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earnings report. “[Yet] our stock price has fallen significantly as bad news runs rampant through the sector.” It was a pitch designed to assuage analysts, and, for the most part, it did. “The utility stocks had been hit hard by worst-case scenarios connected with energy trading, but they still have strength,” Argus Research analyst Jeff Gildersleeve told the Fort Worth Star-Telegram, echoing Nye’s analysis. Meanwhile, the CEO boasted that TXU’s stock, at $35 a share, was quite a buy. But despite all the happy talk, TXU was actually careening toward bankruptcy. Just three months after that upbeat July earnings report, TXU abruptly disclosed that its European subsidiary had glaring financial problems. Executives were forced to sell off the European outfit at a $4 billion loss. The price of TXU stock plummeted 75 percent, and many elderly shareholders saw their life savings vanish in a matter of days. Nye and other TXU executives claimed ignorance, saying that the company’s “near death experience,” as Nye put it, surprised them as much as everyone else. Now two federal lawsuits charge that TXU executives committed securities fraud in 2002. The complaints allege that TXU executives knew all along that the company was risking bankruptcy and never disclosed the dangers to shareholders. In public, Nye had relentlessly pitched TXU stock; in company meetings, he had referred to TXU’s economic condition as “whistling by the graveyard,” according to court documents \(Nye later claimed he was talking about other companies, misleading financial statements, embellished their earnings reports, inflated the stock price for their own gain, and, in some cases, told outright lies to stock market analysts and the public. TXU officials have said that both suits lack merit. “TXU provided proper disclosure then and now,” said a company spokeswoman in an e-mailed response to written questions from the Observer. Nye initially declined an interview request. But in a brief conversation with the Observer at the Republican National Convention in New York, Nye said, ” [The lawsuits] result from the fact that the stock price went down substantially from the failure in Europe. There were probably 12 to 15 companies that had a similar pattern of losses in Europe. The causation is clear. I think our case is clear. We feel very comfortable about our position.” One of the lawsuits is a class-action suit filed in federal court by TXU shareholders, who lost billions during the company’s 2002 crisis. The second, more unusual case, is a whistleblower claim filed by a former TXU senior vice president. It is believed to be the first case to test the whistleblower protections of the 2002 Sarbanes-Oxley Act passed by Congress in response to the Enron fiasco. If the accusations are correct, then TXU violated the very laws designed to prevent another Enron. Much of the behind-the-scenes information about TXU comes from court documents filed by Jim Murray, the former TXU vice president and the plaintiff in the whistleblower case. \(Citing a confiMurray was hired in December 2000 as a senior vice president for capital management in TXU’s energy trading company. He spent most of his time working on business development and putting together deals, but because of his background as a securities lawyer, he was also asked to comment on drafts of financial disclosures before they were released to the public. According to his complaint, Murray, not long after joining the company, began pointing out to his superiors that TXU’s statements were overly positive and failed to disclose important financial weaknesses. On April 23, 2001, for instance, he e-mailed his boss, President of Energy Trading V.J. Horgan, criticizing Nye’s recent comments that, “Once again our quarterly results are outstanding.” In fact, revenues were down 7 percent from the previous year. When Enron collapsed in late 2001, Murray fretted that TXU could be descending into a similar morass. According to his complaint, then-CFO Mike McNally talked openly in executive meetings about “earnings management”inflating profits. McNally’s notion of earnings management included, on at least one occasion in early 2002, directing Horgan to shift some of her division’s cash reserves into McNally’s totals so he that could “make his numbers,” according to Murray’s complaint. \(McNally has since left TXU and couldn’t be bending over backwards to avoid having our book accounting reflect economic reality.” By early 2002, it had become clear to Murray that TXU faced some serious problems. He foresaw three ways in which the company could easily go bankrupt by the end of 2002, if not sooner. One danger was an over-reliance on natural gas. Although primarily considered an electricity provider, TXU derived a remarkable amount of its profits, according to Murray’s complaint, from natural gas. If, as some analysts predicted, the price of gas fell, TXU could plummet into bankruptcy. Investors had little way of knowing that they were betting their money on a company that was so reliant on a single commodity. That wasn’t TXU’s only vulnerability. The company’s finances were in such poor shape that Murray was concerned about TXU’s credit rating. It was only a matter of time, he argued, before Wall Street’s independent credit rating agencies caught on and significantly lowered their evaluation of TXU to below investment grade. “I find it unpardonable that we got down to $100 million of untapped liquidity in July, that we had $5.6 billion more current liabilities than current assets at year end,” he e-mailed Horgan in late 2001. “The markets and ratings agencies are going to focus on us with increasingly [sic] scrutiny and figure out our risks.” A lower credit rating would have been disastrous because it would have triggered payment clauses in various contracts and energy deals; an internal TXU study concluded that $4.3 billion in payments would have immediately come due. That would have been problematic, to say the least, given that TXU had only $850 million in the bank at the time. Again, investors had no clue. To make matters worse, TXU’s British subsidiary, TXU 9/10/04 THE TEXAS OBSERVER 5