A class action lawsuit alleging that KN Energy Inc., now KinderMorgan Inc., violated federal securities laws, committed fraud andmisrepresented itself has been filed in U.S. District Court for theDistrict of Colorado by a Denver law firm. Dyer & Shuman LLPsaid it had filed the lawsuit on March 8 on “behalf of persons whopurchased or otherwise acquired the shares of KN EnergyInc…between March 19, 1997 and March 9, 1999.” Kinder Morgan hadno comment on the lawsuit.

Allegedly, KN Energy made “material misrepresentations and/oromissions of material fact” concerning the “extraordinary risks”posed by its high proportion of “keep whole” contracts inconnection with its processing plant operations.

The lawsuit also charges that the company disseminated”misleading financial information” by reporting as income proceedsfrom “extraordinary transactions, to bolster the company’sfinancial results in order to facilitate certain securitiesofferings,” without disclosing an increased exposure to future lossrisks created by the transactions.

Earlier this month, the court denied Dyer & Shuman’s motionto be appointed Lead Plaintiff as “premature” because the law firmfailed to comply with the mandate that other class members benotified of their right to move the court to serve as leadplaintiff. The court’s order does not state whether (and, if so,when) the court will entertain new motions for appointment of leadplaintiff. However, by denying the original motion for leadplaintiff “without prejudice,” the court suggests that it wouldconsider appointing other shareholders to serve as lead plaintiff.

Denver-based Dyer & Shuman, LLP has extensive experience insecurities class action litigation, and has played lead roles inmajor securities fraud cases in Colorado and throughout the nation,resulting in the recovery of hundreds of millions of dollars toinvestors.

Although attorneys did not return NGI’s calls by presstime and it’sstill unclear exactly what the charges are against KN Energy, KN’sfinancial and stock price woes are well known. Kinder Morgan picked upKN when it was in the industry basement in terms of financialperformance and stock price last year, according to observers at thetime of the merger. KN had just suffered through the cancellation ofits proposed $6 billion merger with Sempra Energy (in June) in whatone observer described as one of the first “blunders” among energymergers (see Daily GPI, June 22). Thetwo companies said that as they were studying the integration processthey discovered the combined company “would not be able to realize thebusiness objectives they originally anticipated.” At the time, manyobservers blamed the cancellation on KN’s financial woes. Just priorto the announcement, KN had warned investors that warm temperatures,high storage levels, poor processing margins and reduced gastransportation throughput during the first quarter took a bite out ofearnings and could continue to plague the company for the rest of theyear (see Daily GPI, April 28). KN saidits first quarter earnings were expected to come in up to 7 centsbelow recently estimates of about 20 cents per share, beforeconsidering costs of 3 cents per share incurred relevant to a proposedmerger with Sempra Energy.

Many observers said KN’s problems dated back to its costlypurchases in 1997, which included the $4 billion MidCon Corp.purchase from Occidental Petroleum in December 1997 and thepurchase of the Bushton processing complex and related gatheringassets in the Hugoton Basin from Enron in February 1997.

Richard Kinder, CEO of Kinder Morgan, vowed to get KN “out of theditch” and back down the highway when Kinder merged with KN lastSeptember in what many observers called a slam dunk deal. MerrillLynch analyst Donato Eassey said it was the transaction of the decadebecause it essentially had KN buying Kinder Morgan for $654 millionwhile Richard Kinder, a KN board member, and Bill Morgan took controlof the remaining company (see Daily GPI, July 12, 1999). They promptly cleanedhouse, selling off hundreds of millions of dollars in assets andlaying off hundreds of employees (see Daily GPI, Sept. 16). The gutting of the companycontinues.

Kinder Morgan Inc. stock was up 69 cents yesterday to $34.69. Ittraded as low as about $13/share last summer following the KNmerger.

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