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Whistleblowers are not PowerlessEmployee Advocate – DukeEmployees.com – May 8, 2003
Most whistleblower articles imply that the company holds all of the cards. The playing field may now be a lot more level, according to the Dallas Morning News. Whistleblowers now have the Sarbanes-Oxley Act in their arsenal.
Some analysts commenting on the TXU Corp. whistleblower lawsuit say the company cannot win.
Stephen Kohn, chairman of the National Whistleblower Center, said "In a typical whistle-blower case, the employer will almost always lose -- even if they win the employment case -- because of the increased regulatory scrutiny that often follows a valid whistle- blower claim."
The suit was filed by a former executive, William J. Murray. He claims that he was fired for asking accounting practices questions internally. He also asked about financial public disclosure.
When the executives have had enough and start coming clean, the game is about over. Does this help explain the millions of dollars often paid to parting executives? It is not called hush money (how crass). It’s called a separation bonus, a departing gift, a severance package, or anything else, except hush money.
A lot of things seem vaguely familiar about this case. TXU cut the dividend by 80 percent. Executives had repeatedly promised investors that they would not cut it. This incident perked the interest of the SEC. The stock price is down over 75 percent.
It is about time the whistleblowing matter starting shifting in favor of the employees. Many workers who have been holding back, because they thought the deck was stacked against them, may now come forward. The line forms at the right.
DA’s Were Watching DukeThe Charlotte Observer – by Stan Choe – May 5, 2003
They were considering a probe until federal agents stepped in
(5/4/03) - Before the U.S. attorney swooped in three months ago to investigate allegations that Duke Power underreported regulated profits, two N.C. district attorneys considered launching their own probe.
The local prosecutors, Peter Gilchrist of Mecklenburg County and Colon Willoughby of Wake County, said they decided instead to follow standard protocol and let federal authorities handle the case. The U.S. Attorney's Office, they said, has wider jurisdiction and more powerful tools, such as use of grand juries and the Federal Bureau of Investigation.
The local prosecutors said they still could legally push for their own investigation, but called that unlikely.
N.C. Attorney General Roy Cooper's office, too, is watching the federal investigation into whether Duke committed a crime. That office typically follows the lead of district attorneys in such cases, officials say.
With Duke Power's service area stretching from Durham to the South Carolina/Georgia border, and parent company Duke Energy Corp.'s global reach, federal authorities are better equipped to handle such a job, the local prosecutors said.
"If there's something there, (the U.S. attorney) will find it," Gilchrist said. "They have a much greater chance of discovering something."
Duke Power spokesman Tom Williams said the company would cooperate with any agency that launched a new investigation, as it says it has with federal authorities.
Until they read a Duke news release in February announcing the federal probe, Gilchrist and Willoughby said, they were ready to press ahead with a joint local investigation.
"We were going to start making some inquiries into looking into it," Gilchrist said.
Gilchrist and Willoughby first began thinking about their own investigation last year after an independent auditor accused Duke of intentionally underreporting $124 million in regulated profit from 1998 to 2000.
Grant Thornton LLP, which conducted a 10-month investigation for Carolinas regulators, said Duke attempted to mislead utility commissioners and avoid a possible rate decrease for customers.
Duke has acknowledged that it made accounting errors but denies it acted intentionally. It settled with Carolinas regulators last year, agreeing to pay $25 million in fuel-cost increases, which customers normally pay.
After reading the publicly available audit and Duke's response last year, Willoughby called experts in utility regulation for help in deciphering them. The Grant Thornton report was steeped in accounting procedure and lingo.
As Gilchrist and Willoughby were studying the audit early this year, they learned the U.S. Attorney's Office had launched an investigation. Had the two conducted their own probe, they would have used State Bureau of Investigation agents.
"If (the U.S. attorney) had chosen not to investigate, then we would have had to make a hard decision whether or not to do our own," Willoughby said.
Duke’s Former Corporate Controller LeavesDow Jones – by Mary Ellen Lloyd – April 22, 2003
(4/18/03) - CHARLOTTE, N.C. -- A high-ranking financial official with Duke Energy Corp.'s Duke Power unit has left the company.
Duke spokesman Tom Williams on Friday confirmed Jeffrey L. Boyer, a 25-year employee and the former corporate controller of Duke Energy, is no longer with the company.
Mr. Boyer was a vice president for planning and finance at Duke Power when he left, Mr. Williams said. He was corporate controller, Duke's principal accounting officer, from 1997 to 1999, which includes the period an auditor hired by state regulators said Duke Power inappropriately made accounting changes that shifted expenses from its unregulated enterprises to its regulated utilities.
