IN THE UNITED STATES DISTRICT COURT DISTRICT OF MARYLAND NORTHERN DIVISION
: IN RE ALLEGHENY ENERGY, INC., : 03-MD-1518 SECURITIES LITIGATION : (All Actions) :
AMENDED CLASS ACTION COMPLAINT
Lead Plaintiffs, individually and on behalf of all others similarly situated, allege the following upon information and belief, based upon the investigation of their counsel, which included, among other things, a review of United States Securities and Exchange Commission
(“SEC”) filings by Allegheny Energy, Inc. (“Allegheny Energy,” “Allegheny” or the "Company”) as well as other regulatory filings, securities analysts reports, press releases and other public statements issued by the Company, claims and counter-claims filed by and against Allegheny relating to the subject matter of this lawsuit, and discussions with former employees of Allegheny and its operating subsidiaries and divisions thereof.
NATURE OF THE ACTION
1. This action is a class action on behalf of all persons who purchased the securities of
Allegheny Energy during the period from April 23, 2001 to October 8, 2002, inclusive (the "Class
Period"), to recover damages caused by Defendants’ violations of the federal securities laws. During the Class Period, Defendants issued to the investing public materially false and misleading statements concerning the Company's operational strategy, operations, and financial results that inflated the price of Allegheny commons stock artificially.
2. Prior to the Class Period, to take full advantage of a wave of states’ deregulating energy utilities and creating competition among power providers, Allegheny disclosed a shift in Case 1:03-md-01518-AMD Document 33 Filed 05/03/2004 Page 2 of 77
strategy and operating focus. Defendants embarked on a mission to convert Allegheny from a stodgy and conservative regulated utility to a “diversified energy company.” Not only did
Allegheny seek to expand its energy holdings, but also, its customer base. To accomplish this,
Allegheny split itself into two major subsidiaries, the regulated energy transmission and distribution company and the unregulated energy generator and “sophisticated energy merchant.”
3. To promote the activities of its unregulated subsidiary, Allegheny had established a small group of persons to engage in energy marketing and structured trading at first employing a small group of traders. In early 2001, in an effort to maximize the potential for its unregulated generation and trading business, Allegheny announced that it would catapult itself into one of the top 10 energy traders in the United States by purchasing Global Energy Markets (“G.E.M.”) from
Merrill Lynch & Co., Inc. (“Merrill Lynch”). G.E.M. was the crown jewel of Allegheny’s strategy to convert itself from energy distributor to energy merchant. Not only was the acquisition of G.E.M. critical to the realization of Defendants’ business strategy, but it was, according to Allegheny, immediately and materially accretive to Allegheny’s earnings. After announcing the purchase of
G.E.M. on January 8, 2001 and conducting what claimed to be a substantial due diligence effort,
Allegheny assumed control of G.E.M. upon the completion of the deal on March 16, 2001.
4. Not one month after the completion of Allegheny’s purchase of G.E.M., on April 13,
2001, Defendants were directly informed that the president and head trader of G.E.M., Daniel L.
Gordon (“Gordon”), was potentially a rogue trader and an embezzler. Indeed, defendant Michael
P. Morrell, a senior officer of both Allegheny and its unregulated generation and trading Company
(“AE Supply”), received an April 13, 2001 letter, informing him of Gordon’s potentially criminal conduct. Notwithstanding having actual knowledge that Gordon was potentially a criminal,
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Allegheny knowingly avoided both disclosing that disturbing fact to the public and establishing a system to investigate and to monitor Gordon and G.E.M.
5. In October, 2001, once again, Defendants were slapped in the face with evidence of impropriety at its G.E.M. trading division. Having stated its financial results for the second quarter of 2001, ended June 30, 2001, Allegheny was forced to restate its results due to errors relating to accounting errors at G.E.M. Securities analysts conveyed that Defendants had attributed the accounting errors to integration, but stated that if there were further problems, G.E.M. and or
Allegheny could be suffering from internal control problems which investors would view with great disfavor. Defendants denied the existence of any such problems.
6. Notwithstanding these most serious red flags, throughout the Class Period, defendants failed to disclose material adverse facts about G.E.M. and its effect on Allegheny’s operations and financial results. Far from being a positive force for Allegheny’s operational strategy and an accretive acquisition, however, G.E.M. was hollow. Subsequent to the Class Period, Merrill Lynch and Allegheny have sued one another over the G.E.M. purchase agreement. In the course of those proceedings, Allegheny has admitted that G.E.M. was rife with accounting and other improprieties and built on a shaky foundation. Allegheny has admitted in pleadings that a trading operation is only as strong as the integrity of its personnel and its systems. Prior to Allegheny’s assuming control of G.E.M. and throughout its ownership and operation thereof, however, G.E.M.’s internal controls and risk management were defunct, debilitating G.E.M., rendering it essentially worthless.
As Allegheny reported in its Annual Report on Form 10-K for the year ended December 31, 2002
(“2002 10-K”), filed in September 2003, G.E.M. lacked all basic internal business and financial reporting controls and accounting policies. During the Class Period, Allegheny neither attempted
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to remedy the severe operational and financial accounting problems at G.E.M., nor disclosed its overwhelming problems to investors.
7. In addition to failing to disclose that the G.E.M. acquisition was, in truth, neither accretive nor an adequate energy marketing and trading operation, Allegheny failed to disclose other material adverse facts relating to its unregulated businesses. To generate energy for its trading and marketing division, in early 2001, Allegheny purchased three power generation stations from Enron.
Unbeknownst to investors, however, but known to or recklessly disregarded by Defendants, these three plants were, at the time of purchase and throughout the Class Period, in poor working condition and provided little to Allegheny or its AE Supply subsidiary. Defendants failed to disclose that assets for which Allegheny had paid dearly were essentially worthless.
8. By failing to disclose these material facts to investors, Defendants caused the price of Allegheny common stock to be artificially inflated throughout the Class Period. In direct response to the disclosure of the adverse truth behind the poor quality of the G.E.M. and Enron power station purchases, the price of Allegheny common stock fell precipitously causing Lead
Plaintiffs and members of the Class to suffer damages.
JURISDICTION AND VENUE
9. The claims alleged herein arise under Sections 10(b) and 20(a) of the Securities and
Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78(j)(b), 78(t) and 78t-1(a) and the rules and regulations promulgated thereunder by the SEC, including Rule 10b-5, 17 C.F.R. § 240.10b-5.
10. Jurisdiction over the subject matter of this action is conferred upon this Court by
Section 27 of the Exchange Act, 15 U.S.C. Section 78aa, 28 U.S.C. Section 1331 and 28 U.S.C.
