The Securities and Exchange Commission (SEC) has charged a Canadian-based oil and gas company and three of its former top finance executives for their roles in what the US regulator describes as ‘an extensive, multi-year accounting fraud’
The SEC's complaint alleges that Penn West Petroleum Ltd, which has since been renamed Obsidian Energy Ltd, fraudulently moved hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts.
As a result, the SEC alleges that Penn West, which was one of Canada's largest oil producers at the time, was able to artificially reduce its operating costs by as much as 20% in certain periods, which falsely improved reported metrics for oil extraction efficiency and profitability.
According to the SEC's complaint, the fraud was orchestrated by the company'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 in order 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. According to the SEC's complaint, they frequently met this target to the dollar by having the company record large, round number, and unsupported adjusting journal entries. Within the company, this practice was referred to as ‘reclass to capital’.
The SEC claims that Takeyasu and Curran directed the reclass-to-capital practices without ensuring that the accounting entries reconciled with actual capital spending amounts, and Curran and Grab were repeatedly warned by a subordinate accountant 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.
Gerald Hodgkins, associate director in the SEC's enforcement division, said: ‘As alleged in our complaint, Penn West's widespread accounting abuses were directed by its most senior accounting executives. 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.’
The SEC's complaint, which was filed in federal court in Manhattan, charges Penn West, Takeyasu, Curran, and Grab with violating the antifraud, 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 has 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. The settlement is subject to court approval. Grab agreed to the settlement without admitting or denying the allegations or findings.