Mr. Williams wouldn't say when Mr. Boyer left or under what circumstances. He wouldn't comment on whether the departure was related in any way to the audit or any investigation of the allegations.
"We don't talk about why people are no longer with the company," Mr. Williams said.
Directory assistance had no telephone listing for Mr. Boyer, whose age was listed as 42 in Duke Energy's 1999 10K filing with the Securities and Exchange Commission. The Charlotte Observer in Friday's edition said Mr. Boyer had referred questions to an attorney the newspaper didn't name. The attorney was out of the country and unavailable for comment, the newspaper said.
Duke said it made some accounting mistakes and denied intentional wrongdoing but settled the charges last year, paying a $25 million settlement to the two states. Mr. Williams wouldn't comment on an ongoing federal grand jury investigation into Duke's accounting practices during the period.
Duke Executive Pleads IgnoranceThe Charlotte Observer – by Stan Choe – March 9, 2003
(3/8/03) - The U.S. Department of Labor has ruled against a Duke Power whistleblower who claimed his bosses retaliated after he tipped off regulators to accounting irregularities at the utility.
The Labor Department's Occupational Safety and Health Administration said it found either insufficient evidence or that Duke's actions preceded the Sarbanes-Oxley Act, which protects whistleblowers.
The whistleblower, Duke accountant Barron Stone, said he will appeal OSHA's decision and take his case to federal court.
Stone and his attorney said the OSHA investigator wasn't well-enough versed in the Sarbanes-Oxley Act, which went into effect last summer, to conduct a thorough investigation.
Duke Power spokesman Tom Williams said, "We think the Labor Department reached a logical conclusion and believe the preliminary finding speaks for itself."
Stone, who continues to work at Duke, lodged the complaint after he was moved against his will from one senior analyst's job in the controller's office to another. His previous job put him on a better career path, he said. He also had to move from a private office to a cubicle; his pay remained the same.
Duke says the executive in charge of the reorganization, which moved 13 people, didn't know Stone was the whistleblower at the time. Stone disagrees.
OSHA found that "evidence collected and credible testimony failed to produce any indication of management retaliation," according to a letter it sent Stone.
Stone triggered a joint investigation by the N.C. Utilities Commission and the S.C. Public Service Commission when he alerted regulators in 2001 to his suspicions over Duke Power's accounting practices. An auditor hired by the states said Duke intentionally underreported $124 million in profits between 1998 and 2000, in a possible attempt to avoid a rate decrease.
Duke, the Carolinas' largest utility, denies intentional wrongdoing, and it settled with the commissions for $25 million.
A federal grand jury is investigating Duke's accounting.
Stone and his attorney, Gerard Bos, said they will file an objection with the Labor Department, which will send the case before an administrative law judge. After that hearing, Stone can -- and will -- appeal to the federal court, Bos said.
"We feel our chances are much better with a judge than with an investigator," Stone said.
OSHA has so far received about 50 complaints from whistleblowers about management retaliation under the Sarbanes-Oxley Act and has ruled on about a dozen of them, a spokesman said.
The spokesman said he couldn't comment on Stone's case, as it's still open.
Stone filed his complaint under federal laws because states seem to protect whistleblowers only after they're fired, Bos said. The Sarbanes-Oxley Act protects such workers from demotions, harassment and other retaliation while still on the job.
Whistleblower SetbackDow Jones Business News – by Mary Ellen Lloyd – March 8, 2003
(3/7/03) - CHARLOTTE, N.C. -- An investigation by the U.S. Department of Labor found Duke Energy Corp. didn't violate a new federal law protecting whistleblowers, according to a letter sent to both attorneys for Duke and for employee Barron Stone.
"Evidence collected and credible testimony failed to produce any indication of management retaliation and/or pretext for these alleged adverse employment actions," said Cindy Coe Laseter, Atlanta regional administrator for the Labor Department's Occupational Safety and Health Administration, in a letter dated Monday and released Friday by Duke.
Mr. Stone's attorney, Gerard Bos, said he hadn't seen the letter yet but " absolutely" planned an appeal, based on what the OSHA investigator told him about the decision.
A Duke spokesman said the agency reached the same "logical conclusion" Duke had.
"We believed all along that we were dealing with this matter properly and the Department of Labor tends to agree," said spokesman Randy Wheeless.
Mr. Stone, a senior forecast analyst at the company's Duke Power unit, in November filed a complaint saying he was "harassed and demoted" as a result of his report of questionable accounting changes to authorities, including the Securities and Exchange Commission.
Mr. Stone's questions over accounting led to a $25 million settlement between Duke Power and state regulators in the Carolinas.
