Two former Dynegy Inc. executives face up to five years in prison and $250,000 in fines after they pleaded guilty last Tuesday to one count of conspiracy to commit securities fraud for their part in Project Alpha, a scheme that disguised a $300 million loan as a natural gas trade. The former executives, who agreed to cooperate with prosecutors, are scheduled to be sentenced in October.

Gene Shannon Foster, Dynegy’s former vice president of tax, and Helen Christine Sharkey, a former member of Dynegy’s risk control and deal structure group, made the pleas for the one count that arose from the Project Alpha deal (see NGI, July 7).

A third defendant, Jamie Olis, Dynegy’s former finance vice president, did not appear in court on Tuesday. Olis had earlier pleaded not guilty and is facing a possible jail sentence of 35 years and $2 million in fines for charges related to Project Alpha. All three defendants had been charged in June with conspiracy, securities fraud, mail fraud and wire fraud by the U.S. Attorney’s Office, and Foster and Sharkey had originally also pleaded innocent. The trio still faces charges by the Securities and Exchange Commission (SEC) for their involvement in Project Alpha.

When the indictments were unsealed in June, Olis was arrested and freed on $250,000 bond. Olis’ attorney Terry Yates said then that his client had pleaded not guilty “because he is not guilty.”

According to the indictments, the defendants, then Dynegy employees, 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. However, the money should have been booked as debt because the defendants secretly promised to repay the $300 million with interest, according to the indictment. The indictment stated that the repayment guarantee was hidden from former Dynegy accountants Arthur Andersen.

The defendants agreed that the nature of the transaction should “never, never, never go to anyone,” because the defendants were “the only ones that have complete knowledge of this transaction,” according to the indictment. Federal prosecutors allege that Project Alpha was set up with the assistance of the Citicorp banking unit, Deutsche Bank and Credit Suisse First Boston.

Dynegy has been cooperating with the investigation since it began. Dynegy had already 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.

Following the plea agreement announcement, Dynegy said in a statement, “While it is the company’s policy not to discuss former employees or comment on the facts of this case, we respect the judicial process and the efforts of the U.S. Attorney’s Office to resolve this matter in a thorough and deliberate manner.

“Dynegy has been and will continue to be committed to complete cooperation with all government agencies and to restoring the confidence of its stakeholders.”

When the ex-employees were first indicted, Harold Degenhardt, district administrator for the SEC office in Forth Worth, said the Project Alpha case remains ongoing, adding that “others” involved in the complex accounting scheme 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.

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