richard schwartz, et al. v. txu corporation, et al. 02...
TRANSCRIPT
UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
RICHARD SCHWARTZ, PLUMBERS &PIPEFITTERS NATIONAL PENSION FUND,RONALD CANADA, ARTHUR CARSTENNIELSEN, JR ., MICHAEL CONNOR, SELMASIEGAL and DALE LYNN CONNOR, OnBehalf of Themselves and All Others SimilarlySituated,
Plaintiffs,
vs.
TXU CORP., ERLE NYE, MICHAEL J .McNALLY, BRIAN N. DICKIE, BIGGS C.PORTER, V.J: HORGAN, DEREK C .BONHAM, J .S. FARRINGTON, WILLIAM M .GRIFFIN, KERNEY LADAY, JACK E .LITTLE, MARGARET N. MAXEY, J .E.OESTERREICHER, CHARLES R . PERRY,HERBERT H. RICHARDSON, MERRILLLYNCH, PIERCE, FENNER & SMITH,INCORPORATED, BANC OF AMERICASECURITIES LLC, CREDIT SUISSE FIRSTBOSTON CORPORATION and SALOMONSMITH BARNEY INC .,
Defendants .
Civil Action No. 3 :
ORIGINAL-U .S. DISTRICT COURT
NORTt1ERN DISTRICT OF TEX )
FILED
LL L 1 LCD 3
CLERK, U .S. DISTRICT COUR
By Deputy
(Consolidated with Nos . 3 :02-CV-2248;3 :02-CV-2255; 3:02-CV-2262; 3 :02-CV-2270; 3 :02-CV-2279; 3 :02-CV-2314; 3 :02-CV-2315; 3 :02-CV-2322; 3:02-CV-2328 ;3 :02-CV-2334 ; 3:02-CV-2337; 3 :02-CV-2339; 3:02-CV-2343 ; 3 :02-CV-2346; 3 :02-CV-2360; 3 :02-CV-2366; 3:02-CV-2416 ;3 :02-CV-2438 ; 3:02-CV-2450; 3 :02-CV-2458; 3 :02-CV-2471 ; 3 :02-CV-2528; 3 :02-CV-2586; 3 :02-CV-2600; 3:02-CV-2689 ;3 :02-CV-2738; 3:02-CV-2739; 3:03-CV-0289; 3 :03-CV-0290)
CLASS ACTION
Assigned to : Judge Ed Kinkeade
DEMAND FOR JURY TRIAL
PLAINTIFFS' CONSOLIDATED COMPLAINT FORVIOLATION OF THE FEDERAL SECURITIES LAWS
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SUMMARY OF ACTION
1 . This is a securities class action on behalf of all persons who purchased the publicl y
traded securities of TXU Corp. (collectively "TXU" or the "Company"), and TXU Europe Limited,
its wholly-owned subsidiary including TXU Europe Capital I, 9-3/4% Trust Originated Preferred
Securities ("TOPrS"), between 4/26/01 and 10/11/02 (the "Class Period"), and including those who
purchased TXU securities pursuant to TXU's 5/31/02 secondary stock offering of 11 million shares
at $51 .15 per share and its offering of 8 .8 million units of FELINE PRIDES (collectively the
"Offerings") . Defendants are officers and directors of TXU and investment banks which were
underwriters of the Offerings . Plaintiffs allege violations of the federal securities laws arising out
of defendants' issuance of false and misleading statements about the health of the Company's
business, its operating performance and prospects .
2 . TXU is a multinational energy services holding company and one of the larges t
energy services companies in the world . As of the end of 2002, TXU provided electricity and natural
gas services and engaged in merchant energy trading in the United States, Europe and Australia . In
2001 and 2002, TXU served about 11 million residential , commercial and industrial customers .
3 . Throughout the Class Period, TXU's business and financial performance in the United
States and Europe was being negatively impacted by deregulation due to rate freezes, falling prices
and malfunctioning billing software . As a result of these problems, TXU's ability to generate
operating earnings was deteriorating throughout the Class Period, and TXU was increasingly unable
to meet earnings guidance. In addition, TXU was exposed to billions of dollars in losses due to
multiple factors, including gas pipeline deterioration . TXU routinely ran a high liquidity risk in 2001
and 2002. Consequently, it was widely known at TXU that the Company's credit rating was being
closely scrutinized by ratings agencies and was in danger of being downgraded to below investment
grade. TXU Europe was also suffering from collapsing wholesale electricity prices for the electricity
it generated, and from unfavorable supply contracts with other UK generators which were entered
into when prices for electricity were much higher and which required TXU Europe to make
"capacity" payments in addition to the cost of purchasing electricity. TXU's European operations
exposed TXU to further billions of dollars in losses which were not revealed until late 2002, whe n
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TXU announced that it was selling its European assets . Compounding these financial woes, TXU's
new billing software purchased to deal with deregulation was malfunctioning so badly that it cause d
hundreds of millions of dollars in delayed billing and lost revenues in 2002 .
4. TXU paid a strong dividend of $ .60 per share per quarter for 12 consecutive quarters
prior to the third quarter of 2002, and before that had paid at least $ .50 per quarter for more than
eleven years . Because of TXU's declining earnings and liquidity, however, TXU's dividend was
known internally to be in jeopardy throughout the Class Period.
5. TXU's deteriorating financial condition was widely known by its highest level officers
named as defendants herein . For instance, during the Class Period, Erle Nye, TXU's Chairman and
Chief Executive Officer, often used the phrase "whistling by the graveyard" in referring to TXU's
financial condition internally. TXU officers openly discussed and exchanged e-mails that contained
direct alerts about the Company's liquidity crisis, risks of a downgrade and misleadingly positive
public statements about TXU' s financial performance and prospects .
6. TXU and its officers named as defendants herein, however, purposefully conceale d
the Company's declining earnings, its liquidity risk and the consequent risk of a ratings downgrade
and a dividend cut, the deterioration of its European operations and the disaster caused by its new
billing system. Instead, throughout the Class Period they intentionally made false and misleading
positive representations about TXU for the purpose of artificially inflating its stock price, completing
the Offerings to raise much needed cash, and ensuring that they would be awarded large bonuses
based on TXU's earnings performance. Throughout the Class Period, the officer defendants engaged
in what they admitted to be "earnings management" and assured investors that the Company's results
and performance were "outstanding," that Europe was producing strong operating results, that TXU's
US and European operations were succeeding in the deregulated environment and that TXU's future
prospects were exciting. In order to support their false statements, certain of the officer defendants
manipulated TXU's earnings by maintaining excess reserves and reporting non-operational earnings
as operational, which presented a false picture of TXU's financial performance .
7. TXU also engaged in proprietary trading, which is speculation relating to the direction
of gas and power prices, in the United Kingdom and the United States. The officer defendants
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blatantly misled investors , who in the wake of Enron were fearful of companies engaged in
speculation in the energy markets, about TXU's proprietary trading. For example , on July 25, 2002,
McNally stated to analysts that TXU was "not in the business of proprietary trading ." McNally
admi tted the false and misleading nature of this statement the very next day in a conversation with
another senior TXU executive, admitting that he misrepresented this fact because he did not want
to discuss it with the analysts .
8. The officer defendants also assured investors that TXU's dividend was "secure" even
as late as 10/11/02, and represented that TXU was on track to report earnings per share ("EPS") o f
$4.35+ and $4 .60+ in 2002 and 2003, respectively .
9. As a result of the officer defendants ' false statements, TXU's stock traded at
artificially inflated levels , as high as $56 per share, throughout the Class Period . TOPrS also traded
at artificially inflated levels throughout the Class Period as a result of defendants' false statements .
10. Due to the artificial inflation of TXU stock, defendants were able to complete th e
Offerings in late 5/02 to early 6/02 : a secondary offering of 11 .8 million shares of common stock
priced at $51 .15 per share and an offering of 8 .8 million units of FELINE PRIDES (equity linked
debt securities), raising nearly a billion dollars in much needed financing . These Offerings were
accomplished pursuant to false and misleading Registration Statement/Prospectuses . Subsequent
to the Offerings, defendants needed to maintain a high stock price to avoid triggering the conversion
of preferred stock into common stock and additional debt pursuant to a partnership agreement.
11 . On 10/4/02, TXU issued an earnings warning, indicating that due to customer attrition
and ongoing problems in Europe the Company would report 2002 EPS of only $3.25. On this news,
the Company's stock price declined to $27 per share, from more than $40 per share the prior week .
However, the stock continued to be inflated as defendants concealed the extreme liquidity problems
from which the Company was suffering . Defendants even assured the market until Friday, 10/ 1 1/02,
that the Company was strong financially and that the dividend was "sound and secure . "
12. Then, on Monday, 10/14/02, before the market opened, TXU stunned the market with
news that it was cutting its dividend 80% to $0.125 per share and was selling all of its Europea n
assets, and would incur a huge $4 billion loss on the disposition . Also on 10/14/02, Standard &
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Poor's Ratings Services announced that it had lowered its long-term corporate credit rating on TXU
and its Australian subsidiaries to BBB from BBB+, and S&P lowered the longterm credit ratings o n
TXU Europe Ltd . and also European subsidiaries to B+ from BBB- .
13. The Company's stock price immediately collapsed on this news to as low as $10 .1 0
per share before closing at $12.94, a one day drop of 31 %, on volume of 39 million shares. This
stunning collapse ofTXU's stock is shown in the following chart :
TXU Corp .April 26, 2001 - December 31, 2002
Daily Share Price s60
40
ccea
U)I-
o. 30
LtoOC
20
50
10
26-Apr-01 24-Aug-01 31-Dec-01 02-May-02 30-Aug-02 31-Dec-0226-Jun-01 30-Oct-01 04-Mar-02 02-Jul-02 30-Oct-02
TOPrS also fell from about $26 per share to approximately $2 .50 per share after 10/4/02 .
14. Analysts were furious at having been misled :
Gerard Klauer Ma tt ison wrote on 10/14/02 :
In our view, the dividend action further undermines the company's alreadynear non-existent credibility in that as recently as October 9 management sawno reason for the dividend to be considered in jeopardy .
Deutsche Bank wrote on 10/14/02:
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The company's announcement appears to abandon Europe, and is likely to
cause a signific ant write-off of the company's equity investment in Europe,about $4B currently.
CS First Boston wrote on 10/14/02 :
The TXU's dividend cut from $2 .40 per share to $0 .60 annually,announced this morning, is sure to add to the differentiation in the groupamong the riskier companies and those with more secure financial andfinancing pictures . While TXU's issues are clearly related to its troubled UKand European operations, the draw-down of its credit facilities, high payoutratio and lesser "earnings power" as discussed below are the issues to watchwith others .
15 . TXU repo rted a loss of$ 15.23 per share for 2002 and analysts now project TXU wil l
report 2003 EPS of only $1 .99 in contrast to the more than $4 per share that defendants pretended
was justified by TXU's existing condition and performance . The Company subsequently disclosed
that it would record a loss of as much as $4 .5 billion on the disposition of its European assets .
TXU's stock price has never recovered to Class Period levels .
JURISDICTION AND VENUE
16. The claims asserted arise under § § 10(b) and 20(a) of the Securities Exchange Act of
1934 (the "Exchange Act"), 15 U .S .C. §§78j(b) and 78t(a), and Rule I Ob-5, and under §§ 11,12(a)(2)
and 15 of the Securities Act of 1933 ( the "Securities Act"), 15 U .S.C. §§77k, 771(a)(2) and 77o .
Jurisdiction exists pursuant to §27 of the Exchange Act, 15 U . S .C. §78aa, and §22 of the Secu rities
Act, 15 U .S.C. §77v, and 28 U .S.C. §§ 1331 and 1337(a). Venue is proper in the Dallas division of
the Northern District of Texas under 28 U.S .C. § 1391(b), as the defendants reside in this dist rict and
division, and this is the district in which a subst antial part of the events or omissions giving rise to
the claim occurred .
THE PARTIES
17. (a) Plaintiff Plumbers & Pipefitters National Pension Fund purchased shares o f
TXU stock as described in the attached certification and was damaged thereby.
(b) Plaintiff Ronald Canada purchased shares of TXU stock as described in th e
attached certification and was damaged thereby.
(c) Plaintiff Arthur Carsten Nielsen, Jr . purchased shares of TXU stock a s
described in the attached certification and was damaged thereby .
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(d) Plaintiff Michael Connor purchased TXU PRIDES as described in th e
attached certification and was damaged thereby .
(e) Plaintiff Selma Siegel purchased shares of TXU stock as described in the
attached certification and was damaged thereby.
(f) Plaintiff Dale Lynn Connor purchased TXU PRIDES as described in the
attached certification and was damaged thereby.
18. Defendant TXU is headquartered in Dallas, Texas. TXU provides elect ric and natura l
gas services, merchant energy trading, energy marketing, telecommunications and energy related
services. TXU's common stock is traded in an efficient market on the New York Stock Exchange.
TXU Europe Ltd . is a wholly-owned subsidiary of TXU, and is a holding company for TXU's
European Operations. TXU controls TXU Europe Limited, which issued TOPrS . TOPrS traded on
the NASDAQ during the Class Period . TXU's counsel has agreed to accept service on its behalf -
Robert K. Wise, Hunton & Williams, 1601 Bryan Street, 30th Floor, Dallas, Texas 75201 .
19 . (a) Defendant Erle Nye ("Nye") was at all relevant times Chairman of the Board
and CEO of TXU. Because of his positions , Nye knew the adverse non-public information about
TXU's business, as well as its finances , markets and present and future business prospects via access
to internal corporate documents (including the Company's operating plans, budgets and forecasts,
and repo rts of actual operations compared thereto ), conversations and connections with other
corporate officers and employees , attendance at management and Board of Directors ' meetings or
commi ttees thereof, and via reports and other information provided to him in connection therewith.
Just weeks before delivering devastating news to investors, on 9/10 /02, Nye sold 47,485 shares of
TXU stock for proceeds of $2.12 million. Previously, on 10/3/01 Nye sold 11 ,000 shares of TXU
stock for proceeds of $548,680 . Nye also received a bonus of $ 1 .95 million and a Long-Term
Incentive Plan ("LTIP") bonus of $4.3 million in 2002 based on the stock price inflation he
cont ributed to. Nye signed the Registration Statement pursuant to the Offerings . TX-U's counsel has
agreed to accept service on Nye's behalf- Robert K. Wise, Hunton & Williams, 1601 B ryan Street,
30th Floor, Dallas, Texas 75201 .
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(b) Defendant Michael J . McNally ("McNally") was Executive Vice Chairman
and CFO of TXU . Because of his positions , McNally knew the adverse, non-public information
about TXU's business , as well as its finances and present and future business prospects via access
to internal corporate documents (including the Company's operating plans, budgets and forecasts,
and reports of actual operations compared thereto), conversations and connections with other
corporate officers and employees , attendance at management meetings and committees thereof, and
via repo rts and other information provided to him in connection therewi th . McNally also received
a bonus of$500,000 and a LTIP bonus of $1 .4 million in 2002 based on the stock price inflation he
contributed to. McNally signed the Registration Statement pursuant to the Offerings . TXU's counsel
has agreed to accept service on McNally's behalf- Robert K . Wise, Hunton & Williams , 1601 Bryan
S treet, 30th Floor, Dallas , Texas 75201 .
(c) Defendant Brian N . Dickie ("Dickie") was Executive Vice President of TXU
and President of the TXU Energy business segment of TXU . Because of his position, Dickie knew
the adverse, non-public information about TXU's business, as well as its finances and present and
future business prospects via access to internal corporate documents (including the Company's
operating plans, budgets and forecasts, and reports of actual operations compared thereto),
conversations and connections with other corporate officers and employees, attendance at
management meetings and committees thereof, and via reports and other information provided to
him in connection therewith . On 6/7/02, the same day Dickie told other TXU executives the
Company would have a lot of trouble meeting guidance, Dickie sold 14,342 shares of TXU stock
for proceeds of $717,100. Dickie also received a bonus of $1 .1 million and a LTIP bonus of
$625,000 in 2002 based on the stock price inflation he contributed to . TXU's counsel has agreed to
accept service on Dickie's behalf - Robert K. Wise, Hunton & Williams, 1601 Bryan Street, 30th
Floor, Dallas, Texas 75201 .
(d) Defendant Biggs C. Porter ("Porter") was the Controller and Principa l
Accounting Officer of TXU . Because of his positions , Porter knew the adverse , non-public
information about TXU' s business , as well as its finances and present and future business prospect s
via access to internal corporate documents (including the Company's operating plans, budgets an d
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forecasts, and reports of actual operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management meetings and committees thereof,
and via reports and other information provided to him in connection therewith . Porter signed the
Registration Statement pursuant to the Offerings . TXU's counsel has agreed to accept service on
Porter's behalf - Robert K . Wise, Hunton & Williams, 1601 Bryan Street, 30th Floor, Dallas, Texas
75201 .
(e) Defendant V.J. Horgan ("Horgan") was President of Energy Trading at TXU .
Because of her position, Horgan knew the adverse, non-public information about TXU's business,
as well as its finances and present and future business prospects via access to internal corporate
documents (including the Company's operating plans, budgets and forecasts, and reports of actual
operations compared thereto), conversations and connections with other corporate officers and
employees, attendance at management meetings and committees thereof, and via reports and other
information provided to her in connection therewith . Notwithstanding that knowledge, Horgan
participated in defendants' scheme to conceal highly negative information and issue false, positive
statements about the condition and performance of TXU . TXU's counsel has agreed to accept
service on Horgan's behalf - Robert K . Wise, Hunton & Williams, 1601 'Bryan Street, 30th Floor,
Dallas, Texas 75201 .
(f) Defendant Derek C. Bonham ("Bonham ") was a director of TXU. Bonham
signed the Registration Statement pursuant to the Offe rings . TXU's counsel has agreed to accep t
service on Bonham's behalf - Robert K. Wise, Hunton & Williams, 1601 Bryan Street, 30th Floor ,
Dallas, Texas 75201 .
(g) Defendant J.S . Farrington ("Farrington") was a director of TXU . Farrington
signed the Registration Statement pursuant to the Offerings . TXU's counsel has agreed to accep t
service on Farrington's behalf- Robert K . Wise, Hunton & Williams, 1601 Bryan Street, 30th Floor,
Dallas, Texas 75201 .
(h) Defendant William M . Griffin ("Griffin") was a director of TXU. Griffin
signed the Registration Statement pursuant to the Offerings . TXU's counsel has agreed to accep t
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service on Griffin's behalf - Robert K. Wise, Hunton & Williams, 1601 Bryan Street, 30th Floor,
Dallas, Texas 75201 .
(i) Defendant Kerney Laday ("Laday") was a director of TX-U. Laday signed the
Registration Statement pursuant to the Offerings . TXU's counsel has agreed to accept service on
Laday's behalf - Robert K . Wise, Hunton & Williams, 1601 Bryan Street, 30th Floor, Dallas, Texas
75201 .
(j) Defendant Jack E. Little ("Little") was a director of TXU . Little signed the
Registration Statement pursuant to the Offerings . TXU's counsel has agreed to accept service on
Little's behalf - Robert K . Wise, Hunton & Williams, 1601 Bryan Street, 30th Floor, Dallas, Texas
75201 .
(k) Defendant Margaret N. Maxey ("Maxey") was a director of TXU. Maxey
signed the Registration Statement pursuant to the Offerings . TXU's counsel has agreed to accep t
service on Maxey's behalf - Robert K . Wise, Hunton & Williams, 1601 Bryan Street, 30th Floor ,
Dallas, Texas 75201 .
