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| Robert Bentley and Rebekah Caldwell Mason |
The HealthSouth accounting-fraud trial of 2003 and the ongoing Southern Company/Matrix LLC scandal (with roots in the North Birmingham Bribery case) have a number of similarities. Most alarming, perhaps, is the failure in both of well-known auditing firms to catch the fraud they were required to find, writes a longtime Alabama attorney at his Web site, donaldwatkins.com.
For good measure, Watkins shines a spotlight on an Alabama politician who clearly was connected to the North Birmingham Bribery Scandal but has largely escaped scrutiny in its aftermath -- as alleged racketeering activities involving Southern Company, Alabama Power, and Matrix LLC have come to light. We are talking about former Alabama Governor Robert "Luv Guv" Bentley, who was in office when the North Birmingham scheme took flight. Watkins also shines light on Bentley's married paramour, Rebekah Caldwell Mason. (More on Bentley and Mason in a moment; see area highlighted in yellow below.)
Watkins, who had a front-row seat as a criminal-defense lawyer, says Ernst & Young (E & Y) failed spectacularly in its oversight role for HealthSouth. Under the headline "Deloitte & Touche Audits of Southern Company Under Fire, Watkins writes that E & Y's failure is reminiscent of what is happening now with Deloitte in the Southern Company case, which includes Alabama Power as a central player.
Watkins himself has become a central player, having filed a criminal RICO complaint with the U.S. Department of Justice and a complaint with the U.S. Nuclear Regulatory Commission, alleging Southern Company and its affiliates are not fit to own and operate the Vogtle Plant in Georgia.
Deloitte's somnolent actions as a "watchdog" over Southern Company are drawing heavy attention from Watkins at his Web site. He writes:
The Southern Company's long-running racketeering enterprise was brazen. It was exposed for the first time in criminal complaints filed with the U.S. Department of Justice's (DOJ) Criminal Division on January 27, 2023, by several victims of the racketeering activities.
It appears that the racketeering enterprise and fraud schemes were successful because the auditing firm of Deloitte & Touche, LLP, permitted the Southern Company and its affiliates to pay participants in the scheme, such as Alabama-based Matrix, LLC, and its owner, Joe Perkins, tens of millions of dollars “without invoicing.” Often, these payments were spread across multiple Southern Company affiliates to avoid detection. On many occasions, these payments were subsumed within the artificially inflated invoices submitted by the company’s law firms and other major vendors.
Funds for bribing public officials were usually laundered through fake charities and third-party vendor payments. These payments were routinely handed out, much like a drug dealer supplies his/her junkies.
The fraud and racketeering schemes used by the Southern Company should have been detected by Deloitte & Touche during the audit process. The responsibility for assessing whether these illegal activities were "material" also fell on Deloitte. Both the Southern Company and Deloitte should have disclosed this illegal activity in the Southern Company's 10-Q and 10-K filings over the course of the past 10 years.
In assessing "materiality," several factors come into play. Chief among them is the intentional misstatement or concealment of unlawful transactions.
Like HealthSouth's accounting-fraud scheme, the Southern Company's racketeering enterprise, fraud scheme, and illicit payments to key participants were concealed from scrutiny through a litany of billing, accounting, and money-laundering tricks.
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| Joe Perkins notes |
This disclosure requirement is the reason why Florida Power & Light and NextEra Energy came clean in their January 25, 2023, Form 8-K filing about their shady business dealings with Matrix and Perkins in Florida.
As of this date, the Southern Company has not come clean about its multi-billion-dollar fraudulent conduct with the Kemper project or the racketeering activities that have forced the company to seek a non-prosecution agreement with the DOJ.
Is this an instance of history repeating itself? That seems to be the case, as Watkins provides background on the HealthSouth matter -- and the importance of auditors in fraud cases:
HealthSouth operated a $2.7-billion accounting fraud scheme from 1996 to 2002. HealthSouth was exposed for "cooking its financial books and records" only after a former chief financial officer of the company became a "whistleblower" who reported the fraud to federal authorities in 2002.
Five different HealthSouth chief financial officers committed accounting fraud by following a simple three-step plan:
HealthSouth officials compared their actual financial statements to the expectations of Wall Street analysts and investors.
These CFOs instructed subordinate employees to manipulate the financial books and records of the company to achieve the desired results.
HealthSouth generated fake documents to backfill the holes in the company’s false financial statements.
Ernst & Young (E&Y), the company that audited HealthSouth's financial records, was in a position to detect the fraud, but it did not do so. In 2009, E&Y paid dearly for this mistake by forking over $109 million to HealthSouth shareholders to settle their lawsuit against E&Y.
The Southern Company and its affiliates ran an interstate racketeering enterprise for many years. This racketeering scheme included acts of bribery, extortion, money laundering, obstruction of justice, witness tampering, and antitrust conduct.
