Feds demand payback for misused stimulus funds

Millions of dollars for carbon sequestration that apparently never happened.


This story was originally published at Wyofile.com on Feb. 3, 2015. It is an update to the Two Elk Saga series published in May/June 2014. 

Citing “serious mismanagement or misuse of funds,” federal officials have demanded that Two Elk power plant promoter Michael J. Ruffatto pay back most of the $7.8 million his company received for a 2009-2010 federal stimulus research project in Wyoming’s Powder River Basin, according to records obtained by WyoFile through a Freedom of Information Act lawsuit.

Officials with the Department of Energy’s National Energy Technology Laboratory in Pittsburgh, Pa., ordered Ruffatto to return $5.7 million, mostly payments to an unstaffed Wyoming land-and-cattle subsidiary of his Colorado-based company, North American Power Group, Ltd.

Part of the Obama administration program to create jobs and revive the moribund American economy, the stimulus grant was for carbon sequestration research, including the drilling of a deep-characterization well to study underground geology in the area. But no well was drilled and no new jobs were created.

In the documents, Ruffatto reported that his company returned $2 million to the government according to a schedule set out by National Energy Technology Laboratory account managers. But Ruffatto balked at making additional payments after learning that another investigation into the grant had been opened by the DOE Inspector General in October 2012. According to the documents, the company still owes $3.7 million.

On Friday, a North American Power Group spokesman issued the following statement: “We have been responsive to all requests by the government for information and documentation. We have been timely with agreed-upon repayment of $2 million in disallowed items until the agreed-upon schedule was interrupted by the further government inquiry. We have continued to cooperate with the government and look forward to a mutually satisfactory conclusion to this issue.”

The federal documents — released nearly two years after WyoFile first requested them — reveal important details about the circumstances leading up to the January 2012 suspension of the Two Elk stimulus grant. However, much remains to be learned about what has happened in the three years since the suspension of the grant.

The only government action revealed in the documents was the 2012 requirement to pay back the full $5.7 million in “unallowable” costs by a deadline of  Oct. 31, 2012. The consequences of non-payment were not addressed.

Contacted last week about this story and about the status of any federal investigation, National Energy Technology Laboratory chief counsel Paul Detwiler said the agency had  “no comment.”

Over the past two years, however, officials at various levels of  the Department of  Energy, including Detwiler, have repeatedly insisted that the case is under “active investigation” and faces “pending enforcement action.”

The nature of any federal probe is important because if investigators find evidence of fraud, Ruffatto and his company could be subject to stiffer civil or criminal penalties under federal False Claims Act or other fraud statutes.

The False Claims Act, also known as the “Lincoln Law” because of its origins in the American Civil War, carries a penalty of between $5,500 and $11,000 for each false claim and treble the amount of the government’s damages. The government is required to prove that a person “knowingly submits a false claim to the government or knowingly causes another to submit a false claim to the government or knowingly makes a false record or statement to get a false claim paid by the government.”

For the last fiscal year, 2013-2014, the government reported recovering $5.69 billion in settlements and judgments under the False Claims Act.

Paul Skirtich, the assistant U.S. Attorney in Pittsburgh, PA, to whom the North American Power Group case has been assigned, is an expert and frequent speaker on federal false claim prosecutions.

Early in his own career as an Arizona assistant attorney general in Phoenix, Ruffatto himself was part of a team of prosecutors in a massive fraud case. That 1976 case resulted in the conviction and imprisonment of flamboyant Lincoln Thrift Association founder Robert H. Fendler.

Key to the current investigation into the suspended stimulus grant is the unstaffed Wyoming subsidiary, North American Land & Livestock, LLC, that Ruffatto incorporated in 1996 as a land and cattle operation. According to the federal documents, North American Land billed and received $5,534,604.50 from the government but could produce only $47,602 in allowable charges for what it claimed was “heavy equipment mobilization; drilling pad and mud pit construction; drilling water procurement and layout area preparation.”

Historically, North American Land had been used by Ruffatto to buy and sell property near the Two Elk site, which he dreamed of developing into a major power plant complex that would burn coal from the nearby Black Thunder and other coal mines.

The North American Land claims were by far the highest costs disallowed by the government. Other “unallowable” expenses included charges for property tax, supplies, travel, and legal fees paid to the Holland & Hart law firm in Denver.

In one letter dated Feb. 1, 2012, federal contract officer Martin J. Byrnes observed that Ruffatto was submitting invoices for expenses dating to 1994, more than 15 years before the stimulus grant was awarded.