His was among the first complaints filed under the Sarbanes-Oxley Act, which took effect July 30. Section 806 of the act protects any employee providing information to the federal government or a supervisor regarding what the employee believes is a violation of federal securities law or any provision of federal law relating to fraud against shareholders.
OSHA's decision in Mr. Stone's complaint against Duke is among the first issued since the agency became responsible for investigating whistleblower complaints under the Sarbanes-Oxley Act.
Of about 50 complaints filed so far, OSHA has issued preliminary decisions in about a dozen, an agency spokesman said.
Mr. Stone claimed in his complaint with federal authorities that he was moved from his job in financial forecasting to handle special projects, of which Duke initially had done. He also said he was rejected for other positions for which he is qualified and said he received several "grueling interrogations" by Duke Energy personnel in connection with his reports to regulators.
Duke on Feb. 17 said a federal grand jury has requested documents related to the audit ordered by regulators in the Carolinas as a result of Mr. Stone's allegations. Mr. Stone has said he met with Federal Bureau of Investigation agents last month in that investigation.
OSHA said this week that of 12 allegations made by Mr. Stone, 40, during the investigation, eight were ruled out either because they involved actions before July 30, the date Sarbanes-Oxley was enacted, or because of other jurisdictional issues. Among the remaining allegations, OSHA said its investigation found it was "reasonable" to believe Duke hadn't violated Sarbanes-Oxley.
Mr. Stone has 30 days to file objections and request a hearing with an administrative law judge. Mr. Bos, Mr. Stone's attorney, said he is also investigating whether he can appeal immediately in federal court.
Mr. Bos said he couldn't yet comment on what grounds for appeal he might cite. But he complained that some issues were inadequately explored because the investigator seemed overwhelmed by the case and didn't know how to interpret the new law.
"The investigator was an OSHA investigator," Mr. Bos said. "He's used to going into factories, where he's looking for bad ladders and things of that nature."
Doug Hartnett, a staff attorney with the Government Accountability Project, called Mr. Bos' concern valid.
"These are going to be different kinds of complaints than OSHA usually handles," he said. "We do have concerns (investigators) don't have the subject- matter expertise."
The Washington, D.C., Government Accountability Project is a nonprofit public interest group and law firm that litigates whistleblower cases and develops policy and legal reforms related to whistleblower concerns. Mr. Hartnett said the organization has been tracking OSHA decisions but hasn't yet drawn any conclusions from those made so far.
Laura Effel, a Roanoke, Va., lawyer who is representing Cardinal Bankshares Corp. in a complaint filed against it, noted complainants cannot file lawsuits until either the federal government dismisses the complaint or 180 days pass without a decision. Given that timeline and how new Sarbanes-Oxley is, she expects more decisions in coming days.
"I think we're just beginning to see these cases," she said.
Ms. Effel hadn't seen the decision in the Stone/Duke case and couldn't comment on possible implications for future cases.
But she disputed the idea that OSHA investigators are unqualified. " Whistleblowing claims are not unusual for OSHA," she said. "Just because (the complaints) arise under some other statute and these new claims involved accounting, that doesn't mean that this investigator doesn't know what to do."
FBI Continues Duke Criminal InvestigationThe Charlotte Observer – by A. Griffin, S. Choe, T. Reed – February 21, 2003
(2/20/03) - The N.C. Utilities Commission confirmed Wednesday that four of its officials have met with federal agents as part of a grand jury investigation into Duke Power's accounting practices.
Federal Bureau of Investigation agents met last week with N.C. Utilities Commission lawyer Bob Bennink, chairwoman Jo Anne Sanford, commissioner Sam Ervin IV and Don Hoover, the regulatory agency's operations director.
"We were just made aware of the fact that there was an investigation under way and that there would be subpoenas issued," Bennink said.
Duke Energy Corp., Duke Power's parent company, said earlier this week that the Western District of North Carolina grand jury had subpoenaed documents relating to Duke's 1998-2000 accounting.
Duke, the Carolinas' largest utility, with 2.1 million customers, has acknowledged minor accounting mistakes but said none was intentional. The probe is one of a half-dozen civil cases and criminal investigations involving Duke Energy. Most of its legal fights center on its wholesale energy and trading division and are occurring in places such as California, Texas and Washington, D.C.
The federal investigation in North Carolina appears limited to Duke Power and is the first criminal investigation of a public utility in recent memory in the Carolinas. The only other criminal investigation of a regulated utility Carolinas regulators could remember Wednesday was an illegal campaign-contribution case in the 1970s against Southern Bell Telephone Co., now BellSouth.
Last year, an independent audit by accountant Grant Thornton LLP concluded that Duke underreported $124 million in profits, seeking in some cases to mislead regulators. Utilities commissions in both states regulate profit margins for energy companies.
