Dynegy Settles Investor Lawsuit for $468 Million

Dynegy Inc., owner of power plants in 12 states, said Friday that it would pay $468 million to settle shareholder charges that it misled investors by disguising loans as energy trades in 2001.

The agreement with plaintiffs led by the University of California is the ninth-largest settlement in a U.S. securities fraud case, according to data compiled by Bloomberg News. Houston-based Dynegy said that it would pay $250 million from its own funds and $68 million in company stock and that insurers would pay $150 million.

“We are taking responsibility for the resolution of issues associated with a past era for the company,” Chief Executive Bruce Williamson said.

The settlement clears away the most significant litigation risk Dynegy faces. The case concerns accusations that the company misled investors with a natural gas transaction called Project Alpha, in which the company “mischaracterized the proceeds of borrowing as operational revenues and manipulated its reported tax liability,” the University of California said in a statement.

A former Dynegy executive, Jamie Olis, is serving 24 years in prison for conspiracy, securities and mail fraud for his part in helping disguise loans as energy trades through an off-the-books partnership. Similar tactics at Enron Corp. led to that company’s bankruptcy in December 2001.

Under the agreement, Citigroup Inc., which was involved in the Project Alpha transaction, has agreed to pay $5 million.

Dynegy also has agreed to let the plaintiffs appoint two directors to the company’s board to help monitor corporate governance reforms, according to the University of California. The settlement covers claims for damages on behalf of purchasers of Dynegy’s common stock from June 2001 to July 2002.

“This is a significant amount of money,” said Chris Ellinghaus, an analyst at Williams Capital Group in New York. “It reflects how angry investors were about the energy industry of the 1990s, how shockingly everything collapsed and how insistent they were on a large settlement.”

A trial had been set for May, according to Dynegy’s annual report, which was filed with the Securities and Exchange Commission last month.