What is more, an article in the Journal of Forensic and Investigative Accounting (Vol. 15: Issue 1, January-June 2023) by Amanda M. Grossman, Steven D. Grossman, and D. Larry Crumbley describes a multi-billion-dollar Southern Company fraud scheme that was perpetrated by the utility giant in connection with the construction of, and cost overruns associated with, its Kemper County, Mississippi, "clean coal" power plant. This article is well-written and riveting.
Southern Company's Code of Ethics should have helped forestall any fraudulent activities. But in the real world, Watkins writes, such a code can prove to be "worthless":
The Southern Company's payments to participants in the long-running, multi-state racketeering scheme violated a written Code of Ethics, that states:
“All business records and accounts will be complete, accurate and based on proper accounting principles. . . . Any attempt to conceal, omit or make false entries in the records will not be tolerated.
We maintain appropriate internal controls to prevent and detect fraud. We will make full, fair, correct, and timely disclosures in financial reports and other public communications.”
Despite this Code provision, vendor payments “without invoicing” and money-laundering activities became the basic tools for implementing and concealing the company’s fraud and racketeering schemes.
How did Deloitte audit tens of millions of dollars paid by the Southern Company, Alabama Power Company, and Georgia Power Company to vendors like Matrix and Perkins for clandestine work that did not require invoicing?
What did Deloitte rely upon to determine whether the documentation for these payments was complete, accurate, and based on proper accounting principles?
Where are the deliverables that supported the highly-questionable payments to Matrix and Perkins during Deloitte's auditing process?
The Code of Ethics further states that:
“We do not offer or provide gifts or entertainment of any type, including meals and transportation, to any government employee or public official in the United States or internationally unless doing so is appropriate and legal. We never offer bribes or kickbacks.”
Despite this anti-bribery provision, records show that Alabama Power Company contributed $30,000 of the $360,000 used to bribe former state representative Oliver Robinson in 2018 in what is known in Alabama as the "North Birmingham Bribery Case." Alabama Power's law firm, Balch & Bingham, contributed to the bribery fund, as well.
As for Bentley and Mason, Watkins suggests their problems might not be behind them:
Alabama Power Company officials also made the company's fleet of private jets available to a host of greedy public officials for impressionable joy-riding with their girlfriends, mistresses, and/or lovers. Additionally, the company paid key vendors to pick up the tab for out-of-town partying for many of these public officials. Alabama Power also financed an illicit love affair between former Alabama governor Robert Bentley and his married mistress, Rebekah Caldwell Mason. (As we've reported previously at Legal Schnauzer, there were early signs that Bentley did not take the requirements of his plea deal seriously, that he had not learned any lessons at all.)
It sounds like Watkins might have some fascinating posts coming down the road. And he does not expect Southern's "Code of Ethics" to deter any wrongdoing. (Note: It's worth remembering that Bentley's plea deal did not require him, and those close to him, to turn over large numbers of documents, ensuring that a world-class stonewall job would ensue. We said at the time that the plea deal was a bad deal for the people of Alabama, keeping the full scope of the Bentley-Mason from being publicly known. Could the stonewalling come back to bite the governor and his lady friend? If serious investigators become involved -- and they uncover multiple instances of Alabama Power underwriting illicit affairs -- that certainly seems possible. Here is more from Watkins:
Lastly, the Code of Ethics describes a duty to act whenever an employee learns of unethical behavior within the company. Here is the Code provision:
“All employees have a duty to act. We must promptly report any suspected violation of this Code, company policies or any applicable laws or regulations.”
Yet, when Brett Wingo, a company employee and "whistleblower," reported a multi-billion-dollar fraud scheme at the Kemper project to CEO Tom Fanning and others within the Southern Company, he was unlawfully fired from his job. Wingo had been warned by Southern Company executives that he was “digging a hole for his career and not to become a martyr.”
Deloitte seems to have stepped into a mud pit and extricating itself might be challenging, Watkins writes:
As was the case with HealthSouth, the crime spree at the Southern Company was out-of-control. It flourished for over a decade.
Deloitte could have detected this crime spree by simply following the auditing standards of the Public Company Accounting Oversight Board (PCAOB). Under these standards, Deloitte was required to perform audit procedures to obtain a “reasonable assurance” as to whether Southern’s financial statements were free from material misstatement, whether caused by error or fraud (PCAOB AS 1001.02: General Principles and Responsibilities).
It appears that the blatant disregard of the proper accounting techniques in composing the Southern Company's financial statements over the past decade led to the complicity of Deloitte in perpetrating a multi-billion-dollar fraud scheme and an interstate racketeering enterprise that ran amok.
Finally, President George W. Bush's Department of Justice came down hard on the perpetrators of the fraud scheme in the HealthSouth case. President Joe Biden's Department of Justice appears to be coddling the perpetrators of the fraud and racketeering scheme at the Southern Company. Biden's DOJ exhibits a "softness" on Wall Street criminals who run multi-billion-dollar fraud and racketeering schemes that is unprecedented in the 21st century.
Why?
Next: Did Deloitte auditors fail to catch Alabama Power's funding of affairs involving politicos and their girlfriends, including "Luv Guv" Robert Bentley and Rebekah Caldwell Mason? What could be the legal implications?
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