PHOENIX – On May 23 a federal grand jury handed down an eight count indictment against former Arizona Corporation Commission (ACC) Chairman Gary Leonard Pierce; his wife Sherry Ann Pierce; George Harry Johnson, owner of Johnson Utilities, LLC; and James Franklin Norton, a lobbyist for R&R Partners, retained by Johnson and Johnson Utilities to represent them before the ACC.
The indictment also calls out an “unindicted coconspirator” who acted at the direction of all four named defendants.
Back in August 2010, all five ACC Commissioners, including Pierce, considered whether Johnson, as the owner of Johnson Utilities, should be able to have his personal income tax expenses reimbursed and paid for by his utility customers and whether to increase the utility’s wastewater division’s revenues through a rate base increase.
All five ACC commissioners agreed with Arizona’s Residential Utility Consumer Office and ACC staff’s finding on Dec. 23, 2009 as determined in Decision No. 71445, it was “not appropriate or in the public interest to allow pass through entities such as the company to recover personal income tax expenses through rates. The company’s request is not reasonable and will be denied.”
The ACC noted in its decision that the fair value of the company’s wastewater division rate base was $136, 562 and therefore a rate of return analysis was not reasonable.
The ACC, in its Aug. 25, 2010 Decision No. 71854, stated, “Authorizing an operating margin of 3 percent produces rates and charges that are just and reasonable.”
Johnson Utilities proposed a fair value rate base of $17,479,735.
During an ACC Open Meeting on Sept. 6, 2011, Pierce, who was chairman of the commission at that time, voted to increase the fair value of the wastewater division rate base for Johnson Utilities from $136,562 to $18,244,755, which would then increase the utility’s revenues, and to “include specific language for Johnson Utilities to request income tax expense prospectively in a future A.R.S. § 40-252 Petition if the Commission changes its policy on imputed income tax expense.”
Two commissioners voted with Pierce, one commissioner abstained and one commissioner dissented.
In his dissent, the commissioner stated, “With no additional evidence or an amended opinion and order presented to the commissioners, there was nothing new to persuade me that we erred in Decision No. 71854. Given the lack of new evidence or information, I do not believe the record supports the vote to amend Decision No. 71854 and the resulting increases in rates for Johnson Utilities’ customers.”
Count one of the indictment charges that all four defendants along with others known and unknown to the grand jury knowingly and willfully conspired with each other to commit federal programs bribery, honest services mail fraud and honest services wire fraud.
The indictment alleges Pierce and his wife fraudulently and unlawfully received $31,500 from Johnson through Norton in exchange for Pierce’s favorable and unlawful official actions on matters before the ACC, including Decision No. 72579, which added back into a rate base, a wastewater division plant of $18,244,755, which was previously disallowed, and the docketing of a proposed policy change in ACC, which led to the ACC permitting utilities organized as subchapter S corporations and limited liability companies to charge their ratepayers for the utility owner’s personal income taxes.
According to the indictment, in order to facilitate the payment of money and property to Pierce, Norton agreed to act as a conduit between Johnson and Pierce and, in doing so, was offered the opportunity to purchase land valued at approximately $350,000 for Pierce, and caused an unindicted coconspirator to act as a consultant for Johnson for approximately $6,000 per month plus expenses, and hire Sherry Pierce and pay her approximately $3,500 per month from around November 2011 through about August 2012.
The purpose of that consulting arrangement was allegedly to conceal the direct payment of funds by Johnson to Pierce.
During the period of the conspiracy, the unindicted coconspirator set up a separate consulting firm and bank account, through which he billed Johnson approximately $6,000 per month plus expenses.
To hide the conspiracy and scheme to defraud, the indictment states the unindicted coconspirator, acting at the direction of Johnson and Norton, asked Sherry Pierce to submit monthly invoices for approximately $3,500, sent and received emails from Sherry Pierce, took her to lunch and gave her simple tasks, some of which were performed and reviewed by her husband.
Upon receipt of the $6,000, Johnson paid the unindicted coconspirator via checks drawn on an account held by Johnson International, Inc.
Upon receipt of the checks, the unindicted coconspirator then sent monthly checks in the amount of approximately $3,500 to Sherry Pierce via a separate checking account.
On Aug. 4, 2011 Pierce mailed and docketed a letter to parties requesting proposed amendments to aid in the ACC’s consideration of a petition to amend ACC Decision 71854 relating to an increase in water and wastewater rates for Johnson Utilities’ customers.
On Aug. 9, 2011 Johnson and Johnson Utilities filed a proposed amendment modifying ACC Decision No. 71854 regarding relief related to an increase in water and wastewater rates for their customers and other matters favorable to Johnson.