(1) Defendant J .E. Oesterreicher ("Oesterreicher") was a director of TXU.
Oesterreicher signed the Registration Statement pursuant to the Offerings . TXU's counsel has agreed
to accept service on Oesterreicher's behalf- Robert K . Wise, Hunton & Williams, 1601 Bryan Street ,
30th Floor, Dallas, Texas 75201 .
(m) Defendant Charles R . Perry ("Perry") was a director of TXU . Perry signed
the Registration Statement pursuant to the Offerings . TXU's counsel has agreed to accept servic e
on Perry's behalf - Robert K . Wise, Hunton & Williams, 1601 Bryan Street, 30th Floor, Dallas ,
Texas 75201 .
(n) Defendant Herbert H. Richardson ("Richardson") was a director of TXU .
Richardson signed the Registration Statement pursuant to the Offerings. TXU's counsel has agreed
to accept service on Richardson's behalf- Robert K. Wise, Hunton & Williams, 1601 Bryan Street ,
30th Floor, Dallas, Texas 75201 .
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(o) The defendants identified in ¶19(a)-(e) are referred to herein collectively as
the "Officer Defendants ." The defendants identified in ¶19(f)-(n) are referred to herein collectivel y
as the "Director Defendants ."
20. Defendants Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill Lynch") ,
Banc of America Securities LLC ("Banc of America"), Credit Suisse First Boston Corporation ("C S
First Boston"), and Salomon Smith Barney Inc . ("Salomon") (collectively, the "Underwrite r
Defendants") were the lead underwriters of the Company's securities sold pursuant to the Offerings .
(a) Merrill Lynch maybe served with process by serving its registered agent CT
Corporation System, 350 North St . Paul Street, Dallas, Texas, 75201 .
(b) Banc of America may be served with process by serving its registered agent
CT Corporation System, 350 North St. Paul Street, Dallas, Texas , 75201 .
(c) CS First Boston may be served with process by serving its registered agen t
Prentice Hall Corporation System, 800 Brazos, Austin, Texas, 78701 .
(d) Salomon may be served with process by serving its registered agent C T
Corporation System, 350 North St . Paul Street, Dallas, Texas, 75201 .
DEFENDANTS' SCIENTE R
21 . During the Class Period, each of the Officer Defendants knew of the adverse fact s
alleged herein and had the power to control TXU's false and misleading public statements .
22. TXU and each of the Officer Defendants is liable for inflating the price of TXU
securities by making false and misleading statements and omitting material adverse information .
The defendants' wrongful course of conduct: (a) artificially inflated the price of TXU's securities
during the Class Period; (b) deceived the investing public, including plaintiffs and other Class
members, into acquiring TXU's securities at artificially inflated prices ; (c) permitted TXU to
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complete a secondary stock offering and issue millions of dollars worth of FELINE PRIDES ;' and
(d) permitted TXU to benefit economically from the wrongful course of conduct .
23 . As alleged in the following paragraphs , TXU and the Officer Defendants kne w
throughout the Class Period about wide-ranging, undisclosed adverse facts that were negatively
impacting TXU's financial condition and stability, and which contradicted what defendants told th e
public about TXU's financial performance .
TXU's Unlawful "Earnings Management"and Misleading Statements About Earnings
24. Throughout the Class Period, the Officer Defendants engaged in unlawful "earning s
management" solely in order to manipulate financial results and thereby report earn ings expected by
the investing public . For example, McNally, TXU's CFO, and other TXU executives deliberately
overstated reserves in 2001 and the first half of 2002 so that they could reduce reserves as necessary
to meet earnings targets . In addition , McNally implemented a scheme whereby non-recurring gains
were separated into small enough segments to avoid disclosing them as non-operational gains and
instead repo rt them as operating earnings. This conduct was in direct violation of Generally
Accepted Accounting P rinciples ("GAAP") and Securities and Exchange Commission ("SEC")
regulations . SEC Regulation S-K, Item 303 requires companies to describe their results of
operations and "any unusual or infrequent events on transactions" that materially affect their income .
By separating the non -recurring gains TXU failed to adequately describe its operations as required
'The 6/3/02 Prospectus described the FELINE PRIDES as follows :
The FELINE PRIDES initially will consist of units referred to as Income PRIDES,each with a stated amount of $50. Each Income PRIDES will include a purchasecontract pursuant to which the holder will agree to purchase from TXU Corp . sharesof its common stock, together with the attached preference stock purchase rights, onMay 16, 2006, and TXU Corp . will make quarterly contract adjustment payments atthe rate of 2 .325% of $50 per year, as described in this prospectus supplement . EachIncome PRIDES will also include $50 principal amount ofTXU Corp .'s SeniorNotesdue May 16, 2008. The Senior Notes will bear interest at a rate of 5 .8% per year .This rate is expected to be reset on or after November 16, 2005 . The Senior Noteswill not trade separately from the Income PRIDES unless and until substitution ismade, the Income PRIDES are settled early or the Senior Notes are remarketed, allas described in this prospectus supplement . A holder may substitute U.S . Treasurysecurities for the Senior Notes in the manner described in this prospectus supplement .A unit consisting of a purchase contract and a substituted Treasury security is referredto as a Growth PRIDESSM.
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by SEC Regulations . In contrast, McNally caused non-recurring losses to be reported as one time
extraordinary events, excluded from operating results, an inconsistency with the way non-recurring
gains were being reported that can only be explained by defendants' manipulative conduct designed
to increase but never decrease TXU's earnings . As a result of such earnings management practices,
TXU's operating earnings were artificially inflated throughout the Class Period, as described in
¶¶144-158 .
25 . During the class period, William Murray ("Murray" ), a licensed attorney and former
Senior Vice President for TXU, was responsible for reviewing and commenting on quarterly and
annual reports that the Company filed with the SEC . In so doing, Murray was in constant and
continuous communication with TXU's top level management including, but not limited to, Nye,
McNally and Horgan. By virtue of his education, his work experience (16 plus years in executive
management positions for 6 energy service companies), as well as his position within TXU, Murray
discovered that TXU's financial statements were being grossly misstated and material information
intentionally omitted, not in compliance with SEC regulations or GAAP . Accordingly, Murray
repeatedly questioned both the accuracy and the adequacy of the Company's financial disclosures and
repeatedly informed TXU's top level management of his concerns . By his efforts, Murray is to TXU
what Sharon Watkins is to Enron - a person in a position to know and who is an intelligent persistent
advocate for truthful and complete disclosure of TXU's actual financial status . Like Watkins at
Enron, Murray was intentionally ignored by top level management prior to investors losing billions
of dollars when the truth finally came out . In addition to all the other allegations, Murray alone
provides the who, what, when and where necessary to survive both a motion to dismiss under fifth
circuit, PSLRA and Federal Rules of Civil Procedure 9(b) jurisprudence . He has been thoroughly
interviewed by Plaintiffs counsel .
26. High level TXU executives were aware of McNally's improper earnings management
practices . For example, Murray went to the extreme of expressing concerns about McNally's
earnings management practices orally and in writing to Horgan, TXU's President of Energy Trading,
prior to 8/1/02. Horgan claimed to share Murray's conce rns , and commented on at least one occasion
that McNally should be replaced . In addition , Jerry W. Pinkerton ("Pinkerton"), TXU's Controller,
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retired early in the first quarter of 2002 in direct response to McNally's unlawful earn ings
management practices . Pinkerton candidly told McNally prior to reti ring , "you can go to jail but I'm
not."
27. Despite her purported disdain for McNally' s illegal practices , Horgan also "manage d
earnings." She told Murray and approximately 15 other of her direct reports at a meeting on either
the 41st, 42nd or 43rd floor of the Company's Dallas Headquarters in 2001, that because she could
make her 2001 trading numbers handily, she was going to over-reserve for 2001 and have profit in
reserve to take in the future if she needed it . Horgan later told Murray that McNally told her that
TXU, the parent, was coming up short on its earnings and he needed Horgan to provide more
contribution to earnings . She agreed to reduce reserves to provide the needed earnings . McNally
later told Horgan that he had made an error, did not need Horgan's extra earnings to meet TXU's
guidance, so that Horgan did not release reserves . Horgan told her direct reports in a Friday staff
meeting that she continued to maintain excess reserves even after her discussions with McNally .
TXU's Statements About Earnings andGuidance Were False and Misleading
28 . By early 2001, it had become increasingly clear to top TXU executives that TX U
would not be able to meet its guidance to analysts by growing earnings per share, on an operational
basis, at double digit rates while reducing its debt and paying a 5% dividend in an amount which
neared TXU's net income . At a meeting attended by top TXU executives, Murray detailed
statements about TXU's inability to legitimately meet its guidance .
29. Consistently throughout 2001 and 2002, until his exist from TXU, Murray repeatedly
expressed concern that the company's public statements about earnings did not reflect its true
economic condition. For instance, on April 26, 2001, Murray sent an e-mail to Horgan noting that
contrary to TXU's public reports that earnings had increased 7% in 1 QO 1 and Nye's representation
that 1 Q00 earnings were "outstanding," TXU actually suffered "a 7% quarterly decline in earnings
vs lastyear and lastyear was a 7-8% decline in earningsfrom the previous year." Murray further
warned in an October 6, 2001 e-mail that the Company's dividend was "unsustainable" and that it
was only "a matter of time" before it would have to be cut . Internal Company documents reviewed
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by Murray in formulating his conclusions included, but were not limited to : Daily trading records ;
Forecasts ; Budget Drafts ; Information provided by Ratings Agencies ; Contracts and materials related
to Capital Requirements for TXU Europe; and Risk M anagement Meeting minutes from meetings
ran by McNally.
30. On 2/2/02 Murray sent an e-mail to Horgan and accountants preparing the annual
reporting documents, noting the misleading nature of TXU's 2001 earnings announcement :
If operating income was down 8-9%, income before extraordinary income was down9% (and down 36% on a pre-tax basis) and net income was down 27-28%, do weneed to better explain how we came up with our earnings release headline of"TXU Completes Transition Year with 10% Earnings Growth?" Does this spinpromote management credibility?
The earnings release and the annual report are very positive. On the otherhand, no segment made its cost of capital except probably US Electric, which was aregulated business in 2001, (and trading if it were broken out from retail) . And nosegment made a double digit growth rate except US Energy, which basically stoppedlosing money. Given our track record, do we need to explain how we are going tomake double digit earnings growth while paying a 5% dividend, deleveraging froma high base, increasing our exposure to competition, etc .? Are we at risk of losingcredibility by being excessively positive?
31 . On 2/23/02, Murray sent an e-mail to Horgan and others describing the following
"excessive risks with our credibility in [our] external communications" : (a) the Company's focus on
"pro forma earnings' increases while GAAP earnings are declining" ; and (b) TXU's reference
to the "strength "ofearnings contributionsfrom the "USElectric, US Gas andEurope segments "
when "US Gas had negative net income . Europe's net income was down 25% from 2000 which
was in turn down 25% from 1999 . Europe's pre-tax income was negative ." On the same date at a
breakfast meeting, Murray made a presentation on these issues and included the primary points in
a memo to TXU President H . Jarrell Gibbs ("Gibbs") ; but Horgan ordered Murray not to give Gibbs
a written copy. The memo stated:
I am w riting this memo because I am conce rned about a number of financialaccounting, policy and communications related issues regardingTXU. Primarilytheyfall into three catego ri es :
Credibility;Risk ofFinancial Distress;Managing Expectations.
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32. Murraywas not the only TXU employee w riting about TXU's undisclosed problems .
Murray himself referred to a memo written by McNally :
I was thinking - this memo isn 't particularly consistent with the annual report'spositive tone. IfMcNally is writing this to senior management at the same time theannual report is being issued it might not be helpful if there was an issue overTXU's disclosure adequacy and it was discovered.
33 . TXU internally monitored its daily earn ings volatility and distributed reports on
earn ings to its highest level officers . On 5/29/02, Murray said in an e-mail to Horgan that TXU's
"Earnings volatility" was "greater than disclosed" in its 1 Q02 1 OQ and 2001 1 OK. After sending this
e-mail and because of the concern among the Officer Defendants that his notations may lead to
securities fraud exposure, Murray was removed from the distribution list detailing daily earnings
volatility.
34. During a 6/7/02 meeting, Murray again stated that he thought TXU's earnings
communications had been misleadingly positive given TXU's underlying business results . Murray
stated that in the current difficult market, maintaining credibility was essential and that maintaining
Nye's and TXU's credibility was far more important than stretching to issue a positive earnings
result . At the same meeting Dickie, President of TXU Energy and an Executive VP of TXU, stated
that he thought that TXUwould have a lot of trouble making its earnings numbers. On this same
day Dickie sold 14,342 shares of TXU stock for proceeds of $717,000. Kirk R. Oliver ("Oliver"),
TXU's treasurer and assistant secretary, also stated that he had just returned from New York and that
one of the ratings agencies had told him that TXU was "in its cross-hairs" for a ratings downgrade .
35 . On or about 6/10-15/02, Oliver told Murray that a previously-planned bond offerin g
was being postponed because Dickie did not have a sufficient handle on his financial results for
management to make accurate representations on the bond selling road show . Murray pointed out
that there had been an equity road show only 2-3 weeks earlier and asked how management could
have been able to properly make representations then if it could not do so now . Murray also
discussed with Oliver that Nye had stated many times internally that TXU's internal numbers were
frustratingly unreliable and always changing .
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36. During an earnings conference call on 7/25/02, McNally stated that TXU's financial
results were "excellent," even though quarterly and six month operating earnings, excluding changes
in accounting, were down and TXU's net income gain was due to lower net interest expense because
of the decline in short term rates . McNally also affirmed earnings guidance for both 2002 and 2003,
despite knowing that TXU's financial results had been manipulated through "earnings management"
for the current time periods in a scheme that could not endure . McNally also stated that TXU would
be restructuring its underwater power contracts in Europe in the 3rd quarter, and that if they weren't
restructured it could be a $0 .20/share earnings hit in 4Q02, but that the North American and
Australian business would cover this shortfall if the contracts were not restructured . These
statements were false as internal reports showed that TXU Europe wanted $3-4 billion to restructure
these contracts. Thus, even if only half of the contracts were restructured it would cost TXU over
$1 billion - over a $3.50 per share hit. Ultimately, when TXU Europe was discontinued, TXU
reported charges which generated a loss of $4 billion in 4Q02 . As a result of these problems, TXU
was at risk of losing its investment grade rating, and needed to be paying down debt to protect the
credit rating, not adding debt, as if TXU lost the investment grade rating it would face bankruptcy.
During the 7/25/02 call McNally also falsely stated that TXU was not in the business of proprietary
trading; was clean on round trip trades ; and that he and Nye would have no problem making their
certifications regarding the accuracy of the Company's financial statements on 8/14/02 . McNally's
positive statements to the analysts were repeated at road shows to market the mid-2002 stock
offerings and were directly contrary to remarks he had made at a 3/02 Principal Manager's meeting
at which McNally expressed a much more negative view of the Company's performance and outlook .
37. On 7/26/02, one day after the conference call with analysts, Murray told McNally that
he was surprised that the analysts had not asked more questions about the underwater power
contracts in Europe . McNally stated that he thought his statement about the $0 .20/share potential
hit in the fourth quarter took care of their concerns . McNally admitted to Murray that there could
be more than a $0.20/share hit but that he told the analysts that it would not be worse than
$0.20/share so they would not worry about the issue . McNally also admitted that his statement
about the Company's proprietary trading was false .
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38. Murray's review of the Company's SEC filings also revealed that the Company ha d
underestimated the approximately $ 1 billion dollar loss experienced by TXU Europe in 2000 by the
use ofunreasonable accounting methodologies which were not rigorously scrutinized nor back tested
for reasonableness. Horgan expressed agreement with Murray's comments on 11 /8/01 . The
Company's SEC filings, however, were not modified to accurately reflect the 2000 loss .
39. Defendants also knew their positive public statements regarding TXU's Europea n
operations were false . In late 2001 or early 2002, Nye traveled to New Jersey to meet with
consultants from McKinsey and Company who had prepared a report on TXU Europe . They met
in an IBM facility. During a two-hour meeting with the consultants, Nye was given a negative
written report about TXU Europe . After receiving the report, Nye asked for the location of a paper
shredder so that he could shred it. Informed there was no shredder at the facility, Nye had a driver
take him (and the document) to a location in the same city where Nye could destroy the document.
TXU Failed to Disclose Material Risksin Misleadingly Positive SEC Filing s
40. One ofMurray's responsibilities at TXU was to review annual reports and SEC filing s
for the accuracy of representations made therein . During 2001 and 2002, Murray advised other TXU
executives in a-mails that TXU was not adequately disclosing serious, identifiable risks to its
financial performance, liquidity and credit ratings, and that the exceedingly positive nature of TXU's
public statements was materially misleading.
41 . For example , Murray identified the following mate rial exposures facing TXU by
2001, which TXU failed to disclose in SEC filings during the Class Period : (a) TXU faced a $1
billion exposure for replacement of PVC pipeline that was experiencing unexpectedly fast
deterioration; (b) the deterioration of the PVC pipeline increased the Company's exposure for leaks
and explosions in an amount estimated to be $500 million ; (c) because the pipe was manufactured
by Enserch, TXU did not possess a third party warranty claim ; (d) TXU faced an estimated $140
million liability as a result of a 1998 misstatement of Texas State Franchise tax ; and (e) TXU faced
a $1 billion dollar loss associated with a virtual power station in the UK. Murray expressed
concerns about not disclosing these adverse risks in a 9/20/01 e-mail to Horgan :
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Can we legally issue stock or other securities without disclosing these issues?Why do we not have to at least disclose these issues in this quarter's 10-Q?
We are bending over backwards to avoid having our book accountingreflect economic reality (i.e. avoiding goodwill impairment, etc .) . . . .
TXU's failure to disclose these material risks caused its stock price to be artificially inflate d
throughout the Class Period.
42. Murray also repeatedly advised his superiors that the Companys Class Period SEC
filings and annual reports were overly optimistic and misleadingly positive in light of the substantial
risks facing the Company. Murray often sent a-mails about the misleading nature of TXU's SEC
filings to Horgan, who then forwarded the a-mails to other senior managers including Dickie,
McNally, Nye, former TXU Energy CFO Ellen Beatty and her successor Paul O'Malley ("O'Malley") .
On 2/5/01 Murray said in an e-mail to Horgan about the Annual Report : "[TJhis material is so
excessively positive that it damages our credibility ." On 1/18/02, Murray e-mailed Horgan and
stated that the excessively positive nature of the 2001 Annual Report would "haunt us if we have
a liquidity or refinancing crisis or a gas price collapse in 2002 ." Murray further asked "[sJhould
we kill this sound bite and stick to the facts? "
43 . Murray summarized TXU's looming woes in a 12/19/01 e-mail to Horgan :
We have a massive, leveraged, largely unhedged, directional bet on a singlecommodity in a single market . Sooner or later this has to go against us and we'rebearish on gas now.
We routinely run huge liquidity risk . I find it unpardonable that we gotdown to $100mm of untapped liquidity in July, that we had $5 .6 billion more currentliabilities than current assets at year end, that we have such a short maturity durationon the rest of the debt .
The markets and ratings agencies are going to focus on us withincreasingly [sic] scrutiny and figure out our risks . . .
