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U.S. Securities and Exchange Commission

United States of America
before the
Securities and Exchange Commission

Securities Act of 1933
Release No. 8232 / May 12, 2003

Securities Exchange Act of 1934
Release No. 47828 / May 12, 2003

Accounting & Auditing Enforcement
Release No. 1780 / May 12, 2003

Administrative Proceeding
File No. 3-11110

In the Matter of





The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Reliant Resources, Inc. ("Reliant Resources") and Reliant Energy, Inc. ("Reliant Energy") (collectively "Respondents" or "Reliant").


In anticipation of the institution of these proceedings, Respondents have submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, Respondents consent to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order ("Order"), as set forth below.


On the basis of this Order and Respondents' Offer, the Commission finds1 that:


Until August 31, 2002, Reliant Energy was an electric and gas public-utility holding company exempt from registration under Section 3(a)(2) of the Public Utility Holding Company Act of 1935 (the "1935 Act").2 Reliant Energy's common stock was registered with the Commission under Section 12(b) of the Exchange Act, and traded on the New York Stock Exchange under the symbol REI until October 1, 2002.

In December 2000, Reliant Energy transferred a significant portion of its unregulated businesses to Reliant Resources, then a wholly-owned subsidiary incorporated in Delaware and based in Houston, Texas. In May 2001, Reliant Resources conducted an initial public offering of approximately twenty percent of its common stock. The initial public offering was intended as the first step in the separation of Reliant Energy's regulated and unregulated businesses. Reliant Resources' common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and trades on the New York Stock Exchange under the symbol RRI.


During the period from at least January 1999 through May 2001, Reliant Energy was an electric and gas utility holding company that had several operations, including a Retail Group that provided retail energy services to residential and business customers, a Wholesale Group that acquired, developed, and operated unregulated electric power generation facilities, and a Delivery Group that operated regulated utilities, including the electric utility serving Houston, gas local distribution companies in six states, and two interstate natural gas pipelines.3 The Wholesale Group also traded in and marketed power, natural gas, natural gas transportation capacity, and other energy-related commodities. The Wholesale Group's trading and marketing activities included marketing power produced from power plants Respondents owned, as well as purchasing power from other generators and marketers and selling it primarily to electric utilities, municipalities, cooperatives, and other marketing companies. The Wholesale Group also used derivative instruments to manage and hedge its fixed price purchase and sale commitments and to reduce exposure relative to the volatility of cash and forward market prices. The Wholesale Group also offered "power origination products," which were packages of energy services custom designed to meet the long-term energy needs of certain customers. Reliant Energy included the Wholesale Group's financial reporting in its quarterly and annual reports that it filed with the Commission in 1999 and 2000. In December 2000, Reliant Resources took over the management of the Wholesale Group. Upon completion of Reliant Resources' initial public offering and beginning with its quarterly report for the period ended March 31, 2001, Reliant Resources assumed the financial reporting obligations of the Wholesale Group.

The Round Trip Trades

In early May 2002, following the public announcement that another energy trading company had engaged in round trip trades, Reliant Resources made internal inquiries and subsequently announced that it had similarly engaged in significant same-day commodity trading transactions involving simultaneous, pre-arranged purchases and sales with the same counter party for the same volume at the same price ("round trip trades"). Reliant Resources promptly reported to the Commission the facts surrounding the round trip trades, and also publicly disclosed those facts in a press release dated May 12, 2002. For the most part, the round trip trades resulted in neither profit nor loss to either transacting party. Instead, the trades were designed for the sole purpose of increasing trading volumes to improve Respondents' standing in the gas and power trading rankings in industry publications.

The idea of engaging in round trip trades grew out of a desire by certain employees in the Wholesale Group to increase Respondents' status in the industry as energy marketers and traders. Various industry publications kept track of power trading volumes that energy companies reported quarterly to the Federal Energy Regulatory Commission ("FERC"). Other publications tracked energy companies' natural gas trading volumes by contacting the companies and compiling the information themselves. The charts in these publications, which came to be called the industry rankings, or "league tables," were regularly published by several energy industry trade publications in the late 1990s.

