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Allegheny Must Pay Merrill Lynch $115M for Share of Trading Unit

A judge ruled last week that Allegheny Energy will have to pay $115 million plus interest to buy Merrill Lynch and Co.'s 2% equity stake in Allegheny Energy Supply Co., the generation and marketing unit that Allegheny bought from Merrill Lynch in 2001. The decision pressured Allegheny stock down about 3%, but the judge also agreed to hear Allegheny's counterclaims, which could reduce the payment amount.

Judge Harold Baer, Jr. of the U.S. District Court for the Southern District of New York granted Merrill Lynch's motion for summary judgment on its breach of contract claim, thereby requiring Allegheny to purchase Merrill's equity position in the marketing unit. The purchase price will be offset by any judgment Allegheny receives on its counterclaims.

The lawsuits arose as a result of a dispute between Allegheny and Merrill Lynch regarding Allegheny's purchase of Global Energy Markets (GEM) from Merrill in 2001 for $490 million and a 2% equity interest in the trading unit. Merrill Lynch had initially filed a lawsuit against Allegheny charging that it did not follow through on part of the purchase transaction. Allegheny had promised to buy out Merrill's stake in the trading unit for $115 million if the business failed to acquire a set level of generating capacity within 18 months. The trading unit did not achieve that level, and Merrill wanted to liquidate its interest. Allegheny refused.

After Merrill Lynch filed its lawsuit, Allegheny filed its counterclaims, charging that Merrill made false and misleading representations about the trading operation "with the intent of inducing Allegheny to purchase GEM for more than $490 million, thus providing Merrill Lynch with significant profits." Allegheny told the court that the trading business it purchased may have been involved in wash and sham trading with Enron Corp., and its revenues, trading volumes and growth rates may have been artificially inflated in order to capture a higher purchase price.

The company also charged that Merrill Lynch misrepresented and/or concealed certain concerns about executive Daniel Gordon's qualifications. Gordon was head of the trading unit but was fired in July 2002 by Allegheny after the discovery of his involvement in certain transactions that violated the company's conflict of interest policies. Gordon, 27, pleaded guilty in 2003 to criminal charges of money laundering, wire fraud and conspiracy to falsify books and records. He agreed to forfeit $43 million from illegal profits.

Baer denied Merrill's summary judgment motion regarding Allegheny's breach of contract and fraud counterclaims. As a result, they remain pending before the court. "We intend to pursue these claims vigorously," Allegheny Chairman Paul J. Evanson said on Wednesday. The trial on those claims is scheduled to begin May 9.

However, Baer granted Merrill's summary judgment motion dismissing Allegheny's counterclaims for breach of fiduciary duty, which included a punitive damages claim, and negligent misrepresentations. He also denied Allegheny's motion for partial summary judgment on its contract claim.

In its lawsuit, Allegheny asked the court to rescind the purchase agreement, in effect reversing the transaction, and require Merrill Lynch to give it back money that it paid to Merrill for GEM, and to require the investment bank to pay punitive and compensatory damages of at least $475 million.

Allegheny has since eliminated the bulk of its energy trading activities, which had been a substantial drag on earnings and cash flow. Headquartered in Greensburg, PA, the company is an investor-owned utility company with two major businesses: Allegheny Energy Supply, which owns and operates electric generating facilities, and Allegheny Power, which delivers power to customers in Pennsylvania, West Virginia, Maryland, Virginia and Ohio.

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