Dynegy Witness Tells of Plot to Inflate Cash Flow

From Reuters

Dynegy Inc.'s chief financial officer and seven others conspired in 2001 to disguise a $300-million loan as operating cash flow, a former Dynegy tax executive testified Tuesday in the fraud trial of his onetime deputy.

Former Tax Vice President Gene Shannon Foster, 44, pleaded guilty to a single count of conspiracy to commit securities fraud. He is the principal witness in the trial against Jamie Olis.

Olis, whom Foster hired and managed in the tax division at Dynegy, has pleaded not guilty to a six-count indictment charging him with securities, wire and mail fraud and conspiracy for his role in a 2001 deal dubbed Project Alpha.

Project Alpha caused serious problems for Dynegy after a Securities and Exchange Commission probe became public April 25, 2002, causing Dynegy stock to plummet 52% the following day. Dynegy paid $3 million to settle the SEC complaint without admitting or denying wrongdoing.

Federal prosecutors argue that Olis conspired with others to hide the true nature of Alpha from investors and their auditors at Arthur Andersen, who had vetoed a key component of the deal.

Prosecutors have made passing reference to numerous unindicted co-conspirators in court papers. In addition to Olis, two others have been charged with a crime.

The purpose, prosecutors said, was so the Houston company could improperly add $300 million in operating cash flow to a quarterly statement to assuage Wall Street concerns about operating cash flow that lagged earnings.

"I worked with others to hide documents from Arthur Andersen," Foster testified, adding that it was "in an attempt to have the transaction accounted for the way we wanted it."

On the stand Tuesday, Foster for the first time named Robert Doty, the former chief financial officer, as a conspirator.

"It was myself, Jamie Olis, Helen Sharkey, Tammy Norman, Richard Gould, Wendy Ho, Rob Doty, Mark Spradling and Cliff Rankin," Foster testified under questioning from Assistant U.S. Atty. Jimmy Sledge.

Asked by Sledge what Doty's role was, Foster responded: "He was ultimately over it. It was ultimately his project." Doty resigned from Dynegy under pressure last year.

A lawyer for Doty, Michael Wilson, declined to comment.

Norman worked with Dynegy's gas trading division, Gould in finance and Ho was an in-house lawyer. Spradling and Rankin work for Vinson & Elkins, which Dynegy hired to assist on the deal.

Sharkey was an accounting executive at Dynegy, who like Foster, pleaded guilty in August to a single conspiracy count. They were initially charged along with Olis in June.

A spokesman for Vinson & Elkins denied any wrongdoing. Lawyers for the others could not be reached for comment.

Foster, 44, also testified that Olis was the first person to recognize that Alpha could cut Dynegy's tax rate and boost its operating cash flow, which, he added, was something the finance division and Dynegy management wanted.

Earlier testimony showed that Andersen tax experts pitched the framework of the deal that became Alpha to Foster as a way of cutting Dynegy's tax rate. It was later that Olis, a lawyer and accountant, saw the cash flow benefits.

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