$ 25,000.00 worth of personal expenses and political contributions in behalf of Orange & Rockland per year" (Tr. of Plea at p. 14 produced to this Court as part of the pleadings in a related litigation, Sluys v. Gribetz, 842 F. Supp. 764 (S.D.N.Y. 1994).
In her plea to the second charge, Ms. Winikow testified that she entered into an advertising contract with Community Media, Inc. on behalf of O&R and agreed without the consent of her employer to accept a benefit from the advertising contract, "to wit, cessation of negative press coverage -- negative press about Orange & Rockland Utilities, Inc. from another person . . . upon an agreement or understanding that such benefit would influence her conduct in relation to her employer's or principal's affairs . . .."
In her plea to the third charge Ms. Winikow testified that between March 1, 1992 and April 28, 1992, she made a political contribution in behalf of O&R to "The Friends of Sam Colman Committee" in a name other than the true contributor by having Midland Park Graphics, Inc., an O&R vendor, appear to be the contributor, and also print campaign and related material for use at a Colman Committee fundraiser valued at $ 2,379, the expense of which was paid by O&R. Under the same charge she admitted a further contribution under the name of Midland Park Graphics, Inc. by having that firm issue a check to the Colman Campaign Committee in the amount of $ 1,485 and that Midland Park Graphics was reimbursed by O&R for the amount of that check. Furthermore, she admitted that a further political campaign contribution was made under the name of Maxine Epstein, and another by Mark DeBlasio, in each case by having Mr. Silverman, the president of Devotion, Inc., "solicit a third party to issue a personal check", and that she had asked Silverman to get third party checks made out to the Colman campaign as political donations on behalf of Orange & Rockland Utilities, which she describes in her testimony before Justice Meehan as being "the true contributor".
In addition to the diversion of funds of O&R which were disclosed by Ms. Winikow in her plea of guilty, it was disclosed that other payments of a fraudulent nature were made directly or indirectly by others, including defendant CSI, and charged directly or indirectly to O&R in a manner so as to conceal the true purposes of the payments, or the identity of the payer, or both. Some of these payments were illegal and others were not expenses properly chargeable to the utility.
The allegations of fraudulent diversion of funds and fraudulent representation to the ratepayers and the rate regulators contained in the amended complaint are far broader than the information uncovered by the Rockland County Grand Jury investigation. Included are claims of affirmative misrepresentations made after the wrongdoing came to light, as to the nature, extent and amount of the unauthorized, illegal, improper or unreported payments and items of bribery and extortion. Substantial diversion of funds is also charged based on payment of personal expenses of O&R's then Chief Executive Officer James F. Smith, expenses of Ms. Winikow and others.
The complaint also charges that defendants concealed and affirmatively misrepresented to the PSC projections for future electricity and gas demand in the franchised area.
The Board of Directors of O&R established a Special Committee to investigate, ascertain and report the amount of funds diverted. That amount appears to be substantial, although it is also obvious that only a small proportion of the money was taken into account as test period expenses for purposes of pro forma statements of cost of service used by O&R in rate fixing proceedings before the Public Service Commission. In litigation brought by O&R in this Court as a plaintiff, it is alleged affirmatively that:
". . . Winikow, Schwartz, Paul Pickard, Maria Pickard, CSI, Silverman and Devotion, through fraudulent means, diverted monies and funds rightfully belonging to Orange and Rockland, exercised without permission or authority, exclusive rights of ownership over these funds to the exclusion of Orange and Rockland's exclusive rights of ownership to these funds, thereby converting Orange and Rockland's property."
