Oil and gas producer Magnum Hunter Resources last week disclosed in a Form 8-K filing with the Securities and Exchange Commission that it has received a Wells Notice for potential material weaknesses in the company’s internal control over financial reporting.
On April 3, Magnum Hunter said the SEC made a preliminary determination to recommend an enforcement action against the company, following a formal investigation the SEC launched in 2013 “regarding the company’s internal controls, change in outside auditors during 2012 and 2013 and public statements to investors and asking the company to preserve documents relating to these matters.”
The Wells Notice, which is neither a formal allegation nor a finding of wrongdoing, allows Magnum Hunter the opportunity to provide its reasons for why the proposed enforcement action should not be filed, and to address the issues raised by the SEC before a decision is made on whether to bring an enforcement proceeding.
The SEC issued similar Wells Notices to Magnum Hunter Chief Executive Officer Gary Evans and J. Raleigh Bailes, former chairman of the audit committee and Magnum Hunter’s former chief financial officer at the time when Magnum Hunter decided to dismiss its prior independent registered public accounting firm and its former chief accounting officer.
“While the Wells Notices do not specify the factual bases for the claims that would be included in the proposed actions, the company believes that the issues raised by the Wells Notices relate primarily to the company’s internal control over financial reporting during certain periods prior to the filing of the company’s 2012 annual report,” the Form 8-K stated. That annual report identified certain material weaknesses in the company’s internal control over financial reporting—material weaknesses that Magnum Hunter said it has since remediated.
Magnum Hunter said it intends to respond in the form of a Wells submission, setting forth why it believes an enforcement action against it should not be commenced. Evans and Bailes are also expected to make Wells submissions in response to their notices.
“In connection with the company’s dismissal of its prior independent registered public accounting firm and the filing of the company’s 2012 annual report on Form 10-K, the company was not required to restate any of its financial statements previously filed with the SEC and the company’s new independent registered public accounting firm issued an unqualified opinion on the company’s financial statements for fiscal year 2012,” the Form 8-K stated.
Magnum Hunter added that it’s “unable to assess with confidence or certainty how long the SEC process will last or its ultimate outcome.”