3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 1 of 187 UNITED STATES DISTRICT COURT DISTRICT OF SOUTH CAROLINA (COLUMBIA DIVISION) Civil Action No. 3:17-CV-2616-MBS CLASS ACTION In re SCANA Corporation Securities Litigation CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS JURY TRIAL DEMANDED 3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 2 of 187 TABLE OF CONTENTS I. INTRODUCTION .............................................................................................................. 2 II. JURISDICTION AND VENUE ....................................................................................... 13 III. THE PARTIES.................................................................................................................. 13 A. Lead Plaintiffs ....................................................................................................... 13 B. Defendants ............................................................................................................ 14 1. SCANA ..................................................................................................... 14 2. The Officer Defendants............................................................................. 15 3. The Director Defendants ........................................................................... 16 C. Relevant Non-Parties ............................................................................................ 18 IV. FACTUAL BACKGROUND AND SUBSTANTIVE ALLEGATIONS OF FRAUD ... 19 A. Background On SCANA And Its Nuclear Business ............................................. 19 1. The 2005 Energy Policy Act Created Billions Of Dollars Of Tax Credits Available For Nuclear Construction Completed By January 2021........................................................................................................... 21 2. The BLRA Allowed SCANA To Charge Increased Energy Rates To Recover “Prudent” Nuclear Project Construction Costs ........................... 22 B. SCANA Petitions To Build Two New Nuclear Reactors At The V.C. Summer Site ........................................................................................................................ 24 C. SCANA Sought A Two-Year Extension To The Nuclear Project But Assured The Public That All Major Issues Have Been Resolved. ...................................... 28 D. Defendants Knew No Later Than October 2015 Of Numerous Problems And Risks With The Nuclear Project Leading To Delays Well Past 2020 .................. 32 1. SCANA Retained Bechtel To Assess The Nuclear Project ...................... 32 2. The Bechtel Assessment and First Bechtel Report ................................... 37 3. Defendants Attempted To Alter Bechtel’s Report .................................... 43 3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 3 of 187 4. The Sanitized Second Bechtel Report....................................................... 45 E. Defendants Reaffirmed Nuclear Project Completion By 2020, Despite Bechtel’s And Santee Cooper’s Warnings That The Date Was Unachievable .... 47 F. Defendants Continued To Conceal The Bechtel Reports ..................................... 51 1. Defendants Prevented Disclosure Of The Bechtel Reports ...................... 51 2. Defendants Conceal The Existence Of The Bechtel Report From SCANA’s Public Watchdog ..................................................................... 53 G. Defendants Did Nothing To Fix Some Of The Nuclear Project’s Greatest Deficiencies, Dooming The Nuclear Project ........................................................ 55 1. In Early 2016, Defendants Reject Recommendations To Increase Oversight Of The Nuclear Project ............................................................ 55 2. In Mid-To-Late 2016, The Nuclear Project Schedule Slips Further Behind And Progress Fails To Improve.................................................... 61 3. Former Employees And Internal Progress Reports Confirm That Defendants Knew the Nuclear Project Would Not Be Completed In 2020........................................................................................................... 68 H. Defendants Misled Investors About The Nuclear Project Throughout 2016 ....... 75 I. Defendants Were Aware That Election Of The Fixed Price Option Did Not Remove The Risk Of Future Cost Increases And, In Fact, Threatened The Viability Of The Nuclear Project .......................................................................... 80 J. The Director Defendants Were Active Participants In SCANA’s Fraud ............. 86 V. Partial Disclosures, Further Misleading Statements, And The Gradual Emergence Of The Full Impact Of The Fraud .......................................................................................... 88 A. The Financial Meltdown Of Toshiba And Westinghouse Called The Nuclear Project Into Question ............................................................................................ 