SAN FRANCISCO (CN) – After months of quarreling over Pacific Gas and Electric’s liability for sparking destructive wildfires, fire victims joined their former foe Wednesday in fighting to block a group of current and former investors from extracting billions of dollars from PG&E on securities fraud claims.
Lawyers for a proposed class of investors seek to file one massive claim on behalf of all PG&E shareholders who bought stock from April 2015 to November 2018 and noteholders who purchased bonds between March 2016 and April 2018. They claim PG&E misled investors about its commitment to wildfire safety and compliance with state regulations.
The shareholders say PG&E failed to notify those who sold shares before the company filed for bankruptcy on Jan. 29, 2019, of their right to file claims for damages in the bankruptcy case.
At a hearing Wednesday, a lawyer for fire victims argued the shareholders have no right to seek damages from PG&E through the bankruptcy case because their claims are “derivative,” resulting directly from wildfires and not due to the company’s alleged misstatements.
“They weren’t harmed by the misrepresentation until there was a fire that destroyed the company. The damage that they incur is a result of the fire,” said attorney David Richardson, of the Tort Claimants Committee, which represents fire victims.
Representing aggrieved shareholders, attorney Michael Etkin dismissed that argument as specious. He said it was obvious misrepresentations inflated the stock price and tricked investors into paying too much for PG&E stock.
“Stock that was purchased at an average of $55 per share during the class period ended up being worth much, much less because of the failure to disclose and misrepresentations,” Etkin said.
Public Employees Retirement Association of New Mexico was appointed lead plaintiff in the securities class action, which was first filed in June 2018. The case, overseen by U.S. District Judge Edward Davila in San Jose, was automatically stayed when PG&E filed for bankruptcy in January 2019.
PG&E lawyer Stephen Karotkin accused shareholder plaintiffs’ lawyers of strategically waiting several months after a claims-filing deadline was set to bring their motion so they could “prosecute a class action and get the fees associated with that.”
If Etkin and his co-counsel were concerned that shareholders were not notified about their right to file claims in bankruptcy court, an objection should have been filed much earlier, Karotkin argued.
“They wanted to wait and try to gum up the works to extract a settlement,” Karotkin said.
PG&E argues the court should deny the investors’ motion because the shareholder class was not certified before PG&E declared bankruptcy, former shareholders were likely notified about the bankruptcy case through a massive advertising campaign, and granting the motion would adversely affect the effort to get PG&E out of bankruptcy by a state-imposed deadline of June 30, 2020.
Granting the motion will also require the judge to determine the value of the shareholders’ claim before financing can be secured to bring the company out of bankruptcy, PG&E attorney Richard Slack argued.
The financing will come from existing equity holders, who will “need to know how much they’re diluted by a big class seeking billions of dollars in damages,” Slack said.
Attorneys for shareholders countered that if they cannot file one massive claim, PG&E will have to work with banks that handled stock purchases and ensure every person who bought shares during the class period is notified of their right to file a claim. That would take more time and effort, shareholders’ attorney Andrew Behlmann insisted.
“The remedy we’re proposing is infinitely more efficient than anything that’s on the table right now,” Behlmann said.
After two hours of debate, U.S. Bankruptcy Judge Dennis Montali took the arguments under submission.
Also on Wednesday, Montali overruled objections to confidential settlements reached with 18 Tubbs Fire victims who were selected as preference plaintiffs for a state court trial on PG&E’s liability for the 2017 Tubbs Fire. The trial was cancelled after PG&E agreed to a $13.5 billion settlement for all uninsured wildfire claims.
Attorney Rafey Balbanian, who represents over 1,000 Camp Fire victims, argued the secret settlements prevent his clients from learning if the amounts are inflated in a way that will eat into payouts for other fire victims. All payouts must be administered through a limited, $13.5 billion trust, equally funded by cash and liquidated stock in the reorganized PG&E corporation.
Montali assured Balbanian that his “fears are not founded.” A formula for equitably distributing funds from the trust will ensure “each victim is compensated properly,” the judge said.
PG&E lawyers on Wednesday also attempted to address concerns raised by California Gov. Gavin Newsom, who blasted the company last week for failing to alter its bankruptcy plan in a way that would comply with Assembly Bill 1054 and allow it to access a $21 billion insurance fund to protect it from future wildfire liabilities.
“It has to be completely reimagined, a completely transformed company,” Newsom said during a Public Policy Institute of California event in Sacramento on Wednesday. “Its culture has to change. Its mindset has to change.”
Newsom has previously said he wants a “more qualified and independent” board of directors, more capital to invest in fire prevention and stricter enforcement mechanisms to ensure PG&E meets safety improvement goals.
Karotkin told Montali on Wednesday that PG&E is engaged in “constructive efforts” with the governor’s office, adding he believes the company will “be able to resolve those concerns.”
According to Karotkin, the company plans to file an amended reorganization plan by the end of this week. He also proposed filing a draft disclosure statement, which will include details on how the $13.5 billion trust for fire victims will be administered, on Feb. 7.