GAO

United States General Accounting Office

Report to the Chairman

Committee on Governmental Affairs

U.S. Senate

February 2000 TENNESSEE VALLEY 

AUTHORITY

Problems With 

Irrevocable Trust 

Raise Need for 

Additional Oversight

GAO/OSI-00-6

Page 1 GAO/OSI-00-06 TVA’s Center For Rural Studies Trust

United States General Accounting Office

Washington, D.C. 20548

Office of Special Investigations

B-283498 Letr

February 29, 2000

The Honorable Fred Thompson

Chairman

Committee on Governmental Affairs

United States Senate

Dear Mr. Chairman:

The Tennessee Valley Authority (TVA), a wholly owned government 

corporation, is responsible for developing and conserving the natural 

resources of the Tennessee River Valley and supplying power throughout a 

seven-state area. TVA's authorizing legislation allows it to operate with a 

high degree of independence. All authority over TVA's operations is vested 

in TVA's three-member Board of Directors, which is composed of full-time 

TVA employees. The President appoints the Board members with the 

advice and consent of the Senate, to serve 9-year, overlapping terms of 

office. The President designates one member as the Chairman.1

In September 1999, we reported,2 among other matters, that TVA's Office of 

Inspector General (OIG) had conducted investigations of allegations made 

against each of TVA's Board members. Specifically, the OIG initiated one of 

these investigations after receiving allegations concerning the creation and 

operation of an irrevocable trust known as the Center for Rural Studies 

(CRS) Trust and the role of TVA's Board Chairman, Craven Crowell. TVA 

created CRS in 1994 for the purpose of conducting studies and programs 

relating to issues and problems of rural communities. TVA funded CRS with 

a $30-million endowment. As a result of the OIG investigation, the trust 

agreement was revoked in 1995 and the funds were returned to TVA.

1

 Craven Crowell was appointed to the Board and designated as TVA's Chairman in May 

1993; his term expires May 2002. During the period covered by this investigation, the other 

two Board members were William Kennoy and Johnny Hayes who were appointed to the 

Board in 1990 and 1993, respectively. Director Hayes resigned on February 1, 1999, and 

Director Kennoy's term expired on May 18, 1999.

2 Tennessee Valley Authority: Facts Surrounding Allegations Raised Against the Chairman 

and the IG (GAO/OSI-99-20, Sept. 15, 1999).
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Following the issuance of our September 1999 report, you expressed 

concern about the lack of oversight of TVA activities, raising specific 

concerns about the way TVA management created CRS. As a result, we 

agreed to determine the significant events pertaining to the creation, 

funding, and operation of CRS as well as any investigations of CRS; 

determine how TVA accounted for the funds returned to TVA; and respond 

to your concern about oversight of TVA activities.

Results in Brief The trust agreement drafted to create CRS included safeguard provisions to 

ensure that CRS was accountable to TVA. At Chairman Crowell's direction, 

the structure of the trust was, however, changed and all the safeguard 

provisions were eliminated in a revised trust agreement. Further, Chairman 

Crowell named himself the Chair of CRS's Management Committee for an 

unlimited term. After the media criticized Chairman Crowell's dual role and 

lifetime chairmanship at CRS, Chairman Crowell had the trust agreement 

amended.

The TVA OIG initiated an audit of CRS after receiving an allegation 

concerning Chairman Crowell's role in creating CRS. Three days after the 

Inspector General (IG) notified CRS's Management Committee that the 

audit revealed possible criminal violations, CRS was terminated. After 

receiving the same allegations as the OIG, the U.S. Attorney's Office 

(USAO) for the Eastern District of Tennessee opened an investigation. The 

USAO decided that the IG could not be independent in investigating senior 

TVA managers and therefore excluded the OIG from the investigation. After 

an 8-month investigation, USAO officials determined that there was a prima 

facie case that Chairman Crowell violated the conflict-of-interest statute 

and that further investigation was warranted. However, USAO officials felt 

that USAO should not continue its investigation because the U.S. Attorney 

was a personal friend of Chairman Crowell. They referred the matter to the 

Department of Justice's Public Integrity Section.

After reviewing the evidence and holding 1 day of grand jury testimony, 

Justice concluded that Chairman Crowell's actions as a TVA official 

benefited CRS and thus demonstrated that Chairman Crowell had 

committed a technical violation of the conflict-of-interest statute. However, 

Justice concluded that Chairman Crowell should not be prosecuted 

because he had relied upon a good faith opinion from the designated 

agency ethics official. That official advised him that serving on both the 

TVA Board and CRS's Management Committee was not a conflict of 

interest. According to Justice, the opinion of the designated agency ethics 
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official was incorrect. Finally, Justice reviewed information concerning 

double billing by CRS's President/Chief Executive Officer (CEO). It 

declined to prosecute this matter after it concluded, among other factors, 

that there was no evidence that the President/CEO had personally profited.

We determined that CRS funds were transferred to TVA after CRS was 

terminated, including the $30 million endowment, which was deposited 

into TVA's operating account and commingled with other TVA funds. 

Further, the accumulated earnings of about $3.3 million were transferred 

from CRS and deposited into TVA's Rural Studies Agency Account. As of 

October 31, 1999, the value of the Rural Studies Agency Account was about 

$1.6 million.