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1307. This Court has personal jurisdiction over defendants pursuant to Section 27 of the Exchange
Act, 15 U.S.C. Section 78aa.
11. Venue is proper in this District pursuant to section 27 of the Exchange Act and 28
U.S.C. § 1391(b). Allegheny maintains its headquarters in Hagerstown, Maryland. Many of the acts and transactions constituting the violations of law alleged herein, including the preparation and dissemination to the investing public of false and misleading information, occurred in substantial part in this Judicial District.
12. In connection with the acts, transactions, and conduct alleged herein, defendants, directly and indirectly, used the means and instrumentalities of interstate commerce, including the
United States mails, interstate telephone communications and the facilities of the national securities exchanges.
THE PARTIES
13. Lead Plaintiffs the Finkelstein Family and StoneRidge Investment Partners LLC purchased shares of Allegheny Energy common stock during the Class Period. Lead Plaintiffs’ transactions in Allegheny Energy stock during the Class Period are set forth in their previously submitted Certifications.
14. Defendant Allegheny Energy is incorporated in the state of Maryland with its principal offices located 10435 Downsville Pike, Hagerstown, Maryland 21740-1766. During the
Class Period, its Energy Trading Division, Allegheny Energy Global Markets, was headquartered in New York City at 909 Third Avenue, 33rd Floor, New York, New York 10022.
15. As of October 21, 2002, Allegheny Energy had approximately 126 million shares outstanding. During the Class Period, Allegheny Energy’s common stock was actively traded on
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the New York Stock Exchange (“NYSE”). Allegheny Energy describes itself as "an integrated
Fortune 500 energy company with a balanced portfolio of businesses, including Allegheny Energy
Supply, which owns and operates electric generating facilities and supplies energy and energy-
related commodities in selected domestic retail and wholesale markets; Allegheny Power, which
delivers low-cost, reliable electric and natural gas service to about three million people in Maryland,
Ohio, Pennsylvania, Virginia, and West Virginia; and a business segment offering fiber-optic and
data services, energy procurement and management, and energy services.”
16. Defendant Alan J. Noia (“Noia”) was, at all times relevant hereto, Allegheny Energy's
Chairman, President, and Chief Executive Officer. Defendant Noia signed the Company’s annual
report, filed on SEC Form 10-K, for the fiscal year ended December 31, 2001.
17. Defendant Michael P. Morrell (“Morrell”) was, at all times relevant hereto, a Senior
Vice President of Allegheny Energy and the president of subsidiary Allegheny Energy Supply.
Defendant Morrell signed the Company’s annual report, filed on SEC Form 10-K, for the fiscal year
ended December 31, 2001.
18. Defendant Bruce E. Walenczyk ("Walenczyk") was, since May 1, 2001, a Senior
Vice President and Chief Financial Officer of Allegheny Energy. Defendant Walenczyk signed the
Company’s annual report, filed on SEC Form 10-K, for the fiscal year ended December 31, 2001.
19. Defendants Noia, Morrell, and Walenczyk, are referred to herein as the “Individual
Defendants.”
20. The Individual Defendants, by reason of their direct and substantial management
positions and responsibilities during the time relevant to this Complaint, were “controlling persons”
of Allegheny Energy and Allegheny Energy Global Markets within the meaning of section 20 of the
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Exchange Act. The Individual Defendants had the power and influence to control Allegheny Energy
and Allegheny Energy Global Markets and exercised such control to cause the Company and
Allegheny Energy Global Markets to engage in the violations and improper practices complained
of herein. The Individual Defendants, because of their positions as officers and directors of
Allegheny Energy and Allegheny Energy Global Markets, had access to adverse, non-public
information about the Company’s financial condition and future prospects.
21. Defendants had a duty promptly to disseminate truthful and accurate information with
respect to Allegheny Energy and promptly to correct any public statements issued by, or on behalf
of, the Company which had become false, misleading, or otherwise inaccurate.
22. Defendants knew, or recklessly disregarded, that the misleading statements and
omissions complained of in this action would cause the price of the Company's common stock to
become artificially inflated. Defendants acted knowingly, or in such a reckless manner, as to
constitute a fraud and deceit upon plaintiffs and the other members of the proposed Class.
23. The statements made by defendants, as outlined below, were materially false and
misleading when made. Allegheny Energy had no reasonable or adequate basis to justify or support
its earnings forecasts. The true financial and operating condition of the Company, which was known to, or recklessly disregarded by, defendants, remained concealed from the investing public during
the Class Period. Defendants, who were under a duty to disclose these facts, misrepresented or
concealed those facts during the relevant time period.
CLASS ACTION ALLEGATIONS
24. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class consisting of all those who purchased the securities,
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and options on the securities, of Allegheny Energy between April 23, 2001 and October 8, 2002, inclusive (the “Class Period”) and who were damaged thereby. Excluded from the Class are
Defendants, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which Defendants have, or had, a controlling interest.
25. The proposed Class is so large that joinder of all Class members is impracticable.
Throughout the Class Period, Allegheny Energy's common shares and other securities were actively traded on the NYSE. As of October 21, 2002, Allegheny Energy had approximately 126 million shares outstanding. While the exact number of Class members is unknown to Plaintiffs at this time and can only be ascertained through appropriate discovery, Plaintiffs believe that there are not less than thousands of Class members. Record owners and other members of the Class may be identified from records maintained by Allegheny Energy or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.
26. Plaintiffs’ claims are typical of the claims of the members of the Class, as all members of the Class are similarly affected by Defendants’ wrongful conduct in violation of federal law that is complained of herein.
27. Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation.
28. Common questions of law and fact exist as to each member of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:
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a. Whether the federal securities laws were violated by Defendants’ acts as
alleged herein;
b. Whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business and operations of Allegheny Energy;
and
c. To what extent the members of the Class have sustained damages and the
proper measure of damages.
29. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the
damages suffered by individual Class members may be relatively small, the expense and burden of
individual litigation make it impossible for members of the Class to individually redress the wrongs
done to them. There will be no difficulty in the management of this action as a class action.
SUBSTANTIVE ALLEGATIONS
30. In early 2001, Allegheny billed itself as “a diversified energy company. . . .”
Headquartered in Hagerstown, Maryland, Allegheny was comprised of both regulated and
unregulated businesses. It owned three regulated electric public utility companies, West Penn Power
Company (“West Penn”), Monongahela Power Company (“Monongahela Power”) and The Potomac
Edison Company ("Potomac Edison"). It also owned a regulated public utility natural gas company,
Mountaineer Gas Company, a wholly owned subsidiary of Monongahela Power. Collectively, these
units did business as “Allegheny Power,” delivering power to 1.6 million customers in Maryland,
Ohio, Pennsylvania, West Virginia and Virginia and natural gas to 230,000 customers in West
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Virginia. Each of Allegheny Power’s operating units was subject to regulation by the service or utility commission in the various states in which they operated.
