“DA to study Cobb utility audit”

Misconduct at Cobb EMC more pervasive than previously known.

By Russell Grantham rgrantham@ajc.com

An internal audit for Cobb EMC found that “self-dealing and conflicts of interest abounded” at the Marietta utility during the tenure of indicted ex-CEO Dwight Brown, ultimately costing the member-owned EMC hundreds of millions of dollars.

Brown ran the utility like an “autocrat,” auditors said, intimidating others into doing his bidding while steering tens of millions of dollars and other assets to himself and favored associates.

The audit has caught the attention of the Cobb County District Attorney’s office, and could lead to a wider probe of the utility’s former top managers, advisers and business partners.

“We are very interested in everything in that report,” said Don Geary, chief assistant district attorney for Cobb County. “We are continuing to investigate.”

The findings are the latest turn in a scandal that began unfolding in 2007 with an Atlanta Journal-Constitution investigation into Cobb EMC’s creation and operation of a high-profile, for-profit subsidiary, Cobb Energy. It led eventually to two lawsuits on behalf of utility members, a $98 million legal settlement and Brown’s 2011 indictment for racketeering and other financial misdeeds.

His case is pending. Brown has sought unsuccessfully to have the indictment thrown out.

The audit details nearly $400 million in costs to Cobb EMC stemming from the Cobb Energy venture, which Brown championed.

More than $86 million of that went to Brown and people or firms with close ties to the former CEO, through payments from Cobb EMC, Cobb Energy or other subsidiaries, according to the audit. Over 16 years, Brown and his wife collected $21.3 million in pay, stock dividends, unpaid loans and tax reimbursements.

Two attorneys for Brown could not be reached for comment Tuesday, though one of his former lieutenants at Cobb Energy disputed some of the audit’s findings.

Questionable dealings

But David Cohen, an attorney who represented the energy co-op’s members in the two lawsuits, said the audit showed the misconduct was more pervasive than previously known.

“We knew it was bad, but it appears from the report to be much worse than any of us expected,” he said.

The 154-page audit report and 1,500 pages in supporting documents is the result of a three-year investigation by an outside law firm and a forensic audit firm.

Made available to Cobb EMC’s 177,000 members last month, the audit was one of the first orders of business for a new board of directors elected after Brown’s indictment and retirement.

“We made a commitment that we would do a complete and thorough forensic audit. We feel like we’ve fulfilled that commitment,” Cobb EMC Chairman Bryan Boyd said.

The utility is now ready to “move forward,” he said. “We have spent enough legal fees to last a lifetime.”

Brown’s indictment alleges he indirectly enriched himself and other utility leaders through Cobb Energy, at the expense of Cobb EMC and its customers.

The auditors detailed scores of questionable dealings by Cobb EMC’s top managers, advisers, vendors and others. Some of its harshest language was for Brown’s management style.

‘A dictatorial manner’

“Dwight Brown was a bully, not a leader, who made unilateral decisions in a dictatorial manner,” the auditors said. “If anyone spoke up or asked him questions Brown shouted them down, humiliated them or just ignored them.”

Brown in 1997 persuaded the Cobb EMC board to transfer employees, operations, customers and electricity meters into the new for-profit venture, which he also headed. The meter network alone was worth up to $19 million, by some estimates. In exchange, Cobb EMC got $5 million in cash and common stock that Cobb Energy valued at $5 million.

Cobb Energy lost money from the start. To keep it afloat, Cobb EMC kept shoveling tens of millions in borrowed money, fees and other payments to Cobb Energy. In 2009, Cobb EMC even borrowed $20 million to “buy” electricity meters back from Cobb Energy.

Cobb EMC’s stake ultimately proved worthless because Cobb Energy was insolvent when it was shut down as part of a lawsuit settlement, auditors said.

Cobb Energy wasn’t worthless to Brown, his wife, and other insiders who held preferred stock in the for-profit unit, however. From 1999 to 2008, they collected $6.4 million in dividends on their preferred stock in the venture, auditors said.

Generous to a fault

The auditors said Brown was very generous with the utility’s money when it helped win supporters, doling out millions to executives, suppliers, law firms, community institutions and others, even as Cobb Energy’s losses put its parent deeper into debt.

Cobb Energy paid $12.7 million to put its name on Cobb’s performing arts center in 2005, and the Cobb School District got $1.65 million.

“Brown was very good at spreading money around to folks in the community,” Cohen said. “It made it very difficult for people to challenge him.”

Brown created more ties — and conflicts of interest — through a pair of multimillion-dollar real estate projects he was developing in Mississippi and Tennessee, auditors said. Brown recruited several Cobb EMC and Cobb Energy executives, board members, vendors and outside lawyers who advised the utilities to invest in his ventures. Both eventually failed.

One partner was the football coach at his son’s high school, Lassiter, whose foundation also got a $650,000 donation from Cobb Energy.

“The former CEO had many friends, and he did his best to take care of them,” the auditors said. “He did not allow a conflict of interest to stand in his way.”

Meanwhile, millions more went into firms Brown directed the utility to buy, often on a whim, with no business plan, auditors said. Many of the businesses failed.

Numbers disputed

Auditors said Dean Alford, a former Brown lieutenant at Cobb Energy, received $18 million during his years at the utility, auditors said. His wife, Debbie Dlugolenski Alford, is president of the Georgia Lottery.

Alford, reached Tuesday, disputed much of the auditors’ findings. He said $13 million of the amount the audit said he got actually went to three subsidiaries he ran, not to him personally.

“I didn’t get any compensation from those companies,” he said. He also said a judge approved his purchase of one of those subsidiaries, a consulting business, from Cobb Energy in a “transparent process.” He said his participation in Brown’s real estate projects was above-board and created no conflicts of interest.

“I’ve done a lot of investments with a lot of business associates,” he said. The audit “doesn’t say that I’ve done anything wrong. It doesn’t say I have any conflicts.”

The auditors, however, said Brown’s projects “wove a tapestry of conflicts of interest” that harmed the utility and rendered its managers and advisers unable to make objective business decisions or recommendations.

Liz Coyle, executive director of Georgia Watch, a consumer group, said the audit spotlights a problem with customer-owned electric power co-ops that are not regulated by the Georgia Public Service Commission. The co-ops aren’t required to hold open meetings or disclose much information to members, she said.

“We think this is further evidence of the need for legislation that would require greater transparency,” she said.

SOURCE: Atlanta Journal Constitution