Securities and Exchange Commission Press Release - On Thursday, the Securities and Exchange Commission (SEC) filed securities fraud charges against three former employees of Dynegy Inc. in connection with their roles in Dynegy's Project Alpha, a $300 million financing transaction that disguised the company's true financial condition. In a civil suit filed in the U.S. District Court in Houston, the Commission is seeking fines and disgorgement of all of the defendants' ill-gotten gains, including bonuses and trading profits received during the period of their misconduct.
The Commission alleges that the three defendants disregarded accounting advice from Dynegy's outside auditors, established secret side agreements to conceal their improper conduct, authorized the improper elimination of risk by equity investors in a special-purpose entity and concealed transaction details from the company, the company's auditors and the investing public.
Project Alpha was previously the subject of a settled cease-and-desist order issued by the Commission on Sept. 24, 2002. In its order, the Commission found that Dynegy violated the antifraud, reporting, books and records and internal controls provisions of the federal securities laws by improperly recording Alpha's impact on Dynegy's financial statements as $300 million in operating cash flow and $79 million in net income (from a presumed tax benefit), when instead, the $300 million was actually a loan and the tax benefit was invalid. In settling the Commission's action, Dynegy paid a $3 million civil penalty.
The individuals named in the Commission's suit are:
Gene S. Foster, age 44, of Houston, Texas. Foster, a Texas-licensed CPA, was Dynegy's "Vice President of Taxation" during the relevant period and was responsible for all of Dynegy's tax-related matters, including planning and compliance issues.
Jamie Olis, age 37, of Houston, Texas. Olis was Dynegy's "Senior Director, Tax Planning and International" for most of 2000 and 2001. In January 2002, Olis was promoted to "Vice President, Finance." Olis provided technical tax expertise on various Dynegy transactions, including Alpha. Olis is a Texas-licensed CPA and an attorney licensed to practice in the State of Texas.
Helen C. Sharkey, age 31, of Houston, Texas. Sharkey was Dynegy's "Manager — Accounting, Deal Structure" during the relevant period. Sharkey, a Texas-licensed CPA, was the sole accounting representative assigned to the Alpha deal team.
In its complaint against Foster, Olis and Sharkey, the Commission alleges as follows.
In early 2001, the tax and accounting advisors of Dynegy's outside auditors, Arthur Andersen LLP, worked closely with the defendants to structure Alpha in a manner consistent with guidelines Andersen believed would ensure Alpha's conformity with generally accepted accounting principles (GAAP).
In the spring of 2001, Foster, Olis and Sharkey, under mounting pressure to complete Alpha, disregarded Andersen's advice that certain forms of risk-hedging involving derivative instruments such as commodity price swaps and interest rate swaps would defeat Dynegy's goal of accounting for Alpha as an ordinary operating contract and require recording it as a financing.
After an Andersen representative objected to certain hedging activities, the defendants effectively excluded the Andersen representative from Alpha-related meetings.
Foster, Olis and Sharkey agreed to conceal the prohibited hedging activities in secret side agreements to the swap confirmations.
The defendants allowed the equity investors in an Alpha SPE to hedge all commodity price risk, also against Andersen's specific advice and in violation of the equity-at-risk requirement.
Foster, Olis and Sharkey concealed these transaction details from Andersen and Dynegy.
Foster, Olis and Sharkey knew, or were severely reckless in not knowing, that their acts and omissions would cause Dynegy to account improperly for Alpha in its financial statements and submit false and misleading reports to the Commission and the investing public.
In its complaint, the Commission seeks an order against all the defendants, enjoining them from violations, and from aiding and abetting violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws, imposing civil money penalties, and ordering disgorgement of all ill-gotten gains, including bonuses and trading profits received during the period of their misconduct.
Foster, Olis and Sharkey are no longer employed by Dynegy. In 2001, Foster received a salary of $170,000 and a bonus of $160,000, while Olis received a salary of $162,000, a bonus of $110,000, a grant of options for 25,000 shares, and further profited from the sale of his personally held Dynegy stock in the approximate amount of $200,000. Sharkey received a salary of $80,000 in 2001.
The Commission filed its action at the same time that the U.S. Attorney's Office for the Southern District of Texas unsealed indictments against Foster, Olis and Sharkey for the conduct that is the subject of the Commission's complaint. The Commission acknowledges the assistance and cooperation of the United States Attorney's Office in Houston throughout its investigation.
Compliments of the Securities and Exchange Commission