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Gas Natural (EGAS) Shareholder Derivative Lawsuit

A Gas Natural shareholder filed a derivative action case against the board of directors of Gas Natural Inc, alleging that the CEO and board of directors systematically made payments to undisclosed “related parties” owned by the CEO which had the effect or illegally and artificially raising consumer rates for natural gas.

Gas Natural shareholder alleges scheme to funnel money to CEO-controlled entities

Gas Natural is a natural gas company, which primarily operates local distribution companies in seven states. Gas Natural's revenues are highly regulated and all of the states served by Gas Natural limit its rate of return based on purchasing, operating, and maintenance costs in order to ensure that customers are charged a "fair, just, and reasonable" price.  Calculating a “rate of return” requires that Gas Natural limit its rate of return by its "rate base," which generally includes its original purchasing cost, cost of inventory, and allowance for working capital, less accumulated depreciation of installed used and useful gas pipeline and other gas distribution or transmission facilities.

The shareholder derivative complaint alleges that Gas Light has systematically exploited and overcharged its customers through dubious deals with certain related parties and affiliates that are owned and controlled by Gas Natural's Chairman of the Board of Directors (the "Board") and Chief Executive Officer ("CEO"), defendant Richard M. Osborne ("R. Osborne"). These deals had the effect of artificially inflating the “rate base” allowing Gas Natural to justify to regulators its given rates. 

While the price of natural gas faced a steady decline, the Company drastically inflated its consumer pricing and funneled money to affiliated companies through a scheme of systematically overpaying its affiliates for gas purchases, and by paying its affiliates unearned fees for imaginary services that were never actually performed.

Gas Light discloses regulatory review of company’s operations

In 2012, Gas Natural Inc released a report that claimed its total revenue for the year went down from $99.22 million in 2011 to $93.82 million that year. Company representation also stated the company's net income decreased to $3.72 million from $5.37 million.

Gas Natural Inc filed with the U.S. Securities and Exchange Commission on November 15, 2013 disclosing that on the 13th of November, two days prior, two subsidiaries of Gas Natural Inc, (Northeast Ohio Natural Gas Corp and Orwell Natural Gas Company) were included in an Opinion and Order produced by the Public Utilities Commission Of Ohio. This issued order pertained to the gas cost recovery cases these subsidiaries were entangled in.  On the 15th of November Gas Natural announced that an Opinion and Order had been issued by the Public Utilities Commission of Ohio (PUCO), related to the gas cost recovery cases involving two of the Company’s operating subsidiaries.

The findings of the PUCO report included, among other things, numerous instances of dubious related party transactions that led to customers being overcharged, lack of inadequate internal controls and the Company’s improper manipulation of the regulated utility business. The PUCO report is a result of a 2012 audit of the Company designed to see if Gas Natural was properly billing its customers for natural gas in accordance with regulated recovery practices. The 2012 audit was actually a follow up to an audit in 2010 which raised questions about the Company’s enforcement of contract terms, appropriateness of purchase price provisions, and related party transactions. On the 15th, Gas Natural Inc also  released a statement claiming it needs to analyze the Public Utilities Commission Order to ensure whether or not there would be impact on their Form 10-Q, the document for the fiscal period that ended September 30.

 

Current Case Status: 
The Magistrate has basically denied the Defendants motion to dismiss. The order is attached but perhaps the most compelling portion is the Magistrate's acceptance that the shareholder has plead demand futility. Generally, a shareholder must demand that the board take action before that shareholder has standing to bring a derivative action. Here the Magistrate accepted that the shareholder has plead sufficient facts to show that the majority of directors are not independent. The parties are waiting for the District Court to either accept or modify the Magistrate's order.
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