The problems we found with CRS's creation and operation during our 

investigation raise concern about the need for better oversight of TVA's 

activities. For example, the Board permitted the creation of an irrevocable 

trust with a $30 million endowment from TVA that operated with no 

accountability to TVA. In addition, TVA's IG can be fired by the Board, thus 

limiting the IG's independence. We have reviewed the issue of the adequacy 

of TVA oversight in the past, concluded that it needed greater attention, and 

identified options for improving oversight and accountability. Further, a 

prior debate in Congress included a proposal for the creation of a larger 

Board of part-time directors responsible for policymaking and oversight of 

TVA's management.
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Significant Events 

Pertaining to the 

Creation, Funding, and 

Operation of CRS

In April 1994, with the draft plan for CRS in hand, Chairman Crowell tasked 

TVA's Office of General Counsel (OGC) with preparing a trust agreement 

that recognized Chairman Crowell as the Chair of CRS's Management 

Committee. The draft trust agreement included several provisions that 

assured that CRS would be accountable to TVA. Based on his review of the 

draft trust agreement, the designated agency ethics official3

 concluded that 

Mr. Crowell's concurrent seats on both the TVA Board and CRS's 

Management Committee would not constitute a violation of the conflict-ofinterest statute, 18 U.S.C. section 208.4

 However, the final trust agreement 

gave CRS—and particularly the Chair of the Management Committee—

considerable power by providing the Chair with an unlimited term and 

stripped TVA of its oversight capabilities. When the terms of the trust 

agreement were publicly disclosed, TVA was criticized in the news media. 

As a result of this criticism, TVA amended the trust agreement. In the 

14 months that CRS existed, its receipts and investment income totaled 

over $33.2 million and its expenditures were over $1.4 million. TVA directly 

paid approximately $829,000 of these expenditures.

3

 TVA employees are subject to the executive branch-wide standards of ethical conduct at 5 

C.F.R. part 2635. 18 C.F.R. § 1300.101. Pursuant to 5 C.F.R. part 2635, the designated agency 

ethics official's responsibilities include coordinating and managing the agency's ethics 

program, counseling agency personnel concerning ethics standards, as well as assisting 

managers in understanding and implementing agency ethics programs. 5 C.F.R. § 2635.101 

provides that criminal conflict of interest statutes, e.g. 18 U.S.C. § 208, must be taken into 

consideration in determining whether conduct is proper.

4

 Among other things, 18 U.S.C. § 208 prohibits an executive branch officer or employee 

from participating personally and substantially in a matter in which he or an organization in 

which he is serving as an officer has a financial interest. 
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Events Prior to Formal 

Board Approval

In November 1993 at the direction of Chairman Crowell, a public relations 

firm, Seigenthaler Public Relations, 5

 was tasked to develop the concept for 

a TVA rural development center. The center would be funded with 

$30 million, which TVA was scheduled to receive in June 1994.6

Mr. Seigenthaler submitted a draft plan in April 1994.

Subsequently, Norm Zigrossi, TVA's Chief Administrative Officer, instructed 

TVA General Counsel Ed Christenbury to prepare a trust agreement 

creating a nonprofit entity. Deputy General Counsel William Osteen 

informed James Barkley, the attorney assigned to prepare the agreement, 

that the trust would receive moneys from a variety of sources and would be 

tax exempt. In addition, Mr. Osteen told Mr. Barkley that the trust 

agreement must stipulate that (1) the trust would be controlled by a 

3-member Management Committee, each with a 3-year staggered term;7

(2) the trust would receive a $30-million endowment from TVA; and (3) the 

trustee would retain investment discretion over the endowment.

The draft trust agreement that Mr. Barkley submitted to Mr. Osteen on

May 30, 1994, was subsequently approved by both Messrs. Osteen and 

Christenbury. It was then provided to Chairman Crowell and Mr. Zigrossi 

for review. It was drafted to protect TVA's interest and contained 

provisions assuring CRS's accountability to TVA. The key provisions of the 

document were as follows:

• The TVA Board was empowered to appoint and remove members of the 

trust's Management Committee.

• The books and records of the trust would be open to inspection and 

audit by TVA and GAO.

5

 TVA executed a contract with Thomas Seigenthaler's firm, Seigenthaler Public Relations, 

effective October 1, 1993, to advise on the planning of TVA's rural economic development 

programs. Part of the work involved establishing the rural development center concept and 

planning the organization of CRS. Effective December 1, 1994, Mr. Seigenthaler began 

performing work for CRS under a retainer agreement executed directly with CRS. On 

September 1, 1995, this agreement was replaced by an agreement that Seigenthaler Public 

Relations would bill CRS on an hourly basis.

6

 The funds were the proceeds of the settlement of a 1984 antitrust lawsuit.

7

 The proposed composition of the Management Committee included Mr. Crowell as the 

Chair, with Mr. Zigrossi and a TVA Senior Vice President as the other Management 

Committee members.
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• The trustee was to make an annual accounting to both the Management 

Committee and TVA.

• The trustee was empowered to invest the endowment in securities and 

property approved by TVA.

After the draft trust agreement was provided to Mr. Zigrossi, Chairman 

Crowell requested that Mr. Osteen, in his capacity as the designated agency 

ethics official, provide an opinion of whether by serving on the CRS 

Management Committee, Chairman Crowell would violate the conflict-ofinterest statute.8

 In response to this inquiry, Mr. Osteen tasked Robert 

Thompson, an OGC attorney and the alternate ethics official, to help draft 

an opinion. Mr. Thompson told us that he reviewed the original trust 

agreement prepared by Mr. Barkley and concluded that there was no 

conflict of interest. He based his decision on the fact that TVA had 

significant control over the trust in the trust agreement prepared by 

Mr. Barkley. Specifically, the TVA Board appointed CRS's Management 

Committee and had audit rights, and the CRS Board had to report annually 

to the TVA Board. In addition, the activities of the trust would be consistent 

with TVA's mission and would further that mission. Mr. Thompson added 

that he never reviewed the final trust agreement.

In June 1994, after reviewing the opinion prepared by Mr. Thompson and 

based on his own knowledge of the draft trust agreement, Mr. Osteen 

issued a written opinion. He concluded that Chairman Crowell's service on 

the Management Committee would not violate the conflict-of-interest 

statute. He reasoned that there was a direct nexus between TVA and CRS 

as evidenced by TVA's creation of CRS. Further, he believed the mission of 

the trust was consistent with and furthered TVA's mission and that 

Chairman Crowell's service on the Management Committee would be 

within the scope of his TVA official duties.

