Former Enron suitor Dynegy Inc. has agreed to pay $468 million to settle a class action suit that accused the Houston-based company and several of its former officers and directors of conspiring to cook the company’s books to mislead investors. The Chronicle story on the settlement is here.
For more than a decade in the Houston business community, Dynegy was known as “Enron-lite” — a smaller energy company that tracked Enron’s success in various business ventures, but primarily in natural gas trading. The class action claims arose during the period after Dynegy’s failed merger with Enron during that latter company’s meltdown at the end of 2001. Inasmuch as Enron was a market-maker in energy trading, that entire industry suffered a major shakeout immediately after Enron’s demise, and Dynegy was one of the trading companies that had to scramble to avoid its own demise in the aftermath of Enron’s bankruptcy.
Dynegy said it will pay the settlement using available cash, insurance, company stock, and bank lines. Dynegy reported about $1.2 billion in cash and unused bank credit availability as of Dec. 31, 2004. Dynegy will use insurance to cover $150 million of the settlement, $250 million from its cash reserves, and the remaining $68 million will be in the form of Dynegy’s common stock issuance. Dynegy expects to book a first-quarter charge of $155 million from the settlement and associated legal expenses, and its stock finished Friday’s regular session down 3.8% at $3.56.
The class action claims revolved around a financial project dubbed “Project Alpha,” a system of gas trades that Dynegy allegedly used to mollify a discrepancy between lagging operating cash flow and rising net income. As a part of that deal, class plaintiffs alleged that Dynegy disguised a $300 million loan as cash to inflate its financial statements. Representatives of Arthur Andersen, Dynegy’s former auditor, testified that Dynegy representatives had not disclosed key parts of the deal to Andersen and that its accounting treatment of the deal would have been different had all information been disclosed. That testimony led to a well-known conviction in a related criminal case that is known on this blog as the sad case of Jamie Olis.
The settlement also covers negligence allegations pending against former Dynegy CEO Chuck Watson, former president Steve Bergstrom, and former CFO Rob Doty. Their portions of the settlement will be paid out of the company’s Directors and Officers’ liability insurance policy.
Houston's Clear Thinkers
Longtime Houston attorney Tom Kirkendall's observations on developments in law, business, medicine, culture, sports, and other matters of general interest to the Houston business, professional, and academic communities.
Looks like a textbook example of a strategic win for corporations who “cooperate” with over zealous prosecutors by throwing their employees out in front to save themselves the publicity and share price hit of ongoing criminal “investigations”. Interesting that the plaintiffs are also alleging another $850 million fraud in a loan by Citigroup- yet there was no criminal pursuit of Dynegy or anyone else on that one. Also interesting that Arthur Anderson, who claimed information was hidden from them, paid $1 million to settle claims against them- which is a lot for a defunct company with a backlog of other adverse litigation and claim to be the innocent victims of fraud themselves.
By the way, why are so many of these criminal prosecutions about “disguised loans”- seems if you are going to commit a crime and conspire with your bosses, corporate officers and other departments- all that is required to pull off such a mega fraud involving hundreds of millions of dollars- you’d be much better off just quietly fiddling with the books- like Healthsouth. Why should Dynegy, AIG and others go into an elaborate structuring that has attorneys and accountants and banking experts working overtime to put a deal like that together, and wind up producing loads of documents as evidence and risk the multiple expert eyes on it, any one of whom may have an attack of conscience or fear at any point and decide to cut a deal to disclose your “crimes”?
Everybody is ready to close the book and “look toward the future” but one mid level tax guy is in jail for 24 years and his boss who testified against him for his deal of 5 years seem to be the only ones paying the severest price for the monetary loss to the primary civil plaintiff, UofC, which even itself claims at least one other significant cause of loss according to their own lawsuit.
I wonder when prosecutors will start having to pay for stockholder loss caused by their strategic public announcements of “investigations” that are based on little if any evidence of criminal wrongdoing or be held accountable for their public fraud in claiming that the wrongdoers are properly pursued and are paying a just price. I know- it’s a silly question..