Dynegy

(DYN)

is paying a $3 million fine to settle a

Securities and Exchange Commission

investigation into a controversial natural gas-financing deal that raised allegations of accounting irregularities at the Texas-based power company.

The SEC opened an investigation in May into the $300 million financing transaction, dubbed Project Alpha, which Dynegy had used to minimize its tax exposure and boost its cash flow.

In announcing the settlement, the SEC said its investigators had found that Dynegy engaged in securities fraud by providing investors with misleading information about the accounting treatment for the transaction, which reportedly reduced the company's tax bill by $80 million in 2001.

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Dynegy, as is customary in negotiated settlements, neither admitted nor denied the allegations. The ailing company's stock rose 11 cents, or 9%, to close at $1.28.

The Project Alpha deal is similar to some of the questionable off balance sheet financing deals that led to

Enron's

collapse. The SEC began looking into the deal after questions arose about the accounting rules Dynegy was using for a so-called special purpose entity that enabled the transaction to go forward.

"Public companies using off-balance sheet, special purpose entities must ensure -- that they have accurately portrayed the economic realities of the transactions," said Harold Degenhardt, an SEC administrator, in a prepared statement announcing the settlement.

Late last year, Dynegy had considered buying Enron, after news of the accounting scandals at that company began making headlines. But at the last minute, Dynegy backed out of the deal, and then Enron filed for bankruptcy.

The SEC contends that the Project Alpha deal, a five-year financing transaction, was really a loan to the company "masquerading as operating cash flow." Regulators found that deal involved a series of "sham trades" that helped artificially inflate Dynegy's cash flow in 2001.

In assessing the $3 million fine, the SEC noted that it was dissatisfied with Dynegy's "lack of full cooperation in the early stages of the investigation." Back in May, when news of the SEC investigation first became public, Dynegy told investors that it was cooperating fully with the regulatory agency.