44. The Officer Defendants were alarmed, but their response was to seek deniability by
cautioning Murray not to disseminate his negative views of Company operations widely within th e
Company. Specifically, Horgan cautioned Murray :
I don't think you need to make your thoughts so widely known through e-mail . Thepotential for those who don't like your comments to take exception is great .
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45 . Nye was aware ofundisclosed leverage and liquidity ri sk, undisclosed risk of ratings
agency downgrades and associated consequences . In fact, Nye echoed Murray's views at a senio r
management meeting, where Nye, as was his habit, referred to TXU's financial circumstances as
"whistling by the graveyard . "
46. On 2/5/02, Murray sent an e-mail to Oliver and other senior managers about
inaccurate information in TXU's 2001 Annual Report regarding its liquidity requirements if it s
ratings were downgraded . Murray observed in his e-mail :
TXU is so highly levered currently that we will be constrained regarding how muchliquidity facilities will be available. Our past practices need to be materiallyimproved on (i.e. getting down to $100mm in untapped liquidity facilities lastsummer, routinely using emergency liquidity facilities for forecastable cash needs,waiting until shortly before expiration of existing liquidity facilities to contract fornew ones, expecting to be down to $400mm of untapped liquidity in February 2002,etc. )
47. On or about 3 /24/02, a representative from the Goldman Sachs' Houston office told
at least one TXU executive that Goldman Sachs had previously advised TXU's senior managemen t
that they didn't believe TXU would be able to maintain its ratings given its financial structure .
48. A downgrade of TXU's ratings would have a dire effect on the Company for multipl e
reasons, including that TXU would have to post collateral on a $600 million obligation related to
reclamation of land it was mining. The terms of the obligation required no collateral if one of a
number of tests were met . As of 3/02, the only test that TXU appeared to meet was that it was
investment grade. If TXU were to lose its investment grade, however, it would have to post at least
$600 million in collateral. Ratings agencies had previously requested information regarding TXU's
cash requirements if it was downgraded to less than investment grade . TXU provided inaccurate
information, including a gas price forecast which was artificially high, to the ratings agencies and
thus evaded these dire consequences in the short term and artificially inflated the price of the stock .
49. In 7/02, TXU formed an internal group to analyze anticipated problems in the event
that the Company lost its investment grade credit rating . On 7/2/02, Murray attended a meeting of
this group with Horgan, Oliver, Horton, Shorter and others to discuss TXU's potential collateral
requirements if it were downgraded to less than investment grade . During the July 2 meeting,
Horton said TXU could have to post as much as $4.3 billion of additional collateral on its
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obligations if downgraded, but had only $850 million in untapped liquidity facilities . Murray
stated that given that the Company did not have financial ratios of an investment grade Company,
a significant risk of bankruptcy existed . Discussion of the numbers indicated that ifTXUno longer
supported TXUEurope 's credit, TXUcould avoid $1.9 billion ofpotential collateral requirements.
Horton prepared a written repo rt detailing the issues discussed at the 7/2/02 meeting.
50. Murray concluded that as of 7/02, considerations regarding the risk of bankruptcy
included the following :
• Based on all internal accounts the UK electric market, TXU Europe'sprincipal market, was suffering from low electricity prices and had not recovered in2002;
• According to Ken Price, an officer of TXU Energy Trading, when TXUbought the p rimary business that was now known as TXU Europe, TXU's internalvaluations were approximately 60% of the amount actually paid;
• As market forward curves were higher in March of 1998 than in 2002,presumably valuations would have been lower in 2002 than in 1998 except to theextent such market prices were hedged ;
• TXU Europe's strategy was to hedge with retail customers . Based on p . 6 ofTXU Europe's 10-K for 2001, at year end there were about 4 .0mm UK customers .During 2001 TXU had lost 667k customers and gained 324k customers . Given thatone tends to lose profitable customers migrating to lower cost providers and acquiredcustomers tend to be less profitable than customers lost, Murray had concerns aboutthe effectiveness of the purported hedge retail customers provided ;
• Based on TXU Europe's 10-K published in March 2002, at year end 2001,TXU Europe had an average net income from continuing operations of only 20mmpounds per year over the previous 3 years, negative 600mm pounds of workingcapital and tangible book equity (shareholders' equity less goodwill) of almostnegative 2 billion pounds ;
• TXU Europe had put in a capital request for $2-3 billion to TXU Corp. tofund restructuring of under-water power contracts that were, b ased on discussionswith TXU Europe's Treasurer, Oliver's group and Mittag, apparently not reflected onTXU Europe's books on a mark-to -market basis ;
• TXU Corp . lacked financial ratios consistent with rating agency guidelinesfor investment grade ratings ;
• According to Oliver, TXU's Treasurer, at least one rating agency had TXUCorp. " in its cross -hairs" for a credit rating downgrade;
• According to Oliver, TXU Europe, lacks independent investment grade creditrating creditworthiness ; it is reliant upon credit suppo rt from TXU Corp. to maintainan investment grade rating ;
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According to Oliver and his group, TXU Europe has $1 .9 billion in liquiditycalls if it loses its investment grade rating and doesn't have adequate untappedliquidity facilities to fund these calls ; and
• According to Oliver and his group TXU had $4 .3 billion in liquidity calls ifit lost its investment grade rating and only $850mm in untapped liquidity facilities .
51 . TXU failed to disclose the material liquidity risk and risk of bankruptcy in its SE C
filings or in statements to ratings agencies .
52 . The accuracy of Murray's assessment of the Company was accepted by other senior
executives, including Nye and Murray's immediate supervisor, Horgan, who confirmed her
agreement with Murray in writing on 10/8/01 :
Totally agree with your assessment, both with the allocation of debt, the need tocommunicate to the agencies , and the inappropriateness of a convert at this time. Ihave [shared] these thoughts with Brian [Dickie ] . Don't know how to make the pointto Erle [Nye, CEO of TXU] directly, or even if that is appropriate at this time . . .thoughts? Erle has chosen the Mike [McNally] pony to ride , which is what hasgo tten us here .
Although Murray' s criticism of the Company was accepted internally as accurate, no disclosures o f
the serious issues facing the Companywere made publicly, and defendants continued to misrepresen t
the performance of TXU to analysts, ratings agencies and investors .
TXU's Severe Billing Problems Were NegativelyImpacting Revenue and Receivable s
53 . TXU was so unprepared for deregulation that it was unable to bill many of its mediu m
and large commercial customers . Billing problems were endemic at TXU and many customers were
not billed at all for the power they consumed . Beginning in 3/02, many large customers became very
angry after not receiving bills for a few months and began cancelling their service . These customers
were lost to competitors such as Reliant, First Power and New Power. Problems with customers
were so prevalent that a customer service center was established to communicate with customers
who were expressing dissatisfaction with TXU. The billing system simply did not work on most
accounts in excess of $ 1 million per month . Billing on one large account Ame rican Airlines was
ultimately corrected, but numerous other large accounts were not corrected .
54. The problems were caused, in part, by a computer system purchased by TXU, the
Computer Information Systems Plus ("CIS"), specifically to deal with deregulation . Deregulation
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had forced TXU service divisions to separate from delivery and transmission divisions and thi s
created a need for a new computer system . The system was originally designed for another company
and than was stripped down in an attempt to customize it for TXU. The system never worked as it
was not created for the functions that TXU was trying to use it for . Malfunctions in this system were
caused by the interchange between the Public Utilities Commission ("PUC") and TXU. The
problems related to the programing system , as the code used by programmers was not interfacing
correctly with the PUC. These problems persisted both during and after the Class Period .
55 . The CIS system was tested in 11 /01 by TXU's chief Information Officer . This testing
revealed that the system was not operating properly, and "billing [was] not bringing in the incom e
and revenue to continue operations . "
56. Contract employees were hired to help the Company meet the 1/1 /02 deadline to have
the post deregulation billing system up and running. Billing for large commercial and industrial
customers including Albertson Grocery and Blockbuster Video, which accounted for approximately
10% of TXU's business, failed to function as the computer system would not interface with the
Electric Reliability Council of Texas ("ERCOT") as required post deregulation . As a result many
customers did not receive bills for several months and/or received double and even triple bills . As
a result of this system failure, some billing had to be done manually and eventually the Company
actually stopped sending bills to many customers due to the high probability of error . After this
failure the Company resorted to sending by e-mail manually constructed spreadsheets with estimates
based on historical usage instead of bills . This substitute for billing based on usage could only be
done where the customer would accept such documentation. The billing backlog became so great
that the billing staff had to work 16-hour days, 7 days per week . The responsible executive
ultimately resigned under Company pressure, as a result of continued failure to resolve the software
interface problem. As of 10/02, the problem had yet to be resolved .
57. The customer billing system had huge error rates . These rates were detailed at a risk
management committee meeting . Despite these problems the system was implemented and resulted
in hundreds of millions of dollars in delayed billings in 2002 . As a result of these problems, TXU
did not have a system in place that could function in the deregulated environment . The lack of an
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i
effective automated system also plagued energy traders in the newly deregulated environment as the y
were unable to effectively determine volume and pricing to appropriately calculate hedge positions .
No disclosure of this problem was made to the public .
58 . TXU was suffering from software problems during 2002, which had not bee n
resolved as of late spring 2002 . In a 2001 year end review, written comments were provided about
these programming deficiencies . Additionally, Andersen Consulting was retained, at great expense
to TXU, to acquire install, test and implement the hardware and software required to implement the
post deregulation billing system. This system was part of "Project Champion" which was intended
to provide TXU with computer systems which could function in the new deregulated environment .
One crucial part of this system was the "middleware" or interface product named e*gate, which was
made by SeeBeyond Company. This product did not function properly . Andersen was unable to
successfully implement this program and as of spring of 2002 TXU's billing was in chaos .
59. By April or May of 2002, TXU's Information Technology ("IT") Departmen t
informed upper management that the e*gate software could not be made to function correctly and
this caused transactions to be lost and made it impossible to bill customers properly. By 5/02
revenue lost as a result of this problem amounted to approximately $30 million and by year-end
totaled approximately $300 million.
60. Rules were violated by billing customers for usage which occurred more than thre e
months prior to billing. Some customers were in fact billed for usage as long as eight months after
it occurred . TXU billing was so compromised that the Company did not even receive bills for its
own usage for the Energy Plaza Building or the Hardwood Building .
61 . Conversion to the new billing system had to be halted in June 2002 because it wa s
not possible for the system to properly interface . The problem was not resolved and the Teleco m
division sales people were told to discontinue taking new customers . As of 11/02, the problem stil l
had not been resolved and billing was still being done manually.
62. Deregulation also caused TXU problems with initiating service for new customers ,
with many not able to receive meters or temporary poles . Some customers had to wait over a mont h
to receive these items so they could begin electrical service. These problems are continuing .
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63. Deregulation of the energy industry also completely derailed TXU's customer servic e
capabilities . Before deregulation customers could call TXU to have changes made to their accounts .
After deregulation this was not usually possible. After deregulation all account ch anges had to be
communicated with the ERCOT . This additional step caused many problems for TXU's systems.
As a result, customers were often told that they had to call multiple people to make account changes .
64. Upon information and belief, Texas Instruments, Frito Lay, Wal-Mart, Brinker
International, McDonalds and a group of Dairy Queen Franchises all dropped TXU as their provider ,
in part, over problems with TXU's computer billing system .
TXU Used Round-Trip Trades to FalselyInflate Trading Volume and Revenue s
65. The Public Utility Commission of Texas ("PUCT") has confirmed (and TXU has
admitted) that TXU engaged in round-trip transactions during 2000-2002 . These sham, off-setting
transactions, were used by TXU to artificially inflate revenue and trading volume . TXU would sell
a set quantity of Natural Gas or power to a competitor at a set price per unit . Its competitor would
then sell an identical volume to TXU at the same price . No gas or power would be transferred
between parties, no money was exchanged and the trades did not have any economic value -but the
trades artificially inflated TXU's trading volume and revenues . TXU admittedly engaged in 275
Natural Gas round-trip transactions in 2001 which accounted on average for 134,874 MMBtus per
day or .76% of total volume; and 112 Natural Gas round-trip transactions in 2002 which accounted
on average for 49,981 MMBtus per day or . 13% of total volume. TXU admittedly engaged in 11
Power round-trip transactions in 2001 which accounted for 341,801 Mwh's and 10 such transactions
in 2002 which accounted for 19,421 Mwh's . In addition to the round-trip trades that TXU confirmed
to the PUCT, Lead Plaintiffs investigation of TXU's trading with Enron has revealed over 60 round-
trip trades during 2000 and 2001 . The round-trip trades, in which the Company simultaneously
bought and sold power or gas at the same price, terms and volume, resulted in no real revenue or
volume to either party. TXU's disclosures of results attributable to the round-trip transactions
conveyed a false picture of its financial status and business activity . In June and early 7/02, Horgan
told Murray that TXU had seven apparent round-trip trades in the US and that TXU Europe had
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received fees for entering into a number of essentially round t rip -trades in Europe . In response to
at least one ERCOT inquiry regarding "round-trip trades," TXU denied it engaged in "round-trip
trades ." Subsequent SEC filings indicated that varying numbers of round -trip trades were repo rted
to different agencies based on varying interpretations of information requests .
TXU Manipulated the Texas Energy Marketto Artificially Inflate Profits
66 . During the Class Period, TXU manipulated the energy market in Texas so as to rea p
fraudulent profits . By engaging in a variety oftactics, TXU deceived investors as to its true financial
position and artificially inflated its stock price . TXU followed the methods of Enron, to "game" the
Texas energy market. These practices included : (a) artificially increasing the load on the energy
schedule submitted to Texas market regulators to artificially boost revenues; (b) using strategies to
create the illusion that there were energy shortages ; (c) "overscheduling" energy; (d) using "wash"
trades to falsely boost the volume of trading revenues ; and (e) physically withholding power through
manipulation of resource plan information, and a variety of other illicit tactics .
67. As a result of TXU's conduct , PUCT ordered TXU to return many millions of dollar s
in excess earnings to customers in the form of an excess mitigation credit .
Bonuses
68 . Senior executives did not want to release adverse information prior to April 2002, as
the Company's stock price as of 3/31/02, relative to an index of competitors, would be used t o
calculate their bonuses .
69. On 3/31/02, various officers of TXU received LTIP bonuses based on the total return
to equity shareholders compared to the return to equity shareholders of the Companies comprisin g
the Standard & Poor's Electric Utilities Index over the three-year period ending 3 /31/02 . Based on
information in TXU 's SEC filing, these bonuses included the following :
$4,286,400 (of total 2002 compensation of $7,810,135) to Erle Nye ;$1,071,600 (of total 2002 compensation of $2,869,396) to Brian Dickie ; and$1,430,624 (of total 2002 compensation of $2,735,736) to McNally .
70. The LTIP bonuses were in addition to the following bonuses defendants received a s
a result of their false statements :
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Nye $1,950,000Dickie $625,000McNally $500,000
71 . On 6/7/02, Dickie sold 14,342 shares of TXU stock for $50/share or $717,100 . This
sale was made the same day as Dickie's statement that he thought it would be difficult for TXU t o
make its 2002 earnings .
BACKGROUND
72 . TXU's Texas utilities distribute electricity to 2 .7 million customers and 1 .4 million
gas customers . TXU has a generating capacity of some 19,000 megawatts in the state, and it owns
the 7,200-mile Lone Star Pipeline. Retail competition in Texas has prompted the Company to
separate its regulated and nonregulated electric operations into two units - Oncor handles regulated
transmission and distribution operations, and TXU Energy is responsible for power generation and
retail energy marketing operations . TXU Energy has also taken over TXU's wholesale energy trading
operations throughout the U .S. and in Canada .
73 . Overseas , TXU Europe was one of the largest electricity suppliers in the UK, and had
5.7 million gas and electricity customers there, as well as power station interests that give it a
generating capacity of 3,100 megawatts. It adopted TXU Energy as its UK retail brand, and has sold
some UK generation and distribution assets to focus on its retail supply business . The Company also
generates and markets energy throughout Europe . TXU Australia Holding's subsidiaries provide
electricity and natural gas to about 1 million customers in Victoria .
74. The first North Texas electric power company was founded in Dallas in 1883 .
Another was built in 1885 in Fort Worth. From these and other small power plants, three companies
grew to serve most of the state : Texas Power & Light (TPL, incorporated in 1912), Dallas Power &
Light (DP&L, 1917), and Texas Electric Service (TES, 1929) . Texas Utilities Company, called TU,
was formed in 1945 as a holding company for the three utilities .
75. In 1993 TU bought Southwestern Electric Service (now TXU SESCO), another Texas
electric utility. Accounting changes resulted in a loss for TU in 1995 . However, it gained entry to
the telecom arena, buying a 20% stake in the Texas operations of wireless PCS provider PrimeCo .
(The Company sold the PrimeCo stake in 1999 .) TU expanded its telecom holdings in 1997 when
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. . .
4
it acquired phone company Lufkin-Conroe (now part of TXU Communications) . In 1996, TXU
bought Australian electric company Eastern Energy (now part of TXU Electricity) . TU bought
British utility The Energy Group (now TXU Europe) for about $10 billion in 1998 . In 1999 the
Company bought Australian state-owned natural gas distributors Westar and Kinetic Energy . TU
also joined a consortium to build undersea power lines connecting Tasmania to the Australian
mainland.
76. In 1999 the Texas Legislature approved retail competition for the electric industry ,
beginning in 2002. This legislative change would b ring competition which would impact TXU's
ability to successfully grow its business . Also in 1999, TU restructured its operations and began
using the name TXU Corp . It officially changed its name in 2000.
77. In 2000, TXU acquired Norweb Energi , United Utilities' electricity and gas supply
business, which added some 1 .8 million electricity customers and 400,000 gas customers in the UK .
TXU also cont ributed the stock of its telecommunications companies to Pinnacle One Partners in
exchange for a 50% stake and about $960 million , which was earmarked for TXU's debt. It was with
this entity that TXU entered an agreement that required TXU to maintain its stock p rice to avoid
triggering additional debt . Efforts to reduce debt and streamline operations included TXU's sale of
its natural gas processing operations , UK gas metering business and interests in a Czech utility and
North Sea gas fields .
78. In 2002, retail electric competition began in Texas, and TXU responded by separatin g
TXU Electric's regulated and nonregulated operations . TXU Electric's name was changed to TXU
US Holdings, which also took over TXU SESCO's electric operations. Defendants wanted to reduce
debt, as they knew margins would be reduced in the future due to increased competition. However,
competition was already adversely impacting the Company's results and if this information reached
the market, TXU would be unable to raise the necessary funds to continue growing .
79. Another issue pressing TXU to maintain a high stock price was a "trigger " related to
$8 10 million in off-balance sheet financing TXU had obtained . TXU had entered into a partnership
agreement with a partnership called Pinnacle One Partners LP ("Pinnacle") in which TXU held a
50% interest . In connection with the transaction, TXU had issued 810,000 shares in preferred stock
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and $810 million in senior notes to Pinnacle . The agreement provided that in the event of a decline
in TXU's share price below $21 .93 per share ("the trigger") coupled with a decline in TXU 's credit
rating (or other events), the following would occur : (a) TXU would be required to sell equity or raise
proceeds to repay Pinnacle's senior notes ; and (b) TXU might be required to consolidate Pinnacle
into its own financial statements , increasing its reported debt by hundreds of millions of dollars .
Thus, defendants made the false statements alleged herein to maintain the Company's stock p rice.
