Risk & Compliance

KeySpan Under the Gun

CFO, CEO being investigated for insider trading. Also: did Kenneth Lay cash out before Enron went belly up? Plus: Andersen's weekend loss is Deloit...
Stephen TaubApril 8, 2002

KeySpan CFO Gerald Luterman and two other executives are being investigated by the Securities & Exchange Commission and the U.S. Attorney’s Office for possible illegal insider trading violations.

On March 5, the SEC issued a formal order of investigation of the trading activity of a number of KeySpan insiders, including Luterman, Craig Matthews, who was chief operating officer at the time, and division president Robert Fani. The Commission is also probing the energy company’s compliance with reporting rules and regulations.

The period in question spans KeySpan’s February 2000 acquisition of the Roy Kay companies, through the company’s July 17, 2001 announcement that it would be taking a special charge.

As you may recall, KeySpan management stunned investors and regulators back in July when it said it would take a $30 million charge in the second quarter for accounting “inaccuracies” and higher-than-expected costs at its Roy Kay plumbing, mechanical and electrical-contracting businesses.

Interestingly, Luterman, Matthews and Fani were named in a proxy filed on Friday by Houston Exploration Co., an oil and gas explorer that is 67 percent owned by KeySpan. But in a proxy filed by KeySpan on the same day, KeySpan management only referred to the ongoing inquiries of “certain officers,” without identifying the individuals in question.

KeySpan management said it is cooperating with the SEC.

KeySpan and several officers and directors, including officers who are members of the company’s Houston Exploration’s Board, are also defendants in a number of class action lawsuits filed in the United States District Court for the Eastern District of New York. Those suits came after KeySpan announced the $30 million charge, according to the filings.

According to Bloomberg, citing the Washington Service (which tracks trading by corporate insiders), CFO Luterman sold 430,690 shares of KeySpan stock between May 11 and June 1 last year, Total value of the shares? $16.7 million. Nice work if you can get it.

FBI Investigating Lay

The FBI is looking into whether former Enron Chairman Ken Lay illegally dumped stock after learning that the company’s finances were crumbling. This, according to Reuters, citing sources close to the case.

Reportedly, Lay’s alleged stock dealings could be the smoking gun that law enforcement officials have been seeking to charge former Enron executives with a crime. Special Justice Department prosecutors and SEC officials are helping conduct the probe, according to the report.

According to published accounts of civil lawsuits, Lay sold $100 million worth of Enron stock between February 1999 and July 2001. Lay was also accused of selling stock after a now-infamous August 2001 meeting with Enron Vice President Sherron Watkins, who warned about potential problems with a number of off-balance sheet partnerships.

Other key Enron managers who have been accused in the past of insider trading include former Chief Executive Jeff Skilling, former CFO Andrew Fastow and former Vice Chairman Cliff Baxter. Baxter committed suicide in January.

Andersen’s Loss is E&Y’s Gain

It was a painful weekend for Andersen.

Since Friday, more than a half dozen public companies reported they have dumped the indicted company as their auditor. And the big winner of those defections? Ernst & Young.

At least four of the companies that fired Andersen over the past three days have replaced the embattled auditor with E&Y. In fact, recreational vehicle-maker Fleetwood Enterprises Inc. noted it had hired E&Y after using Andersen’s services since the Eisenhower Administration (1955, to be exact).

Starwood Hotels & Resorts Worldwide Inc., Valero and Genuity Inc. also named Ernst & Young as their independent auditor to replace Andersen. “The decision to change auditors followed a long and thoughtful review of various alternatives,” Starwood management said in a press release, echoing the statements from other Andersen bolters.

In a press release Friday, Genuity, a provider of Internet-infrastructure services, said “recent events” at Andersen have created the need to “engage another independent firm that can meet our global needs.”

At least three other companies that dumped Andersen switched to Deloitte & Touche.

They include Advance Auto Parts, Inc., the nation’s second largest auto parts chain, KeySpan Corp (see above), and the Houston Exploration Co., which is 67 percent owned by KeySpan.

“The decision to change independent public accountants was not the result of any disagreement between the company and Arthur Andersen on any matter of accounting principles, practices or financial disclosure,” KeySpan management stated in the same proxy filing that also revealed the SEC investigation of a number of the company’s top executives.

And Atrion Corp., which makes medical products, said it replaced Andersen with Grant Thornton LLP.

Other Accounting Probes

  • New World Restaurant Group, Inc., best known for its Manhattan Bagel stores, said the SEC is conducting an informal investigation into matters announced by the company on April 3.

As CFO.com reported, New World announced on April 3 the resignation of Chairman Ramin Kamfar and the termination of Chief Financial Officer Jerold Novack. The company also noted that it was delaying the filing of the company’s 10-K for fiscal 2001.

Novack, 45, joined New World as vice president of finance in June 1994. He was appointed CFO in January 1999.

New World said that it is cooperating fully with the investigation.

Meanwhile, management at Reliant Resources Inc. said it is cooperating fully with the SEC in an informal inquiry into the company’s restatement of second and third quarter earnings.

On Feb. 5, the company reported the restatements would increase earnings for the second and third quarters by $100 million to $130 million, as it recognized profits in 2001 that it had expected to record in 2002 and 2003. The restatement stemmed from a reassessment of how the company accounted for derivative instruments.

Elsewhere: R.R. Donnelley & Sons Co. said it settled a dispute with the Internal Revenue Service over the deductibility of interest on loans secured by corporate owned life insurance (COLI) policies. The settlement calls for the company to pay the IRS a portion of taxes on all prior deductions plus interest. The company also surrendered various life insurance policies.