Also in June 1994, Mr. Zigrossi submitted to Mr. Christenbury a document 

prepared by Messrs. Zigrossi and Seigenthaler directing certain changes in 

the structure of the trust. According to the document, (1) CRS was to be 

funded by an irrevocable trust established by TVA and (2) the members of 

the Management Committee would not be eligible for compensation for 

services while employed by TVA. According to Mr. Christenbury, 

Mr. Seigenthaler also told Mr. Christenbury that Chairman Crowell would 

(1) be named as the Chair of CRS's Management Committee, (2) have an 

8

 18 U.S.C. § 208.
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unlimited term, and (3) have the power to remove and appoint the other 

members. As to the other Management Committee members, Mr. Zigrossi 

and a TVA Senior Vice President would serve 6-year and 3-year terms, 

respectively. Further, TVA was not to have the right to audit the books and 

records of the trust.

Mr. Christenbury told Mr. Seigenthaler that allowing the Chair of CRS's 

Management Committee to have sole control of the moneys and activities 

of the trust created appearance problems. He was also concerned that TVA 

was not going to have the authority to audit CRS. Notwithstanding these 

concerns, Mr. Christenbury instructed his staff to make the changes to the 

trust document to reflect Mr. Seigenthaler's instructions. Mr. Seigenthaler 

told us that he developed the concept for CRS; however, he denied 

involvement in the final decisions concerning the structure of the trust 

agreement.

The revised trust agreement contained the following key provisions:

• The Chair of the Management Committee could remove any other 

Management Committee member.

• The Chair of the Management Committee would have an unlimited term.

• The Chair of the Management Committee could appoint his successor.

• The books and records of the trust were open to inspection by only the 

Management Committee and its agents.

At the time he prepared the revised trust agreement, Mr. Barkley 

complained to Mr. Osteen about the structure of the Management 

Committee. He pointed out that TVA would have no control over the trust 

and could take no action even if the Chair of the Management Committee 

became incapacitated. Mr. Barkley stated that he considered it “very 

disconcerting” that Chairman Crowell had named himself Chair of the CRS 

Management Committee for an unlimited term. He also said he told Mr. 

Osteen that it was an “odd thing” for the Chair of the Management 

Committee to control such power and that “political concerns” would 

eventually lead to the breakup of the proposed organization. 9

 According to 

Mr. Barkley, Mr. Osteen responded, “. . . this is what the Chairman wanted.”

9

 Mr. Barkley made these statements in response to questions by the Federal Bureau of 

Investigation during its investigation of Chairman Crowell.
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Mr. Osteen stated that he did not review and was not fully aware of the 

contents of the final trust agreement, but he does not believe that any 

changes to the trust agreement would have affected his opinion concerning 

Chairman Crowell serving on the CRS Management Committee. He added 

that he was never asked to review his previous ethics opinion after the trust 

agreement was changed and that he did not independently review the 

opinion in light of the final trust agreement. He told us that he did not recall 

Mr. Barkley raising any concerns about the revised trust agreement.

In July 1994, Chairman Crowell and Director Hayes approved the revised 

trust agreement through the sequential approval process.10 However, 

Director Kennoy disapproved of some of the terms in the trust agreement 

and thus refused to sign it. Specifically, Director Kennoy expressed 

concerns that TVA lacked the authority to hold the CRS Management 

Committee accountable and that the Chair of the Management Committee 

had too much control.

Although he knew about Director Kennoy's concerns, Chairman Crowell 

concluded that the structure of CRS would remain the same. However, 

Chairman Crowell directed that the trust agreement name Directors Hayes 

and Kennoy to the Management Committee in place of Mr. Zigrossi and the 

Senior Vice President. Director Kennoy continued to raise concerns that 

the Management Committee lacked accountability to TVA. As a result of 

Director Kennoy's disagreement with the proposed CRS trust agreement, 

the Board was forced to vote on the matter at a public hearing.

10 Mr. Christenbury explained that there are two methods employed to gain Board approval 

of various proposals. The first, the sequential approach, is typically used when TVA 

management desires not to release information to the public. The second, the open Board 

meeting, is used when the release of information will not detrimentally affect TVA and when 

the time demands for the action falls within the Board's next scheduled meeting.
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Prior to the TVA Board voting on the proposal to establish CRS, Chairman 

Crowell met with Director Kennoy. Director Kennoy described the meeting 

as an attempt by the Chairman to coerce him into voting for the proposal 

when it came before the Board. Director Kennoy stated that shortly after 

the meeting, the TVA IG informed him that the OIG had received allegations 

from a Member of Congress concerning improper conduct on his part. 

Director Kennoy told us that he believes that Chairman Crowell used his 

contacts to initiate this matter. The IG told us that his office completed its 

investigation of the matter and issued a report, concluding that there were 

no violations on the part of Director Kennoy. Chairman Crowell reviewed 

the investigative report and prepared a written response, which was critical 

of the OIG investigation of Director Kennoy.11

Formal Board Approval to 

CRS and Amendments to 

the Trust Agreement

On October 26, 1994, the trust agreement was formally presented to TVA's 

Board. The proposal passed with the Chairman and Director Hayes voting 

“yes” and Director Kennoy voting “no.” Director Hayes told us that this vote 

was the only one that had not been unanimous during the time he served on 

the Board. He said that normally any disagreements between the Board 

members are resolved before an issue is presented at a public Board 

meeting. The Board resolution stipulated that only the earnings from the 

$30 million endowment could be expended by the trust and if the trust 

terminated, the endowment would be returned to TVA. In addition, the 

Board authorized $300,000 of federal appropriated funds for CRS' s initial 

operating expense. In addition, the resolution authorized TVA to loan its 

employees to CRS.