A Reuters article described TXU as "desperate to hold on its'investment grade'rating so its U .S . and
Australian business can maintain easy access to credit . "
FALSE AND MISLEADING STATEMENTS MADEBY DEFENDANTS DURING THE CLASS PERIO D
80. On 4/26/01, TXU reported its 1Q01 results in a release which stated in part :
TXU . . . a global merchant energy company with operations on three continents, todayannounced better than expected earnings for the first quarter . With these results,TXU is well positioned to achieve annual earnings growth expectations of 7 to 9percent for the year.
Excluding restructuring costs in TXU's European operations in both periods,earnings for the first quarter ended March 31, 2001 were a higher than anticipated$0.83 per share of common stock compared to $0 .89 for the same period last year.Earningsfor the first quarter of2001 (including restructuring costs) were $0 .76 pershare of common stock compared to $0.71 per share for the first quarter of 2000, anincrease of 7percent.
First quarter results reflect continued strong contributions from the USElectric, US Gas, Europe, and Australia segments, improved gross margins from theUS Energy operations, and the benefits of the common stock repurchases in 2000 .
"Once again, our quarterly results are outstanding ," said Erle Nye,chairman and chief executive of TXU. "Growth in our global merchant energybusiness and continued exceptional performance by our employees in all operationscontinue to add value for our shareholders and prove the validity of our strategy andmerchant energy business model . We remain focused on delivering superiorshareholder value, as illustrated by six key initiatives: delivering growth fromexisting businesses, creating opportunity with the Texas electricity industryrestructuring, diversifying US assets outside of Texas, structurally separating themerchant energy and energy delivery businesses, capturing substantial value from theglobal merchant energy business and continuing to strengthen the company's credit ."
81 . Subsequent to issuing its results , TXU hosted a conference call in which TXU
management (Nye/McNally) made statements and answered questions about TXU' s business and
results. Defendants stated :
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4J J
A couple of highlights that you will pick up on the call, earningsper sharewere up 7% to 76 cents a share . Quarterly earnings per share excluding unusualitems exceeded expectations at 83 cents a share. We had enhanced performancedriven by primarily the US Electric and US Gas segments . We also had better than
expected performance in Europe and good strong performance in the US Energy andAustralia segments. We are on track for producing the 7-9% earnings per sharegrowth for 2001 over 2000.
Movingto the Europe financial results, the Europe segmentproduced strongoperating results in the first quarter, slightly ahead of expectations, primarily dueto strong growth in Continental Europe . MerchantEnergy volumes almost doubled700,000 gigawatt hours confirming TXU as a leading player in the UK and otherEuropean energy markets . Reporting net income for the quarter of $67 million,unchanged from. the first quarter of 2000 . As I mentioned before, the current quarterincludes restructuring costs associated with the outsourcing of the Customer Servicefunction of Vertex about $17 million or 7 cents a share .
As I said the US Electric operations performs very well and making greatprogress with a lot of effort throughout our whole team in preparing for therestructured competitive environment . Moving into the US Gas segment, US Gasoperations had another great quarter . The first quarter net income was $39 millioncompared to $30 million, an increase of $9 million or about 30% from the prior firstquarter last year .
On an annual basis, we expect that rate reduction to be offset by the 24 Sevenjoint venture, the Vertex outsourcing, and growth in Merchant Energy Business asit was offset in 2000, we are going to continue to offset it in 2001 and beyond . The
Merchant Energy Business continues to drive growth in Europe .
82 . Immediately after TXU issued its results , Murray e-mailed Horgan indicating the
misleading nature of the release :
I don't like how we do our corporate financial communications at all . Ourquarterly earnings, excluding non-recurring items, are down from $0 .89 to $0.83 pershare and we have a quote from Nye saying "Once again, our quarterly results areoutstanding." First, this is a 7% quarterly decline in earnings vs last year. ...Hardly continuing outstanding performance. Why does corporatecommunications think spinning results is more important than managementcredibility?
83. Based on defendants' 4/26/01 statements, James L . Dobson of Deutsche Banc Alex .
Brown Inc. commented positively on the Company's European Operations as follows :
European operations performed better-than-expected with flat earnings at $67 millionas compared to the first quarter of 2000 . The company had anticipated an earningsdecline in the quarter due to the negative impact from timing effects on the NorwebEnergi acquisition, the UK distribution rate reduction (which was implemented inApril 2000) and a stronger US dollar . However, these factors were more than offsetby continued growth in the European and UK merchant energy business and lowerrestructuring costs. Foreign currency had a negative impact of $ 8 million in the firstquarter. Management maintains its target to sell $1 .5 billion of European assets andthe company is over 50% to achieving this goal with the sale of its NorthSea GasAssets ($300mm) and its Cantabrico stake ($500mm) . The remaining
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generation-related assets are in the UK and the company anticipates anannouncement in mid-2001 .
84. Based on defend ants ' 4/26/01 statements , Morgan Stanley Dean Witter issued a report
on TXU on 5/9/01 which stated in part :
Europe: TXU's Trading Operation in Europe isAm ong the Strongestin theWorld, in Our View TXU is a major energy trader in Europe . They have establisheda clear "early leader" advantage in trading operations and have raised the bar ofsophistication among the players. The operation engages in purchasing and sellingof natural gas and electricity, along with risk management services .
The application of this European knowledge base in the U .S. should be asignificant positive - now that investors have begun seeing the earnings potential ofproven, large-scale trading and marketing businesses - and could provide upside tomargins going forward. Europe provides roughly 30% of operating EPS and hashelped create a diversified worldwide player out of this Texas rooted company . Mid-to high-teen's growth is this segment is expected to continue .
TXU's balanced portfolio of assets and trading strengths also positioned themwell for the launch of NETA in the UK. The New Electricity Trading Agreement(NETA), began in the UK on March 27th . NETA moves generators out of thetraditional "pool" model and into bilateral contracts . Our UK traders estimate theimpact for TXU's asset base to be neutral to marginally positive .
85. These statements st and in stark contrast to internal TXU Communications . For
example, on 4/23/01, Murray sent Horgan an e-mail which stated:
They [TXU Europe] must have huge mark to market losses , let alone their losses onplants that are economic losses but aren 't marked to market. Why doesn't TXU makethem account on a mark to market basis to reflect this track record ? I think youmight want to consider bringing this up in your discussion with B rian [Dickie] .
86. On 5/21/01 TXU hosted a conference with analysts in Fort Worth, Texas . At the
conference defendants described TXU's "Business Processes" and "Information Technology" as
"World Class Merchant Capabilities ." Defendants further stated that TXU's European operations
would "continue operational excellence and cost leadership ." Defendants further described TXU's
"strong UK position." McNally additionally projected the following "Earnings growth : • Merchant
Energy 11-13%, • Consolidated EPS 9-11% ."
87. On 7/26/01, TXU reported its 2Q01 results in a release which stated in part :
TXU . .. a global energy company with operations on three continents, todayannounced earnings for the second quarter that put it in good position to achieveearnings expectations of $3 .65 to $3 .75 per share for 2001 and serve as a strong basefor anticipated growth of 9 to 11 percent per year .
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Earnings for the second quarter ended June 30, 2001 were $0 .78 per shareof common stock (on record revenues of $6 .1 billion, a 33 percent increase)compared to $0 .67 per share for the same period last year, excluding previouslyreported non-operating items, a 16 percent increase. Non-operating items reportedin the previous period were gains on the sales of the UK mete ring business andsubstantially all of the assets of TXU Processing and restructuring costs in Europe,primarily associated with the "24-Seven" networks joint venture with LondonElectricity. Including these items , earnings for the second quarter of 2000 were $0 .87per share of common stock .
Second quarter results reflect strong contributions from the US Electric,Europe, and Australia segments, and improved gross margins from the US Energyoperations, with continued development of retail infrastructure and systems inpreparation for opening the Texas electricity markets .
"I am very pleased with another quarter of good results ," said Erle Nye,chairman and chief executive of TXU. "Not only are we well positioned to meetcurrent year earnings goals, we are also implementing our global merch ant energybusiness model in Texas and North Ame rica as we have successfully done in Europeand Australia. We have also made good progress in our asset disposal and portfoliorepositioning program in Europe with the sale of our interest in Hidroelect rica delCantab rico in the second quarter and the completion of the disposition of the 1,000MW Rugeley power plant in July . These will strengthen our balance sheet andposition us for additional growth . "
Mike McNally, chief financial officer added, "These results are a directreflection of our continued focus on adding shareholder value . With anticipatedearnings per share of between $1.30 and $1 .35 for the third quarter, we are oncourse to meet market expectations of $3 .65 to $3 .75 per share for 2001 and in linewith our stated goal of 9 to 1 i percent earnings growth in 2002 . And this does notinclude the positive effects on earnings of the non-amortization of goodwill that theFinancial Accounting Standards Board has made effective in 2002 ."
88. Based on defendants' 7/28/01 statements , Jefferies & Co . issued a report on TXU
which stated in part as follows:
We are reiterating our Buy rating on TXU Corporation following its analystmeeting in New York. We believe that TXU shares should trade at a P/E of 11 .6x,a 5% premium to the 2002 group average multiple .
Management reiterated its targeted consolidated EPS of $3.65-$3.75 in2001 and growth of 9%-11% thereafter. TXU provided a table of indicativeearnings suggesting earnings in the rang of $3 .62 in 2001, $4.00 in 2002, and $4 .40in 2003. This included an assumption of increasing the common share base by 262million in 2001, 270 million in 2002, and 274 million in 2003 . The rising share baseis caused by mandatory convertible debt that the company has outstanding and thatmust be exercised this year and next . Factors that may influence performance in agiven year include exchange rate fluctuations (principally in Australia and the U .K.)and performance of energy trading .
European Energy merchant operations continues to target mid-teens EPSgrowth . Price volatility for electricity has moderated since the introduction of theNew Energy Trading Arrangements . This decrease was more than offset by highergas volatility, which accounted for virtually all of the 21 % increase in U .K. trading
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EBITDA. Beginning October 2001, the U .K. supply business will be completelyseparate from the distribution business . This may set the stage for a future sale of theslower growing network business in the U.K. Energy trading in Continental Europehas also increased considerably in the first half of 2001 .
89. Based upon defendants' 7/26/01 statements , on 8/2/01 H&R Block Financial Advisors
issued an Equity Research Update which contained the following :
TXU Europe - This unit is one of the leading integrated electricity and gasgroups in the United Kingdom. TXU Europe's business units include EasternElectricity, the largest UK regional electricity company serving 3 .2 millioncustomers; TXU Europe Power, the fourth largest UK generating company with over6,800 megawatts of capacity ; Eastern Natural Gas, one of the UK's largest natural gassuppliers serving over 700 thousand customers ; and TXU Europe Energy Trading,which manages the price and volume risks associated with generation, wholesaling,and sale of electricity and gas . TXU Europe also has interests, primarily throughjoint ventures, in the Nordic Region, Spain, and other European countries .
90. Based on defendants' 7/26/01 statements, Credit Lyonnais issued a report which stated
in part :
We forecast earnings of $3 .70 and $4 . 10 for 2001 and 2002, respectively,approximately in line with consensus .
We forecast earnings growth in the 9%-11% range based on the retailopportunities in the U .K. and Germany; generation and retail opportunities in theIberian and Nordic markets ; and asset divestitures that will provide capital forredeployment. We found our German utilities analyst, Andreas Thielen, who can bereached at (+49 69 7543 4752), extremely helpful in this regard .
91 . Based on defendants' 7/26/01 statements, Deutsche Banc Alex . Brown Inc . issued a
report which stated in part :
We are maintaining our operating earn ing estimates of $3 .65 and $4.75 for2001 and 2002, respectively. Our 2002 estimate includes $0 .75 from the eliminationof goodwill amort ization . We have a Market Perform rating on the shares of TXU .
92. Defendants' statements between 4/26/01 and 7/26/01 were materially false and
misleading due to the following undisclosed facts :
(a) TXU's financial statements were false and misleading and in violation of
GAAP, as desc ribed in ¶¶144-175 ;
(b) TXU was so highly leveraged and its liquidity was so precarious .that it was
in danger of investment downgrades that would have dire impacts on its financial condition in the
near future . TXU might be required to raise over $4 billion in collateral , which it did not have, i f
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•. _ ) l
the Company's investment grade fell, thus a downgrade in the Company's investment grade coul d
lead to insolvency;
(c) TXU was experiencing pipeline deterioration which would cost approximatel y
$1 billion to remedy ;
(d) TXU had engaged in "round- trip trades" which falsely inflated trading volume
and revenue; and
(e) TXU's European operations were faring much worse than represented . TXU
Europe was locked into risky tolling agreements and contracts which required it to pay more for
power than it could sell it for on the open market, negatively impacting its profitability .
93 . On 10/25/01, TXU announced its 3Q01 results, including that :
Net income rose to $334 million, or $1 .28 a share, from $328 million, or$1 .25, a year earlier, the company said in a statement distributed by PR Newswire .Revenue rose 13 percent to $6 .6 billion from $5.83 billion.
94. McNally, chief financial officer, was quoted in the earning release:
"The continued focus of management and employees on executing the strategy andadding shareholder value has resulted in yet another good quarter . With anticipatedearnings per share of between $0 .63 and 40.68 for the fourth quarter, we are oncourse to meet expectations of $3 .65 to 43 .70 per share for 2001 . I remaincomfortable with analysts' estimates for 2002 in the general range of $4 .75 to $4.85per share."
95. On 10/25/01 TXU hosted a conference call in which TXU m anagement mad e
statements and answered questions about TXU's business and results. Defendants stated :
TXU Europe segment Q4 reported earnings $21 million. TXU Europe saw strongresults from ongoing operations and positive tax effects . TXU Europe reduced operatingincome , primarily to losses on disposal of generating plants .
Anticipate EPS of between $0.63 and $0.68 for Q4. Expect $3 .65 to $3.70 EPS fullyear 2001 . Comfortable with analyst expectations for full year EPS 2002 in range of $4 .75to $4 .85. Company expects 9 to 11 percent growth in 2002 . Expect U.S. Electric segmentnet income in $840 million for the year .
96. In contrast , internal TXU communications painted a much gloomier picture. For
example, on 12/18/01, Murray sent an e-mail to Horgan stating:
We have a massive, leveraged, largely unhedged, directional bet on a singlecommodity in a single market. Sooner or later this has to go against us and we'rebearish on gas now.
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~ J
We routinely run huge liquidity risk. I find it unpardonable that we got downto $100mm of untapped liquidity in July, that we had $5 .6 billion more currentliabilities than current assets at year end, that we have such a short maturity durationon the rest of the debt .
The markets and ratings agencies are going to focus on us with increasingscrutiny and figure out our risks . . . .
97. On 1/31/02, TXU announced its 4Q01 results in a press release which stated in part :
TXU . . . a global energy services company with business interests on three continents,reported today that it earned $3 .78 per share on common stock on record revenuesof $28 billion, a 27 percent increase, and earnings of $980 million for the year endedDecember 31, 2001, excluding usual items discussed below . This represents a 10percent increase over earnings of $3.43 per share for 2000 . Reported earnings were$2 .52 per share of common stock on net income of $655 million .
Continued strong operating performance by the company's US Electric andUS Energy segments, growth from Europe and better than expected results fromAustralia were key factors in the performance . The results were achieved whilecontinuing to focus on debt reduction, implementing wholesale and retail capabilitiesrequired for competition in the Texas electricity market, overcoming a rate reductionand preparing for the final phase of electricity competition in Victoria, Australia onJanuary 13, 2002, and the fundamental restructuring of the European portfolio .
"TXU had an outstanding transition year in 2001," said Erle Nye, chairmanand chief executive of TXU . "Our shareholders realize a total return of more than 12percent which was 20 percentage points higher than the S&P Electric Companiesindex and 24 percentage points higher than the S&P 500 index. With the transitioncomplete, we are well positioned to continue to deliver core earnings growth of 9 to11 percent annually . "
98. Also , on 1/31 /02 TXU held a conference call to discuss the results of operations for
the year ended 12/31 /01 . During the conference call, TXU management made statements an d
answered questions . Defendants stated :
The fundamentals of our business continue to produce strong cash flows and high-quality earnings which suggest potential upside to our valuation .
When you consider that we have a dividend yield of about five percent, Ibelieve we have a compelling case for investing in TXU . With our transformationactivities complete, I am more confident than ever that superior strategy and thebusiness model that we have chosen are correct and will continue to generate superiorand sustained earnings and cash flows, and thus, superior shareholder value .
Frankly, it has been a long journey, and I am ever so pleased to be wherewe are and I am very excited about our prospects.
Our businesses did perform extremely well for the quarter and the 12-monthperiod, and that's despite all the various challenges we've had in the restructuring o f
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the businesses and repositioning of the businesses . I am real excited about theresults last year and even more excited about the prospects going forward.
As I'm sure everyone has recognized, given the scale of the successfulrestructuring and the European operations in 2001 . The results for 2001 aresomewhat complex . . . the European team is very pleased with the outcome of ourefforts in 2001 and the superb position we now start from in 2002 . As Erle saidearlier, its been a long journey and we're very pleased with where we now endedup . . . . We very successfully repositioned the U .K. upstream gas and electricitygeneration portfolios for fundamentally different market conditions . . . . The balancesheet is now substantially stronger . . . . Throughout all this restructuring, theunderlying business continued to grow and to grow well.
Overall, looking at these operating results in the round [Europe] we see futureinterest savings, reduced U.K. purchase power costs, an on-going effective tax ratebelow 25 percent and improved results and growth in continental Europe, replacingthese disposable gains and reduction in future foreign tax credits . . . . The overridingmessage I would like to leave you with is that a huge restructuring has been verysuccessfully accomplished in the European operations in 2001 . We are now in anoutstanding position for 2002 and beyond And I know you'll be glad to hear thedo not anticipate any unusual adjusting items in earnings for 2002. As we said atthe time of the disposal of the U.K. network's business, we see our Europeanearnings growing at the upper end of the declared 11-30 percent range of TXU'sglobal merchant energy activity .
Thanks to everybody for your patience with us . We are very pleased with theresults, we are confident in the next year and we look forward to talking to you inNew York next week.
99. Based on statements made by defendants, in early February, Morgan Stanley reported :
Operating results appear to be improving and our sense is that TXUhas developedone of the stronger trading and marketing units in Europe . (Emphasis in original .)
[D]ivestitures [in Europe] leave company slimmer and ready to grow .
100. On 2/5/02 TXU hosted a quarterly meeting with analysts to discuss the Company's
business and operations . Defendants made the following statements :
I want to say again, in case we leave any doubts, we're very firm that we'reOK on the consensus of someplace between 435 and 445 . I'm more firm and I'mmore persuaded than Mike McNally is . But not much. We're within - I'm about aquarter above him, but he's right in the middle of that range . And Mike will comearound over time. He always does .
We expect to have a strong first quarter, probably something on the order of$1 .00, $1 .05. That would be about a 20 percent increase over the prior year. I hopethat just by leaving this slide up there by now, you've gotten the point that we areimproving our returns on equity. That's a - it is not an apparency. It is a reality . Andwe like the basis upon which we're moving .
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d
We also wanted to reposition our portfolio in the UK. And I think we did thatin a good fashion. We, first of all, reduced our regulatory risk . We exited the wiresbusiness there . We're pleased with that . We got good value for it . And I'll let Philtell you about that .
And we also shortened our generation position in the UK, in view of ourfeelings about the market and we, I guess, we reoriented our supply curve there in abeneficial fashion. We had a dream about resolving a number of nagging andlingering regulatory problems in Texas .
