Dynegy agreed Tuesday to pay $3 million to settle federal fraud charges that the company engaged in sham energy trades to pump up revenue.
Dynegy’s deal with the Securities and Exchange Commission is expected to usher in similar settlements with several other energy traders accused of using accounting trickery.
As part of the deal, Houston-based Dynegy agreed to cooperate with the SEC’s continuing investigation into actions by individual executives.
Dynegy neither admitted nor denied wrongdoing.
The SEC accused Dynegy of using special-purpose entities and so-called round-trip energy transactions to inflate company revenue.
Round-trip trades involve the simultaneous purchase and sale of energy at the same price and quantity with the same party. The transactions provide no profit but can inflate revenue or trading volume.
In a series of trades named Project Alpha, Dynegy reported ”as cash flow from operations what was in actuality nothing more than a loan,” the SEC said.
The practice boosted cash flow by $300 million in 2001.
Dynegy also misled investors by reporting inflated revenue and volume, which resulted from undisclosed round-trip trades, on its DynegyDirect online trading platform.
Federal investigators have asked or ordered 10 other energy companies to provide information about round-trip trades.
The Commodity Futures Trading Commission, the Federal Energy Regulatory Commission and the U.S. attorney are also investigating.
Accounting experts say the use of round-trip trades to boost cash flow is the latest in a host of accounting gimmicks embraced by unscrupulous companies in the past two years to flatter results.
When investors began to doubt the reality of ”pro forma” numbers or other accounting devices, some CFOs turned to one area of a company’s financial statement that was widely thought by investors to be not only an accurate measure of corporate health but also indisputable: cash flow.
”Dynegy is an example of a disturbing trend,” says Charles Niemeier, chief accountant of the SEC’s enforcement division.
”This is a very important case because investors need to understand that cash flow can be manipulated,” he says.
Energy-trading activity has deteriorated since the investigations began earlier this year, and investors and credit-rating companies have grown skeptical of the size and value of the business.