Comic Woody Allen once postulated that murderers should be given the death penalty before they commit the crime, thus sparing the life of the victim. That’s typical of Woody’s wild imagination, but it’s no wilder than what’s happening on today’s regulatory scene: corporate wrongdoers want their victims to pick up the tab for companies’ misbehavior, and pro-business government regulators nod approvingly.
You don’t believe that? Get this: San Diego Gas and Electric is asking the Public Utilities Commission to charge ratepayers $28.9 million a year because the company wants protection from soaring insurance costs resulting from the company’s negligence in wildfire prevention. The commission’s own Consumer Protection and Safety Division, along with the California Department of Forestry and Fire Protection (called Cal Fire), found that in the Witch Creek and Rice Canyon fires of 2007, SDG&E was in violation of state utility rules. The company didn’t properly maintain and run transmission and operation lines by following such safety measures as keeping trees away from those lines.
What’s more, SDG&E did not cooperate in a timely fashion in the probe, according to investigators at the Consumer Protection and Safety Division. Then, the utility tried to get the commission to delay publication of the report, according to San Diego’s Utility Consumers’ Action Network (UCAN), a citizens’ group that keeps an eye on the utility and other entities such as the city’s water department.
More than 1200 homes were destroyed or damaged in those two fires. The residents were SDG&E customers. Now those same customers, known as ratepayers in utility lingo, are being asked to pick up the tab for the utility’s increased insurance costs. The company wants its shareholders to get off the hook on this expense. UCAN says it’s “the most arrogant and bizarre rate hike ever demanded by a utility.”
Says Michael Shames, head of Utility Consumers’ Action Network, “SDG&E creates a fire that causes ratepayers damages and then tries to get the same ratepayers to pick up the cost. There is no accountability.” The consumer group has filed protests against the utility’s attempt to recoup costs from victims. Utility Consumers’ Action Network also wrote the state insurance commissioner, complaining that “the state’s insurers are cutting availability and increasing costs for fire-related insurance.” The insurance companies are leaving the state “high and dry.”
Similarly, Ruth Hendricks, a customer of San Diego Gas and Electric, filed a protest. “SDG&E’s failure to comply with fire safety rules was systemic and was based upon an apparent business decision to operate its business at unsafe levels of risk,” says her filing. The utility’s “negligent, reckless and knowing conduct resulted in predictable massive losses.”
“The idea that SDG&E would go to the Public Utilities Commission and ask them to make ratepayers pay for the company’s negligent behavior shows how absurd this is,” says Mike Aguirre, Hendricks’s attorney. “The best way to get SDG&E to be more careful is for the commissioners to do something that affects the company’s bottom line.”
But Shames holds out little hope that the Public Utilities Commission will do the right thing. The agency is “blatantly utility-friendly,” says Charles Langley of UCAN. In attempting to get the commission to let it systematically shut off power to the backcountry during fire season, SDG&E noted that its own equipment had caused 167 fires in the five and a half years ended in mid-March of this year.
The notion that victims should pay for a company’s malfeasance has rankled Judge Jed Rakoff of U.S. District Court in Manhattan. The case before him revolves around Bank of America’s purchase of Wall Street’s severely ailing Merrill Lynch, consummated early this year. Close observers of this imbroglio believe that during the banking crisis of late 2008, the U.S. Treasury Department and Federal Reserve pressured B of A into making the deal and not backing out after it became clear that the original price was absurdly high.
The Securities and Exchange Commission, which is supposed to regulate Wall Street, this year charged that Bank of America “materially lied” to its shareholders by not disclosing billions in bonuses that would be paid to Merrill executives when the merger went through. Presumably, the shareholders might have nixed the deal had they known of this largesse for a loser.
The New York attorney general and a House of Representatives committee are looking into the matter. So is a criminal grand jury, reportedly. Bank of America’s claims that it did inform its shareholders simply make no sense. The Securities and Exchange Commission took its usual easy way out: Bank of America agreed to pay a fine of $33 million without admitting or denying guilt. It’s called a “consent decree.” Wags describe it thusly: “I didn’t do it, but I will never do it again.”
The securities agency wraps up 90 percent of its cases through settlements. But Rakoff was not buying the B of A agreement. “Shareholders who were the victims of the bank’s alleged misconduct now pay the penalty for that misconduct,” he wrote in a scathing decision rejecting the settlement. “If the bank is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders’ money as a penalty for lying to them?”
The bank said it took advice from its lawyers, and they are protected by the lawyer-client privilege. The securities agency asked the bank to waive the privilege, but it refused. So the agency said that pursuing the matter any further would be too expensive and time-consuming. Rakoff would have none of it: he wants the miscreants identified.
The judge says the case has to go to trial in February. The securities agency, although defending the original consent decree, says it will go to court and possibly make more charges against B of A. Cynics wonder what will happen, because it certainly appears that Federal Reserve chairman Ben Bernanke and then–Treasury Secretary Hank Paulson may have been the bad guys holding the gun to the bank’s head.
San Diegan Gary Aguirre (Mike’s brother), who has been fighting the Securities and Exchange Commission for years, admires Rakoff’s courage and logic. The agency fired Gary Aguirre when he wanted to pursue one of Wall Street’s biggest big shots. Two congressional committees studied the matter and concluded Gary was right and the agency wrong. “It is utterly amazing to me that with the change of the guard at the SEC, they don’t at least put on a pretense of getting serious about regulation,” he says.
And that’s the point: there is general agreement that there must be more regulation, particularly of the financial industry. But if the corporate wrongdoers can pass on the cleanup costs to their victims, what’s the use?