Ending a half-decade of litigation over reserves revisions, allegations of wash trading and charges of market manipulation, El Paso Corp. announced Wednesday that it will pay about $48 million and its insurers will cover the remaining $242 million to settle multiple shareholder class action lawsuits and several other derivative lawsuits filed against the company between 2000 and 2004.

El Paso said the settlements cover all shareholder class action litigation filed on behalf of purchasers of its securities between Feb. 22, 2000 and Feb. 17, 2004. Under the terms of the one agreement El Paso and its insurers will pay a total of $273 million to the plaintiffs. Its insurers will contribute $225 million of the total. Since El Paso previously reserved a substantial portion of its contribution in prior periods, the company said the settlement will have no material impact on its quarterly financial results. The parties intend to submit the settlement to the court within 45 days.

The second agreement covers an associated derivative lawsuit that made similar claims to those in the class action litigation. It involves the payment of $17 million, which was fully funded by El Paso’s insurers, of which $12 million will be used to fund the settlement of the shareholder litigation. This settlement already has been approved by the court.

“These settlements resolve the last major legacy issue for El Paso,” said El Paso CEO Doug Foshee, who was brought over from Halliburton in 2003 after former CEO William Wise was fired over the company’s reserves revisions and charges of wash trading that allegedly inflated its revenues (see NGI, July 21, 2003). “We believe this is the right course of action for our stakeholders as we eliminate litigation uncertainty and allow investors to focus on the progress of our company.”

El Paso and its current and former directors and officers did not admit liability or fault for the matters alleged in the lawsuits.

The settlements bring to an end a dark chapter in El Paso’s corporate life. Its troubles began shortly before Enron Corp.’s collapse with the sale of 1.3 Bcf/d of turned-back El Paso Natural Gas pipeline capacity to affiliate El Paso Merchant Energy and then got much worse with substantial negative revisions to its gas and oil reserves and allegations of wash trading.

The company’s stock price tumbled more than 80% over a 12-month period in 2001 and 2002. Class action lawsuits spearheaded by Oscar S. Wyatt Jr., one of the largest holders of El Paso Corp. stock, accused the energy company and its top officials of participating in fraudulent “schemes and a pattern of conduct” to make El Paso “appear on paper far more successful than it actually was” (see NGI, Nov. 25, 2002). Wyatt, who founded Coastal Corp. and is considered a legend in the industry, was named lead plaintiff in multiple lawsuits against El Paso, which had acquired Coastal in a $24 billion mega-deal in 2000.

Wyatt accused El Paso of reporting gross revenues that were “wildly exaggerated” due to the company’s involvement in “round trip” trading practices; misusing “mark-to-market” accounting to inflate revenues and earnings; hiding “massive liability and guarantees” through the use of off-balance sheet transactions; and manipulating the California energy market to “artificially boost” the price of natural gas.

In 2003 after several years of litigation, FERC approved a $1.7 billion settlement of California’s allegations that El Paso Natural Gas drove up natural gas prices in the state by withholding capacity during the state’s energy crisis, and gave preferential treatment to its power merchant affiliate during bidding on transportation capacity (see NGI, Nov. 17, 2003).

By October 2004, the company reported that financial restatements for 1999 through 2003 resulted in a loss to shareholder equity of about $2.4 billion. Of that amount, nearly $1.7 billion was lost from a 1.8 Tcfe reduction to the company’s natural gas and oil reserves, while $700 million came from historical hedge accounting restatements (see NGI, Oct. 4, 2004; May 31, 2004). The reserves revisions led to a personnel shake-up in the company’s exploration and production unit, but they were only the latest ripple in a major upheaval at the company over the prior four years.

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