Beginning in 1999, Respondents' decided that it was advantageous to be in the top ten, and then the top five, and ultimately the top three in these industry league tables in terms of volumes traded because it would help Respondents market "power origination products" to large energy users. To achieve this goal, Respondents decided to pre-arrange several large trades to increase trading volumes. Each round trip trade was for a large volume in order to achieve with one transaction the increased volume that would only result from hundreds of smaller trades. Because so much trading volume could be achieved with so few trades, the administrative and transactional cost was much lower than it would have been with smaller trades. Moreover, each round trip trade was pre-arranged with a pre-selected counter party that had an agreement with Respondents which allowed for netting of transactions which involved like products. These agreements typically provide that all pending deliveries of like products resulting from trades between the two contracting parties will be netted against each other prior to delivery. As a result, since the round trip trades were for exactly -- or almost exactly — offsetting quantities and prices of the same commodity at the same delivery point, they offset each other, and no exchange of commodities or cash was required. These arrangements eliminated a substantial portion of the transaction costs and reduced the risk of default that would have been associated with multiple trades.

In seeking out round trip trades, Respondents made an effort to find counter parties that were lower in the rankings than Respondents so that any resulting increase in the counter party's standing in the league tables would not adversely affect Respondents' move upward in the rankings. Respondents considered booking the round trip trades at a price of zero, but rejected the idea because it might skew the market prices reported to the FERC. Instead, they booked all the round trip trades at market prices. Based on Respondents' practice at the time of recording all trades on a gross basis, the revenues and offsetting expenses associated with the round trip trades were recorded in Respondents' books and records.

The 1999, 2000, and 2001 Round Trip Trades

In 1999, Respondents entered into five power round trip trades totaling 29.75 million megawatt hours with three counter parties: PanCanadian Energy Services, Inc., Merchant Energy Group of the Americas, Inc. ("MEGA"), and Public Service Company of Colorado. MEGA requested and Respondents paid an accommodation fee of $50,000 to do the trade. In 1999, Respondents also entered into one large gas round trip trade for 182 billion cubic feet with Cokinos Energy. This trade was not entered into Respondents' trading records. Respondents made a top-side adjustment to add the $364 million in revenue and the $364 million in offsetting cost of goods sold attributable to this trade. The 1999 power and gas round trip trades added over $1.4 billion in offsetting gross revenue and expenses.

In 2000, Respondents entered into four power round trip trades totaling 30.32 million megawatt hours with two counter parties: BP Energy Company ("BP Energy") and CMS Marketing, Services, and Trading Company ("CMS"), at the time a relatively small player that had not appeared in the top 50 of the league table rankings. By early 2000, certain of Respondents' employees had left and gone to work for CMS. The 2000 trades with BP Energy and CMS added over $1 billion in offsetting gross revenue and expenses. Over 97 percent of this revenue and expense was attributable to the round trip trades with CMS.

In 2001, Reliant Resources entered into eight power round trip trades totaling 74.36 million megawatt hours with CMS and one gas round trip trade for 46 billion cubic feet with EnCana Energy Services Inc. (formerly PanCanadian Energy Services, Inc.) ("PanCanadian"). One of the trades with CMS was not entered into Reliant Resources' trading records or accounting system until two months after the scheduled delivery on the contract. The 2001 power trades with CMS accounted for about 20 percent of Reliant Resources' total trading volume for the year and added over $3.6 billion in revenue and expenses. By June 2001, round trip trades between Reliant Resources and CMS reached the point that an industry publication noted that "CMS and Reliant traded about 20 [million megawatt hours], lifting CMS up from the rank of 56th a year ago to 18th for the first quarter 2001."

