Tennessee Valley Authority: Problems With Irrevocable Trust Raise Need
for Additional Oversight (Letter Report, 02/29/2000, GAO/OSI-00-6).
Pursuant to a congressional request, GAO provided information on the
Tennessee Valley Authority's (TVA) creation of the Center for Rural
Studies (CRS) Trust, focusing on: (1) the significant events pertaining
to the creation, funding, and operation of CRS as well as any
investigations of CRS; (2) how TVA accounted for the funds returned to
TVA; and (3) the oversight of TVA activities.
GAO noted that: (1) the trust agreement drafted to create CRS included
safeguard provisions to ensure CRS was accountable to TVA; (2) at
Chairman Craven Crowell's direction, the structure of the trust was
changed and all the safeguard provisions eliminated in a revised trust
agreement; (3) Chairman Crowell named himself the Chair of CRS'
Management Committee for an unlimited term; (4) the TVA Office of the
Inspector General (OIG) initiated an audit of CRS after receiving an
allegation concerning Chairman Crowell's role in creating CRS; (5) three
days after the Inspector General (IG) notified CRS Management Committee
that the audit revealed possible criminal violations, CRS was
terminated; (6) the U.S. Attorney's Office (USAO) for the Eastern
District of Tennessee opened an investigation and decided the IG could
not be independent in investigating senior TVA managers and excluded the
OIG from the investigation; (7) after an 8-month investigation, USAO
officials determined that there was a prima facie case that Chairman
Crowell violated the conflict-of-interest statute and further
investigation was warranted; (8) USAO officials felt that USAO should
not continue its investigation because the U.S. Attorney was a personal
friend of Chairman Crowell, and referred the matter to the Department of
Justice's (DOJ) Public Integrity Section; (9) after reviewing the
evidence and holding 1 day of grand jury testimony, DOJ concluded
Chairman Crowell's actions as a TVA official benefited CRS and
demonstrated that he had committed a technical violation of the statute,
but should not be prosecuted because he had relied upon a good faith
opinion from the designated agency ethics official; (10) according to
DOJ, the opinion of this official was incorrect; (11) finally, DOJ
reviewed information concerning double billing by CRS' President/Chief
Executive Officer (CEO); (12) it declined to prosecute this matter after
it concluded there was no evidence that the President/CEO had personally
profited; (13) GAO determined that CRS funds were transferred to TVA
after CRS was terminated, including the $30 million endowment, which was
deposited into TVA's operating account and commingled with other TVA
funds; (14) the problems GAO found with CRS creation and operation raise
concern about the need for better oversight of TVA's activities; (15)
TVA's IG can be fired by the Board, thus limiting the IG's independence;
and (16) earlier GAO reviews of TVA oversight had concluded it needed
greater attention, and identified options for improving oversight and
accountability.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: OSI-00-6
TITLE: Tennessee Valley Authority: Problems With Irrevocable
Trust Raise Need for Additional Oversight
DATE: 02/29/2000
SUBJECT: Inspectors general
Malfeasance
Investigations by federal agencies
Internal audits
Federal corporations
Funds management
Corporate audits
Information leaking
Conflict of interests
IDENTIFIER: TVA Rural Studies Agency Account
TVA Technology Brokering Program
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GAO/OSI-00-6
Office of Special Investigations
B-283498
February 29, 2000
The Honorable Fred Thompson
Chairman
Committee on Governmental Affairs
United States Senate
Dear Mr. Chairman:
The Tennessee Valley Authority (TVA), a wholly owned government corporation,
is responsible for developing and conserving the natural resources of the
Tennessee River Valley and supplying power throughout a seven-state area.
TVA's authorizing legislation allows it to operate with a high degree of
independence. All authority over TVA's operations is vested in TVA's
three-member Board of Directors, which is composed of full-time TVA
employees. The President appoints the Board members with the advice and
consent of the Senate, to serve 9-year, overlapping terms of office. The
President designates one member as the Chairman.1
In September 1999, we reported,2 among other matters, that TVA's Office of
Inspector General (OIG) had conducted investigations of allegations made
against each of TVA's Board members. Specifically, the OIG initiated one of
these investigations after receiving allegations concerning the creation and
operation of an irrevocable trust known as the Center for Rural Studies
(CRS) Trust and the role of TVA's Board Chairman, Craven Crowell. TVA
created CRS in 1994 for the purpose of conducting studies and programs
relating to issues and problems of rural communities. TVA funded CRS with a
$30-million endowment. As a result of the OIG investigation, the trust
agreement was revoked in 1995 and the funds were returned to TVA.
Following the issuance of our September 1999 report, you expressed concern
about the lack of oversight of TVA activities, raising specific concerns
about the way TVA management created CRS. As a result, we agreed to
determine the significant events pertaining to the creation, funding, and
operation of CRS as well as any investigations of CRS; determine how TVA
accounted for the funds returned to TVA; and respond to your concern about
oversight of TVA activities.
The trust agreement drafted to create CRS included safeguard provisions to
ensure that CRS was accountable to TVA. At Chairman Crowell's direction, the
structure of the trust was, however, changed and all the safeguard
provisions were eliminated in a revised trust agreement. Further, Chairman
Crowell named himself the Chair of CRS's Management Committee for an
unlimited term. After the media criticized Chairman Crowell's dual role and
lifetime chairmanship at CRS, Chairman Crowell had the trust agreement
amended.
The TVA OIG initiated an audit of CRS after receiving an allegation
concerning Chairman Crowell's role in creating CRS. Three days after the
Inspector General (IG) notified CRS's Management Committee that the audit
revealed possible criminal violations, CRS was terminated. After receiving
the same allegations as the OIG, the U.S. Attorney's Office (USAO) for the
Eastern District of Tennessee opened an investigation. The USAO decided that
the IG could not be independent in investigating senior TVA managers and
therefore excluded the OIG from the investigation. After an 8-month
investigation, USAO officials determined that there was a prima facie case
that Chairman Crowell violated the conflict-of-interest statute and that
further investigation was warranted. However, USAO officials felt that USAO
should not continue its investigation because the U.S. Attorney was a
personal friend of Chairman Crowell. They referred the matter to the
Department of Justice's Public Integrity Section.
