Energy-Trade Ruse Downplayed at Trial

In a courtroom haunted by Enron Corp. and power crisis abuses in the West, lawyers for two former energy traders told jurors Tuesday that they reported fake natural gas transactions to private industry publications but didn’t know it could be a crime.

Former Dynegy Inc. employee Michelle Valencia and Greg Singleton, who worked for El Paso Corp., are the first of several former traders to go to trial after a lengthy federal investigation into errant practices in the aftermath of Enron’s December 2001 bankruptcy filing.

Enron’s failure sparked increased scrutiny throughout the energy-trading industry, which beforehand operated with little oversight and with plenty of room for abuse.

Valencia, who ran Dynegy’s trading desk for the West, and Singleton are accused of reporting fake data in 2000 and 2001 to private, for-profit industry publications that use the information to calculate natural gas index prices.

The publications, such as Inside FERC Gas Market Report or Natural Gas Intelligence, calculate prices based on information supplied by traders or their companies, which in turn use those prices in trading.

Companies reported such data voluntarily, and no governmental agencies regulated how the publications handled the information. Such indexes are used to price billions of dollars in transactions involving natural gas and electricity in physical and financial markets each year.

Lawyers for Valencia and Singleton said they reported fake trades upon orders of superiors or on par with industry practice, and did not intend to skew index prices or otherwise break the law.

Valencia’s lawyer, Chris Flood, compared the industry practice to speeding with no stop signs in sight.

“What she was trying to do was work in a system that was broken,” Flood said.

But federal prosecutor John Lewis told the seven-man, five-woman panel that jurors don’t have to find that Valencia and Singleton knew their behavior was criminal. To convict, the jury has to find that Valencia and Singleton intended to deceive or cheat by reporting bogus data.

Valencia and Singleton have pleaded not guilty, and few if any of the fake trades were actually part of the publications’ calculations.

But under federal law, the government needs only to prove that fake trades were reported -- not whether they were published or affected the markets.

Lewis read jurors a letter that a then-Dynegy trader, Jeff Hornback, wrote to management in spring 2001 criticizing fake trade reporting as unethical. Hornback had reported fake trades, then refused to do so, and the letter explained why he refused to sign the company’s ethics code.

Hornback said in the letter that reporting fake trades was “no less a violation of integrity than a misstatement of earnings would be” and “I have seen top managers instruct traders that this is how the game is played.”

Since that era, Congress and the Federal Energy Regulatory Commission have implemented changes to strengthen oversight.

Valencia faces 23 counts of conspiracy, false reporting and wire fraud. Singleton faces 10 counts of conspiracy, false reporting and obstruction of justice in allegations that largely overlap with those against Valencia.

The trial is expected to last about a month.