The company reached settlements last year with regulators in both Carolinas after a 15-month investigation.
After rising from a small Southern utility into an international energy player, Duke has been walloped recently by the same investigations and plummeting power prices that have ravaged the industry.
Duke says it will vigorously defend itself and its employees.
Robert Gruber, head of the N.C. commission's public staff, said he was surprised by the federal probe. The public staff represents consumers in rate cases and helped commissioners in their study of the accounting changes.
"I don't know what possible crime has been committed," Gruber said. "... I am surprised. I don't know what potentially they're talking about, just speaking as a lawyer."
But Tom Ashcraft, a former U.S. attorney now in private practice in Charlotte, said in general federal prosecutors begin investigations with a broad range of potential charges and whittle them down over time. The list starts with mail fraud, he said.
George M. Anderson, another former U.S. attorney, now in private practice in Raleigh, said investigations often last a year before prosecutors decide whether or how to charge companies.
"Especially with companies as big as Duke Energy ... it's going to take a long time," he said.
Sharon Miller, executive director of the Carolina Utility Consumers Association, was not surprised by news of a grand jury inquiry. The association represents some of the state's biggest power customers, large manufacturers and industrial clients such as R.J. Reynolds and GlaxoSmithKline.
The group has consistently argued for lower power rates for its members and a deeper investigation of Duke's books.
"The Grant Thornton report clearly produced documents that showed these were intentional acts," she said. "This merits full investigation."
FBI agents have also interviewed S.C. regulators and Barron Stone, the Duke accountant who tipped off regulators to Duke's accounting changes.
Gary Walsh, executive director of the S.C. Public Service Commission, said agents who interviewed him Jan. 31 "wanted to be educated on the audit. I was advised that the grand jury investigation was in the first step of the process of the U.S. attorney being able to subpoena documents."
The audit accused Duke of intentionally manipulating its accounting to come in under the profit margins allowed by the states. If it had gone over, regulators could have reduced the rates customers pay.
Duke spokesman Tom Williams said Wednesday he was unaware of any Duke employees being interviewed by the FBI except for Stone. N.C. officials would not discuss details of their conversation with federal investigators.
The FBI could not be reached for comment Wednesday.
Duke’s Legal FrontsThe Charlotte Observer – February 21, 2003
(2/20/03) - Most of Duke Energy’s legal battles center on its role in the 2000-01 energy crisis that rocked California, which for months suffered rolling blackouts. California and many of its residents accuse Duke and outer energy companies of withholding power to drive up prices. Duke denies wrongdoing.
* The Federal Energy Regulatory Commission and the U.S. attorney in San Francisco are looking into whether Duke and other energy companies manipulated the wholesale market to boost profits. FERC Commissioner Nora Brownell said last week her commission could rule on the matter by this spring.
* Several California residents have consolidated class-action lawsuits against the state’s energy generators, including Duke, in a California Superior Court in San Diego.
* Burbank, Calif., has asked FERC to break its contract with Duke for long-term power, saying the prices are too high. Sacramento asked FERC for a similar deal; it settled with Duke instead on a new long-term contract at undisclosed new terms.
Duke and other energy companies are also facing legal pressure over so-called round-trip trades, where companies buy and sell power simultaneously at the same price. The practice can make demand appear grater, which can drive up prices.
* The Commodity Futures Trading Commission, U.S. attorney in Houston and Securities and Exchange Commission are investigating the round-trip trading.
Duke spokesman Pat Mullen said the various regulatory agencies often are seeking the same data in their respective investigations. Duke is cooperating fully, he said.
Duke Confirms Criminal ProbeAssociated Press – February 19, 2003
(2/18/03) - CHARLOTTE, N.C. - An accounting controversy in which Duke Power Co. was accused of underreporting profits in North and South Carolina has become a federal criminal probe, the company confirmed.
Duke Power said it received a subpoena Friday from a federal grand jury seeking documents related to last year's audit of the utility's accounting between 1998 and 2000.
The audit, conducted by Grant Thornton LLP at the request of regulators from North Carolina and South Carolina, concluded that Charlotte-based Duke Power devised a plan to underreport earnings by nearly $124 million during the three-year period.
Last year, Duke Power paid a $25 million settlement to the two states. The settlement included no admission of intentional wrongdoing; the company has said only that it made some accounting errors.
"Now, it's being looked at at the federal level," Duke spokesman Tom Williams said Tuesday. "We're going to be fully cooperating. But having said that, we're going to fully defend our employees and our company if we have to."