To illustrate the magnitude of the round trip trades, what was considered a large trade at Reliant Resources was about 200,000 megawatt hours of power. In 1999, the round trip power trades averaged about 5.95 million megawatt hours, or thirty times a normal large trade. In 2000, the average round trip power trade entered into by Reliant Resources was 7.37 million megawatt hours, or thirty-seven times a normal large trade, and in 2001 it was 9.29 million megawatt hours, or forty-six times a normal large trade. Assuming that other marketers accurately reported their volumes, the ultimate effect of the round trip trades was to increase Reliant Resources' power ranking from tenth to seventh in 1999, from seventh to fifth in 2000, and from fifth to third in 2001. The ultimate effect on the gas ranking was to move Reliant Resources from eighth to seventh in 1999.

On a few occasions, back office and accounting personnel asked questions about the round trip trades. Respondents ignored those concerns.

Reliant's Filings

Because of Respondents' practice of recording all trades on a gross basis, the round trip trading transactions conveyed an inaccurate picture of Respondents' gross revenue and expenses.4 For example, in its 2001 annual report (which it subsequently amended), Reliant Resources reported gross revenues of $36.5 billion for 2001. Over $3.8 billion — or approximately ten percent — of this gross revenue resulted from the round trip trades. On May 21, 2002, Respondents restated revenues for 1999, 2000, and 2001 to reflect the net value instead of the gross value of the round-trip trades. The round trip trade revenue that was removed in the restatement accounted for 17.7 percent, 5.3 percent, and 10.6 percent, respectively, of previously reported revenues.

Respondents also included the inaccurate volume numbers attributable to the round trip trades and mentioned their rankings in the league tables in their annual and quarterly reports filed with the Commission.5 Respondents also reported the round trip trade volume numbers to various market publications, which then ranked Respondents in terms of trading volumes against other energy companies.

Respondents also included the overstated trading volumes and gross revenue in prospectuses and registration statements that they filed with the Commission in anticipation of securities offerings. The prospectus, dated April 30, 2001, for Reliant Resources' initial public offering noted that it was "the fifth largest power marketer in the United States for the year 2000 based on [megawatt hours] of electricity sold," and "the tenth largest marketer of natural gas for the year 2000 based on total [billion cubic feet] of natural gas sold." In addition to this prospectus, Reliant Energy filed a registration statement with the Commission on Form S-3 in September 1999, and Reliant Resources filed a registration statement on Form S-1 in October 2000. Those filings also included or incorporated the revenue and expense overstatements in previously filed annual and quarterly reports.

Earnings Shifting Transactions

Beginning in the Fall of 2000 and continuing through the Spring and Summer of 2001, energy prices were dramatically increasing in the regions Respondents served. The volatile and rapidly increasing market made it apparent that actual earnings would come in above forecasts. Respondents made two separate efforts to move earnings out of current periods and into future periods in which the high prices likely would not be sustained. The first effort to move earnings was in the fourth quarter of 2000 and the second effort was in the second and third quarters of 2001.

The Swing Swap Transaction

In late 2000, the Wholesale Group determined that its 2000 earnings would greatly exceed forecasted earnings. In the month of December alone earnings were about $70 million over forecast. Not wanting actual earnings to come in over forecast, Respondents considered various ways to move about $77 million of 2000 earnings into 2001. Among other things, Respondents considered increasing the size of reserves, entering into a peaking option, and entering into a swing-swap transaction. Respondents ultimately abandoned the idea of increasing the reserves and failed to book the peaking option on time.6 Respondents ultimately did enter into the swing-swap transaction purportedly with PanCanadian, one of the counter parties involved in the round trip trades, to move $20 million in pre-tax earnings from 2000 to 2001.

The swing-swap consisted of four financially-settled natural gas swap transactions that had the effect of decreasing fourth quarter 2000 pre-tax earnings by $20 million and increasing first quarter 2001 pre-tax earnings by $20 million. The "legs" of the two December swap transactions were a sale (or fixed cash inflow) of 1,500,000 million British thermal units ("mmbtu") at $26.50 per mmbtu and a purchase (or fixed cash outflow) of 1,500,000 mmbtu at $39.85 per mmbtu, with the counter party's legs perfectly offsetting, resulting in a $20 million pre-tax loss for Respondents in the last quarter of 2000. The legs of the two January swap transactions were a purchase of 3,100,000 mmbtu at $13.215 per mmbtu and sale of 3,100,000 mmbtu at $19.6747 per mmbtu, again with the counter party's legs perfectly offsetting, resulting in a $20 million pre-tax gain to Respondents in the first quarter of 2001.

