Emps. Ret. Sys. of St. Louis v. Jones

EMPLOYEES RETIREMENT SYSTEM OF THE CITY OF ST. LOUIS, Plaintiff, v. CHARLES E. JONES, et al., Defendants,FIRSTENERGY CORP., Nominal Defendant.

Case No. 2:20-cv-04813

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO EASTERN DIVISION

May 11, 2021

CHIEF JUDGE ALGENON L. MARBLEY

Magistrate Judge Kimberly A. Jolson

OPINION & ORDER

I. INTRODUCTION

Before the Court is a Motion to Dismiss the Consolidated Verified Shareholder Derivative Complaint by Defendants Michael J. Anderson, Steven J. Demetriou, Julia L. Johnson, Donald T. Misheff, Thomas N. Mitchell, James F. O'Neil III, Christopher D. Pappas, Sandra Pianalto, Luis A. Reyes, Leslie M. Turner, Steven E. Strah, James F. Pearson, K. Jon Taylor, and Nominal Defendant FirstEnergy Corp. ("FirstEnergy" or the "Company") (collectively, the "FirstEnergy Defendants" or "Defendants"). (ECF No. 79).¹ For the following reasons, the Court DENIES the Motion to Dismiss.

II. BACKGROUND

A. Facts as Alleged by Plaintiffs

In considering this motion to dismiss, this Court must view the Consolidated Complaint in the light most favorable to Plaintiffs and take all well-pleaded factual allegations as true. Tackett v. M & G Polymers, 561 F.3d 478, 488 (6th Cir. 2009).

According to Plaintiffs, this action seeks to hold current and former FirstEnergy directors and officers accountable for their roles in orchestrating a large bribery, racketeering, and pay-to-play scheme with Ohio politicians. (Consol. Compl. ¶ 1, ECF No. 75). Specifically, between 2017 and 2020, FirstEnergy and its most senior officers paid more than $60 million in illegal contributions to Ohio's Speaker of the House, Larry Householder, and other Ohio public officials, in exchange for favorable legislation designed to bail out the Company's failing nuclear power plants. (Id. ¶ 2). The U.S. Attorney for the Southern District of Ohio described this plot as "likely the largest bribery, money laundering scheme ever perpetrated against the people of the state of Ohio." (Id. ¶ 7).

FirstEnergy is an Ohio-based utility company and one of the nation's largest investor-owned electric systems. (Id. ¶ 49). It owns and operates two Ohio nuclear power plants and provides electricity to 6 million customers through its ten utility operating companies, which service seven states across the Midwest and the Mid-Atlantic. (Id.). The Company's business segment, known as Competitive Energy Services ("CES"), is comprised of three entities: FirstEnergy Solutions ("FES"), FirstEnergy Nuclear Operating Co. ("FENOC"), and Allegheny Energy Supply ("AE Supply").

FirstEnergy began to face significant financial strain in 2016, as its costly nuclear power plants became less profitable. (Id. ¶ 3). The Company had invested hundreds of millions of dollarsinto the plants' maintenance while demand for nuclear power diminished. (Id.). As a result, FirstEnergy reported a $1.259 billion loss in its energy services segment on July 28, 2016. (Id. ¶ 53). Shortly thereafter, Moody's and Standard & Poor's downgraded FES's senior unsecured rating and its corporate credit rating to "below investment grade," signifying that FES faced "a substantial risk of default. . ." (Id. ¶ 54). By November 2016, the Company announced a strategic review with the goal of exiting the competitive power generation business of FES within twelve to eighteen months. (Id. ¶ 55). FirstEnergy director and Chief Executive Officer, Defendant Jones, explained that FES faced several risks, including weak energy and capacity pricing, as well as an obligation to refinance $645 million in debt through 2018. (Id.). FirstEnergy's outside auditor announced in February 2017 that FES's "current financial position and the challenging market conditions impacting liquidity raise[d] substantial doubt about its ability to continue as a going concern." (Id. ¶¶ 56, 77). The Federal Energy Regulatory Commission ("FERC") rejected FirstEnergy's application to transfer certain assets from CES to another subsidiary in January 2018, further limiting the Company's ability to restructure its debt or declare FES bankruptcy. (Id. ¶ 78). In other words, FirstEnergy owned a subsidiary that was causing it significant financial loss, and it had very limited options to extricate the Company from this situation. (Id. ¶ 79).

The Company's financial situation also impacted each of the Officer Defendants, since most of their compensation was based on the Company's annual financial performance. (Id.). For example, from 2017 to 2019, Defendant Jones's performance-based compensation comprised 87% of his total compensation, which exceeded $55 million cumulatively over those three years. (Id. ¶¶ 22, 81). Compensation for other officers between 2017 and 2019 was 76%, 75%, and 74% incentive-based, respectively. (Id. ¶ 81).

