FirstEnergy defendants call out judge blocking derivative deal. He is not amused.

REUTERS/Chip East

Aug 22 - With U.S. District Judge John Adams of Akron on the verge of appointing new shareholder lawyers to resume litigating derivative claims against directors and officers of the Ohio utility FirstEnergy Corp, FirstEnergy board members tried Saturday to halt, at least temporarily, the revival of a case they regard as settled.

Adams responded on Monday afternoon with an order accusing the FirstEnergy defendants of "numerous misrepresentations of fact."

The judge rejected defendants' assertion that he "injected" false information into the record of the case by engaging in extrajudicial internet research. He also suggested that he's not going to allow FirstEnergy defendants to continue to obstruct depositions of former top executives ensnared in a bribery scheme in which company officials paid Ohio lawmakers millions of dollars to enact favorable legislation.

"The belated concerns expressed by these FirstEnergy defendants appear to be yet another attempt to delay discovery in this matter," Adams wrote. "None of the numerous officers and directors alleged to have directly participated in the bribery scheme have ever been placed under oath and compelled to truthfully answer questions."

The Akron judge, as you surely recall, has balked at a proposed $180 million global settlement of shareholders’ derivative claims against FirstEnergy board members who allegedly failed to avert the bribery scheme.

Even though a different Ohio federal judge, U.S. District Judge Algenon Marbley of Columbus, has granted preliminary approval to the proposed global settlement and held a final fairness hearing on the deal earlier this month, Adams said last week that he intends to appoint two shareholder firms, Markovits, Stock & DeMarco and Abraham, Fruchter & Twersky, to relaunch discovery in a parallel suit he previously refused to transfer to Marbley.

FirstEnergy defendants sought on Saturday to slow down the Adams whirlwind. A special litigation committee of the FirstEnergy board teamed up with several individual defendants in the derivative suit in a motion demanding that Adams disclose all of the communications he has had with the shareholder firms that responded to his call for new lawyers to take over the case. The motion also sought disclosures from the Akron judge about his receipt of a purported shareholder letter that Adams has cited in criticizing the proposed settlement and about Adams’ independent research surrounding the deal.

Until the judge responds to these disclosure demands, the motion said, Adams should refrain from taking any additional action in the case.

“The parties file this motion reluctantly,” the motion said. “However, in light of the known ex parte communications; the specter of others presently unknown to the parties; the threat of future ones; and the court’s independent investigations, the parties are left with no choice but to seek full disclosure to ensure fair and open proceedings here.”

The motion was filed by the special litigation committee’s counsel from Debevoise & Plimpton and by Jones Day and Ballard Spahr, which represent individual defendants. I reached out to a half-dozen lawyers who signed the motion but none got back to me. Nor did the shareholder lawyers selected by Adams to revive the case, Jeffrey Abraham and Michael Klein of Abraham Fruchter and Terence Coates of Markovits. The shareholder firms that negotiated the proposed $180 million settlement — Bernstein Litowitz Berger & Grossmann, Saxena White and Cohen Milstein Sellers & Toll — also didn’t respond to my email query about the new motion.

Adams has criticized those original shareholder lawyers since the parties first notified him and his Columbus colleague Marbley about the deal last February. The Akron judge began floating the idea of replacing lead shareholder counsel back in March, when he first cited a letter he said he had received from a FirstEnergy shareholder who questioned why shareholders were not demanding the return of compensation paid to FirstEnergy's top executives and were not pursuing claims against the company's auditor.

Saturday’s motion asserted that the shareholder letter contained several inaccuracies, including the misidentification of Ernst & Young Global Ltd as FirstEnergy’s auditor. (The auditor was PwC LLP.) Adams docketed part of the letter, which appears to be an email, but did not reveal information about the writer’s identity or even how the letter, which does not appear to have been addressed to him, came to his attention. Saturday's motion requested additional disclosures about the letter, given that Adams read much of its contents into the record of a hearing in March.

Adams said in Monday's order that he has already provided "the full sum and substance" of the letter. If FirstEnergy defendants wanted more information about it, he said, they should not have waited several months to ask for it.

Adams formally called for applications from new shareholder lawyers in July. Five firms responded. The judge asked all of them to submit detailed discovery plans, which he pledged to file in the docket.

The FirstEnergy defendants' motion noted that only the Markovits plan had been docketed. The motion argued that the federal Code of Judicial Conduct and precedent from the 6th U.S. Circuit Court of Appeals requires Adams to reveal all of his communications with the applicants, including his interactions with a firm that withdrew its application after discovering a potential conflict. (As I reported last week, Adams did not initially identify the potentially conflicted firm.)

On Monday, Adams confirmed that Boies Schiller Flexner withdrew because of a potential conflict. He also docketed the other applicants' discovery plans, which he said he would have filed earlier but for a case of COVID.

Adams rejected the FirstEnergy defendants' assertion that he appeared to have drawn an erroneous conclusion, based on independent internet research, about the company's efforts to claw back compensation from former executives caught up in the bribery scandal.

The defendants said Adams seemed to have relied on a 2021 report from a Pennsylvania public utility commission when he concluded that FirstEnergy did not plan to seek to recoup millions of dollars paid out to those executives. In fact, according to Saturday’s motion, the Pennsylvania report involved only company subsidiaries that are not involved in the derivative case. And contrary to Adams' assertion that the company has failed to seek clawbacks, the motion said, FirstEnergy has already demanded the return of $56 million from its former CEO Charles Jones.

In Monday's response, Adams said he did not engage in an improper independent investigation but simply took judicial notice of a public document from a state commission. "The court has done nothing other than exercise its authority to attempt to move this matter forward as required by the civil rules," he said, insisting that he has been "transparent at every stage of this litigation, utilizing a public forum at all times to seek information from the parties."

Saturday's motion did not request Adams’ recusal. But the filing did hint at potential next steps, citing U.S. Supreme Court precedent that describes reliance on extrajudicial research as a basis to establish a judge’s disqualifying bias. Can a mandamus petition or a recusal motion be far behind?

Read more:

Boies Schiller tripped up in apparent conflict in FirstEnergy derivative suit

FirstEnergy settlement be damned, judge orders new plaintiffs' lawyers

One judge approved a $180 million settlement with FirstEnergy. Another won’t let it go

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.