31. With a move toward deregulating power companies in the late 1990s, Allegheny experienced competition for its customers. According to the Company, “[i]n the face of deregulation, and the resulting competition,” Allegheny sought to expand aggressively both its energy holdings and its customer base. In late 1999, Allegheny sought and received permission to form AE Supply (“Supply”). Allegheny would use supply to hold its generating assets, rights, interests and related obligations – to take advantage of the opportunity to transfer at book value certain of Allegheny Power's generation assets as a result of economic factors and state legislative and regulatory changes.
32. Thus, Allegheny had separated its “unregulated” power generating business from its regulated power supply business. According the Company, it “operates and markets competitive retail and wholesale electric generation and operates regulated electric generation for its affiliates.”
Allegheny also owned and operated Allegheny Ventures, to invest in and develop
“telecommunications and energy-related projects.”
33. Defendants were very upbeat about Allegheny’s new strategy. On April 27, 2001,
Noia was a guest speaker at a Greater Hagerstown Committee meeting. During his address, Noia emphasized that “we hope to dispel the old notion of the state conservative utility company.
Companies like ours must take advantage of the fresh opportunities of this new era, while never losing sight of our existing strengths, and that is exactly what we are doing.” Noia described how
Allegheny is progressing with a three-pronged strategy of building its low cost generating fleet to national prominence through its Allegheny Energy Supply subsidiary; expanding the reach of its
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energy delivery business, Allegheny Energy and to new markets and products; and seeking continued growth in Allegheny ventures which invests in telecommunications distributed generation and other projects.
34. On January 8, 2001, Allegheny issued a press release disclosing that it had agreed to purchase Global Energy Markets (“G.E.M.”) from Merrill Lynch for $490 million and a 2% interest in AE Supply. The definitive purchase agreement called for G.E.M. to become a subsidiary of AE Supply. About the acquisition, Noia was upbeat, stating:
G.E.M. will create significant value for shareholders as we transform Allegheny Energy into a major national player in the energy marketplace. The changes in our industry are creating exciting growth opportunities for companies with a comprehensive understanding of energy marketing and trading and an asset base to continue to capitalize on market opportunities. The G.E.M. team brings us the sophisticated skills and market presence to capture more of these opportunities. It will complement our existing skills and help to extract maximum value from our low-cost generating fleet.
Our generating fleet is one of our most valuable assets, and this acquisition is a significant step toward unlocking its full value. Growth is expected from both in-house marketing activities and from a referral agreement that Allegheny Energy Supply has with Merrill Lynch. We expect that the acquisition will support our efforts to grow Allegheny Energy's earnings by more than 10 percent a year. This transaction represents yet another positive step for us as our corporate strategy unfolds. We are committed to becoming a national energy merchant, and the combination of our powerful generating fleet with G.E.M.'s experience will drive growth and shareholder value.
35. In its January 25, 2001 press release, announcing its financial results for fiscal 2000,
Allegheny again touted its acquisition of G.E.M., stating:
Early in 2001, Allegheny Energy announced plans to acquire Global Energy Markets (G.E.M.), the energy trading and marketing arm of Merrill Lynch, to expand and develop our marketing and trading of electricity, natural gas, and other energy commodities. The acquisition complements our already strong trading operation and
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continues our transformation into a national energy merchant. The addition of G.E.M. will enhance our presence in the national energy marketplace, where we can extract maximum value from our growing portfolio of low-cost generation.
36. On March 16, 2001, Allegheny Energy’s subsidiary, AE Supply, announced that it
had completed its acquisition of G.E.M. from Merrill Lynch. According to Noia:
The Global Energy Markets acquisition brings significant value to our shareholders and positions our Company among the top players in the national energy marketplace. The combination of our powerful generating fleet with Global Energy Markets' experience in trading and marketing will help unlock the full value of our generating assets and support our strategy of growing earnings per share by more than 10 percent a year.
37. The Company reported that G.E.M. would operate in New York City under the name
Allegheny Energy Global Markets and named Gordon, the former head of G.E.M., President of
Allegheny Energy Global Markets. In addition, Allegheny negotiated new employment agreements
with many of G.E.M.’s management, employees and traders, including Gordon, the former head of
G.E.M. who became president of the new Allegheny division.
38. In the March 16, 2001 release, Allegheny stated further that:
With Allegheny Energy Global Markets, Allegheny Energy Supply is a world-class trading and marketing operation and has a national platform from which to sell its generation. After only two years of operations, G.E.M. is ranked in the top 20 in the nation in electric volumes traded. With this acquisition, Allegheny Energy Supply expects to be in the top 10 of all power marketers in the nation, based on volume of trades.
Additionally, Allegheny Energy Supply expects to see growth opportunities from a referral agreement with Merrill Lynch, under which it will refer its clients with energy trading needs to Allegheny Energy Global Markets.
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39. On March 30, 2001, Allegheny filed its Annual Report on Form 10-K405 for the year
ended December 31, 2000 (“2000 10-K”). In the 2000 10-K, Defendants described Allegheny’s
purchase of G.E.M. from Merrill. According to Defendants:
The acquisition is intended to help transform the Company into a major participant in the national energy marketplace and allow the Company to take advantage of growth opportunities created by changes in the energy industry. The addition of G.E.M.'s sophisticated structured transaction and trading skills and market presence to the Company's existing marketing and operating skills will assist in extracting the maximum value from the Company's low- cost generating fleet.
40. According to Defendants, the acquisition of G.E.M. gave Allegheny “a significant
trading and marketing operation and a national platform from which to sell its wholesale
generation.” With the acquisition, Defendants expected that AE Supply’s “volumes traded will be
in the top 10 of all power marketers in the nation.” Equally important for Allegheny, however, was
both a thirty (30) month period during which Merrill Lynch would “refer its clients with energy
trading needs to AE Supply and that “[t]he acquisition of G.E.M. include[d] the support
infrastructure necessary to conduct business immediately upon completion of the transaction.”
41. On April 9, 2001, Defendants caused Allegheny to issue a press release, disclosing
that it intended to issue 10 million shares of common stock in early May, 2001 with Merrill Lynch
and Goldman Sachs & Co serving as “joint book-running managers” and Bank of America Securities
LLC, JP Morgan, Salomon Smith Barney, and SunTrust Equitable Securities serving as co- managers. Allegheny disclosed that it would use the proceeds from this “prospectus only” offering
“to fund the acquisition of generating facilities.”
