THURSDAY, APRIL 8,
2004
RELIANT ENERGY SERVICES, INC. AND FOUR OF ITS OFFICERS
CHARGED WITH CRIMINAL MANIPULATION OF CALIFORNIA ELECTRICITY
MARKET
San Francisco Grand Jury Returns Six-Count Indictment
Against Houston-Based Energy Company and Traders, Charging Conspiracy,
Commodities Manipulation and Wire Fraud
WASHINGTON, D.C. -
Houston-based energy company Reliant Energy Services, Inc., and four of
its officers have been charged in connection with a federal criminal
investigation of the manipulation of the California energy markets, the
Department of Justice announced today.
A federal grand jury in San
Francisco returned a six-count indictment today against Reliant Energy
Services, Inc., a subsidiary of the company now known as Reliant
Resources, Inc., and four of its officers: Jackie Thomas, 49, a former
Vice President of Reliant's Power Trading Division; Reggie Howard, 37, a
former Director of Reliant's West Power Trading Division; Lisa Flowers,
37, a term trader for Reliant's West Power Trading Division; and Kevin
Frankeny, 42, Reliant's Manager of Western Operations. All of the
defendants are residents of Texas.
The indictment was announced
today by Attorney General John Ashcroft, Deputy Attorney General James
Comey, Assistant Attorney General Christopher A. Wray of the Criminal
Division, U.S. Attorney Kevin V. Ryan of the Northern District of
California, FBI Director Robert Mueller, Commodities and Futures Trading
Commission Chairman James Newsome and Federal Energy Regulatory Commission
Chairman Pat Wood, III. The indictment alleges that in June 2000, Reliant
Energy Services and its officers and employees intentionally drove up the
price of electricity in the state by shutting off its power generation to
create the false appearance of a shortage. According to the indictment,
the plan worked, and Reliant Energy Services allegedly reaped millions in
illegal profits.
These charges are the first ever brought against
a corporate entity for engaging in fraudulent and manipulative trading
practices during the California energy crisis of 2000-01. During the
crisis, Reliant Energy Services's parent company, then known as Houston
Industries Power Generation, Inc., was one of the "Big 5" electricity
generators that had purchased power plants in California after
deregulation forced its utilities to divest their plants between 1997 and
1999. The company acquired five electric power generation plants in
California, known as Coolwater, Ellwood, Etiwanda, Mandalay, and Ormond
Beach. In 2000, it operated the plants and marketed electricity within the
state through Reliant Energy Services, its wholly-owed subsidiary and the
defendant named in today's indictment. Reliant Energy Services is a
Delaware corporation and is headquartered in Houston,
Texas.
According to the criminal indictment, the defendants engaged
in a conspiracy and scheme to defraud the California electricity market
and its participants, and to manipulate and attempt to manipulate the
price of electricity in California. The indictment alleges that in June
2000, defendant Lisa Flowers held a long trading position in the so-called
"term" market for future deliver of electricity at the Palo Verde, Arizona
trading hub. On the morning of Monday, June 19, 2000, prices in the
relevant California electricity markets fell dramatically. Based on Ms.
Flowers' trades and then-current market prices, Reliant's West Power
Trading Division faced an unprecedented multi-million dollar financial
loss.
The indictment alleges that in order to reverse Reliant
Energy Service's losing financial position, the defendants devised an
illegal scheme to drive up the price of electricity in California by
shutting off the majority of the company's power generation plants,
intentionally creating the appearance of an electricity shortage, and
disseminating false and misleading information to the market that wrongly
attributed the shut-downs to environmental limitations and maintenance
problems. According to the indictment, Reliant Energy Services's
manipulation worked, and prices for electricity rose throughout the
remainder of the week for all market participants in the California spot
and term markets.
The indictment alleges that as a result of the
defendants' fraud and manipulation, the California Power Exchange ("PX")
day-ahead market and the Independent System Operator ("ISO") "real time"
market published artificially inflated spot prices for electricity which
were accessed by market participants throughout California. These
electricity markets ultimately charged all market participants
artificially high prices for day-ahead, real-time and "out-of-market"
(emergency) electricity and energy services purchased during the period of
the manipulation. Among the victims of the allegedly manipulated,
artificially inflated prices for electricity was Pacific Gas &
Electric Co. in San Francisco, which acquired electricity for its retail
customers through these markets.
The indictment alleges that once
the defendants achieved the artificial inflation of prices, Reliant Energy
Services proceeded to turn certain of the company's plants back on in
order to sell its power to California's grid manager, the ISO, for as much
as $750 per megawatt hour (the federally-imposed price cap at the time).
According to the indictment, the defendants also proceeded to sell the
company's previously losing financial position in the term market, which
had become profitable because of Reliant's manipulative scheme.
