The headquarters building of the U.S. Securities and Exchange Commission (SEC) stands in Washington, D.C. (Joshua Roberts/Bloomberg)
The U.S. securities watchdog says it has charged Calgary-based Obsidian Energy Ltd. and three former executives for their roles in an alleged multi-year accounting fraud that made it look like the oil and gas company was spending less money than it was to get oil of out the ground.
The U.S. Securities and Exchange Commission complaint filed in New York Wednesday alleges that Obsidian – which changed its name from Penn West Petroleum Ltd. just this week – “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 per cent in certain periods, which falsely improved reported metrics for oil extraction efficiency and profitability.”
The commission alleges the fraud was orchestrated by three former senior executives: The company’s former chief financial officer Todd Takeyasu, former vice president of accounting and reporting Jeffery Curran, and former operations controller Waldemar Grab.
The commission complaint charges Penn West, Mr. Takeyasu, Mr. Curran, and Mr. Grab with violating the anti-fraud, reporting, books and records and internal controls provisions of U.S. federal securities laws between 2012 and the beginning of 2014 – when Penn West was one of Canada’s largest energy companies.
“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,” said the SEC news release.
In 2014, what was then Penn West unveiled details of accounting irregularities and launched a review of its financial statements dating back 4 1/2 years. At the time, the company said it had notified securities regulators in Canada and the U.S. about the issues, which included some entries that appeared to reduce expenses. The company added that its historical financial documents for the period under review were not reliable.
Reacting to the news that the U.S. regulator was pursuing legal action Wednesday, David French, Obsidian Energy’s current president and chief executive said: “We are naturally disappointed that the SEC has chosen to pursue these past matters which we reported to them and fully remediated years ago. This is particularly true since the employees involved in the matters have long since left the company.”
He added that we do not anticipate this matter to materially alter the business activities and Obsidian Energy appreciates the SEC’s “view of its obligations regarding these past matters and look forward to a timely resolution.”
According to legal documents filed by the commission, Penn West had in 2014 long been considered one of the highest-cost producers in the oil and gas industry. “Penn West struggled to keep expenses under control through legitimate cost-cutting measures and still lagged behind other Canadian oil and gas producers.”
With the goal of improving the financial picture of the company, the commission says Mr. Takeyasu, Mr. Curran, and Mr. Grab allegedly 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 said it is seeking permanent injunctions and monetary relief against all the defendants, officer-and-director bars from Mr. Takeyasu and Mr. Curran, and a clawback of incentive-based compensation awarded to Mr. Takeyasu.
The regulator said Mr. Grab is co-operating with the SEC, and has agreed to a settlement that includes permanent injunctions and an officer-and-director bar. The settlement is still subject to court approval, and the SEC said Mr. Grab agreed to the settlement without admitting or denying the allegations or findings.
The SEC said its investigation found no personal misconduct by Penn West’s two former chief executives, Murray Nunns and David Roberts. The two men “have reimbursed the company for cash bonuses and certain stock awards they received during the period when the company allegedly committed accounting violations.”