Both U.S. Attorney Bob Conrad Jr. and the head of the North Carolina operations for the FBI, Chris Swecker, declined to comment Tuesday.
Gary Walsh, executive director of South Carolina's Public Service Commission, said he was interviewed by FBI agents on Jan. 31. He said he spent several hours detailing the accounting irregularities documented in the Grant Thornton audit.
The possibility that Duke intended to underreport its profits, "made it a criminal case, that's what I was told," Walsh said Tuesday.
"My view from the very beginning was that in fact Duke Power did implement a plan to ensure that they did not report earnings to the South Carolina Commission that were in excess of what was authorized," Walsh said. "In the information that I reviewed, they went so far as to calculate how many dollars of adjustment they had to make in order to insure they did not file in excess."
Jo Anne Sanford, head of the North Carolina Utilities Commission, declined to comment on the federal investigation, saying the commission has concluded its proceedings on the issue.
Shares in Duke Power's parent, Duke Energy, rose 28 cents to close at $14.43 each in Tuesday trading on the New York Stock Exchange.
Concerns about Duke's accounting practices were first raised by Duke accountant Barron Stone, who contacted South Carolina regulators in 2001. He said Duke excluded refunds it received from nuclear-plant insurance and included executive compensation and other costs that should have been charged to shareholders.
As a public utility, Duke Power's income is capped by regulators. If profits rise above a set return level, the states can reduce consumer rates. Duke is allowed a 12.25 percent return in South Carolina and a 12.5 percent return in North Carolina.
The bulk of the underreported $124 million involved $84 million in insurance rebates from Duke's nuclear power plants. In 1998, the company stopped including the rebates in utility accounts, effectively reducing its regulated returns.
In an audit released last October, Boston-based Grant Thornton concluded that "Duke undertook a coordinated effort to identify and record (entries) which would lower Duke's net utility operating income reported to the state commissions."
Duke has disputed the "tone and presentation" of the Grant Thornton report, arguing that the company did not intend to mislead state regulators. "There are 'expert opinions' on both sides of complex issues, particularly the issue of nuclear insurance distributions," the company said in a response to the Grant Thornton report.
"The main reason why we settled is that we acknowledged we should have had better communications with the commissions, particularly when we made the (1998) change around nuclear insurance distribution," Williams said Tuesday. "We should have talked with the commissions."
Duke Saw Slowdown, Kept MumTheStreet.com – by Melissa Davis – February 19, 2003
(2/18/03) - In October of 2001, as Enron prepared to shock Wall Street with a huge earnings shortfall, rival Duke was pondering a big surprise of its own.
The North Carolina energy giant was set to report third-quarter earnings that would topple expectations. The numbers looked particularly strong in energy trading, a business pioneered by Enron and one that Wall Street continued to embrace as especially lucrative and rewarding.
Duke's "problem," if you will, was that third-quarter earnings were so high -- and beating the Street, by more than a penny or two, promised only limited rewards. Nevertheless, Duke went on to report ongoing quarterly profits of $1.02 that beat consensus estimates by 26 cents and set a company record that remains intact today.
But Duke filed that earnings report only after a telling private debate among high-level company executives, according to an internal Duke accountant who's raised concerns about the company's bookkeeping. He says that less than a week before releasing its third-quarter numbers, Duke was still weighing the idea of taking various charges -- including a big write-down that would have reflected a cooling view of the still-hot merchant energy business.
"The company would have liked to have held back some of those earnings for a rainy day," says Barron Stone, who served as a senior forecast analyst for the company at the time. "Because the storm did come. And there was information on the table that leads one to believe we saw the future then."
For its part, Duke insists it had no way of forecasting the meltdown that was coming. "It's unfair to criticize the company for not seeing [the future] in a crystal ball," said Duke spokesman Randy Wheeless.
Wheeless declined to elaborate on the matter further. But Stone's account suggests that Duke knew in 2001 that the merchant energy business looked far less rosy than the company and Wall Street were forecasting. Even so, Duke continued to boast about opportunities in the sector -- until last fall, when it became one of the last energy traders to publicly back away from its expectations.
That sudden turnabout, coupled with more recent setbacks, triggered sharp declines that have left Duke's stock trading at 12-year lows. The stock shed 9 cents to close Friday at $14.15, more than 50% below October 2001 levels.
Stone's concern about Duke's accounting had been building for years. And that concern is clearly reflected in emails -- coupled with internal correspondence and forecasting documents -- that Stone shared with regulators and, more recently, TheStreet.com.
