MANHATTAN (CN) – Shareholders sued Dynegy and Carl Icahn in a federal class action, claiming they failed to reveal that a wholly owned subsidiary fraudulently transferred one of Dynegy’s indirectly owned subsidiaries to the energy giant, and that when the truth was revealed, Dynegy’s stock price dropped from $5.99 to 76 cents.
Lead plaintiff Charles Silsby sued Dynegy, its CEO Robert Flexon, CFO Clint Freeland and billionaire investor Carl Icahn, Dynegy’s largest shareholder, accusing them of violating the Securities Exchange Act.
Dynegy provides wholesale power to six states, in the Midwest, the Northeast and the West Coast, according to the company website.
Dynegy, the third-largest U.S. independent power producer, agreed to be acquired for $665 million by Icahn Enterprises after shareholders rejected a lower bid from the Blackstone Group in 2010.
“Throughout the class period, defendants failed to disclose that Dynegy’s wholly owned subsidiary fraudulently transferred direct ownership in one of Dynegy’s indirectly owned subsidiaries directly to Dynegy,” the complaint states.
“After the truth regarding Dynegy’s acquisition was disclosed to the public, unsuspecting investors watched the price of Dynegy’s common stock drop from a class period high of $5.99 per share to $0.76 on March 9, 2012, a decline of approximately 87 percent.”
Silsby, who seeks to represent all investors who bought Dynegy stock at artificially high prices between Sept. 2, 2011 and March 9, says he suffered “devastating losses” as a result of Dynegy’s fraud.
He claims that Dynegy used its wholly owned subsidiary, Dynegy Holdings LLC, to acquire direct ownership of its indirectly owned subsidiary, Dynegy Coal Holdco.
“Icahn, through various corporate entities, controlled approximately 14.8 percent of Dynegy’s outstanding shares and appointed two directors, Vincent J. Intrieri (‘Intrieri’) and Samuel Merksamer (‘Merksamer’), to the Dynegy and DH Board of Directors,” the complaint states. “When DH began having problems meeting its debt obligations, and thereby threatened the value of Icahn’s equity holdings in Dynegy, the Dynegy Board created the Finance and Restructuring Committee (‘FRC’), headed by Intrieri and Merksamer, to reorganize DH’s debt.”
Silsby says Dynegy announced it acquired Coal Holdco in a Sept. 2, 2011 press release which misrepresented the value of the acquired equity stake to be $1.25 billion, and camouflaged Dynegy’s true financial situation.
“The aforementioned statement was false and materially misleading when made because the defendants failed to disclose that (1) DH was insolvent or on the brink of insolvency at the time of the transaction; (2) the value of the ‘undertaking’ was substantially less than $1.25 billion; and (3) that the acquisition of the direct ownership of Coal Holdco was therefore an improper fraudulent transfer,” according to the complaint.
Dynegy and four of its wholly owned subsidiaries filed for bankruptcy in November.
“Subsequently, on March 9, 2012, the examiner in the DH bankruptcy proceeding published a report, the contents of which are incorporated by reference herein, which disclosed that Dynegy improperly acquired Coal Holdco through a fraudulent transfer,” the complaint states. “On this news, the company’s common stock declined $0.42 per share, or approximately 35 percent, to close on March 9, 2012 at $0.76 per share, on unusually heavy trading volume.
“At all relevant times, Dynegy’s stock was traded on the NYSE. As described above, defendants’ material misrepresentations and omissions had the effect of creating and maintaining an artificially inflated price for Dynegy’s stock. Those misrepresentations and omissions that were not immediately followed by an upward movement in the company’s stock price served to maintain the share price at artificially inflated levels by maintaining and supporting a false positive perception of Dynegy’s business, operations, performance and prospects.
“Defendants had a duty to promptly disseminate accurate and truthful information with respect to the company’s financial and operational condition or to cause and direct that such information be disseminated, and to promptly correct any previously disseminated information that was materially misleading to the market. As a result of their failure to do so, the price of Dynegy common stock was artificially inflated during the class period, directly causing plaintiff and the class to suffer damages when the truth eventually emerged.
“Defendants’ false and misleading statements and omissions in their SEC filings and other public statements during the class period directly caused losses to plaintiff and the class. On the strength of these false statements, the company’s stock price was artificially inflated to a class period high of $5.99 per share on Sept. 16, 2011.
“As the truth began to emerge regarding the nature of Dynegy’s acquisition of Coal Holdco, the price of Dynegy stock declined as the market processed each set of previously undisclosed facts. Each such disclosure removed a portion of the artificial inflation in the price of Dynegy’s common stock and directly caused plaintiff and other class members to suffer damages. On March 9, 2012, Dynegy’s common stock had declined to a close of $0.76 per share – a decline of approximately 87 percent per share from its class period high.”
Silsby seeks class certification, rescission and compensatory damages for violations of the Securities Exchange Act.
He is represented by Richard Gonnello with Faruqi & Faruqi.