Court upholds RICO claims against Puerto Rico utility

Judge Jay A. García-Gregory (prd.uscourts.gov)

Judge Jay A. García-Gregory (prd.uscourts.gov)

SAN JUAN, Puerto Rico — A US District Judge overseeing a class-action lawsuit against Puerto Rico Electric Power Authority (PREPA) and the world’s largest fuel oil suppliers for perpetuating an extensive fuel oil fraud has upheld claims that the defendants violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and denied motions to dismiss the suit.

According to Hagens Berman, a consumer-rights class-action law firm, the order from Judge Jay Garcia-Gregory on Tuesday denied motions to dismiss from the majority of the suit’s 20 defendants, allowing RICO claims to continue against PREPA, Shell Oil, Petrobras, Alchem and various other laboratories and fuel oil suppliers.

“This order is a major victory for the nearly 1.5 million PREPA customers who were defrauded through this complex and deeply entrenched scheme,” said Steve Berman, managing partner of Hagens Berman. “Residents and businesses were overcharged to the tune of $1 billion by these corrupt, greedy organizations, and we are pleased that the court agrees that they should be held to answer for their actions.”

It is likely that the court’s ruling will reinforce questions as to the apparent failure of the local FBI office and the US Attorney in Puerto Rico to pursue any investigation into these allegations, especially in the face of a 23-page legislative report released by the government of Puerto Rico on June 24, 2015, which outlines how government officials in Puerto Rico conspired with Wall Street firms to commit $11 billion dollars in financial fraud.

According to the legislative report itself, PREPA paid previous bondholders with capital received from new investors, which is the classic hallmark of a Ponzi scheme.

In the original RICO action, filed February 24, 2015 in the US District Court for the District of Puerto Rico, Puerto Rico residents and businesses accused PREPA and 20 total defendants of perpetuating an extensive fuel oil fraud, resulting in users of electricity in Puerto Rico being overcharged by more than $1 billion dollars for electricity since 2002.

The suit states the defendants received kickbacks and payments for colluding to raise fuel oil prices that were directly passed to users of electricity, by agreeing to use non-complaint fuel oil and falsifying lab tests.

The order from Judge Garcia-Gregory stated, “Plaintiffs’ allegations against PREPA are extensive,” denying PREPA’s motion to dismiss on grounds that it is a co-conspirator with responsibility for inflating the fuel’s price. “Plaintiffs have successfully shown this by alleging that the three groups of participants — the Fuel Oil Supplier Participants, the PREPA Participants, and the Laboratory Participants — all coordinated together for the common purpose of falsifying laboratory results to pass off Non-compliant Fuel Oil as Compliant Fuel Oil.”

Attorneys allege that PREPA – one of the largest public power agencies in the United States – fraudulently agreed to accept millions of barrels of fuel oil that did not meet specifications of contracts between PREPA and its oil suppliers, or specifications set by the EPA. PREPA accepted this non-compliant fuel oil and the laboratories certified the fuel oil as compliant in exchange for kickbacks and commissions from the fuel oil suppliers, according to the complaint. PREPA served approximately 1.5 million customers in 2012.

“I am not surprised to see the courts uphold the RICO lawsuits. I have maintained all along that a second year law student could use the RICO and anti-trust statues to prosecute this criminal enterprise. Collusion between the municipal agencies, the rating agencies and Wall Street’s biggest banks are a mathematical certainty. The odds that all three participants came to the same wrong conclusions are a factor of 107. In other words, it is impossible these are random events,” said Richard Lawless, the CEO of Commercial Solar Power, Inc., a company that was reportedly forced into bankruptcy by what he described as the “bizarre behaviour” of PREPA.

In recent developments in the case, plaintiffs alleged that Alchem, a laboratory named in the suit’s laundry list of defendants, switched its testing methodology to satisfy PREPA on December 31, 2010, and that it used the new testing methodology to falsify test results for every PREPA sample tested after this date. Plaintiffs point to contrasting sample pages of Alchem’s log book dated before the change in testing methodology and after the change, showing the log book page before the change in testing methodology reflects that every sample tested was rendered non-compliant, whereas the two log book pages after the change show that every sample tested was deemed compliant.

“Based on Plaintiffs’ new allegations, the Court finds that Plaintiffs have adequately pled that Alchem committed two or more RICO predicates and thus have alleged Alchem’s participation in a ‘pattern of racketeering activity,’” Judge Garcia-Gregory stated.

The suit seeks to recover out-of-pocket losses, compensatory damages and punitive damages for plaintiffs under the RICO Act and for the disgorgement of profits under the common law of unjust enrichment.

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