Wall Street did not appear to be fazed late last week by the class-action lawsuit spearheaded by Oscar S. Wyatt Jr., one of the largest holders of El Paso Corp. stock, that accused the giant 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.”

Instead of the expected negative reaction, El Paso stock, which has lost more than 80% of its value in the past year, climbed about 5.5%, or 59 cents a share, to close at $11.33 Thursday. The upward trend continued into Friday afternoon, with El Paso shares trading at $11.49. The uptick in the company’s stock apparently was being credited to a recent filing at FERC by the Office of Pipeline Safety, which some seem to think may support El Paso’s arguments in a high-profile complaint case.

Last Wednesday, lawyers filed in U.S. District Court in Houston the amended lawsuit that consolidates an initial class-action shareholder complaint brought in July. Wyatt, who founded Coastal Corp. and is considered a legend in the industry, was named lead plaintiff. Houston-based El Paso acquired Coastal in a $24 billion mega-deal last year. Wyatt reportedly holds about 4 to 5 million El Paso shares, and has been scathing in his criticism of the company and its top management over the past months.

In the 64-page complaint, 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 liabilities and guarantees” through the use of off-balance sheet transactions; and manipulating the California energy market to “artificially boost” the price of natural gas.

“Until the truth began to emerge, El Paso was a favorite of Wall Street and lured many investors to buy its stock. Analysts rated the stock as a ‘strong buy’ and a ‘must own’ due to its ‘outstanding track record of driving strong earnings growth’ caused by higher volumes, margins, and the strong demand for natural gas,” the lawsuit alleged. But that was all smoke and mirrors, it said. El Paso said it will “vigorously defend” the company against the allegations in the lawsuit, which it expected, and “we fully expect to prevail.”

The complaint disputes El Paso claims it never engaged in round-trip, or “wash,” trading, which involves two companies conducting a simultaneous buy and sale of electricity or natural gas at the same price to boost a company’s trading volumes and financials. “Such round-trip trades not only occurred at the company, but they accounted for an astonishing $800 million to $1.1 billion in reported gross revenues between September 2001 and May 2002.”

Contrary to El Paso’s assertions, the lawsuit reported that El Paso entered into at least four wash trades for 50 MW of power with Reliant last January, and two wash trades with Duke Energy during the same month. The six trades generated more than $10 million of revenue for El Paso, and “are barely the tip of the iceberg as compared to the full extent of wash trading engaged in by El Paso,” it said.

The energy company “blatantly and openly encouraged” its traders to carry out wash trades, the complaint claimed. Tim Bourn, senior managing director of trading at El Paso, “directed the offering of bonuses to El Paso traders who showed a high volume of trading” on the IntercontinentalExchange (ICE), and the trader with the highest volume at the end of any given month was given an additional $10,000 bonus, it alleged. El Paso, along with five other energy companies, is an equity partner in ICE.

El Paso’s trading activities currently are being investigated by the Federal Energy Regulatory Commission, the Commodity Futures Trading Commission, the Securities and Exchange Commission and the U.S. Attorney’s Office in Houston.

“Even more egregiously, El Paso falsely represented [itself] in its initial 10-Q for the first quarter of 2002 by stating that it no longer recognized revenues from contract years more than ten years out,” as had been done previously under mark-to-market accounting. “In fact, El Paso secretly recognized at least $90 million from such contract years in that quarter alone,” the complaint noted.

Moreover, Wyatt charged that much of El Paso’s earnings growth in 2001 was due to its “deliberate manipulation of the California energy market by using its Merchant and Pipeline companies acting in concert.” The issue is at the center of a high-profile complaint at FERC, where an agency judge found El Paso Natural Gas withheld substantial amounts of transportation capacity to California during the state’s energy crisis to drive up the price of gas. All eyes now are on the full Commission, which has the option to accept or reject in full or part the judge’s ruling.

El Paso argues that it was not trying to manipulate prices, but claims its deliveries to California were restricted due to the safety risks posed by operating a system at high pressures, particularly in the wake of the rupture of its system in New Mexico. In comments filed at FERC recently, the Office of Pipeline Safety (OPS) noted that operating pipelines at “excessive pressures” posed numerous safety risks, including “deformation of pipeline materials, rupture and leakage of gas.” The OPS further said the maximum allowable operating pressure (MAOP) of a pipeline “may not be exceeded except in limited, temporary circumstances, such as pipeline startup and shutdown.”

Elsewhere in the lawsuit, Wyatt accused El Paso of making “false and misleading statements” in connection with its acquisition of Coastal. El Paso “misrepresented itself to be a financially healthy company when, in fact, El Paso needed to complete the merger to obtain assets…to maintain Enron-like earnings.”

The class-action lawsuit is on behalf of persons or entities who purchased or acquired El Paso stock between Nov. 9, 2000 and Sept. 23, 2002, the date that the FERC judge ruled El Paso manipulated the California market. It names the El Paso corporation, Chairman and President William Wise, Executive Vice President Ralph Eads and CFO H. Brent Austin as defendants.

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