Monday, 15 May 2017

OF DECEIT, EMERA AND MUSKRAT MADNESS

GUEST POST WRITTEN BY CABOT MARTIN

Close observers of things Muskrat are by now getting used to troubling news regarding this benighted project.

However, the most recent Uncle Gnarley posts building on revelations first made by a former Muskrat Falls project engineer (aka the Unknown Engineer) on UncleGnarley on January 30, 2017 must have shocked even the most cynical.

Seriously - are we talking about someone playing fast and easy with the numbers?

If true, would be big time shit.

Then came last Wednesday’s stellar CBC St. John’s Morning Show interview by Anthony Germain featuring the disguised voice of the “Unknown Engineer” repeating on the public airwaves his astounding assertions ending with a call for a “Forensic Audit” of the manner in which the Muskrat project costs were prepared.

The next day Mr. Germain followed up with an extended interview on the mechanics of a Forensic Audit with financial wiz Larry Short – all of which served to turn up the heat on this issue in dramatic fashion. 



Said to have been an act of conscience, the Unknown Engineer detailed a frightening scenario wherein someone or some group (to work must have been a group) within the Muskrat project team supposedly deliberately or recklessly ignored reality in presenting the Project’s costs to their shareholder the Provincial Government.

The parading of these lower than reasonable costs served to convince an ill-informed and na├»ve Provincial Cabinet that the Muskrat project, that Nalcor was so fervently promoting, made sense – when patently, to use some Nalcor jargon, the “business case” was built on sand.

The Newfoundland and Labrador Cabinet’s final and complete swallowing of the bait can be precisely dated to the Muskrat Falls Sanction Decision of December 17, 2012.

But that was “merely” when the final fatal step was taken. How far should a Forensic Audit go back? If not then, then when?

How far back should our Forensic Audit team, a band of financial sleuths with all the latest gear, start hauling things apart? Looking at the "why" in addition to the "what"; following the money; examining who knew what and when.

These are decidedly not the sorts of questions that the current Auditor General's review and approach would involve. This makes The St. John's Telegram's Editorial "Leave it to the AG" of last Friday (May 12th) all the more inexplicable.

The Unknown Engineer's "argument" did not "suggest" a Forensic Audit to the CBC, he at some risk pleaded for one.

His "argument" was not that "the numbers used to justify the project were unrealistic from the start" but that those numbers were part of a deliberate scheme to get the project going.
To quote him as reported in Uncle Gnarley - in a follow up piece on February 6 (essential reading) “

“I could not put up with falsifying information anymore.

To begin with, the original cost of $6.2 billion on which the project was approved was a complete falsification. The estimate was deliberately kept low — below $7 billion, so as to appear favourable relative to the cost of thermal power generation.

The likely costs were known about three years ago, but Nalcor Management kept it a secret, steadfastly denying that there were major schedule delays and cost overruns, until it was no longer possible to hide the true status with the election of a new Provincial Government.”

In spite of this incredible statement, the whole Unknown Engineer matter is dismissed in the Telegram's words with "At the moment, though, overweening political pride is not a crime".

Did the Unknown Engineer say anything about politicians? As far as I can tell he was saying our elected politicians were duped from the beginning.

The Telegram Editorial ends with a candidate for The Museum for the Morally Bankrupt:
"But how much more blame can we afford? “

All of which basically overlooks the "Forensic" in "Forensic Audit"- like settling for an X-Ray when a CAT Scan is in order in the face of a life threatening problem.

It's all just a small step from the Telegram's position to "Move along; Move Along; Nothing to see here Folks".

But I digress into the weeds of God knows what and must return to matters of substance.

A good grasp of the history of any project is essential to any real Forensic Audit.
Consequently, it is essential for one go back to the beginning, to the Williams Government’s engagement of SNC-Lavalin in 2006 to prepare not only a technical feasibility study of Muskrat Falls as a “stand alone” project but also, at the same time, a financing plan for it’s development.

This SNC-Lavalin study was evidently keystone, a point when an apparently unstoppable momentum was created.

The SNC-Lavalin Study Report has never been made public and the present Government as a token of it’s sincerity in this matter should do so immediately.

One can only speculate as to its contents but lacking, for now, a better starting point, this SNC-Lavalin study and the process by which it was commissioned would seem a good point at which to start any Forensic Audit.

And, of course, we cannot forget that the Sanction Decision of December 17, 2012 itself was followed by a series of Nalcor commercial decisions.

Such as the awarding of construction contracts and equipment purchases with their attendant cancellation clauses and penalties payable by Nalcor (i.e. us).

All of which supposedly served to make it “too late” for this Province to reverse course even when the abyss loomed.

Chief of these entanglements was the triggering of Nalcor’s complex contractual relationship with Emera – a corporate name that, it is safe to say, residents of this Province will come to invoke with the same virulence as “Hydro Quebec”.

So the Forensic Audit should properly cover all those Emera contract negotiations, indeed must cover those negotiations, including the Emera-Nalcor dance before, during, and as a consequence of regulatory hearings in Nova Scotia before their Utility and Review Board (UARB).

Halifax based Emera was, and is, of course, Nova Scotia’s “Chosen Instrument’ to not just access our hydro power but more fundamentally to take advantage of this Province’s billions in oil royalties.

So that’s the problem, and in spite of some opinion more skeptical about our legal system than this writer, I suggest that, as the man said, “There’s got to be a law against that.” 

If, for discussion purposes, we take our Unknown Engineer to be correct, the next obvious question has to be –

Did Emera know (or should have known) that this egregious Nalcor behavior was going on over on the other side of the negotiating table (more or less unknown to the Newfoundland Government) when Emera entered into their vast and bewildering web of Muskrat contracts with Nalcor?

