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Lawsuits Target Allegheny Parent

Jan 2, 2002 | Centre Daily Times

Financial problems at the parent company of Allegheny Power have spawned at least 16 class-action lawsuits since Nov. 4, when the utility and power trader said it would delay filing its third-quarter earnings report.

The latest suit, announced Tuesday by Pittsburgh lawyer Alfred Yates Jr., accuses Hagerstown, Md.-based Allegheny Energy Inc. of harming investors with a series of misleading financial statements that artificially inflated the company's stock price.

The suits focus on the period between April 23, 2001 and Oct. 8 or Nov. 4, depending on when lawyers filed their legal proceedings.

On Wednesday, Yates refused to discuss the suit he initiated in U.S. District Court for the Southern District of New York. Most of the other suits were also filed in New York.

The suits seek damages for violations of federal securities laws on behalf of investors who bought Allegheny Energy stock during the period when the company and certain executives were supposedly making the misleading comments.

Allegheny Energy spokeswoman Tara Curtis declined to discuss the suits. "Our policy is we don't comment on pending litigation," Curtis said, adding that the suits will not affect customers.

According to Yates, Allegheny Energy issued numerous news releases during the period that reported record quarterly results. The company allegedly said it expected strong earnings during 2002, even though the U.S. economy and power markets were struggling.

Yates claims Allegheny Energy artificially inflated its revenue by relying on "round-trip" or "wash" energy transactions made by its subsidiary, Global Energy Markets, with Enron Corp., the Houston energy company that filed for bankruptcy protection last year.

Round-trip trades are the simultaneous purchase and sale of energy at the same quantity and price between the same companies.

Allegheny Energy's financial performance began to slide early this year, following record earnings in 2001. Blaming weak energy markets and sluggish economic conditions, the company reported a second-quarter loss of $32.3 million. It also blamed the Enron bankruptcy.

Two months later, on Sept. 25, Allegheny Energy sued Merrill Lynch and Co., from which it had bought Global Energy Markets in 2001. Allegheny Energy alleged that Merrill Lynch did not reveal that Global Energy Markets had inflated its revenues by engaging in round-trip trades with Enron.

On Oct. 1, Moodys Investors Services downgraded Allegheny Energy's unsecured credit rating to what Yates said was a "junk" rating. A week later, Allegheny Energy issued a statement saying it had defaulted on its principal credit agreements after lenders demanded additional collateral because of the downgrade.

The company's stock price responded by falling 49 percent to $3.80 per share and triggering a first wave of lawsuits.

On Nov. 4, Allegheny Energy said it would not file its third-quarter earnings statement because a review of prior-quarter earnings had turned up errors.

The disclosure unleashed a second round of suits, including the one announced by Yates.

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