US financial scandals are rumbling on with the revelation that a number of significant players in the energy trading sector have been conducting what are termed 'wash trades' in order to boost apparent revenues and market liquidity. Wash trades (aka round trip or ricochet trades) involve simultaneous counterparty transactions of equal volume and value at no profit. At least one firm has admitted the policy boosted revenues by $4.4 billion while others have said that the practice was responsible for some 10 per cent of trading revenue.
The scandal broke after firms including Dynegy, CMS, Reliant and Duke admitted conducting the round trip trades, a practice revealed in memos from defunct trader Enron. The aftermath has seen a number of senior heads roll in a high profile series of damage limitation exercises. Chuck Watson, chief executive of Dynegy resigned over the scandal, as has William McCormick chief executive and chairman of CMS. They join a number of other senior executives from Reliant as swift remedial action is taken to try and avoid more serious consequences. Even so this latest scandal is certain to raise the profile of legislative bills that would mandate greater regulatory oversight of the energy market.
Following the revelations regulator FERC ordered some 150 companies to deliver information on trading strategies and any evidence of wash trades as part of a wider investigation into power price manipulation in the western region. The great majority of firms denied any malpractice and even Dynegy was clear that it had not conducted wash trades in the California region. Other traders that have filed denials include Mirant, PPL, Entergy-Koch, El Paso, Williams, PNM, NRG and PG&E's trading arm. Duke has admitted to a limited number of such trades but maintains they were for legitimate business purposes.
Depite denials, share prices have suffered. Dynegy, for example, has had to respond to a formal investigation from the SEC and California legislators; despite a recent rally its share value plunged more than 80 per cent over the year. California has accused scores of energy players of inflating wholesale electricity prices during the state's power crises of 2000 and 2001 and is demanding $8.9 billion compensation for overcharging between October 2000 and June 2001.
l Accountancy firm Andersen has been found guilty by a US federal court of obstructing the course of justice by their actions in destroying documents related to Enron financial dealings. Enron investors now plan to pursue Andersen's overseas partners.
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