a FirstEnergy Corp. lawsuit filed Sept. 1 against Michael Pircio, a former employee of Clearsulting, a client of FES, which is also a plaintiff in the case. Pircio participated in Clearsulting’s audit and validation of certain FirstEnergy processes and procedures for Sarbanes-Oxley compliance.

The lawsuit alleges Pircio unlawfully accessed Clearsulting’s computer without authorization and downloaded FirstEnergy’s proprietary and confidential information. It seeks the return of the property and an injunction against any release of the information along with damages.

Sanford Heisler Sharp LLP, which is representing Pircio on a potential whistleblower action but not on the Sept. 1 lawsuit, notified FES/Clearsulting that Pircio had shared the information with the firm and SEC but would not share further.

“On August 7, 2020, we submitted information to the Securities and Exchange Commission concerning FirstEnergy and Clearsulting. Since then we have been in communication with Brian D. Fagel, assistant director of the public finance abuse unit, and we intend to continue cooperating with the SEC in its investigation,” the letter from SHS attorney Vince McKnight read.

The parties agreed to an order approved Sept. 9 by U.S. District Court Judge Pamela Barker, who presides in the Northern District of Ohio Eastern Division, under which Pircio is enjoined from using, disclosing, or misappropriating any of plaintiffs’ information and data and agrees to return it to FirstEnergy “upon the conclusion of the SEC Investigation.”

“Until the conclusion of the SEC Investigation, Defendant Michael Pircio shall instruct” his lawyers “to maintain the confidentiality of plaintiffs’ data and information and not to disclose it except to the SEC in furtherance of the SEC Investigation, or as otherwise instructed or ordered by the SEC,” the order reads.

The SEC involvement was first reported earlier this week by Cleveland.com.

The legislation created an upside for holders of about $2 billion of tax-exempt pollution control notes issued or backed by FirstEnergy because it enhanced and assured what could be recovered under the company's Chapter 11 reorganization. It slapped surcharges on energy customers in Ohio to, among other things, support the money-losing nuclear plants.

Federal authorities allege Householder violated federal racketeering statutes through honest services wire fraud and the receipt of millions in bribes and money laundering. Householder and others are accused of accepting bribes between March 2017 and March 2020 to steer passage of House Bill 6 and to help stave off a public ballot initiative that would have overturned the legislation. Four others were also charged.

FirstEnergy was not named in the complaint but the subsidiary FES was the primary beneficiary of the legislative bailout as the owner of the nuclear plants, federal authorities confirmed. The publicly traded company acknowledged the subpoenas it received in connection with the investigation surrounding House Bill 6.

Energy Harbor is the successor company to FirstEnergy Corp.’s subsidiary FirstEnergy Solutions that went through bankruptcy and had tapped the municipal market. The company emerged from Chapter 11 in February with its new name after shedding $4 billion in debt.

Bondholder-creditors Avenue Capital Group and Nuveen Asset Management LLC are major owners and have seats on the board, according to company disclosures. It operates the nuclear plants and is no longer affiliated with FirstEnergy Corp.

The legislation replaced a ratepayer surcharge for renewable power with one that subsidized the two nuclear generation facilities. It imposes a fee of 85 cents a month on residential ratepayers from 2021 through 2027, generating about $170 million a year with $150 million benefitting the Davis-Besse and Perry nuclear plants and the remaining funds going to solar development.

Ohio lawmakers agree House Bill 6 is tainted and are considering a repeal of the bill but there are GOP and Democratic divisions on how best to repeal and replace with new legislation in a way that preserves jobs and the timing. Gov. Mike DeWine, a Republican, supports a repeal and replacement and the House Select Committee on Energy Policy and Oversight began holding meetings this month on the subject.

The company had $1.5 billion of unsecured debt and $690 million of secured municipal debt. The private power plant operator sold the tax-exempt debt to fund air and water pollution control facilities and sewage and solid waste facilities at its power generation plants. Without the bailout, FES planned to shutter the plants.

The Chapter 11 filing included FirstEnergy Solutions, its subsidiaries, and FirstEnergy Nuclear Operating Co. but Akron-based parent company FirstEnergy Corp. was not included.

FirstEnergy Corp. owns 10 regulated electric utilities in five states. Energy Harbor owns and operates a portfolio of nuclear and fossil power stations throughout Ohio, Pennsylvania and West Virginia.

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