Three former executives involved in Duke Energy‘s energy trading operation have been indicted in what the local U.S. Attorney’s Office contends was a fraudulent scheme to attain bonus compensation through making part of Duke Energy’s trading operations look profitable when they really were not.
Timothy Kramer, 40, former vice president of Duke Energy North America. Todd Reid, 41, former vice president, and Brian Lavielle, 33, a former trader were charged with racketeering, wire and mail fraud, and falsification of corporate books and records. All of them pled not guilty today and were released on $100,000 bond. If convicted on all counts, the defendants face prison sentences of anywhere from five years to life, in addition to forfeiture of $7 million in “false gains” plus penalties of up to $9 million.
The gist of the indictment is that the defendants allegedly ginned up 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. The indictment alleges that there were 400 rigged trades that produced a $50 million profit in the trade book used for bonus calculations between March 2001 and May 2002. The schemes are alleged to have inflated bonuses for the defendants by a total of at least $7 million.
Moreover, this is the first federal case that I know of in which senior-level executives have been accused of devising schemes to generate trading profits in a “mark-to-market” book that determined bonuses, on one hand, and to enter losses in an “accrual” book that had no bearing on bonuses, on the other. Duke and many other energy trades used mark-to-market accounting to record profit and loss for energy contracts that might not settle for many years. 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 results.
Interestingly, the amount of money involved in the alleged fraud is relatively small when compared with Duke Energy’s pretax profits in 2001 from energy trading. Wholesale energy trading that year generated a pretax profit of $1.34 billion, and Duke’s wholesale-trading profits more than tripled from 2000 to 2001.