On Thursday three former Dynegy executives were charged in federal court with conspiracy and fraud. The executives named in the indictment: Jamie Olis, Dynegy’s former senior director of tax planning; Gene Foster, former vice president of tax; and Helen Sharkey, a former member of Dynegy’s risk control and deal structure group.
According to the federal indictment, the executives used accounting gimmickry to boost cash flow and decrease the energy company’s tax load. The Securities and Exchange Commission has also filed a civil lawsuit of its own against the executives.
Government prosecutors claim the three executives borrowed money and then attempted to disguise the loan as cash flow from operations, instead of accounting for it as debt. In addition, the indictment asserts that the three senior managers hid the true nature of the transaction from Andersen, Dynegy’s independent auditor at the time.
Each of the ex—Dynegy executives were charged with conspiracy, securities fraud, mail fraud, and wire fraud. The maximum penalty for securities fraud is 10 years in prison and a $1 million fine. The maximum penalties for the other charges are 5 years in prison and a fine of $250,000.
“This case is about truth in the marketplace. These defendants are accused of withholding the truth about Dynegy’s true fiscal condition from the SEC, shareholders and the public,” said Michael Shelby, U.S. Attorney for the Southern District of Texas, in a statement.
This isn’t the first time Dynegy executives have come under legal fire. Last September the company’s management was forced to pay a $3 million fine to settle an SEC investigation into a natural-gas deal. That deal, known internally as Project Alpha, reportedly involved a complicated web of accounting transactions related to a contract with ABG Gas Supply LLC. Regulators maintained that the deal improperly boosted the company’s cash flow by as much as $300 million and cut taxes by $79 million.
The SEC claimed the $300 million should have been disclosed as financing rather than cash flow in the company’s 10K for 2001. The commission also concluded that net income had been overstated by the same amount as the tax benefit. Dynegy settled the investigation without admitting or denying the agency’s allegations of securities fraud.
Earlier this year, another former Dynegy employee was indicted for recording 43 round-trip transactions on three occasions, according to the Associated Press. Round-trip trades are typically done to boost transaction volume, but the deals do not add to a company’s revenues.
Siebel Shareholders Vote Down Options Plan
Stockholders at Siebel Systems, a maker of customer relationship management software, shot down a proposal to treat stock options as an expense and link executive options to the company’s performance. The company’s board and top executives had fervently pushed against the proposed measures, claiming they would cause the company “significant damage.”
Meanwhile, other shareholders protested outside the San Mateo, California-based company’s annual meeting, complaining about CEO Tom Siebel’s compensation package. The dissident shareholders claim Siebel’s compensation, at more than 7,500 times the average U.S. salary, is one of the highest executive pay packages in the United States. This according to the Financial Times.
Richard Ferlauto, a representative of the American Federation of State, County, and Municipal Employees union pension plan, which sponsored the expensing resolution, reportedly accused Siebel of using “the corporate treasury to campaign against stock option expensing.”
At Siebel’s annual meeting, company management said approximately 65 percent of the 417 million shares voted were cast against the proposal to expense options. Sixty-two percent of the votes were cast against the performance-based options proposal.
Given that Siebel directors and senior executives own 15.6 percent (82 million shares) of the company—Siebel himself holds an 11.2 percent stake—it’s not a shock that the two proposals were voted down.
According to an article in the Wall Street Journal, Tom Siebel touted the practice of compensating employees with generous stock options as a “fundamental tenet” of the company, which he founded in 1993. “We wanted to build an employee-owned company,” he told that paper.
Other technology corporations that have recently rejected stock-expensing resolutions include Intel and PeopleSoft. Shareholders at Apple Computer and Veritas Software, however, have passed such proposals. But senior executives at Apple have yet to implement the proposal, saying they want to wait until the Financial Accounting Standards Board issues its verdict on the expensing of stock-option grants.
FASB’s decision is expected soon, although a House bill currently before Congress would place a three-year moratorium on any changes to the current standard for the accounting of employee stock options.
Few Buyers for Terrorism Insurance
It appears that corporations are passing on terrorism insurance.
According to Aon Risk Services, corporates are passing on terrorism coverage not because attacks are unlikely, but because of the difficulty of measuring the risk and determining its costs. Aon says there’s also considerable confusion surrounding the implementation of a federal plan to backstop private terrorism insurance.
In a panel discussion Thursday, Gail Nordstrom, a managing director at Aon, said that only about 15 percent of Aon’s corporate clients in the United States have purchased terrorism coverage, according to Dow Jones Business News. What’s more, many of those that have bought coverage have only done so under pressure from lenders or business partners, added Nordstrom.
“An awful lot of this is an issue of being in denial or being confused about the process,” insisted Nordstrom.
Under the federal Terrorism Risk Insurance Act (TRIA), primary insurers in the United States were required to notify customers how much it would cost to add terrorism coverage to their policies. Although prices for terrorism coverage vary widely, it tends to be expensive. Premiums range from 2.5 percent to 300 percent of the original property premium, said Nordstrom.
Aon expects more companies to purchase terrorism coverage in the future as it becomes clearer what is covered and how claims will be certified and paid.
Judge Okays Suit Against DaimlerChrysler
A Delaware district judge has given a group of former Chrysler shareholders the green light to pursue a multi-billion-dollar class-action suit against DaimlerChrysler AG.
On Thursday, the judge gave the group—led by billionaire investor Kirk Kerkorian—certification to go ahead with the suit. Some observers say the go-ahead might give shareholders the upper hand if the suit is eventually settled.
The former shareholders—who initially launched the suit in 2000—claim that DaimlerBenz AG and its chief executive, Juergen Schrempp, planned and executed a takeover of Chrysler in 1998, although the company called the deal a “merger of equals.” The suit reportedly began after a story in the Financial Times quoted Schrempp saying that he had always planned a takeover but that Chrysler would agree only to a merger. A December 1 trial date has been set for the suit.
Shareholders of the U.S. car company would likely have received $5 billion to $10 billion more as a premium for giving up control to Daimler had the German automaker actually acquired Chrysler, according to Dow Jones Newswire. The class-action suit, as well as some individual suits, will attempt to recover that money.
- Shareholders at El Paso are seeking to replace management at the nation’s largest pipeline company. Led by Selim Zilkha, an international businessman, El Paso shareholders are scheduled to vote on whether to replace the board on June 17. El Paso has been shrouded in controversy since Enron’s collapse cast a shadow over the entire energy sector. Following investigations into El Paso’s role in the California energy crisis, the company has scrapped its long-term business plan. It has also been hit with a number of shareholder lawsuits and lost its investment-grade credit rating.
- The global junk-bond default rate fell to 6.4 percent in May from a revised 6.7 percent in April, according to Moody’s Investors Service. The rating agency expects the rate to hover around that level during the next year. Default rates on high-yield bonds stood at 8.3 percent at the beginning of the year. “We expect a gently falling but still high global speculative default rate,” said David Hamilton, head of default research at Moody’s.