In an email dated Oct. 4, 2001 -- 12 days before Duke released third-quarter results to the public -- Stone told the Securities and Exchange Commission that Duke had identified steps to intentionally trim its third-quarter earnings from $1.11 to $1 a share. He was particularly troubled by Duke's plan to suddenly "pre-fund" three years' worth of contributions to the Duke Foundation, a charitable organization run by employees of the company itself.
"There may be a valid justification for pre-funding a charitable activity such as this from an accounting standpoint," Stone says. "But I'm not aware of what that justification would be."
Robert Lipe, KPMG Centennial Professor of Accounting at the University of Oklahoma, saw no problem with booking the big donation -- if the company had already committed to contributing that particular amount. He was more troubled by the idea of a company taking specific steps to shave its earnings in general.
"Does that sound somewhat disingenuous?" Lipe asked. "It's not exactly the way I'd like to put my accounting numbers together."
Stone apparently wasn't the last person troubled by the foundation charge. In a January follow-up to the SEC, Stone said other employees questioned the multiple-year charity funding that, in the end, was booked in the final quarter of 2001. After his colleagues allegedly mentioned possible "earnings management," Stone stepped forward and asked what Duke's outside auditors would think.
"At this point, [my boss] stated, 'Maybe I should just take these handouts up,' and seemed to get nervous over the questions being asked," Stone told the SEC.
But back in October of 2001, Stone had fixated on bigger things. Duke's merchant energy division was pitching a plan to cut earnings by 15 cents a share -- or by three times more than the pre-funded donations -- using a charge that Stone felt was questionable at best.
Duke was now looking to establish a $183 million reserve to cover penalties associated with canceling turbine orders from General Electric. But the third quarter, when Duke hoped to take the charge, had already closed without Duke apparently even negotiating the matter with GE, Stone says.
Looking back, Stone now sees an ominous warning -- transmitted internally by his own company -- of the downturn to come.
"I don't think you talk about booking a reserve like that unless you have serious concerns about the health of that business," says Stone, who was transferred out of forecasting after going to authorities with his concerns about Duke's accounting. "But this issue never came up in public until another year later.
"And by then, Duke was already going to hell in a hand basket."
Duke told TheStreet.com that it took the turbine charge when it could "properly account for the impact." But internal emails show the company considered taking the charge nearly a full year earlier. Indeed, Duke continued to toy with the idea until the 11th hour.
"There is still some possibility that it could be booked in the third!" division CFO Kirk Michael wrote in an email five days before Duke wrapped up its third-quarter 2001 earnings report. "Stay tuned: This is going to be exciting!!"
Ultimately, the proposal landed on the desk of CEO Rick Priory, who decided against the charge right before the earnings release.
The company did, however, take smaller charges -- also related to merchant energy -- that Stone viewed as conveniently timed. Specifically, Duke established reserves to cover the future demolition of power assets the company had apparently planned to destroy since inheriting them through an acquisition three years earlier.
"What makes establishing these reserves viable now?" Stone asked in an email to the SEC a week before the charges were booked. "Are we doing all this simply because it is to our benefit from an earnings standpoint now vs. other times?"
Lipe also saw problems with this particular charge, since the demolition work had apparently not even begun. The company itself adamantly insists that it did nothing to manage earnings.
"We do not manage earnings," Wheeless said. "That's just not how we do business here at Duke Energy."
Wheeless went on to say that Duke has never been contacted by the SEC about the earnings report in question. As a matter of policy, the SEC doesn't comment on any dealings with companies.
Duke itself didn't stay focused on the turbine issue for long. Talk of turbine cancellations -- so hot just days earlier -- abruptly ended when the company filed its third-quarter 2001 report. After that, Stone says, Duke set out to erase even leftover traces of the debate.
"My fellow forecasting teammates and I were told verbally to discard any of the information/scenarios that discussed the GE turbine initiative," Stone said. "It was like an issue that was talked about and then totally vanished."
But Duke had already laid out clear, if unexecuted, plans to cancel turbines ordered for the construction of power plants. And Stone had to wonder: Why would Duke be willing to pay a steep penalty to cancel the turbines unless not canceling them looked even more expensive in the end?
Going forward, Duke itself portrayed none of Stone's uneasiness. Even as industry experts began to rumble about "overbuilding" in the power sector, Duke insisted that opportunities were ripe and its own strategy was quite sound. In February 2002, for example, the company told local North Carolina media that its cautious risk-management strategy would make Duke immune to any fallout from gluts in supply. Two months later -- after reporting disappointing results for the first quarter -- Duke reiterated its plan to build more power plants and even predicted that new generation would significantly boost earnings by the third quarter and allow the company to deliver on its promise of up to 15% in annual profit growth for 2002.
But information inside the company, available more than half a year earlier, did not support those claims. Stone said as much in an Oct. 25, 2001, email to the SEC, when Duke was in the midst of developing budgets and forecasts for the following three years.
