GENE PHILLIPS AND BASIC CAPITAL MANAGEMENT, INC. AGREE TO $850,000 CIVIL PENALTY IN MARGIN CREDIT FRAUD SCHEME.
On September 24, the Commission filed a civil complaint in the United States District Court for the District of Columbia against Gene E. Phillips, a resident of Dallas, Texas, and Basic Capital Management, Inc., one of the largest privately owned real estate management companies in the United States. The complaint alleges that Phillips and Basic Capital violated the antifraud and stock accumulation reporting provisions of the securities laws. In settlement of the Commission's charges, Phillips and Basic Capital consented to the entry of a judgment ordering them to pay a civil money penalty of $850,000. This is the most substantial penalty ever obtained in a Commission action concerning a failure to file stock accumulation reports.
The Commission's Complaint alleges that:
* Between May 1996 and June 1997, Basic Capital and five other affiliated entities (the Phillips Group) over which Phillips exerted significant control collectively purchased over one million shares of the common stock of Greenbriar Corporation, a security listed on the American Stock Exchange. The Greenbriar holdings of the Phillips Group exceeded 5% of those shares by July 1996 and amounted to approximately 16.1% by June 1997.
* Phillips and Basic Capital should have filed a report on Schedule 13D with the Commission within ten days after the Phillips Group acquired five percent of Greenbriar's outstanding shares in July 1996. They should have amended that filing each time the Phillips Group collectively acquired an additional one percent or more of Greenbriar's outstanding shares. No filing was made, however, until April 9, 1998, long after the required filing dates
The Phillips Group deposited their Greenbriar shares in margin accounts and borrowed against those shares to fund additional stock purchases. Because of the failure of Phillips and Basic Capital to file reports disclosing their accumulation of Greenbriar stock, the broker-dealers who extended margin credit to the Phillips Group did so without knowing that the Phillips Group controlled as much as 16.1% of Greenbriar's outstanding shares. This information would have affected the manner in which the broker-dealers evaluated the market for Greenbriar stock and the liquidity of the shares pledged as collateral for the margin loans. By knowingly or recklessly failing to provide the broker-dealers with the information required Phillips and Basic Capital commited securities fraud.
In a related administrative proceeding, the Commission today issued an Order requiring Phillips, Basic Capital and four related affiliates, Nevada Sea Investments, Inc., International Health Products, Inc., One Realco Corporation and TacCO Financial, Inc., to cease and desist from violating the antifraud and stock accumulation reporting provisions of the securities laws. All the respondents in that administrative proceeding consented to the issuance of the Order. [SEC v. Basic Capital Management, Inc. and Gene E. Phillips, Civil Action No. 1:02CV01872, D.D.C.] (LR-17740); Administrative Proceeding - Rel. 34- 46538; File No. 10898)
SEC ORDERS DYNEGY INC. TO CEASE AND DESIST FROM VIOLATING THE FEDERAL SECURITIES LAWS; DYNEGY AGREES TO PAY $3 MILLION CIVIL PENALTY
On September 24, the Commission issued a settled cease-and-desist order (Order) against Dynegy Inc. (Dynegy or the Company), a Houston based corporation in the business of energy production, delivery and trading, and filed a settled civil suit in the Southern District of Texas, Houston Division, seeking a $3 million penalty against the Company. In a consent filed in the civil suit, Dynegy has agreed to pay the $3 million penalty. The Commission finds in the Order, and alleges in its civil complaint that in its 2001 Form 10-K filed with the Commission, Dynegy improperly accounted for, and failed to disclose the financing nature of a $300 million payment associated with a financing transaction code-named Project Alpha (Alpha), involving special-purpose entities. The Commission also finds in the Order, and further alleges in its complaint that Dynegy reported, improperly, notional trading value, volume and revenue results from two large "round-trip" energy trades - simultaneous, pre-arranged buy-sell trades of electricity with the same counter-party, at the same price and volume, and over the same term, resulting in neither profit nor loss to either party.
More specifically, the Commission finds in the Order, and alleges in its complaint that Dynegy implemented Alpha to close the widening gap between the Company's net income and operating cash flow - by artificially boosting, through Alpha, its 2001 cash flow from operations by $300 million - and to achieve an Alpha-linked $79 million tax benefit. According to the Commission's Order and complaint, Dynegy committed financial fraud by failing to disclose in its Form 10-K the complex financing transactions underlying Alpha, and by failing to otherwise clarify that the $300 million Alpha-related payment was in the nature of a loan to Dynegy, not operating cash flow. Additionally, the Commission finds in the Order, and alleges in its complaint that Dynegy improperly accounted in its Form 10-K for the $300 million payment.
According to the Commission in its Order and complaint, Dynegy reported, improperly, in two Dynegy press releases certain financial and volumetric results from the round-trip trades, both conducted on November 15, 2001. Specifically, the Commission finds in the Order, and alleges in its complaint that Dynegy was negligent in including in a January 23, 2002 press release the notional trading value (price x volume x term) of one of the round-trip trades in a discussion of increased trading traffic on Dynegydirect, Dynegy's electronic trading platform, and that Dynegy was negligent in including the volume, and first quarter 2002 revenue and cost results of the other round-trip trade in an April 30, 2002 press release. Additionally, the Commission finds in the Order, and alleges in its complaint that Dynegy was negligent in failing to disclose in either press release that the reported financial and volumetric results included results from the economically vacuous round-trip trades.
Dynegy consented to the entry of the Order, without admitting or denying the Commission's findings. The Order requires that Dynegy cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1, thereunder. In addition, Dynegy is ordered to continue to cooperate with the Commission staff in the staff's ongoing investigation and to restate its financial statements for its fiscal year 2001 in a manner that conforms to Generally Accepted Accounting Principles. (Rels. 8134; 34-46537; AAE Rel. 1631; File No. 3-10897; Press Rel. 2002-140) |
