U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19119 / March 3, 2005
Accounting and Auditing Enforcement
Release No. 2197 / March 3, 2005
Securities and Exchange Commission v. Hopper, et al., U.S. District Court for the Southern District of Texas (Civil Action No. 4:04-CV-1054) (2004)
Securities and Exchange Commission v. Eddie Richard Meche, U.S. District Court for the Southern District of Texas (Civil Action No. 4:05-CV-694) (2005)
SEC NAMES TAMELA PALLAS, FORMER OFFICER OF RELIANT RESOURCES, IN ACCOUNTING FRAUD CASE INVOLVING OVER ONE BILLION DOLLARS IN ROUND TRIP ENERGY TRADES
The U.S. Securities and Exchange Commission today amended its complaint in federal district court in Houston to add new claims against Tamela Charisse Whitlow Pallas. The SEC's amended complaint alleges that in 1999 Houston-based Reliant Resources, Inc. overstated its revenues by over $1.4 billion by engaging in a series of fictitious round-trip power and natural gas trades. The complaint alleges that Pallas, Reliant's former head of energy trading, was instrumental in orchestrating the round-trip trades and was the most senior Reliant officer to approve them.
According to the complaint, Reliant in 1999 entered into five round-trip power trades totaling 29.75 million megawatt hours with three counterparties: PanCanadian Energy Services, Inc., Merchant Energy Group of the Americas, Inc., and Public Service Company of Colorado. Reliant also entered into a round-trip gas trade for 182 billion cubic feet with Cokinos Energy. In total, the 1999 round-trip trades added over $1.4 billion in gross revenue and expenses to Reliant's books.
The complaint alleges that, because Reliant reported its trades on a gross basis, the round-trip trades inflated Reliant's revenues by 17.7% in 1999. In addition to recording inaccurate revenues, Reliant allegedly published inflated trading volumes in its annual and quarterly reports and included the overstated volumes and revenues in prospectuses and registration statements filed in anticipation of securities offerings.
The complaint alleges that Pallas led the effort to devise Reliant's round-trip trading program, and that she explicitly approved the trades. According to the complaint, Pallas understood that the round-trip trades would create a misleading impression of Reliant's energy trading operations and intended the trades to have that effect.
The complaint charges Pallas with violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and for aiding and abetting Reliant Resources, Inc.'s and Reliant Energy, Inc.'s violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint seeks civil penalties, a permanent injunction against future violations, disgorgement, and an officer and director bar.
In a separate administrative proceeding, the SEC issued a settled cease-and-desist order against former Reliant Chief Risk Control Officer Eddie Richard Meche. In a companion civil action, Meche consented to pay a civil penalty of $25,000. Meche neither admitted nor denied the findings in the SEC's order and the allegations in its complaint. For further information, see Administrative Release No. 3-11844.
The SEC previously entered into a settled cease-and-desist order against Reliant Resources, Inc. and Reliant Energy, Inc. in connection with the companies' 1999-2001 round-trip trades. See In the Matter of Reliant Resources, Inc. and Reliant Energy, Inc., Administrative Proceeding File No. 3-11110 (May 12, 2003).