(P 23 of Civil RICO Complaint in Orange & Rockland Utilities, Inc. v. Linda Winikow, et al., S.D.N.Y. Dkt. No. 93 Civ. 6038 (CLB) filed August 26, 1993)
In a lawsuit in the Supreme Court of the State of New York, County of Rockland, brought against James F. Smith (Index No. 0623/94, Complaint dated March 16, 1974) O&R alleges affirmatively in great detail that as Chief Executive Officer of O&R, Smith systematically beginning in 1979 engaged in a continuing course of fraudulent conduct by misappropriating funds of O&R and services "for the personal benefit of himself, his family, his friends, and other persons and organizations with which he had a private relationship (Smith Compl. P 6) and that through acquiescence or gross negligence "Winikow was permitted to engage in illegal activities including systematic abuse of her expense budget and misappropriation of O&R funds and resources for her own benefit, and violations of election and commercial bribery laws". (Smith Compl. P 10)
The motions attack the complaint on its face on a rather narrow ground, asserting that all claims are barred by what is described as the "Filed Rate Doctrine".
The complaint itself tracks the allegations in County of Suffolk v. Long Island Lighting Company, 907 F.2d 1295 (2d Cir. 1990). In that case, hereinafter "LILCO", a panel of our Court of Appeals held that "the [RICO] Statute is not ambiguous as to whether its proscriptions extend to a state regulated public utility." The Court in LILCO also rejected the concept of Burford abstention,
on the theory that the federal court entertaining a RICO case brought by ratepayers based on allegations of fraud committed by the utility in the rate regulation process would be "interfering unduly with specialized ongoing state regulatory schemes" or "disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern". The Court of Appeals in LILCO held that this was so, notwithstanding "application of a federal RICO remedy would wreak havoc with the state regulatory process and . . . the Public Service Commission, not a federal court, is in the best position to provide a remedy in the best interest of ratepayers for frauds allegedly committed in Public Service Commission rate cases."
The New York Attorney General, having been asked by the Court in LILCO to comment, opined that, "an award of damages in this case would enhance rather than conflict with New York's regulatory scheme", and the Public Service Commission of New York declined to comment at all. The LILCO case also declined to rely on the primary jurisdiction doctrine to defer to the ratemaking agency's supposed expertise (Opinion at p. 1310), and held that the unavailability of treble damages and attorneys' fees was an appropriate matter for its consideration in reaching that result.
Upon careful examination none of the legal conclusions expressed in LILCO are anything more than dicta because the judgment of the district court in favor of LILCO was affirmed, however, in light of the clear and lengthy analysis by the Court of Appeals opinion in LILCO, we would have been compelled to say that the complaint in this case clearly states a valid Civil RICO claim upon which relief can be granted.
Thereafter, in the case of Wegoland Ltd. v. Nynex Corp., 806 F. Supp. 1112 (S.D.N.Y. 1992), Judge Wood of this Court considered motions to dismiss a class action brought against a telephone utility alleging a Civil RICO conspiracy to defraud the plaintiff class of ratepayers, by giving misleading financial information to the regulatory agencies and consumers to support inflated rate requests. Judge Wood held that the RICO claims should be dismissed as nonjusticiable because of the Filed Rate Doctrine of the Supreme Court. Her conclusion was supported by two cases decided in 1992, after LILC, in other circuits, Taffet v. Southern Co., 967 F.2d 1483 (11th Cir. 1992) (en banc) ("Taffet II") and H.J., Inc. v. Northwestern Bell Telephone Co., 954 F.2d 485 (8th Cir. 1992).
The district court opinion in Wegoland details the history of the Filed Rate Doctrine, beginning with the opinion of Justice Brandeis in Keogh v. Chicago and Northwestern Railway Co., 260 U.S. 156, 67 L. Ed. 183, 43 S. Ct. 47 (1922), in which, in the context of a civil anti-trust claim a shipper alleged that the defendant carrier conspired to fix rates for transporting freight in interstate commerce. The Supreme Court held that where the rates charged had been filed with the Interstate Commerce Commission and inferentially were deemed reasonable by not being set aside, the district court should dismiss the case for failure to state a claim. The Supreme Court regarded the Commission's determination of the reasonableness of the rates as dispositive as to whether the rates were reasonable, even assuming that the filed rate was the product of a conspiracy. The theory of the Keogh case was that the filed rates determine the rights between the customer and the utility and the Interstate Commerce Act had provided a remedy for injured shippers and consignees, so that it was improbable Congress intended to afford another remedy under the Sherman Act.
