It’s not as sexy as some of the Enron-related criminal trials, but the trial of two former Duke Energy natural gas traders began in Houston federal court yesterday.
Former Duke traders Timothy Kramer and Todd Reid face racketeering, conspiracy, wire and mail fraud, money laundering and falsifying corporate books charges in connection with an alleged scheme to book phony electricity and natural-gas trades to boost trading volumes and inflate profits in a trading book that was the basis of their annual bonuses (you can download a copy of the indictment here). A third former Duke Energy trader defendant — Brian Lavielle — previously copped a plea and will presumably testify against Messrs. Kramer and Reid during the trial.

By the way, a couple of seasoned veterans who were involved in prior Enron-related criminal trials are representing the defendants in this case. Jack Zimmermann, who represented Kevin Howard during the recent Enron Broadband trial, is representing Mr. Kramer and Tom Hagemann, who represented Daniel Bayly in the Nigerian Barge trial, represents Mr. Reid.
This is one of the first criminal cases of which I am aware in which senior-level executives have been accused of devising schemes to generate profits in a trading book by using “mark-to-market” accounting in calculating bonuses, on one hand, and entering losses in an “accrual book” that had no bearing on bonuses, on the other. Duke Energy and many other energy traders previously used mark-to-market accounting to record profit and loss for energy contracts that might not settle for years into the future. However, the mark-to-market accounting method has come under intense scrutiny since the demise of Enron Corp. in late 2001 because of the latitude that the method allows in recording profitable results in trading operations. Consequently, if the defense can make this a trial over the advisability of using mark-to-market accounting, then my sense is that the defendants have a decent chance of acquittal. Stay tuned.