FRANKFORT — In early 2011, Attorney General Jack Conway decided he lacked probable cause to act on a state audit that criticized public business deals worth tens of millions of dollars at an Eastern Kentucky utility company and questioned improper bidding procedures, violations of the Open Meetings Act and possible conflicts of interest.
However, Conway — this year's Democratic nominee for governor — kept in touch with people at that company, Pikeville-based Utility Management Group, which privately runs Pike County's water and sewer services.
For his 2011 re-election and his gubernatorial campaign, Conway has taken at least $16,000 in contributions from UMG's owners, executives, managers and their families. In addition to that sum, in December, UMG co-owner and chief operating officer Greg May hosted a fundraiser for Conway's current campaign that raised a reported $11,250. Conway calls May "a political ally" whom he has known "for six or seven years."
"Greg's one of 10 to 12 really politically active people in Pike County," Conway said in a recent interview. "I probably logged a call into Greg and said, 'Hey, we're coming down, can you help out?'"
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Conway said there is nothing improper about his UMG-related donations. He said his campaigns reject money and offers to raise money from anyone who is under investigation by the attorney general's office or who has a criminal or sex offense record. But Conway said he won't turn down help from people simply because they are connected to an audit that "lands on my desk."
"We did not have a criminal investigation of UMG," Conway said. "Greg May was not named in that audit. We did not start a criminal investigation of UMG. Just because an audit comes to my desk, that does not trigger a criminal investigation."
Twice since the audit, Conway said, his office has opposed the interests of UMG, once with an Open Records Act decision that said the company must publicly disclose financial data, and more recently by questioning UMG on behalf of Pike County ratepayers at the Public Service Commission. The PSC is weighing Pike County rate increases of 25 percent for water service and 159 percent for sewer service.
"I have always carried out the duties of my office without fear or favor. You are not getting anything for your contribution to me," Conway said.
Neither Greg May nor Archie Marr, UMG's chief executive officer and also a Conway donor, returned calls seeking comment for this story. May and his wife have given nearly $100,000 in political donations to Democrats and Republicans since 2001. Marr and his wife have given at least $62,000.
During the 2010 primary, UMG gave $15,000 of its own corporate funds to a short-lived group, Citizens for Eastern Kentucky Government, that aired television commercials attacking Chris Harris, then a Pike County magistrate seeking re-election. The commercials showed a scantily dressed woman and accused Harris — without merit — of spending "our tax money" on "casinos, strip clubs, even call girls." Voters returned Harris to office.
"What happened was, the Pike County Fiscal Court had voted for my motion to ask for an audit of Mountain Water District and its contract with Utility Management Group," said Harris, who is now a Democratic state representative. "That raised their ire at UMG. They came after me politically for trying to expose what I believe is mismanagement and basically a corporate shell game at the water district involving public money."
'Conflicts of interest'
Pike County Fiscal Court's request for an examination went to then-state Auditor Crit Luallen. On Jan. 27, 2011, Luallen released a 73-page audit criticizing how the county's publicly owned Mountain Water District privatized its water and sewer operations through UMG, a company that was created by May, highway contractor Leonard Lawson and a few other men.
"The Mountain Water District board entered into its original contract with UMG in 2005 through a questionable procurement process with no public board discussion and no examination of the contract terms, which resulted in costly management fees and conflicts of interest," the auditor's office concluded. "The audit found that after contracting with UMG, Mountain Water District costs began to escalate at a faster rate, creating increasingly larger losses for the district despite increasing revenue."
Luallen's audit had eight findings, including potential conflicts of interest between UMG and the water district; irregularities in UMG's contract; failure to follow the proper bidding process; a rapid increase in fees paid to UMG without public explanation; and violations of the Kentucky Open Meetings Act when the water district's board discussed UMG's contract behind closed doors.
Complicating the audit, Luallen said, UMG refused to provide her staff with records necessary to examine the water district's finances. UMG had collected $36 million in fees from the water district by that point, she noted.
Luallen presented her audit to Conway and the Legislative Ethics Commission for "further review and possible follow-up."