We had a comprehensive settlement in the works . We're very hopeful thatthat will be completed successfully soon and that will have a very beneficial impacton our management team, on our corporation and on our ability - that's a focus backon growing the company . And that is a very significant initiative that we wereinvolved in .
We have a growing strength in our balance sheet . We've got strong earningsgrowth. We're predicting from nine to 11 percent on an ongoing basis. We've gotgood cash flows . We've got a solid dividend . If you combine the dividend with a 10percent growth rate, you ought to have something more than 12 .6 percent growth inthe future . And, frankly, with a modest PE, we think we've got a good bit of roomfor PE expansion.
That was my subtle way - you know, subtle as in a brick through awindshield, of suggesting to you that we think this is a company that's got greatprospects. We've enjoyed some success of late. We think that's simply a precursorto the future and we hope you agree . I will leave that slide there as long as yourpatience will permit.
All of our international operations have performed exceedingly well in thelast 12 months .
101 . In early 2002, credit rating agencies reduced the ratings of power companies in
reaction to Enron related concerns . At a mid-February 2002 UBS Warburg Utilities Conference
Horgan claimed the agencies were mistaken . As ASAP reported :
V.J . Horgan, president ofTXU energy Trading, told conference attendees thatpart of the problem stems from credit -rating agencies not fully understanding thetrading business .
She argued that analysts are incorrectly viewing the whole power industry astarnished by Enron's woes . "It's too easy to say it all about trading . . . [b]ut really itis about Enron making bad investment decisions."
102. On 2/14/02, The New York Times published a story comparing Enron's off-balance-
sheet manipulations to TXU :
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Investment bankers at some big Wall Street firms helped create and findinvestors for complex partnerships that the Enron Corp. used to mask its truefinancial condition . Then they started helping other comp anies in the same way.
Bankers at Citigroup, Credit Suisse First Boston and Deutsche Bank Alex .Brown found ways for Enron to remove lagging assets from its balance sheet byselling bonds backed by Enron stock .
After hatching that idea, some of those bankers took it on the road and soldit to other corporations that wanted to make their financial statements look better,too .
A leading purveyor, Credit Suisse First Boston, managed similar transactionsfor a few other clients in the energy and utility sectors, people close to the firm said .Among the companies that have created partnerships with structures similar to someused by Enron are the El Paso Corporations, the Williams Companies and the TXUCorporation, according to investment bankers and analysts at rating agencies .
103 . TXU, with the help of analysts covering the Company, rebutted The New York Times
story. On 2/14/02, Merrill Lynch published a Research Bulletin which stated in part :
• An article in today's New York Times lists TXU among other companies tohave established partnership structures backed by company stock . The partnershipin question is called Pinnacle One Partners and we believe it poses little risk for TXUinvestors. We discussed Pinnacle in some detail in a recent note (2/6/02) and wouldreiterate the following key points here :
• First, the $80m of debt at the partnership is not that material in the context ofTXU's overall long-term debt of $15 .6bn (9/30/01 ) . Second , the rating agencies areclearly comfortable with the exposure , having included the $800m of debt on TXU'sbalance sheet in their recent reviews . Third, assets contributed to Pinnacle weretransferred at book value . Fourth , the partner investors in Pinnacle are 50% ownerswhich invested significant funds ($ 150m) in the venture. Fi fth, the TXUCommunications business model is best desc ribed as that of an ILEC or mini-RBOC .With strong cash flow from the local business , and a relatively modest new build, webelieve the business is at the less risky end of the telecom spectrum.
104. The Pinnacle off-balance-sheet debt was much more significant then defendants
suggested . As Murray noted :
To the extent that the value of the assets of Pinnacle decline, TXU hasguaranteed the difference in value between the assets and the guaranteed returnby issuing stock; TXU's potential exposure to this type of vehicle is less than theexposures ofEnron and numerous .com companies who were launched into deathspirals by this type of obligation, but it is non-trivial .
105. Based on statements made by the defendants, on 3/1/02, Commerzbank reported :
TXU has a high dividend yield relative to its peers in the utility sector . We estimatethat TXU will pay a dividend of $2 .40 per share this year, which results in a current
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.
dividend yield of almost 5% . This compares to a dividend yield for the S&P ElectricUtilities index of around 4% .
106. Based on statements made by the defendants, on 3/6/02, ABN AMRO reported :
"We believe TXU should continue to be a solid and stable investment comprisingutility operations with a substantial yield of 4 .6% and limited exposure to the volatilewholesale markets ." In addition, "[i]nvestors should note that TXU offers ahigher-than-average dividend yield of 4 .6%, compared with 4.4% for its immediatepeer group and 3 .9% for our entire universe ." Further, "[m]anagement expects . . .13% growth from TXU Europe . . ." And in discussing TXU's dividend policy, "TXU'sannual dividend is $2 .40 per share, which reflects an approximately 55% payout ratiofor 2002. TXU's board of directors froze the dividend at $2 .40 per share in 2000.The company does not expect a change in dividend policy in the near future .
107. Defendants were successful in convincing the market that its finances and future
dividends were solid. In 3/02, TXU's stock traded at its all -time high , above $52 per share .
108 . On 3 /14/02, TXU filed its 2001 Form 10-K, which included its previously repo rted
2001 financial statements . The Form 10-K represented the following with respect to net income :
Net income available for common stock in 2001 increased $249 million, or28$, to $655 million. Earnings per share were $2 .52 in 2001 compared with $3 .43in 2000. A 2% decline in average shares outstanding had favorable impact of $0 .06on the comparison of earnings per share . The decline in net income reflected theextraordinary items and certain transactions and unusual items as discussed above.
109. This omitted the fact that most (89%) of the net income was attributed to US Electric .
This fact had been pointed out to Horgan prior to filings in a 2/2/02 e-mail :
I would note that US Electric's net income is 109% of TXU's total net income.Even excluding extraordinary items, it is 89% . We don't tell the story to reflect thisin the annual report, the 10K, etc.
110. The 2001 Form 10-K also represented that Energy Trading grew to sales volume of
26,105 Gwh in 2001, from 21,917 Gwh in 2000 and 6,544 in 1999. The Form 10-K also stated :
The trading operation is one of the largest volume energy traders in NorthAmerica. As such, it leads TXU Energy's entry into selected regions in NorthAmerica by gaining market intelligence through its trading activities and acquiringpower generation capacity outside of Texas .
111 . On 3/27/02, TXU filed its 2001 Annual Shareholders Report with the SEC. It
contained a letter from Nye which stated in part :
.In my letter to you last year, I articulated a number of long-term initiativesthat are still key to reaching the goal of incre asing the intrinsic value ofTXU. Theinitiatives are to effectively implement industry restructuring in Texas , diversity USassets outside of Texas, capture the value of global merch ant energy, st ructurally
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. ,.
I
separate our two businesses, and strengthen credit . The 2001 results demonstrateconsistent progress on these initiatives .
VALUE ON THREE CONTINENTS
Our distinctive portfolio model is now implemented on three continents, andthe TXU brand is launched globally . The merchant energy business in on track tocapture value and achieve its goal of 11 to 13 percent earnings growth . In 2001, theEuropean business successfully completed a fundamental restructuring of itsoperations. The result is a sharper focus on merchant energy operations in thecompetitive markets of Europe, a United Kingdom business that is repositioned tosucceed in an environment with low wholesale energy costs, and a substantiallystrengthened balance sheet .
TWO GREAT BUSINESSES
After several years of very focused activity, we have completed the structuralseparation of the merchant energy and energy delivery businesses . The top-performing energy delivery business, which delivers electricity and natural gas oversystems of wires and pipes, has operations of significant scale in North America andAustralia.
The effects of one of the biggest failures in American business history willbe many. It seems clear that investors will attach more value to businesses that havea sound and consistent strategy, operate within proven competencies, demonstratequality execution, practice timely and complete communications, and make directand transparent disclosures . The very positive financial performance of TXU lastyear may be due in part to the credibility and reputation the company enjoys in themarket. I cannot imagine a more valuable attribute, nor one that is more worthy ofpreserving.
TXU has stayed the strategic course to develop well-diversified, globaloperations. I am confident that TXU's prudent and insightful approach makes it asound investment with a sustainable growth prospect . Guided by our ethical corevalues, we have the right strategy and business model, exceptional skills, well-positioned assets, and steadfast commitment to deliver the greatest shareholder valueas we serve our customers with products that enhance the quality of their lives .
112. In fact, defendants' statements between 10/25/01 and 3/27/02, were materially false
and misleading due to the following undisclosed facts :
(a) TXU's financial statements were false and misleading and in violation o f
GAAP, as desc ribed in ¶¶144-175 ;
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.r
(b) TXU was so highly leveraged and its liquidity was so precarious that it was
in danger of investment downgrades that would have dire impacts on its financial condition in the
near future;
(c) TXU's dividend rate was too high considering its financial condition an d
would have to be curtailed to save money to reduce debt and meet earnings targets . A reduction o f
the dividend would trigger a terrible chain of events . It would most certainly cause a drop in th e
Company's stock price since many of TXU's shareholders relied on the dividend . A reduction in the
stock price would trigger consolidation of Pinnacle into TXU's financial statements, increasing it s
debt and would force the conversion of preferred stock into common stock ;
(d) TXU was experiencing pipeline deterioration which would cost approximatel y
$1 billion to remedy;
(e) TXU had engaged in "round-t rip trades " which falsely inflated trading volum e
and revenue ;
(f) TXU's European operations were faring much worse than represented . TXU
Europe was locked into risky tolling agreements and contracts which required it to pay more fo r
power than it could sell it for on the open market, negatively impacting its profitability ;
(g) TXU might be required to raise over $4 billion in collateral , which it did no t
have, if the Company's investment grade fell, thus a downgrade in the Company's investment grade
could lead to insolvency;
(h) In a senior management meeting Nye joked about "whistling by the graveyard "
regarding TXU's financial situation; and
(i) TXU's billing system had huge error rates and was not adequately functionin g
in the newly deregulated environment .
113 . On 4/25/02, TXU reported its 1 Q02 results in a release which stated in part :
TXU . . . a global energy services company with business interests on three continents,today announced that earningsfor the first quarter ended March 31, 2002 were$0.94 per share of common stock versus $0 .76 per share for the first quarter of 2001,an increase of 24%. Before an extraordinary item discussed below, earnings for thefirst quarter of 2002 were $1 .01 per share, an increase of 22 percent over first quarter2001 earnings of $0 .83 per share, excluding unusual items .
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Mike McNally, chief financial officer said , "I am pleased by the continuedefforts and ability of the management and employees of TXU to deliver outst andingresults while continuing to focus on long term growth and shareholder value . Thediversity of our operations allowed us to overcome very difficult market conditionsin the UK this quarter with increased contributions from the rest of the internationaland North America operations , meeting our guidance for the first quarter earnings .We also continue to improve the balance sheet and are on course to achieve our goalof 55 percent long-term debt to capital this year and continued improvementthereafter . Finally, I am still very comfortable wi th analysts ' estimates for 2002 inthe general r ange of $4 .35 to $4.45 per share and anticipate second quarter results inthe $0 . 70 to $0 . 75 range . "
With regard to the Company's UK operations, the press release provided in pertinent part as follows :
Segment results were driven primarily by difficult market conditions in the UK,where very mild winter weather contributed to low volatility and prices in electricityand gas markets. These conditions decreased the value of the length of the UKportfolio in the quarter, which tends to be a net seller to the market in the winter.Results for the rest of the year should benefit in the current price environment as theUK portfolio is a net buyer in those periods . The decreased results from UKoperations were somewhat offset by added contributions from Australia andContinental Europe. Improved results from Australia were primarily driven byimproved margin and favorable energy market movements.
114. Subsequent to issuing its results, TXU hosted a conference call in which TXU
management (Nye/McNally/Horgan) made statements and answered questions about TXU's busines s
and results . Defendants stated :
• Management planned to continue expansion of the Company's generating portfoliooutside of Texas and TXU was looking to expand in the UK .
• Since year-end TXU had strengthened its balance sheet by closing on the previouslyannounced sale of the networks business in the UK. And closing on the sale of two plantsin Texas was expected soon.
• The first quarter had been difficult for the UK energy business, as TXU hadstructured its portfolio to be long during the peak months. The winter turned out to be verymild and, accordingly, there were low wholesale prices . However, management expectedto benefit from lower wholesale prices in the upcoming off-peak months where theCompany's position would be short to the market . The results for the quarter and the 12-months ended were very strong. The Company was continuing to execute its strategy ofadjusting the portfolio of businesses to maximize shareholder value . TXU's operations wereperforming well .
• Customers' ability to switch providers was not hurting the Company . TXU's positionwas very favorable compared to budget in both customer count and load compared to whereit expected to be .
• Competition was not a huge downside as competitors would probably be raising theirprices .
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• TXU management believed TXU could grow its Inte rnational Energy business 9%to 11 % by pursuing generation and retail opportunities in German and Nordic markets .
• The Company had $600 million to $800 million available per year to makeacquisitions and grow its business .
TXU was on track to report EPS of $4 .35-$4.45 in 2002 and $4.60+ in 2003 .
115 . Based on these statements , analysts issued reports on TXU which rated the Company
as follows and forecast the following ea rnings for TXU :
Firm Analyst Rating
Deutsche Bank Dobson Market Perform
Vestigo/Fidelity Sackler Hold
Legg Mason Tanner Buy 3
2002 EPS 2003 EPSForecast Forecast
$4.40
$4.40 $4.80
$4.35 $4.70
Credit Lyonnais Nangia Hold $4.40 $4.60
116. These analysts also stated the following about TXU :
• Deutsche Bank: "Management reaffirmed 2002 earnings guidance of $4 .35 to $4.45per share and offered second quarter guidance of $0 .70 to $0.75 per share . Weaker thanexpected UK results are expected to be offset by improved North American results .
TXU will continue to pursue growth through acquisitions . Target markets includethe US Mid Atlantic and Northeast regions, Germany, the Nordic region and the UK. TheCompany will target generation assets in the US and Nordic markets and retail supply assetsin Germany and the UK."
• Vestigo: "Management continues to forecast annual earnings growth of 9%-11 % forthe Company. They believe EPS for 2003 will be in the range of $4 .80 to $4.90. We areestablishing our 2003 EPS estimate at $4 .80. Management anticipates earnings contributionof$715-$725 million for NA Energy, $520-$530 million for the international operations and$300 million of the NA Delivery . "
• Legg Mason: "We are raising our target price of TXU Corporation to $57 per sharefrom $50. We are increasingly optimistic about the company's growth prospects and aregiving it a multiple which is closer to that of the industry ."
117. Based on statements made by the defendants, on 4/26/02, Salomon Smith Barne y
reported,
"[w]e maintain our 2002 forecast of $4.45 and $4.90 for 2003 and our long term 10%EPS growth rate estimate . TXU seems to be committed and will be able todeleverage its balance sheet and to reach a debt ratio of 55% by year end ."Furthermore, "Europe and Australia showed strong results . . . . "
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1 3
118. On 4/30/02, defendant Nye was interviewed by Bloomberg News concerning the
Company's first quarter earnings and TXU Europe, its UK subsidiary. With regard to problems at
TXU Europe, the interview went as follows :
Bloomberg : Let me ask you about the earnings picture that you describe. You sawstrength? You said that you met your first-quarter earnings,strengthened theAustralian business, but/had] difficult conditionswith the U.K., with the Amerada Hess' unit Is that a continuingproblem, or is that quickly resolved?
Nye: No, no no. This is strictly related to the very mild weather that wehad in the U.K this last winter . That's the peak period . We were alittle long for the peak. We're short off peak and the wholesalemarket has declined, so we have to make up some of that in thecoming quarters . But that was very much of a weather-related andwholesale price related circumstance.
We think we'll make the consensusfor the remainder of theyear, and that provides us a very strong earnings growth pictureover the last several years , and we think that will continue forseveral years to come .
119. On 5/30/02, TXU filed a Prospectus Supplement with the SEC pursuant to the
issuance of 11 million shares of TXU common stock, priced at $51 .15 per share. The underwriters
of the offering were granted an over-allotment of 1 .65 million shares . Separately, on 6/3/02, TXU
filed a Prospectus Supplement to sell 8 .8 million FELINE PRIDES (equity linked debt instruments) .
These Prospectuses were issued pursuant to a Registration Statement filed on 3/15/02, and signed
by the defendants as indicated in ¶19. TXU ultimately issued 11 .8 million shares of common stock
for net proceeds of $585 million and raised $440 million from the issuance of the PRIDES . Both
Prospectuses represented the following with respect to TXU's European operations :
TXU Europe's operations in the United Kingdom (UK) and other parts of Europe areprimarily conducted through subsidiaries of TXU Europe Group Plc . TXU Europeserves approximately 5 .7 million electricity and gas customers in the UK and is oneof the largest suppliers (retailers) in England and Wales . Subsidiaries of TXUEurope also include TXU Europe Power Limited, a large generator of electricity inthe UK; TXU UK Limited, one of the largest retail suppliers of natural gas in the UK ;and TXU Europe Energy Trading Limited and other subsidiaries engaged inwholesale energy marketing and trading and risk management in the UK and in thecentral and Nordic regions of Europe.
The Prospectuses also incorporated by reference TXU's 2001 Form 10-K, which included TXU' s
financial statements for 2001, including a balance sheet representing TXU had goodwill of $7.2
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billion. The Form 10-K also included TXU's European results for 1999, 2000 and 2001 and showed
growth in all areas, including :
CUSTOMERS (end of year - in thousands)
2001 2000 1999
Electric 4,395 4,358 2,931
Gas 1,273 1,127 805
The Prospectuses also reported Ratio of Earnings to Fixed Charges of 1 .49 and Ratio of Earnings
to Fixed Charges and Preference Dividends of 1 .47.
120. In fact, by this time, TXU's European operations were extremely troubled an d
competition was already severely hindering TXU's European customer base . As a result, TXU's
goodwill was overstated and its future results were sure to be much worse than represented in th e
filings .
121 . The Prospectuses also included a section on TXU's dividends, showing that the
quarterly dividend had been $0 .60 per quarter for at least ten straight quarters . While the section
included a sentence indicating "[fjuture dividends will depend upon TXU Corp .'s profit level and
capital requirements as well as financial and other conditions existing at the time," the Prospectuses
omitted the fact that TXU was already in such perilous financial condition that its future dividends
would undoubtedly be much lower than the amounts indicated for prior quarters .
122. On 7/25/02, TXU reported its 2Q02 results in a release which stated in part :
TXU . . . a global energy services company with business interests on three continents,today announced that earnings for the second quarter ended June 30, 2002 were $0 .73per share of common stock versus $0.78 per share for the second quarter of 2001 .Year-to-date earnings were $1 .67 per share of common stock compared to $1 .55 pershare for year-to-date 2001, an increase of eight percent. Before an extraordinaryitem related to debt extinguishment in the first quarter, earnings for year-to-date 2002were $1 .73 per share, an increase of seven percent over the prior year period earningsof $1 .61 per share, excluding unusual restructuring costs in the first quarter of 2001 .
