You remember Matt Levine’s mantra in his “Money Stuff” column on Bloomberg: “everything is securities fraud”? “You know the basic idea,” he says, a
“company does something bad, or something bad happens to it. Its stock price goes down, because of the bad thing. Shareholders sue: Doing the bad thing and not immediately telling shareholders about it, the shareholders say, is securities fraud. Even if the company does immediately tell shareholders about the bad thing, which is not particularly common, the shareholders might sue, claiming that the company failed to disclose the conditions and vulnerabilities that allowed the bad thing to happen. And so contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else you’ve got. Securities fraud is a universal regulatory regime; anything bad that is done by or happens to a public company is also securities fraud, and it is often easier to punish the bad thing as securities fraud than it is to regulate it directly.” (Money Stuff, 6/26/19)
(See this PubCo post.) But here’s a new one—bribery and political corruption as securities fraud. As described in this press release, in the fiscal-year-end enforcement crush, the SEC brought settled charges against Exelon Corporation, a utility services holding company, and its subsidiary, electric utility company Commonwealth Edison Company (ComEd), and filed a complaint against ComEd’s former CEO alleging “fraud in connection with a multi-year scheme to corruptly influence and reward the then-Speaker of the Illinois House of Representatives.” Exelon and ComEd agreed to settle the charges, with Exelon paying a civil penalty of $46.2 million. The charges against the CEO are headed for trial. So how is this securities fraud? According to the Chief of the SEC Enforcement Division’s Public Finance Abuse Unit, the CEO’s “remarks to investors about ComEd’s lobbying efforts hid the reality of the long-running political corruption scheme in which they were engaged….When corporate executives speak to investors, they must not mislead by omission.”
Background. According to the Order, ComEd is the largest utility company in Illinois and is subject to extensive regulation by the State, including regulation of rates. The applicable rates formula was set to expire by 2019, and ComEd wanted the Illinois General Assembly to pass legislation, called the “Future Energy Jobs Act” or “FEJA,” to extend that rates formula beyond 2019. According to the SEC, FEJA would ensure a continued favorable rate structure that ComEd acknowledged could provide reasonably foreseeable anticipated benefits to ComEd exceeding $150 million. To secure passage of FEJA, ComEd sought the help of the Speaker, who, the SEC alleged, “was able to exercise control over what measures were called for a vote in the House of Representatives and had influence and control over his fellow lawmakers concerning legislation, including legislation that affected ComEd.” The complaint noted that ComEd was aware of the power of the Speaker because, in the early 2000s, he “had successfully thwarted several legislative initiatives championed by ComEd.” As a result, “ComEd made a concerted and well-funded effort to improve its relationship with the powerful legislator.”
From around 2011 through 2019, the SEC alleged, ComEd engaged in a scheme to arrange for various associates of the Speaker to obtain jobs, vendor subcontracts and related monetary payments with the intent to corruptly influence the Speaker to assist ComEd with legislation, particularly FEJA. The payments to the Speaker’s associates aggregated over $1.3 million and were made indirectly through third-party vendors under contracts with ComEd for consulting and related services. As a result, the payments were “not identifiable in ComEd’s vendor payment system” as payments to the Speaker’s associates. The consultant submitted invoices to ComEd for advice on “legislative issues” and “legislative risk management activities,” but, the SEC alleged, “[i]n reality, a substantial portion of this compensation paid to Consulting Firm was intended for payment to [the Speaker’s] associates, who did little or no work for ComEd.” According to the SEC, certain senior executives and agents of ComEd, including the CEO who allegedly helped engineer the hiring of at least one of the Speaker’s political allies, were aware of the corrupt purpose of the payments. In addition, the SEC charged that the CEO signed “false and misleading documents” in connection with the renewal of consultant’s contract, describing the consultant’s “unique insight and perspective” to circumvent an internal policy that would otherwise have required a competitive bidding process. The Order and the complaint contain other similar allegations.
The complaint summed up the charges against the CEO, alleging that, under the CEO’s “watch and with her active participation, ComEd and its parent, Exelon Corporation, showered [the Speaker’s] confederates with over a million dollars in payments. The goal was to ingratiate the Exelon organization to [the Speaker] so he would do its political bidding in Springfield. The payments were supposedly for services rendered. But [the CEO] knew those payments bought ComEd and Exelon one thing and one thing alone: Clout. Not legal, lobbying, or consulting services.” The SEC also noted that the CEO “received a $100,000 bonus to reward her efforts to pass FEJA.”
But, the complaint emphasized, the SEC was “bring[ing] this action to hold [the CEO] accountable for her violations of the federal securities laws.” To that end, the SEC charged that the CEO “concealed this scheme and those bribes from Exelon’s investors; from ComEd’s and Exelon’s auditor; and from the companies’ books, records and internal controls.” More specifically, the SEC charged that the CEO “made materially misleading statements to Exelon investors regarding ComEd’s lobbying and legislative efforts in support of the FEJA legislation,” referring to having “pulled together a coalition to come in with an agreed bill,” but omitting to mention that “ComEd was engaging in an effort to corruptly influence and reward a government official to secure favorable legislation.” Likewise, when an agreement was reached on the bill, the company’s press release discussed legitimate efforts, such as assembling a bipartisan coalition and multiple stakeholders, but, the SEC alleged, it was “misleading because it omitted that ComEd was engaging in an effort to corruptly influence and reward a government official to secure favorable legislation.” As stated in the complaint, the CEO “hid that scheme from Exelon’s investors. Such a scheme posed a risk of ComEd’s exposure to criminal and civil liability. It also cast doubt on the integrity and effectiveness of ComEd’s management. Any reasonable investor would have thus considered the information material.”
The complaint also charged that the CEO signed misleading rep letters to the auditors, because “she failed to disclose the ongoing bribery scheme that should have been considered for disclosure in the financial statements” and in MD&A as required by Reg S-K Item 303.
Violations. The SEC concluded that Exelon and ComEd violated Section 17(a)(2) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, which prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of securities; Section 13(b)(2)(A) of the Exchange Act, the requirement to maintain accurate books and records; Section 13(b)(2)(B), the requirement to maintain a system of internal accounting controls. Exelon agreed to pay a civil penalty of $46.2 million. (Separately, ComEd entered into a deferred prosecution agreement with the U.S. Attorney for N.D. Illinois, admitting to certain information and agreeing to pay a criminal fine of $200 million.)
The SEC charged the CEO with knowing violation of 17(a)(2) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; aiding and abetting Exelon’s and ComEd’s violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; violation of Rule 13a-14 of the Exchange Act by signing misleading certifications; violation of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, by circumventing internals accounting controls and falsifying books and records; and violation of Exchange Act Rule 13b2-2(a), by making false statements to the auditors. The SEC sought a permanent injunction, an officer and director bar, disgorgement and civil money penalties. The complaint notes that, in May, a federal jury found the CEO “guilty of conspiring to influence and reward the former Speaker, along with multiple bribery and record falsification charges.”
Post-script: for some of the history of political corruption as securities fraud, check out this column by Kevin LaCroix on the The D&O Diary.
