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Lawsuits Targeted Board, Cain Over Retirement Fund

Hermain Cain
Chip Somodevilla, Getty Images

Republican Herman Cain served on the board of a Midwest utility company that paid $10.5 million to settle claims it failed to protect the retirement savings of its employees and paid another $26.5 million over claims it manipulated gas prices, potentially embarrassing episodes for a candidate running for president on his business experience.

Cain sat on the board of directors for Aquila Inc., a Kansas City-based utility, from 1992 until it was acquired in 2008 by Great Plains Energy Inc. Employees alleged in a class-action lawsuit that they were pressured into investing their retirement funds and other savings into company stock. Cain has been forced to answer questions on the campaign trail about the lawsuit, which was reported by Mother Jones magazine in May.

Those employees said Cain and other company officials should have warned their employees that the stock was becoming increasingly risky as the firm floundered financially. The workers said the company’s stock should have been eliminated as an investment option in the retirement fund. While Cain sat on the board, Aquila’s stock price dropped from roughly $37.50 in 2001 to less than $5 before the company was acquired seven years later.

Cain denies any wrongdoing and takes credit for helping stave off a corporate bankruptcy.

“There’s a degree of risk in all investments in all companies,” Cain spokesman J.D. Gordon said. “The actions that the board took saved the company.”

Cain shared responsibility for the company’s overall direction as a member of the board. But attorney Fred Isquith, who represented eight workers who started the class-action lawsuit over the employees’ retirement fund, said he was unaware of any evidence showing Cain was more culpable than others on the board. He said the utility was effectively run by members of the Green family, which founded it.

“Could the board have done something? Sure,” Isquith said. “Was it run on a day-to-day basis by the Green family? Absolutely. It was the board’s responsibility collectively, and Mr. Cain was a member of the board.”

Federal records show Isquith has made thousands of dollars in political donations, predominantly to the Democratic Party and its candidates. He said he does not have a preference for a candidate in the Republican presidential primary.

Lawyers for the workers said Aquila started out as a relatively conservative investment. As a traditional utility, the company produced predictable — though not necessarily large — returns and offered a dependable dividend payment.

And the company encouraged its employees to invest. Workers enrolled in the company’s investment plan could buy Aquila stock, among other options. It matched employee contributions into the plan fund with company stock. It granted stock options to nearly all its employees and allowed them to purchase up to $10,000 monthly in stock at advantageous prices. Workers could also use their dividend payments to buy even more Aquila stock at a discount.

The lawsuit alleged that the company sent internal publications and set up meetings where employees were encouraged to invest even more. Starting in 1994, the company’s annual report listed workers whose stock in the firm was worth at least twice their annual pay.

By the middle of 2001, Aquila stock accounted for two-thirds of the retirement plan’s value, lawyers said.

The root of the company’s trouble came when it decided to expand into the energy trading business. The utility, then called UtiliCorp United Inc., started the process of spinning off its trading arm, called Aquila, into a separately traded stock. The timing couldn’t have been worse.

A major blow came with the 2001 collapse of Enron, a major energy trader, in one of the biggest corporate scandals in U.S. history. It led to investigations of shady energy trading practices that, according to federal authorities, included parts of Aquila.

The utility eventually agreed in a settlement with the Commodity Futures Trading Commission to pay $26.5 million over claims that two of its subsidiaries manipulated natural gas prices by providing false prices and other financial details to trade publications. The parent company was the sole or majority owner of those subsidiaries for most of their existence.

A report from the Federal Energy Regulatory Commission identified Aquila as one of several firms that had manipulated energy prices in Western states. A wholly owned subsidiary of Aquila later agreed to pay nearly $76,000 to settle related complaints. The company denied wrongdoing and said it paid to avoid the cost of litigation.

Rocked by the turmoil, Aquila called off plans to spin off its energy trading unit. Its stock price plummeted as the company suffered repeated downgrades to its credit rating and fell under the scrutiny of investigators. It laid off workers to save cash and stopped paying dividends. Company executives announced they would exit the energy trading business and focus on being a traditional utility.

“I feel that they had the knowledge and the ability to know that the company was getting in a shaky position, and it was their responsibility,” Sharon Lee Arr, a former Aquila worker who was laid off, said during a 2005 deposition. “They were to be looking out for the stockholders and it was their responsibility to have invested and done things differently.”

The employees who sued alleged the company did not fully disclose the extent of its problems. Former Aquila worker Robert C. Goodson said employees were shown videos where company executives blamed the stock fluctuations on broader troubles in the market and financial unease following the Sept. 11 terror attacks. He said Aquila stock had been the “foundation of my retirement.”

“It wasn’t just a gradual decline. It was not even close to that,” Goodson said in a 2005 deposition. “That stock dumped fast.”

A lawyer representing the utility quizzed Goodson on why he did not sell off his shares as troubles mounted for the company. At the time, the stock was trading for less than $4.

“At least if you converted it right now you’d be in a profitable position?” Aquila attorney Timothy O’Brien said. “Yeah, make a few bucks,” Goodson said. “I’d be able to buy a 12-pack.”

(Copyright 2011 by The Associated Press. All Rights Reserved.)

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