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San Francisco Grand Jury Returns Six-Count Indictment Against Houston-Based Energy Company and Traders, Charging Conspiracy, Commodities Manipulation and Wire Fraud

WASHINGTON, D.C. - Houston-based energy company Reliant Energy Services, Inc., and four of its officers have been charged in connection with a federal criminal investigation of the manipulation of the California energy markets, the Department of Justice announced today.

A federal grand jury in San Francisco returned a six-count indictment today against Reliant Energy Services, Inc., a subsidiary of the company now known as Reliant Resources, Inc., and four of its officers: Jackie Thomas, 49, a former Vice President of Reliant's Power Trading Division; Reggie Howard, 37, a former Director of Reliant's West Power Trading Division; Lisa Flowers, 37, a term trader for Reliant's West Power Trading Division; and Kevin Frankeny, 42, Reliant's Manager of Western Operations. All of the defendants are residents of Texas.

The indictment was announced today by Attorney General John Ashcroft, Deputy Attorney General James Comey, Assistant Attorney General Christopher A. Wray of the Criminal Division, U.S. Attorney Kevin V. Ryan of the Northern District of California, FBI Director Robert Mueller, Commodities and Futures Trading Commission Chairman James Newsome and Federal Energy Regulatory Commission Chairman Pat Wood, III. The indictment alleges that in June 2000, Reliant Energy Services and its officers and employees intentionally drove up the price of electricity in the state by shutting off its power generation to create the false appearance of a shortage. According to the indictment, the plan worked, and Reliant Energy Services allegedly reaped millions in illegal profits.

These charges are the first ever brought against a corporate entity for engaging in fraudulent and manipulative trading practices during the California energy crisis of 2000-01. During the crisis, Reliant Energy Services's parent company, then known as Houston Industries Power Generation, Inc., was one of the "Big 5" electricity generators that had purchased power plants in California after deregulation forced its utilities to divest their plants between 1997 and 1999. The company acquired five electric power generation plants in California, known as Coolwater, Ellwood, Etiwanda, Mandalay, and Ormond Beach. In 2000, it operated the plants and marketed electricity within the state through Reliant Energy Services, its wholly-owed subsidiary and the defendant named in today's indictment. Reliant Energy Services is a Delaware corporation and is headquartered in Houston, Texas.

According to the criminal indictment, the defendants engaged in a conspiracy and scheme to defraud the California electricity market and its participants, and to manipulate and attempt to manipulate the price of electricity in California. The indictment alleges that in June 2000, defendant Lisa Flowers held a long trading position in the so-called "term" market for future deliver of electricity at the Palo Verde, Arizona trading hub. On the morning of Monday, June 19, 2000, prices in the relevant California electricity markets fell dramatically. Based on Ms. Flowers' trades and then-current market prices, Reliant's West Power Trading Division faced an unprecedented multi-million dollar financial loss.

The indictment alleges that in order to reverse Reliant Energy Service's losing financial position, the defendants devised an illegal scheme to drive up the price of electricity in California by shutting off the majority of the company's power generation plants, intentionally creating the appearance of an electricity shortage, and disseminating false and misleading information to the market that wrongly attributed the shut-downs to environmental limitations and maintenance problems. According to the indictment, Reliant Energy Services's manipulation worked, and prices for electricity rose throughout the remainder of the week for all market participants in the California spot and term markets.

The indictment alleges that as a result of the defendants' fraud and manipulation, the California Power Exchange ("PX") day-ahead market and the Independent System Operator ("ISO") "real time" market published artificially inflated spot prices for electricity which were accessed by market participants throughout California. These electricity markets ultimately charged all market participants artificially high prices for day-ahead, real-time and "out-of-market" (emergency) electricity and energy services purchased during the period of the manipulation. Among the victims of the allegedly manipulated, artificially inflated prices for electricity was Pacific Gas & Electric Co. in San Francisco, which acquired electricity for its retail customers through these markets.

The indictment alleges that once the defendants achieved the artificial inflation of prices, Reliant Energy Services proceeded to turn certain of the company's plants back on in order to sell its power to California's grid manager, the ISO, for as much as $750 per megawatt hour (the federally-imposed price cap at the time). According to the indictment, the defendants also proceeded to sell the company's previously losing financial position in the term market, which had become profitable because of Reliant's manipulative scheme.

