Allegheny Energy to pay more than $15 million in settlement

October 01, 2005|By DANIEL J. SERNOVITZ


Allegheny Energy will pay more than $15 million to settle a class action stemming from its 2001 purchase of troubled Merrill Lynch & Co. subsidiary Global Energy Markets (GEM), according to company filings with the Securities and Exchange Commission and court documents.

The 14 consolidated class-action suits, brought before the U.S. District Court of Maryland by Allegheny shareholders, are tied to a string of events that led to Allegheny's financial decline, the collapse and bankruptcy of Enron Corp., and Moody's Investors Service's 2002 decision to downgrade Allegheny's credit to junk status, a rating the company has yet to recover from.

Allegheny, through its insurance carrier, also will pay an additional $450,000 to settle a separate, but related class action filed after the initial suit.


Shareholders claim in both class-action suits that Allegheny misled them about the financial health of GEM, and those statements caused them to buy shares that fell considerably in value once news about GEM's problems surfaced.

Deborah Gross, a Philadelphia lawyer representing some of the shareholders, confirmed the settlement, but noted only that, "We still have a number of terms to work out."

Allegheny spokesman Allen Staggers said the company will not comment on the settlement until it is approved by the courts and the potentially thousands of shareholders who bought Allegheny stock from April 23, 2002, to Oct. 8, 2002, under what they claim to be false statements about GEM's revenues and financial outlook.

Allegheny bought GEM, which according to news accounts and court documents was rife with problems tied to questionable business practices, as part of an ambitious effort to position itself as a major player in the national energy marketplace.

After buying the company, Allegheny sued Merrill Lynch for the $490 million it had paid for GEM, alleging Merrill Lynch withheld information about the company's revenues and financial practices. Among those practices is an allegation GEM artificially inflated its revenues by engaging in wash transactions, deals in which it would sell and buy holdings from other companies, including Enron, for the same monetary amounts.

In July, a federal judge with the U.S. Court of Appeals in the Southern District of New York dismissed Allegheny's suit and ruled in favor of a countersuit by Merrill Lynch requiring Allegheny to pay $115 million plus interest unpaid as part of the GEM sale. Allegheny has said it will appeal the ruling, but Staggers said the company has not yet filed that appeal.

Allegheny's stock fell from $12.85 per share on Sept. 25, 2002, when Allegheny filed its suit against Merrill Lynch, to $3.80 per share on Oct. 8, 2002. While the exact number of shareholders is not disclosed, court filings indicate Allegheny had about 126 million shares outstanding on Oct. 21, 2002 and that, "... Plaintiffs believe that there are not less than thousands of Class members."

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