The June 22, 1995, Metro Pulse (a local newspaper) reported that 

regardless of how long he remained in office, Chairman Crowell had 

assured himself lifetime personal control of over $30 million in TVA funds 

that were delivered in October 1994 into the establishment of the 

autonomous CRS.

11 On September 13, 1994, the OIG received allegations against Director Kennoy from a 

Member of Congress. The Member informed the OIG that the allegations came from a 

credible source, but declined the OIG's request to identify the source. Prior to issuing a 

report in June 1995, the IG requested that the Department of State OIG perform a quality 

review to ensure the adequacy of the investigation. The State Department concurred with 

the final report and stated that under its own operating policies and procedures, the findings 

would have been referred to Justice's Public Integrity Section for a definitive prosecutive 

opinion. In the TVA IG's opinion, such a referral was not warranted. In July 1995 Chairman 

Crowell wrote his response to the OIG report.
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On September 27, 1995, the trust agreement was amended as follows:

“The Chair of the Management Committee shall hold office for a term to expire on May 18, 

2002. The terms of office for the Chair of the Management Committee and other two 

members of the Management Committee shall coincide with the expiration of their present 

terms as members of the Tennessee Valley Authority Board of Directors. After these limited 

terms expire, all subsequent appointees serve six-year terms. The Chair of the Management 

Committee shall have the power to appoint members of the Management Committee.”

Funding for CRS Total funding for CRS during the approximately14 months it was in 

existence was $33,222,297. On November 23, 1994, Chairman Crowell 

signed the trust agreement and had $30 million transferred to the trustee.12

On November 28, TVA transferred an additional $617, 091—the interest 

earned on the $30 million endowment from the date TVA received it on 

June 22, 1994. The TVA OIG audit of CRS was unable to locate any 

documentation of the Board authorizing this transfer.

On January 13, 1995, TVA and the Electric Power Research Institute 

(EPRI)13 entered into an agreement that provided for EPRI to provide CRS 

initial funding for operating expenses and to conduct research and 

development projects. At the time, Mr. Crowell was the Chairman of TVA's 

Board, the Chair of CRS's Management Committee, and a member of 

EPRI's Board of Directors. Further, TVA paid EPRI annual dues of 

$25 million, representing approximately 10 percent of EPRI's total annual 

revenue.

EPRI was to provide CRS at least $600,000 per year for 1995, 1996, and 1997 

by using $300,000 of its funds plus $300,000 that TVA would provide EPRI. 

The funding for 1995 was to be used for the development of a 5-year plan 

and for CRS's start-up phase. In May 1995, TVA transferred to EPRI the 

$300,000 in funds authorized by the Board in October 1994. EPRI paid CRS 

a total of $505,250 during the period that CRS was in operation.

12 On November 16, 1994, the CRS Management Committee selected Union Planters National 

Bank as the trustee.

13 EPRI was formed in 1972 to conduct a coordinated research and development program for 

the U.S. electric utility industry. EPRI's activities range from supporting fundamental 

research to commercializing products and services developed for its member utilities and 

the electric industry.
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On August 14, 1995, TVA transferred another $300,000 directly to CRS to 

pay for a CRS survey conducted by Roper Starch Worldwide, a nationally 

recognized pollster. The project director, under contract with CRS, 

described the survey as an in-depth survey of rural areas in the Southeast 

United States on attitudes about such things as politics and economic 

opportunity. He added that it was his understanding that Chairman Crowell 

would be using the data for his book on the rural south.

The survey funds came from the interest earned on federally appropriated 

funds associated with TVA's Technology Brokering Program.14 Prior to the 

funds transfer, Lawrence Stein, CRS's President and Chief Executive 

Officer15 requested that TVA's Vice President for Economic Development 

release the funds to CRS, but she refused because no contract or 

agreement existed between TVA and CRS for the release of the funds. She 

subsequently refused to release the funds even when the Chairman 

requested that she do so. Chairman Crowell then directed the Vice 

President for Economic Development to transfer the funds to Mr. Zigrossi, 

which she did. Mr. Zigrossi subsequently released the funds to CRS.

From November 1994 through January 1996, CRS received a total of 

$1,798,956 in investment income.

14 In 1988, TVA created the Technology Brokering Program to promote economic 

development through interagency agreements with federal agencies, particularly the 

Department of Defense. The federal agency funded projects through this program and TVA 

administered the contracts for a certain fee. This program is referred to as off-loading of 

contracts. Upon receipt, TVA invested the program advance funds and earned about 

$4.3 million in interest revenue during 1992 and 1993. In 1994, the Subcommittee on 

Oversight of Government Management of the Senate Committee on Governmental Affairs 

published a report titled, Off-loading: The Abuse of Inter-Agency Contracting to Avoid 

Competition and Oversight Requirements. The report specifically discussed the 

accumulation of excess fees and interest earned by TVA and recommended that TVA return 

these funds to the U.S. Treasury. TVA has since returned approximately $6.8 million; 

however, the Department of Defense OIG has determined that an additional $4.8 million is 

outstanding.

15 On July 18, 1994, TVA named Lawrence Stein to be the President and Chief Executive 

Officer of CRS effective November 15, 1994.
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Table 1: Center for Rural Studies Trust, Summary of Cash Receipts and Investment 

Income Earned November 23, 1994, through January 31,1996

a

Mr. Stein told us that the Center for New West made this payment to CRS to offset his costs for travel 

to a conference that the Center for New West sponsored.

Source: TVA OIG Draft Report

According to TVA's OIG analysis of CRS's expenditures for the period 

November 1, 1993, through January 31, 1996, the total cost incurred was 

$1,410,747, of which TVA paid $829,691 directly. Of the $1.4 million cost 

incurred, $680,790, or 48 percent, was paid for salaries and benefits of the 

three TVA employees on loan to CRS, including relocation costs. Of the 

$680,000, $377,388 was associated with Mr. Stein.