The officials also characterized as “questionable” another $1.2 million Ruffatto paid himself, his company vice-president Brad Enzi — son of Wyoming U.S. Sen. Mike Enzi — and other North American employees with public funds from the Obama administration’s 2009 economic stimulus program.

Ruffatto, an attorney and businessman, billed the government $214.38 an hour as “chief investigator” for the scientific carbon storage research project, claiming that he worked as many as 76 hours a week. In one month alone — October 2010 — he collected $73,369.52 in salary and benefits, according to records obtained by WyoFile in a previous Freedom of Information Act request detailed in a Sept. 27, 2011, story,Two Elk Stimulus: Big paychecks but no new jobs.

Campbell County rancher Dan Tracy lives near the proposed Two Elk power generation site. After two decades in the works, only a concrete pad, a tin building and some dirt work exist. (Rone Tempest/WyoFile)
Some $7.8 million was given to Ruffatto before his grant to study carbon sequestration potential in Wyoming was suspended for accounting irregularities on Jan. 9, 2012. But only $763,635 — approximately 10 percent of the total — was determined by DOE contract officers to be legitimate.

Most of the “allowable” expenses were to Stanford University ($226,779) and Montana State University ($249,826), which had participated in the early stages of the carbon sequestration study. Both universities quit the project after it was clear that North American Power Group was not going to drill the deep exploratory well that was supposed to be the centerpiece of research to determine the underground CO2 storage potential of the region.

In fact, much of federal officials’ frustration evident in the documents involved Ruffatto’s failure to provide, as one March 21, 2012, letter stated, “daily drilling reports, standard or advance well logs and other documentation related to reported drilling costs and associated work.” In the same letter, federal contract supervisor Byrnes questioned why costs that appeared to be associated with a power plant that Ruffatto had proposed for the Two Elk site, including “air permit litigation,” had been charged to the stimulus grant.

While Byrnes’ questions in the letters tend to be specific and technical, reflecting the scientific and engineering nature of the carbon sequestration stimulus grant, Ruffatto’s replies are often wordy and obscure, somehow managing to be simultaneously defensive and obsequious without answering the questions.

Anyone who has read the hundreds of letters and transcripts of Ruffatto testimony — from his nearly 20 years of dealings with state officials over his Two Elk power plant proposal and from hearings and depositions before the Colorado Public Utilities Commission — will recognize his style. Short, direct queries from bewildered officials are met with a torrent of  elaborate verbiage that is difficult to decipher.

For example, in response to a one-sentence Feb. 2012, Byrnes query about why “socioeconomic reports” had been billed to the engineering project, Ruffatto wrote loftily:

"The socioeconomic information focuses on the geographic project area and requires gathering updated data concerning population, demographics, population estimates and forecasts, economic conditions, employment characteristics and industry, income characteristics, government revenues, future economic conditions, housing, schools, health care, public safety, municipal services, transportation and addresses potential impacts, including overall employment needs, wages, direct community impacts, indirect benefits and tax implications. It also provides information about and addresses the ‘carrying capacity’ of the area without the impact of the project and with the impact of the project …”

He did not say why this information was part of a sequestration study.

When Byrnes questioned some legal fees that were included in the invoices submitted to the government, Ruffatto blamed a 2009 lawsuit that had been filed by the Sierra Club and the Powder River Basin Resource Council challenging state air quality permits that North American Power Group had obtained to build a coal-fired power plant on the site. The power plant was not linked to the sequestration study.

“NAPG was required to defend its site activities to prevent the loss of these permits,” Ruffatto wrote, defending the expense charges.

Yet later in the same March 28, 2012, letter he becomes apologetic.

Ruffatto ends his letter with an appeal for the federal agency’s blessing: “With NETL’s permission and approval, we are ready to complete the project.”

The stimulus grant was suspended in a Jan. 9, 2012, letter from Byrnes to Ruffatto. Byrnes’ “final determination of total unallowable costs” of $5,719.281.92 was made in a June 25, 2012, letter to Ruffatto demanding repayment by certified check.

Last spring WyoFile published a seven-part investigative series, The Two Elk Saga, that detailed the history of the stimulus grant and earlier power plant projects proposed by Ruffatto and North American Power Group, which shares ownership of four small California power plants with a Japanese-owned company, IHI Power Services Corp., Aliso Viejo, Ca.

However, details of the suspension, including the amount of “unallowable costs” and the repayment schedule, were not known until documents were obtained under a settlement agreement that was reached between this reporter and attorneys for the government on Jan. 26, 2015.