In early December 2000, Respondents' employees decided to book the swing-swap, but they entered the separate legs into the trading records on different dates in an apparent effort to obscure the fact that they were all part of one related transaction whose net value was zero. There were also no cash flows associated with these transactions. PanCanadian has no record of the transactions and never executed the contracts. As a result of the swing-swap transaction, Respondents understated net income by $12.7 million after tax in 2000, or about six percent, and overstated net income by $12.7 million after tax in 2001, or about two percent. On March 24, 2003, Reliant Resources filed a Form 8-K announcing its intention to restate its financial statements for 2000 and 2001, in part relating to the swing-swap transaction. The effect of the restatement relating to the swing-swap transaction was to increase net income by $12.7 million for 2000 and decrease net income for $12.7 million for 2001.

The Structured Transactions

In 2001, the substantial increases in earnings over projections continued due to price volatility in the California power markets. Reliant Resources attempted to enter into contracts with counter parties that were paying high prices for energy. Reliant Resources offered those counter parties somewhat lower current prices in exchange for agreed-upon energy deliveries in a future year at a somewhat higher than market price. Such contracts would have had the effect of leveling energy prices for both parties and creating a degree of certainty in an uncertain market. However, Reliant Resources was unsuccessful in reaching an agreement with customers on such contracts, and instead decided to enter into derivative transactions with other power marketers to try to achieve a similar result.

During the May through September 2001 time frame, Reliant Resources executed four structured transactions. Each structured transaction consisted of a series of forward or swap contracts to buy and sell an energy commodity in 2001 and another series to buy and sell an energy commodity in 2002 or 2003. Reliant Resources booked the structured transactions as derivative instruments that would qualify for hedge accounting in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). Reliant Resources ultimately concluded that the deals did not qualify for such accounting treatment, and issued a restatement. In addition, Reliant Resources failed to appreciate that SFAS No. 133 cannot be used to shift a predetermined gain to a future period.

The counter parties to the deals were Cinergy Corporation ("Cinergy"), Aquila, Inc. ("Aquila"), and PanCanadian (with whom Reliant Resources did two structured transactions). The transactions were recorded in Reliant Resources' cash flow hedge accounting records and were, in effect, matched to and overlaid on existing contracts that Reliant Resources had designated as hedges (the "existing hedges") such that the existing hedge and structured transactions in combination continued to serve as a cash flow hedge. Each series of contracts in a structured transaction was entered into contemporaneously with the same counter party and was for the same commodities, quantities, and delivery location. Thus, the contracts were offsetting in terms of economic attributes. However, the commodity prices for the 2001 buy and sell contracts were different, as were the buy and sell prices for the offsetting 2002 or 2003 contracts. The contract prices in totality were structured to result in a net cash outflow to the counter parties in 2001 and a net cash inflow from the counter parties in 2002 or 2003. These transactions were intended to shift about $134 million in earnings from 2001 into later periods.

To complete certain of the transactions, Reliant Resources had to take several unusual steps. In one case, Reliant Resources had to pay a total of $1 million in upfront "demand charges" to PanCanadian to induce it to enter into two of the deals. In two of the four structured transactions, Reliant Resources also allowed certain counter parties to exceed credit limits to do the deals. In those two structured transactions, Reliant Resources entered into additional off-setting mirror transactions in their mark-to-market books to mitigate the increased counter party credit risk. These mirror transactions perfectly matched the cash flows and terms of the structured transaction, which had been recorded in the hedge book. By recording the mirror trades in the mark-to-market books and the structured transaction in the hedge books, the trades did not cancel each other out in the financial statements.