Prior to entering into the contract with CRS, EPRI requested that Mr. Stein 

provide CRS's proposed General and Administrative (G&A) rate. The 

contract required EPRI to reimburse CRS for costs incurred, including a 

pro rata share of the overhead rate or G&A. Mr. Stein informed EPRI that 

CRS had an 81.82 percent G&A rate. Because EPRI's auditors typically 

review cost proposals prior to signing a contract, EPRI officials requested 

that they audit CRS to substantiate the 81.82 percent G&A rate. Mr. Stein 

would not provide the support necessary to conduct the audit. He 

subsequently contacted Chairman Crowell who in turn contacted the 

President of EPRI and expressed his dissatisfaction and concern about the 

EPRI/CRS contract not being signed. As a result of this contact, the audit 

was not conducted and the contract was signed on March 1, 1995.

Description Amount

Funds received from TVA

 Initial endowment (November 23, 1994) $30,000,000

 Interest earned on initial endowment

 (November 28, 1994) 617,091

 Rural attitudes survey 300,000

Total received from TVA $30,917,091

Other sources of revenue

 Funds received from EPRI (1995) 505,250

 Funds received from the Center for New Westa 1,000

Total funds received, November 1994-January 1996 $31,423,341

Total investment income $1,798,956

Total funds received and investment income $33,222,297
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Significant Events 

Pertaining to the Audit 

and Investigations of 

CRS and Chairman 

Crowell

Based on an anonymous complaint concerning Chairman Crowell's 

creation of CRS, TVA's OIG initiated an audit of CRS in November 1995. 

Three days after the IG informed CRS's Management Committee that the 

audit revealed possible criminal violations, the Management Committee 

terminated CRS, moving its activity under the aegis of TVA. Less than a 

month later, Mr. Stein resigned. After receiving the same complaint, the 

USAO for the Eastern District of Tennessee opened an investigation with 

the Federal Bureau of Investigation (FBI). After an 8-month investigation, 

the USAO decided that the Eastern District should be recused from any 

further investigation, citing the U.S. Attorney's personal relationship with 

Chairman Crowell. However, the USAO felt further investigation was 

warranted because there was a prima facie case that Chairman Crowell had 

violated the conflict-of-interest prohibitions in 18 U.S.C. section 208. The 

investigation was transferred to the Public Integrity Section of Justice, 

which declined prosecution of Chairman Crowell. Justice also reviewed the 

information concerning the double billing by Mr. Stein and declined to 

prosecute this matter. 

Allegations Against 

Chairman Crowell

In September 1995, an anonymous source sent letters to two congressional 

offices containing allegations about Chairman Crowell. The source 

claimed, among other things, that Chairman Crowell had made financial 

arrangements to benefit his personal friends and political cronies by way of 

CRS.

One of these congressional offices forwarded the letter to the GAO 

FraudNET, which referred the matter to TVA's OIG on October 16, 1995. 

The other office forwarded the letter to the FBI. During October 1995, the 

TVA OIG received letters from both the FBI and GAO, conveying the 

allegations from the anonymous source regarding Chairman Crowell. 

Independently, the FBI's Knoxville office initiated a public corruption 

investigation in November 1995. On November 28, 1995, the IG provided 

Chairman Crowell a copy of the anonymous letter containing the 

allegations and requested that Chairman Crowell, as Chair of CRS's 

Management Committee, authorize a financial audit of CRS by the OIG. The 

OIG did not have audit rights.

TVA OIG Audit and 

Investigation of CRS

After Chairman Crowell authorized the audit of CRS, the OIG immediately 

initiated the audit to trace all CRS funds received and disbursed. An initial 
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review of CRS's financial records determined that there was no accounting 

system and CRS's internal controls were “absolutely” inadequate.

As a result, the auditors interviewed Mr. Stein to determine the basis for 

CRS's billings to EPRI. During an interview on November 30, 1995, 

Mr. Stein admitted that he directed a TVA employee on loan to CRS to 

“concoct the EPRI bills out of nothing.” He also stated that the bills were 

“contrived” and EPRI was billed for “presumed” costs. In subsequent 

conversations with the OIG, Mr. Stein said his intent was to acquire as 

much money as possible for CRS before TVA's 3-year commitment expired. 

Mr. Stein said he sought EPRI moneys to move funds quickly into CRS 

accounts in anticipation of full operations. Mr. Stein had informed the 

Internal Revenue Service (IRS) that he intended to accumulate funds in the 

trust for 3 years and use the interest to provide salary/compensation for 

himself, other staff, and operations.

The OIG audit of CRS records determined that CRS overbilled EPRI by 

$361,045, of which $257,034 appeared to have been falsified and 

determined that the balance was not in compliance with the contract. 

$227,366 in G&A expenses billed to EPRI was entirely unsupported by 

actual CRS expenditures. Further, the OIG found that CRS submitted other 

budget proposals to a vendor and IRS, that indicated the G&A rate was 10.4 

percent or 5.4 percent, respectively. These G&A rates were not shared with 

EPRI, nor was the fact that TVA was paying for most of CRS's expenses. In 

effect, CRS billed EPRI as if all its costs were direct costs, and added 

overhead costs even though it never incurred such costs. Mr. Stein told OIG 

auditors that he was not aware of any double billing or overbilling.

On December 4, 1995, following the CRS audit fieldwork, the IG notified 

the CRS Management Committee16 of potential violations of law 

surrounding CRS billings to EPRI. The OIG opened two investigations 

involving CRS based on the questionable billings and other indications of 

financial irregularities found during the audit.