After reviewing the evidence and holding 1 day of grand jury testimony,
Justice concluded that Chairman Crowell's actions as a TVA official
benefited CRS and thus demonstrated that Chairman Crowell had committed a
technical violation of the conflict-of-interest statute. However, Justice
concluded that Chairman Crowell should not be prosecuted because he had
relied upon a good faith opinion from the designated agency ethics official.
That official advised him that serving on both the TVA Board and CRS's
Management Committee was not a conflict of interest. According to Justice,
the opinion of the designated agency ethics official was incorrect. Finally,
Justice reviewed information concerning double billing by CRS's
President/Chief Executive Officer (CEO). It declined to prosecute this
matter after it concluded, among other factors, that there was no evidence
that the President/CEO had personally profited.
We determined that CRS funds were transferred to TVA after CRS was
terminated, including the $30 million endowment, which was deposited into
TVA's operating account and commingled with other TVA funds. Further, the
accumulated earnings of about $3.3 million were transferred from CRS and
deposited into TVA's Rural Studies Agency Account. As of October 31, 1999,
the value of the Rural Studies Agency Account was about $1.6 million.
The problems we found with CRS's creation and operation during our
investigation raise concern about the need for better oversight of TVA's
activities. For example, the Board permitted the creation of an irrevocable
trust with a $30 million endowment from TVA that operated with no
accountability to TVA. In addition, TVA's IG can be fired by the Board, thus
limiting the IG's independence. We have reviewed the issue of the adequacy
of TVA oversight in the past, concluded that it needed greater attention,
and identified options for improving oversight and accountability. Further,
a prior debate in Congress included a proposal for the creation of a larger
Board of part-time directors responsible for policymaking and oversight of
TVA's management.
Operation of CRS
In April 1994, with the draft plan for CRS in hand, Chairman Crowell tasked
TVA's Office of General Counsel (OGC) with preparing a trust agreement that
recognized Chairman Crowell as the Chair of CRS's Management Committee. The
draft trust agreement included several provisions that assured that CRS
would be accountable to TVA. Based on his review of the draft trust
agreement, the designated agency ethics official3 concluded that Mr.
Crowell's concurrent seats on both the TVA Board and CRS's Management
Committee would not constitute a violation of the conflict-of-interest
statute, 18 U.S.C. section 208.4 However, the final trust agreement gave
CRS--and particularly the Chair of the Management Committee--considerable
power by providing the Chair with an unlimited term and stripped TVA of its
oversight capabilities. When the terms of the trust agreement were publicly
disclosed, TVA was criticized in the news media. As a result of this
criticism, TVA amended the trust agreement. In the
14 months that CRS existed, its receipts and investment income totaled over
$33.2 million and its expenditures were over $1.4 million. TVA directly paid
approximately $829,000 of these expenditures.
In November 1993 at the direction of Chairman Crowell, a public relations
firm, Seigenthaler Public Relations, 5 was tasked to develop the concept for
a TVA rural development center. The center would be funded with
$30 million, which TVA was scheduled to receive in June 1994.6
Mr. Seigenthaler submitted a draft plan in April 1994.
Subsequently, Norm Zigrossi, TVA's Chief Administrative Officer, instructed
TVA General Counsel Ed Christenbury to prepare a trust agreement creating a
nonprofit entity. Deputy General Counsel William Osteen informed James
Barkley, the attorney assigned to prepare the agreement, that the trust
would receive moneys from a variety of sources and would be tax exempt. In
addition, Mr. Osteen told Mr. Barkley that the trust agreement must
stipulate that (1) the trust would be controlled by a 3-member Management
Committee, each with a 3-year staggered term;7
(2) the trust would receive a $30-million endowment from TVA; and (3) the
trustee would retain investment discretion over the endowment.
The draft trust agreement that Mr. Barkley submitted to Mr. Osteen on
May 30, 1994, was subsequently approved by both Messrs. Osteen and
Christenbury. It was then provided to Chairman Crowell and Mr. Zigrossi for
review. It was drafted to protect TVA's interest and contained provisions
assuring CRS's accountability to TVA. The key provisions of the document
were as follows:
� The TVA Board was empowered to appoint and remove members of the trust's
Management Committee.
� The books and records of the trust would be open to inspection and audit
by TVA and GAO.
� The trustee was to make an annual accounting to both the Management
Committee and TVA.
� The trustee was empowered to invest the endowment in securities and
property approved by TVA.
After the draft trust agreement was provided to Mr. Zigrossi, Chairman
Crowell requested that Mr. Osteen, in his capacity as the designated agency
ethics official, provide an opinion of whether by serving on the CRS
Management Committee, Chairman Crowell would violate the
conflict-of-interest statute.8 In response to this inquiry, Mr. Osteen
tasked Robert Thompson, an OGC attorney and the alternate ethics official,
to help draft an opinion. Mr. Thompson told us that he reviewed the original
trust agreement prepared by Mr. Barkley and concluded that there was no
conflict of interest. He based his decision on the fact that TVA had
significant control over the trust in the trust agreement prepared by
Mr. Barkley. Specifically, the TVA Board appointed CRS's Management
Committee and had audit rights, and the CRS Board had to report annually to
the TVA Board. In addition, the activities of the trust would be consistent
with TVA's mission and would further that mission. Mr. Thompson added that
he never reviewed the final trust agreement.