Selected Quarter Highlight s
* TXU took further actions to strengthen the balance sheet, maintain ampleliquidity, and position the company for future growth . TXU issued over $1billion of common stock equity and equity-linked securities (11 .8 millionshares of common stock and 8 .8 million share of FELINE PRIDESSM) .TXU also established a joint $1 billion 364-day revolving credit facility at USHoldings, Oncor and TXU Energy and a $500 million 3-year credit facilit y
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r •
AI J
at TXU Corp. to replace the existing TXU Corp . and TXU US Holdings $1 .4billion credit facility. Oncor, TXU's electricity delivery business , issued $1 .2billion aggregate principal amount of Senior Unsecured Notes at favorablerates .
The Public Utility Commission of Texas approved the sweeping settlementplan for TXU and two of its wholly owned subsidiaries, TXU Energy andOncor, resolving all major pending issues related to the company's transitionto competition.
TXU strengthened its position in the Germ an energy market with thepurchase of 74 .9 percent of Braunschweiger Versorgungs AG (BVAG), awholly owned subsidiaryof Stadtwerke Braunschweig . The acquisition adds210,000 electricity , gas, heating and water customers with the network andenergy businesses in the Branschweig area of central Germany, increasingTXU's German customer b ase to more th an 650 ,000 and its European retailbase to over 6 million residential and business customers .
* TXU completed the sale of 2,334 megawatts of gas fired electric generatingplants in Texas .
* TXU completed the acquisition of 122 megawatts of gas fired generationplant in Pedricktown, New Jersey.
* TXU further strengthened its position in the Nordic region with the purchaseof Forbrukerdraft, one of Norway's fastest growing retail energy supplierswith 43,000 customers . The acquisition complements TXU's existing retailinterests in Atro in Finland and its 780 MW of generation output capacitythrough a joint venture with Powest Oy in Finland, contracts for hydro-electric power in Norway and interests in other contracts for electricity inFinland .
* TXU will begin serving approximately 34,000 residential and small businesscustomers of NewPower in the Houston area in an agreement that providesa new base of customers in Houston for TXU and provides the customerswith a seamless transition.
* TXU launched several innovative new programs in Australia to furtherenhance customers' lives. One program saves pensioners money by makingtheir energy payments "worry free" through direct debit, which helps TXUreduce billing and payment processing costs . TXU Electricians was launchedto provide a reliable, fixed price, one-stop service to customers, 24 hours aday, seven days a week. A dual fuel product was introduced that combinesgas and electricity into a single monthly bill - the first of its kind in Australia .
* TXU Energy in North America launched TXU Energy Sentinel, providinglarge commercial and industrial customers the freedom to choose from acomprehensive suite of 26 energy management services.
* TXU further evidenced its commitment to the environment with severalevents in the second quarter . TXU won the annual Kenes C. BowlingNational Mine Reclamation Award from the Interstate Mining CompactCommission for reclamation in the coal category at its Monticello Mine ineast Texas . TXU also partnered with the Dallas Trees and Parks Foundationand Richland College to create the largest known non-profit urban tree far m
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in the United States . In addition, a TXU joint venture made applications forthe largest offshore wind farm in the UK, an approximate 200 MWdevelopment in northwest England in the Solway Firth .
Regarding the financial results, Mike McNally, chief financial officer said,"This is yet another example of the focus and ability of the TXU team to deliverexcellent results in challenging times. As in the first quarter, the diversity of ouroperations allowed us to overcome continued difficult market conditions in the UKwith increased contributions from the rest of the international and North Americaoperations. We also continue to position for growth and improve the balance sheetand have exceeded our near term goal of 55 percent long-term debt to capital thisyear ."
McNally continued, "We expect third quarter earnings to be in a range of$1 .55 to $1 .60 per share and fourth quarter earnings of $1 .05 to $1 .10 per share ofcommon stock. While the continued challenges in the UK market will place somepressure on the achievement of our 2002 target of $4 .35 to $4.45, with normalsummer weather in Texas, continued progress on initiatives in place in the UK toenhance margins through restructuring long term contracts and physical generationpositions, and anticipated cost reductions and other initiatives globally, we remainfocused on achieving this guidance. These initiatives will also position us well tomeet 2003 expectations in the $4 .80 to $4.90 per share range . "
123 . Subsequent to issuing its results , TXU hosted a conference call in which TXU
management (Nye/McNally) made statements and answered questions about TXU 's business and
results . Defendants stated :
• TXU was working to restructure UK power contracts to improve results for itsEuropean operations .
• If we are unsuccessful in restructuring those production contracts, it could affect thecompany by 20 cents a share for the year . However, there is upside in Australia, NorthAmerican energy delivery and North American energy . So I think a downside in Europe canbe offset by other places in the system . I want number one to put a floor under the concerns,but also show that there is upside in other places .
• We're not in the business of proprietary trading ; our business is to be in the businessof matching and managing a portfolio now when you do that (technical difficulty) .
TXU was on track to repo rt EPS of $4.35-$4.45 in 2002 and $4 .80+ in 2003 .
124. On the call, Nye lied in pertinent part as follows :
"There should be no doubt that we have sound accounting practices and donot trade to artificially increase revenues. . . . However, our stock price has fallensignificantly as bad news runs rampant through the sector . "
125 . On 7/26/02, one day after the above-referenced conference call with analysts, Murra y
spoke with McNally directly and stated that he was surprised that the analysts had not asked mor e
questions about the underwater power contracts in Europe. McNally stated that he thought hi s
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3 - 1)
statement about the $0.20/share potential hit in the fourth quarter took care of their concerns .
McNally admitted that there could be more than a $0 .20/share hit but that he told the analysts that
it would not be worse than $0.20/share so they would not worry about the issue . McNally also
admitted that irrespective of his comment about not being in the business of proprietary trading, he
knew otherwise . Proprietary trading consists of active speculation regarding the direction prices will
move within the energy market . McNally said he made the misstatement because he "did not want
to get into that area" with the analysts . McNally's positive statements to the analysts, which were
also echoed at road shows to market the mid-2002 stock offerings, were directly contradicted by his
remarks at a March 2002 Principal Manager's meeting at which McNally expressed a much more
negative view of the Company's performance and outlook . McNally's public statements regarding
earnings guidance also directly contradicted internal statements of several senior managers including
Dickie, Murray and head ERCOT trader Larry Leverett .
126. Following defendants' public statements, Paul Fremont, an analyst at Jefferies & Co .
commented positively on the Company's outlook and stated in pertinent part as follows :
"People had been expecting a blow up in Europe . . . . The fact they reaffirmedguidance, even with the possibility of missing, is better than anticipated. "
Based on these statements , other analysts issued repo rts on TXU which rated the Company a s
follows and forecast the following earnings for TXU :
2002 EPS 2003 EPSFirm Analyst Rating Forecast Forecast
Deutsche Bank Dobson Market Perform $4.35 $4.70
Credit Lyonnais Nangia Add $4.40 $4.60
127. On 9/17/02, TXU was forced to delay the sale of $439 million in bonds in Australia
as demand had weakened .
128. In fact, defendants ' statements between 9/25/02 and 7/26/02 and the Prospectuses
were materially false and misleading due to the following undisclosed facts :
(a) The new regulatory environment was already having such a severe impact o n
TXU's business that it was only a matter of time before TXU would have to dispose of ce rtain
business units and seek additional financing;
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(b) TXU's European operations were faring much worse than represented and
were not recovering after a slow winter and competition in Europe was making the operations no t
profitable and not worth TXU's continued investment, such that a disposition would be necessary ;
(c) The Company claimed to be successfully addressing the previous problems
in its UK operations and represented that these problems were being "quickly resolved," when, i n
fact, the reduced wholesale electricity prices in the UK power markets was a "continuing problem "
which would persist in eroding the Company's profit margins ;
(d) TXU's financial statements were false and misleading and in violation of
GAAP, as described in ¶¶144-175 ;
(e) TXU was so highly leveraged and its liquidity was so precarious that it was
in danger of investment downgrades that would have dire impacts on its financial condition in th e
near future ;
(f) TXU's dividend rate was too high considering its financial condition and
would have to be curtailed to save money to reduce debt and meet earnings targets . A reduction of
the dividend would trigger a terrible chain of events . It would most certainly cause a drop in the
Company's stock price since many of TXU's shareholders relied on the dividend . A reduction in the
stock price would trigger consolidation of Pinnacle into TXU's financial statements, increasing its
debt and would force the conversion of preferred stock into common stock ;
(g) Customer attrition was a growing problem in a deregulated environment a s
high-profit customers were leaving TXU for more economical alternatives ;
(h) TXU was not on track to achieve EPS of $4 .35+ and $4.60+ in 2002 and
2003, respectively ;
(i) TXU's new billing system was severely flawed and prevented TXU's bill s
from reaching many of its customers , thereby impairing TXU's badly needed cash flow;
(j) TXU had engaged in "round-trip trades" which falsely inflated trading volume
and revenue ;
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(k) TXU Europe was locked into tolling agreements and contracts which required
it to pay more for power than it could sell it for on the open market, negatively impacting its
profitability ;
(1) TXU's financial condition was so precarious by the end of 2001 that senior
executives began discussing the possibility of bankruptcy in April or May of 2002 ;
(m) The value of TXU's Comanche Peak nuclear power plant was overstated b y
$5-6 billion; and
(n) TXU might be required to raise over $4 billion in collateral , which it did not
have, if the Company's investment grade fell, thus a downgrade in the Company's investment grade
could lead to insolvency.
129. On 10/4/02, Moody's revised the outlooks for ratings assigned to securities issued b y
TXU (Baa3) and TXU Gas (Baa2) to "negative" from "stable " in response to deterioration in the
credit profile of TXU Europe (Baal) and pressure on the credit profile of TXU Gas. Reuters
reported that the negative outlook "reflects Moody's conce rns that depressed wholesale markets may
cause fu rther ratings pressure in Europe or elsewhere. "
130 . Also on 10/4/02, TXU issued a release revising earn ings expectations for 2002 and
2003 . The release stated in part :
TXU . . . a global energy services company serving customers in the United States,Europe and Australia, announced today that it is adjusting its guidance for earningsfor the third quarter ended September 30, 2002 to a range ofUS$0 .90 to US$0 .95 andfourth quarter to a range of US$0 .60 to US$0.65 per share of common stock.Management is also adjusting its guidance for the year 2002 to a range of US$3 .20to US$3.25 per share of common stock, and its guidance for the year 2003 to a rangeof US$3.45 to US$3 .55 per share of common stock.
[Erie Nye, chairman and chief executive, said,] "While I am very disappointedwith these results, I am convinced that we have a superior strategy and businessmodel that will deliver long-term value . TXU's management team remains focusedon enhancing shareholder value, continually improving the balance sheet, andmaintaining a sound and attractive dividend ."
131 . In an interview following this announcement , defendant Nye acknowledged that the
Company had failed to adequately supervise its deteriorating situation in the UK . When questioned
regarding this latest revelation, defendant Nye stated in pertinent part as follows :
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"We understood the individual implications of these various things butwhen they acted in concert we didn't fully comprehend what we had a hold ofthere. . . . And this is a very troublesome thing . "
"We were clearly the victims of undue optimism . "
"As we looked into what happened there, it seemed tome that the planningprocess, which would include the budgeting process, . . . was deficient."
Defendant Nye further stated :
"We have also determined that we've got some deficiencies in our planningand budgeting systems there so the data didn 't give us the early warning that weshould have had. "
132 . The Company's stock dropped to $27 on this shocking news but continued to trad e
at artificially inflated levels as the Company assured investors its dividend was safe and stated tha t
its business was sound . In fact, on 10/9/02, Nye stated on a conference call with investors that :
TXU is strong financially and entirely capable of maintaining normal operations asa highly regarded enterp rise. The dividend is sound and secure, and [with] thoseearning growthsofabouteightpercentfor '03 over '02, combined with exceptionalcash flows, the prospectsfor the Company and its investors are very attractive .
Defendant McNally was also questioned regarding these latest developments . With regard to the
Company's ongoing support for TXU Europe, he responded in pertinent part as follows :
"I don't see any basis on which we would just walk away from Europe. "
133. On 10/8/02, the Company issued a press release reaffirming its strong financial
position and liquidity which, among other things, "'will provide ample funding for the stron g
dividend ."' The Company also repo rted that a credit rating downgrade of a European unit may
trigger the early repayment of at least 275 million pounds ($430 million) in bonds .
134. As a result , TXU's stock stabilized in the $15-$18 range.
135. On 10/10/02, an article in the Fort Worth Star Telegram reiterated defendants '
commitment to maintaining the Company's dividend payment, stating in pertinent part as follows :
Executives reiterated that TXU has $2 .6 billion in cash on hand forcontingencies and suggested that banks would drop the so-called cross-collateralization of European debt. They also said the Dallas-based utility has noplans to reduce its quarterly dividend of 60 cents per share.
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J
136. On Friday, 10/11/02, an article in The New York Times reported on the confusion
regarding the cross-default clause, stating in pertinent part as follows:
At that conference call, and the ones that followed on Monday andWednesday, officials seemed to have trouble sorting out the facts, particularly aboutthe company's debt situation. "We made mistakes," Mr . Nye conceded. There wasplenty of confusion over whether a default on British debt would lead to a cross-default on American debt . It would, but for only $500 million . "I asked our treasurypeople how that got in there," Mr. Nye said of the cross-default clause . "Nobody hasbeen able to give me a reason ."
With regard to the Company's continued payment of its dividend, the article quoted defendant Nye ,
who positively stated in pertinent part as follows :
"I believe the dividend is secure.. . . I don't know of anything today that wouldmake me think otherwise."
137. The next business day after Nye had reiterated his belief that "the dividend is
secure, "on Monday, 10/ 14/02, TXU issued a release announcing it would cut its dividend 80% an d
would exit from Europe, offering its European assets up for sale! The release stated :
TXU announced that it took dramatic action today to ensure that TXU Corp .'s creditand liquidity position remains s trong.
In order to meet the new requirements of the rating agencies for investmentgrade credit , TXU's Board of Directors declared a qua rterly dividend of US$0.125per share of common stock. This represents an 80 percent reduction from theprevious quarterly dividend of US$0.60 per share . The dividend will be paid onJanuary 2, 2003 to shareholders of record on December 6, 2002 . The indicatedannual dividend is now US$0 . 50 per share of common stock .
Erle Nye, Chairman and Chief Executive, said, "Today's actions are the directresult of rating agencies' concerns as to the company's liquidity and credit situation .Today's financial markets and concerns of the rating agencies have forced us to takethis dramatic action ."
138. On this news, TXU's stock collapsed to as low as $10.10 per share, before closing at
$12.94 per share on volume of 39 million shares . This stunning collapse of TXU's stock is shown
in the following chart:
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TXU Corp .April 26 , 2001 - December 31, 2002
Daily Share Prices60
50
402
Co.a. 30wCaea0
20
10
26-Apr-01 24-Aug-01 31-Dec-01 02-May-02 30-Aug-02 31-Dec-0226-Jun-01 30-Oct-01 04-Mar-02 02-Jul-02 30-Oct-02
139. Analysts were furious at having been misled :
Gerard Klauer Mattison wrote on 10/14/02 :
In our view, the dividend action further undermines the company's alreadynear non-existent credibility in that as recently as October 9 management sawno reason for the dividend to be considered in jeopardy .
Deutsche Bank wrote on 10/14/02 :
The company's announcement appears to abandon Europe, and is likely tocause a significant write-off of the company's equity investment in Europe,about $4B currently.
CS First Boston wrote on 10/14/02 :
The TXU's dividend cut from $2 .40 per share to $0 .60 annually,announced this mo rning, is sure to add to the differentiation in the groupamong the riskier companies and those with more secure financial andfinancing pictures. While TXU's issues are clearly related to its troubled UKand European operations, the draw-down of its credit facilities , high payoutratio and lesser "earnings power" as discussed below are the issues to watchwith others .
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W.H. Reaves & Co. wrote on 10/14/02 :
"The company a few weeks ago was saying the dividend was secure . . . . Thisdoesn't help its credibility ."
140. Also on 10/ 14/02, Standard & Poor's Ratings Services announced that it had lowered
its long-term corporate credit rating on TXU and its U .S. and Australian subsidiaries to BBB from
BBB+. In addition , S&P lowered the long-term corporate credit ratings on TXU Europe Ltd . and
its European subsidiaries to B+ from BBB- . According to S&P :
The outlook on TXU Corp. and its U .S. and Australian subsidiaries remains negative,and the ratings on TXU Europe remain on CreditWatch with negative implications,where they were placed on Oct. 10, 2002 .
"The rating action on TXU Corp . follows a material deterioration in thecompany's credit quality in 2002, due primarily to weak performance in the U .K.business, which has never provided any dividends to the parent," said AnthonyFlintoff, director at Standard & Poor's . "The weakness in TXU Corp.'s Europeanoperations has applied added pressure to its financial profile, which has been veryweak for the triple-'B'-plus rating in the past few years," added Mr . Flintoff.
141 . The problems with TXU's European operations were not the result of an immediate ,
unforeseen crisis, but had been inevitably building for many months . As Britain's The Independent
explained on 10/14/02 :
At the root of the company's problems is the 40 percent fall in wholesaleelectricity prices in the past three years . In addition to losses on its own generatingstations, TXU is exposed to loss-making contracts taken out with the other five UKgenerators . The contracts, signed at a time when prices were considerably higher,involve TXU Europe making "capacity" payments of € 370m a year in addition to thecost of purchasing the electricity.
142. Thus, the economic crisis TXU faced in the European operations was not the resul t
of a sudden crisis or unforeseen emergency . TXU Europe was locked into five long-term power
contracts in the UK, but with the steep 40% drop in wholesale electricity prices in the UK, TXU
Europe was buying power at much higher prices than it could sell it, making it impossible for TXU
Europe to make a profit. TXU Europe's problems simply could not have caught TXU by surprise,
as Nye and TXU management have claimed .
143 . Analysts now expect TXU to report EPS of just $3 .20 and $3 .45 in 2002 and 2003,
respectively, more than $1 .00-$2.00 a share lower for each year . The Company subsequentl y
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disclosed that it would record a loss of as much as $4 .5 billion on the disposition of its European
assets .
FALSE AND MISLEADING FINANCIAL STATEMENT S
144. During the Class Period, TXU reported false and misleading financial statements b y
engaging in "earnings management" wherein reserves were increased and decreased not based on
reasonable estimates of TXU's liabilities but rather based on desired earnings targets . TXU also
improperly recorded income under mark-to-market accounting, failed to record losses on impaired
assets as required by GAAP and failed to record losses for uncollectible accounts receivable on a
timely and adequate basis . Not only were earnings falsified but also other financial ratios and data.
145 . According to Murray, the Company was "bending over backwards to avoid having
[its] book accounting reflect economic reality" and was "playing awfully close to legal and ethical
boundaries ." Despite this pointed criticism of TXU policies the defendants refused to reveal the
problems being experienced by the Company to the investing public . Specifically, the Company
failed to disclose in the Prospectuses or any other oral or written statements disseminated to the
public, among other things that the Company was experiencing a billion dollar liability on its
pipelines, had made state franchise tax misstatements, failed to account for impaired goodwill of
many billion dollars of its assets, and faced deferred income tax related structural constraints .
Despite the warnings of a respected senior executive none of these issues were adequately disclosed .
146. In July 2002, a senior TXU executive stated internally that "all of our upsides ar e
accounting and all of our downsides are real ."
147. TXU reported the following financial results during the Class Period :
1Q01 2Q01 3Q01 4Q01 1 Q02 2Q02
Revenues $8.4B $6.1B $6.6B $6 .8B $8.1B $7.2B
Net Income $196M $201M $334M $198M* $250M $195M
* Excluding unusual items .
