According to a press release dated July 13, 2005, on July 7, 2005, the U.S. District Court for the Southern District of Texas approved a deal reached in April requiring Dynegy to pay $468 million to settle a securities fraud class action suit surrounding the company's so-called "Project Alpha" transactions.

In a press release dated April 15, 2005, the University of California, lead plaintiff in a securities fraud class-action suit against Dynegy, said Friday it reached a $468 million settlement with the power generator and some of its former executives. The University claimed Dynegy (DYN) violated securities law by misleading investors in the way it accounted for Project Alpha, a $300 million financing scheme based on a series of natural gas trades that overstated the power generator's cash flow for most of 2001.

As part of the settlement, Dynegy agreed to appoint two plaintiff-nominated directors to help monitor corporate governance reforms put in place at the company. Dynegy said its director and officer insurance policies would cover $150 million of the settlement and another $68 million would come from a stock issue. Dynegy will also make cash payments of $250 million in two series: $175 million in the second quarter and another $75 million following federal court approval. Additionally, Dynegy agreed to pay $5 million in attorneys' fees and expenses related to derivative litigation.

The complaint charges Dynegy and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The complaint alleges that Dynegy and its top officers inflated the price of the Company's stock in order to pursue an accelerated securities sale program. Defendants knew that concealing Dynegy's true vehicle, Project Alpha, for creating cash flow from operations and the true impact it would have on the Company provided the only way that they could foster the perception in the business community that Dynegy was not "Enron Corp.," i.e., the only way Dynegy could post the revenue and earnings per share growth claimed by defendants. Prior to the Class Period, the Individual Defendants realized that many of their complicated deals to generate reported net income did not generate cash flows. The defendants knew that investors would eventually discover this discrepancy and the Company's stock price would collapse. To prevent this, Dynegy classified what was essentially a loan from CitiGroup Inc. as an operating activity rather than as a financing activity as required by Generally Accepted Accounting Principles. The defendants' wrongful course of business (i) artificially inflated the price of Dynegy's stock during the Class Period; (ii) deceived the investing public, including plaintiff and other Class members, into acquiring Dynegy's securities at artificially inflated prices; (iii) allowed the Individual Defendants to extract millions of dollars in bonuses for creating the appearance of the Company's phenomenal cash flow from operations growth; and (iv) allowed Dynegy to sell nearly half a billion dollars of its own securities to the unsuspecting public.