89 B. SCANA Abandoned The Nuclear Project, Claiming It Was The “Prudent” Decision ................................................................................................................ 99 C. Public Investigations Threaten To Strip SCANA Of Billions Of Dollars Of BLRA Funds, And Reveal That Defendants Were Aware Of – And Actively Concealed –The Fatal Risks Facing The Nuclear Project .................................. 105 VI. Post-Class Period Events ................................................................................................ 124 A. SCANA’s Board Revoked Marsh’s And Byrne’s Golden Parachutes ............... 124 - ii - 3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 4 of 187 B. SCANA Announced A Proposed Merger, Which Faces Strong Opposition ...... 124 C. Moody’s Downgraded SCANA’s Credit Ratings to “Speculative ‘Junk’ Grade” ................................................................................................................. 127 D. SCANA Whistleblower Confirms Defendants Intentionally Concealed Their Gross Mismanagement Of The Nuclear Project “To Prop[] Up Earnings To Be Able To Make Their Bonuses” ........................................................................... 128 VII. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS ......................................................................................................... 130 A. False And Misleading Statements And Omissions Concerning SCANA’s Ability To Complete The Nuclear Project By The End Of 2020 ....................... 131 B. False And Misleading Statements And Omissions Concerning Defendants’ Commitment To Transparency ........................................................................... 143 C. False And Misleading Statements And Omissions Concerning SCANA’s Oversight of the Nuclear Project ......................................................................... 146 D. False And Misleading Statements Concerning Progress At The Nuclear Project ................................................................................................................. 154 E. False And Misleading Statements Concerning The Impact Of A Westinghouse Or Toshiba Bankruptcy On The Nuclear Project’s Continued Viability ............ 158 F. Defendants Failed To Disclose “Known Trends or Uncertainties” That Would “Have A Material . . . Unfavorable Impact On . . . Revenues Or Income From Continuing Operations” In Violation Of Item 303 ............................................. 166 VIII. LOSS CAUSATION ....................................................................................................... 168 IX. THE INAPPLICABILITY OF THE STATUTORY SAFE HARBOR .......................... 173 X. THE PRESUMPTION OF RELIANCE ......................................................................... 174 XI. CLASS ACTION ALLEGATIONS ............................................................................... 175 XII. CAUSES OF ACTION ................................................................................................... 177 XIII. PRAYER FOR RELIEF ................................................................................................. 181 XIV. JURY TRIAL DEMAND ............................................................................................... 181 - iii - 3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 5 of 187 Lead Plaintiffs the West Virginia Investment Management Board (“West Virginia IMB”) and Stichting Blue Sky Global Equity Active Low Volatility Fund and Stichting Blue Sky Active Large Cap Equity USA Fund (related funds collectively referred to herein as “Blue Sky”), (collectively, the “Lead Plaintiffs”), individually and on behalf of a class of similarly situated persons and entities, by their undersigned attorneys, allege the following against SCANA Corporation (“SCANA” or the “Company”) and the Individual Defendants (defined below), upon personal knowledge as to themselves and their own acts, and upon information and belief as to all other matters. Lead Plaintiffs bring this federal securities class action on behalf of themselves and a class consisting of all persons and entities who purchased, or otherwise acquired, the publicly traded securities of the Company from October 27, 2015 through December 20, 2017, inclusive (the “Class Period”), and who were damaged thereby, subject to certain exclusions addressed in paragraph 439 below (the “Class”). The Defendants in this action are: SCANA; Kevin B. Marsh, SCANA’s former Chief Executive Officer (“CEO”) and Chairman of SCANA’s Board of Directors; Jimmy E. Addison, SCANA’s current CEO and former Chief Financial Officer (“CFO”) and Executive Vice President; Stephen A. Byrne, SCANA’s former Executive Vice President; Harold C. Stowe, the Lead Director on SCANA’s Board during the Class Period until on or about April 27, 2016; D. Maybank Hagood, a director on SCANA’s Board during the Class Period, including as its Lead Director since on or about April 27, 2016, as well as a member of the Board’s Nuclear Oversight Committee; and James W. Roquemore, a director on SCANA’s Board and the Chairman of its Nuclear Oversight Committee during the Class Period. Lead Plaintiffs’ and the Class’s claims arise under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule l0b-5 promulgated thereunder. 