Power Engineering - Three former duke energy employees indicted for bogus trading scheme

22 April, 2004 - Three former Duke Energy Corp. workers in Houston were indicted Wednesday, accused of making false energy trades to get higher bonuses from the Charlotte-based company.

The three are accused of using accounting tricks to generate $50m in bogus energy-trading profit while they were working for a Duke subsidiary in Houston. The subsidiary, Duke Energy Trading and Marketing, trades power and natural-gas contracts. The company was not charged.

The size of the former employees' annual bonuses depended on energy-trading profits, according to the 18-count indictment handed up by a federal grand jury in Houston.

Timothy Kramer, Todd Reid and Brian Lavielle each pleaded not guilty to charges in a hearing Wednesday after they were taken into custody. Each was released on $100 000 bond.

Kramer and Lavielle couldn't be reached for comment Wednesday. A woman answering the phone at Reid's home said he had no comment. Each faces as much as 20 years in prison.

The indictment describes Duke as a victim of fraud by the three former employees. Duke, which has had its own legal battles in recent years, said it may try to recoup the bonus money, depending on how the government's case goes.

All three former employees are charged with racketeering, mail and wire fraud and falsifying corporate books. Kramer and Reid, the two highest-ranking former employees, are also charged with money laundering.

The indictment describes complex accounting maneuvers that the three used in making so-called "round-trip" trades to falsely increase their profit numbers.

Such trades created an explosion of controversy when discovered in 2002. In a round-trip trade, two companies simultaneously sell to and buy from one another identical contracts for natural gas or power delivery at the same price. No gas or power is actually delivered, but both companies mark the revenue from the transaction into their books. By making it appear that demand for gas or power was great, such trades can drive up market prices.

In the three former employees' case, they marked the "profit" from the sale in one accounting book and the "loss" from the purchase in another, even though each trade was a net wash.

The accounting book where the three counted the "profits" was the one that dictated their annual bonuses, prosecutors contend. With the inflated profits, the indictment says, Reid received a $5m bonus, Kramer got $4m and Lavielle got $340 000 in 2001.

The indictment describes Lavielle as a trader in the Houston office. Reid was his boss, and Kramer was Reid's boss.

Duke said Wednesday it notified the government about the round-trip trades after the company discovered them in 2002. That same year, it adjusted its books to clear the fraudulent numbers alleged in the indictment, Duke said. The changes were immaterial to earnings, the company said.

In September, the Duke affiliate agreed to pay $28m in penalties to settle civil charges. Federal regulators accused Duke of reporting inflated prices for natural-gas trading in an attempt to manipulate the market.

Duke Energy Trading and Marketing neither admitted nor denied the charges in its settlement. Duke owns 60 per cent of the affiliate and charged $17m to its earnings in last year's third quarter for its share of the civil penalty.

The Securities and Exchange Commission is still investigating round-trip trades at Duke. Duke says it has changed its policies and procedures to ensure accuracy.

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