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Attorney General Lockyer Files Major Electricity Market Manipulation Lawsuit Against Enron
Alleges Inventor of Market Games Broke Laws In Bilking 'Grandma Millie'
(SAN FRANCISCO) – Attorney General Bill Lockyer today filed a lawsuit against Enron to recover potentially hundreds of millions of dollars from the company for the massive, unlawful market manipulation and fraud it committed during the California Energy Crisis of 2000-01.
"At the same time this corrupt enterprise successfully lobbied its friends in the federal government to block price caps and blame California, it was robbing our businesses and consumers blind," said Lockyer. "Enron was the architect of a rip-off scheme that bled billions of dollars from our state's economy. They may be bankrupt, but we will hold them accountable. Grandma Millie is California. I am her lawyer, and she seeks justice."
Filed in Alameda County Superior Court on behalf of the people, Lockyer's complaint alleges Enron's market manipulation violated the state's Unfair Competition Law (UCL) and commodities fraud statute. The lawsuit seeks restitution, damages and disgorgement of unjust profits. Additionally, the complaint asks the court to award civil penalties of $25,000 for each commodities fraud violation and $2,500 for each violation of the UCL.
The complaint does not specify the total relief sought. The court will determine that figure based on the evidence. But Lockyer said the damages, restitution, disgorgement and civil penalties could well total in the hundreds of millions of dollars. The named defendants include: Enron Corporation; Enron Energy Services, Inc.; Enron Energy Services Operations, Inc.; Enron Energy Services LLC; Enron North America Corporation; and Enron Power Marketing, Inc.
The lawsuit is the latest enforcement action resulting from Lockyer's ongoing, three-year investigation of market misconduct by Enron and other power companies during the Energy Crisis. And it comes in the wake of the release of audio tapes and transcripts that record Enron trader conversations and provide disturbing evidence of the firm's market behavior.
"While the state reeled from the combined impact of sky high power prices, supply shortages and rolling blackouts, the Enron defendants enjoyed massive, unprecedented profits, and extracted millions of dollars in ill-gotten gains from utilities and their customers ...," the complaint says. "And through it all, the Enron defendants displayed a shocking disregard for the public welfare, as numerous telephone conversations involving their personnel vividly demonstrate."
On the tapes, the traders not only brazenly talk about exporting power and gaming the market, they spew profanity-laced boasts about bringing California to its knees, inflicting financial pain on "Grandma Millie" and Enron's influence with President Bush. Seeing profit in destruction, they express hope fires will torch California power lines, chanting, "Burn baby, burn."
Additionally, the tapes indicate Enron's top two executives, Ken Lay and Jeff Skilling, had knowledge of the market manipulation and received briefings on how it enriched the company.
Lockyer's complaint focuses on market gaming strategies Enron concocted to collect payment for energy sevices and power it did not provide, and to charge rates above price caps in effect at the time. "Beginning as early as 1998 and continuing at least through 2001, the Enron defendants willfully engaged in a startling array of manipulative and fraudulent trading schemes ...," the complaint alleges.
The games targeted by Lockyer's lawsuit include strategies to create false congestion and obtain premium prices to relieve the non-existent congestion. The games in this category include "Death Star" and "Wheel-Out."
The complaint also cites the "Get Shorty" game in which Enron engaged in paper trading of, and collected high prices for, reserve power Enron had no intention of providing. "Fat Boy" and "Ricochet" are two other games specifically mentioned in the lawsuit. In "Fat Boy," Enron intentionally overstated the amount of power it intended to provide, knowing it would receive the highest possible price for the excess.
In "Ricochet" transactions, Enron evaded price caps by buying power in California, selling it briefly to an entity outside the state, repurchasing it from the out-of-state entity, then selling it back into California. This game allowed Enron to charge above-cap prices because the state's grid operator paid such premiums for out–of-state energy when supply fell below demand in the real-time market.
The Enron case marks the first time Lockyer has sued a company for commodities fraud using the enforcement authority granted him under a law that took effect Jan. 1, 2004. The statute, which Lockyer sponsored, gives the Attorney General concurrent jurisdiction with the state Corporations Commissioner to investigate violations of California's commodities fraud law, and to bring civil enforcement actions for violations. The commodities law prohibits fraud in the sale or purchase of commodities. Electricity is a commodity, as defined under the statute.
Lockyer's Energy Task Force, working in cooperation with utilities, state regulators and the Governor's Office, has produced seven settlements to resolve enforcement actions arising from the Energy Crisis. The seven settlements have a combined value of $2.42 billion. Of that total, more than $1.9 billion represents ratepayer relief.