In June 1994, after reviewing the opinion prepared by Mr. Thompson and based
on his own knowledge of the draft trust agreement, Mr. Osteen issued a
written opinion. He concluded that Chairman Crowell's service on the
Management Committee would not violate the conflict-of-interest statute. He
reasoned that there was a direct nexus between TVA and CRS as evidenced by
TVA's creation of CRS. Further, he believed the mission of the trust was
consistent with and furthered TVA's mission and that Chairman Crowell's
service on the Management Committee would be within the scope of his TVA
official duties.
Also in June 1994, Mr. Zigrossi submitted to Mr. Christenbury a document
prepared by Messrs. Zigrossi and Seigenthaler directing certain changes in
the structure of the trust. According to the document, (1) CRS was to be
funded by an irrevocable trust established by TVA and (2) the members of the
Management Committee would not be eligible for compensation for services
while employed by TVA. According to Mr. Christenbury,
Mr. Seigenthaler also told Mr. Christenbury that Chairman Crowell would
(1) be named as the Chair of CRS's Management Committee, (2) have an
unlimited term, and (3) have the power to remove and appoint the other
members. As to the other Management Committee members, Mr. Zigrossi and a
TVA Senior Vice President would serve 6-year and 3-year terms, respectively.
Further, TVA was not to have the right to audit the books and records of the
trust.
Mr. Christenbury told Mr. Seigenthaler that allowing the Chair of CRS's
Management Committee to have sole control of the moneys and activities of
the trust created appearance problems. He was also concerned that TVA was
not going to have the authority to audit CRS. Notwithstanding these
concerns, Mr. Christenbury instructed his staff to make the changes to the
trust document to reflect Mr. Seigenthaler's instructions. Mr. Seigenthaler
told us that he developed the concept for CRS; however, he denied
involvement in the final decisions concerning the structure of the trust
agreement.
The revised trust agreement contained the following key provisions:
� The Chair of the Management Committee could remove any other Management
Committee member.
� The Chair of the Management Committee would have an unlimited term.
� The Chair of the Management Committee could appoint his successor.
� The books and records of the trust were open to inspection by only the
Management Committee and its agents.
At the time he prepared the revised trust agreement, Mr. Barkley complained
to Mr. Osteen about the structure of the Management Committee. He pointed
out that TVA would have no control over the trust and could take no action
even if the Chair of the Management Committee became incapacitated. Mr.
Barkley stated that he considered it "very disconcerting" that Chairman
Crowell had named himself Chair of the CRS Management Committee for an
unlimited term. He also said he told Mr. Osteen that it was an "odd thing"
for the Chair of the Management Committee to control such power and that
"political concerns" would eventually lead to the breakup of the proposed
organization. 9 According to Mr. Barkley, Mr. Osteen responded, ". . . this
is what the Chairman wanted."
Mr. Osteen stated that he did not review and was not fully aware of the
contents of the final trust agreement, but he does not believe that any
changes to the trust agreement would have affected his opinion concerning
Chairman Crowell serving on the CRS Management Committee. He added that he
was never asked to review his previous ethics opinion after the trust
agreement was changed and that he did not independently review the opinion
in light of the final trust agreement. He told us that he did not recall Mr.
Barkley raising any concerns about the revised trust agreement.
In July 1994, Chairman Crowell and Director Hayes approved the revised trust
agreement through the sequential approval process.10 However, Director
Kennoy disapproved of some of the terms in the trust agreement and thus
refused to sign it. Specifically, Director Kennoy expressed concerns that
TVA lacked the authority to hold the CRS Management Committee accountable
and that the Chair of the Management Committee had too much control.
Although he knew about Director Kennoy's concerns, Chairman Crowell
concluded that the structure of CRS would remain the same. However, Chairman
Crowell directed that the trust agreement name Directors Hayes and Kennoy to
the Management Committee in place of Mr. Zigrossi and the Senior Vice
President. Director Kennoy continued to raise concerns that the Management
Committee lacked accountability to TVA. As a result of Director Kennoy's
disagreement with the proposed CRS trust agreement, the Board was forced to
vote on the matter at a public hearing.
Prior to the TVA Board voting on the proposal to establish CRS, Chairman
Crowell met with Director Kennoy. Director Kennoy described the meeting as
an attempt by the Chairman to coerce him into voting for the proposal when
it came before the Board. Director Kennoy stated that shortly after the
meeting, the TVA IG informed him that the OIG had received allegations from
a Member of Congress concerning improper conduct on his part. Director
Kennoy told us that he believes that Chairman Crowell used his contacts to
initiate this matter. The IG told us that his office completed its
investigation of the matter and issued a report, concluding that there were
no violations on the part of Director Kennoy. Chairman Crowell reviewed the
investigative report and prepared a written response, which was critical of
the OIG investigation of Director Kennoy.11
On October 26, 1994, the trust agreement was formally presented to TVA's
Board. The proposal passed with the Chairman and Director Hayes voting "yes"
and Director Kennoy voting "no." Director Hayes told us that this vote was
the only one that had not been unanimous during the time he served on the
Board. He said that normally any disagreements between the Board members are
resolved before an issue is presented at a public Board meeting. The Board
resolution stipulated that only the earnings from the $30 million endowment
could be expended by the trust and if the trust terminated, the endowment
would be returned to TVA. In addition, the Board authorized $300,000 of
federal appropriated funds for CRS' s initial operating expense. In
addition, the resolution authorized TVA to loan its employees to CRS.
The June 22, 1995, Metro Pulse (a local newspaper) reported that regardless
of how long he remained in office, Chairman Crowell had assured himself
lifetime personal control of over $30 million in TVA funds that were
delivered in October 1994 into the establishment of the autonomous CRS.
On September 27, 1995, the trust agreement was amended as follows:
"The Chair of the Management Committee shall hold office for a term to
expire on May 18, 2002. The terms of office for the Chair of the Management
Committee and other two members of the Management Committee shall coincide
with the expiration of their present terms as members of the Tennessee
Valley Authority Board of Directors. After these limited terms expire, all
subsequent appointees serve six-year terms. The Chair of the Management
Committee shall have the power to appoint members of the Management
Committee."
