AEP admits its corporate accountability reports are mere "puffery"

Lawyers for American Electric Power (AEP) described statements made in the electric utility’s annual corporate accountability reports as mere corporate “puffery” and a federal judge agreed.

In an order issued yesterday, U.S. District Court Judge Sarah D. Morrison granted AEP’s motion to dismiss a lawsuit by shareholders who claimed the value of their stock was damaged after reporting by the Columbus Dispatch revealed AEP as an unnamed “energy company” described by federal prosecutors in their racketeering case against former Ohio House Speaker Larry Householder.

The plaintiffs in the shareholder lawsuit, Nickerson v. American Electric Power, alleged that AEP’s leadership made misleading statements about the company’s commitments to transparency around lobbying and political spending, and hid AEP’s funding of Empowering Ohio’s Economy, a 501(c)(4) dark money group caught up in the Householder corruption scandal.

The federal criminal case against Householder centers on nearly $60 million in bribe payments FirstEnergy secretly made through two 501(c)(4) dark money groups, Partners for Progress and Generation Now. In exchange, FirstEnergy secured a since-repealed $1 billion dollar bailout that benefited nuclear and coal plants owned by a bankrupt subsidiary through the enactment of Ohio’s House Bill 6 in 2019. Prosecutors have netted three guilty pleas connected to the scheme and FirstEnergy agreed to pay a $230 million penalty as part of a deferred prosecution agreement, but Householder is fighting the charges and awaits trial next year.

As the largest shareholder in the Ohio Valley Electric Corporation (OVEC), AEP also benefited from HB 6, which increased subsidies for two money-losing coal plants owned by OVEC. Empowering Ohio’s Economy, funded solely by $8.7 million in contributions from AEP, paid a total of $700,000 to Generation Now, which pleaded guilty to racketeering earlier this year in connection with the bribe payments from FirstEnergy. Empower Ohio’s Economy also contributed $500,000 to the Coalition for Term Limits, another 501(c)(4) organization that was part of Householder’s failed scheme to weaken Ohio’s term limits law.

In the related civil lawsuit filed by AEP shareholders, the plaintiffs pointed to misleading statements that AEP made about political transparency and lobbying disclosures in the company’s annual corporate accountability reports for 2019 and 2020.

Judge Morrison noted in her ruling that:

… Defendants [AEP] argue that the Corporate Accountability Reports are “textbook” puffery, inactionable under the PSLRA [Private Securities Litigation Reform Act]. The Court agrees. The statements excerpted contain corporate-speak “so banal and ubiquitous” that a reasonable investor would rely no more on their content than on a glossy brochure of toothy grins and erect thumbs.

Sure enough, lawyers for the AEP defended those statements as “textbook examples of inactionable puffery” in their motion to dismiss the civil lawsuit.

AEP’s lawyers included a table that listed reasons why they considered company statements flagged by the plaintiffs as misleading to be “not actionable” in court.

Two statements were labeled by AEP’s attorneys as containing “mere ‘puffery.’”

One of those puffed up statements came from a press release announcing AEP’s 2019 Corporate Accountability Report:

Lobbying & Political Contributions

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The investments needed to modernize the power grid are in the billions of dollars, and the stakes have never been higher. To understand the policies and regulations that could affect our business, we participate in a number of organizations, lobby on our customers’ behalf and contribute to political candidates, where allowed by law.

Each year, AEP publicly discloses lobbying activities and political contributions. We also annually report on the portions of membership dues paid to organizations such as the U.S. Chamber of Commerce and Edison Electric Institute (EEI) that go toward lobbying.

We post our lobbying policy online and we discuss political contributions annually with AEP’s Board of Directors’ Committee on Directors and Corporate Governance.

* * *

We believe in transparency and active participation in public debate. Our experience is that open, candid discussion and a good-faith attempt to reach common ground is the best way to do business.

The second statement containing “mere ‘puffery’” came from AEP’s Corporate Accountability Report for 2020:

At AEP, we never have been more certain of our responsibility to a sustainable future for our customers, communities and employees. We will continue to take steps to reduce our carbon footprint, to empower customers and to value and develop our workforce. Together, our energy and future are truly boundless.

