PG&E victims’ lawyer scrutinized over Wall Street connections
The revelation came during a marathon town hall at a Santa Rosa hotel in December, when a prominent Texas attorney stood before a crowd of people whose homes burned in devastating wildfires two years earlier.
San Antonio lawyer Mikal Watts was telling the group about a $13.5 billion settlement he had helped broker with PG&E Corp. to pay victims of fires caused by the company’s power lines. Watts’ clients stood to benefit from that deal, a major milestone in PG&E’s bankruptcy case that became public days earlier.
Flipping through a presentation projected on a screen flanked by a Christmas tree and a U.S. flag, Watts reviewed the details of the settlement. Then, after at least 50 minutes of talking, he shifted gears. He jokingly told victims that he wanted to “be your daddy” for a little bit, according to a video reviewed by The Chronicle.
Victims needed to consider “all sorts of conflicts of interest out there,” Watts said. He stressed that he knew he had to earn his clients’ trust.
“I want to disclose to you something that happened to me over the last 90 days,” Watts said. “I’m not worried about it, but I want to tell you about it, because it’s a good example.”
What followed was a somewhat confusing spiel about his “huge” line of credit and various exchanges he had with other lawyers and Wall Street financiers before he agreed to the settlement with PG&E. Watts said he learned along the way that part of his line of credit had been “in effect, cordoned off,” or allocated, to two New York financial firms, Apollo Global Management and Centerbridge Partners.
Apollo holds more than $600 million of PG&E debt and insurance claims against the company, according to court papers filed in April. Centerbridge, meanwhile, held nearly $496 million in PG&E debt and insurance claims as of late last year, a December court filing shows. Centerbridge is also a PG&E shareholder and has committed to buying as much as $325 million of new stock when the bankruptcy concludes.
Watts’ December comments about the firms did not seem to cause much of a stir at the time. But now, nearly five months later, they are a major source of concern for a vocal group of fire victims and their lawyers.
Members of the group have said in court papers and interviews that Watts’ remarks signal a potential conflict of interest that he did not properly disclose. They have asked PG&E’s bankruptcy judge to intervene, arguing that fire victims were not fully informed when they began voting on the company’s plan to resolve its bankruptcy a few weeks ago. On Friday, the judge scheduled a May 12 hearing on the matter.
No matter the circumstances, Watts should have expressly asked his clients to waive the potential conflict, said Steven Kane, a San Diego lawyer representing about 300 fire victims.
“It’s a basic rule,” Kane said. “It’s something you learn in Legal Ethics 101 in law school.”
Watts has insisted he did nothing wrong and that he did adequately inform his clients. He says lenders have no power to control the legal decisions of his firm, Watts Guerra, and the loan in question is helping his firm run its offices and invest in other suits such as litigation against San Francisco vaping company Juul.
In an interview with The Chronicle, Watts said he took out a $100 million loan for his law firm from the St. Louis investment bank Stifel in September. The loan was “strictly a refinancing of a previous one,” he said. In Watts’ telling, he later learned from Apollo and Centerbridge that they bought stakes in the loan — his arrangement with the bank does not permit him to be notified of others who become involved in the credit facility.
His firm represents about 16,000 fire victims, the largest client base in the PG&E case. Since the company filed for bankruptcy in January 2019, Watts has not been involved in the courtroom litigation, but he has played a major role behind the scenes, including during the negotiations of the settlement to pay victims.
Watts, 52, is an accomplished trial attorney, known partly for his successful role in litigation against Firestone and Ford Motor Co. that led to the recall of millions of defective tires. He is also a prolific donor in Democratic Party politics, and in 2007 he explored a campaign to unseat U.S. Sen. John Cornyn, R-Texas, but dropped out of the race.
His legal tactics have come under scrutiny before.
In 2015, Watts and several others he worked with were indicted by the federal government over allegations that they had falsely claimed to represent 40,000 fishermen seeking payment from BP over the 2010 Deepwater Horizon oil spill. Watts represented himself in a 2016 trial and was acquitted. Two individuals who collected names and information were convicted of 66 counts of identity theft, aggravated identity theft, mail fraud and wire fraud.