To permit courts to change rates unilaterally would result in unequal rates being charged to members of the same class of ratepayers (lower rates for plaintiffs) and because the court would, of necessity, determine whether the new rate it set was reasonable and non-discriminatory, such a determination would require reconstituting the whole rate structure for many other articles of freight moving in interstate commerce. As Judge Wood pointed out in Wegoland, subsequent decisions have amplified this well known doctrine and "further developed [its] rationale", 806 F. Supp. at 1114.
In Montana-Dakota Utilities Co. v. Northwestern Public Service Co., 341 U.S. 246, 95 L. Ed. 912, 71 S. Ct. 692 (1951), without explicitly referring to Keogh or the Filed Rate Doctrine itself, the Supreme Court held that despite the possibility of fraud, and although federal law provided the petitioner with no administrative remedy, the district court could not adjudicate a case based on fraud which would require a determination of what the reasonable rate would be in the absence of the fraud. This was considered to be "a nonjusticiable issue more appropriately determined by the Commission". Id. at 251.
Later, in Arkansas Louisiana Gas Co v. Hall ("Arkla"), 453 U.S. 571, 69 L. Ed. 2d 856, 101 S. Ct. 2925 (1981), the Court held that the considerations underlying the filed rate doctrine "are preservation of the agency's primary jurisdiction over reasonableness of rates and the need to insure that regulated companies charge only those rates of which the agency has been made cognizant". Id., cited in Wegoland. While the decision focuses on the need to avoid discrimination against non-plaintiff ratepayers, Montana-Dakota concentrates on the need for courts to refrain from adjudicating cases that would require them to apply the nonjusticiable standard of 'the reasonable rate'". See, also, Square D Company v. Niagara Frontier Tariff Bureau, 476 U.S. 409, 90 L. Ed. 2d 413, 106 S. Ct. 1922 (1986), a case similar to Keogh where it was claimed that regulated rates had been inflated through an anti-trust violation.
Judge Wood's opinion then addressed the LILCO case, observing that "the parties in LILCO did not address the Filed Rate Doctrine and the Second Circuit's opinion maintained complete silence on that issue, mentioning neither the doctrine nor any of the cases decided under the doctrine". 806 F. Supp. at 1122
As noted earlier, this Court believes the result in LILCO was probably consistent with the result in the Filed Rate cases because its affirmance of the district court's grant of Judgment Notwithstanding the Verdict in favor of the utility, which is the bottom line in LILCO, essentially makes the rest of the discussion dicta. Judge Wood expressed it differently: "although LILCO in no way forecloses the application of the Filed Rate Doctrine in the present cases, there does appear to be some theoretical tension between LILCO and the applicability of the Filed Rate Doctrine in this case." Id. at 1123.
We now turn to the disposition of Wegoland in the Court of Appeals, by a different panel than that which decided LILCO. On May 24, 1994, a panel of our Court of Appeals affirmed Judge Wood's decision in Wegoland, "for substantially the reasons articulated in Judge Wood's thorough and commendable opinion." The Court of Appeals in Wegoland, after reviewing the history of the Filed Rate Doctrine concluded that, "because a fraud exception to the Filed Rate Doctrine is both contrary to guiding Supreme Court precedent and important regulatory policies, we hold that there is no fraud exception to the Filed Rate Doctrine that would save this suit from dismissal.
The panel in Wegoland then addressed LILCO:
"We conclude that LILCO erects no barrier in this Circuit to the application of the Filed Rate Doctrine to RICO suits brought by rate-payers against utilities. Since we had no occasion to consider the Filed Rate Doctrine in LILCO because it was not brought to the panel's attention, the absence of such discussion can by no means be construed as am implicit rejection of the Filed Rate Doctrine. Accordingly, the LILCO decision does not alter the outcome in this case." (Emphasis added)