JEA sued its fired CEO and Managing Director Aaron Zahn on June 5, calling him the “principal architect and ringleader of perhaps the largest fraud in Jacksonville history” in his efforts to financially benefit from and convince the JEA board of directors to support the utility’s sale.
Jacksonville’s city-owned utility filed the six-count lawsuit against Zahn in the 4th Judicial Circuit Court in Duval County seeking damages for alleged fraud; breach of fiduciary duty; breach of the public trust; and fraudulent inducement. JEA demanded a jury trial in the case.
The lawsuit alleges Zahn knew his July 2019 employment contract violated Florida law and says he could have received $23 million from an employee bonus plan he recommended the utility board to approve.
Attorneys for JEA also filed a motion to halt arbitration on Zahn’s possible post-termination compensation that is part of his employment contract.
According to the lawsuit, Zahn filed a demand for arbitration May 8 with the American Arbitration Association.
JEA’s board of directors voted Jan. 28 to terminate Zahn with cause based on preliminary investigations of a plan to offer the public utility for sale and an employee compensation plan promoted by the executive that was abandoned when its potential financial cost to the utility was revealed.
“Zahn’s fraudulent scheme has left in its wake criminal and legislative investigations; credit downgrades by bond rating agencies; massive bills from law firms, lobbying groups, and investment bankers; and a damaged reputation from a breach of the public’s trust,” the suit reads.
According to JEA’s legal team, Zahn made false and misleading statements and omissions to the board on the utility’s historical electric unit sales, future financial projections and JEA’s contractual obligations for its contribution to the Georgia-based nuclear Plant Vogtle to sway board members, the public and City Council on a sale.
The lawsuit alleges Zahn misled the JEA board with threats of job cuts and moving the utility’s headquarters out of Downtown.
“At the time he made these statements, Zahn knew that management had no immediate plan to do either of those things,” the lawsuit states
The lawsuit calls the other scenarios for JEA’s future floated by Zahn, including an initial public offer and transitioning to a community-owned co-op, “strawman alternatives.”
JEA attorneys claim Zahn directed Chief Administrative Office Herschel Vinyard to create a presentation that exaggerated alleged legal constraints on JEA to adapt its business.
Vineyard is on paid administrative leave from JEA, and his conduct as a JEA employee and role in the never-implemented Long Term Performance Unit Plan is under investigation by the Office of General Counsel.
“All of this was choreographed to present the fiction that the only viable path forward for JEA was to privatize,” the lawsuit alleges.
Zahn’s response
In a June 5 email to the Daily Record, Zahn’s attorney John D. Mullen called JEA and the general counsel’s office lawsuit “a disguised press release in response to Mr. Zahn’s demand for arbitration.”
“The claims of the lawsuit have no factual basis and are a rehash of largely disproven conspiracy theories,” Mullen said. “The OGC, specifically Jason Gabriel, Sean Granat, and Lawsikia Hodges, are trying to protect their public and professional reputations by using a lawsuit to distance themselves from JEA policy decisions made with their full participation and approval.
“It is keenly interesting that JEA now disavows the strategic work of JEA’s own Board of Directors, the OGC itself, 100(-plus) JEA employees, McKinsey & Co., JP Morgan, Morgan Stanley, and numerous other industry-leading consultants,” Mullen said.
Zahn’s attorney also argues the claim that Zahn presented misleading financial forecasts “is absurd,” and he claimed Interim CEO Paul McElroy presented “a similar outlook” on “numerous occasions” from 2014-18 when he last led the utility.
‘Illegal PUP’
JEA lawyers said the performance unit plan was “the central component and motivating force” behind Zahn’s push to privatize JEA and that the plan was illegal.
Zahn claimed that this bonus plan was designed to put the total amount of compensation for JEA’s employees at the 50th percentile of the market, the lawsuit states.
The Council Auditor’s Office issued a memo Nov. 18 that said the bonus plan could have cost JEA up to $636.6 million if the utility was sold to a private company. The JEA board killed the plan Dec. 17.
The lawsuit also cites an initial pay schedule for the bonus plan that was never presented to the JEA’s board. The schedule said 47% of the plan’s performance units would have been issued to JEA senior leadership team and 2% would have gone to line employees.
Those units would have been allocated at 40% of the employee’s salary. Had JEA been sold for $10.5 billion, that would have given Zahn the $23 million payout.
In total, the lawsuit states JEA’s 14-member senior leadership team would have been paid more than $200 million.
“These golden parachutes in no way reflect the 50th percentile of the market, and therefore patently violate the very policy Zahn used to justify the plan,” the lawsuit states.
The JEA board approved the bonus plan July 23. At the same meeting, the board allowed JEA to issue the invitation to negotiate and it approved Zahn’s employment contract.
The lawsuit claims Zahn failed to correct former JEA CFO Ryan Wannemacher when he told the board the overall cost of the program would be $3.4 million annually when he knew the figure was greater.
JEA lawyers also said Zahn failed to disclose to the board a May 20, 2019, memo from law firm Nixon Peabody that said the bonus plan would not “be able to clear hurdles under Florida law” before it was approved.
Employment contract
Zahn’s employment contract is a central part of JEA’s lawsuit. Attorneys claim it should be “void as a matter of law because it was an integral part of Zahn’s fraudulent scheme and the additional payouts.”
“Emails discovered since Zahn’s termination demonstrate that he used JEA’s own law firms — Pillsbury and Foley & Lardner — to craft employee-friendly terms for his personal benefit and to JEA’s detriment,” the lawsuit states.
Zahn was given a retroactive pay increase when the JEA board approved his contract.
JEA’s attorneys claim the utility’s Chief Legal Officer Jody Brooks had previously advised Zahn that a retroactive salary increase was prohibited and considered “extra compensation” under Florida law.
JEA payroll records from Aug. 9, 2019, show Zahn was retroactively paid $115,693.92 in salary and $8,054.64 in leave in one lump sum.
JEA wants Zahn to return the payment, according to the lawsuit.
JEA’s attorneys
Jacksonville-based law firm Nelson, Mullins, Riley & Scarborough filed the suit against Zahn with city Office of General Counsel attorney Sean Granat on JEA’s behalf.
The Nelson Mullins team is led by attorney Lee D. Wedekind III. The firm entered into a $300,000 agreement with the general counsel’s office Feb. 4 to represent “JEA’s interests in connection with the employment and termination” of Zahn, according to a contract obtained March 6 by the Daily Record.