Total funding for CRS during the approximately14 months it was in existence
was $33,222,297. On November 23, 1994, Chairman Crowell signed the trust
agreement and had $30 million transferred to the trustee.12 On November 28,
TVA transferred an additional $617, 091--the interest earned on the $30
million endowment from the date TVA received it on June 22, 1994. The TVA
OIG audit of CRS was unable to locate any documentation of the Board
authorizing this transfer.
On January 13, 1995, TVA and the Electric Power Research Institute (EPRI)13
entered into an agreement that provided for EPRI to provide CRS initial
funding for operating expenses and to conduct research and development
projects. At the time, Mr. Crowell was the Chairman of TVA's Board, the
Chair of CRS's Management Committee, and a member of EPRI's Board of
Directors. Further, TVA paid EPRI annual dues of $25 million, representing
approximately 10 percent of EPRI's total annual revenue.
EPRI was to provide CRS at least $600,000 per year for 1995, 1996, and 1997
by using $300,000 of its funds plus $300,000 that TVA would provide EPRI.
The funding for 1995 was to be used for the development of a 5-year plan and
for CRS's start-up phase. In May 1995, TVA transferred to EPRI the $300,000
in funds authorized by the Board in October 1994. EPRI paid CRS a total of
$505,250 during the period that CRS was in operation.
On August 14, 1995, TVA transferred another $300,000 directly to CRS to pay
for a CRS survey conducted by Roper Starch Worldwide, a nationally
recognized pollster. The project director, under contract with CRS,
described the survey as an in-depth survey of rural areas in the Southeast
United States on attitudes about such things as politics and economic
opportunity. He added that it was his understanding that Chairman Crowell
would be using the data for his book on the rural south.
The survey funds came from the interest earned on federally appropriated
funds associated with TVA's Technology Brokering Program.14 Prior to the
funds transfer, Lawrence Stein, CRS's President and Chief Executive
Officer15 requested that TVA's Vice President for Economic Development
release the funds to CRS, but she refused because no contract or agreement
existed between TVA and CRS for the release of the funds. She subsequently
refused to release the funds even when the Chairman requested that she do
so. Chairman Crowell then directed the Vice President for Economic
Development to transfer the funds to Mr. Zigrossi, which she did. Mr.
Zigrossi subsequently released the funds to CRS.
From November 1994 through January 1996, CRS received a total of $1,798,956
in investment income.
Table 1: Center for Rural Studies Trust, Summary of Cash Receipts and
Investment Income Earned November 23, 1994, through January 31,1996
Description Amount
Funds received from TVA
Initial endowment (November 23, 1994) $30,000,000
Interest earned on initial endowment
(November 28, 1994) 617,091
Rural attitudes survey 300,000
Total received from TVA $30,917,091
Other sources of revenue
Funds received from EPRI (1995) 505,250
Funds received from the Center for New Westa 1,000
Total funds received, November 1994-January 1996 $31,423,341
Total investment income $1,798,956
Total funds received and investment income $33,222,297
aMr. Stein told us that the Center for New West made this payment to CRS to
offset his costs for travel to a conference that the Center for New West
sponsored.
Source: TVA OIG Draft Report
According to TVA's OIG analysis of CRS's expenditures for the period
November 1, 1993, through January 31, 1996, the total cost incurred was
$1,410,747, of which TVA paid $829,691 directly. Of the $1.4 million cost
incurred, $680,790, or 48 percent, was paid for salaries and benefits of the
three TVA employees on loan to CRS, including relocation costs. Of the
$680,000, $377,388 was associated with Mr. Stein.
Prior to entering into the contract with CRS, EPRI requested that Mr. Stein
provide CRS's proposed General and Administrative (G&A) rate. The contract
required EPRI to reimburse CRS for costs incurred, including a pro rata
share of the overhead rate or G&A. Mr. Stein informed EPRI that CRS had an
81.82 percent G&A rate. Because EPRI's auditors typically review cost
proposals prior to signing a contract, EPRI officials requested that they
audit CRS to substantiate the 81.82 percent G&A rate. Mr. Stein would not
provide the support necessary to conduct the audit. He subsequently
contacted Chairman Crowell who in turn contacted the President of EPRI and
expressed his dissatisfaction and concern about the EPRI/CRS contract not
being signed. As a result of this contact, the audit was not conducted and
the contract was signed on March 1, 1995.
and Chairman Crowell
Based on an anonymous complaint concerning Chairman Crowell's creation of
CRS, TVA's OIG initiated an audit of CRS in November 1995. Three days after
the IG informed CRS's Management Committee that the audit revealed possible
criminal violations, the Management Committee terminated CRS, moving its
activity under the aegis of TVA. Less than a month later, Mr. Stein
resigned. After receiving the same complaint, the USAO for the Eastern
District of Tennessee opened an investigation with the Federal Bureau of
Investigation (FBI). After an 8-month investigation, the USAO decided that
the Eastern District should be recused from any further investigation,
citing the U.S. Attorney's personal relationship with Chairman Crowell.
However, the USAO felt further investigation was warranted because there was
a prima facie case that Chairman Crowell had violated the
conflict-of-interest prohibitions in 18 U.S.C. section 208. The
investigation was transferred to the Public Integrity Section of Justice,
which declined prosecution of Chairman Crowell. Justice also reviewed the
information concerning the double billing by Mr. Stein and declined to
prosecute this matter.
In September 1995, an anonymous source sent letters to two congressional
offices containing allegations about Chairman Crowell. The source claimed,
among other things, that Chairman Crowell had made financial arrangements to
benefit his personal friends and political cronies by way of CRS.
