Investigations are ongoing into “others” who may have been involved in a series of complex energy trades better known at Dynegy Inc. as Project Alpha, according to a Fort Worth-based Securities and Exchange Commission (SEC) official. The SEC official said “further action is likely” after three former Dynegy accountants were charged with criminal fraud on Thursday.

Jamie Olis, 37, Dynegy’s former senior director of tax planning; Gene Shannon Foster, 44, former vice president of tax; and Helen Christine Sharkey, 31, a former member of Dynegy’s risk control and deal structure group, each were charged with conspiracy, securities fraud, mail fraud and wire fraud by the U.S. Attorney’s Office in Houston. All three are certified public accountants with the state of Texas.

In a statement following the indictments, Harold Degenhardt, district administrator for the SEC office in Forth Worth, said the case is ongoing regarding Project Alpha, and that “others” involved in the complex accounting scheme also may be indicted in the future. “Those who betray the public trust will be pursued and punished. Investors deserve this commitment and the markets require it,” Degenhardt said.

Michael Shelby, U.S. Attorney for the Southern District of Texas, unveiled the three indictments during a press conference in Houston Thursday morning. He said the case was about “truth in the marketplace.” The defendants “are accused of withholding the truth about Dynegy’s true fiscal condition from the SEC, shareholders and the public.”

When asked if the U.S. Attorney’s office is still investigating others in the case, Shelby said, “I don’t know who else might have known about this. We’ll see how that plays out.” The Houston Department of Justice office is heading a Corporate Fraud Task Force set up in the aftermath of the Enron Corp. debacle.

According to the indictments, the defendants set up ABG Gas Supply as a special purpose entity to purchase gas at market price, then resell the gas to Dynegy at a discount. The company then allegedly sold the gas at market prices to generate approximately $300 million in trading revenue.

For the next 51 months of the contract, officials allege that ABG Gas would buy natural gas to sell to Dynegy at a premium to market prices, effectively repaying a loan. Referring to the transaction, Shelby said, “there was no risk. At the conclusion, ABG and the financial institution that funded ABG would recoup” the investment. According to federal prosecutors, Project Alpha was set up with the assistance of the Citicorp banking unit, Deutsche Bank and Credit Suisse First Boston.

Allegedly, Olis, Sharkey and Foster conspired to conceal the nature of the circular hedging transaction from regulators and investors, and federal officials cited an e-mail in which the three agreed that documentation should be kept secret because they were “the only ones that have complete knowledge of the transaction.”

The trio faces a maximum penalty of 10 years in prison and a $1 million fine for the securities fraud charges. The other federal charges carry a maximum penalty of five years in prison and a fine of $250,000.

At the same time the Justice Department was unveiling its indictments, the SEC also filed civil securities fraud charges against the three former employees for their roles in Project Alpha. The SEC alleges that the three defendants disregarded accounting advice from Dynegy’s outside auditors and then concealed their improper conduct from the company, its auditors and investors.

Dynegy paid $3 million to settle an SEC complaint involving Project Alpha last year (see NGI, Sept. 30, 2002). The SEC had alleged that Dynegy engaged in securities and accounting fraud because it told investors after Project Alpha was disclosed in April 2002 that the project was set up to secure a stable natural gas supply.

In the aftermath of Project Alpha, which in part led to the resignation of Chairman Chuck Watson and CFO Rob Doty, Dynegy restated its earnings in 2001 downward 12% (see NGI, Nov. 18, 2002). Dynegy did not admit any wrongdoing in the SEC settlement, which also involved penalties relating to four “round-trip” gas transactions that were used to inflate energy trading volume.

In a statement Thursday, Dynegy said, “While it is Dynegy’s policy not to discuss former employees or matters pertaining to their employment, the company has been and remains committed to complete cooperation with the U.S. Attorney’s Office in Houston and other government agencies.”

Last Tuesday, Dynegy informed the trade press of its decisions to stop reporting natural gas, liquids and power pricing information for index calculations and to exit the Committee of Chief Risk Officers, which has been developing guidelines for price reporting and indexing. The main reason for its decisions, Dynegy said, was its reorganization, particularly its plan to exit third-party energy marketing and trading, which is substantially complete.

“After careful consideration by our senior management and board of directors, we have decided that we will not report power, natural gas or natural gas liquids transaction information to index publications,” John Sousa, Dynegy’s vice president of corporate communications, said in a letter to publications, including Natural Gas Intelligence.

“As you may know since we announced our restructuring and reorganization last fall, Dynegy has substantially wound down its third-party marketing and trading activities. It is our intention to fully exit this business. Given our diminishing presence in this area and a decreasing number of transactions, we do not believe that Dynegy would be a significant source for the transaction information that you seek,” Sousa said.

A Dynegy spokesman said the decision to exit CCRO was based on its decision to stop price reporting. “We appreciate the leadership that CCRO has provided and the time and effort they have spent to develop guidelines, but our decision to exit really stems from our decision not to report prices.”

Dynegy, whose predecessor Natural Gas Clearinghouse was the industry’s first natural gas marketing company, announced plans last October to exit the energy trading business (see NGI, Oct. 21, 2002). In January, the company canceled its long-term purchase and sale contracts with ChevronTexaco (see NGI, Jan. 20).

The series of upheavals was triggered initially by its ill-fated attempt to merge with Enron in late 2001. The merger subsequently failed, costing Dynegy millions. Besides the SEC fine, Dynegy also paid a $5 million fine to the Commodity Futures Trading Commission to settle charges it tried to manipulate U.S. energy markets. A former Dynegy natural gas trader, Michelle Maria Valencia, is awaiting trial on fraud charges for allegedly sending false price data to an industry publication.

In other news, a shareholder lawsuit originally filed last year against Dynegy was amended on June 6 to include more plaintiffs in a complaint that alleges the company hid an $850 million loan from Citicorp through an off-balance sheet transaction in 2000 to preserve its credit rating. The lawsuit is led by the University of California, which has lost millions on its Dynegy investments.

The lawsuit centers on a transaction referred to as “Black Thunder,” which was disclosed last year by Dynegy. Last year, Black Thunder was one of $300 million in ratings triggers removed by Dynegy to help it secure credit and restructure (see NGI, July 1, 2002). The amended complaint added several financial institutions as defendants, which the lawsuit alleges acted as underwriters for fees to enable Dynegy to sell debt offerings.

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