Background: Former Employees: Reid-Backed Firm Lied to Get Stimulus Cash
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UPDATE: Geothermal Firm Sued Under False Claims Act
by Elizabeth Warmerdam, Courthouse News, March 26, 2015
LAS VEGAS (CN) - A geothermal energy developer cannot duck claims that it defrauded the United States of $122 million by reporting false information about two projects to get government grants, a federal judge ruled Tuesday.
Tina Calilung and Jamie Kell filed the qui tam lawsuit against Ormat Industries in 2013 under the False Claims Act to recover money the Israel-based corporation allegedly obtained illegally from the American Recovery and Reinvestment Act of 2009, the economic stimulus package that distributed $831 billion in assistance to businesses.
At the center of the complaint are Ormat's two energy-producing geothermal plants known as North Brawley, in Imperial Valley, Calif., and Puna, in Hawaii.
Calilung, an economist who worked as Ormat's asset manager, claims the company reported false and misleading information on its grant applications to the Department of the Treasury to get grants worth $122 million for the Brawley project and $13.8 million for the Puna project.
Ormat allegedly misrepresented the date the Brawley plant was put into service, intentionally drove up costs, and misrepresented the viability of the plant so that it could qualify for the funds.
Calilung claims that Ormat misrepresented the Puna project as new, though it was an expansion of an already constructed facility.
She claims that the cost of the expansion should have been allocated between the 8 megawatts of expanded capacity and the 30 megawatts of original capacity. She said the 30 megawatts of original capacity should not have qualified for the grant.
"But for these purposeful misrepresentations, Ormat would not have received Section 1603 funds to support these projects and such funds could have been invested by the U.S. Treasury into truly viable geothermal projects actually qualified to receive the funds," Calilung said in the complaint.
Ormat was granted a transfer of the case from the Southern District of California to the District of Nevada, and sought dismissal for lack of subject-matter jurisdiction based on the Tax Bar and Public Disclosure Bar.
Pursuant to the Tax Bar, the False Claims Act does not apply to claims or statements made under the Internal Revenue Code. Although the type of qui tam case typically precluded by the Tax Bar is one involving federal income tax matters, Ormat argued that it also extends to actions involving grants received in lieu of tax credits.
But U.S. District Court Judge Robert Jones found that the statements at issue were not "made under" the Internal Revenue Code, but under Section 1603 of the American Recovery and Reinvestment Act.
"The false or misleading information that relators allege Ormat knowingly presented to the Treasury involve material provisions of Section 1603, including the placed-in-service requirement, the grant amount as determined by the cost basis of the property, and the nature of a specified energy property," Jones said in his 45-page ruling.
Additionally, the Tax Code recognizes that the ARRA provides an independent means through which an entity can receive a government subsidy for engaging in clean energy, Jones said. "And in this case, Ormat chose to obtain cash payments under Section 1603 rather than claiming tax credits under the Tax Code."
Ormat also argued that Calilung's claims were based on SEC filings that were submitted before she and Kell filed their initial complaint in February 2013, so they are not original sources of the information alleged.
Jones found that Ormat's annual reports in 2007, 2008 and 2009 do qualify as public disclosures, but they do not cover all of the allegations in Calilung's suit.
The reports state that construction on the Brawley plant was substantially completed in December 2008, that Ormat anticipated reaching commercial operation of the power plant in 2009, and that the plant was placed in service on Jan. 15, 2010.
"Regardless of the date that Ormat reported to the Secretary and that appears in the SEC filings, relators claim that the January 15, 2010 date is false and misleading. Thus, the fact that the 2007 and 2009 Form 10-Ks make it clear that Ormat considered the Brawley plant substantially complete in December 2008 and that it was producing energy from that point on does not mean that relators' claims are barred," Jones ruled.
"That information would not necessarily lead the government to the conclusion that this placed-in-service date was chosen with the intent to defraud the United States. The additional information available to the public likewise does not indicate that January 15, 2010 was not the actual date the Brawley plant was placed in service," the judge found.
However, Calilung's claims that Ormat misrepresented the eligible basis for the Brawley plant and intentionally incurred extra costs prior to submitting its second grant application are substantially similar to information contained in the SEC filings.
"The increasing costs of the Brawley plant are well documented in the various filings. The 50-MW target production rate was never reached despite Ormat's multiple attempts to remedy the problems with the geothermal resources," Jones said.
Because these claims had been publicly disclosed, they must be dismissed.
Jones also found that claims relating to the Puna project - specifically, that Ormat falsely stated that Puna was a stand-alone facility rather than an expansion and that Ormat improperly allocated the total cost of the project to the expansion rather than to the existing facility - are substantially similar to information found in Ormat's 2011 annual report.
However, in this case, Jones determined that Calilung and Kell can be considered original sources of the information in their complaint.
"The court finds that relators have provided sufficient independent and material information related to the Puna Expansion to overcome the Public Disclosure Bar," Jones wrote.
Both Calilung and Kell say they worked on the Section 1603 application for the Puna expansion, and provided factual allegations that added to what was publicly disclosed before they filed their lawsuit.
Details relating to the ability of the expansion to operate on its own, representations made to third parties regarding the existing well, and an alleged alteration of Ormat's application to include the full cost of the well in order to increase its eligibility for the grant do not appear in the SEC filings, but rather "seem to be based solely on the personal interactions of the relators as former Ormat employees," Jones found.
The judge declined to dismiss the action based on Ormat's claims that Calilung and Kell did not sufficiently plead fraud or state a claim for which relief can be granted.
However, he said that the relators will need to prove that Ormat was ineligible for the funds it received.
PDF: Lawsuit Text
March 19, 2015: Former Employees Sue Ormat: Geothermal Firm Lied to Get Stimulus Cash