the film forum library tutorial contact

Avista Legal Woes Mount by Karen Dorn Steele, Staff Writer The Spokesman Review, November 12, 2000

Corporation dogged by energy trading probe, lawsuits by shareholders, former traders

A federal agency is investigating possible violations of energy futures trading rules at an Avista Corp. subsidiary in Houston in 1998.

Commodity Futures Trading Commission investigators want to know whether Avista Energy intentionally manipulated the futures market to drive up the price of a large electricity futures contract in the summer of 1998.

Avista Corp. is also dealing with other legal problems that occurred during the tenure of Avis- ta Chief Executive Officer Tom Matthews, who was replaced last month as CEO and resigned as chairman of the board Friday.

Matthews has said he became a lightning rod for criticism that deflected attention from the company's successes.

The problems include lawsuits from four former Avista Energy electricity traders, who say their managers reneged on bonuses for racking up big profits for the subsidiary in 1998 and 1999.

Three of the traders' lawsuits have been settled for undisclosed amounts, the latest one last week.

In addition, Avista is preparing to defend four shareholder lawsuits over the financial hits investors took this year from the company's $123 million in energy trading losses at its regulated utility.

The most hush-hush of these legal wrangles involves the CFTC, an agency created by Congress in 1974 to monitor the sale of commodity futures and options markets nationwide.

The agency has issued a formal "order of investigation" to look into the alleged violations at Avista Energy, said New York attorney Michael Koblenz, a former CFTC assistant director and Eastern regional counsel.

The agency works like the Securities and Exchange Commission, which regulates and monitors stock trading.

In May, the CFTC's Division of Enforcement issued subpoenas to several current and former Avista Energy employees.

The agency wants information on “certain trading in the August 1998 Palo Verde and California-Oregon border electricity futures contracts on the New York Mercantile Exchange (NYMEX),'' according to one of the subpoenas.

Avista spokesman Steve Becker declined repeated requests for comment last week on the CFTC probe and the lawsuits against Avista.

“It's our policy not to comment on any threatened or pending litigation,'' Becker said.

Koblenz is representing Luis Pando, a former Avista Energy senior analyst and trader, in the CFTC investigation.

Pando worked at Avista from August 1997 through March 1999 and now works for Southern California Gas Co. in Los Angeles.

Pando is also one of the four Avista Energy traders who sued over their bonuses. Pando says Avista owes him at least $300,000; his case is pending.

Futures contracts have been traded for more than a century for agricultural products. In the last 20 years, the trades have expanded into many new markets, including energy.

The contracts are used by power traders to hedge against future price fluctuations of the energy market.

Although money changes hands on paper between marketers dealing with the NYMEX contracts, rarely do actual kilowatts get delivered.

The CFTC has authority to bring civil charges in administrative or federal court and can also refer alleged trading violations to the Justice Department for possible criminal charges, Koblenz said.

“Individuals could lose their licenses and be fined, or be asked to disgorge some of their profits. The same penalty applies to the corporate structure,'' Koblenz said.

CFTC spokesman Dennis Holden declined comment on the Avista investigation last week. “The CFTC does not confirm or deny the existence of any investigation,'' Holden said.

In a recent interview, Pando said he was questioned for two days in September by commission investigators in New York.

“They are looking at violations of the Commodities Exchange Act. It was intimidating,'' Pando said.

The investigation's focus is on an option for 800 megawatts of power that was expiring in August 1998. A megawatt is enough to provide electricity to 600 homes.

Avista made a $4 million to $5 million profit on the deal, but a trader outside the company complained to the New York Mercantile Exchange that Avista traders were trying to manipulate the price, said another former Avista Energy trader.

“The rumor is that someone leaked this trade in advance,'' cutting into the potential profits of other traders, said the ex-trader, who asked not be named in this story.

Pando says he doesn't know how he ended up on the CFTC subpoena list.

He never worked in Houston, where the trade was made, and has never traded futures contracts. He said he sold over-the-counter physical power into the California market from Spokane after he became an energy trader in July 1998.

“I was very surprised I was brought into this. This is a very serious charge, but I wasn't involved,'' Pando said.

Meanwhile, Avista has settled three of the four energy traders' lawsuits over their bonuses, said Robert Dunn, their Spokane attorney.

“A couple of these guys were like the Ken Griffey and Alex Rodriguez of the power industry. They made so much money for the company it kicked them into an unheard-of bonus category,'' Dunn said.

In an interview last Monday,, former Avista Energy trader Michael Griswold said he made $25 million in profits for Avista Energy in 1998 before he left the company in the dispute over the bonuses.

His lawsuit was settled Wednesday and Griswold can no longer discuss the case, Dunn said.

Meanwhile, a high-profile Seattle firm with expertise in securities litigation has been named lead counsel for the Avista shareholder suits filed last summer.

Hagens and Berman represented Washington, Idaho and 11 other states as special attorneys general in the recent litigation against the tobacco industry spearheaded by Washington Attorney General Christine Gregoire.

The Seattle firm was also recently hired by Microsoft to help defend the computer company in the government's antitrust case.

It also won a settlement from junk bond financier Michael Milken on behalf of several Washington state public employee pension funds. Milken pleaded guilty in 1990 to six felony counts in the unrelated Drexel, Burnham Lambert securities fraud litigation and was jailed for 22 months.

The Seattle firm's lawyers “have played lead and/or major roles in cases that have resulted in cumulative recoveries in excess of $260billion,'' according to the firm's backgrounder filed for the Avista case in U.S. District Court in Spokane.

The Avista shareholders sued shortly after Avista CEO Matthews announced in June that the company would lose $90 million from bad electricity trades at its regulated utility in this year's turbulent energy market. The losses have since grown to $123 million.

They allege Avista exposed shareholders to unacceptable risks by “covertly'' entering into massive electricity forward contracts “in an undisclosed gamble that electricity prices would decrease in the future.''

Instead, the price skyrocketed, “causing Avista's share price to drop sharply,'' the complaint says.

The lawsuits seek to represent all shareholders who bought Avista stock between April 7 and June 21 this year.

Avista's Becker declined comment on the shareholder lawsuits, again citing company policy not to discuss pending litigation.