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Third Man Named in Coastal Fraud Complaint

Third Man Named in Coastal Fraud Complaint

The Commodity Futures Trading Commission (CFTC) and the U.S. Department of Justice are now after three people for allegedly misappropriating energy futures trades from Coastal, defrauding the company of millions of dollars. Robert C. Rossi joins former Coastal States Trading Corp. employee Steven G. Soule; and Kyler F. Lunman II, owner of Hold-Trade Inc. (Ltd.) as a respondent in the case.

A federal grand jury in Houston has returned an 18-count indictment against Rossi, Soule, and Lunman, charging them with conspiracy, commodity fraud, wire fraud and money laundering in connection with the scheme.

According to a CFTC complaint, filed Dec. 22, Soule and a telephone clerk on the New York Mercantile Exchange (NYMEX) carried out wrongful allocations, and Lunman and Hold Trade furthered the scheme. The wrongdoing, which came to light in early 1997, is said to have occurred from at least Sept. 4, 1993 through about Dec. 31, 1995. The amended complaint alleges that Rossi committed fraud in two fashions. One, by aiding and abetting the other respondents; and two, as controlling person of floor broker entities known as Refined Energy Executions Inc. and Refined Executions Inc., knowingly inducing Refined to violate the Commodity Exchange Act (CEA). Rossi is alleged to have assisted the scheme by permitting the use of Refined's facilities and telephone clerk.

The original complaint says Soule entered most of Coastal's crude oil, heating oil, and natural gas futures orders, which he gave to telephone clerk Thomas F. DeMarco at Refined. "Soule and DeMarco together ensured the successful completion of the wrongful allocations by creating doctored floor order tickets and entering into additional transactions to replace those transactions that were misappropriated. Lunman and Hold Trade completed the scheme by providing the accounts into which the misappropriated Coastal trades were placed, monitoring the movement of Coastal's profitable trades into those accounts, and disbursing the ill-gotten gains among the scheme's participants. All respondents benefited financially from their roles in the scheme."

Soule was employed by Coastal, first as a futures trading coordinator and later as a manager of futures trading, from about Sept. 4, 1990 to about Dec. 20, 1994. Before that, between January and September 19990, he worked as a telephone clerk for Refined on the floor of the NYMEX.

The amended complaint institutes a public administrative proceeding to determine if the allegations are true and whether sanctions should be imposed. Possible sanctions include a cease and desist order, a permanent trading prohibition, civil monetary penalties not exceeding $100,000 for each violation, and restitution. At press time Friday, Coastal had not returned a call for comment. Joe Fisher, Houston

Georgia PSC Taking More Aggressive Approach to Deregulation

Concerned that a threshold number of Atlanta Gas Light (AGL) customers in certain warmer regions of Georgia may not switch to alternative suppliers by the next winter heating season, the Georgia Public Service Commission is taking action to change Georgia's gas competition law, SB 216, to get AGL out of the merchant function possibly by next fall.

"We're contemplating an aggressive move on being able to get Atlanta Gas Light out of the consumer sales," Commissioner Lauren (Bubba) McDonald told NGI. The legislation that is being crafted by the commission and is expected to be introduced this week would change the current law and "escalate the commission's authority as far as moving AGL's customers into the competitive marketplace," he said.

There are nine gas consumer regions in the state that were separated because of differing supply mixes and upstream transportation. Under the current law when 33% of the customers in a given region, or pool, have switched to alternative suppliers, the others are notified and given 100 days to choose a marketer. If they haven't chosen a marketer by the end of that 100 days, the law calls for the commission to randomly assign them to one.

Currently some areas are very close to reaching the 33% threshold. A total of 397,000 customers, or 28% of AGL's 1.45 million customers, have switched to alternative suppliers since customer choice began four months ago. The Athens pool has the highest participation rate at 27.3%. The other most active areas include Macon, with 25.2%; Augusta, 23.6%; Newnan, 23.2%; Atlanta, which has 968,000 customers making it the largest pool, with 21.7%; and Rome, with 20.8%. However, customer choice hasn't caught on as well in the regions farther south where winter heating isn't much of an issue. Customer participation in Savannah is at 16%. In Valdosta, it's 17.4%, and in Brunswick, which is the farthest south of all nine areas, participation is at only 12.9%. With the end of the heating season approaching, the PSC is concerned several of the pools in Georgia could go through at least one more heating season under AGL's wing.

"This could go on for a long period of time and we would still have AGL in the consumer sales," said McDonald. "I'm concerned that we'll have some 200,000 customers out there still with AGL after a million have already switched over. Are there going to be stranded costs that those 200,000 are going to have to eat? We don't know.

"If we move forward with this legislation, we would initiate an effort with timely notice to all consumers that we would expedite random assignment prior to some point in time." He said that point in time could coincide with the expiration of AGL's volumetric transportation pricing program. AGL was forced by the commission earlier this month to return to volumetric pricing and refund $14.5 million to customers because of a public uproar over AGL's decision to switch to demand-based billing last November. The PSC said the demand-based billing program was on track to overcharge customers $300 million by September. AGL's volumetric pricing ends Sept. 30, when it will return to a demand-based billing method.

AGL Likes the Idea

An Atlanta Gas Light spokesman said the company has not seen the legislation and therefore could not comment accurately on any details of the PSC's plans. However, AGL generally is in favor of switching all its customers at one time rather than on nine different dates.

"One thing that has happened over the last months has been confusion about gas rates, confusion about gas deregulation. If your company was faced with imposing a deadline for when 1.45 million customers must choose a marketer or be assigned one and communicating that to all your customers, you would want to do it all at once," said AGL's Ross Willis. "[Otherwise] you are going to have a lot of confusion about what the deadline is."

The legislation, however, also may take some freedom away from AGL. McDonald said it also will include language that would give the PSC more power to regulate daily balancing. The PSC would like to be able to step in when there is a question about balancing penalties, he said. "We would rather have a better grasp on that rather than it being left out there for the company to handle all by itself. It's basically supposed to be a pass through right now. It would continue to be so, but if it got out of hand, i.e., through excessive penalties or some of the directions maybe that the company would like to take, we just wouldn't have to go through all the hearing processes to be able to take action. We would just have a little firmer handhold on it.

"Since we are responsible for making this work, we think we should stick our neck out a little bit more and take a stronger approach and a heavier hand and see if we can't do what Atlanta Gas Light Co. wanted to do in 1997 through the legislative process and get out of consumer sales.

"I told Atlanta Gas Light's new president this is what you asked for now you're going to get it," said McDonald. "Now that's pretty blunt but sometimes they get a little blunt with us too."

He said the PSC is working with the leadership of both the house and the senate and expects the legislation to be introduced this week. "If it's not introduced [this] week then there probably will be no legislation because we are presently just a day over half of the Georgia legislative session."

Rocco Canonica

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