Passed Over

In January, that unease grew when he learned he wouldn't get a management post that he thought he'd been promised, which he expected would pay him more than $100,000 yearly. Instead, he says he was told his $84,000 salary would rise just $1,000. He complained to human resources. "I know I am a valuable person and my worth is much more than the offer you have given me," his Jan. 10 letter said. "I have been set back approximately 10 years professionally and monetarily." His complaint made little difference.

A month later, disgusted and demoralized, Mr. Beatty left Dynegy -- taking along the documents on the trades and Project Alpha. He went to Colorado to pursue job leads with utilities, "just hoping to start fresh on a new job."

Mr. Beatty had been sharing some of his thoughts about Dynegy with an old Navy buddy, Jack Pitts. Mr. Pitts worked at a New York investment fund, Steadfast Capital, that since December had been "short" Dynegy's stock, that is, betting that its price would drop.

On Feb. 27, Mr. Pitts wrote in an e-mail to Mr. Beatty that any sign of dubious accounting at Dynegy would "make investors' fears go crazy and take the stock into a tailspin." He also e-mailed Steadfast colleagues that "I think my friend Ted can really help us on Dynegy."

As Mr. Beatty recalls it, Mr. Pitts said that Steadfast Capital could help expose questionable dealing at Dynegy, simultaneously offering Mr. Beatty an outlet and Steadfast a potential profit. At one point, Mr. Beatty adds, Mr. Pitts half-jokingly told his friend he'd be famous once the story got out, maybe making the cover of Time magazine. Mr. Pitts, through a spokesman, declined to comment.

Mr. Beatty also says Steadfast Capital promised to hire him as a "consultant." The investment fund acknowledges it made money betting against Dynegy shares but says, "Steadfast denies ever having a consulting arrangement, verbal or written, with Mr. Beatty."

Losing Bet

Then the Beattys jumped into the market themselves. Ms. Beatty says that in March she invested roughly $8,000 in "put" options on Dynegy, giving her the right to sell the stock at a set price. The puts' value would rise if the stock fell -- a likely outcome if Project Alpha became known.

The Beattys say they felt uneasy about the move but did it because they needed money. "We felt like we had no other choice," Ms. Beatty says.

But "those options sat like a ton of bricks in our stomachs. They just added to the pressure we were under," she adds. Worried about violating insider-trading rules, they dumped the puts after just a few days. But because Dynegy shares had risen, not fallen, in the interim, the puts' value was now less. "We lost $2,400," Ms. Beatty says.

Mr. Beatty, in the meantime, had begun contacting newspapers, including The Wall Street Journal, offering to tell what he knew about Project Alpha. He initially asked whether he would be paid for his information. Told no, he agreed to talk about it anyway.

He soon heard from Dynegy. Ms. Beatty says an assistant general counsel of Dynegy, Cristin Cracraft, left messages for the couple saying "you'd better watch out" and "this isn't a game." They also got a letter from her saying Mr. Beatty was violating Dynegy employees' ethics code by disclosing confidential information, and warning that "Dynegy will be pursuing legal action in response to your conduct." Ms. Cracraft didn't return phone calls seeking comment.

On April 3, The Wall Street Journal published a front-page article disclosing Project Alpha³, based on Mr. Beatty's documents as a starting point and fleshed out with extensive interviewing of experts to make sense of the documents and corroborate them. For that article, the Journal agreed to maintain the Beattys' anonymity; since then, however, the Beattys have given express permission for their identity to be disclosed.

The article said that Dynegy, while acknowledging Project Alpha's financial benefits, contended its main purpose was to provide a stable source of natural gas. A "disgruntled former employee" had mischaracterized the complicated transaction, Dynegy's chief financial officer wrote later on a company Web site. The price of Dynegy's stock barely moved.

Steadfast Capital then arranged a phone call between Mr. Beatty and John Stout, a Steadfast investor. Mr. Beatty says Mr. Stout promised introductions to people in the financial community who would help "get the story out."

Mr. Stout doesn't recall saying that. He says he was just trying, at Steadfast's request, to find Mr. Beatty legal representation for his troubles with an angry Dynegy. The investor adds that he tried to arrange financial relief for Mr. Beatty by introducing him to people who could help him seek an IRS reward for exposing tax avoidance. "I was helping a friend of mine [at Steadfast] help a friend in need," says Mr. Stout.

Mr. Beatty says he did apply to the IRS, so far with no result. He says Mr. Stout's contacts also put him in touch with credit-rating agencies and other journalists. As for the lawyer Mr. Stout recommended, that person showed less interest in helping Mr. Beatty with his Dynegy problem than in getting hold of the documents, Mr. Beatty says.

Shareholder Suit

The lawyer was Randall Steinmeyer from Milberg Weiss Bershad Hynes & Lerach LLP, a New York firm that files many shareholder lawsuits. Mr. Beatty gave him the Project Alpha documents. Soon after, Milberg Weiss filed a shareholder suit against Dynegy. The suit in U.S. District Court for the Southern District of Texas alleged that Dynegy, through Project Alpha, had "inflated the price of the company's stock in order to pursue an accelerated securities sale program." Dynegy says it will fight the suit.

Mr. Beatty says Mr. Steinmeyer told him that there might be consulting work for him over the course of the suit, which could be years. "He told me I'd end up making more money than he did," Mr. Beatty says. Mr. Steinmeyer denies saying this. Milberg Weiss has paid the Beattys about $9,250 for sporadic consultant work and continues to ask Mr. Beatty questions about his documents at times. But Mr. Beatty was expecting full-time employment.