42. On April 11, 2001, Defendants caused Allegheny to file the 424B5 Prospectus with the SEC. Defendants touted Allegheny’s acquisition of G.E.M., stating:
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On March 16, 2001, we acquired the Energy Trading Business of Merrill Lynch Capital Services, Inc., which now operates as Allegheny Energy Global Markets, LLC, a subsidiary of Allegheny Supply. The Energy Trading Business significantly enhances our existing wholesale marketing, power trading, fuel procurement, customized energy solutions and risk management activities and also enables us to trade structured energy products. By acquiring this expertise in nation-wide trading, market analysis and risk management, we are better able to expand and compete outside our traditional regions. According to POWER MARKETS WEEK, the combined volumes traded during 2000 by Allegheny Supply and the Energy Trading Business would have ranked us as the thirteenth largest power marketer in the United States.
43. Defendants conveyed that G.E.M. was a critical component to Allegheny’s successfully implementing its operating strategy “to transform our generating business from a regional operator of formerly regulated utility generation assets to a competitive national energy merchant with sophisticated energy marketing and structured trading capabilities.” For example,
“to optimize the performance of [Allegheny’s] unregulated generating assets, which were previously operated as part of a vertically integrated utility,” Defendants stated, they were “combining the energy marketing, trading, fuel procurement and risk management expertise of the Energy Trading
Business with our existing skills in these areas. . . .” Defendants continued that Allegheny’s
“acquisition of the Energy Trading Business enhances our existing wholesale marketing, power trading, fuel procurement, and comprehensive risk management services, and enables us to offer structured trade and customized energy-related solutions to our wholesale customers.”
44. Indeed, among the most important factors leading Defendants to state that Allegheny was “well-positioned to become one of the premier energy companies in the United States” was “the significant competitive advantage. . . [of a]n experienced national energy management team with state-of-the-art energy trading and risk management models, systems and infrastructure.
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45. In its Prospectus filed pursuant to SEC Rule 424B5, filed with the SEC on April 11,
2001 (“425B5 Prospectus”), Allegheny touted its strategy “to transform our generating business from a regional operator of formerly regulated utility generation assets to a competitive national energy merchant with sophisticated energy marketing and structured trading capabilities.”
(Emphasis added). According to the Company, it “intend[ed] to expand our energy delivery business while continuing to offer ‘best-in-class’ transmission and distribution services in the East
Central United States.” Moreover, by implementing that strategy, management projected that
Allegheny would “grow our net income by an average of more than 10% per year over the next five years.”
46. Allegheny laid out several means of achieving its stated strategy. Among the most important principles was Allegheny’s intention to “maximize the value of our low-cost transferred assets through portfolio optimization” and to “develop customized structured energy management solutions.” Allegheny stated:
We are combining the energy marketing, trading, fuel procurement and risk management expertise of the Energy Trading Business with our existing skills in these areas in order to optimize the performance of our unregulated generating assets, which were previously operated as part of a vertically integrated utility.
We believe that the physical and financial commodity market skills of our Energy Trading Business will allow us to trade natural gas, source fuel supplies, help manage our fuel and dispatch risk to developing market conditions and better control our costs of production. As a result, we expect to be able to achieve more stable cash flows, increase our earnings and optimize our portfolio of power sales to our wholesale customers.
47. With respect to energy management solutions, Allegheny sought to “enhance[] our existing wholesale marketing, power trading, fuel procurement, and comprehensive risk
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management services, and [] to offer structured trade and customized energy-related solutions to our
wholesale customers.” According to Allegheny, during 2000, AE Supply “substantially increased
the volume of its wholesale electricity trading activities due to the completion of the construction
or acquisition of additional capacity, concluding “that [AE] Supply's wholesale electricity activities
now represent trading activities.”
48. With increased capacity and its expressed intention to pursue “trading activities” as
part of its overall strategy related to its unregulated operations, Allegheny needed an accomplished energy trading division, something it did not have prior to March, 2001. Thus, Allegheny’s inability
either to develop energy trading and marketing expertise or to purchase that expertise would likely scuttle both the operating strategy it had defined for itself and its ability to grow earnings at a relatively robust 10%.
49. Thus, Defendants conveyed to the market that the acquisition of G.E.M. was a critical
component to Allegheny’s executing on its business plan – a component that would be accretive to
earnings immediately and into the future. Directly contrary to those representations, however,
Defendants knew or were severely reckless in not knowing that G.E.M. was built on sham
transactions and other shady deals – transactions and deals that artificially inflated its value and
projected accretive growth for Allegheny.
FALSE AND MISLEADING STATEMENTS
50. On April 23, 2001, Defendants caused the Company to issue a press release,
announcing Allegheny’s financial results for the First Quarter, 2001, ended March 31, 2001.
According to the release, Allegheny’s earnings rose 17% from $0.78 in the first quarter of 2000 to
$0.91 in the first quarter of 2001. According to Defendants, the increase in earnings was fueled by
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“higher sales and greater net revenues from unregulated businesses that are expanding into the
national energy marketplace.” According to Defendant Noia:
The 17 percent increase is only part of our positive story. Allegheny Energy's unregulated earnings grew by 80 percent, compared to the first quarter of 2000, reflecting our diligence in executing a high- level growth strategy that continues to provide positive results for shareholders. We continue to capture market opportunities that have translated into very satisfying overall results. The addition in this quarter of Allegheny Energy Global Markets -- our new energy marketing and trading arm -- to our portfolio of high-performing businesses has provided us with another dimension of earnings power that we expect will create even greater value in the future.
*****
Our results are right on track with projected earnings," added Noia. "This keeps us on a clear path toward meeting our 2001 earnings guidance of $3.80-$4.10 a share. We continue to advance our strategy to grow as a national energy merchant, and our portfolio of strong energy businesses are focused intently on providing shareholder value today and into the future. (Emphasis added).
51. On April 24, 2001 at 11:00 am, Defendants conducted a conference call with analysts and investors to discuss Allegheny’s earnings for the first quarter of 2001. According to an April 24,
2001 Deutsche Bank Alex Brown (“Deutsche Bank”) analyst report, Allegheny’s management reiterated both its consolidated EPS guidance for 2001 of $3.80-$4.10 and its projection that
Allegheny’s earnings would grow by 10% annually over the next few years. According to Deutsche
Bank, management further stated that G.E.M. would contribute $0.30-$0.40 per share to 2001 earnings. With respect to Allegheny’s quarterly results, management stated that Allegheny’s earnings “were driven primarily by strong results at the unregulated businesses, including increased energy sales and generation additions.” Management expected 20% growth from its unregulated
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businesses over the next several years, “which should, according to management, “drive earnings
growth at the company as a whole.”
