When I report on legal and regulatory filings about the Dragonpipe (the Mariner East pipeline system), I often view it as a service to readers, to spare them the tedium of working their way through long and obscure texts on their own. This is not one of those cases; I hope, after you get a taste of the content, you’ll want to read this one yourself.
On June 15, 2020, a law firm filed a class-action suit on behalf of Energy Transfer investors. It’s an unusual document from several perspectives. Dragonpipe Diary readers will not be surprised at its allegations: that ET investors lost money because ET management misled them, causing the value of the stock to drop when the truth emerged. There have already been several lawsuits of this kind. This one differs primarily in the degree of detail it provides and the remarkably good quality of the writing. It’s almost 200 pages long, but I predict that if you start reading it, you’ll have a hard time stopping. You can read it here.
The case. First let me summarize the basics. If you boil it down, the heart of this case is contained in a table in paragraph 432 (172 pages into the document), listing six instances in which ET management knowingly provided investors with false information, and when the truth came out (which the lawsuit calls a “corrective event”), the stock dropped. In each case, the drop was more negative than the market as a whole (represented by the S&P 500). The six instances of corrective events are:
- August 9-13, 2018: “Energy Transfer reveals that it will not complete ME2 on time, and will instead seek to achieve reduced flows on the pipeline by joining the 20″ ME2 pipes to 12″ older, existing pipes, thereby creating ‘Frankenpipe’” (ET down 5.6%, market down 1.1%)
- October 27-29, 2018: “The Associated Press reported on Energy Transfer’s failure to disclose key risks associated with Pennsylvania geology, and the Pennsylvania DEP ordered Energy Transfer to cease work on the Revolution Pipeline due to landslides and sinkholes.” (ET down 4.0%, market down 0.7%)
- December 19- 21, 2018: “Chester County D.A. Tom Hogan announces investigation into Energy Transfer, and Reuters disseminates it to the market.” (ET down 5.4%, market down 1.6%)
- August 8-12, 2019: “Chester County charges constables Energy Transfer hired with bribery.” (ET down 4.6%, market down 1.8%)
- November 12- 13, 2019: “Associated Press reveals FBI corruption investigation into Wolf administration’s role in connection with DEP permitting process for ME2.” (ET down 6.8%, market up 0.2%)
- December 3, 2019: “Chester County DA Hogan files criminal bribery and conspiracy charges against Energy Transfer’s head of security in connection with hiring constables for pipeline security.” (ET down 2.0%, market down 0.7%)
Although there is discussion of Mariner East 1 and of the Revolution pipeline explosion, this document deals primarily with misleading information about the construction of Mariner East 2 and 2X.
The “lead” plaintiffs in the case are:
- Allegheny County Employees’ Retirement System (12,300 participants)
- Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge (7,000 participants)
- Denver Employees Retirement Plan (22,500 members)
- International Association of Machinists and Aerospace Workers National Pension Fund (100,000 participants)
- Iowa Public Employees’ Retirement System (368,000 members)
But the lawsuit is “on behalf of all investors who purchased or otherwise acquired Energy Transfer common units between February 25, 2017 and December 2, 2019”.
The defendants are many of ET’s top managers at the time:
- Kelcy Warren (Chairman and CEO)
- John McReynolds (President until October 2018)
- Thomas Long (CFO)
- Marshall (“Mackie”) McCrea (COO, becoming President in October 2018)
- Matthew Ramsey (COO since October 2018)
- Michael Hennigan (Sunoco President until April 2017, then President of the Crude, Liquids, and Refined Products group for ET)
- Joseph McGinn (Sunoco Senior Manager for Public Affairs, becoming Senior Director of Public Affairs for ET in April 2017, then VP of Public Affairs for ET)
The document. I find the lawsuit itself to be unusual in two respects: it is easy to read and follow, and it contains a lot of the evidence which might be expected to be presented only at trial. These features make it interesting reading. It begins with an 11-page “Summary” which lays out many of ET’s transgressions, mistakes, and untruthful communications during its construction of ME2 and Revolution. Some of these are barely (or never) mentioned again in the rest of the document, but they provide a sense of the pattern of indifference to the law and to public safety that has characterized ET’s approach.
The section headings are extensive and present the heart of each part of the case. I can think of no better way to summarize what this case is about than to reproduce the table of contents. Unfortunately, that would take many pages, so here some of the major headings from it. (The subheadings, omitted here, fill in many of the details. If you read no other part of the lawsuit, be sure to read the table of contents.)
SUMMARY OF THE FRAUD
- Energy Transfer Embarked on the Simultaneous Construction of Several Pipeline Projects Through Pennsylvania
- Energy Transfer Was Motivated to Rush Through the DEP’s Approval of the ME2 Permits to Avoid Public Criticism of the Pipeline’s Serious, Undisclosed Risks to Human Life
- Energy Transfer Obtained the ME2 Permits Through Intimidation and Coercion of Government Officials Despite the Applications Being Facially Deficient
- Energy Transfer Ruins Lisa Drive, Bribes Government Officials to Intimidate Local Residents and Creates the “Frankenpipe” (Which Causes Delay and Reduces the ME2 Throughput)
- Energy Transfer’s Revolution Pipeline Explodes, Rendering the Revolution Pipeline Inoperative to this Day
- Energy Transfer’s Reckless Pipeline Construction Resulted in Scores of Additional Violations, Regulatory Scrutiny and Consent Orders
- November 2019: The FBI Launches Its Investigation into the Pennsylvania Governor’s Office Related to the Permitting Process
- Despite Energy Transfer’s Prior Claims of Purported Pipeline Completion, the Intended ME2 Pipeline Remains Unfinished to this Day
The lawsuit asks for a jury trial and for damages “in an amount to be proven at trial”.
Much of the content of this lawsuit will be familiar to Dragonpipe Diary readers, but there are some sections with information that was new (to me, at least). In particular, the sections about the ouster of DEP head John Quigley and about financial analysts’ revelations concerning the Frankenpipe had details I hadn’t encountered elsewhere. I will be writing about those in later posts.
If you’re ready for some interesting reading, turn off your phone, get comfortable, and follow the link in the second paragraph of this post.