FirstEnergy and Domestic Corruption Woes

Compliance professionals are already well-acquainted with the seedy mechanics of overseas bribery. Now FirstEnergy Corp. in Ohio has given us a full frontal view of how domestic corruption happens right here in the United States, too. 

You might recall the case from last year. Larry Householder, the now-former speaker of the Ohio House of Representatives, was arrested by the feds for taking millions in bribes from FirstEnergy, in exchange for delivering a taxpayer-funded bailout of two nuclear power plants owned by a FirstEnergy subsidiary. Now FirstEnergy has settled charges with federal prosecutors for its role in the case, agreeing to pay a $230 million penalty and implement a raft of compliance program improvements.

The settlement, announced last week, contains all the usual promises that we see in corporate FCPA enforcement actions: 

  • Accepting a three-year deferred-prosecution agreement;
  • Hiring an independent chief ethics and compliance officer (already done: FirstEnergy hired Antonio Fernández for the role in March); 
  • Cooperating in any further investigations the feds might do, including against individuals or other energy companies involved in the Householder mess; 
  • Submitting annual progress reports (which, alas, will not be made public) to federal prosecutors; and
  • The catch-all “working to establish a culture of ethics, integrity, and accountability at every level of the organization.”

FirstEnergy also agreed to several governance reforms, such as hiring an executive director for the board of directors and creating a “compliance oversight subcommittee” of the board’s audit committee to implement compliance recommendations from outside counsel. (The company did not need to hire an independent compliance monitor.)

Most interesting, however, is that FirstEnergy must also start disclosing the donations it makes to so-called 501(c)(4) organizations — that is, the nonprofit groups that ostensibly are “social welfare” groups under the U.S. tax code, but serve as conduits for dark-money political spending because the groups don’t have to disclose the sources of their funding.

Under the terms of FirstEnergy’s DPA, the company must start listing all donations it makes to 501(c)(4) groups, including each group’s name and address, date of contribution, amount of contribution, and purpose of contribution. FirstEnergy must also update that list quarterly and post the list on its website with an easy-to-find “Corporate Contributions” title.

How FirstEnergy’s Bribery Scheme Worked

Really, the scheme worked pretty easily — which is a damning statement about corporate political spending within the United States, but anyway, compliance officers should take some time to understand the mechanics of it. 

As outlined in the deferred-prosecution agreement, FirstEnergy executives orchestrated the creation of a 501(c)(4) nonprofit in February 2017 called Partners for Progress Inc. Those executives directed that Partners for Progress be incorporated in Delaware rather than Ohio, because Delaware law is less transparent about corporate ownership. They decided who the three directors of Partners for Progress should be, two of whom were FirstEnergy lobbyists. FirstEnergy had even set aside $5 million in December 2016 for an “unnamed” 501(c)(4) to be established later.

On the other side of the equation was Householder. He also orchestrated the creation of a 501(c)(4) in early 2017, Generation Now. FirstEnergy executives knew full well that Generation Now was a front organization for Householder’s wallet; the DPA includes excerpts of email messages that specifically say Householder and FirstEnergy’s then-CEO Chuck Jones discussed using Generation Now as a vehicle to receive FirstEnergy donations. (Jones was fired last year.) 

One other intermediary: FirstEnergy Service, the subsidiary of FirstEnergy that operated two failing nuclear power plants in Ohio in the late 2010s. FirstEnergy Service subsequently filed for bankruptcy and emerged as Energy Harbor last year.

So how did the scheme work? Jones directed FirstEnergy Service to make political donations to Partners for Progress, which funneled the money to Generation Now, which Householder used to fund his political empire and personal expenses like a second home in Florida. See Figure 1, below.

Through that arrangement, prosecutors say, FirstEnergy funneled $60 million to Householder from 2017 into 2020. In exchange, Householder pushed legislation into law that provided a $1.3 billion taxpayer bailout for those two nuclear power plants owned by FirstEnergy Services. 

Householder still awaits trial in Ohio. Several of his aides, however, have pleaded guilty in the case, as did Generation Now earlier this year. That taxpayer bailout may now be repealed. The Cleveland Plain Dealer has a thorough summary of the case if you’re interested. 

Compliance Program Implications

So if that’s how a corporate bribery scheme might unfold in the United States, and your company has to disclose its political spending to prevent such corruption in the future — what would that effort entail? 

First, the company would need to adopt policies about donations to political causes — meaning, senior leadership would need to decide what it wants to do here. 

Those policies absolutely should address direct contributions to political campaigns, since all businesses or their senior executives can run afoul of violating campaign finance law. Moreover, some businesses that bid on state contracts (such as investment advisers handling public pension money) have specific compliance obligations to avoid “play to play” conflicts of interest.

What tripped up FirstEnergy, however, were donations to politically active third parties: those 501(c)(4) groups like Partners for Progress and Generation Now. So if a business wants to avoid this sort of corruption — which is where the sleazy stuff happens, remember — you’ll need to state that in a policy. You’ll need to define whether you refrain from all 501(c)(4) donations, or only some; and if only some, you’ll need to define which ones do or don’t pass muster. 

Moreover, clarity into the company’s charitable donations will be imperative, since 501(c)(4) groups don’t need to disclose their donors and there isn’t necessarily an easy way to trace money back from recipient charity to donor company. So you, the compliance officer in central command, will need visibility into payments made by charitable foundations the company manages, subsidiaries, and so forth.

You might also consider conflict-of-interest policies to address what third parties do that could bring corruption risk to your enterprise. Recall, for example, those FirstEnergy lobbyists who served on the board of Partners for Progress; you could include COI clauses in employment contracts requiring your agents to disclose such relationships. (That shouldn’t be news; if you don’t already do this with your overseas agents, please re-read the FCPA Resource Guide from the Justice Department. But the point is just as valid for U.S. agents as well.) 

Why Do This at All?

These questions about corporate political spending are not just academic. Good governance activists have been pushing for more disclosure of corporate political spending for years, and those demands increased sharply after the Jan. 6 insurrection. Shareholders have been filing more resolutions in favor of disclosure this proxy season, and those resolutions have been getting more support. Caterpillar, for example, had 47 percent shareholder support for such a resolution this spring; another one at Duke Energy passed with 52 percent support.

Disclosure of political spending would fall under the “G for governance” category of ESG issues. We don’t yet know whether the Securities and Exchange Commission will include this hot potato in its forthcoming proposals for enhanced ESG disclosures, nor what form such a proposal might take: disclosure of donations directly to political campaigns, or wider disclosure that includes 501(c)(4) groups, too. So stay tuned. 

Meanwhile, use FirstEnergy as a good example of what not to do.

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