Pierce introduced and docketed an amendment titled: “Pierce Proposed Amendment #1” in support of the Johnson Utilities agenda item for discussion and consideration at the ACC Open Meeting for Aug. 11, 2011.
During that meeting, Pierce voted to direct staff to prepare and docket an order incorporating the requested modifications outlined in his amendment, including the language permitting the company to request income tax expense, for consideration at the ACC’s September meeting.
On Sept. 6, 2011, Pierce called for a vote to accept Johnson Utilities’ petition to amend ACC Decision No. 71854.
In doing so, Pierce, voted to authorize a rate increase for water and wastewater rates for Johnson Utiltites’ customers in Pinal County.
Passing by a vote of 3-2, ACC Decision No. 72579 included modifications requested by Johnson that were contrary to staff’s recommendations and were previously disallowed.
Not only did the modified decision add $18,244,755 into the rate base for Johnson Utilities, $10,892,391 for wastewater plant cost and $7,352,364 related to affiliated profit, Pierce also voted to pass a provision allowing Johnson to request personal income tax expense prospectively.
On Sept. 28, 2011, Pierce, his wife, Norton and the unindicted coconspirator met for dinner. During that meeting, the unindicted coconspirator told Sherry Pierce a contract and confidentiality agreement would be drafted as part of her employment with the unindicted coconspirator’s consulting firm for the purpose of preventing Sherry Pierce from disclosing the nature of her employment and the source of money to third parties.
On Nov. 9, 2011, Johnson signed a check for $6,000, drawn from an account held by Johnson International, made out to the unindicted coconspirator’s consulting firm.
That same day, Sherry Pierce signed an independent contractor agreement as well as a confidentiality agreement related to her independent contractor agreement with the unindicted coconspirator’s consulting firm.
The following day, Johnson met with the unindicted coconspirator and gave him a check for $6,000 made out to the unindicted coconspirator’s consulting firm.
That same day, the unindicted coconspirator opened a checking account in the name of the consulting firm.
On Nov. 18, Pierce and his wife accepted check number one, drawn on the account held by the unindicted coconspirator’s consulting firm for $3,500 from the unindicted coconspirator.
Sherry Pierce endorsed the check and deposited it into an account she held jointly with her husband.
On Dec 8, 2011, Johnson signed another $6,000 check made out to the coconspirator’s consulting firm.
A few days later, Sherry Pierce emailed an invoice dated Dec. 8, 2011 to the unindicted coconspirator for “December Consulting Services as per Contract: $3,500.”
On Dec. 19, 2011, the Pierces accepted another check from the unindicted coconspirator for $3,500.
Sherry Pierce endorsed the check and deposited it into an account she held jointly with her husband.
The indictment points out Johnson was the original source of all the money paid to Sherry Pierce through the unindicted coconspirator.
Then on Dec. 27, 2011, Pierce sent an email to the unindicted coconspirator pertaining to the possible purchase of land valued at approximately $350,000 by Pierce and Norton.
The funds for the purchase were to be provided by Johnson.
Two days later, Pierce sent an email to Norton regarding the possible purchase of that land with an opening offer of $300,000.
The email included a “Letter of Intent to Purchase” dated Dec. 29, 2011 and listed Pierce and Norton as the purchasers.
In the email, Pierce advised Norton that he would advise the real estate agent to take his name off the letter of intent so that Norton “will be the buyer.”
The funds for the purchase were to be provided by Johnson.
Continuing on monthly through July 2012, checks were written to the unindicted coconspirator by Johnson with checks subsequently written to Sherry Pierce by the unindicted coconspirator, which she endorsed and deposited into the joint account she held with her husband.
On July 31, 2012 the unindicted coconspirator sent Sherry Pierce an email advising her that contract work for clients would be limited as of Aug. 1, 2012.
Sherry Pierce responded to the unindicted coconspirator regarding the end of payments from Johnson, “I’ve really enjoyed working with and getting to know you better. Gary told me about his conversation about this with Jim so I was already aware.”
On Aug. 3, 2012 Johnson signed a check made out to unindicted coconspirator’s consulting firm in the amount of $6,027.48.
On Aug. 9, 2012 the unindicted coconspirator sent an email to Sherry Pierce advising her he “just got my final check in the mail while I was in Tucson so will get a check out to you tomorrow.”
On August 13, 2012 Sherry Pierce received a $3,500 check from the unindicted coconspirator, which she endorsed and deposited into her and her husband’s joint account.
In February 2013, Pierce voted to allow the recovery of personal income taxes by pass-through public service corporations such as Johnson Utilities.
Each of the defendants were charged with one felony count each of conspiracy, federal programs bribery and honest services mail fraud plus five counts of honest services wire fraud.
