Litigation Release No. 18188 / June 12, 2003
Accounting and Auditing Enforcement Release No. 1800 / June 12, 2003
Securities and Exchange Commission v. Gene S. Foster, Jamie Olis and Helen C. Sharkey, Civil Action No.H-03-2044, United States District Court for the Southern District of Texas, Houston Division (June 12, 2003).
On June 12, 2003, the Commission filed an action in United States District Court in Houston charging three former employees of Dynegy Inc. with fraud in connection with Project Alpha ("Alpha"), a structured financing transaction. Alpha was the subject of a settled cease-and-desist order issued by the Commission in September 2002; in the order, the Commission found that Dynegy violated the antifraud, reporting, books and records and internal controls provisions of the federal securities laws, by reflecting Alpha's impact on its financial statements in the form of $300 million in operating cash flow and $79 million in net income. In re Dynegy Inc., Exchange Act Release No. 34-46537 (September 24, 2002). The Commission found in its order that the Alpha-derived funds were actually loan proceeds, representing, therefore, cash flow from financing activities, not operations, and that the Alpha-derived tax benefit was invalid. In settling the Commission's action, Dynegy also paid a $3 million civil penalty.
In its action against the former Dynegy employees, the Commission alleges that they engaged in fraud, and that they aided and abetted Dynegy's fraud, and other federal securities law violations, arising out of the Alpha transaction. 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, in part, as follows: that in early 2001, tax and accounting professionals employed by Arthur Andersen LLP, Dynegy's auditor, worked closely with the defendants in structuring Alpha; that Andersen established guidelines for the structuring of Alpha to ensure the validity of Dynegy's intended accounting for Alpha under generally accepted accounting principles; that in the spring of 2001, Foster, Olis and Sharkey, under pressure to complete Alpha, disregarded Andersen's advice that certain forms of risk hedging would defeat Dynegy's intended accounting for Alpha, by requiring Alpha to be recorded as a financing; that the defendants effectively excluded Andersen's Alpha liaison, a tax professional, from crucial pre-closing meetings; that to ensure Alpha's closing, the defendants linked certain hedges to each other, contrary to Andersen's advice, in secret side agreements; and that the defendants allowed the equity investors in an Alpha special purpose entity to hedge all commodity price risk, also against Andersen's specific advice. According to the complaint, Foster, Olis and Sharkey, knowing that, due to the proscribed hedge transactions, Dynegy could not rely on Andersen's support for its accounting for Alpha, intentionally concealed the transactions from Andersen and from Dynegy - and consequently, from the investing public.
The Commission alleges in its complaint that Foster, Olis and Sharkey violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder and, that Foster, Olis and Sharkey aided and abetted Dynegy's violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13, thereunder. In its action, the Commission is seeking, as against each defendant, a permanent injunction, disgorgement plus prejudgment interest, and a civil money penalty.
The Commission acknowledges the assistance and cooperation of the United States Attorney's Office in Houston.
