Dynegy Inc. was fined $3 million by the Securities and Exchange Commission yesterday in a settlement of SEC charges that it defrauded investors by overstating its cash position by $300 million last year and by inflating its earnings through sham “round-trip” energy trades.
The SEC enforcement action against the Houston energy company parallels ongoing federal investigations of energy-trading companies, including Enron Corp., whose businesses surged at the end of the 1990s with the spread of electricity deregulation.
Enron’s energy trades are being investigated by a federal grand jury in San Francisco. A Senate subcommittee has accused Enron of similar deceptive statements about its cash flow.
The $300 million overstatement of Dynegy’s cash flow, according to the SEC, resulted from a complex energy deal called Project Alpha. In its public financial statements, Dynegy initially accounted for the cash as the front end of an multiyear energy trade.
“In reality, the $300 million was a loan masquerading as operating cash flow,” the SEC said yesterday. “As a result, Dynegy investors were deceived,” said Harold F. Degenhardt, head of the SEC’s Fort Worth office.
Dynegy also received a $79 million tax benefit by claiming large financial losses on the initial energy trades in the Alpha transaction, the SEC said.
The company, which settled the SEC charges without admitting or denying the agency’s findings, overstated its cash flow from operations by 37 percent and its net income by 12 percent last year, the SEC said.
Project Alpha’s funds came from Citigroup, which also arranged similar disputed energy transactions with Enron that should have been declared as loans, according to a Senate subcommittee.
Degenhardt said the SEC continues to investigate individuals and “third parties” involved in the Dynegy transactions.
Dynegy previously announced that it will restate earnings for 2001 and 2002 after correcting the accounting treatment of Project Alpha and the round-trip trades.
Energy trading has all but disappeared since Enron’s bankruptcy filing last year as investors have fled from Dynegy and other Enron competitors. Dynegy shares closed at $1.20 yesterday, up 3 cents but far below their 52-week high of $46.94, reached last November during the company’s failed attempt to acquire Enron.
The stock losses and trading investigations swept out key Dynegy leaders. Founder and chief executive Charles L. Watson resigned in May, followed the next month by Chief Financial Officer Robert D. Doty Jr.
SEC Enforcement Director Stephen M. Cutler said the $3 million fine was based on Dynegy’s failure to fully cooperate with the agency in its initial investigation. The SEC indicated the fine could have been more had the company not begun assisting the inquiry.