Dynegy Inc., a U.S. power producer that nearly went bankrupt after Enron Corp. collapsed, will pay $468 million to settle shareholder claims that it misled investors by disguising loans as energy trades in 2001.
The agreement with plaintiffs led by the University of California is the ninth-largest settlement of a class-action securities fraud case in the United States, according to data compiled by Bloomberg. Dynegy will pay $250 million from its own funds and $68 million in company stock, while insurers will pay $150 million, the Houston company said in a statement yesterday.
"Dynegy engaged in some of the same types of off-balance-sheet transactions that Enron did, and when the whole thing got exposed, its stock plummeted," said William S. Lerach, lead attorney for the shareholders. "They engaged in secret transactions to artificially boost cash flow."
Shareholder losses after Enron's bankruptcy three years ago led to increased scrutiny of the energy-trading industry by securities and commodity regulators and credit-rating services. Dynegy's stock plunged 95 percent in 2002, touching a low of 51 cents, making it the worst performer in the Standard & Poor's 500-stock index.
The plaintiffs charged that the company misled investors with a natural gas transaction called Project Alpha, in which the company "mischaracterized the proceeds of borrowing as operational revenues and manipulated its reported tax liability," the University of California said in a written statement.
Under yesterday's agreement, Citigroup Inc., which was involved in the Project Alpha transaction, agreed to pay $5 million. The settlement covers claims for damages on behalf of purchasers of Dynegy's common stock from June 2001 to July 2002.
A former Dynegy executive, Jamie Olis, is serving 24 years in prison for conspiracy and securities and mail fraud for his part in helping disguise loans as energy trades through an off-the-books partnership.
Dynegy restated $300 million in earnings in 2002 and agreed to pay $3 million to resolve charges brought by the U.S. Securities and Exchange Commission related to the transactions.
Former Enron chairman Kenneth L. Lay and chief executive Jeffrey K. Skilling are both facing criminal charges over their role in the downfall of that company, which Dynegy tried to acquire in 2001 as Enron collapsed.
Dynegy's accounting "was neither of the same magnitude or the same seriousness as Enron, but that's not to diminish the losses to shareholders," Lerach said.
Dynegy also has agreed to let the plaintiffs appoint two directors to the company's board to help monitor corporate governance reforms, according to the University of California.
The settlement will result in a $225 million pre-tax charge in the first quarter, or $155 million after tax, Dynegy said. The company will provide updated guidance for 2005 earnings on May 9. Dynegy earlier this year projected a 2005 loss of $335 million, partly because of high fuel costs at the company's power plants. The company has reported losses of $3.44 billion for the past three years.
The $468 million Dynegy settlement "is a significant amount of money," said Chris Ellinghaus, an analyst at Williams Capital Group in New York who rates Dynegy "neutral" and doesn't own any shares. "It reflects how angry investors were about the energy industry of the 1990s, how shockingly everything collapsed, and how insistent they were on a large settlement."