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Rogue Traders Falsify Earnings at MCN

Rogue Traders Falsify Earnings at MCN

When things just started to look like they were getting better, all of a sudden they just got worse for MCN Energy Group. After a tough year in 1998 and the planned divestiture of its entire exploration and production division, MCN Energy Group said yesterday it has discovered serious financial accounting manipulation within its gas marketing subsidiary, CoEnergy Trading, and will have to recalculate its earnings going back to 1997.

MCN said it will delay filing its 1999 first quarter Form 10-Q with the Securities and Exchange Commission pending completion of a special investigation of the operations of CoEnergy. It has identified transactions "in which its internal control systems were overridden, resulting in the recording of certain expenses in improper periods." With the assistance of Deloitte & Touche LLP, its independent auditors, MCN is investigating the situation to determine the impact of these transactions. The company said it likely will have to restate financial results for prior periods and recalculate results for 1Q99. The analysis to date indicates 1997 net income will be reduced, with offsetting increases made to results reported in subsequent periods, including the first quarter of this year, in which MCN reported a 5% increase in net income to $85 million and 17% jump in revenues to $768 million.

"Our review of the situation is not complete, but it is very important to note that what we have identified so far are instances in which certain expenses were recorded in the wrong earnings periods," said MCN Chairman Alfred R. Glancy III. "Our findings indicate this is not a situation involving commodity trading losses, falsely recorded revenues or any other issue that would affect MCN's financial position. Rather, it is a case of earnings manipulation by certain individuals who are no longer with the company."

Glancy said during a conference call that MCN discovered gas purchase contacts in which the marking unit agreed to pay significantly less than market prices for gas in 1997 in return for higher market prices paid in later periods. That had the effect of overstating 1997 income by delaying accrual of the related expenses. The information about the transactions was withheld from MCN's accounting department.

MCN spokesman Stewart Lawrence reiterated that the company did not lose any money or report false revenues because of the scam, but money was shifted around to show immediate improved financial performance. "They had an incentive to show great results, and this is one way to falsely show great results" in the first year of trading, he said.

Three employees, including two subsidiary officers, have been terminated. Disciplinary action against other employees will likely be forthcoming upon completion of the investigation, the company said. Guy Jarvis, currently vice president of CoEnergy, has assumed all operating responsibilities for the gas marketing subsidiary, which sells about 1.37 Bcf/d of gas and employs 24.

MCN Energy Group Inc. is a diversified energy holding company with more than $4 billion in assets. Its principle subsidiary is Michigan Consolidated Gas, a gas distribution and transmission company serving 1.2 million customers in more than 500 communities throughout Michigan.

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