Mr. Beatty says he won't get anything from a damage verdict or settlement in the suit because he isn't a Dynegy shareholder. He wonders if it has been worth being so helpful to people such as Mr. Pitts, Mr. Stout and Mr. Steinmeyer: "They all said they wanted to help me and they asked for the documents to help me -- or that's what they said."

In April, Mr. Beatty landed some consulting work at a Colorado utility, Platte River Power Authority. He impressed executives there and particularly hit it off with a project engineer, Bill Emslie, who, like him, had served on a Navy submarine. Mr. Emslie says he was sympathetic when told what had happened at Dynegy. "If he made known things that were being done that were not straight-shooting business arrangements, they need to be exposed. I applaud him for that," Mr. Emslie says.

Though Mr. Beatty discussed a permanent job at Platte River, none materialized. Mr. Beatty suspected Dynegy was blackballing him in the industry. Platte River's Mr. Emslie doubts that, saying, "He's probably carrying baggage with him from the job." Platte River executives say his whistle-blowing didn't make them uneasy, it was just that there were no appropriate openings.

In part to restore her husband's name, Maren Beatty began working the phones, asking Standard & Poor's and Moody's Investors Service if they wanted to speak with her husband about Dynegy. The credit-rating services declined.

Then in late April, Dynegy disclosed that the SEC had begun an informal inquiry into its finances. The company also said that after consulting with the SEC, it had decided to reverse Project Alpha's effect on its cash flow.

The stock plunged 30% in a single day, delivering rich payouts to those who'd sold it short. Suddenly Mr. Beatty's documents were having an impact -- and the couple got nervous. Ms. Beatty says the pressure made them "probably totally paranoid."

Noises in the Night

Two days after word of the SEC inquiry, the Beattys woke up in their home outside Denver at about 3:45 a.m., both hearing what sounded like someone inside the house opening and closing drawers. They called the police and waited outside while officers inspected their home. "It was absolutely frightening," Ms. Beatty says.

Mr. Beatty made clear what he thought had happened. "I believe this was done by my previous employer Dynegy in Houston," he said, according to a police report filed with the Larimer County Sheriff's Office. "I have the documents at home that I took from the company. The company knows I have them."

The sheriff's office concluded nothing had been taken. The case is in suspension, pending any further leads. Dynegy's Mr. Byford calls the notion that the company was behind a home break-in "absolutely absurd."

About a week later, Mr. Beatty flew to Texas for a meeting with an SEC investigator. After a long meeting discussing his information about Dynegy, Mr. Beatty asked if the agency would hire him to do research on the industry. Rebuffed, he again felt betrayed. "The SEC was the worst in terms of people not being helpful after they get your information," he says. An SEC spokesman says the agency generally doesn't hire people for specific cases or pay for information.

Pressure on Dynegy grew. On May 9, The Wall Street Journal reported⁴ that the SEC was looking into "round trip" trades that served only to raise Dynegy's trading volume. Later that month, the U.S. Attorney in Houston subpoenaed Dynegy documents on trading and Project Alpha. And Dynegy announced it would reverse Alpha's tax benefits and revise 2001 earnings 12% lower as a result.

In late May, Dynegy's board asked Chief Executive Chuck Watson to resign. Round-trip-trade revelations also led to resignations of senior executives at some other energy traders, including CMS Energy Corp. and Reliant Resources Inc.

Appeal to a Director

But Mr. Beatty still didn't have a job. Increasingly anxious about money, his wife now took a radical step: In July, she contacted Dynegy itself about work.

In a phone conversation with Charles E. Bayless, head of the Dynegy board's audit committee, Ms. Beatty complained that Dynegy had told investors and employees it would pursue her husband vigorously. Ms. Beatty then said he had evidence of other questionable practices at the company. According to a recording of the call, she asked if Dynegy's board would hire Mr. Beatty as a "consultant" so he could help the company find those other problems.

An e-mail from Mr. Bayless makes clear the board considered doing so, but it ultimately declined. "We would be subject to criticism for doing anything that looked like we were paying a potential witness," he e-mailed the Beattys.

Ms. Beatty says, "We had no intentions to blackmail the company. We just needed a job."

In mid-August, the Beattys say, they began getting mysterious messages they took as threats. They got anonymous one-word e-mails saying "Stop" and "Quit."

Soon after that, the family rented a truck and started packing.

In September, the SEC filed a civil securities-fraud case alleging Dynegy had presented "materially misleading information" to the public on Project Alpha and the round-trip trades. It also accused Dynegy of misleading investors by saying that a "disgruntled former employee" -- a reference to Mr. Beatty -- had mischaracterized Project Alpha. Dynegy simultaneously settled the case by agreeing to pay a $3 million penalty, neither admitting nor denying the allegations.

People familiar with the matter say the SEC didn't press for a larger fine because Dynegy investors had already been punished enough. The shares, above $30 in March, now trade at around $1. Meanwhile, in October, the company said it would leave energy trading and refocus on power generation, natural-gas liquids and regulated utility businesses. "Dynegy is working hard to move forward," the company's Mr. Byford says.

The Beattys find the SEC action gratifying, in a way. Today, Ms. Beatty is working on a book about their experience, while her husband continues to search for steady work. At times, Mr. Beatty regrets ever deciding to take on Dynegy. "Sometimes I wish I never heard of Project Alpha," he says.

Write to Jathon Sapsford at jathon.sapsford@wsj.com⁵ and Paul Beckett at paul.beckett@wsj.com⁶