One of these congressional offices forwarded the letter to the GAO FraudNET,
which referred the matter to TVA's OIG on October 16, 1995. The other office
forwarded the letter to the FBI. During October 1995, the TVA OIG received
letters from both the FBI and GAO, conveying the allegations from the
anonymous source regarding Chairman Crowell. Independently, the FBI's
Knoxville office initiated a public corruption investigation in November
1995. On November 28, 1995, the IG provided Chairman Crowell a copy of the
anonymous letter containing the allegations and requested that Chairman
Crowell, as Chair of CRS's Management Committee, authorize a financial audit
of CRS by the OIG. The OIG did not have audit rights.
After Chairman Crowell authorized the audit of CRS, the OIG immediately
initiated the audit to trace all CRS funds received and disbursed. An
initial review of CRS's financial records determined that there was no
accounting system and CRS's internal controls were "absolutely" inadequate.
As a result, the auditors interviewed Mr. Stein to determine the basis for
CRS's billings to EPRI. During an interview on November 30, 1995,
Mr. Stein admitted that he directed a TVA employee on loan to CRS to
"concoct the EPRI bills out of nothing." He also stated that the bills were
"contrived" and EPRI was billed for "presumed" costs. In subsequent
conversations with the OIG, Mr. Stein said his intent was to acquire as much
money as possible for CRS before TVA's 3-year commitment expired. Mr. Stein
said he sought EPRI moneys to move funds quickly into CRS accounts in
anticipation of full operations. Mr. Stein had informed the Internal Revenue
Service (IRS) that he intended to accumulate funds in the trust for 3 years
and use the interest to provide salary/compensation for himself, other
staff, and operations.
The OIG audit of CRS records determined that CRS overbilled EPRI by
$361,045, of which $257,034 appeared to have been falsified and determined
that the balance was not in compliance with the contract. $227,366 in G&A
expenses billed to EPRI was entirely unsupported by actual CRS expenditures.
Further, the OIG found that CRS submitted other budget proposals to a vendor
and IRS, that indicated the G&A rate was 10.4 percent or 5.4 percent,
respectively. These G&A rates were not shared with EPRI, nor was the fact
that TVA was paying for most of CRS's expenses. In effect, CRS billed EPRI
as if all its costs were direct costs, and added overhead costs even though
it never incurred such costs. Mr. Stein told OIG auditors that he was not
aware of any double billing or overbilling.
On December 4, 1995, following the CRS audit fieldwork, the IG notified the
CRS Management Committee16 of potential violations of law surrounding CRS
billings to EPRI. The OIG opened two investigations involving CRS based on
the questionable billings and other indications of financial irregularities
found during the audit.
On December 7, 1995, the CRS Management Committee signed a resolution to
initiate termination of CRS and transfer its activities into TVA. It was
reported in the media that Chairman Crowell announced that CRS--charged with
enhancing Tennessee Valley economic growth, creating rural jobs, and making
the power system more competitive--would be moved beneath TVA's corporate
umbrella.17 TVA also entered into a contract with the University of Kentucky
Research Foundation to continue the contractual relationship initiated
between CRS and the foundation.18 The contract tasked the foundation to
perform or supervise studies related to issues and problems of rural
communities and to benefit rural inhabitants of the Tennessee Valley Region.
On January 5, 1996, Mr. Stein resigned from TVA, effective January 22, 1996.
He agreed not to disclose the terms and arrangements surrounding his
resignation or make comments or statements to the news media that were
adverse to or critical of TVA, its management, its employees, or its
programs. TVA also agreed not to disclose the terms of Mr. Stein's
resignation, except as required by applicable law.
During the 14 months CRS operated, a 5-year plan was developed and two
activities--the Roper Starch Survey and preparation to publish an Internet
guide for farmers--were undertaken.
In late 1995, after receiving a copy of the anonymous complaint from the
FBI, an Assistant U. S. Attorney (AUSA) for the Eastern District of
Tennessee reviewed the allegations and concluded that the FBI was not
actively investigating the matter and that additional investigation was
warranted. As a result, the USAO began supervising the investigation and the
FBI began serving subpoenas for records. The AUSA was aware that TVA's OIG
was conducting an audit of CRS and concluded that the TVA OIG could not be
entirely independent in investigating Chairman Crowell and other senior
managers at TVA because TVA's Board could fire the IG. Therefore, the OIG
was excluded from the investigation.
The IG first learned of the FBI and USAO investigation of CRS in February
1996. After a meeting with the AUSA, the IG suspended all audit and
investigative efforts and provided the FBI all OIG files regarding the
allegations concerning CRS and Chairman Crowell, including summaries it had
prepared.
The FBI/USAO investigation focused on whether Chairman Crowell's
participation in the creation of CRS constituted a violation of 18 U.S.C.
section 208. The investigation did not address CRS's questionable billing
practices. The FBI conducted a number of interviews with TVA employees,
including Mr. Zigrossi.
Mr. Zigrossi told us that he had conversations with Virgil Young, at the
time the Special Agent in Charge (SAC) of the Knoxville, Tennessee, FBI
office. Prior to becoming TVA's Chief Administrative Officer, Mr. Zigrossi
had been TVA's first IG and previously served as the SAC of the FBI
Washington, DC, field office. He asked SAC Young about the status of the FBI
investigation of Chairman Crowell. However, SAC Young told us that while he
did have conversations with Mr. Zigrossi during the FBI's investigation of
Chairman Crowell, they did not discuss the investigation.
On August 22 or 23, 1996, at the request of SAC Young, a meeting was held at
the USAO with the AUSA, the Chief Assistant, the FBI supervisor, the FBI
case agent, and SAC Young attending this meeting. At that time, SAC Young
attempted to convince the USAO that there was insufficient evidence to
proceed with a case against Chairman Crowell. SAC Young told us that this
was the first time he ever attempted to convince a U.S. Attorney not to
pursue a prosecution. According to the FBI case agent, the arguments
presented by SAC Young at the meeting were identical to those used by Mr.
