updated 4/15/2005 6:23:15 PM ET 2005-04-15T22:23:15

Dynegy Inc. has agreed to pay $468 million in cash and stock to settle a class-action shareholder lawsuit alleging the company misled investors about a natural gas deal wrongly used to boost cash flow, the company said Friday.

"This sort of settlement lets us put this era of the company's history behind us, and it removes that risk of a very significant piece of litigation," Dynegy CEO Bruce Williamson told The Associated Press Friday. "It was a long negotiation with the plaintiffs and I think we both approached it from an interest of trying to settle it."

The lawsuit led by the University of California, a major shareholder, also alleged Houston-based Dynegy hid an $850 million loan from Citigroup to preserve its credit rating. Citigroup was dismissed as a defendant last year, but agreed to pay $5 million in exchange for plaintiffs' waiving their appeal rights, the university said Friday.

The combined $473 million also settles negligence allegations pending against other defendants, including former Dynegy CEO Chuck Watson, former company president Steve Bergstrom, and former finance chief Rob Doty, University of California spokesman Trey Davis said.

The university in March reached a $1 million settlement with co-defendant Arthur Andersen LLP, Dynegy's former auditor, so the total settlement reaches $474 million.

In addition, Dynegy will appoint two directors selected by the university to monitor governance reforms the company has already put in place.

Williamson noted that $68 million of Dynegy's portion would be paid in company stock.

Neither Dynegy nor others settling the litigation admitted any liability. Dynegy said the settlement can be accommodated through available cash and bank lines, and the company will record a pre-tax charge of about $225 million in the first quarter. Dynegy will release first-quarter earnings May 9, the day the lawsuit was scheduled for trial.

The settlement is subject to court approval.

The lawsuit was filed in 2002 upon revelations of Project Alpha, a 2001 scheme to disguise a loan as $300 million in cash flow to combat Wall Street worries that earnings lagged behind high trading revenues. Watson was pushed out the next month, and Doty and Bergstrom resigned later that year.

Jamie Olis, a former Dynegy finance executive, is serving 24 years for conspiracy and fraud for helping push through Project Alpha. The only two others charged _ Olis' former boss, Gene Foster, and former in-house accountant Helen Sharkey _ each pleaded guilty to conspiracy and are awaiting sentencing.

The University of California alleged that it lost about $113 million on its investment in Dynegy shares from Nov. 1, 2000 through May 7, 2002.

"The settlement is extremely favorable for the defrauded investors," James Holst, the university's general counsel, said in a statement. "It maximizes recovery to the class while permitting Dynegy to continue its financial comeback."

Dynegy was among the hardest hit of energy merchants battered by investors throughout 2002 in the wake of Enron Corp.'s 2001 collapse. Dynegy's stock price fell from the mid-40s to less than a dollar as the market reacted to management ousters, accusations of manipulating the California power market, inaccurate financial disclosures and trading improprieties in addition to Project Alpha.

Dynegy in 2002 paid a combined $8 million to the Securities and Exchange Commission and the Commodity Futures Trading Commission to settle allegations related to Project Alpha and improper trading.

Williamson took over Dynegy in October 2002 and has since cut debt and shed money-losing businesses, such as telecommunications. Last year Dynegy closed the $2.3 billion sale of Illinois Power Co. to St. Louis-based Ameren Corp., leaving Dynegy to focus on its unregulated power generation and natural gas liquids businesses.

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