The ethics commission pounced on the one finding where it had jurisdiction: After an eight-month investigation, it fined state Rep. W. Keith Hall, D-Phelps, for taking $171,000 in no-bid contracts from the water district after he helped it get millions of dollars from the state budget. Hall's son later was hired as Greg May's personal assistant at UMG.
By contrast, Conway's office waited until after the ethics commission acted to open a criminal investigation, in November 2011, and then closed it after two months without taking any formal action. The delay would prove problematic: A key witness, Will Brown, the water district's superintendent who became UMG's project manager after the privatization, died that August and so could not be subpoenaed to testify.
Fight over records
Speaking recently, Conway said he and several top aides met with Luallen just before she released her audit. They decided it would be hard to build a criminal case on the facts as presented, Conway said. Most of the offenses were misdemeanors, subject to Kentucky's one-year statute of limitations, in part because Mountain Water District had not adopted the state's model procurement code setting rules for purchasing, he said.
One possible Class D felony for public corruption, involving Hall's no-bid contracts, would be difficult to prove because Brown died, Conway said.
"We saw some questions about business practices. We talked a lot about what information (Luallen) had or didn't have," Conway said. "But when we went through the exercise, the only thing we had was a potential official misconduct, which was a misdemeanor and time-barred, and the other of these questions involving the former superintendent and Keith Hall," Conway said.
Hall, who lost his House seat last year, is scheduled to stand trial June 22 on federal bribery charges unrelated to his work for Mountain Water District.
Asked recently about how the attorney general handled her Mountain Water District audit, Luallen said, "I have no reason to believe, or no evidence, that they did not act accordingly on that referral."
Luallen said Conway's office took a positive step in September 2011 when — at the request of Pike County officials — it ruled that UMG must comply with the Open Records Act because it received at least 25 percent of its revenue from public sources. Until then, UMG refused to disclose records with information about the water district's finances, citing its status as a private, for-profit company, Luallen said.
But the documents never were produced. Several months later, the General Assembly rewrote the Open Records Act to create an exemption that the company successfully used to challenge Conway's opinion in Pike Circuit Court. The lawsuit is pending at the Kentucky Court of Appeals.
"People have been disappointed that after all these years, we haven't been able to get to the bottom of this," Assistant Pike County Attorney John Doug Hays said recently of the UMG open records fight.
"There has been a lot of controversy about Mountain Water District and the way it's conducting business with UMG," Hays said. "We want to get into UMG's records. Some of the Mountain Water relationships with UMG might help explain the rates being charged to us and the rate increases we're facing. Who might be on their payroll and who has political connections out there, for example."
UMG's political connections were the focus of a 2010 federal bid-rigging trial involving Leonard Lawson, the highway contractor who co-founded UMG, and former Kentucky Transportation Secretary Bill Nighbert. Prosecutors said Lawson arranged for payments to be made to Nighbert through UMG in exchange for inside information on upcoming state highway contracts.
Archie Marr, who was Lawson's longtime accountant as well as UMG's chief executive officer, testified during the trial that UMG gave Nighbert a $125,000-a-year consulting job and a $34,000 car because his political connections made him an ideal salesman to pitch the company's services to city and county leaders. The jury acquitted Lawson and Nighbert on all charges.
A government ethics watchdog said Conway, to be cautious, should not take campaign money from people connected to cases referred to him. Unlike most politicians, attorneys general and state auditors play adversarial roles that require keeping an arm's length from certain donors, said Richard Beliles, chairman of Common Cause of Kentucky.
"The attorney general is supposed to be the people's attorney," Beliles said.
"It's very disappointing that Attorney General Conway would not, at the very least, avoid this appearance of impropriety. Assuming that he made the right decision to not pursue the auditor's report, he still should not be receiving contributions from people he has been asked to investigate," Beliles said.
However, Conway said he only would feel obliged to reject UMG-related donations if the company was the subject of an active investigation by his office, which was never the case. For the two months his office had an investigation opened, the subject was Mountain Water District, not UMG or any of its executives, he said.
"We draw the line, and we vet every single check, and if it clears, it clears," Conway said. "And it cleared, and that's the standard for whether or not we take a check or we don't take a check."