52. The foregoing material statements were false and misleading for the following
reasons:
a. As discussed infra, beginning in September, Merrill Lynch and Allegheny
sued each other over the G.E.M. purchase. In Allegheny’s amended counter-claim (“Counter-
Claim”) against Merrill Lynch for fraudulent inducement and breach of contract related to its purchase of G.E.M., Allegheny made some startling admissions. According to its own admission, when Allegheny purchased G.E.M. from Merrill Lynch, G.E.M.’s revenues and trading volume –
critical components of growth – were neither significant nor increasing. Further, at the time
Allegheny purchased G.E.M. from Merrill Lynch, the trading unit had no sophisticated internal
controls designed to ensure the propriety of its energy trades. Also according to Allegheny’s
Counter-Claim, G.E.M.’s personnel, among the most important part of the energy trading unit
Allegheny purchased, were less than qualified and had insufficient probity to manage the purchased
business. Again, according to Allegheny, all of these things “were critical because a trading
operation such as G.E.M. is only as strong as a combination of its personnel and the integrity of its systems.”
b. In the Counter-Claim, Allegheny has admitted that any positive representation
that it made about G.E.M. subsequent to its assuming control was both material and false and
misleading. According to the Counter-Claim, upon taking control of G.E.M. on the March 16, 2001
completion of the purchase, G.E.M.’s revenues, trading volumes, and growth rate were artificially
inflated. Moreover, Allegheny’s internal controls and risk management procedures were a
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“complete failure,” a fact that “seriously taint[ed] G.E.M. and its value.” Moreover, at the time of
purchase, G.E.M.’s president and head trader had engaged in embezzlement from Merrill Lynch of
over $43 million, another serious blow to the value of G.E.M. to Allegheny.
c. Prior to purchasing G.E.M., in the fall and early winter of 2000, pursuant to
a confidentiality agreement, Allegheny conducted a thorough due diligence of G.E.M., receiving
several due diligence presentations from Merrill Lynch in September, 2000. According to
Allegheny, Merrill Lynch provided it with information relating to G.E.M.’s historical financial performance for 1999 and projections for fiscal years 2000 and beyond. According to Allegheny,
Merrill Lynch convinced it that G.E.M.’s financial results were accelerating positively. For example, according to Allegheny’s assertions in the Counter-Claim, at a September 22, 2000 meeting, Merrill Lynch provided Allegheny with financial information, indicating approximately
20% net operation revenue growth and a similarly healthy increase in trading inventory. According
to Allegheny, Merrill Lynch forecasted G.E.M.’s compound annual revenue growth of 20%.
According to Allegheny, “[t]hese representations were intended by Merrill to give the impression
that G.E.M. had significant legitimate revenues and trading volume, and that its business was solid
and continuing to grow.” While Merrill Lynch may have mislead Allegheny, it was Allegheny that
passed on healthy consolidated growth numbers based in large part on G.E.M. growth projections
similar to those Merrill Lynch had conveyed to it. Because Allegheny now asserts that those
projections were false, necessarily, it passed on material, false and misleading information to
investors and continued to do so throughout the Class Period.
d. Allegheny has asserted that Merrill Lynch misrepresented that G.E.M. had
“formidable internal control mechanisms and risk management infrastructure.” According to the
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Counter-Claim, in written materials provided at two separate occasions in September 2000, Merrill
Lynch represented the following:
G.E.M. had “[d]eveloped a robust risk management infrastructure that includes state-of-the-art trading systems, strong operations, and financial support with control practices that are among the best in the industry.” G.E.M.’s “Back Office is responsible for a myriad of items ranging from data quality/integrity to payments and settlements with counterparties.” “[t]wo attorneys within the Office of General Counsel have been assigned to provide legal counsel to the Global Energy Markets Group. A significant percentage of the General Counsel’s efforts pertains to the negotiation of trading agreements with counterparties.” G.E.M. had significant “accounting” and “controllers” systems, as well as firmwide risk control mechanisms.
After the completion of the acquisition, Allegheny conveyed these concepts to investors with the same conviction that Merrill Lynch conveyed them during the sale process.
e. In fact, G.E.M. suffered from a chronic and systematic breakdown of its internal accounting controls in its trading operations throughout the Class Period. This breakdown in controls was evident to defendants throughout the Class Period. Indeed, according to former employees, described below, and to admissions in subsequent filings with the SEC, Allegheny
Energy’s internal controls were so deficient that, among other things,
i. the company was unable to capture trading information on a company- wide basis;
ii. the trading risk potential was captured at department level, and “each trader was doing his own thing”;
iii. trade data was captured by individual departments, rather than on a
Company-wide basis;
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iv. traders inputted their own pricing;
v. the Company did not limit system access to its trade valuations;
vi. trade data was not easily retrievable because there was no standard
format to store the data. Each trader stored his own data in his own way; and
vii. top management was unable to determine overall risk exposure of the
Company’s trading positions.
f. Without adequate controls, the traders at G.E.M., led by Gordon, ran amuck.
Unbeknownst to investors, G.E.M. had engaged in “sham energy trades” with Enron. According
to Allegheny, Merrill Lynch’s G.E.M. unit completed “round trip” or “wash” transactions with
Enron whereby the two firms, “exchanged matched gas or power contracts that essentially cancel each other out while inflating reported revenue and trading volume.” By engaging in these sham transactions, Merrill was able to “paint[] a misleading picture of these indices of [G.E.M.]’s value.”
In turn, Allegheny passed these values on to investors, values it knew or was reckless in not knowing were artificially and materially inflated.
g. In addition, without the proper controls, defendants were unable to value these long term energy contracts through mark-to-market accounting estimates utilizing the best
information available as required by GAAP. These estimates were pivotal because it was both
permitted and required by the accounting rules to record as current income a portion of the estimated
future income. Without any internal controls, defendants were able to fraudulently manipulate
quantitative curves necessary to the estimation process, so as to materially and artificially inflate the
assets, revenues and profits of Allegheny Energy and AE Supply thereby materially and artificially
inflating growth projections for both AE Supply and Allegheny as a whole.