"The initial cut of what got turned in doesn't support what Mr. Priory has told analysts," Stone told the SEC. "As a matter of fact, there is no growth for 2002 over 2001 or 2003 over 2002."
Those internal forecasts, unavailable to the general public, proved to be correct. On Sept. 20, 2002 -- nearly a year after Duke first considered halting its turbine orders -- the company suddenly announced that business had taken a turn for the worse. The company formalized plans to halt construction of three power plants, warning of a hefty third-quarter charge as a result, and slashed earnings guidance for both 2002 and 2003.
"Up until the third quarter, we really didn't see the drastic downturn," Duke spokesman Terry Francisco insisted this month. "The very young merchant energy sector ... really became depressed in 2002 unlike anything many people expected."
Stone's comments, of course, counter Duke's professed surprise. Meanwhile, Duke is clearly trying hard to talk about anything but its merchant business.
In recent discussions with the investment community, Duke has repeatedly stressed that 80% of its future earnings will come from regulated, rather than riskier unregulated, businesses. But formal documents show that these "safer" earnings can be manipulated as well.
It was in late 1998 -- just after South Carolina regulators determined that another utility was earning too much profit -? when Stone first began to grow uneasy. Duke had authorized a special project aimed at cutting the profits its own utilities reported to North and South Carolina regulators but leaving the company's overall bottom line unchanged. And the project, which relied heavily on accounting maneuvers, was a clear priority.
During a staff meeting on the matter, Duke executives in fact stressed that there was "a risk to the company" if the project failed. Such comments are documented in a state-ordered investigation triggered by Stone's tips to regulators. After raising futile protests internally, Stone said he felt ethically obligated -- as a certified accountant -- to blow the whistle on his employer.
"By 2001, it had become apparent to me that the two state commissions weren't going to catch it -- because it had been reported that way for three years -- and that management wasn't going to change it," Stone said. "And I just thought it was wrong."
Stone is convinced that his decision to step forward cost him his position in forecasting, although Duke denies this and continues to employ Stone in an equal-paying job. Nevertheless, Stone has gained some vindication.
On Friday, Duke fielded a grand jury subpoena for documents related to its Carolina utility profits. This new investigation comes less than four months after the state-ordered outside">audit conducted last year by Grant Thornton, determined that Duke had intentionally underreported utility profits by nearly $124 million between 1999 and 2001. Duke has publicly disputed some of Thornton's accounting judgments as mere "differences of opinion." But Carolina regulators have sided with Thornton, as have utility customers. Unhappy with a modest $25 million in promised refunds, some of Duke's largest customers have renewed their calls for a full-scale investigation of the company's rate strategy since the release of Thornton's report.
In the meantime, Stone remains concerned that Duke may be less than forthright with the public. He says the company knows better than to tinker with earnings -- and that it even sent executives to an "earnings management" seminar, warning against the practice, just a week before the questionable turbine charge first came up.
"The seminar addressed how to deal with earnings management," Stone recalled. "And it essentially said, 'You don't do it -- up or down.'"
Grand Jury Probes DukeThe Charlotte Observer – by Ted Reed, Gary Wright – February 19, 2003
(2/18/03) - A federal grand jury is investigating Duke Power, apparently looking into whether the Charlotte-based utility committed criminal acts in accounting.
Duke Power parent Duke Energy Corp. said Monday that it has received a subpoena from the Western District of North Carolina grand jury for documents related to last year's independent audit of Duke Power's 1998-2000 accounting. The company said it will cooperate.
The audit by accountant Grant Thornton LLP concluded that Duke underreported $124 million in profits, seeking in some cases to mislead regulators.
FBI agents, investigating for the grand jury, have interviewed Gary Walsh, executive director of the S.C. Public Service Commission, and Duke accountant Barron Stone, the first to raise questions about Duke accounting.
"They asked me to explain the accounting irregularities," Walsh told The Observer. "I was told by the FBI that the appearance that it was an intentional act to underreport earnings made it criminal."
Stone said he referred FBI agents to key documents. "There are 13,000 documents and 30-some depositions," he said. "I think I enhanced their knowledge. ... I am convinced that Duke acted intentionally."
Duke has acknowledged minor accounting mistakes but said none was intentional. It subsequently reached settlements with regulators in both Carolinas. With 2.1 million customers, Duke is the Carolinas' largest utility.
U.S. Attorney Bob Conrad would not talk about whether the federal government is investigating Duke Power.
Chris Swecker, head of the FBI in North Carolina, and Mark Calloway, former U.S. attorney for the Western District of North Carolina, who represents Duke Energy, also declined comment.
