Dynegy Board: A Conflict Of Interest

Electric energy provider Dynegy (NYSE: DYN) has been through a great deal recently. It threatened to file Chapter 11. The firm said it might not be able to refinance a credit facility. The company’s CEO and CFO agreed to step down several days ago as Carl Icahn and Seneca Capital, which have competing interests, took control of the board. The “director elections demonstrate the Board’s commitment to an expeditious and orderly transfer of leadership at Dynegy,” said Patricia A. Hammick, Chairman of Dynegy Inc. “The Board has recognized the desire of our stockholders to pursue a different path for the Company. The new directors will take the lead in charting a course forward for Dynegy, both in selecting new Board members and new executive leadership.”

Vincent Intrieri and Samuel Merksamer were nominated by Icahn Associates.   E. Hunter Harrison was nominated by Seneca. Thomas W. Elward is independent. Current Dynegy directors Patricia A. Hammick, David W. Biegler, Victor E. Grijalva, Howard B. Sheppard and William L. Trubeck do not intend to stand for reelection at the Annual Meeting of Stockholders

The nominations would appear to break the spirit if not the letter of the SEC regulation that investors in public companies should not have insider information. Icahn has made a bid for the company. Icahn on Wednesday said he signed an agreement with the company that would allow him to buy up to 19.99999% of the company while retaining his voting rights. That arrangement will have ongoing support from his two directors. So will his bid of $5.50 to buy the entire company, although the Seneca director who favor a higher bid may not. Seneca thinks Dynegy is worth more than $5.50.

The war for Dynegy’s future ought to be fought on the public stage because it has public shareholders. Instead, it is fought in private behind closed doors. The two firms with the greatest financial interests in the firm have immediate access to information about the company’s financial status, it re-financing problems, and when and who the corporation will put in as CEO. Each of these things could effect the stock price, but outside public investors may not know that for hours or even days.

The problem is that the SEC has not stepped in to challenge these conflicts. The agency has not even said it will review any of the Icahn or Seneca moves. It would not be a complex matter; not nearly as complicated at tracking and catching Bernie Madoff’s fraud which arguably took several years and several lost chances.

The SEC has a chance to show that the money taxpayers spend to operate is worthwhile. Dynegy will be sold or auctioned off in pieces, without the SEC even asking the basic question of how Icahn can be an insider with his people on the company board and an outsider as he buys shares.

Douglas A. McIntyre