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h. With respect to G.E.M.’s personnel, once again, in the Counter-Claim,
Allegheny stated that “trading operations are only as strong as a combination of its personnel and
the integrity of its systems.” According to Defendants, the personnel it inherited from Merrill Lynch was not only incapable of sustaining G.E.M. but possessed very questionable ethics. Merrill represented to Allegheny that it had “[a]ssembled, through careful recruiting and internal transfers and training, what is possibly the best electricity trading group in the industry.” Gordon was integral to these operations. According to the Counter-Claim, Merrill Lynch conveyed that the personnel who would run G.E.M. for Allegheny “had sufficient qualifications, probity, and experience to manage G.E.M.’s operations and to oversee trading activities.” In turn, Defendants conveyed this material notion to the market, notwithstanding that it was false. Indeed, unbeknownst to investors, according to the Counter-Claim, Gordon had caused G.E.M. and Merrill Lynch to engage in a series of “questionable transactions that may have violated its conflict of interest and/or internal financial control policies.” Moreover, he misrepresented his qualifications and was, according to the Counter-
Claim “very difficult to control or supervise.”
i. Thus, according to Allegheny’s own allegations, directly contrary to the representations of Merrill Lynch, G.E.M. was rife with problems – problems Defendants neither remedied nor disclosed, even though they were aware of them, during the Class Period. With knowledge or reckless disregard of the truth behind its G.E.M. operation that existed prior to its purchase and persisted throughout the Class Period, Defendants disseminated false and misleading statements thereon.
j. In addition to Allegheny’s problems with G.E.M., Defendants knew or were reckless in not knowing that Allegheny’s broader accounting and operating controls were wholly
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inadequate, as pointed out to Allegheny in an August 26, 2002 letter from PricewaterhouseCoopers,
Allegheny’s independent auditor. Indeed, Allegheny lacked proper accounting and operating
controls, resulting in the following errors to its 2001 financial statements:
i. improperly recorded purchased gas costs after the adoption of a
purchased gas adjustment clause for Mountaineer in 2001 ($4.6 million);
ii. improperly recorded the extent of losses under the equity method of accounting relating to Allegheny Ventures’ ownership interest in a joint venture in 2001 ($2.8 million);
iii. failed to record liabilities for incurred but not reported claims for self- insured liability claims ($10.7 million);
iv. failed to record penalties for failure to deliver minimum amounts of gypsum pursuant to contract ($2.5 million);
v. understated reserve adjustments relating to adverse power purchase commitments ($1.7 million);
vi. understated accrued payroll costs ($1.6 million);
vii. failed to accrue costs associated with services or goods received ($1.2 million”);
viii. incorrectly recorded Supplemental Executive Retirement Plan costs
($1.1 million); and
ix. failed to record adjustments for bank reconciliations ($1.8 million).
k. During a September 26, 2003 conference call with investors, Paul Evanson
(“Evanson”), Allegheny’s current President and CEO, described Allegheny’s accounting and
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reporting deficiencies as “extensive.” According to Evanson, even at that late date, Allegheny had
“material weaknesses in controls,” notwithstanding “a major program to upgrade personnel, systems,
and processes.” In light of these material weaknesses – in essence the complete breakdown or non-
existence of controls at Allegheny, these errors in Allegheny’s audited 2001 financial statements and
its unaudited financial statements for the interim periods thereof as well as for the first two quarters
of 2002 were qualitatively material.
l. Lastly, the Purchase Agreement for G.E.M. required Allegheny to supply AE
Supply (G.E.M.) with a defined amount of energy generating capacity by September 16, 2002. If
Allegheny was unable to provide such capacity, then Merrill had the right to require Allegheny
Energy to repurchase all of Merrill’s equity interests in Allegheny Energy Supply for $115 million
plus interest. The Purchase Agreement also provided that if the Company had not completed an
initial public offering involving Allegheny Energy Supply within two years of March 16, 2001,
Merrill had the right to sell its equity interests in Allegheny Energy Supply to Allegheny for $115
million plus interest. Defendants failed to disclose that, because of the absence of proper controls
and risk management systems, they knew or were reckless in not knowing of the tremendous
difficulty Allegheny would encounter in complying with the provisions of the purchase agreement
for G.E.M which would put Allegheny at substantial risk of incurring further liability to Merrill
Lynch.
m. To provide this supply, Allegheny purchased three power stations from Enron.
As detailed below, however, defendants knew or were reckless in not knowing shortly after they
purchased these power stations that they could not and would likely never provide the energy supply necessary to satisfy the terms of the Purchase Agreement.
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53. Analysts reacted favorably to Defendants’ disclosure of both Allegheny’s positive earnings report and the impact of the G.E.M. acquisition, incorporating both into their earnings estimates. For example, according to Deutsche Bank’s April 24, 2001 Report, “AYE’s earnings in the quarter were driven primarily by strong results at the unregulated businesses, including increased energy sales and generation additions. AYE expects +20% annual earnings growth from its unregulated businesses over the next several years, which should drive earnings growth at the company as a whole.” Similarly, in an April 25, 2001 Report, Lehman Brothers’ analysts noted that among the reasons why AE Supply was so favorably positioned was the purchase of G.E.M., because that “was a good way to accelerate building the company’s energy marketing presence.”
54. In an April 26, 2001 Report, First Union analysts raised their 2001 earnings estimates and reiterated their “Buy” rating on Allegheny, stating:
The higher growth expectations reflect AYE’s shifting business mix to unregulated merchant activities from the regulated utility. With first quarter results coming in as expected, we have gained comfort in AYE’s ability to meet the management guidance ranged of $3.80- $4.10 per share in 2001. Growth beyond 2001 is expected to be driven by plans to build or buy approximately 3,500 megawatts of new generation capacity, the leveraging of those additional megawatts by the recently acquired Global Energy Markets, and effective management of production costs.”
55. In an April 27, 2001 press release, Defendants caused Allegheny to announce the pricing of the offering of its common stock, first announced on April 9, 2001. The offering was for
12.4 million shares at $48.25 per share. The sale was expected to provide $598.3 million in gross proceeds to the Company used to fund the Company’s acquisitions of generating facilities in the mid-west and for other corporate purposes. As stated in the April 9, 2001 releases, the offering was jointly led by Goldman Sachs & Company and Merrill Lynch.
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56. On April 30, 2001, Allegheny filed a Prospectus Supplement pursuant to SEC Rule
424(b)(2) (“424B2 Prospectus”) for the sale of a total of 12.4 million shares. The contents of the
424B2 Prospectus were substantially similar to the contents of the 424B5 Prospectus Defendants
caused Allegheny to file with the SEC on April 11, 2001 with respect to Allegheny’s strategy and
the impact on the Company of it purchase of G.E.M.