Finally, for one of the structured transactions, Reliant Resources discovered that it did not have adequate existing hedges against which to match and overlay the structured transaction. For the purpose of creating an open hedge, Reliant Resources entered into a forward contract to buy a commodity from another counter party, separate from the structured transaction. However, Reliant Resources realized that the counter party was not creditworthy, so it insisted on closing out the trade with an off-setting sell position. In addition, in order to "assist with the accounting treatment" and maintain the image of an open hedge, Reliant Resources' employees postdated the offsetting sale position so that it appeared that the hedge was open until October, when in fact the offsetting sale position was arranged in August at the same time as the buy position. In order to accomplish the postdating, Reliant Resources' employees created the sales confirmations to the counter party in August, but dated them in October.

In mid-January 2002, Reliant Resources' senior management initiated a comprehensive review of the transactions which culminated in an announcement on February 5, 2002 that Reliant Resources would restate earnings for the second and third quarters of 2001 due to the incorrect application of SFAS 133 associated with the structured transactions. Because commodity risk was offset in each set of contracts in a structured transaction when considered in combination, there was no substantive commodity price risk mitigation provided by the structured transaction, as required by SFAS No. 133 for cash flow hedging. Reliant Resources therefore ultimately accounted for the transactions as derivatives with changes in fair value recognized through the income statement. The effect of the restatement was for Reliant Resources to recognize approximately $134 million in 2001 earnings that it had previously expected to recognize in 2002 and 2003, raising 2001 reported earnings from approximately $218 million to $352 million.

Calculation of Hedge Ineffectiveness

Upon adoption of SFAS No. 133, Reliant Resources was required to measure the ineffectiveness of its hedge transactions. Initially, Reliant Resources neglected to perform this calculation and record the results in its financial statements for the first three quarters of 2001. Subsequently, when Reliant Resources began performing these calculations in the fourth quarter of 2001 and continuing through 2002, it calculated the ineffectiveness using the wrong date for hedging instruments entered into prior to the adoption of SFAS No. 133. The amount of hedge ineffectiveness for these forward contracts was calculated using the trade date. However, the proper date for the hedge ineffectiveness calculation is hedge inception, which for these contracts was deemed to be January 1, 2001, concurrent with the adoption of SFAS No. 133. These errors in accounting for hedge ineffectiveness resulted in an understatement of revenues of $28.7 million in 2001 and an overstatement of revenues of $12.3 million in 2002. On March 24, 2003, Reliant Resources filed a Form 8-K announcing its intention to restate its financial statements for 2001 and 2002, in part relating to errors in calculating hedge ineffectiveness. The effect of the restatement relating to these errors was to increase net income by $18.6 million for 2001 and decrease net income for $8 million for 2002.


As a result of the conduct described above, Respondents violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities. As demonstrated in this Order's findings, Respondents engaged in round trip trades that dramatically overstated Respondents' trading volumes in their annual and periodic reports. Respondents also overstated their revenue and expenses. Because these amounts were offsetting, they did not affect net income. Respondents also violated the anti-fraud provisions by booking one of the structured transactions as a cash flow hedge based on documents that certain employees had postdated, and by using the swing-swap transactions to move earnings from December 2000 to January 2001.

As a result of the conduct described above, Respondents violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Section 13(a) of the Exchange Act requires issuers to file periodic reports with the Commission containing such information as the Commission prescribes by rule. Exchange Act Rule 13a-1 requires issuers to file annual reports, and Exchange Act Rule 13a-13 requires issuers to file quarterly reports. Under Exchange Act Rule 12b-20, the reports must contain, in addition to disclosures expressly required by statutes and rules, such other information as is necessary to ensure that the statements made are not, under the circumstances, materially misleading. The obligation to file reports includes the requirement that the reports be true and correct. United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.), cert. denied, 502 U.S. 813 (1991). The reporting provisions are violated if false and misleading reports are filed. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 67 (D.C. Cir. 1980). Respondents violated these provisions by filing inaccurate and misleading reports containing the round trip trades, structured transactions, and the swing swap transaction that moved earnings from one period to another.

