The waiting for the other shoe to drop regarding Nicor Energy LLC is over as rumors of fraudulent accounting that have been swirling since last year have turned into suits filed by the Securities and Exchange Commission (SEC) and the U.S. Attorney for the Northern District of Illinois.

In the U.S. District Court for the Northern District of Illinois, the SEC filed a civil enforcement action against four former executives of now defunct Nicor Energy for allegedly using an array of improper accounting tools to hit earnings targets.

In addition, three of the four executives and an outside lawyer who worked for Nicor Energy were indicted in a Chicago federal court for allegedly manipulating the books in 2001 to make the joint partnership seem profitable so they could cash in on performance-triggered bonuses.

Formed in 1997 as a retail energy marketing partnership between Nicor and Dynegy Marketing and Trade, Nicor Energy was shut down late last year amid speculation of legal action over its accounting practices (see Daily GPI, Oct. 30, 2002; March 28). Nicor Inc. wrote down to zero its investment in the joint venture in the third quarter 2002.

The SEC alleges that the four former executives of Nicor Energy inflated net income by $11 million in 2001. Named in the SEC suit are: CEO Kevin M. Stoffer; Andrew J. Johnson, director of financial services; John Fringer, vice president of power services and regulatory affairs; and John F. Weir, director of gas services and major markets.

In the action, the SEC alleged that the defendants, using Nicor as a conduit, defrauded the investing public regarding Nicor Energy’s financial condition and results of operations for the year ended Dec. 31, 2001. Because of the fraud, the SEC said Nicor Energy falsely reported to Nicor net income of $4.097 million instead of losses of $7.47 million for 2001, noting that the false results were then turned in to be reported to Nicor’s investors.

“Officers of a private entity such as Nicor Energy deceive the investing public when they provide false financial information to their parent corporation,” said Stephen Cutler, director of the SEC’s Enforcement Division. “The Complaint we filed today alleges that defendants did just that. We will seek stiff sanctions and work closely with the U.S. Attorney’s Office to ensure that this serious breach of trust is addressed.”

Robert Burson, senior associate regional director of the SEC’s Midwest Regional Office added, “According to the complaint, the defendants overstated Nicor Energy’s unbilled revenue accounts, understated Nicor Energy’s accounts receivable reserve, shifted 2001 expenses into 2002 and shifted 2002 income into 2001, all in order to inflate Nicor Energy’s 2001 income by more than $11 million.”

The SEC said it is seeking an order permanently enjoining the defendants from violating federal securities laws, granting civil penalties and permanently barring the defendants from serving as an officer or director of a public company.

In the second case, U.S. Attorney for the Northern District of Illinois Patrick J. Fitzgerald announced the indictment of three of the four executives named in the SEC case and one other individual. In addition to Stoffer, Johnson and Fringer, the U.S. Attorney’s case was also brought against Michael Munson, a lawyer who represented Nicor Energy.

The U.S. Attorney’s case alleges that the defendants “attempted to make Nicor Energy appear to be more profitable in 2001 than it actually was, by causing revenues to be inflated and expenses to be understated.” In doing so, the U.S. Attorney stated that Stoffer, Johnson and Fringer “fraudulently sought to obtain approximately $400,000 from Nicor Energy, in the form of bonuses and other compensation.” The suit alleges that Munson “sought to please” Nicor Energy, which he hoped would send him additional legal business and eventual employment.

To receive the bonuses, the criminal indictment alleges that the defendants inflated revenues by as much as $6 million at times, while lowering actual expense figures to make the joint venture seem more profitable than it was. The suit also alleges that the fraudulent financial information harmed investors of Nicor Inc. and Dynegy.

If convicted, each wire fraud count carries a maximum penalty of five years in prison and a $250,000 fine.

Commenting on the suits, Dynegy spokesman John Sousa said that Nicor Energy “is functioning only as a legal entity at this point. There are no commercial operations associated with the company. We were not responsible for Nicor Energy’s daily operations. It was and LLC that was run by independent management not associated with Dynegy.”

Responding to the charges, Nicor Inc. said that during the time period covered by the charged conduct, Nicor Energy had its own management and was operated separately from Nicor and Nicor Gas. The company also noted that Nicor Energy disposed of all of its natural gas and electric accounts earlier this year and the business is in a final liquidation phase.

The parent company said it originally discovered accounting irregularities at Nicor Energy as part of a 2001 year-end audit and management review of Nicor Energy’s financial results.

“Nicor publicly disclosed these findings to federal authorities and the investment community,” the company said. “Nicor Inc. has cooperated fully throughout the investigation and is pleased that this matter has now come to a resolution.”

The suits come as Nicor Gas continues its battle against charges that it allegedly embarked on a plan to defraud consumers at a time when they were paying record high gas prices (see Daily GPI, Dec. 11).

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