57. The foregoing material statements in the 424B2 Prospectus were false and misleading
for the following reasons stated above in paragraph 52.
58. On May 2, 2001, Allegheny announced that it had closed its public offering of its
common stock selling a total of 14.26 million shares which included an over-allotment of 1.86
million shares. Defendant Noia stated “we are very pleased with the successful completion of the sale of our common stock. We have experienced strong demand for our stock and the price per share is near record-high levels. These are clear indicators that our growth strategy is working. We are gaining recognition as a major force in a growing national energy market and are continuing to increase shareholder value.”
59. In a May 3, 2001 press release, Defendants caused Allegheny to announce that AE
Supply had completed the purchase of Natural Gas Fired Merchant generating capacity in three Mid-
West states from Enron Corp., giving Allegheny more than 14,000 MW of total generating capacity that it will own or control by 2005. Defendant Noia commented that the new generating capacity provided Allegheny “with significant generation presence and capability as an energy merchant to sell electricity from efficient natural gas-fired generation facilities in more areas of the country with a growing demand for energy.” Noia continued that “[t]hese premium generating assets are designed for operation in times of peek electricity demand. Because of its national presence,
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Allegheny Energy Global markets will be able to market the output from these newly acquired facilities in a wide variety of ways with our portfolio of existing assets and other supply arrangements so that overall operating efficiency and shareholder value is maximized.”
60. The foregoing material statements in the May 3, 2001 release were false and misleading for the reasons stated above in paragraph 52.
61. On May 10, 2001, Allegheny Energy held its annual meeting of shareholders. At this meeting Noia said the Company has advanced from Main Street to Wall Street, executing its strategy to capture value for its shareholders and continue its success as a national energy merchant.
Defendant Noia went through the highlights of the year 2000 and early 2001 which included:
! The purchase of Allegheny Energy Global Markets, a nationally recognized energy
commodity trading business, which vaulted the Company into the upper echelon of
national energy marketing and trading operations;
! Record net income for 2000 of $2.84 per share, or $313.7 million, before
extraordinary charges, which was eight percent higher than that of the previous year;
! An increase of nearly 80 percent in Allegheny Energy’s stock price, placing the
performance of the Company in the top 10 of its peer companies in the Dow Jones
Electric Utilities Index;
! Expansion of Allegheny Energy’s generating fleet by more than 50 percent and 4,287
megawatts (MW) in growing areas of the United States, with plans in place to own
or control more than 14,4000 MW by 2005;
! Successful integration of new natural gas acquisitions and the addition of 250,000
new gas customers in the regulated energy delivery business;
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! Growth in our unregulated businesses, which contributed positive net income of $2
million after less than two years of operation; and
! Inclusion in the Fortune 500 list, the Standard & Poor’s 500, the Barron’s 500, and
the Forbes “Platinum 400" list of America’s top performing companies.
62. In his May 10, 2001 presentation to shareholders, Noia stated:
The year 2000 was a pivotal one for Allegheny Energy. Never before in our Company’s history have we achieved so much. Allegheny Energy owes its successful transformation from a regional electric utility to a national marketer of energy and energy services to the Company’s adherence to a solid strategy for growth. We have not deviated from this strategy and it has served us well. Simply put, our strategy is to transform our energy supply business into a national energy merchant; expand our energy delivery business; and add a new dimension of earnings growth through a ventures business that creates opportunities related to our core business.
The acquisition of Allegheny Energy Global Markets brought to Allegheny “a team of experienced financial and fuel trading and risk management professionals to blend with our skilled regional electricity traders and a book of business that started paying dividends on day one.” Last month, the Company announced the closing of the sale of 14.26 million shares of common stock, which netted $667 million in proceeds. The day after the stock sale closed, Allegheny Energy completed the purchase of three Midwestern generating plants that have a combined generating capacity of 1,710 MW. “These unites (in Indiana, Illinois, and Tennessee) have been quickly integrated into our system and are ready to take advantage of opportunities in the marketplace in the coming months and years,” Noia said. “This latest acquisition of generating assets brings out total generating capacity, both owned and controlled, to nearly 11,900 MW. Other announced projects will give us more than 14,400 MW by 2005, strategically positioned across the United States. The skillful integration of these assets with the energy trading expertise of Allegheny Energy Global Markets has created a winning combination for the shareholders of our Company. “Our enthusiasm for the future of our changing industry and our place within it are great,” he concluded. “You will see more good things from Allegheny Energy in the coming months.”
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63. The foregoing material statements made Allegheny’s annual meeting of shareholders were false and misleading for the reasons stated above in paragraph 52.
64. On May 15, 2001, Defendants caused Allegheny to file with the SEC its Quarterly
Report on Form 10-Q for the period ended March 31, 2001 (“1Q01 10-Q”). The 1Q01 10-Q contains several references to G.E.M., specifically with regard to Allegheny’s purchase from Merrill
Lynch and the activities in which G.E.M. would engage. For example, in the 1Q01 10-Q, Allegheny stated:
On March 16, 2001, Allegheny Energy Supply acquired G.E.M., the energy commodity marketing and trading unit of Merrill Lynch Capital Services (Merrill Lynch). This acquisition significantly increased the volume and scope of Allegheny Energy Supply's energy commodity marketing and trading activities. G.E.M. activities include the marketing and trading of electricity, natural gas, and other energy commodities using both over-the-counter contracts and exchange-traded contracts, such as the New York Mercantile Exchange. (Emphasis added).
65. The foregoing material statements in the 1Q01 10-Q were false and misleading for the reasons stated above in paragraph 52.
66. In a May 17, 2001 Report, Credit Lyonnais Securities’ (“CLS”) analysts instituted coverage of Allegheny with a “Buy” rating, stating that Allegheny’s common stock traded at a discount to its “integrated electric peers,” but that it should trade at a premium. Among the reasons that CLS believed Allegheny would beat consensus estimates was the increase in its capacity utilization factor and its acquisition of G.E.M. which “should enable [Allegheny] to capture more of the volatility that is inherent in the marketplace today as well as maximize the unique options embedded in [Allegheny]’s generation.” With respect to the G.E.M. acquisition, CLS continued that
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Overall we have a favorable opinion of the G.E.M. acquisition: (1) it is accretive to the bottom line by $0.30-$0.40 per share immediately; (2) it allows Allegheny Energy to capture more of the short-term volatility that wholesale energy markets are currently experiencing; and (3) Allegheny acquired G.E.M. at an attractive price.
