Prosecutors: Cobb Energy saga started with broken promise

By Margaret Newkirk

The Atlanta Journal-Constitution

In September 1997, the chief executive of non-profit electric cooperative Cobb EMC made a pledge to a group of customers gathered at its annual membership meeting.

CEO Dwight Brown had formed a new for-profit affiliate called Cobb Energy just a few days earlier, according to a bill of indictment handed down by a Cobb County grand jury Thursday.

He assured the crowd that it wouldn't hurt their electric cooperative. “We will not allow Cobb EMC to subsidize this new company,” he said. "We make this pledge that Cobb Electric Membership Corporation will not subsidize this other company, and this other company is created to work for you and to work for Cobb Electric Membership Corporation.”

The speech kicks off a blistering narrative in the 31 count indictment of Brown, who has been the chief executive and public face of both Cobb EMC and the increasingly high-profile Cobb Energy ever since.

Less than a year later, the indictment said, "Cobb EMC was subsidizing Cobb Energy to the tune of millions of dollars per year, a situation that continued for a decade."

Brown now stands accused of racketeering and theft from the co-op he has led for nearly two decades. One of the biggest co-ops in the country, Cobb EMC serves about 200,000 customers in suburban Atlanta.

Thursday's indictment followed a two-year  investigation by the District Attorney for Cobb County, Pat Head, and is focused on issues first raised in an 2007 investigative report in The Atlanta Journal-Constitution. The charges carry maximum sentences of between 10 and 20 years apiece.

Brown's attorney, Craig Gillen, and Cobb EMC’s board of directors both strongly defend Brown.  He “is innocent of these charges and we intend to fight each and every charge in court, " Gillen said, adding that the transactions at the heart of the indictment were legitimate and done with the co-op board's approval. A board statement said it "firmly believes that Mr. Brown committed no crimes."

The case is complicated, but prosecutors essentially say Brown indirectly enriched himself through his operation of, and stock in, Cobb Energy at the expense of Cobb EMC and its customers.

Barring a deal, a jury will decide whether Brown carried out legitimate transactions or conspired to steal assets from Cobb EMC and its customers.

The indictment shows that prosecutors are relying on two main assertions: that assets flowed from Cobb EMC to Cobb Energy and indirectly to Brown; and that the co-op's members were misled about the existence and effect of the transfers.

It began, according to prosecutors, shortly after Brown's speech at the 1997 annual meeting.

"Contrary to the promises to Cobb EMC's members, Cobb EMC promptly entered into an operating agreement with Cobb Energy, transferring Cobb EMC’s entire workforce to Cobb Energy and obligating Cobb EMC to pay Cobb Energy a surcharge – on the combined weekly salaries and fringe benfits of what were now Cobb Energy’s employees," the indictment says.

The contract terms were not disclosed to the co-op's members, the indictment said.

Cobb EMC transferred its meters to Cobb Energy for $10 million, and Cobb Energy began operating the co-op's business for a mark-up that would eventually reach 11 percent.

Brown has explained the creation of Cobb Energy and the asset transfers as a way to both protect the co-op from hostile takeovers and allow diversification into other businesses and sources of revenue.

He began the diversification in 1998, when prosecutors said Cobb Energy used Cobb EMC's assets -- its customer lists and market data -  to enter into a deal with SCANA Energy to sell natural gas. But Cobb Energy didn't pay for those assets as it should have, the indictment says.

Cobb Energy got more than $60 million in SCANA revenue over the next 11 years; Cobb EMC got none.

"Thus, less than a year after (Brown’s) express promise to Cobb EMC’s members that Cobb EMC would not subsidize Cobb Energy, all of Cobb EMC's employees were working for Cobb Energy, Cobb Energy was being paid a premium to employ Cobb EMC's former workforce, Cobb EMC's meters were owned by Cobb Energy, and all of the revenues from the SCANA contract were flowing to Cobb Energy," the indictment says.

Cobb EMC was added to the SCANA contract in 2005 but still got no revenue. Then it got hit for an early termination fee when Cobb Energy ended the SCANA deal. According to the indictment, Brown "directed that Cobb EMC pay Cobb Energy approximately $3.4  million in connection with the termination of the SCANA contract, even though Cobb EMC had never received any revenue from that contract."

Co-op customers were not told any of this, the indictment says.

Brown also concealed other facts from co-op members, the indictment says,  including Brown's $300,000 separate salary from Cobb Energy and $3 million in loans made by Cobb Energy and Cobb EMC to Brown and his wife. The loans were forgiven. The Browns paid no principal and no interest, and used the proceeds to buy $3 million in Cobb Energy stock. None of that was disclosed to co-op members, the indictment says.

The  stock paid the Brown's $256,000 in dividends annually, or $1.8 million between February 2002 and December 2008, when a civil suit settlement shut the arrangement down.

The indictment says that money was also stolen from Cobb EMC and its members. Co-ops are supposed to allocate excess revenues at the end of the year to their customers, and typically pay back a portion of it it back annually.

That money went instead to Cobb Energy, the indictment said: Despite years of representations to the contrary, it said, Cobb Energy lost money every year from 1998 through 2005.

Without the SCANA contract revenue and mark-up on its agreement with Cobb EMC,  "Cobb Energy would have failed and Cobb Energy could not have paid Brown millions of dollars in salary and other compensation, (paid) dividends on his preferred stock and forgiven the principal and interest on the loans."

The indictment says Brown deliberately misrepresented that reality to co-op customers.

The indictment quotes from reports to members: “In addition, the formation of Cobb Energy, our for-profit affiliate, is providing additional revenues, which are having a positive impact on Cobb EMC," the company said in one. Another statement said Cobb Energy "is being financed independent of Cobb EMC."

The indictment also quotes from fervent defense from Brown made at an annual customer meeting shortly after the AJC's report.

The "non-disclosures and misrepresentation culminated," the indictment said, "with Dwight T. Brown’s false representation to the assembled Cobb EMC members at the 2007 annual meeting, when he stated: ‘I will tell you that we have never, ever done anything without telling you. And if you don’t believe it, go back and dig out all your newsletters, all your annual reports and you will see it's all there.'

"It isn’t," the indictment said.