The Securities and Exchange Commission this week charged a Canadian-based oil and gas company and three of its former top finance executives for their roles in an extensive, multi-year accounting fraud.
The SEC complaint alleges that Penn West Petroleum (which has since been renamed Obsidian Energy) fraudulently moved hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts. This alleged fraudulent movement caused Penn West to artificially reduce its operating costs by as much as 20 percent in certain periods, which falsely improved reported metrics for oil extraction efficiency and profitability.
The SEC complaint states that the fraud was orchestrated by Penn West Petroleum’s former CFO Todd Takeyasu; former vice president of accounting and reporting, Jeffery Curran; and former operations controller, Waldemar Grab. The SEC alleges that they manipulated the company’s operating expenses to lower a key publicly reported metric concerning the cost of oil extraction and processing needed to sell a barrel of oil.
Penn West allegedly created an internal budget target representing the amount it would improperly move in its publicly-reported financial statements and gave the illusion that it was spending less money to get oil of out the ground. In fact, the SEC alleges, the company historically struggled to keep its operating costs under control, and Takeyasu, Curran, and Grab managed operating expenses to meet the budget target. They frequently met this target to the dollar by having the company record large, round number, and unsupported adjusting journal entries, the SEC said. Within the company, this practice was referred to as “reclass to capital.”
As alleged in the SEC’s complaint, Takeyasu and Curran directed the reclass-to-capital practices without ensuring that the accounting entries reconciled with actual capital spending amounts, and a subordinate accountant repeatedly warned Curran and Grab that the reclass entries lacked support. In September 2014, the company publicly reported that it would restate its financial statements from 2012 to the first quarter of 2014 and its historical financial statements and related audit reports could no longer be relied upon.
“Combating financial fraud is critical to maintaining a fair and transparent marketplace,” said Stephanie Avakian, Co-Director of the SEC's Enforcement Division. “We will continue to vigorously pursue and punish corporate executives and other individuals whose actions violate the federal securities laws.”
“As alleged in our complaint, Penn West’s widespread accounting abuses were directed by its most senior accounting executives,” said Gerald Hodgkins, Associate Director in the SEC’s Enforcement Division. “These executives breached their disclosure obligations to investors and kept hidden from the market the true nature of a key financial metric and the company’s struggle to control its operating expenses.”
Charges levied. The SEC's complaint, whic filed in federal court in Manhattan, charges Penn West, Takeyasu, Curran, and Grab with violating the anti-fraud, reporting, books-and-records and internal controls provisions of the federal securities laws. The SEC seeks permanent injunctions and monetary relief against all the defendants, officer-and-director bars from Takeyasu and Curran, and a clawback of incentive-based compensation awarded to Takeyasu.
Grab, who is cooperating with the SEC's litigation, has agreed to a settlement including permanent injunctions and an officer-and-director bar. He also agreed to a permanent suspension from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. Grab agreed to the settlement, which is still subject to court approval, without admitting or denying the allegations or findings.
The SEC's investigation found no personal misconduct by Penn West's two former CEOs, Murray Nunns and David Roberts, who have reimbursed the company for cash bonuses and certain stock awards they received during the period when the company allegedly committed accounting violations. Therefore, it isn't necessary for the SEC to pursue claw-back actions under Section 304(a) of the Sarbanes-Oxley Act, the SEC said. Those amounts, converted to U.S. dollars, are approximately $262,451 for Nunns, and $22,290 for Roberts.