As a result of the conduct described above, Respondents violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Section 13(b)(2)(A) of the Exchange Act requires all issuers to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets. Respondents, through the reporting of the round-trip energy trades, structured transactions, swing-swap transaction, and hedge ineffectiveness errors, violated Section 13(b)(2)(A) by failing to keep books, records and accounts that accurately and fairly reflected their assets and financial results. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain an adequate system of internal accounting controls. Respondents violated Section 13(b)(2)(B) by failing to ensure against the inclusion of results from round trip trades in Respondents' computation and public disclosure of their trading volume and trading revenue, and by allowing the swing-swap transactions to be included in their public reports. Respondents' reporting of revenue derived from these transactions was inconsistent with Generally Accepted Accounting Principles ("GAAP") (Statement of Financial Accounting Concepts No. 5). Respondents also violated Section 13(b)(2)(B) by failing to devise and maintain a system of internal controls sufficient to provide reasonable assurances that structured transactions and hedge ineffectiveness were recorded as necessary to permit preparation of financial statements in conformity with GAAP.


The Commission finds that Respondents violated Section 17(a) of the Securities Act, and Sections 10(b), 13(a) and 13(b)(2) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.


In view of the foregoing, the Commission deems it appropriate to accept Respondents' Offer of Settlement and impose the sanctions specified therein.

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Respondents Reliant Resources and Reliant Energy cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, and Sections 10(b), 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz


1 The findings herein are made pursuant to Respondents' Offer and are not binding on any other person or entity in this or any other proceeding.

2 Section 3(a)(2) exempts a holding company that is "predominantly a public-utility company whose operations as such do not extend beyond the state in which it is organized and states contiguous thereto."

3 The businesses that made up the Delivery Group, other than the retail electric sales function that was transferred to Reliant Resources, now comprise CenterPoint Energy. On August 31, 2002, CenterPoint Energy, Inc. ("CenterPoint Energy") became the holding company for the Reliant Energy group of companies and each share of Reliant Energy common stock was converted into one share of CenterPoint Energy common stock. On September 30, 2002, CenterPoint Energy distributed each of its shares of Reliant Resources common stock pro rata to its shareholders of record, thereby completing the separation of the regulated and unregulated businesses. The trademarks and names associated with "Reliant Energy" were transferred to Reliant Resources at the time of the distribution. Although CenterPoint Energy is the successor to Reliant Energy for financial reporting purposes under the Exchange Act, CenterPoint Energy and Reliant Resources do not have any common officers or directors.

4 Because the revenues and expenses were offsetting, the round trip trades had no effect on Respondents' net earnings.

5 For example, on April 12, 2002, in the text of its 2001 annual report (which it subsequently amended), Reliant Resources described its energy trading practices as follows:

According to Platt's Power Markets Week and Natural Gas Intelligence Group, we were the third largest power trader and ninth largest natural gas trader in the United States in 2001.

The company stated that it had traded approximately 112 million megawatt hours of total power volume in 1999, 202 million megawatt hours in 2000, and 380 million megawatt hours in 2001. Approximately 26 percent, 14.5 percent and 19.5 percent of these volumes, respectively, were attributable to round trip trades. Reliant Resources also stated that it had traded 1,746 billion cubic feet of gas in 1999 and 3,695 billion cubic feet in 2001. Approximately 20 percent and 6 percent of these volumes, respectively, were attributable to round trip trades.

6 In an apparent attempt to move $10 million from 2000 to 2001, Reliant Resources did enter into the peaking option with Cokinos Natural Gas Company ("Cokinos"), one of the counter parties to the round trip trades, whereby Reliant Resources would buy an out of the money call option in December and sell an out of the money call option in January. Assuming each option expired worthless, Reliant Resources would recognize a $10 million loss in December and a $10 million gain in January. Because Respondents recorded the transaction in the following month, this transaction failed to move this additional $10 million out of 2000 into 2001.



Modified: 05/12/2003