BlackRock and Vanguard are the top two managers of index funds in American finance. The third most powerful player in index funds is Boston-based State Street. Index funds have revolutionized the investment world to the point that Bloomberg calls the top firms "The Big Three . . . the most important players in corporate America, whether they like it or not."
How did this happen? Bloomberg explains: "The index fund is one of a handful of unambiguously beneficial financial innovations. Before it caught on, investors routinely paid sky-high fees to active stockpickers who often delivered subpar returns. The near-universal popularity of index funds puts them up there with Social Security, Stevie Wonder, and streaming TV."
That makes "The Big Three" extraordinarily influential. And now, two of them -- BlackRock and Vanguard -- are about to become players in the evolving Southern Company financial-fraud scandal that is rocking the energy sector in Alabama, Georgia, Mississippi, Florida, and beyond. How could that happen? Longtime Alabama attorney and entrepreneur Donald Watkins has a plan to make it happen, as he explains in an article at his donaldwatkins.com Web site. Under the headline "Investor Guide to Southern Co.’s Fraud Scheme, Watkins writes:
I am preparing an annotated investor guide to the Southern Company’s accounting-fraud scheme and racketeering enterprise for delivery to the Vanguard Group and BlackRock. I expect the CEOs of these regulated investment companies to promptly report the accounting-fraud schemes and racketeering activity contained therein to the SEC, Nuclear Regulatory Commission, and U.S. Department of Justice in Washington.
Vanguard and BlackRock may have a greater interest in protecting shareholder value in the Southern Company than the utility company's senior management executives, the SEC, or the Department of Justice (DOJ).
The executives at the Southern Company are conflicted and compromised. The SEC’s integrity and adherence to the law was judicially assessed by a federal judge in 2003 and found to be sorely lacking.
The Department of Justice appears to be weak, ill-equipped to prosecute massive accounting fraud by a New York Stock Exchange Company the size of the Southern Company, and weaponized to go after January 6th insurrectionists and small-time street criminals. Instead of prosecuting major Wall Street crooks, the Department of Justice simply allows them to pay fines and penalties, as they continue on with their business activities and crime sprees. These companies avoid criminal prosecutions because they are “too big to prosecute.”
If the Southern Company, SEC, and DOJ -- under their current management -- are weak, Watkins intends to go around them, by heading straight to the top. Is that an audacious plan? Maybe, but Watkins never has been one to shrink from a challenge. This is the guy who, after all, sought to buy several major-league baseball teams -- the Tampa Bay Devil Rays, Minnesota Twins, California Angels, and Montreal Expos, and also pursued the St. Louis Rams of the National Football League.
The CEOs of BlackRock and Vanguard are the equivalent of rock stars in the financial world-- and Watkins says they likely have a strong interest in stamping out financial fraud. Watkins provides background on the CEOs and their companies:
Institutional investors own 63% of the Southern Company. The two largest institutional investors in the Southern Company are:
(a) The Vanguard Group, Inc., which is an American registered investment advisor based in Malvern, Pennsylvania. Vanguard is headed by CEO Tim Buckley. In 2022, Vanguard had $8.1 trillion in assets under management. Vanguard owns 8.7% of Southern Company’s stock.
(b) BlackRock, Inc., is a New York-based multinational investment company. BlackRock is headed by CEO Larry Fink. Black Rock has $10 trillion in assets under management. As of November 28, 2022, BlackRock owned 7% of the Southern Company’s stock.
Since January 27, 2023, we have published an exclusive series of articles exposing the Southern Company's operation of an interstate racketeering enterprise and accounting fraud scheme for at least the past 10 years. A lot of the fraud and racketeering has been documented in the handwritten notes of Southern Company vendor Matrix, LLC -- which is owned by Tuscaloosa, Alabama, “dirty tricks” operator, Joe Perkins.
The accounting fraud component of the racketeering enterprise includes acts of bribery, extortion, public corruption, price-fixing, money laundering, witness tampering, obstruction of justice, and anti-competitive market conduct.
As a criminal-defense attorney, Watkins had a front-row seat for the HealthSouth accounting-fraud trial of 2003. He says the current Southern Company scandal dwarfs the HealthSouth case in size and scope:
Using the $2.7-billion accounting fraud scheme at HealthSouth (from 1996 to 2002) as a yardstick for measurement, the Southern Company’s multiyear accounting-fraud scheme is 10 times bigger than HealthSouth’s. What is more, the scheme borrowed heavily from HealthSouth’s accounting-fraud playbook of artful deception, material omissions, and old-fashioned hoodwinking.
As the lead defense attorney who successfully defended former HealthSouth CEO Richard Scrushy on all 85 felony counts related to his accounting-fraud criminal case, I am intimately familiar with a litany of strategies, plans, and techniques used by major Wall Street corporations to implement and conceal massive accounting-fraud schemes.