We view this transaction as a positive for shareholders as: a) the acquisition almost pays for itself through the 1,000 MW tolling agreement in California; b) it creates a merchant generator, which is currently favored by investors; c) it enables Allegheny Energy to better capture the volatility that is inherent in today’s wholesale markets; and d) it enables Allegheny Energy to gain wholesale merchant infrastructure, including the ability to structure long term deals. Perhaps the one negative that we see for the transaction is that G.E.M. was more a financial player rather than a physical player, which means the all important knowledge about bottlenecks in the national electric grid and natural gas transmission systems is still incomplete, although the acquisition of G.E.M. helps to fill in some of the knowledge gaps. Therefore we believe this acquisition creates a strong regional wholesale merchant, but perhaps not a strong national player.
67. In May 23, 2001 Report, Morgan Stanley Dean Witter (“Morgan Stanley”) was overwhelmingly positive about Allegheny’s prospects as a direct result of its purchase of G.E.M.
Morgan Stanley analysts wrote that Allegheny’s growth would “be driven primarily by significant unregulated energy acquisitions,” including the acquisition of G.E.M. Indeed, according to Morgan
Stanley, Allegheny’s acquisition of G.E.M. distinguished it from its peers. Allegheny “recognized the tremendous value a trading and marketing business can add to unregulated power assets and the difficulty of building the business from scratch.” Expecting G.E.M. to contribute $0.30-0.40 per share to 2001 EPS, Morgan Stanley called it “a generously accretive acquisition.” Allegheny,
Morgan Stanley wrote, “is one of many companies that have sharply improved their marketing business, which has been a chief driver of higher earnings. This is getting to be a widespread theme among the companies with established or growing merchant energy operations.” Implying that
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G.E.M. was a “strong trading operation,” Morgan Stanley wrote that “there are relatively few strong
trading operations in a huge inefficient marketplace for electricity and gas. Evidence is
accumulating that these companies can continue to drive their earnings higher on a sustained basis
well beyond the levels suggested by already strong commodities markets.” Morgan Stanley was also
positive about AE Supply’s “highly sophisticated credit risk management policies” that enable it to
mitigate risks inherent in the hedging, fixed-price forward purchase/sale contracts, futures, swaps,
and option contracts that expose Allegheny “to commodity price variability as well as counterparty
risks.”
68. On May 23, 2001, Allegheny’s stock closed at $54.79. On March 16, 2001, the day
Allegheny announced that it had completed the acquisition of G.E.M., Allegheny common stock
closed at $45.83. Thus, the G.E.M. acquisition, on which analysts and investors were focused, was
a material catalyst for a 19.6% rise in Allegheny’s common stock price in a span of just two months.
69. According to a July 23, 2001 Report from McDonald Investment (“McDonald”)
analysts, shares of electric generator company stocks fell significantly on July 20, 2001 when
Constellation Energy Group reduced its guidance by $0.40 per share due in large part to “the
collapse of forward pricing for electricity.” According to McDonald, Allegheny’s share price fell,
but it was unfairly painted with a broad brush and suffered only a sympathy decline. According to
McDonald, Allegheny “sold forward a significant amount of capacity for these periods before
pricing started to collapse in early to mid April 2001. In fact, we expect that [Allegheny] has taken
advantage of price weakness to unwind many of these contracts, locking in profit without delivery
risk.” McDonald also noted that Allegheny’s expected earnings strength validated its analysts’
belief “that [Allegheny] is capitalizing on its acquisition of Merrill’s power trading and marketing
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division earlier this year. This acquisition should prove to be very accretive to [Allegheny]’s earnings.”
70. On July 19, 2001, Allegheny’s share price closed at $47.40 per share. By July 24,
2001, as a direct result of Constellations Energy Group’s adverse announcement, Allegheny’s share price had slid to a close of $40.59 on relatively heavy trading volume.
71. In a July 23, 2001 press release, Defendants caused Allegheny to announce that it was seeking SEC approval for an initial public offering of up to 18 percent of the common stock in a new holding company, which would own 100 percent of AE Supply. The stated purpose of the IPO distribution was to permit Allegheny Energy’s delivery business and AE Supply to focus on their respective businesses and market opportunities. About the AE Supply IPO, which analyst had generally viewed as a positive development since the Company first announced the possibility in the spring of 2001, Noia commented
today’s announcement is historic for our Company. Over the past several years, we have transformed ourselves from a regional energy supplier into a national energy merchant by expanding our efficient, low-cost generating fleet and broadening our energy marketing and trading expertise. . . . Our separation into two companies will sharpen the strategic focus of both, enabling each to hone in on core competencies, determine the best means of serving customers, and respond to changing business and landscape.
72. According to Defendants, Allegheny would use proceeds from the IPO to repay debt and pursue growth objectives. Defendant Noia stated that within 18 months of the proposed IPO, depending on regulatory approval, Allegheny would distribute the remaining common stock of AE
Supply to Allegheny shareholders. Thus, Defendants confirmed that Allegheny’s purchase of
G.E.M. was a material part of their strategy to unlock the value of its unregulated businesses.
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73. In a July 26, 2001 press release, Defendants caused Allegheny to announce the
Company’s financial results for the second quarter of 2001 ended June 30, 2001. Allegheny
reported a 55 % increase in second quarter 2001 EPS compared to the same period in 2000, substantially above consensus analyst estimates of $0.76 per share. Critically, the release attributed
Allegheny’s outstanding results in material part to “higher net revenue from unregulated operations,
primarily related to the energy trading activities of Allegheny Energy Global Markets, which was acquired on March 16.” (Emphasis added). Boasting that Allegheny’s upside earnings surprise had
“demonstrate[d] that Allegheny Energy’s strategy and focus is adding real value for our shareholders,” Noia stated:
The strong performance of our Allegheny Energy Global Markets marketing and trading operation has, as we had anticipated, enhanced the value of our competitive portfolio of generating assets located across the country. Add to that a growing energy delivery business, which continues to provide value, and Allegheny has a very solid combination, poised for even greater success as we continue our transformation into a national energy merchant.
We are pleased with our second quarter and year-to-date results, added Noia. In addition, we are confident that our unwavering commitment to a proven growth strategy and solid performance year to date will allow us to achieve our 2001 earnings guidance of $3.80- $4.10 a share. Our portfolio of energy businesses is providing shareholder value today, and we will work to continue to deliver positive results for shareholders in the future.
For the year, Allegheny is confident it will hit within its previous earnings target of $3.80 to $4.10 a share. The company originally provided this outlook in April, when it reported its first quarter results.
74. The foregoing material statements in the July 26, 2001 press release and the July 27,
2001 conference call were false and misleading for the reasons stated above in paragraph 52.
33 Case 1:03-md-0151