The entire saga was recently recounted in a lengthy article in the Atlantic magazine — the 10th anniversary of the oil spill was last month — that focused on Watts. He is also getting a documentary made about the trial, which he described in an interview as a “charade of justice” and “absurd.”
Still, that part of his record has concerned some clients in the PG&E case, including Geoff Reed, who lost his Butte County home in the 2018 Camp Fire.
“Everything on him I read is all bad,” Reed said of Watts.
Reed said he was originally represented by one of the law firms Watts has partnered with but recently changed attorneys. Reed is now represented by Kane, the San Diego lawyer, and his wife, Bonnie.
Watts “did not have my best interests at heart at all,” Reed said.
Watts said he learned of his connection to Apollo and Centerbridge last year, while PG&E shareholders and bondholders were locked in a battle for control over the company. Ultimately, the equity side prevailed, though bondholders later struck their own deal with the company.
Watts told The Chronicle he was “courted” by Apollo and Centerbridge in the time leading up to the settlement that victims’ attorneys reached with PG&E. But when he learned that Apollo and Centerbridge had stakes in his law firm loan, Watts chose to deal only with other firms who were leading negotiations, he said.
“I wasn’t really interested in negotiating with either Apollo or Centerbridge, although to be fair to them, neither of them asked me to,” Watts said. “It was a social introduction. Nothing more, nothing less.”
A representative for Apollo said in an email that the firm owns less than $20 million in “a syndicated loan structure to a law firm which is involved with a vast amount of other unrelated cases and of which we have no control.”
“We have no ability to influence what Watts decides is best for his clients and no incentive to produce a result that is less than full payment,” Apollo said. As a party to the bondholder deal with PG&E, Apollo is “highly supportive” of the company’s bankruptcy plan, the statement said.
Centerbridge declined to comment, and Stifel representatives did not respond to requests for comment.
Jared Ellias, a UC Hastings law professor who has closely followed PG&E’s bankruptcy, said the only real conflict he could see with the loan would be if Apollo and Centerbridge had the ability to demand payment and motivate Watts to settle sooner than he otherwise would. Watts has indicated that is not the case.
“Unless there’s evidence that it affected his decision-making, it would be pretty hard for me to say that this conflict of interest alone is enough to taint this bankruptcy process and to taint the settlement that was reached,” Ellias said.
Fire victims have until May 15 to vote on PG&E’s bankruptcy restructuring plan, which would incorporate the $13.5 billion settlement. On Tuesday, Watts and other law firms told a federal judge that more than 20,000 of their clients had already voted and about 98.7% of them said yes.
“It’s a very small group that’s opposing the plan,” said Gerald Singleton, another San Diego lawyer whose firm was part of the filing to the federal judge. “I don’t think it is fair for them to try and have the court throw out the votes they don’t like.”
Victims are allowed to change their votes until the deadline passes, and many others are still waiting to cast a ballot, hoping to pressure PG&E into improving the terms of the deal. The holdouts do not like the fact that PG&E plans to use stock to fund half of the $13.5 billion trust that would pay their claims, making its true value uncertain. They also want assurances about when PG&E will actually fund the trust.
PG&E said in a statement that company officials “encourage everyone to vote” and are working to get the company’s bankruptcy plan approved in court “as soon as possible, so victims will be paid fairly and quickly.”
The company said it will make its initial funding to the victims’ trust upon its formal emergence from Chapter 11 bankruptcy protection, which is currently targeted for Aug. 29 at the latest. PG&E has to have its bankruptcy plan approved two months before that in order to meet a crucial state deadline.
Actual payments to fire victims will be handled by an independent trustee, PG&E noted.
When Watts was reviewing the settlement in Santa Rosa in December, he framed the $13.5 billion deal as a good one.
“I believe that we have sucked every dollar out of this company that is possible for it to keep the lights on,” he said.
But the ultimate decision about whether to enact the settlement by approving the company’s bankruptcy plan is “not Mikal Watts’ call,” he said — that choice belongs to the fire victims.