Under the lawsuit settlement before chief U.S. District Judge Nancy Freudenthal in Cheyenne, the government provided materials requested under a Freedom of Information Act (FOIA) in exchange for an agreement to dismiss the lawsuit. The agreement does not prevent WyoFile from filing FOIA requests for other materials not related to the 2012 suspension.

After he initially disputed the millions of dollars of “unallowable charges” identified by DOE, the documents show Ruffatto eventually agreed to repay the money according to terms established by the federal agency.

In an Oct. 29, 2012, letter to National Energy Technology Laboratory contract officer Byrnes, Ruffatto reported that he had paid two installments of $1 million each.

However, after making the two scheduled payments, Ruffatto said he had received a “comprehensive subpoena from the office of Inspector General of the Department of Energy earlier this month, indicating that the Department has opened a separate investigation into the concerns you indicated would be resolved by repayment to the Department.”

Ruffatto said the new subpoena meant “we will necessarily be engaging legal counsel to evaluate the issues associated with the investigation and may not be in a position to make further payments until those issues are resolved.”

Ruffatto’s initial agreement to repay the $5.7 million demanded by the government put additional pressure on his already strained business portfolio. In his Oct. 29, 2012, letter, Ruffatto wrote “the closing and sale of certain of our assets to meet the final payment request and fully settle this matter has been delayed.”

Sources close to his business say he may have been referring to the proposed sale of his half-interest in four small power plants in California, valued at approximately $10 million, but encumbered with some debt.

Since his stimulus grant was suspended in January, 2012, Ruffatto has also sold one of his homes, a luxury condominium he bought with his daughter in a Washington, D.C., suburb, and put his California home in Orange County on the market.

Sales details for the Arlington, Va., condominium — a three-bedroom, corner penthouse with Italian cabinetry and a private elevator in the luxury Turnberry Tower across the Potomac River from Georgetown — are contained in an August, 2013, lawsuit Ruffatto filed against the condominium purchasers in Virginia federal court. The lawsuit, later settled, was the result of a dispute about payment for a parking space in the building.

According to the lawsuit, Ruffatto and his daughter bought the condominium for $2,850,000 on March 24, 2010. The purchase was made just after Ruffatto had received approval from DOE for the $5 million second part of his federal stimulus grant.

He put the unit up for sale with an asking price of $3,350,000 in August, 2012, two months after the government demanded that he repay $5.7 million he had received from the stimulus program.

A year later, Ruffatto put his four-bedroom, Orange County “custom estate” up for sale for $4.4 million. The ocean-view home, which Ruffatto built on the site in 2007, is still on the market, but at a reduced price of $3,995,000.

Not on the market is Ruffatto’s 10.7-acre, 6,000-square-foot estate in the affluent Cherry Hills Village suburb south of Denver. The Arapahoe County Assessor appraises the estate at $9 million.

Meanwhile, Ruffatto’s two-decade-old proposal to build what is now a $1 billion Two Elk coal-fired power plant on his property near Wright remains alive — at least on paper — before the Wyoming Industrial Siting Council, the permitting board that regulates industrial projects costing $193.8 million or more.

On June 25, 2014, North American Power Group vice president Brad Enzi informed the siting council that the previously approved construction deadline of January, 2014, could not be met because of pending federal regulations and “general financial market” considerations. Enzi asked the council’s seven members to extend the construction deadline until April 1, 2015.

But Enzi also admitted that even that start date is contingent, “assuming that the independent interconnection agreement for the combustion turbine and the final power purchase agreements are in place on that date.” Problems with securing transmission lines and finding buyers for the electricity have plagued the Two Elk project from its beginnings in 1996.

Enzi did not respond to WyoFile questions for this story.

The U.S. senator’s son — who recently opened an online Wyoming-themed clothing store, Lucky Buffalo Trading Company — appeared before the siting council Nov. 6, 2014, along with State Rep. Mary Throne (D-Cheyenne), legal counsel for the Two Elk project.

Yet again, members of the siting council repeated their concerns about North American Power Group’s ability to complete the power project. However, under urgings from Enzi and Throne, the council agreed to the construction extension by a 4-2 vote.

Voting for the extension were council members James Miller (R-Sundance), Shawn Warner (R-Powell), John Corra (R-Cheyenne) and Peter Brandjord (D-Green River). Voting against were Sandy Shuptrine (Independent-Jackson) and Richard O’Gara (D-Cheyenne).

WyoFile is a nonprofit news organization focused on Wyoming people, places and policy.

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