The charges returned by the grand jury today against each of the
individuals and against the corporate defendant Reliant Energy Services
are conspiracy to commit wire fraud and commodities manipulation, in
violation of 18 U.S.C. � 371; wire fraud, in violation of 18 U.S.C. �
1343; and manipulation and attempted manipulation of the price of a
commodity in interstate commerce, in violation of 7 U.S.C. � 13(a)(2).
Attorney General John Ashcroft stated, "The vast majority of
American companies are businesses of integrity. The vast majority of
corporate executives are honest, hard-working people. But when a company
conducts itself in the manner Reliant Energy Services is alleged to have
acted here, it will face severe consequences. When evidence shows that a
company's corporate culture breeds corruption and disrepect for the law,
the Department of Justice will not hesitate to bring criminal charges
against the company itself."
"The Department of
Justice expects every corporation to comply scrupulously with the law, to
have internal systems that effectively identify criminal conduct committed
by its employees, to disclose promptly to the government any such criminal
conduct, and to cooperate fully in our investigations," said Assistant
Attorney General Christopher A. Wray of the Criminal Division, a member of
the President's Corporate Fraud Task Force. "When those expectations are
not met, a corporation can expect to face criminal charges. This
indictment demonstrates that we can and will bring criminal charges
against a corporation when its conduct, and its actions in response to an
investigation, show that criminal prosecution is necessary to deter future
misconduct and impose required reforms."
U.S. Attorney Kevin V.
Ryan, a member of the President's Corporate Fraud Task Force, said, "A
market controlled by fraud is not a free market. By shutting off power
plants to boost the cost of electricity, Reliant's conduct is alleged to
have left millions of consumers vulnerable to the higher costs and
potential blackouts at the beginning of one of the worst energy crises in
history. Faced with evidence of widespread fraud within the company,
Reliant chose to be uncooperative during the federal investigation. As a
result, the grand jury and the Justice Department send an important
message today to corporate America and consumers: Even a Top Five energy
company can and will face criminal prosecution if it engages in
far-reaching criminal conduct and fails to take immediate steps to
disclose and clean up its act."
FBI Director Robert Mueller, also
a member of the Corporate Fraud Task Force, stated, "Today's indictments
demonstrate the FBI's dedication to investigating corporate greed at all
levels, as corporate fraud impacts not only individual victims but the
entire economy as well. It is vitally important that all citizens be able
to trust the reliability of America's corporations and our energy
markets."
If convicted, the maximum penalty for the corporation,
Reliant Energy Services, for each count of conspiracy and wire fraud is
the greater of $500,000, or twice the gross gain or gross loss to the
victims of the scheme, and up to five years probation. The corporate
maximum penalty for commodities manipulation is the greater of $1 million,
or twice the gross gain or gross loss to the victims of the scheme, and up
to five years probation. The maximum statutory penalty for the individual
defendants charged with a violation of conspiracy to commit wire fraud and
commodities manipulation and with each violation of wire fraud is five
years imprisonment and a $250,000 fine, or twice the gross gain or gross
loss to the victims of the scheme. The maximum statutory penalty for a
violation of commodities manipulation is five years imprisonment and a
$500,000 fine, or twice the gross gain or gross loss to the victims of the
scheme. However, any sentence following conviction would be dictated by
the Federal Sentencing Guidelines, which take into account a number of
factors, and would be imposed in the discretion of the Court.
An
indictment simply contains allegations and all defendants are presumed not
guilty unless and until convicted.
Arrest warrants have been issued
for Thomas, Howard, Frankeny and Flowers, but are stayed until noon on
April 9, 2004. The individual defendants will have the opportunity to
self-surrender and make their initial appearances in federal court in San
Francisco on April 9 at 9:30 a.m. before Magistrate Judge James
Larson.
The prosecution is the result of an 17-month investigation
overseen by the U.S. Attorney's Office, with the assistance of Trial
Attorneys from the Antitrust Division of the Department of Justice and
Commodity Futures Trading Commission (CTFC), as well as special agents of
the Federal Bureau of Investigation. In addition, the CFTC and the Federal
Energy Regulatory Commission have provided ongoing assistance in
connection with the investigation. Patrick D. Robbins, Chief of the
Securities Fraud Section, and Special Assistant U.S. Attorneys Lisa
Tenorio-Kutzkey and Kathy Banar are prosecuting the case in the Northern
District of California, with the assistance of Legal Assistants Katie
Cannuli and Elaine McCoy.
A copy of this press release may be found
on the U.S. Attorney's Office's website at www.usdoj.gov/usao/can
<http://www.usdoj.gov>. Related court documents and information may
be found on the District Court website at www.cand.uscourts.gov
<http://www.can.uscourts.gov> or on
<http://pacer.cand.uscourts/gov.>
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