August 16, 2016

The Pipeline and the Short Seller

Emails show a federal regulator shared non-public information with an investor.

Water gushes into a pilot spreading basin on Cadiz Inc. property in California's Mojave Desert in 2002. (PHOTO: ZUMA PRESS)

Wall Street Journal

Trust in Washington has hit a historic low, and one reason is the sense that government regulators favor some people over others. Consider an email trail that reveals how a federal employee shared inside information about regulatory approval with a short seller.

The emails concern a water pipeline in California that is stuck in regulatory limbo. The story begins in 1998, when the Los Angeles-based land management company Cadiz Inc. began plans to develop a groundwater bank on private land overlying a watershed in the Mojave Desert. Cadiz proposed building an underground pipeline along the Arizona & California Railroad’s right-of-way to transport 50,000 acre-feet of water annually to Southern California.

The Department of Interior’s longstanding policy allowed railroads to run power, telephone and fiber optics lines along their rights-of-way without a federal permit, thus expediting environmental review. However, in November 2011, after Cadiz had modified its plan to reduce environmental opposition, Interior at the insistence of California Sen. Dianne Feinstein revised its policy to limit the use of railroad rights-of-way granted in 1875 to “activities that derive from or further a railroad purpose.”

The Cadiz pipeline was the only project subject to the new rules. Cadiz spent several years and $12 million reconfiguring the pipeline to “further a railroad purpose,” proposing the likes of hydro-turbines, power safety systems and automated fire suppression. None of Cadiz’s compromises satisfied regulators.

On Oct. 2, 2015, the Bureau of Land Management (BLM) informed congressional staff—who tipped off Cadiz—of an imminent adverse ruling. A letter circulated by the bureau noted that the pipeline “does not derive from or further a railroad purpose” because the fire suppression system was “an uncommon industry practice,” among other complaints. The kicker was that the ruling could not be appealed because it “is not a final agency decision.” Thus the pipeline would have to undergo a formal environmental review. Ms. Feinstein has attached riders to every Interior appropriations bill since 2008 barring a review.

Within a week of the BLM ruling, Cadiz’s stock plummeted 65%. Yet one Cadiz investor had inside information that could have allowed him to make a killing. Emails obtained through a Freedom of Information Act request by Cadiz reveal that BLM realty specialist Erik Pignata (who oversaw the Cadiz review from the Sacramento bureau) shared non-public information with Cadiz investor Thomas McGannon of Whetstone Capital Advisors. Cadiz provided the emails to us.


Whetstone, based in Mission Woods, Kansas, describes itself as “a value oriented long/short investment fund.” Mr. McGannon told the Kansas City Business Journal in May 2014 that “when we put a short into the Whetstone portfolio, it’s because we’ve done research on a specific company and think that for one reason or another the value of that company is declining and the stock price is likely to decline over time as well.” That strategy would certainly fit with Mr. McGannon’s research into Cadiz with the help of the BLM’s Mr. Pignata.

Mr. McGannon declined to say if or how he traded Cadiz shares and sent us this statement: “Our research over a five year period led us to believe that there was an investment opportunity presented by Cadiz’s stated business plan, which appeared contrary to information that was publicly available. We did not seek nor obtain any material non-public information regarding the Cadiz Water Project.”

Yet the emails suggest that Mr. McGannon sure was interested in regulatory decisions about Cadiz. The Pignata-McGannon email trail that we’ve seen begins with Mr. McGannon following up on a FOIA request in September 2014 soliciting information about the bureau’s review. Mr. Pignata referred documents related to the request to the bureau’s FOIA officer. This should have closed their communication since government employees aren’t supposed to disclose non-public information to third parties outside of the FOIA process that could benefit private interests.


Mr. McGannon continued to probe Mr. Pignata about the project’s regulatory prospects. “Does the green line go through BLM lands?” Mr. McGannon asked in a Sept. 9, 2014 email, referring to a map of the Cadiz project. “I was mostly just curious if an alternate route along the green line would require BLM approval.” Mr. Pignata responded later that day that the alternative route “almost certainly” does.

On Feb. 19, 2015, Mr. McGannon inquired if there has been “any movement on the project discussions since we last spoke?” Mr. Pignata replied: “No, we are formulating our evaluation with DOI legal staff.” The emails suggest the two chatted repeatedly over the phone.

On June 4 Mr. McGannon emailed “great to catch up” along with a link to a blog post “Strong Sell On Project Failure, Insider Enrichment, And Bankruptcy, Price Target $0” that eviscerated Cadiz. On September 23 Mr. McGannon asked if there was “any news likely this week?” Mr. Pignata replied: “I have a briefing w/ the almost-highest people in my agency tomorrow . . . No pressure or anything.” Mr. McGannon cheered him on: “You got it man!”

A week later, Mr. McGannon inquired into when an adverse ruling would be finalized: “Wont [sic] it be great when I don’t bother you anymore.” Mr. Pignata replied: “I have a feeling Cadiz, Inc. isn’t going anywhere . . . so you’ll get to keep bugging me.” Several of Mr. Pignata’s emails suggest an animus toward the Cadiz project.

On October 1, Mr. Pignata assured his hedge-fund pen pal that the BLM determination would “for sure” be “signed tomorrow.” Mr. McGannon rejoiced: “Maybe one of these days ill [sic] get to buy you a beer or something as a thank you.” BLM made its ruling the next day.

Cadiz disclosed on October 5 that it had been briefed by a congressional office that an adverse ruling might be imminent. The company says the bureau did not respond to its email requests for confirmation. Cadiz’s share price tumbled by nearly two-thirds. A short seller who bet against the stock and had advance knowledge of the outcome could have made significant gains.

There are numerous chronological gaps in the emails between Messrs. Pignata and McGannon, which suggests there may be more documents the government hasn’t turned over. Mr. Pignata declined comment beyond an email saying he had complied with the FOIA request. A spokesperson for the Bureau of Land Management says the agency recently became aware of the Pignata-McGannon communications and has referred the matter to the Department of Interior’s Office of the Inspector General.

House Oversight Committee Chairman Jason Chaffetz has sent a letter to the Bureau of Land Management soliciting more information about the correspondence. The bureau should explain whether Mr. Pignata’s communications comport with a 1990 executive order forbidding government employees from improperly using non-public government information to further a private interest.