* * *

Public Policy & Issue Management

Similar to other companies, AEP has a public policy strategy that seeks to inform decisions made by Congress, the Federal Energy Regulatory Commission (FERC), North American Electric Reliability Corporation (NERC), state legislatures and regulatory commissions, and Regional Transmission Organizations (RTOs).

AEP’s Policy Advisory Team (PAT), consisting of senior executives across all business functions and departments, considers policy options on issues of relevance to the company and supports internal policy analysis and debate. This approach ensures that AEP is speaking with one voice and that all employees with external contacts are clear on our policy positions and objectives. Since its inception in May 2017, the PAT has reviewed more than two dozen issues, including 13 in 2019.

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Climate & Lobbying

Some stakeholders are asking AEP whether our lobbying practices and the policy positions taken by trade organizations to which we belong are in alignment with the Paris Climate Agreement. We believe in transparency and active participation in public policy development, regardless of the issue or position. Moreover, AEP is a respected and sought-after voice when it comes to energy policy-related matters in the U.S.

We report on our public policy positions, annual lobbying and political contributions, policy on political contributions and trade association memberships. We post our lobbying policy online and have consistently acknowledged our intent to participate actively in the political process and in lobbying activities at the national, state and local levels. At AEP, we must consider a number of factors when engaging in this arena, as public policy develops through negotiation and compromise. While many divergent issues are of importance to us, we cannot invest all of our efforts to focus on a single issue. We are obligated to deliver safe, reliable, affordable and secure electricity to all of our customers, and we develop our public policy positions with that in mind.

As the shareholder plaintiffs documented in their response to the motion to dismiss, AEP responded to a subpoena from the Securities and Exchange Commission’s Division of Enforcement seeking information regarding HB 6 by playing up a revised political engagement policy and new anti-corruption policy. Based on the low standard set by AEP’s lawyers, there is nothing in these new transparency statements and policies that should lead shareholders and stakeholders to view them as anything but more corporate puffery.

“AEP had no duty to disclose any facts allegedly omitted from this statement,” AEP’s lawyers also argued in response to plaintiffs’ allegations that the company’s leadership failed to disclose dark money payments to Empowering Ohio’s Economy before those payments drew the attention of federal prosecutors and investigative reporters.

Judge Morrison noted in her order granting AEP’s motion to dismiss that the plaintiffs also alleged Brian Tierney, then Chief Financial Officer for AEP, made statements about HB 6 during a 2019 earnings call which:

…“concealed that Defendants were violating AEP’s own policy [on Corporate Political Contributions] to secure cost-recovery for its coal-fired plants” by making “substantial contributions to Householder’s criminal enterprise . . . through its EOE non-profit[.]”

Morrison sided with AEP on Tierney’s statements.

“The Court simply does not accept the notion that such ‘vague and generic’ statements created any impression that could, or would, have misled a reasonable investor to believe that AEP was not engaged in the criminal bribery scheme that Plaintiffs allege,” Morrison found.

“Nor does the Court find that those statements gave rise to a duty to disclose any such scheme,” Morrison concluded.

During a hearing on the motion to dismiss held on November 23, two days before Thanksgiving, Morrison appeared to view AEP’s political spending around HB 6 as amounting to business as usual for a company seeking financially beneficial legislation from a state legislature.

Morrison was dismissive of the plaintiff’s arguments that AEP knew about Empowering Ohio’s Economy’s payments to Generation Now because Tom Froehle, then a vice president of external affairs for AEP, served on Empowering Ohio’s Economy’s board of directors.

“So if Tom Froehle is on the board for United Way, is he going back to report to AEP that United Way is making contributions and who they are giving their money to?” Morrison said while questioning the plaintiff’s attorney during the hearing, according to a transcript obtained from the court reporter by the Energy & Policy Institute.

The order granting AEP’s motion to dismiss does not represent the final word on the AEP’s role in the HB 6 corruption scandal. Several other related lawsuits filed by AEP shareholders remain pending. AEP said it is cooperating with the SEC subpoena in a quarterly report filed in October.