Meanwhile, Larry Householder sought to regain his position as Ohio Speaker of the House, which he had previously resigned from due to public allegations of money laundering, kickbacks, and illegal campaign contributions. (Id. ¶ 57). He ran in and won the November 2016 election for the two-year House seat representing Ohio's 72nd District. (Id. ¶ 58). A few days after he assumed office on January 3, 2017, FirstEnergy flew Householder to Washington, D.C. on its private jet so that he could attend the inauguration of former President Donald Trump. (Id. ¶ 59). Soon after taking Householder to Washington, FirstEnergy informed investors that it was seeking "legislative solutions" to help its aging nuclear power business. (Id. ¶ 60).

Within two months of this trip, Householder established a secret 501(c)(4) entity called "Generation Now," and FirstEnergy and its subsidiaries began making clandestine quarterly payments of $250,000 to it. (Id. ¶ 63). According to Householder co-conspirator Neil Clark,² Generation Now was structured to be opaque so that donors could "give as much or more to the (c)(4) and nobody would ever know." (Id.). From 2017 to 2018, Generation Now spent approximately $3 million of FirstEnergy funds to support Householder's bid for Speaker of the House, as well as the bids of nearly a dozen other House-candidate allies who would ultimately vote for his elevation to Speaker. (Id. ¶ 89). Householder was re-elected as Speaker of the House in January 2019. (Id. ¶ 101). By July 2020, FirstEnergy and its subsidiaries paid more than $60 million to various entities controlled by Householder, including Generation Now, under the guise of donations. (Id. ¶¶ 2, 4-6, 43, 63, 80-82, 100-02).

The same day that Householder was re-elected, he pledged to create a standing subcommittee on energy generation, which he later admitted was created to pass House Bill 6 ("HB6"). HB6 was introduced in the Ohio state legislature on April 12, 2019, and, according to the FBI, "essentially was created to prevent the shutdown of [FirstEnergy's] nuclear plants." (Id. ¶¶ 100-103). As is relevant here, HB6 has three key components.

First, it provided a bailout for the Company by creating a subsidy on each megawatt hour produced by nuclear generators. (Id. ¶ 103). Given that FirstEnergy's nuclear power plants produced over 18 million megawatts in 2018 (compared to fewer than 1,100 megawatts produced by Ohio's six remaining solar facilities), 94% of the subsidy went to FirstEnergy. (Id.). The subsidy also enabled FirstEnergy to collect more than $160 million annually, and it was funded by a monthly fixed charge on all residential, commercial, and industrial consumers. (Id.).

Second, HB6 also included a "decoupling" provision that ensured a guaranteed level of income for FirstEnergy and therefore established a floor for Defendants' performance-based compensation. (Id. ¶ 82). According to the FBI Affidavit supporting the Criminal Complaint:

Decoupling is the dissociation of annual revenue from volume of energy sales. The decoupling mechanism was based upon the baseline revenue the company received in 2018. Therefore, if a given year's annual revenue [was] less than it was in 2018, the company [could] charge retail customers a rider, or surcharge, to compensate for the lost revenue.

(Id.). The FBI Affidavit further explains that the decoupling amendment was added to HB6 "as a result of the successful influence campaign waged by [FirstEnergy] and the Enterprise" run by Householder. (Id.). Defendant Jones explained during a November 4, 2019 investor call that the decoupling provision "fixes our base revenues and essentially it takes about one-third of our company[,] and I think makes it somewhat recession-proof." (Id. ¶ 83). An Ohio energy consultant estimated that the decoupling provision would allow FirstEnergy to charge ratepayers an additional$355 million through 2024 and guarantee the Company an annual revenue of $978 million. (Id. ¶ 84).

Third, HB6 provided that the Public Utilities Commission of Ohio ("PUCO") could unilaterally extend decoupling at the utility's discretion, which would benefit FirstEnergy by an additional $400 million from 2025 through 2030. (Id. ¶¶ 85, 144). Notably, in November 2020, PUCO's Chairman, Sam Randazzo, resigned two days after the FBI raided his home and the day before FirstEnergy disclosed that it paid $4.3 million to "an individual who subsequently was appointed to a full-time role as an Ohio government official directly involved in regulating" the Company. (Id. ¶ 144).

Even before charges of misconduct surfaced, the public strongly opposed House Bill 6. The bill was criticized as "the worst energy bill of the 21st century." (Id. ¶ 6). A statewide ballot referendum seeking to repeal it quickly followed. (Id.). Numerous press reports publicly questioned the propriety of FirstEnergy's relationship with Householder, including articles by Cleveland.com, the Columbus Dispatch, and the Cincinnati Enquirer. (Id. ¶¶ 97, 105, 113). FirstEnergy vehemently opposed the referendum, spending $38 million over the next few months to defeat it. (Id.).

From Householder's Speaker campaign through HB6's passage and...