16 The members of CRS's Management Committee were also members of the TVA Board of 

Directors.
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On December 7, 1995, the CRS Management Committee signed a resolution 

to initiate termination of CRS and transfer its activities into TVA. It was 

reported in the media that Chairman Crowell announced that CRS—

charged with enhancing Tennessee Valley economic growth, creating rural 

jobs, and making the power system more competitive—would be moved 

beneath TVA's corporate umbrella.17 TVA also entered into a contract with 

the University of Kentucky Research Foundation to continue the 

contractual relationship initiated between CRS and the foundation.18 The 

contract tasked the foundation to perform or supervise studies related to 

issues and problems of rural communities and to benefit rural inhabitants 

of the Tennessee Valley Region. 

On January 5, 1996, Mr. Stein resigned from TVA, effective January 22, 1996. 

He agreed not to disclose the terms and arrangements surrounding his 

resignation or make comments or statements to the news media that were 

adverse to or critical of TVA, its management, its employees, or its 

programs. TVA also agreed not to disclose the terms of Mr. Stein's 

resignation, except as required by applicable law.

During the 14 months CRS operated, a 5-year plan was developed and two 

activities—the Roper Starch Survey and preparation to publish an Internet 

guide for farmers—were undertaken.

U.S. Attorney's Office 

Investigation of CRS and 

Chairman Crowell 

In late 1995, after receiving a copy of the anonymous complaint from the 

FBI, an Assistant U. S. Attorney (AUSA) for the Eastern District of 

Tennessee reviewed the allegations and concluded that the FBI was not 

actively investigating the matter and that additional investigation was 

warranted. As a result, the USAO began supervising the investigation and 

the FBI began serving subpoenas for records. The AUSA was aware that 

TVA's OIG was conducting an audit of CRS and concluded that the TVA OIG 

could not be entirely independent in investigating Chairman Crowell and 

other senior managers at TVA because TVA's Board could fire the IG. 

Therefore, the OIG was excluded from the investigation.

17 The resolution stated that CRS was being terminated because it had not received 

contributions from other entities and had accomplished all the purposes for which it was 

established that it was capable of accomplishing without additional contributions.

18 The initial contract between CRS and the Kentucky foundation was effective in January 

1995; its project manager was Dr. David Freshwater.
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The IG first learned of the FBI and USAO investigation of CRS in February 

1996. After a meeting with the AUSA, the IG suspended all audit and 

investigative efforts and provided the FBI all OIG files regarding the 

allegations concerning CRS and Chairman Crowell, including summaries it 

had prepared.

The FBI/USAO investigation focused on whether Chairman Crowell's 

participation in the creation of CRS constituted a violation of 18 U.S.C. 

section 208. The investigation did not address CRS's questionable billing 

practices. The FBI conducted a number of interviews with TVA employees, 

including Mr. Zigrossi.

Mr. Zigrossi told us that he had conversations with Virgil Young, at the time 

the Special Agent in Charge (SAC) of the Knoxville, Tennessee, FBI office. 

Prior to becoming TVA's Chief Administrative Officer, Mr. Zigrossi had been 

TVA's first IG and previously served as the SAC of the FBI Washington, DC, 

field office. He asked SAC Young about the status of the FBI investigation 

of Chairman Crowell. However, SAC Young told us that while he did have 

conversations with Mr. Zigrossi during the FBI's investigation of Chairman 

Crowell, they did not discuss the investigation. 

On August 22 or 23, 1996, at the request of SAC Young, a meeting was held 

at the USAO with the AUSA, the Chief Assistant, the FBI supervisor, the 

FBI case agent, and SAC Young attending this meeting. At that time, SAC 

Young attempted to convince the USAO that there was insufficient 

evidence to proceed with a case against Chairman Crowell. SAC Young told 

us that this was the first time he ever attempted to convince a U.S. Attorney 

not to pursue a prosecution. According to the FBI case agent, the 

arguments presented by SAC Young at the meeting were identical to those 

used by Mr. Zigrossi when the case agent interviewed Mr. Zigrossi. The FBI 

case agent stated that he believed that SAC Young presented Mr. Zigrossi's 

views as his own.

The Chief Assistant stated that he had had many dealings with SAC Young 

and it was unusual for him to have a working knowledge of an ongoing 

investigation. A senior FBI official in the Knoxville FBI office told us that 

SAC Young did not involve himself in operational matters, including the 

details of ongoing investigations. The AUSA told us that it was highly 

unusual for any investigative agency to argue against proceeding with a 

prosecution, because the agency normally pushes for prosecution. The FBI 

case agent stated that the AUSA was so incensed about SAC Young's 

argument against prosecution that he provided the SAC a copy of the 
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section of the U.S. Attorney's handbook that clearly states that the USAO 

will determine what warrants prosecution.

The U.S. Attorney said that he had attended both professional and social 

functions with Chairman Crowell, including having lunch with Chairman 

Crowell during the course of the investigation of the Chairman. He also 

said that Chairman Crowell had telephoned him to ask about the status of 

the investigation, but the U.S. Attorney denied providing any information to 

Chairman Crowell about the investigation. We attempted to interview 

Chairman Crowell about his contacts with the U.S. Attorney and other 

matters. However, he declined to be interviewed.

Eight months after it began its investigation, the USAO held a meeting to 

review the status of the investigation and to determine what actions needed 

to be taken. The U.S. Attorney, Chief Assistant, Chief of the Criminal 

Section, and the AUSA attended. They agreed that Chairman Crowell's 

actions warranted further investigation by the grand jury to determine if an 

indictment could be returned. However, they also decided that the Eastern 

District of Tennessee should not pursue the grand jury indictment because 

of the relationship between the U.S. Attorney and Chairman Crowell, as 

well as the relationship between the USAO, TVA management, and TVA 

OIG. It was decided that the USAO would request Justice to assume 

responsibility for the investigation and recuse the Eastern District.