The accounting-fraud aspect of the Southern Company’s racketeering enterprise arose from massive cost overruns associated with two construction projects: (a) the “clean coal” plant in Kemper, Mississippi, which was $4.5 billion over budget, and (b) the ongoing construction of Units 3 and 4 at the Vogtle Nuclear Plant in Waynesboro, Georgia, which are $21 billion over budget.
The Southern Company and Georgia Power Company successfully concealed the accounting-fraud scheme from three co-owners (i.e., the Municipal Electric Authority of Georgia, Oglethorpe Power Company, and City of Dalton Utilities) of the Vogtle plant.
The Southern Company and Mississippi Power hid the accounting fraud from oversight entities associated with the Kemper project.
The deceptive shuffling of internal funds was a prominent feature of the Southern Company scheme, Watkins says:
In furtherance of the accounting-fraud scheme, the Southern Company developed and implemented sophisticated techniques to siphon money out of its regulated affiliates (e.g., Alabama Power Company, George Power, Mississippi, etc.) and funnel this money through non-regulated entities (e.g., Southern Company Services, Southern Nuclear Operating Company, etc.) back to the Southern Company to fill the financial “hole” caused by the cost overruns at Kemper and Vogtle.
The schemes, strategies, and techniques for backfilling this multibillion financial “hole” evaded detection by the Southern Company’s outside auditors, Deloitte & Touche, LLP, the entire time Deloitte audited the company's “cooked” financial books and records.
In 2016, the U.S. Securities and Exchange Commission (SEC) had an opportunity to detect the Southern Company’s accounting-fraud scheme while investigating cost overruns at the Kemper project. The Commission’s Atlanta Regional Office failed to detect this fraud because it was too busy pursuing minor cases and targeting “political” adversaries of the Southern Company and its affiliates for investigation. The officials in charge of investigations and civil-enforcement proceedings in the SEC’s Atlanta office during the Southern Company’s accounting fraud period were thoroughly discredited by one federal judge in 2003.
Watkins sees signs that an effective cover-up tool might be in play right now at Southern Company:
Confidential news sources tell my news team that the Southern Company may be in the midst of another merger and acquisition (M&A) transaction right now to (a) cleanse its financial books and records of the existing accounting fraud, to the extent possible, and (b) pump up the company's stock prices as CEO Tom Fanning departs the company at the end of March.
The company's February 15, 2023, 10-K filing discloses the possibility of M&A transactions in the vaguest terms in several sections of the financial report. These sections are lawyer-written "fig-leaf" provisions that are designed to provide pretextual "cover" for an M&A transaction, should one or more of them occur.
Often, M&A transactions provide attractive and effective opportunities to conceal accounting fraud. This technique is taken straight out of the HealthSouth accounting-fraud playbook. Using this technique, the accounting fraud and bad conduct can be moved out of the SEC registrant entities (i.e., Southern Company, Alabama Power, Georgia Power, Mississippi Power, Southern Power, Southern Company Gas) and placed in the Southern Company’s non-regulated entities (i.e., Southern Services Company, Southern Nuclear, Power Secure, Southern Telecom, and Southern Link) to evade detection by the Vanguard Group, BlackRock, other large institutional investors, Wall Street analysts, and a potentially reawakened SEC.
If and when the stock prices plummet due to (a) a subsequent discovery of the accounting-fraud scheme by law enforcement officials, or (b) the Southern Company’s issuance of restated 10-K financial statements, the stock will most likely tank under incoming CEO Chris Womack's tenure at the helm.
That sounds like a scheme to "dump it on the next guy" (who happens to be a Black guy) That would be fitting, given that Southern Company's law firm, Balch & Bingham, has a documented history of dubious actions on matters of race.
Do a number of Southern Company executives have reason to be worried? Yes, says Watkins:
Additionally, each chief executive officer and chief financial officer of a Southern Company registrant who signed a 10-Q and 10-K financial statement during the accounting fraud and racketeering enterprise period may have individual criminal exposure under Sarbanes-Oxley -- the accounting fraud statute that sent more than 18 HealthSouth top executives to prison. This is particularly true for the CEOs of the Southern Company, Mississippi Power Company, and Georgia Power Company who presided over the cost overruns and backfilling of the financial "hole" associated with them.
What is more, the Southern Company/ Mississippi Power received $270 million in federal funds for its Kemper plant during the accounting-fraud period. Based upon an in-depth review of the Southern Company’s 10-Qs, 10-Ks, and other documents during the fraud period, it appears that much of this money was used in a failed attempt to conceal the fraud.
Ironically, in 2021, the Southern Company demolished this “clean coal” construction project that had ballooned from $3 billion to $7.5 billion. It turned out to be a big waste of money.
Finally, Georgia Power, which owns 45.7% of Vogtle, secured federal loan guarantees of $3.46 billion from the U.S. Department of Energy for the construction of Vogtle's nuclear power Units 3 and 4. The loan-guarantee application documents omit any reference to the ongoing accounting-fraud scheme. This omission may subject the signatory officials to federal wire- and mail-fraud charges.
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