The charges returned by the grand jury today against each of the individuals and against the corporate defendant Reliant Energy Services are conspiracy to commit wire fraud and commodities manipulation, in violation of 18 U.S.C. § 371; wire fraud, in violation of 18 U.S.C. § 1343; and manipulation and attempted manipulation of the price of a commodity in interstate commerce, in violation of 7 U.S.C. § 13(a)(2).

Attorney General John Ashcroft stated, "The vast majority of American companies are businesses of integrity. The vast majority of corporate executives are honest, hard-working people. But when a company conducts itself in the manner Reliant Energy Services is alleged to have acted here, it will face severe consequences. When evidence shows that a company's corporate culture breeds corruption and disrepect for the law, the Department of Justice will not hesitate to bring criminal charges against the company itself."

"The Department of Justice expects every corporation to comply scrupulously with the law, to have internal systems that effectively identify criminal conduct committed by its employees, to disclose promptly to the government any such criminal conduct, and to cooperate fully in our investigations," said Assistant Attorney General Christopher A. Wray of the Criminal Division, a member of the President's Corporate Fraud Task Force. "When those expectations are not met, a corporation can expect to face criminal charges. This indictment demonstrates that we can and will bring criminal charges against a corporation when its conduct, and its actions in response to an investigation, show that criminal prosecution is necessary to deter future misconduct and impose required reforms."

U.S. Attorney Kevin V. Ryan, a member of the President's Corporate Fraud Task Force, said, "A market controlled by fraud is not a free market. By shutting off power plants to boost the cost of electricity, Reliant's conduct is alleged to have left millions of consumers vulnerable to the higher costs and potential blackouts at the beginning of one of the worst energy crises in history. Faced with evidence of widespread fraud within the company, Reliant chose to be uncooperative during the federal investigation. As a result, the grand jury and the Justice Department send an important message today to corporate America and consumers: Even a Top Five energy company can and will face criminal prosecution if it engages in far-reaching criminal conduct and fails to take immediate steps to disclose and clean up its act."

FBI Director Robert Mueller, also a member of the Corporate Fraud Task Force, stated, "Today's indictments demonstrate the FBI's dedication to investigating corporate greed at all levels, as corporate fraud impacts not only individual victims but the entire economy as well. It is vitally important that all citizens be able to trust the reliability of America's corporations and our energy markets."

If convicted, the maximum penalty for the corporation, Reliant Energy Services, for each count of conspiracy and wire fraud is the greater of $500,000, or twice the gross gain or gross loss to the victims of the scheme, and up to five years probation. The corporate maximum penalty for commodities manipulation is the greater of $1 million, or twice the gross gain or gross loss to the victims of the scheme, and up to five years probation. The maximum statutory penalty for the individual defendants charged with a violation of conspiracy to commit wire fraud and commodities manipulation and with each violation of wire fraud is five years imprisonment and a $250,000 fine, or twice the gross gain or gross loss to the victims of the scheme. The maximum statutory penalty for a violation of commodities manipulation is five years imprisonment and a $500,000 fine, or twice the gross gain or gross loss to the victims of the scheme. However, any sentence following conviction would be dictated by the Federal Sentencing Guidelines, which take into account a number of factors, and would be imposed in the discretion of the Court.

An indictment simply contains allegations and all defendants are presumed not guilty unless and until convicted.

Arrest warrants have been issued for Thomas, Howard, Frankeny and Flowers, but are stayed until noon on April 9, 2004. The individual defendants will have the opportunity to self-surrender and make their initial appearances in federal court in San Francisco on April 9 at 9:30 a.m. before Magistrate Judge James Larson.

The prosecution is the result of an 17-month investigation overseen by the U.S. Attorney's Office, with the assistance of Trial Attorneys from the Antitrust Division of the Department of Justice and Commodity Futures Trading Commission (CTFC), as well as special agents of the Federal Bureau of Investigation. In addition, the CFTC and the Federal Energy Regulatory Commission have provided ongoing assistance in connection with the investigation. Patrick D. Robbins, Chief of the Securities Fraud Section, and Special Assistant U.S. Attorneys Lisa Tenorio-Kutzkey and Kathy Banar are prosecuting the case in the Northern District of California, with the assistance of Legal Assistants Katie Cannuli and Elaine McCoy.

A copy of this press release may be found on the U.S. Attorney's Office's website at <>. Related court documents and information may be found on the District Court website at <> or on <http://pacer.cand.uscourts/gov.>

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