Gov. Wolf sues bankers, lawyers, engineers, adviser for bond losses

Gov. Wolf sued several firms Monday for arranging what the lawsuit calls “the worst financial disaster in the history of the commonwealth” in connection with a failed $360 million Harrisburg trash-to-steam incinerator project, in the mid-2000s.

The state accused investment bank RBC Capital Markets; Pennsylvania law firms Obermayer, Rebmann, Maxwell & Hippel LLP, Buchanan Ingersoll & Rooney PC, Eckert, Seamans, Cherin & Mellott LLC, and Foreman & Caraciolo PC; financial adviser Public Financial Management Inc. (PFM), of Philadelphia; and York-based engineering firm Buchart Horn Inc. of “unjust enrichment” at taxpayers’ expense.

The governor’s suit (READ LAWSUIT HERE) in Commonwealth Court also accuses Obermayer, Buchanan, Eckert, and PFM of breach of fiduciary duty and legal malpractice. Obermayer and Eckert were also accused of fraud and negligent misrepresentation, and the Foreman firm of aiding and abetting breach of fiduciary duty.

The Buchart firm was accused of professional malpractice in its work setting up the plant. The government says its backers knew it could not have operated profitably, but hid that reality from public officials so the professionals could profit from high fees at public expense.

Eckert has “cooperated fully” with past investigations of the Harrisburg project (which include a grand jury probe under former Attorney General Kathleen Kane, state Senate hearings, and a Harrisburg Authority report) and “will vigorously defend” itself against Wolf’s accusations, CEO Timothy Hudak said in a statement. The city and Dauphin County held public hearings, hired experts, and approved the deal, which state officials also approved. Hudak said a former engineer’s bankruptcy hurt the project, and that it wasn’t Eckert’s fault.

RBC has “no comment,” said spokeswoman Hannah Sloan. PFM also issued a statement, saying that the filing “came as a surprise to us,” and adding that it had no further comment. Other firms did not immediately respond to calls seeking comment.

Veteran professionals including RBC banker James Losty, PFM adviser Glen Williard, and lawyers at each of the firms formed a “working group” that advised Harrisburg on building and financing the incinerator. The group suffered from “destructive conflicts of interest,” which resulted in the members focusing on getting paid, instead of delivering a workable facility to utility ratepayers and taxpayers, the suit contends.

The professionals failed to make the dangers clear to Harrisburg City Council and other public officials, and some of them lied to keep the project going, the suit alleges.

Instead of sound advice that would help ratepayers and taxpayers benefit from a sound facility, the state was given “false and misleading information” by pros who “concealed material facts” and imposed an “imprudent and illegal debt” on taxpayers, according to the suit.

The Wolf administration hired lawyer Walter Anderson of the Washington firm of Harris, Wiltshire & Grannis LLP to sue the professionals (UPDATE): in 2015, to review whether firms that profited from the deal, or their insurers, could be forced to pay anything back. The lawsuit says fees totalled $12 million. The state is seeking, not just lost fees, but also punitive (punishment) damages.

Meanwhile, taxpayers had paid to cover the losses, along with Harrisburg city employees whose pay and benefits were cut, and Harrisburg residents, who lost when the city was forced to sell parking garages and other assets to keep from going bankrupt, according to the suit.

“It is time to hold those responsible for the failed incinerator debt scheme accountable and recoup the taxpayer dollars wasted by their negligence and deception,” Wolf said in a statement.

Wolf blamed “lobbyists and special interests” for “bilk[ing] taxpayers for their own gain” and collecting “millions” in the incinerator debacle.

A series of inquiries by the Harrisburg Authority and other agencies found that the incinerator was poorly designed and badly insured. According to Wolf, taxpayers ended up covering the losses in the form of higher tax payments and fees.

In filing the suit, Wolf signaled his interest in seeking punitive damages from well-connected firms, some run by prominent Democrats, and from their insurers, years after the losses.

City and authority officials, their paid advisers, and contractors building the incinerator shared blame for more than $300 million in losses in this 2011 Harrisburg Authority report reviewing the construction and financing.

Harrisburg defaulted on its bonds in 2012. City Council leaders sought a rare Chapter 9 bankruptcy to avoid paying the incinerator bonds, but Gov. Tom Corbett’s administration insisted the bondholders get paid, and city officials eventually agreed to sell parking garages and other assets and to reduce city employment costs in order to limit damage to lenders.

David Unkovic, the lawyer sent in by Corbett to prevent a bankruptcy that might have boosted borrowing costs for other Pennsylvania communities, resigned in 2012, blaming “unchecked greed” for Harrisburg’s plight.

The city later settled fraud charges with the SEC in connection to the case.