148. Defendants represented these amounts were a fair presentation of TXU's results from
operations .
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149. These representations were false and misleading as to the financial informatio n
repo rted , as such financial information w as not prepared in conformity with GAAP , nor was the
financial information a "fair representation " of TXU's financial condition and operations, causing
the financial results to be presented in violation of GAAP and SEC rules .
150. Regulation S-X, 17 C .F.R. §210.4-01 (a)(1), states that financial statements filed with
the SEC which are not prepared in compliance with GAAP are presumed to be misleading and
inaccurate. Regulation S-X requires that interim financial statements must also comply with GAAP,
with the exception that interim financial statements need not include disclosure that would be
duplicative of disclosures accompanying annual financial statements .
TXU's "Earnings Management " Manipulations
151 . Defendants manipulated TXU's results by increasing or decreasing rese rves to meet
earnings targets. If targets had been reached, reserves would be increased to be used in futur e
quarters to inflate earnings.
152. GAAP requires that accruals be made only when it is probable that a loss has been
incurred and the amount can be reasonably estimated . See FASB Statements of Standards ("SFAS" )
No. 5, ¶8 . Moreover, as former SEC chairman Arthur Levitt stated in a speech given on 9/28/98 :
Problems arise, however, when we see large charges associated with companiesrestructuring . These charges help companies "clean up" their balance sheet - givingthem a so-called "big bath."
Why are companies tempted to overstate these charges? When earnings takea major hit, the theory goes Wall Street will look beyond a one-time loss and focusonly on future earnings .
And if these charges are conservatively estimated with a little extracushioning, that so-called conservative estimate is miraculously reborn as incomewhen estimates or future earnings fall short .
When a company decides to restructure, management and employees,investors and creditors, customers and suppliers all want to understand the expectedeffects . We need, of course, to ensure that financial reporting provides thisinformation. But this should not lead to flushing all the associated costs - and maybea little extra - through the financial statements .
153 . TXU made a practice of man ipulating accrual accounts, including as described in
¶¶24-27. After making excess accruals , TXU would use the excess accrual at a later time to meet
earnings targets . Internally at TXU, employees even used the term "earnings management" to
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describe the manipulations. McNally personally directed the earnings management, instructin g
subordinates to reduce or release reserves when necessary to meet earnings targets .
TXU's Manipula tion of Income Under Mark-to-Market Accounting
154. GAAP, as set forth in and in accordance with Emerging Issues Task Force (EITF )
Issue No. 98-10, SFAS No. 133, provides that trading contracts and derivative instruments are
recorded a current fair value on the balance sheet as either energy trading assets or liabilities, and
any unrealized gains or losses resulting from period-to-period changes in the current fair values are
recorded net in revenues . Such accounting requires that entities utilize reasonable estimates of fair
value of energy contracts .
155 . During the Class Period, TXU abused mark-to-market accounting to inflate its
reported results . For example, for TXU Europe mark -to-market losses were not recorded .
156. On April 23, 2001 Murray sent an e-mail to Horgan stating the following :
They [TXU Europe] must have huge mark to market losses, let alone theirlosses on plants that are economic losses but aren't marked to market . Why doesn'tTXU make them account on a mark to market basis to reflect this track record ?
157. Murray also e-mailed to Horgan the following on 1/31/02 :
On January 25, 2002, Andrew Mittag, Chad Small, Janet Lentz and I met withBill Roberts, Controller of TXU Europe . I asked him why the virtual power stationcontracts are not mark to market. His first reaction was approximately, "because theylose money . "
He also stated that they had a 10mm pound credit risk loss to Enron . He saidthey were accounting for it as extra-ordinary so it didn't hit their operating earningsor performance bonuses . I asked whether credit risk losses weren't a normal part ofthe business rather than extraordinary . He said that Enron even made the papers inGeneva so it was very extra-ordinary . This seems like a stretch to me, especiallygiven that the events of September 11 were not considered extra-ordinary .
158 . TXU ultimately recorded losses for the disposition of TXU Europe exceeding $4
billion. The Company also experienced a huge reversal in mark-to-market income for 2002 for its
U.S . operations . Whereas in 2001, TXU's gross profit was increased by $319 million , in 2002 gross
profit was reduced by $67 million.
TXU's Failure to Record Impairment on a Timely Basis
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159. TXU also misstated its results by failing to record impairment on assets as require d
by GAAP. The Company has subsequently recorded large charges to reflect impairment for it s
assets, including long-term assets and goodwill .
160. GAAP, as set forth in SFAS No . 121, requires that companies review long lived
assets to determine if the assets are impaired . SFAS No . 121, ¶¶5-6 :
5. The following are examples of events or changes in circumstances thatindicate that the recoverability of the carrying amount of an asset should be assessed :
a. A significant decrease in the market value of an asse t
b. A significant change in the extent or manner in which an asset is used or asignificant physical change in an asset
c. A significant adverse change in legal factors or in the business climate thatcould affect the value of an asset or an adverse action or assessment by aregulator
d. An accumulation of costs significantly in excess of the amount originallyexpected to acquire or construct an asse t
e. A current period operating or cash flow loss combined with a history ofoperating or cash flow losses or a projection or forecast that demonstratescontinuing losses associated with an asset used for the purpose of producingrevenue.
6. If the examples of events or changes in circumstances set forth in paragraph5 are present or if other events or changes in circumstances indicate that the carryingamount of an asset that an entity expects to hold and use may not be recoverable, theentity shall estimate the future cash flows expected to result from the use of the assetand its eventual disposition . Future cash flows are the future cash inflows expectedto be generated by an asset less the future cash outflows expected to be necessary toobtain those inflows . If the sum of the expected future cash flows (undiscounted andwithout interest charges) is less than the carrying amount of the asset, the entity shallrecognize an impairment loss in accordance with this Statement. Otherwise, animpairment loss shall not be recognized ; however, a review of depreciation policiesmay be appropriate .
161 . During the Class Period, TXU's Comanche Peak nuclear power plant w as carried on
the Company's balance sheet for more than $7 billion even though its value was approximately onl y
$2 billion, due to changes in the regulatory environment which required that it be evaluated fo r
impairment .
162 . In a meeting in late June/early July of 2002, O'Malley, who reported to Dickie, tol d
Murray that TXU was planning to change the depreciable life on Comanche Peak and write up the
asset to what it would have been if the longer depreciable life had been used all along . Murray stated
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that he did not think this was permissible and that even if it was , he thought this was terrible
accounting because Comanche Peak was on the books for $7-8 billion but its market value wa s
probably less than $2 billion . Writing the asset up would exacerbate further this disparity .
163 . TXU Energy booked $100 million of earnings in the last three days of the second
quarter of 2002. This was highly significant since North America's total net income contribution fo r
2Q02 was $176 million .
164. Similarly the Forest Grove and Twin Oak facilities were also impaired and neede d
to be written down. McNally stated in a public forum that TXU was not going to develop Forest
Grove as a power plant, a critical item in determining the need for a write-down. Forest Grove was
discontinued in 3/02 and there was concern that the equipment was obsolete . One TXU employee
was asked internally to sign a statement that Forest Grove was not impaired . This employee who
reported to Murray refused and Murray backed him up and told him not to sign anything he was not
completely comfortable with . Horgan told Murray it was not his call whether they impaired Forest
Grove and that Murray did not need to be involved .
165. Other assets were similarly impaired . TXU's telecommunications assets were also
impaired. By the beginning of the Class Period, there was an increasing glut of telecommunications
line capacity. TXU Communications, which was TXU's contribution to the purported Pinnacle joint
venture, was losing money . Its only asset, one which the Company highlighted was its number of
access lines . Defendants represented TXU Communications had 225,000 access lines at the end of
2001 (this figure was only 169,000 at year end 2002) . Yet by the beginning of 2001, these lines were
not worth the amount carried on TXU's books due to issues in the telecom industry .
166 . According to a former TXU business analyst, "the market [for componen t
communication comp an ies] was dying ." TXU management knew that its transpo rt business
continued to lose money and was trying to sell it, and TXU Communications underwent "constant
reorgan ization " because the business was performing poorly. The business analyst noted "no one
needed to use the circuits ." Pinnacle posed a double-threat to TXU - not only did it represent
overvalued assets - its also represented unrecorded debt .
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• ` M
167 . Ultimately, in the 4Q02, TXU belatedly recorded a loss of $174 million fo r
impairment of telecommunications investments . Despite factors (as per SFAS No . 121) requiring
that a test for impairment be performed and despite conditions pointing to impairment , TXU failed
to record impairment on a timely basis as required by GAAP . These assets become even more
impaired due to deregulation.
168. Goodwill was also impaired . In fact, on or about 2/5/02, Murray had a telephon e
conversation with Horgan and discussed the allocation of TXU Gas goodwill to TXU Energy .
Murray said that the goodwill should be written off. Horgan advised Murray that the goodwill was
going to be reallocated to TXU Energy and to keep this information quiet because McNally was not
going to let Dickie know until the board meeting so Dickie would not have an opportunity to object .
Murray stated that Nye has acknowledged in the press that the Enserch acquisition had not met
expectations . Murray stated that in his opinion, TXU should impair the goodwill to better reflect
economic reality. Murray also backed Charles Jennings (one of Murray's direct reports) in raising
issues regarding whether the transfer of goodwill to another entity causes a default ofTXU Gas' debt
and whether not writing off such goodwill is appropriate as regards the holders of TXU Gas' debt .
169. Ultimately, in the 4Q02, TXU recorded charges of hundreds of millions of dollars to
reflect impairment for various assets, including Twin Oak and Forest Grove projects . Due to
problems in Europe, TXU reported a huge loss of $4 billion . This loss exceeded by three times all
the net income TXU reported du ring the Class Period .
TXU's Failure to Make Adequate Accrualsfor Uncollectible Accounts Receivable
170. TXU also failed to make timely and adequate accruals for uncollectible receivables .
TXU sold many of its receivables for financings and its failure to adequately reserve was prevalen t
both as to the receivables its retained and the receivables it sold .
171 . GAAP, as set forth in SFAS No . 5 ¶23, required that a loss be recorded for
receivables when it is probable that a receivable or some portion of a group of receivables will no t
be collected .
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172. During the Class Period , TXU's billing problems, described in ¶¶53-64 , caused it to
be unable to collect from customers on a timely basis and made it probable that a larger portion o f
receivables would not be collected .
173. Ultimately, TXU recorded large reserves for uncollectible receivables in 2002. In
fact, Selling General & Administrative Expenses increased by $260 million in 2002, largely due to
bad debt write-offs . Additionally, in 10/02, the accounts receivable transfer program was extended
to 7/03 to reflect changes in the quality of the portfolio, i.e ., more uncollectible receivables. As the
2002 10-K noted :
The delinquency and dilution ratios [under the Receivables Program]exceeded the relevant thresholds at various times during 2002 and in January 2003,but waivers were granted. These ratios were affected by issues related to thetransition to deregulation. Certain billing and collection delays arose due toimplementation of new systems and processes within TXU Energy and ERCOT forclearing customer switching and billing data .
174. Due to these accounting improprieties, TXU presented its financial results in a
manner which violated GAAP , including the following fundamental accounting p rinciples :
(a) The principal that financial reporting should provide information that is useful
to present and potential investors and creditors and other users in making rational investment, credi t
and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34) ;
(b) The principal that financial repo rt ing should provide information about th e
economic resources of an enterprise, the claims to those resources, and effects of transactions, event s
and circumstances that change resources and claims to those resources was violated (FAS B
Statement of Concepts No . 1, ¶40) ;
(c) The principle that financial repo rting should provide information about ho w
management of an enterprise has discharged its stewardship responsibility to owners (stockholders)
for the use of enterprise resources entrusted to it was violated . To the extent that management offers
securities of the enterprise to the public, it voluntarily accepts wider responsibilities for
accountability to prospective investors and the public in general (FASB Statements of Concepts No .
1, ¶50);
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(d) The principle that financial reporting should provide information about an
enterprise's financial perform ance during a period was violated . Investors and creditors often use
information about the past to help in assessing the prospects of an enterp rise . Thus, although
investment and credit decisions reflect investors ' expectations about future enterprise performance,
those expectations are commonly based at least partly on evaluations of past enterp rise performance
(FASB Statement of Concepts No. 1, ¶42) ;
(e) The principle that financial reporting should be reliable in that it represents
what it purports to represent was violated . That information should be reliable as well as relevan t
is a notion that is central to accounting (FASB Statement of Concepts No. 2, ¶158-59) ;
(f) The principle of completeness, which means that nothing is left out of th e
information that may be necessary to insure that it validly represents underlying events and
conditions was violated (FASB Statement of Concepts No. 2, ¶79); and
(g) The principle that conservatism be used as a prudent reaction to uncertaint y
to try to ensure that uncertainties and risks inherent in business situations are adequately considere d
was violated . The best way to avoid injury to investors is to try to ensure that what is reported
represents what it purports to represent (FASB Statement of Concepts No. 2, ¶195, 97) .
175 . Further, the undisclosed adverse information concealed by defendants during th e
Class Period is the type of information which because of SEC regulations, regulations of the national
stock exchanges and customary business practices, is expected by investors and securities analysts
to be disclosed and is known by corporate officials and their legal and financial advisors to be the
type of information which is expected to be and must be disclosed.
CLASS ACTION ALLEGATION S
176. Plaintiffs bring this action as a class action under Federal Rule of Civil Procedure 23 ,
on behalf of all persons who purchased or otherwise obligated themselves to purchase the publicl y
traded securities of TXU during the Class Period (the "Class") .
177. The Class is composed ofpersons dispersed throughout the United States, the joinder
of whom in one action is impracticable . The disposition of their claims in a class action will provide
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substantial benefits to the parties and the Court . As of 8/02, TXU had more than 278 million shares
of stock outstanding, owned by hundreds, if not thousands, of shareholders .
178. There is a well-defined community of interest in the questions of law and fac t
involved in this case . The questions of law and fact common to the members of the Class whic h
predominate over questions which may affect individual Class members include the following :
(a) Whether § § 10(b) and 20(a) of the Exchange Act and/or § § 11, 12(a)(2) an d
15 of the Securities Act were violated by TXU, the Officer Defendants , the Director Defendants
and/or the Underwriter Defendants .
(b) Whether defendants misrepresented material facts ;
(c) Whether defendants' statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they were made, not misleading;
(d) Whether the defendants knew or should have known that their statements were
false and misleading ;
(e) Whether the prices of TXU securities were artificially inflated during the
Class Period; and
(f) The extent of damage sustained by Class members and the appropriate
measure of damages .
179. Plaintiffs' claims are typical of those of the Class because plaintiffs and the Class
sustained damages from defendants' wrongful conduct.
180. Plaintiffs will adequately protect the interests of the Class . Plaintiffs have retaine d
counsel who are experienced in class action securities litigation . Plaintiffs have no interests which
conflict with those of the Class .
181 . A class action is superior to other available methods for the fair and efficien t
adjudication of this controversy .
182 . The prosecution of separate actions by individual Class members would create a ris k
of inconsistent and varying adjudications .
FIRST CLAIM FOR RELIEFFor Violation of §10(b) of the Exchange Act and
Rule 10b-5 Against TXU and the Officer Defendants
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183. Plaintiffs incorporate the above paragraphs by reference .
184. The Officer Defendants knew the material, adverse, non-public information abou t
TXU's financial results and then-existing business conditions, which was not disclosed, an d
participated in drafting, reviewing, and/or approving the misleading statements, releases, reports, and
other public representations of and about TXU .
185. During the Class Period, TXU and the Officer Defendants disseminated or approved
the false statements specified above, which they knew were misleading in that they containe d
misrepresentations and failed to disclose material facts necessary in order to make the statement s
made, in light of the circumstances under which they were made, not misleading .
186. TXU and the Officer Defendants violated § 10(b) of the Exchange Act and Rule l Ob-5
in that they:
(a) Employed devices, schemes, and artifices to defraud ;
(b) Made untrue statements of material facts or omitted to state material fact s
necessary in order to make statements made, in light of the circumstances under which they wer e
made, not misleading; or
(c) Engaged in acts, practices, and a course of business that operated as a frau d
or deceit upon plaintiffs and others similarly situated in connection with their purchases of TX U
securities during the Class Period .
187 . Plaintiffs and the Class have suffered damages in that, in reliance on the integrity o f
the market, they paid artificially inflated prices for TXU securities and TOPrS . Plaintiffs and the
Class would not have purchased TXU securities and TOPrS at the prices they paid, or at all, if they
had been aware that the market prices had been artificially and falsely inflated by defendants'
misleading statements .
SECOND CLAIM FOR RELIE FFor Violation of §20(a) of the Exchange Act
Against TXU, Nye, Dickie and McNally
188. Plaintiffs incorporate the above paragraphs by reference .
189. Nye, Dickie and McNally acted as controlling persons of TXU within the meaning
of §20(a) of the Exchange Act. By reason of their positions as directors and/or officers ofTXU they
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.I J.
had the power and authority to cause TXU to engage in the wrongful conduct complained of herein .
TXU controlled each of the Officer Defendants, all of TXU's employees and TXU Europe Limited ,
its wholly-owned subsidiary.
190. By reason of such wrongful conduct, Nye, Dickie and McNally and TXU are liabl e
pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants '
wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with
their purchases of TXU securities and TOPrS during the Class Period .
THIRD CLAIM FOR RELIEFFor Violation of §11 of the Securities Act
Against TXU, Nye, McNally, Porterthe Director Defendants and the Underwriter Defendant s
191 . Plaintiffs incorporate the above paragraphs by reference . This claim is asserted by
plaintiffs against Nye, McNally, Porter, the Director and Underwriter defendants on behalf of
persons who acquired TXU securities pursuant or traceable to the Prospectuses/Registration
Statement issued pursuant to the Offerings . For purposes of this claim, plaintiffs expressly exclude
and disclaim any allegation that could be construed as alleging fraud or intentional or reckless
misconduct, as this claim is based solely on claims of strict liability and/or negligence under the
Securities Act.
192 . TXU is the issuer of stock issued via the Prospectuses . As such, TXU is strictly
liable for each false and misleading statement in the Prospectuses .
193. Each of these defendants participated in the Offerings and/or was a signatory of the
Registration Statement . Similarly, the Underwriter Defendants each participated in the preparation
and consummation of the Offerings. The Underwriter Defendants issued, caused to be issued, and
participated in the issuance of the materially false and misleading Prospectuses, which
misrepresented or failed to disclose, inter alia, the material facts concerning the business of TXU
as set forth herein . Each of these defendants had a duty to make a reasonable investigation of the
statements contained in the Prospectuses to ensure that said statements were true and that there was
no omission to state any material fact required to be stated in order to make the statements contained
therein not misleading. In the exercise of reasonable care, defendants should have known of th e
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material misstatements and omissions contained in the Prospectuses as set forth herein . None of the
defendants made a reasonable investigation or possessed reasonable grounds for the belief that
statements contained in the Prospectuses were true or that there was not any omission of material
facts necessary to make the statements made therein not misleading . As such, each of these
defendants is liable to plaintiffs and the Class .
194. Each of the defendants named in this claim issued, caused to be issued an d
participated in the issuance of materially false and misleading written statements to the investing
public which were contained in the Prospectuses which misrepresented or failed to disclose, inter
alia, the facts set forth above . By reasons of the conduct herein alleged, each defendant violated,
and/or controlled a person who violated, § 11 of the Securities Act. As a direct and proximate result
of defendants' wrongful conduct , the price for TXU stock was a rtificially inflated and plaintiffs and
the Class suffered substantial damages in connection with the acquisition of TXU securities.
