Two former executives and an ex-energy trader for Duke Energy Corp.’s Houston-based trading unit pleaded innocent last week to charges that they schemed to secure bonuses by fraudulently manipulating energy trading profits. All were released on separate $100,000 bonds.
The U.S. Attorney’s Office for the Southern District of Texas, which is heading up the wide-ranging mission of the Enron Task Force, charged Houston residents Timothy Kramer, 40, a former Duke Energy North America (DENA) vice president; Todd Reid, 41, former vice president; and Brian Lavielle, 33, a former energy trader, with racketeering, wire and mail fraud, and falsifying corporate books and records. Kramer and Reid also were charged with money laundering.
At a news conference to announce the indictments, U.S. Attorney Michael Shelby called the scheme “sophisticated fraud,” and said that “one of the principal victims of this crime is Duke Energy.” According to the indictment, the three “did knowingly devise, intend to devise, and participate in a scheme to defraud and obtain money and property from Duke Energy by means of materially false and fraudulent pretenses, representations and promises, and material omissions.”
The indictment accuses the men of conspiring to use fraudulent round-trip energy trades to buy and sell natural gas or power. Prosecutors allege there were more than 400 trades that resulted in $50 million in fraudulent profits in a period beginning in 2000. Because of those profits, DENA paid cash and stock bonuses to the men, including $5 million to Reid, $4 million to Kramer and $340,000 to Lavielle.
In a statement, Charlotte, NC-based Duke Energy said, “The individuals named in today’s indictments were at one time employed by Duke Energy but no longer work for the company. Duke Energy is reviewing its options for restitution and may take actions, pending the outcome of these indictments.”
Duke Energy said that in 2002, it “identified issues related to the Eastern trading operations — and took swift action to address them. At that time, we brought these matters to the attention of the government entities examining industry trading activities. We have cooperated with the U.S. Attorney in Houston and other government agencies throughout their investigations. The company recorded, in 2002, all the appropriate financial adjustments associated with the activities cited by the U.S. Attorney in today’s announcement. The financial implications were not material to Duke Energy.”
Last year, Duke Energy agreed to pay $28 million to settle a Commodity Futures Trading Commission (CFTC) probe into energy price index reporting (see NGI, Sept. 22, 2003). In that case, the CFTC found that Duke Energy Trading and Markets (DETM), a subsidiary of DENA, had attempted to manipulate the natural gas market by providing energy trade publications with false prices and volumes from gas transactions.
DETM neither admitted nor denied the CFTC charges. However, Duke Energy, which owns a 60% stake in DETM, said it had “terminated or otherwise disciplined certain Houston-based natural gas traders.” It also said that it was continuing to assess whether future discipline was needed.
The CFTC order stated that from at least January 2000 through August 2002, DETM’s Houston office knowingly reported false information, including prices and volumes, to certain gas price index reporting firms in an attempt to skew the indexes to benefit DETM’s trading positions. The CFTC order said that natural gas futures traders refer to the published indexes for price discovery and for assessing price risks, and DETM’s conduct constituted an attempted manipulation in violation of the Commodity Exchange Act (CEA), which, if successful, could have affected prices of New York Mercantile Exchange (Nymex) natural gas futures contracts.
According to a Securities and Exchange Commission filing in February, Duke Energy received a request from Shelby’s office for information “focused on the natural gas price reporting activity” of a former DETM trader. In 2002 and 2003, Duke Energy responded to various information requests and subpoenas from federal regulatory agencies and to grand jury subpoenas from Shelby’s office. All of the requests related to its energy trading activities, Duke Energy said.
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