Dynegy Energy Bankruptcy Threatened by Suspicious Asset Maneuvers
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Dynegy Energy Bankruptcy Threatened by Suspicious Asset Maneuvers

March 22, 2012


A court examiner announced this week that the bankruptcy filing of Houston-based Dynegy Holdings LLC was preceded by allegedly fraudulent asset transfers intended to hide money from creditors, according to a report from United Press International.

The surprising announcement came after a bankruptcy court official, Susheel Kirpalani, conducted a thorough investigation of the energy company’s actions before it filed for Chapter 11 bankruptcy.

Sources indicate that, before the company sought to reorganize its finances in bankruptcy court, it reportedly transferred "hundreds of millions of dollars away from Dynegy’s creditors in favor of its stockholders."

Typically, when companies file for bankruptcies, courts try to help creditors recover as many debts as they can, at the expense of stockholders. Stockholders often receive some compensation in corporate bankruptcy filings, but these sums are typically small compared to the amount of money awarded to major creditors.

In the case of Dynegy, according to Kirpalani, the company attempted to illegally protect its shareholders by shifting assets to them before filing for bankruptcy. If true, this would likely amount to bankruptcy fraud.

Not everyone at the company, however, was aware of the fraud. In a 173-page report filed by Kirpalani last week, some directors come across as more innocent than others.

Sources indicate that the report says some members of the company’s board of directors, including two directors who were placed on the board by major shareholder Carl Icahn, were not aware that the company moved assets to its parent corporation to specifically shield them from creditors.

Nevertheless, these directors allegedly knew of the transfers, and the bankruptcy court’s report recommended that Icahn’s two board members remove themselves from the company’s board.

And, according to a report from the Wall Street Journal, the recent report of foul play could threaten the future of the company’s bankruptcy filing. Sources do not indicate whether this signals the death knell for the Dynegy Energy filing, but the news certainly isn’t pretty.

Of course, when individual filers commit bankruptcy fraud, their cases are often dismissed. In the meantime, Dynegy will huddle with its (undoubtedly disappointed) bankruptcy lawyers and develop a strategy to recover its financial health. This strategy, unfortunately, may not include a formal reorganization in bankruptcy court.

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