Southwest suit says it was misled by ONEOK

David Strow

Tuesday, Jan. 25, 2000 | 11:07 a.m.

Las Vegas-based Southwest Gas Corp. is accusing former merger partner ONEOK Inc. of regulatory manipulation in Arizona -- and is demanding hundreds of millions of dollars in damages in compensation.

A Southwest Gas lawsuit filed Monday in U.S. District Court in Arizona is targeted against both Oklahoma-based ONEOK and Southern Union Co., the Texas company rejected by Southwest Gas last year. The lawsuit, which claims fraud and breach of contract, accuses ONEOK of acting "maliciously, fraudulently and oppressively in conscious disregard of Southwest's rights."

"Southwest therefore seeks exemplary damages in an amount sufficient to punish ONEOK and deter it from engaging in such conduct in the future," Southwest's lawsuit said. "In 1999, ONEOK had sales of approximately $1.842 billion and Southwest seeks punitive damages that are proportional to the magnitude of these revenues."

Weldon Watson, spokesman for ONEOK, said the company was not prepared to comment on Southwest's allegations. The company is, however, seeking a ruling by an Oklahoma federal judge stating that ONEOK acted properly in terminating the merger agreement.

ONEOK terminated its $1.8 billion merger with Southwest Gas Friday afternoon, more than a year after the merger was first announced. In a press release, ONEOK said the termination was the result of "financial risk" associated with Southwest, particularly its potential liability in a racketeering lawsuit filed by Southern Union.

Southern Union's lawsuit accused Southwest of conspiring with ONEOK and several Arizona regulators in an attempt to sink the Southern Union bid through regulatory manipulation.

In many places, the Southwest Gas lawsuit echoes the charges first leveled by Southern Union. But Southwest Gas also insists that it knew nothing about ONEOK's actions, and claims it too was misled by ONEOK and the Arizona regulators. Without this information, Southwest said, its board was unable to make a fully informed decision between ONEOK and Southern Union.

Regulatory information was critical for the board. Southwest Gas rejected Southern Union's higher offer because it believed ONEOK would have a much easier time winning regulatory approval for a merger.

"If ONEOK had disclosed its improper role in the lobbying efforts (of current and former Arizona regulators), it would have caused the (Southwest) board to have serious questions about the integrity of ONEOK's senior management and about ONEOK's chances of obtaining regulatory approval," Southwest's lawsuit states.

Southwest also attacked Arizona Corporation Commissioner Jim Irvin and former ACC Executive Secretary Jack Rose for working on behalf of ONEOK -- again echoing charges raised by Southern Union. Irvin has been Southwest's most outspoken ally in Arizona, calling the merger in the best interest of Arizona consumers. He has also been accused of lobbying regulators in Nevada and California in an attempt to get the ONEOK-Southwest Gas merger approved.

More serious are charges against Rose, who is accused of signing a consulting contract with Prudential Securities that would have brought him millions of dollars if he could successfully close a financing contract for Prudential in the ONEOK-Southwest merger. Rose is then accused of presenting himself as an ACC official as he lobbied for ONEOK -- an effort supposedly motivated by the Prudential contract.

Southwest said it relied on ONEOK's insistence that these charges were not true, and continued to press forward with the merger even as civil and criminal investigations began to push forward. Only later did Southwest discover that ONEOK wasn't telling the truth about its involvement with Rose and Irvin, the lawsuit said.

The breaking point between the companies apparently came in early January, when Deborah Scott, director of the ACC's Utilities Division, testified that the ACC staff had its doubts about "ONEOK's truthfulness and (ONEOK's) ability to identify inappropriate conduct and apparent conflicts of interests, or of its disregard for such actions." The staff then recommended that the merger application not be approved at the present time.

Scott then noted the investigations under way would provide more evidence that could be used to make a final decision. At this point, Southwest claims, ONEOK attempted to halt all discovery in the investigations for 120 days.

On Jan. 18, Southwest Chief Executive Michael Maffie sent a letter to ONEOK officials demanding that "ONEOK cure the deficiencies identified in Scott's testimony." ONEOK responded three days later by killing the merger.

ONEOK's denial of Southwest's charges and its decision to terminate the merger came on the same day. But Watson said he couldn't say whether Southwest's accusations prompted ONEOK to kill the deal.

"I can't answer that ... I just don't know," Watson said.

ONEOK has said the termination was the result of the Southern Union lawsuit against Southwest -- a lawsuit that also names ONEOK as a defendant. Watson acknowledged that ONEOK also faces the risk of potential liability with Southern Union's lawsuit.

But what ONEOK did not want to risk, Watson said, was absorbing Southwest's liabilities on top of its own.

"Even if we'd been successful in going forward with the Arizona commission, we'd still be faced with a liability that lies exclusively with Southwest Gas," Watson said. "There were causes of action exclusively against Southwest Gas, with $750 million in potential liability. That's where our concern is."