Zigrossi when the case agent interviewed Mr. Zigrossi. The FBI case agent
stated that he believed that SAC Young presented Mr. Zigrossi's views as his
own.
The Chief Assistant stated that he had had many dealings with SAC Young and
it was unusual for him to have a working knowledge of an ongoing
investigation. A senior FBI official in the Knoxville FBI office told us
that SAC Young did not involve himself in operational matters, including the
details of ongoing investigations. The AUSA told us that it was highly
unusual for any investigative agency to argue against proceeding with a
prosecution, because the agency normally pushes for prosecution. The FBI
case agent stated that the AUSA was so incensed about SAC Young's argument
against prosecution that he provided the SAC a copy of the section of the
U.S. Attorney's handbook that clearly states that the USAO will determine
what warrants prosecution.
The U.S. Attorney said that he had attended both professional and social
functions with Chairman Crowell, including having lunch with Chairman
Crowell during the course of the investigation of the Chairman. He also said
that Chairman Crowell had telephoned him to ask about the status of the
investigation, but the U.S. Attorney denied providing any information to
Chairman Crowell about the investigation. We attempted to interview Chairman
Crowell about his contacts with the U.S. Attorney and other matters.
However, he declined to be interviewed.
Eight months after it began its investigation, the USAO held a meeting to
review the status of the investigation and to determine what actions needed
to be taken. The U.S. Attorney, Chief Assistant, Chief of the Criminal
Section, and the AUSA attended. They agreed that Chairman Crowell's actions
warranted further investigation by the grand jury to determine if an
indictment could be returned. However, they also decided that the Eastern
District of Tennessee should not pursue the grand jury indictment because of
the relationship between the U.S. Attorney and Chairman Crowell, as well as
the relationship between the USAO, TVA management, and TVA OIG. It was
decided that the USAO would request Justice to assume responsibility for the
investigation and recuse the Eastern District.
Accordingly, on October 2, 1996, the USAO's First Assistant met with
Justice's Public Integrity Section and the Associate Attorney General.
During the meeting, the First Assistant discussed the status of the
investigation and provided the following as reasons warranting the recusal
of the U.S. Attorney and USAO: (1) the U.S. Attorney was a close personal
friend of a former U.S. Senator and, as a result, has known Chairman Crowell
for years; (2) the Eastern District of Tennessee had daily contact with
individuals involved in the investigation; and (3) TVA's General Counsel's
office worked closely with the Eastern District on civil and other
TVA-related matters. The U.S. Attorney and members of his supervisory staff
concluded that it would be difficult for the Eastern District to maintain an
impartial posture in the investigation and prosecution of the allegations
against Chairman Crowell.
On October 16, 1996, the U.S. Attorney wrote a memorandum to Justice
requesting the District's recusal from the investigation. The memorandum
referred to the pending investigation involving TVA, Chairman Crowell, and,
potentially, others who might have been involved with Chairman Crowell's
apparent violation of the federal conflict-of-interest statutes. In
addition, the U.S. Attorney recommended that the companion wire fraud
investigation of double billing by Mr. Stein be referred to the appropriate
USAO.
The AUSA assigned to the investigation told us that he felt that SAC Young's
attempt to convince him to drop the case and the U.S. Attorney's recusal of
the entire USAO were successful attempts to deter him from proceeding with
the investigation. The First Assistant told us that as long as the current
U.S. Attorney is in office, the USAO for the Eastern District of Tennessee
would not be able to pursue a case against Chairman Crowell.
Public Integrity accepted the case from the U.S. Attorney and assigned a
trial attorney in November 1996 to assume responsibility for the
investigation. In December 1996, the Public Integrity trial attorney19 told
the FBI that he would probably recommend declining prosecution after he had
reviewed the summary of interviews conducted by the FBI; reviewed documents
collected by the FBI, USA, and OIG; and held 1 day of grand jury testimony.
According to the FBI case agent, the investigation was about 50 percent
complete at the time it was transferred to Public Integrity and that no
further investigation was conducted after the 1 day of grand jury testimony
in December 1996. Over a year later, on January 6, 1998, Public Integrity
officially notified the FBI in writing that it declined to prosecute the
case.
The Chief of the Public Integrity Section told us that the scope of the
Public Integrity investigation was limited to two questions that concerned
whether Chairman Crowell violated the conflict-of-interest prohibitions in
18 U.S.C. section 208. The first question focused on whether the creation of
the trust resulted in a predictable financial benefit to Chairman Crowell at
the time he had established it. Justice concluded that there was no concrete
evidence that Chairman Crowell would have received a financial gain at the
time the trust was created. It further concluded that even if Chairman
Crowell created CRS for his future benefit or the benefit of friends or
associates, there would be no criminal violation because that is not a
predictable financial gain as defined by the statute.
The second question focused on whether any of Mr. Crowell's official acts as
TVA's Chairman would have financially benefited CRS. Justice concluded that
CRS financially benefited from Chairman Crowell's actions as TVA Chairman.
As a result, Justice concluded that Chairman Crowell's actions on behalf of
CRS constituted a technical violation of the conflict-of-interest statute.
However, citing the good faith opinion by the designated agency ethics
official that Chairman Crowell could simultaneously sit on the Boards of TVA
and the CRS Management Committee, Justice declined to prosecute Chairman
Crowell.20 The Chief of the Public Integrity Section told us that he
believed Mr. Osteen's opinion was erroneous because Chairman Crowell's
actions "clearly" constituted a technical violation of the
conflict-of-interest statute. For example, Mr. Crowell made decisions as
Chairman of TVA authorizing the transfer of funds from TVA to CRS.
Nevertheless, the Chief of Public Integrity advised us that Justice does not
typically prosecute such technical violations.
In order to determine whether this technical violation should be prosecuted,
Justice's investigation focused on determining whether Mr. Osteen's ethic
opinion was coerced. Justice concluded that there was no evidence of
coercion and that the opinion was prepared in good faith.