3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 6 of 187 Lead Plaintiffs’ allegations concerning matters other than themselves and their own acts is based upon the investigation conducted by and through counsel, which included, among other things, the review and analysis of: (i) transcripts, press releases, news articles, and other public statements issued by or concerning SCANA and the Individual Defendants; (ii) research reports issued by financial analysts concerning the Company; (iii) reports and other documents filed publicly by SCANA with the U.S. Securities and Exchange Commission (“SEC”); (iv) SCANA’s corporate website; (v) interviews with former employees of companies who worked on the Nuclear Project (defined below); (vi) transcripts of hearings before SCANA’s regulators and select committees of the South Carolina Senate and House of Representatives; (vii) documents produced to Lead Plaintiffs through Freedom of Information Act (“FOIA”) requests; (viii) press reports; and (ix) other publicly available information. Lead Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. I. INTRODUCTION This securities fraud class action arises from one of the most egregious public scandals in recent South Carolina history – SCANA’s failed construction and ultimate abandonment of two nuclear reactors located at the V.C. Summer nuclear generating station in Fairfield County, South Carolina. The well-publicized debacle surrounding the V.C. Summer reactors has caused enormous losses to SCANA investors, resulted in a number of high profile resignations, and precipitated multiple civil lawsuits and criminal investigations. While the full depth of the wrongdoing underlying the scandal continues to be revealed in an almost-daily fashion, it is already clear that the Defendants named herein – SCANA and certain of its directors and officers – intentionally or recklessly made material misrepresentations and omissions to the public in violation of the federal securities laws. Lead - 2 - 3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 7 of 187 Plaintiffs bring this action to recover on behalf of themselves and all persons and entities who purchased the publicly traded securities of SCANA during the Class Period and were damaged by Defendants’ misrepresentations and omissions. SCANA is a publicly-traded mid-sized electric and gas utility company whose principal subsidiary is South Carolina Electric and Gas Company (“SCE&G”). SCE&G is a regulated utility that generates, transmits and sells energy to approximately 700,000 electricity customers and 350,000 natural gas customers in South Carolina. Throughout the Class Period, the V.C. Summer site was jointly owned by SCE&G and the South Carolina Public Service Authority, which is a state-owned utility commonly referred to as “Santee Cooper.” In May 2008, SCE&G and Santee Cooper reached agreement as joint owners to build two new 1,117-megawatt AP1000 nuclear reactors at the V.C. Summer site (the “Nuclear Project”). The ownership interest was split with SCE&G taking a 55% ownership stake and Santee Cooper the remaining 45% share. These two nuclear reactors would be the first new nuclear power plants to be built in the Unites States since the 1980s. The construction of these reactors was of immense significance to SCANA and its investors. As a mid-sized energy company, SCANA was unable to directly finance the huge costs of the project – initially pegged at $9.8 billion – and instead relied on a 2005 federal law called the Energy Policy Act and a 2007 South Carolina law called the Base Load Review Act (“BLRA”) to help defray costs. The Energy Policy Act created nuclear production tax credits to incentivize the construction of new nuclear facilities. As Defendants repeatedly told investors throughout the Class Period, if the reactors were completed by January 1, 2021, SCANA and Santee Cooper would qualify under the Energy Policy Act for nuclear tax credits worth approximately $2.2 billion ($1.4 billion to SCANA). - 3 - 3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 8 of 187 The BLRA was also integral to SCANA’s ability to pay for the construction of the new reactors. Passed in 2007, the BLRA permitted utility companies to apply to the South Carolina Public Service Commission (“PSC”), a seven-person elected governmental board that regulates utility rates, for permission to raise rates for the purpose of offsetting the construction costs of new nuclear reactors. The BLRA required SCANA to submit detailed information regarding the construction schedule, the capital costs, and completion projections in order to justify any rate increases. The BLRA also provided that SCANA could be held liable for any costs that were incurred “imprudently.” In 2008, SCANA selected Westinghouse Electric Company (“Westinghouse”) as its lead contractor for the new