HELENA - A lawsuit filed in Butte on Tuesday accuses a New York investment bank and a Wall Street law firm of conspiring with Montana Power Co. officials to push for passage of an electric utility deregulation law in 1997 so it could sell its energy assets later.
Those actions, the lawsuit says, led to the ripping apart of Montana Power Co., a Fortune 500 company, which sold all its energy assets and morphed into its telecommunications subsidiary, Touch America, that later filed for bankruptcy in 2003. The company that bought the remaining Montana Power utility assets, NorthWestern Corp., also filed for bankruptcy in 2003. The bankruptcies wiped out the lifetime savings of thousands of shareholders, including a number of current and former employees.
Montana Power executives have adamantly denied since 1997 that they planned to sell off their electricity generation assets when they pushed the electric utility deregulation bill through the 1997 Legislature.
Plan Trust of Touch America Holdings Inc., which is the creditors committee in the bankruptcy of Touch America Holdings Inc., filed the lawsuit against Goldman Sachs & Co., the investment banking firm, and Milbank, Tweed, Hadley & McCloy, the Wall Street law firm, both of which advised Montana Power's executives and directors for many years. Also sued were 10 unnamed "John Doe" defendants, presumably former Montana Power Co. executives, including former Chief Executive Officer Bob Gannon, who's mentioned throughout the complaint.
The lawsuit was filed in state District Court in Butte before District Judge John Whelan. It was filed by the San Francisco law firm of Cotchett, Pitre, Simon and McCarthy and Helena lawyer Mark Baker.
John Harp, a former Kalispell legislator and utility construction business owner who is chairman of the creditors committee, said the lawsuit will seek undisclosed millions of dollars, plus punitive damages. Among the Montana creditors that are included in Plan Trust of Touch America Holdings are Harp's Jode Corp., Rocky Mountain Contractors, now a subsidiary of MDU Resources, and Oasis Telecom.
This is the second major lawsuit filed over the breakup of Montana Power. A $3 billion class-action lawsuit that was filed in 2001 by investors against Montana Power remains active in federal court, with a partial settlement with Touch America needing approval from two bankruptcy courts, said Frank Morrison of Whitefish, one of the attorneys. Other aspects of the case are pending.
The two lawsuits ultimately will be mutually beneficial to each other, Morrison said. The plaintiffs' attorneys in the first lawsuit will able to gain access to some documents from the creditors committee that they weren't able to obtain earlier, Morrison said. At the same time, attorneys for the lawsuit filed Tuesday will be able to use the evidence that Morrison and the other attorneys developed in the first case.
As early as the mid-1990s, Goldman Sachs officials made presentations advising Montana Power officials to sell its generation assets, the hydroelectric dams that had provided the state with cheap power since the early part of the last century, and its more recently built coal-fired power plants, the new lawsuit said.
"During this time period, all the assets of Montana Power were potentially on the table for sale, and Goldman, Sachs was advising Montana Power that there was time pressure to dispose of these assets, especially generation assets, as more and more utilities were dumping similar assets into the market place," the complaint said. "The theory perpetrated by Goldman, Sachs and Gannon, in particular, was that a window of opportunity presented itself and if Montana Power did not dispose of its generation assets, it would potentially fail."
Although there was initial resistance among MPC officials to the sale of the core assets, it "was overcome by the greed of the potential for Montana Power to become a high-flying telecommunications company," the lawsuit said.
The investment bank and law firm concealed the profound implications such a move would have on customers, employees, creditors and shareholders and hid "the enormous financial gains" the two New York businesses stood to make.
Neither Goldman Sachs nor Milbank, Tweed responded to an attempt by the Lee Newspapers State Bureau to get a response, nor did Touch America.
Gannon and the two New York firms used the 1997 deregulation "as part of their scheme to divest Montana Power from its energy assets," the lawsuit said. The 1997 Legislature passed an electric deregulation bill pushed by the company, and Gov. Marc Racicot signed it into law.
The law was touted as a move to provide wholesale and retail customers with a choice of where they bought their electricity, the complaint said. In reality, however, the New York firms and Gannon and others "intended to use the legislation to facilitate the already developed plan to divest the energy assets, and this was concealed from the customers, employees, creditors, shareholders and the public," the complaint said.
Later in 1997, Montana Power announced it would sell its dams and coal-fired plants. The announcement shocked and angered Montanans.
"Within a mere three-year period of time, all under the advice of Goldman, Sachs and Milbank, Tweed, Montana Power disposed of all of its energy assets, which caused the ultimate downfall of Montana Power," the complaint said. "During this time, Goldman, Sachs earned $20 million in fees and Milbank, Tweed also earned millions of dollars in fees."
Goldman Sachs knew as early as 2000 that Montana Power's divestiture plan was a bad idea. The lawsuit quotes an e-mail from Lee Michael to Michael Munson, both of Goldman Sachs, describing the Montana Power situation:
"This is going from bad to worse - a complete cock up in marketing is happening before our very eyes. If I had a gun I would now blow my brains out - we are whistling in the wind - why get professional advice if all you want to do is to go and screw it up all on your own … ."
Later, in the same e-mail string, Michael said, "At least we're not on the utility team for this crap. I wouldn't want to sell this company in several pieces."
Both Goldman Sachs and Milbank, Tweed knew that Montana Power was required to give notice and obtain the consent of two-thirds of its shareholders to sell its assets, but they encouraged Montana Power "to ignore these requirements to have the sales occur more quickly and without public scrutiny," the complaint said.
What's more, the lawsuit accused Goldman Sachs of "playing both ends against the middle." At the same time Goldman Sachs was advising Montana Power to sell its energy assets, it had formed separate partnerships with other businesses to buy "the very type of generating assets that Montana Power was selling," the complaint said.
The lawsuit accused the two New York firms of making false and misleading statements to Montana Power and concealing other information about selling its energy assets.