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Reliant Pays $68M to Settle Class Action Lawsuit Over Round-Trip Trading

Reliant Energy has agreed to pay $68 million, and its accounting firm, Deloitte & Touche, agreed to pay $7 million to settle class action lawsuits by former Reliant shareholders who alleged that the companies failed to disclose in documents related to Reliant's initial public offering (IPO) in April 2001 that it engaged in round-trip energy trading in an effort to exaggerate its revenues and trading volumes.

Reliant admitted in May 2002 that as much as 10% of its energy trading revenues over the previous three years had come from bogus round-trip transactions (see NGI, May 20, 2002; May 27, 2002; June 10, 2002; Nov. 4, 2002). Round-trip trading refers to the practice whereby two companies buy and sell the same amount of power at the same price and at the same time, resulting in a financial "wash" for both companies.

When Reliant Energy Inc. launched Reliant Resources (now called Reliant Energy) as an IPO, it debuted at $30 a share and became the most actively traded stock on its first day. However, the round-trip trading revelations as well as related events throughout the energy sector slammed its stock price to around $7/share in May 2002 and by October of that year the stock had traded as low as 99 cents/share.

Joe Bob Perkins, COO and president of Reliant Energy Inc.'s wholesale group and group president of the wholesale businesses for Reliant Resources, as well as Shahid J. Malik, president of Reliant Energy Services, both resigned because of the scandal. Reliant shares closed Friday up 6 cents to $13.29.

The settlement covers investors who lost money after purchasing common shares of Reliant in its April 30, 2001 IPO. Investors who purchased Reliant stock on the open market before May 14, 2002 also are eligible to participate in the settlement. The Louisiana Municipal Police Employees' Retirement System (MPERS) acted as lead plaintiffs in federal court in Houston, represented by the law firm of Berman DeValerio Pease Tabacco Burt & Pucillo.

"The size of this settlement underscores the positive impact public pension funds like MPERS can have when they step forward to fight corporate crime," said lead counsel Michael Pucillo. "The settlement is an excellent result for all the investors in the class."

Henry Dean, chairman of the MPERS board of trustees, said the settlement amount represented a very significant portion of the money investors lost. "We will continue to use all the means at our disposal to defend the retirement assets of our members," he said.

Under the agreement, the Reliant defendants -- Reliant Energy Inc. and former company executives R. Steve Letbetter, Stephen W. Naeve, Mary P. Ricciardello and Joe Bob Perkins -- will pay $68 million of the settlement, while Deloitte will pay $7 million. About $61.5 million of the total is covered by Reliant's director and officer insurance policies, the company said. Reliant will make a cash payment of $6.5 million as part of the settlement and pay certain costs associated with the defense of the litigation.

The settlement must be approved by Judge Ewing Werlein Jr. of the U.S. District Court for the Southern District of Texas before it becomes final.

"Today's settlement represents another step forward in our continuing effort to resolve the legacy issues that relate to Reliant's historical trading operations," said Reliant Energy CEO Joel Staff. "In addition, it represents a fair and equitable resolution of this matter for all concerned, including the company, our shareholders and the class plaintiffs."

Under the terms of the settlement, Reliant did not admit to any liability by the company or its directors and officers, nor were there any findings of any violations of the federal securities laws. The settlement also includes releases of all claims by the plaintiffs against certain former officers of Reliant.

Reliant said it will record a second quarter pre-tax charge of $8 million ($7 million after-tax) related to the settlement and associated legal expenses.

Reliant provides electricity and energy services to 1.9 million customers primarily in Texas. It also serves commercial and industrial clients in the PJM Interconnection and is one of the largest independent power producers in the nation with more than 19,000 MW of generation capacity.

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