The jaded, demoralized reader might well ask:  “What difference would that make? Sure if it happened, it was all Nalcor’s, thus our, fault. One Province is not another’s keeper.”

Well, by virtue of Nalcor’s practice of secrecy from the start, not just from the public but also from their supposed Provincial Government “masters”, Nalcor and the Province for these purposes do not equate.

In any event, if you will bear with me (with the caveat that this is in no way meant as a “legal opinion”), I’d say maybe Emera’s role makes a lot of difference.

For some basic wisdom in the matter, we should go back to ancient Greece, to the oft-quoted  words uttered by the great Greek philosopher Sophocles (496 BC – 406 BC): 
“Things gained through unjust fraud are never secure.” 

In other words, when you are doing business with someone, don’t be surprised if when you take advantage of that person’s patent mistake it comes back to bite you.

And, to the main point, we could with Muskrat have a situation when all contracts based on such behavior by Emera would be unenforceable by the courts and thus “voidable” at the option of this Province.

If such a case can be made, we could cancel all or any part of the Emera deal; like get off (at least in part) the multi-barbed hook that has been so carefully constructed.

Like “Not Too Late”.

And this might even go, if they were “in on it” like Emera, for those Muskrat bank loans too. 
If such a case can be made, the cost of walking away at this stage may not be as drastic as some have portrayed.

Now Mister Short in his interview with Anthony Germain made a very good point – when you are thinking about doing a “Forensic Audit” , you should always first ask yourself what are you going to get out of it – it does cost money.

But if someone could prove to me that there is definitely, without a shadow of a doubt definitely, nothing, absolutely nothing, to what I am about to say regarding a legal case of civil deceit against Emera, I would still support a Forensic Audit.

Getting to the bottom of what has happened here with Muskrat is like a test – a test for all of us - it is where we grow up as a society - or not.

There is no way we can build a decent and successful society, now or ever, with this matter left unexamined in full.

The very rocks cry out for a Forensic Audit.

By now, of course, certain of the legal fraternity are rolling their eyes; Greek philosophers indeed.

And we are admittedly talking about the law of “civil fraud” – waters our courts are normally reticent to wade into.

I hasten to add that such “civil fraud” is not your run of the mill, Nigerian scam letter fraud, nor qualifies as “fraud” contrary to the Criminal Code of Canada.

No, I am talking about a “civil” matter, something that is often studied in Law Schools as “Fraudulent Misrepresentation” and an “Action of Deceit”.

In spite of the harsh sound of it, civil fraud is pretty mild stuff; no one goes to jail as a result of such an action.

It comes under the old English Common Law concept of an action in “tort” which sounds like some sort of medieval torture but again as the law goes mostly pretty mild stuff; nuisance is a tort; trespass is a tort ; obnoxious neighbour dumps garbage over the fence onto your land – tort.

One classic legal text on the Law of Contract makes plain the objective nature of a civil legal action based on “Fraudulent Misrepresentation” or “deceit”:

Quote: “Motive is irrelevant in an action of deceit. Once it has been proven that the Plaintiff [that’s us – Newfoundland - the aggrieved party] has acted upon a false representation which the defendant did not believe to be true, liability ensues, although the defendant may not have been actuated by any bad motive.”

Now all this would be worth the predictable cries of skepticism in certain St. John’s and Halifax office towers -- but for the leading Supreme Court of Canada case in the matter – a very recent one too and binding on lower Canadian courts.

It’s known as Bruno Appliance and Furniture, Inc against Hryniak and can be found at 2014 Supreme Court of Canada Reports starting at page 8.

In that case, the Supreme Court of Canada set out clearly the requirements necessary to establish the tort of civil fraud (or tort of deceit).

The Bruno case dealt with a far different fact situation from Muskrat but it’s the underlying basis, the core of the Supreme Court’s thinking as expressed in its judgement that is important and clear.

Justice Karakatsanis, writing for a unanimous Supreme Court, outlined the four elements of the tort of civil fraud:
Quote:
"From this jurisprudential history, I summarize the following four elements of the tort of civil fraud: 
(1) a false representation made by the defendant;
(2) some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness);
(3) the false representation caused the plaintiff to act; and
(4) the plaintiff's actions resulted in a loss.” Unquote

So would a Muskrat action by the Province against Emera meet such a four part test?

To start we must note that the Supreme Court is aware of the need for caution in this area which is so key in business relations. At the same time, the court knows that egregious behavior is not a proper basis for a properly working business climate.

One possible basis of an action in deceit could be stated thus:

“Emera knew (or should have known) that Nalcor’s numbers were ridiculous and reckless and nevertheless took part with Nalcor in an elaborate public charade  to take advantage of an ill-informed  and naive Provincial Cabinet to Emera's  benefit and to our detriment.”

Importantly, the Supreme Court said that a defendant (say Emera) can cross the deceit line “through knowledge or recklessness”.

Recklessness.

If there is one thing that we should have no problem proving is that in its actions, well known to, if not actively colluded in by, Emera, that Nalcor set the Gold Standard for economic recklessness.

Nalcor and Emera/Emera and Nalcor – this pair could well be the Bobbsey Twins of Muskrat Recklessness.

Emera knew that Nalcor was not keeping it's shareholder (the Government) properly informed and were selling them a load of hogwash - and the Supreme Court of Canada seems to be saying that in such circumstances Emera should not be allowed to benefit from such actions.

Requirement 4 -  that a loss to this province resulted – would be the easy part.

Move aside Mr. AG - it's time for the "FA" Team to take over.


Would make quite the TV series.