With regard to the double billing, Public Integrity reviewed the information
concerning the double billing by Mr. Stein and determined that there was "no
harm no foul" in that (1) there was no evidence that Mr. Stein personally
profited; (2) the transaction was between two nonprofit organizations; and
(3) TVA had reimbursed the other entity, EPRI, for the amount of the
erroneous billings. Justice further stated that it believed a principal
witness against Mr. Stein would not have been credible. This witness, a
convicted felon hired by Mr. Stein, had testified that Mr. Stein directed
him to over bill EPRI.
The AUSA assigned to the investigation said that Justice informed him that
it declined to prosecute the case, citing TVA's designated agency ethics
official's opinion that there was no conflict of interest as a defense for
Chairman Crowell. The AUSA stated he believed that he was prepared to
overcome that defense.
The Chief of the Criminal Section told us that he was very upset when
Justice sent a letter stating that it had declined the case claiming it did
not meet prosecutive guidelines. He felt that there was a prima facie case
against Chairman Crowell that needed further investigation, but no such
follow-up was done.
We discussed with the Chief of the Public Integrity Section the USAO's view
that there was a prima facie case that Chairman Crowell violated the
conflict-of-interest statute and that there was a need for further
investigation. The Chief of the Public Integrity Section stated that it is
his interpretation as an expert on conflict-of-interest issues that Chairman
Crowell's control over the trust was not enough to result in a violation of
the conflict-of-interest statute. He said the USAO for the Eastern District
of Tennessee does not normally prosecute these types of cases and lacks
expertise in this area.
On January 3, 1996, the CRS Management Committee decided to transfer all CRS
programs, functions, and operations to TVA. The actual dates the funds were
transferred to TVA were May 24 and 29, 1996, when $33,356,109.69 was
transferred from CRS trust accounts to TVA's Rural Studies Agency Account.
The funds returned to TVA by CRS are in TVA's name and not in a trust. In
addition, $521,923.6921 from CRS's accounts was transferred to EPRI on May
2, 1996.
In February 1997, a $1.5 million endowment was made from the Agency Account
to the University of Virginia's Darden School Foundation for the development
of a public-private partnership institute. During March 1997, $30 million
was transferred from the Agency Account to TVA's general operating account
with the U.S. Department of the Treasury. Between 1996 and October 1999,
$2,611,541.52 was paid to continue the rural studies research programs at
the University of Kentucky Research Foundation. The Foundation has produced
about 30 publications related to rural economics and maintains an Internet
web site about rural studies. The value of the Rural Studies Agency Account
as of October 31, 1999, was $1,585,866.93.
The problems we found with the creation and operation of CRS exemplify the
need for better oversight of TVA activities. The issue of TVA's oversight
has been examined several times in the past. In a 1982 report, we pointed to
a growing concern with TVA's activities and identified options for improving
oversight and accountability.22 These options included periodic
congressional oversight hearings. In a 1983 report, we discussed our
concerns about TVA's management and concluded that the issue of the adequacy
of TVA's oversight needed greater attention.23 In a 1987 report entitled
TVA−A Path to Recovery, the Southern States Energy Board concluded,
"additional mechanisms are needed to ensure that TVA is accountable for its
actions to its ratepayers, Congress, and the American public."24 The report
further stated that a larger Board--comprised of part-time directors who
would be responsible for policymaking and oversight of TVA's
management--should be established. In 1995 and 1998 reports, we raised these
same concerns about a lack of oversight of TVA.25
In 1997, TVA's oversight was a topic of debate in the Congress and in
October 1997 a bill was introduced in the Senate to expand TVA's Board from
three full-time members to nine part-time members who had strong backgrounds
in corporate management or strategic decisionmaking. Under this proposal,
the expanded Board would establish long-range goals and policies for TVA and
the day-to-day management would be handled by an independent chief executive
officer. This proposed legislation was not enacted into law.
Currently, there are efforts in the Congress to ensure that TVA's IG is
independent of the TVA Board and therefore can conduct effective oversight
of TVA. Some concerns are that TVA's Board can hire and fire the IG and
TVA's OIG is currently being managed by an interim IG on detail from TVA. As
a result, there are two bills pending in the Congress to make tthe TVA IG a
statutory IG, nominated by the President and confirmed by the Senate.
We conducted our investigation from September 1999 through February 2000. We
interviewed TVA officials involved with the creation of CRS. We also
interviewed TVA OIG employees who were involved in the audit and
investigations of Chairman Crowell and Lawrence Stein and reviewed OIG
supporting documentation. We met with Justice officials and reviewed
documents from the Knoxville office of the FBI, USAO for the Eastern
District of Tennessee, and the Public Integrity Section. We also reviewed
the records from the DOD OIG pertaining to its audit and investigation of
TVA's Technology Brokering Program, which partly funded CRS. We also
reviewed and analyzed TVA Rural Studies financial records, contracts, and
other documents.
We attempted to interview Chairman Crowell and Mr. Zigrossi, but both
declined our request. We also attempted to interview the Public Integrity
Section trial attorney who was assigned to the investigation of Chairman
Crowell; however, Justice declined our request. We previously interviewed
the AUSA assigned to the investigation of Chairman Crowell during our 1999
investigation of TVA. We attempted to interview the AUSA during this
investigation; however, Justice declined our request.
As discussed with your office, unless you announce its contents earlier, we
plan no further distribution of this report until 30 days after the date of
this letter. At that time, we will send letters to interested congressional
committees and members and make copies available to others upon request. If
you have questions about our investigation, please contact me or Deputy
Director for Investigations Donald Fulwider at (202) 512-7455. Assistant
Director John Ryan was a key contributor to this investigation.
