A Houston jury last week began hearing the first case of many that have rocked the merchant sector in the past two years, but this first trial didn’t involve Enron Corp. Instead, a jury is determining whether a former Dynegy Inc. executive, who has pleaded innocent, committed fraud with two fellow executives, who already have pleaded guilty.

The U.S. Attorney’s Office in Houston, which is presenting the case against Dynegy’s Jamie Olis, said last week that the list of potential witnesses against the former finance executive includes former Chairman and CEO Chuck Watson.

In the prosecution’s opening arguments, Assistant U.S. Attorney Belinda Beek tried to make sure jurors understood what the Dynegy case was about. She said it “is not about accounting. This case is about lying. It’s as simple as that.” The case is being heard in U.S. District Judge Sim Lake’s Houston courtroom.

Olis was senior director of tax planning/international in 2001, and later became vice president of finance. He was charged in June with conspiracy and fraud along with his former boss, Gene Foster, and another ex-Dynegy employee, Helen Sharkey, for their involvement in Project Alpha, a financial scheme that prosecutors allege was put together by the three for illegal purposes.

While Olis has maintained his innocence since the beginning, in August, Foster and Sharkey each pleaded guilty to one count of conspiracy and are awaiting sentencing (see NGI, Aug. 11). They also may be called to testify.

According to court records, a Dynegy entity called ABG Gas Supply LLC bought natural gas at market prices and sold it to Dynegy after April 2001 at a $300 million discount. Within the off-balance sheet Project Alpha deal, Dynegy then resold the gas at market prices, booking the $300 million as cash flow on financial statements for the second, third and fourth quarters of 2001. The transaction also allowed Dynegy to book a $79 million tax benefit related to the transaction.

Prosecutor Beek last week made a 45-minute opening argument to explain the difference between Dynegy’s cash flow and earnings, and discrepancies that officials claim were hidden by the conspirators. Beek told jurors that those involved “knew the numbers weren’t right, and they had to do something about it because people were noticing.”

However, defense attorney Terry Yates countered that everything was on the “up and up” with Olis. Rather, said Yates, former Dynegy auditor Arthur Andersen, which helped set up the original transaction in 1998, used “accounting tricks” and also benefited financially — receiving $8 million, the highest fee of all of the law firms and banks that had advised the company on the deal.

Comparing Project Alpha to a Formula One race car, Yates said the transaction was “dangerous, complex and reckless. Arthur Andersen was the driver. They wanted to get to the finish line to get this deal done.”

While prosecutors allege that Olis withheld pertinent information from Andersen, Yates contended that information was withheld only because Andersen had made the request and only wanted to be made aware of certain things, said Yates. “Nothing was hidden from Arthur Andersen that they did not want to see,” Yates said.

Court observers said Olis, who was fired by Dynegy in February, cried silently while Yates told the jury about Olis’ humble beginnings. He stressed that Olis never intended to defraud anyone, and instead, “he was just a tax guy trying to do his job.”

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