Duke Power has not been contacted by the FBI, said Duke spokesman Tom Williams. He said that in response to the subpoena, the firm will make available whatever information is sought and will answer questions.
"We have done our own extensive review and found there was no intentional wrongdoing," Williams said. After the audit was released, the company disputed key portions and said it was not seeking to "manage" earnings.
Stone's complaints to Walsh in June 2001 led to the audit, which concluded that Duke feared full disclosure of its profits could lead to a cut in customer power rates. As a monopoly, Duke Power is allowed a set profit margin. If it exceeds the margin, regulators can lower rates.
Most of the underreporting relates to Duke's decision to reverse its method for reporting insurance rebates on nuclear power plants. Instead of crediting them to regulated accounts, it put them in unregulated accounts, which are not considered in setting rates. Duke has said that it believed the change was supported by accounting standards.
But Stone began challenging the accounting change in 1999, when it was first made. Over a period of a year and a half, he complained twice to supervisors but felt his complaints were ignored. He wavered between wanting to respond to a situation, which he considered wrong, and wanting to protect his career.
When Duke repeated the accounting change for a third time in 2001, Stone called Walsh.
After the audit, Duke moved to settle the allegations by offering credits of $25 million in both Carolinas to help offset higher fuel costs from June 2003 to June 2004, saving the average household about $4.
Duke also agreed to restore $50 million to its nuclear insurance reserve fund, source of many alleged accounting irregularities. The amount could be used to lower rates in either or both states, whenever Duke or the regulators decide to re-examine utility rates.
Grand Jury Reviewing Duke ReportsCharlotte Business Journal - February 17, 2003
A federal grand jury in North Carolina has subpoenaed Duke Energy Corp., demanding documents related to last year's audit in which state regulators found the company had underreported profits by $123.6 million, resulting in overcharges to customers in the Carolinas.
After the audit in October, Duke agreed to reimburse $25 million in customer payments in North and South Carolina. The reimbursement was in the form of credits. Duke denied any wrongdoing in the underreporting.
Duke got the subpoena from a grand jury of the Western District of North Carolina Friday afternoon. The company said it would fully cooperate with the inquiry.
The state commissions selected accounting firm Grant Thornton to review Duke Power Co. accounting practices after a call from a whistleblower in 2001.
Duke Power completed its own internal audit of several accounting practices in August 2001 in response to a call on its own internal ethics hotline. After Duke submitted its response, the commissions asked Grant Thornton for its opinion.
Grant Thornton's 37-page report says that Duke Power reported $64.4 million of 1998 year-end accounting entries that were "inconsistent with applicable accounting principles, inconsistent with Duke Power's past practices or without proper justification." The report also identified $24 million such entries in 1999 and $35.2 million in 2000 of such entries.
The questionable entries effectively reduced Duke's profits, according to Grant Thornton, allowing the regulated utility to maintain higher rates than would have been justified under normal accounting procedures.
Grant Thornton's report points out that the accounting changes may have been Duke's reaction to an earlier 1998 ruling by the South Carolina commission to reduce the rates South Carolina Electric and Gas Co. could charge its customers after that company reported earnings over its allowed rate of return.
Duke, however, countered that Grant Thornton's report actually confirms its earlier submissions to the commission. Duke said Grant Thornton's audit didn't differ substantially from its own findings, completed in a 10-day period at the request of the commissions. When the accounting practices were in question, Duke contended, it was because the rules were open to interpretation. Duke said it simply it interpreted the rules differently.
Duke Gets Audit SubpoenaReuters – February 17, 2003
CHARLOTTE, N.C., Feb 17 - Utility Duke Energy Corp. said on Monday it received a subpoena for documents related to an audit last year into its Duke Power unit by the North Carolina and South Carolina utilities commissions.
The company said in a statement the subpoena, received on Friday from the Western District of North Carolina Grand Jury, was for documents related to Duke Power's regulatory reporting from 1998 to 2000.
Duke said it would cooperate with the inquiry.
South Carolina's utility regulator last November approved a $6 million settlement with Duke over allegations that the energy company misreported profit for three years to keep electricity rates high.
The deal also included a settlement under which Duke, which runs the Duke Power regulated utility, set aside $19 million to compensate North Carolina ratepayers, for a total settlement of $25 million.
The deal was prompted by an independent accounting review that determined the company underreported $124 million of profit in order to avoid a mandated decrease in the rates charged to customers.
Duke officials were not immediately available for further comment on Monday.
Duke closed at $14.15 on the New York Stock Exchange on Friday, well off its 52-week high of $39.60 and just above its 52-week low of $13.