195. Plaintiffs and other members of the Class acquired their TXU securities without
knowledge of the untruths or omissions alleged herein. Plaintiffs and the other members of the Clas s
were thus damaged by defendants' misconduct and by the material misstatements and omissions of
the aforementioned Prospectuses .
196. This action was brought within two years after the discovery of the untrue statements
and omissions and within five years after TXU securities were offered to the public .
FOURTH CLAIM FOR RELIEFFor Violation of §12(a)(2) of the Securities ActAgainst TXU and the Underwriter Defendants
197. Plaintiffs incorporate the above paragraphs by reference .
198 . This claim is asserted by each of the members of the Class who bought their TX U
securities from the underwriters for violation of § 12(a)(2) of the Securities Act against the
Underwriter Defendants and TXU . For purposes of this claim , plaintiffs expressly exclude and
disclaim any allegation that could be construed as alleging fraud or intentional or reckless
misconduct, as this claim is based solely on claims of st rict liability and/or negligence under the
Securities Act.
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199. By means of the Prospectuses and other presentations, defendants were able to, an d
did, sell or cause plaintiffs and members of the Class to purchase new TXU securities .
200. Each defendant named in this claim solicited and/or was a substantial factor in th e
purchase or acquisition by plaintiffs and the Class of TXU securities. Defendants were motivated,
at least in part, by a desire to serve their own financial interests . Said defendants did the following
acts in furtherance of the sale and/or issuance of TXU securities :
(a) They actively and jointly drafted , revised, approved and mailed to the
members of the Class the Prospectuses by which TXU securities were issued . The Prospectuse s
were "selling documents," calculated by these defendants to create interest in TXU securities an d
were filed with the SEC and widely distributed by defendants for that purpose ;
(b) These defendants finalized the Prospectuses and caused them to become
effective. But for these defendants having drafted and/or filed the Prospectuses with the SEC, th e
Offerings could not have been completed; and
(c) These defendants conceived and planned the Offerings and together jointly
orchestrated all activities necessary to effect the sale of these TXU securities to the investing public,
including plaintiffs and the Class, by issuing the securities, promoting the securities, supervisin g
their distribution to the investing public, and jointly drafting the misleading Prospectuses .
201 . But for the solicitation by these defend ants as set forth above, the Offerings could not
and would not have been accomplished . In the exercise of reasonable care, the defendants should
have known of the misstatements and omissions contained in the Prospectuses as set forth above.
202 . None of the false and misleading statements and omissions described herein were
known to the members of the Class at the time they acquired TXU securities .
203 . By reason of the conduct alleged herein, these defendants violated § 12(a)(2) of th e
Securities Act. As a direct and proximate result of these violations of § 12(a)(2), plaintiffs and the
Class sustained substantial damage in connection with their purchases and/or acquisitions of TX U
securities .
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204. Members of the Class purchased or otherwise acquired TXU securities pursuant t o
the defective Prospectuses . Plaintiffs did not know, or in the execution of reasonable diligence coul d
not have known, of the untruths and omissions contained in the Prospectuses .
205. Plaintiffs hereby offer to tender to defendants those securities which members of the
Class continue to own, on behalf of all members of the Class who continue to own such securities ,
in return for the consideration paid for those securities together with interest thereon .
206. By reason of the conduct alleged herein , these defendants violated, and/or controlled
a person who violated, § 12(a)(2) of the Securities Act . As a direct and proximate result of these
violations of § 12(a)(2), plaintiffs and the other members of the Class sustained substantial damage
in connection with their purchases of TXU securities . On behalf of all members of the Class who
still hold their TXU securities, plaintiffs seek rescissory relief. Accordingly, plaintiffs, on behalf of
all members of the Class who continue to own such securities, seek to exercise their right to rescind
and recover the consideration paid for TXU securities and hereby elect to rescind and tender all
shares held by members of the Class to the defendants sued herein .
FIFTH CLAIM FOR RELIEFFor Violation of §15 of the Securities Act Against
Defendants Nye and McNally
207 . Plaintiffs incorporate the above paragraphs by reference . For purposes of this claim,
plaintiffs expressly exclude and disclaim any allegation that could be construed as alleging fraud or
intentional or reckless misconduct, as this claim is b ased solely on claims of strict liability and/or
negligence under the Securities Act. Nye and McNally by reason of their positions with TXU and
stock ownership, were controlling persons of TXU and are liable under § 15 of the Securities Act .
PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for judgment as follows :
A. Declaring this action to be a proper class action and certifying it as such pursuant t o
Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein ;
B . Awarding plaintiffs and members of the Class compensatory damages ;
C. Awarding plaintiffs and members of the Class pre judgment and post judgment
interest, as well as reasonable attorneys' fees, expert witness fees, and other costs ;
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D. Awarding extraordinary, equitable or injunctive relief as permitted by law or equity ;
and
E. Awarding such other relief as this Court may deem just and proper.
JURY DEMAND
Plaintiffs demand a trial by jury .
DATED: July 21, 2003 PROVOST & UMPHREY LAW FIRM, LLPJOE KENDALLState Bar No . 11260700
E KENDALL
3232 McKinney Avenue, Suite 700Dallas, TX 75204Telephone: 214/744-3000214/744-3015 (fax )
Attorneys in Charge andCo-Lead Counsel for Plaintiffs
Co-Lead Counsel for Plaintiffs :
MILBERG WEISS BERSHADHYNES & LERACH LLP
WILLIAM S . LERACHHELEN J. HODGESMARK SOLOMONLAURA M. ANDRACCHIOSCOTT H. SAHAMROBERT R. HENSSLER, JR .401 B Street, Suite 170 0San Diego, CA 92101Telephone : 619/231-1058619/231-7423 (fax)
MILBERG WEISS BERSHADHYNES & LERACH LLP
SANDRA STEINLAURA STEIN1845 Walnut Street, 25th FloorPhiladelphia, PA 19103Telephone: 215/988-9546215/988-9885 (fax)
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i
Attorneys for Plaintiffs :
FRUCHTER & TWERSKYJACK G. FRUCHTEROne Pennsylvania Plaza , Suite 1910New York, NY 1011 9Telephone: 212/279-5050212/279-3655 (fax )
LAW OFFICES OF LAWRENCE G .SOICHER
LAWRENCE G. SOICHER305 Madison Avenue, 46th FloorNew York, NY 10165Telephone: 212/883-8000212/697-0877 (fax)
LAW OFFICES OF CURTIS V .TRINKO, LLP
CURTIS V. TRINKO16 West 46th StreetSeventh FloorNew York, NY 10036Telephone : 212/490-9550212/986 -0158 (fax)
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PW ERS 8 PIPEFITTR NATIONAL PENSION, FUND
("Plaintiff ') declares :
l . Plaintiff has reviewed 4 ;eomplaint and authorized its filing.
2 . Plaintiff did not acquire the security that is the subject of this action
at the direction of plaintiffs counsel or in order to participate in this private
action or any other Iitigation under the federal securities laws .
3, Flaintiffis willing to,serve as arepresentativcparty on behalfofthe
class, including providing testimony at 4eposltion and trial, if necessary .
4 . Plaintiff has made the•following transaction(s) during the Class
Period iri 'the securities that are the subject of this action:
See attached Schedule "A" .
S . During the three years pri•or'to the date ofthis Cer tfleate , Plaintiff
has not sought to serve or se rved as a representative . party for a class in an action
filed under the federal securities laws except as deta i led below :
Plumbers & Pi a itrers Local 572 Pension Fund v. Cisco Systems Inc .#C-0I-2O4'18-JW(ND Cal,)
Joel Abrams: v, Palm. Inc. et. al. 001-CV-5888 (SD NY)
New En land ~colty Caro Pe iv ion Fund v. Sprint Corp . et al. #01-4080ME (USDC Kansas)
John ebhordt v. ConAgra 'Foods, Inc, er.al. #8 ; 01 CV427(USDCle br L ka)
Turbergv. CVS Corporution et . al. #01-CV-114 .64 (USD.CM ssachus1erts)
TXU
Guerra v. Teradyne, Inc., et a!. #07=CV ! 1789 (USDC Massachusetts)
Joseph Leone v. Tyco International (USDC SD NY)
In Re Tyco International, Lrd, Securities Litigation MDL #0a-!335-.
(USL C NH)
6: The plaintiff will not accept, any payment for serving as . a
representative party on behalf of the class beyond the Plaintiff' s pro rata share
of any recovery , except such reasonable costs and expenses (including lost
wages) directly relating to the representation of the class as ordered or approved
by the court.
I declare under penalty of perjury that the foregoing is true and .correct :
Executed. this day of . 2002 .
PLUMBERS & PIPE-FITTERSNATIONAL PENSION FUND
lay 10,antiin a a oni
Its :a~zrnan
-2- TXIJ
SECURITIES TRANSACTION S
Acquisitions
Date Type/Amount ofAcquired Securities Acquired Price
03/21/2002 100 $52 .3005/23/2002 2900 $52 .9805/24/2002 3326 $53.5105/31/2002 1600 $52.7506/12/2002 4500 $49.7406/14/2002 19960 $51 .2606/14/2002 21270 $51 .2608/08/2002 711 $42.1 009/28/2002 912 $41 .00
Sales
Date Type /Amount ofSold Securities Sold Price
04/04/2002 765 $54 .0 108/15/2002 1862 $45 .8910/08/2002 627 $32 .90
* Holding position prior to initial purchase 37,408
CERTIFICATION OF RONALD CANADAIN SUPPORT OF Ct ASS ACTION COM P
Ronald Canada ("plaintiff') declares, as to the claims asserted under the federal securities
laws, that:
1 . Plaintiff has reviewed the complaint prepared by counsel in the above-captioned case and
has authorized its filing .
2. Plaintiff did not purchase the security that is the subject of the complaint at the directio n
of plaintiffs counsel or in order to participate in any private action arising under th e
federal securities laws .
3 . Plaintiff is willing to serve as a representative party on behalf of a class, includin g
providing testimony at deposition and trial, if necessary .
4. Daring the proposed Class Period, plaintiff executed the following transactions in th e
stock of TXU Corporation: See Attachment A
5. In the past three years, plaintiff has not sought to serve, nor has served as a representative
party on behalf of a class in an action filed under the federal sccurities .laws ,
d- Plaintiff will not accept payment for serving as a representative party on behalf of a clas s
beyond plaintiffs pro rata share of any recovery, except such reasonable costs and
expenses (including lost wages) directly relatiztig to the representation of the Class a s
ordered or approved by the Court .
t~aa'
I declaze under pea lty of perjury that the foregoing is true and correct . Execut . d this
1 I day of October, 2002 .
RONALD CANADA
ATTACF-XMENT A
D ate
October 4, 2002October 8, 2002
riQr~ Amount}buy 20,000 sharesBuy 20,000 shares
Pdc$27-41$17 .20
October 16, 2002 Sell 40,000 Shares $11 .50
TXU Signup
Certification and Authorization of Named Plaintiff Pursuant to FederalSecurities Law s
The individual or institution listed below (the "Plaintiff') autho rizes and, upon execution ofthe accompanying retainer agreement by Milberg Weiss, retains Milberg Weiss BershadHynes & Lerach LLP ("Milberg Weiss" ) to file an action under the federal securities laws torecover damages and to seek other relief against TXU Corp . ("TXU"). Milberg Weiss willprosecute the action on a contingent fee basis and will adv ance all costs and expenses . TheTXU Corp. Retention Agreement provided to the Plaintiff is incorporated by reference,upon execution by Milberg Weiss .
First name : Arthur CarstenLast name : Nielsen Jr.Address : 807 Oak CourtCity : Crystal LakeState, Zip : IL., 6001 4Email : [email protected]
Phone : 815-356-660 7
Plaintiff certifies that :
1 . Plaintiff has reviewed the complaint and authorized its filing.
2. Plaintiff did not acquire the security that is the subject of this action at the direction ofplaintiffs counsel or in order to participate in this private action or any other litigationunder the federal securities laws .
3. Plaintiff is willing to serve as a representative party on behalf of a class, includingproviding testimony at deposition and trial, if necessary .
4. Plaintiff represents and warrants that he/she/it is fully authorized to enter into andexecute this certification .
5 . Plaintiff will not accept any payment for serving as a representative party on behalf of aclass beyond the Plaintiffs pro rata share of any recovery, except such reasonable costs andexpenses (including lost wages) directly relating to the represention of the class as orderedor approved by the court .
6. Plaintiff has made no transaction(s) during the Class Period in the debt or equitysecurities that are the subject of this action except those set forth below :
Page 1 of2
http ://miladm .relevanttools . comladm-cgi -bi . . ./txu .021203 .1902.63732&templ=print-cert .htm 12/4/2002
TXU Signup- ti
Acquisitions :
Sales
Page 2 of 2
Date Acquired Number of Shares Acquired Acquisition Price per Share
Oct. 4, 2002 4900Oct. 4, 2002 5000Oct . 7, 2002 5000Oct. 7, 2002 2500Oct. 7, 2002 2500Oct. 7, 2002 2400
27.3127.2123.8822.6122.4122.30
Date Sold Number of Shares Sold Selling Price per Share
7. During the three years prior to the date of this Certification, Plaintiff has not sought toserve or served as a representative party for a class in an action filed under the federalsecurities laws except if detailed below :
wcom,xel
1 declare under penalty of perjury, under the laws of the United yesStates, that the information entered is accurate :
By clicking on the button below, I intend to sign and execute yesthis agreement :
Clicked to Participate in the TXU Action
Signed pursuant to California Civil Code Section 1633 .1, et seq. - Uniform Electronic Transactions Ac t
http ://miladm.relevanttools .com/adm-cgi-bi . . ./txu.021203 .1902.63 732&templ=print-cert .htm 12/4/2002
Mph c O 3RIN$UP1 T OF M,l c ,-X COWL- T
AfrUd Cw3wr C'phW6W) dwft~ as to the dams =mud i dx he
federal SOCMities , t
x. FT 3~ad a axeaft mplabt prcpared by t nsel
in the abuv cam, aidz ba s its fift?,
2. FBainnt did not parse II~e c ics t at the erect ofthe
c o m i = a t the d i r er , o f p l a tt 3#i t s c o ' o s e i ar In c er pardc4m is =y private
OOdM aid3bg IM&WIft f x sacs IaroM
a. his wU1'm6a to srr as a rive party on bdbalfofa
class, i)3adinn j* g W to y at dgvsitkaud ifia ay-.
4. During the propmed Cass Peaod, plahi f ftwmK;dcw in
tbc: S=Aii es ofTXU'_ (_Y 2M as falls ScetAUadVd S o.
5_ in 8bepost t y plaiaWbAs notsougt to oft-ft SS &
repro y of bebWf of a class iaat acd n ffkd mid= *e ftead s ashes law
~ame~CYrsez~as
pfteyoubcU a t s bt +t~d ~sr sew v,~ap~' cex r,~ooc c $7 L
'tag I eac-obw send spa s~ Zt } s tio-ti
~+ act ol~e t~ss~s amp ar ~~#~#~eC,~
Schedule i
Xiciiao i eoaaor 'rar„saet ion t s) inros~io-P c as
06 105/02 5Co $¢9.51
TXU Signup
Certification and Authorization of Named Plaintiff Pursuant to FederalSecurities Laws
The individual or institution listed below (the "Plaintiff') authorizes and, upon execution ofthe accompanying retainer agreement by Milberg Weiss, retains Milberg Weiss BershadHynes & Lerach LLP ("Milberg Weiss") to file an action under the federal securities laws torecover damages and to seek other relief against TXU Corp . ("TXU"). Milberg Weiss willprosecute the action on a contingent fee basis and will advance all costs and expenses . TheTXU Corp. Retention Agreement provided to the Plaintiff is incorporated by reference,upon execution by Milberg Weiss .
First name : SelmaLast name : SiegelAddress : 178 Deer Lake CircleCity: Ormond BeachState, Zip : Florida, 3217 4Email : LadyWhimz@cs .com
Phone : 386-677-3800
Plaintiff certifies that :
1 . Plaintiff has reviewed the complaint and authorized its filing .
2. Plaintiff did not acquire the security that is the subject of this action at the direction ofplaintiffs counsel or in order to participate in this private action or any other litigatio nunder the federal securities laws .
3 . Plaintiff is willing to serve as a representative party on behalf of a class, includingproviding testimony at deposition and trial, if necessary.
4. Plaintiff represents and warrants that he/she/it is fully authorized to enter into andexecute this certification.
5. Plaintiff will not accept any payment for serving as a representative party on behalf of aclass beyond the Plaintiffs pro rata share of any recovery, except such reasonable costs andexpenses (including lost wages) directly relating to the represention of the class as orderedor approved by the court .
6. Plaintiff has made no transaction(s) during the Class Period in the debt or equitysecurities that are the subject of this action except those set forth below :
Page 1 of2
http://miladm.relevanttools .com/adm-cgi-bi . . ./txu.021205 .1543 .79493&templ=print-cert .htm 12/9/2002
* TXU Signup
Acquisitions :
Sales :
Date Acquired Number of Shares Acquired Acquisition Price per Share
05/31/02 500 $51.150000
Date Sold Number of Shares Sold Selling Price per Share
7. During the three years prior to the date of this Certification, Plaintiff has not sought toserve or served as a representative party for a class in an action filed under the federalsecurities laws except if detailed below :
I declare under penalty of perjury , under the laws of the United yesStates , that the information entered is accurate :
By clicking on the button below, I intend to sign and execute yesthis agreement:
Clicked to Participate in the TXU Action
Page 2 of2
Signed pursuant to California Civil Code Section 1633 .1, et seq. - Uniform Electronic Transactions Ac t
http ://miladm.relevan ttools .com/adm-cgi-bi . . ./txu.021205 .1543 .79493&templ=print-cert .htm 12/9/2002
CrR `ICATION OPD A L E LYNNE OO R
Dab-, L1y a Connor {*p nuff dedwas, as !r the rums r =der
the federal yes 1ww,, '
I- Pla"Wfiffb= ,vt uied a dzaf o the Cox 1z pxvd by
is he abavz-capfioned Case,, and aaffiod= it MkP,
2.. PlshAUTod notp se t' 1t ea ttst am the subject of the
pmt a the direc't oa ofpkatis cu=d ar in order tc ,pw&ipa2eiu any pti
act! = risa txd the &d aI secmifimlaws-
3. Pla iw fis turg zo*6 vc as pasty ca bdmIfof i t
class. i g providing, tzftxM at depoddm and dal. ids act
4- Ida t d Class P+ iod, plai~aiffc~oa rd ctians ors
the Mies of CJ_ erW'am N YS~; . as foflorw See Attacnd Scher,
S. S r i r i s e p tea yen% pW 'bas Uot fight to serve as a
rqmzentalive party on b1f o fa class in an acam filed *ader the fad s awes law
r'
mxgm Mahe
p~cyaa ftxfa +s p 's mo~tsieof=Vzca'ory't st~c~
veamozablk ,oae
' Cams%a ardarap to ftCamt
of ewQ~et gi:~aCSsd
. 7015 & of 2w-y
lrlr~_. , M]yr.~a~c
1 t
Ly ,,c Co r ~$)1*•~ir-P ®r. it nup trim
Date
0"51021OW102
20D F4A.49I00' '
. ' .,.x.12