reactors and petitioned the PSC for permission to raise customer rates under the BLRA throughout the anticipated construction period. In order to reassure the PSC and investors regarding the reasonableness of the costs of the project, Defendants stated that they would assign a “dedicated group of SCE&G personnel that will monitor each aspect of the construction process on a day-today basis” and would report “progress, issues and variances to an executive steering committee that includes [Defendant Marsh] as SCE&G’s president … and to the SCANA board of directors.” Construction on the new nuclear reactors began in March 2013 following approval from the federal Nuclear Regulatory Commission (“NRC”), and SCANA initially projected that the first reactor would be on-line and generating power in 2016, and the second by 2019. The Nuclear Project, however, was immediately beset by cost overruns and delays. As early as September 2013 Defendants were calling for emergency (non-public) meetings with Westinghouse - 4 - 3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 9 of 187 and noting in internal emails that “missed deadlines put potentially unrecoverable stress on the 1 milestone schedule approved by the SC Public Service Commission.” Despite these known troubles, SCANA did little to remedy the situation and instead continued to petition the PSC for additional rate increases and schedule extensions. All told, SCANA has successfully petitioned the PSC for nine rate hikes under the BLRA, which collectively added nearly $37 million per month or $500 million per year to customer’s electricity bills. These increases have resulted in South Carolina families paying the highest power bills in the South and the third highest in the Country (behind only Connecticut and Hawaii). By March 2015, the construction problems had become so acute that SCANA petitioned the PSC for a 27-month extension of the construction schedules that adjusted the project completion date to June 2020, and increased costs by nearly $700 million. In public statements surrounding the new petition, Defendants repeatedly assured the public that they would “fulfill our commitment to transparency” regarding the Nuclear Project and additionally assured investors that SCANA was “performing its role as project owner in a manner that is reasonable, prudent, cost-effective and responsible,” with Defendant Marsh stating that “my senior management team and I are directly involved in the management and oversight of the project and in interacting with Westinghouse.” In a September 10, 2015 order, the PSC approved SCANA’s request for $698 million in additional costs and revised substantial completion dates to June 2019 for the first reactor and June 2020 for the second. This approval was granted in reliance on, among other things, testimony provided to the PSC by Defendant Byrne, who stated that the revised 1 All emphases are added unless otherwise indicated. The statements made by Defendants that are bolded and italicized are generally the statements alleged to be false and misleading. All other emphasis is in bold. - 5 - 3:17-cv-02616-MBS Date Filed 03/30/18 Entry Number 72 Page 10 of 187 “construction schedule … represents a reasonable and prudent schedule for completing the construction of the Units.” The PSC particularly noted that Defendants had assured them that “many of the initial risks and challenges of new nuclear construction have been overcome.” Unbeknownst to the PSC or the public, however, construction continued to be plagued by a host of problems that made even the revised schedule totally unrealistic. Indeed, in early 2015 Santee Cooper had pressured SCANA to hire Bechtel Corporation (“Bechtel”) to conduct an analysis of the nuclear project. Bechtel is one of the world’s most respected engineering, construction and project management companies. On or about October 22, 2015, Bechtel presented its initial findings to Defendants Marsh and Byrne, as well as other senior members of SCANA and Santee Cooper management. Lead Plaintiffs recently obtained a previously undisclosed email from Bechtel executives to Santee Cooper outlining the topics to be covered in the October 2015 meeting. The October 2015 email reviewed by Lead Plaintiffs makes clear that Bechtel told the Defendants at (and likely even before) the October 22, 2015 meeting that “the commercial operation dates will be extended” for the nuclear reactors such that:  Unit 2: 18-26 months beyond the current June 2019 operation date.  Unit 3: 24-32 months beyond the current June 2020 commercial operation date. The email also states that SCANA’s “forecasts for schedule durations, productivity, forecasted manpower peaks, and percent complete are unrealistic,” and “the current hands-off approach taken by the Owners towards management of the [contractors] does not allow for real- time, appropriate cost and schedule mitigation.” Despite these alarming findings from Bechtel, SCANA made a significant announcement about the Nuclear Project on October 27, 2015 that was directly contrary to - 6 -