Accordingly, on October 2, 1996, the USAO's First Assistant met with 

Justice's Public Integrity Section and the Associate Attorney General. 

During the meeting, the First Assistant discussed the status of the 

investigation and provided the following as reasons warranting the recusal 

of the U.S. Attorney and USAO: (1) the U.S. Attorney was a close personal 

friend of a former U.S. Senator and, as a result, has known Chairman 

Crowell for years; (2) the Eastern District of Tennessee had daily contact 

with individuals involved in the investigation; and (3) TVA's General 

Counsel's office worked closely with the Eastern District on civil and other 

TVA-related matters. The U.S. Attorney and members of his supervisory 

staff concluded that it would be difficult for the Eastern District to 

maintain an impartial posture in the investigation and prosecution of the 

allegations against Chairman Crowell.

On October 16, 1996, the U.S. Attorney wrote a memorandum to Justice 

requesting the District's recusal from the investigation. The memorandum 

referred to the pending investigation involving TVA, Chairman Crowell, 

and, potentially, others who might have been involved with Chairman 
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Crowell's apparent violation of the federal conflict-of-interest statutes. In 

addition, the U.S. Attorney recommended that the companion wire fraud 

investigation of double billing by Mr. Stein be referred to the appropriate 

USAO. 

The AUSA assigned to the investigation told us that he felt that SAC 

Young's attempt to convince him to drop the case and the U.S. Attorney's 

recusal of the entire USAO were successful attempts to deter him from 

proceeding with the investigation. The First Assistant told us that as long as 

the current U.S. Attorney is in office, the USAO for the Eastern District of 

Tennessee would not be able to pursue a case against Chairman Crowell. 

Public Integrity 

Investigation of Chairman 

Crowell

Public Integrity accepted the case from the U.S. Attorney and assigned a 

trial attorney in November 1996 to assume responsibility for the 

investigation. In December 1996, the Public Integrity trial attorney19 told 

the FBI that he would probably recommend declining prosecution after he 

had reviewed the summary of interviews conducted by the FBI; reviewed 

documents collected by the FBI, USA, and OIG; and held 1 day of grand 

jury testimony. According to the FBI case agent, the investigation was 

about 50 percent complete at the time it was transferred to Public Integrity 

and that no further investigation was conducted after the 1 day of grand 

jury testimony in December 1996. Over a year later, on January 6, 1998, 

Public Integrity officially notified the FBI in writing that it declined to 

prosecute the case.

The Chief of the Public Integrity Section told us that the scope of the Public 

Integrity investigation was limited to two questions that concerned 

whether Chairman Crowell violated the conflict-of-interest prohibitions in 

18 U.S.C. section 208. The first question focused on whether the creation of 

the trust resulted in a predictable financial benefit to Chairman Crowell at 

the time he had established it. Justice concluded that there was no 

concrete evidence that Chairman Crowell would have received a financial 

gain at the time the trust was created. It further concluded that even if 

Chairman Crowell created CRS for his future benefit or the benefit of 

friends or associates, there would be no criminal violation because that is 

not a predictable financial gain as defined by the statute. 

19 Justice refused our request to interview the Public Integrity trial attorney assigned to this 

investigation.
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The second question focused on whether any of Mr. Crowell's official acts 

as TVA's Chairman would have financially benefited CRS. Justice 

concluded that CRS financially benefited from Chairman Crowell's actions 

as TVA Chairman. As a result, Justice concluded that Chairman Crowell's 

actions on behalf of CRS constituted a technical violation of the conflict-ofinterest statute. However, citing the good faith opinion by the designated 

agency ethics official that Chairman Crowell could simultaneously sit on 

the Boards of TVA and the CRS Management Committee, Justice declined 

to prosecute Chairman Crowell.20 The Chief of the Public Integrity Section 

told us that he believed Mr. Osteen's opinion was erroneous because 

Chairman Crowell's actions “clearly” constituted a technical violation of 

the conflict-of-interest statute. For example, Mr. Crowell made decisions as 

Chairman of TVA authorizing the transfer of funds from TVA to CRS. 

Nevertheless, the Chief of Public Integrity advised us that Justice does not 

typically prosecute such technical violations.

In order to determine whether this technical violation should be 

prosecuted, Justice's investigation focused on determining whether Mr. 

Osteen's ethic opinion was coerced. Justice concluded that there was no 

evidence of coercion and that the opinion was prepared in good faith.

With regard to the double billing, Public Integrity reviewed the information 

concerning the double billing by Mr. Stein and determined that there was 

“no harm no foul” in that (1) there was no evidence that Mr. Stein 

personally profited; (2) the transaction was between two nonprofit 

organizations; and (3) TVA had reimbursed the other entity, EPRI, for the 

amount of the erroneous billings. Justice further stated that it believed a 

principal witness against Mr. Stein would not have been credible. This 

witness, a convicted felon hired by Mr. Stein, had testified that Mr. Stein 

directed him to over bill EPRI.

Declination by Public 

Integrity Questioned by 

USAO

The AUSA assigned to the investigation said that Justice informed him that 

it declined to prosecute the case, citing TVA's designated agency ethics 

official's opinion that there was no conflict of interest as a defense for 

Chairman Crowell. The AUSA stated he believed that he was prepared to 

overcome that defense.

20 Good faith reliance on the advice of a designated agency ethics official is a factor taken 

into account by Justice in the selection of cases for prosecution. 5 CFR 2635.107(b).
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The Chief of the Criminal Section told us that he was very upset when 

Justice sent a letter stating that it had declined the case claiming it did not 

meet prosecutive guidelines. He felt that there was a prima facie case 

against Chairman Crowell that needed further investigation, but no such 

follow-up was done.