Sincerely yours,
Robert H. Hast
Acting Assistant Comptroller General
for Special Investigations
(600578)
1. Craven Crowell was appointed to the Board and designated as TVA's
Chairman in May 1993; his term expires May 2002. During the period covered
by this investigation, the other two Board members were William Kennoy and
Johnny Hayes who were appointed to the Board in 1990 and 1993, respectively.
Director Hayes resigned on February 1, 1999, and Director Kennoy's term
expired on May 18, 1999.
2. Tennessee Valley Authority: Facts Surrounding Allegations Raised Against
the Chairman and the IG (GAO/OSI-99-20, Sept. 15, 1999).
3. TVA employees are subject to the executive branch-wide standards of
ethical conduct at 5 C.F.R. part 2635. 18 C.F.R. sect. 1300.101. Pursuant to 5
C.F.R. part 2635, the designated agency ethics official's responsibilities
include coordinating and managing the agency's ethics program, counseling
agency personnel concerning ethics standards, as well as assisting managers
in understanding and implementing agency ethics programs. 5 C.F.R. sect.
2635.101 provides that criminal conflict of interest statutes, e.g. 18
U.S.C. sect. 208, must be taken into consideration in determining whether
conduct is proper.
4. Among other things, 18 U.S.C. sect. 208 prohibits an executive branch officer
or employee from participating personally and substantially in a matter in
which he or an organization in which he is serving as an officer has a
financial interest.
5. TVA executed a contract with Thomas Seigenthaler's firm, Seigenthaler
Public Relations, effective October 1, 1993, to advise on the planning of
TVA's rural economic development programs. Part of the work involved
establishing the rural development center concept and planning the
organization of CRS. Effective December 1, 1994, Mr. Seigenthaler began
performing work for CRS under a retainer agreement executed directly with
CRS. On September 1, 1995, this agreement was replaced by an agreement that
Seigenthaler Public Relations would bill CRS on an hourly basis.
6. The funds were the proceeds of the settlement of a 1984 antitrust
lawsuit.
7. The proposed composition of the Management Committee included Mr. Crowell
as the Chair, with Mr. Zigrossi and a TVA Senior Vice President as the other
Management Committee members.
8. 18 U.S.C. sect. 208.
9. Mr. Barkley made these statements in response to questions by the Federal
Bureau of Investigation during its investigation of Chairman Crowell.
10. Mr. Christenbury explained that there are two methods employed to gain
Board approval of various proposals. The first, the sequential approach, is
typically used when TVA management desires not to release information to the
public. The second, the open Board meeting, is used when the release of
information will not detrimentally affect TVA and when the time demands for
the action falls within the Board's next scheduled meeting.
11. On September 13, 1994, the OIG received allegations against Director
Kennoy from a Member of Congress. The Member informed the OIG that the
allegations came from a credible source, but declined the OIG's request to
identify the source. Prior to issuing a report in June 1995, the IG
requested that the Department of State OIG perform a quality review to
ensure the adequacy of the investigation. The State Department concurred
with the final report and stated that under its own operating policies and
procedures, the findings would have been referred to Justice's Public
Integrity Section for a definitive prosecutive opinion. In the TVA IG's
opinion, such a referral was not warranted. In July 1995 Chairman Crowell
wrote his response to the OIG report.
12. On November 16, 1994, the CRS Management Committee selected Union
Planters National Bank as the trustee.
13. EPRI was formed in 1972 to conduct a coordinated research and
development program for the U.S. electric utility industry. EPRI's
activities range from supporting fundamental research to commercializing
products and services developed for its member utilities and the electric
industry.
14. In 1988, TVA created the Technology Brokering Program to promote
economic development through interagency agreements with federal agencies,
particularly the Department of Defense. The federal agency funded projects
through this program and TVA administered the contracts for a certain fee.
This program is referred to as off-loading of contracts. Upon receipt, TVA
invested the program advance funds and earned about
$4.3 million in interest revenue during 1992 and 1993. In 1994, the
Subcommittee on Oversight of Government Management of the Senate Committee
on Governmental Affairs published a report titled, Off-loading: The Abuse of
Inter-Agency Contracting to Avoid Competition and Oversight Requirements.
The report specifically discussed the accumulation of excess fees and
interest earned by TVA and recommended that TVA return these funds to the
U.S. Treasury. TVA has since returned approximately $6.8 million; however,
the Department of Defense OIG has determined that an additional $4.8 million
is outstanding.
15. On July 18, 1994, TVA named Lawrence Stein to be the President and Chief
Executive Officer of CRS effective November 15, 1994.
16. The members of CRS's Management Committee were also members of the TVA
Board of Directors.
17. The resolution stated that CRS was being terminated because it had not
received contributions from other entities and had accomplished all the
purposes for which it was established that it was capable of accomplishing
without additional contributions.
18. The initial contract between CRS and the Kentucky foundation was
effective in January 1995; its project manager was Dr. David Freshwater.
19. Justice refused our request to interview the Public Integrity trial
attorney assigned to this investigation.
20. Good faith reliance on the advice of a designated agency ethics official
is a factor taken into account by Justice in the selection of cases for
prosecution. 5 CFR 2635.107(b).
21. This amount was the $505,250 EPRI paid CRS plus earned interest of
$16,673.69.
22. Tennessee Valley Authority--Options for Oversight (GAO/PEMD-82-54, Mar.
19, 1982).
23. Triennial Assessment of Tennessee Valley Authority--Fiscal Years
1980-1982
(GAO/RCED-83-123, Apr. 15, 1983).
24. The Southern States Energy Board was comprised of government and
industry experts with diverse experiences in energy operations, management,
and regulation.
25. Tennessee Valley Authority: Financial Problems Raise Questions About
Long-Term Viability (GAO/AIMD/RCED-95-134, Aug. 17, 1995) and Federal Power:
Options For Selected Power Marketing Administrations' Role in a Changing
Electricity Industry
(GAO/RCED-98-43, Mar. 6, 1998).
*** End of document. ***