Several states have recently expressed frustration with holders and their advocates regarding cooperation during audits and other compliance enforcement activities. Some states have stated informally that they believe this “lack of cooperation” will necessitate legal action to increase compliance and facilitate enforcement. Examples of frustrations that have been expressed involve a general lack of cooperation in providing records timely in audits and/or the unwillingness to provide certain records as requested in audits. Other examples include refusing to provide unredacted records relating to certain property types or any financial or legal information that the holders and/or their advocates deem sensitive or unnecessary. Even though states believe that they have broad audit powers and can demand/review any records they deem necessary, many holders have pushed back against these assertions in recent years, resulting in increased litigation.
Recently, the Commonwealth of Pennsylvania (“Pennsylvania”) filed suit against a Pennsylvania-domiciled utility company PPL Corporation (“PPL”) (Docket Number 272 MD 2019, 5/10/2019). PPL is being audited for unclaimed property by the third-party audit firm, on behalf of Pennsylvania and 24 other states. The audit scope includes a review of records pertaining to shareholder accounts to determine if any securities or related property in those accounts are escheatable to any of the participating states. PPL provided partially redacted shareholder records, refusing to provide names, street addresses, social security numbers, and account numbers, as well as any records pertaining to shareholders with last known addresses in states not participating in the audit. PPL believed that the redacted information was not necessary to determine what accounts were legally dormant.
Pennsylvania issued a subpoena on March 13, 2019, demanding that PPL provide all records as originally requested. PPL's outside counsel, on behalf of PPL, refused to comply with the full scope of the subpoena to provide unredacted records electronically, citing information security concerns, among others. However, PPL did express a willingness to allow an on-site visit to review unredacted electronic data on PPL-owned computers to identify escheatable accounts in the participating states. After additional correspondence between the parties did not result in an agreeable resolution, Pennsylvania filed its lawsuit.
In its complaint, Pennsylvania claims that the information provided is inadequate. Furthermore, Pennsylvania believes the on-site review process does not allow auditors the ability to properly perform the necessary analytics using their own software to determine if any of the accounts are holding unclaimed property. Pennsylvania is seeking injunction relief to require PPL to produce unredacted records, as well as a declaratory judgment that “PPL’s refusal to produce the information and documents requested in Part 1 of Pennsylvania Treasury’s March 13, 2019 Subpoena is contrary to Pennsylvania law.”
PPL objected to the complaint by citing concerns over providing sensitive shareholder information electronically to the auditor. PPL also indicated concerns over potential security breaches by the state(s) or their auditors, as well as the potential disclosure of any sensitive shareholder information via public records requests made through other states also participating in the audit. PPL also argues that under 72 P.S. § 1301.23(b) and (c), Pennsylvania has the right to “examine records,” but the law does not require transmittal or production of records. Finally, PPL does not believe that the auditor has the right to examine records for shareholders who reside in states not participating in the audit. Because PPL believes it did provide the necessary records required to conduct the review and further offered the on-site review of unredacted records, it has requested the Commonwealth Court dismiss the case and quash the subpoena.
This case is important to any publicly traded companies that are currently undergoing a securities audit or may be subject to an audit in the future. We are aware of many holders throughout the unclaimed property community have taken similar positions on their audits by either restricting electronic data transmissions, redacting records, and/or offering on-site reviews of electronic data to address similar concerns expressed by PPL. Historically, this approach was deemed acceptable by the states and their audit firms, something that PPL also points out in its Preliminary Objections filing. However, this change in Pennsylvania’s position presents a troubling trend that could affect holders and potentially subject sensitive shareholder records to security breach or public disclosure. We will continue to monitor this case closely and provide updates as we receive them.
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Director, Abandoned and Unclaimed Property Consulting