We discussed with the Chief of the Public Integrity Section the USAO's 

view that there was a prima facie case that Chairman Crowell violated the 

conflict-of-interest statute and that there was a need for further 

investigation. The Chief of the Public Integrity Section stated that it is his 

interpretation as an expert on conflict-of-interest issues that Chairman 

Crowell's control over the trust was not enough to result in a violation of 

the conflict-of-interest statute. He said the USAO for the Eastern District of 

Tennessee does not normally prosecute these types of cases and lacks 

expertise in this area.

Disposition of the CRS 

Accounts After CRS 

Was Terminated

On January 3, 1996, the CRS Management Committee decided to transfer all 

CRS programs, functions, and operations to TVA. The actual dates the 

funds were transferred to TVA were May 24 and 29, 1996, when 

$33,356,109.69 was transferred from CRS trust accounts to TVA's Rural 

Studies Agency Account. The funds returned to TVA by CRS are in TVA's 

name and not in a trust. In addition, $521,923.6921 from CRS's accounts was 

transferred to EPRI on May 2, 1996.

In February 1997, a $1.5 million endowment was made from the Agency 

Account to the University of Virginia's Darden School Foundation for the 

development of a public-private partnership institute. During March 1997, 

$30 million was transferred from the Agency Account to TVA's general 

operating account with the U.S. Department of the Treasury. Between 1996 

and October 1999, $2,611,541.52 was paid to continue the rural studies 

research programs at the University of Kentucky Research Foundation. 

The Foundation has produced about 30 publications related to rural 

economics and maintains an Internet web site about rural studies. The 

value of the Rural Studies Agency Account as of October 31, 1999, was 

$1,585,866.93.

21 This amount was the $505,250 EPRI paid CRS plus earned interest of $16,673.69.
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Concerns Over Lack of 

TVA Oversight

The problems we found with the creation and operation of CRS exemplify 

the need for better oversight of TVA activities. The issue of TVA's oversight 

has been examined several times in the past. In a 1982 report, we pointed to 

a growing concern with TVA's activities and identified options for 

improving oversight and accountability.22 These options included periodic 

congressional oversight hearings. In a 1983 report, we discussed our 

concerns about TVA's management and concluded that the issue of the 

adequacy of TVA's oversight needed greater attention.23 In a 1987 report 

entitled TVA−A Path to Recovery, the Southern States Energy Board 

concluded, “additional mechanisms are needed to ensure that TVA is 

accountable for its actions to its ratepayers, Congress, and the American 

public.”24 The report further stated that a larger Board—comprised of parttime directors who would be responsible for policymaking and oversight of 

TVA's management—should be established. In 1995 and 1998 reports, we 

raised these same concerns about a lack of oversight of TVA.25

In 1997, TVA's oversight was a topic of debate in the Congress and in 

October 1997 a bill was introduced in the Senate to expand TVA's Board 

from three full-time members to nine part-time members who had strong 

backgrounds in corporate management or strategic decisionmaking. Under 

this proposal, the expanded Board would establish long-range goals and 

policies for TVA and the day-to-day management would be handled by an 

independent chief executive officer. This proposed legislation was not 

enacted into law.

Currently, there are efforts in the Congress to ensure that TVA's IG is 

independent of the TVA Board and therefore can conduct effective 

oversight of TVA. Some concerns are that TVA's Board can hire and fire the 

IG and TVA's OIG is currently being managed by an interim IG on detail 

from TVA. As a result, there are two bills pending in the Congress to make 

22 Tennessee Valley Authority—Options for Oversight (GAO/PEMD-82-54, Mar. 19, 1982).

23 Triennial Assessment of Tennessee Valley Authority—Fiscal Years 1980-1982

(GAO/RCED-83-123, Apr. 15, 1983).

24 The Southern States Energy Board was comprised of government and industry experts 

with diverse experiences in energy operations, management, and regulation.

25 Tennessee Valley Authority: Financial Problems Raise Questions About Long-Term 

Viability (GAO/AIMD/RCED-95-134, Aug. 17, 1995) and Federal Power: Options For Selected 

Power Marketing Administrations' Role in a Changing Electricity Industry

(GAO/RCED-98-43, Mar. 6, 1998).

t
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the TVA IG a statutory IG, nominated by the President and confirmed by 

the Senate.

Scope and 

Methodology

We conducted our investigation from September 1999 through February 

2000. We interviewed TVA officials involved with the creation of CRS. We 

also interviewed TVA OIG employees who were involved in the audit and 

investigations of Chairman Crowell and Lawrence Stein and reviewed OIG 

supporting documentation. We met with Justice officials and reviewed 

documents from the Knoxville office of the FBI, USAO for the Eastern 

District of Tennessee, and the Public Integrity Section. We also reviewed 

the records from the DOD OIG pertaining to its audit and investigation of 

TVA's Technology Brokering Program, which partly funded CRS. We also 

reviewed and analyzed TVA Rural Studies financial records, contracts, and 

other documents.

We attempted to interview Chairman Crowell and Mr. Zigrossi, but both 

declined our request. We also attempted to interview the Public Integrity 

Section trial attorney who was assigned to the investigation of Chairman 

Crowell; however, Justice declined our request. We previously interviewed 

the AUSA assigned to the investigation of Chairman Crowell during our 

1999 investigation of TVA. We attempted to interview the AUSA during this 

investigation; however, Justice declined our request.
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As discussed with your office, unless you announce its contents earlier, we 

plan no further distribution of this report until 30 days after the date of this 

letter. At that time, we will send letters to interested congressional 

committees and members and make copies available to others upon 

request. If you have questions about our investigation, please contact me or 

Deputy Director for Investigations Donald Fulwider at (202) 512-7455. 

Assistant Director John Ryan was a key contributor to this investigation.

Sincerely yours,

Robert H. Hast

Acting Assistant Comptroller General

 for Special Investigations

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