Washington, D.C., July 11, 2008 (LAWFUEL) – The Securities and Exchange Commission today charged Houston-based energy company El Paso Corporation, its subsidiaries, and five former employees with fraud for improperly inflating their proved oil and gas reserves, making the companies’ financial statements materially misleading to investors.
The SEC’s complaint, filed in federal district court in Houston, alleges that El Paso’s former employees lacked required supporting data in estimating reserves and ignored negative drilling results and production trends demonstrating that some fields weren’t producing as projected. Without admitting or denying the allegations, El Paso, its subsidiaries El Paso CGP Company LLC (CGP) and El Paso Exploration & Production Co. (EPPH), and the former employees have agreed to settle the SEC’s enforcement action.
“Although proved reserves are estimated, that does not mean ‘anything goes,’” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “Public companies must follow the rules for reserves estimation and reporting, and today’s action emphasizes the Commission’s commitment to ensuring transparency and uniformity when companies report that information to investors.”
Rose Romero, Regional Director of the SEC’s Fort Worth Regional Office, added, “Disregard of the Commission’s rules by companies and their employees will not be tolerated, as demonstrated by this action involving estimated reserves in the oil and gas industry.”
According to the SEC’s complaint, El Paso restated its financial statements for years 1999 through 2002 and the first nine months of 2003, reducing its previously reported proved natural gas and oil reserves over that time period by more than 35 percent and reducing its cumulative earnings through Sept. 30, 2003, by $1.7 billion. CGP and EPPH also restated their previously issued financial statements to correct their material overstatements of proved natural gas and oil reserves, standardized measures of future cash flows, and capitalized costs relating to oil and gas properties.
The SEC’s complaint alleges that in an environment of weak internal controls, El Paso assigned proved reserves to unproved reservoirs, attributed proved reserves to wells and undrilled locations without sufficient underlying data, and failed to take into account negative drilling and production trends when estimating and reporting its proved reserves. For example, El Paso gained information from its drilling activities suggesting that certain fields were not producing as predicted, but failed to investigate adequately the reasons for the negative trends or to reduce those estimates.
To settle the SEC’s charges, El Paso, its subsidiaries, and the former employees all consented to permanent injunctions against violations of the antifraud and other provisions of the federal securities laws. Rodney D. Erskine, the former president of El Paso’s Exploration and Production business segment, agreed to pay a $75,000 penalty, and Randy L. Bartley, the former senior vice president, agreed to pay a $40,000 penalty. Former vice presidents Steven L. Hochstein, John D. Perry, and Bryan T. Simmons each agreed to pay $40,000 penalties.