SEC: Oil Company Improperly Moved Hundreds of Millions from Operating to Capital Expenditure Accounts

Chris Gaetano
Published Date:
Jun 28, 2017

The Securities and Exchange Commission charged a Canadian oil company and three of its former top finance executives with perpetuating a massive accounting fraud over the course of several years. The SEC said that the company, Penn West Petroleum (now renamed Obsidian Energy), was one of the largest oil producers in Canada, but had historically struggled to keep its operating costs under control. Because of this, the SEC said that the company manipulated key metrics in order to give the impression that it was managing its costs more effectively than it actually was. To do this, the SEC said the company reclassified hundreds of millions of dollars worth of operating expenses as capital expenditures or royalties, which allowed it to falsely report improved metrics to the investing public. In essence, the company claimed it was spending less money to get oil out of the ground than it actually was. 

"Defendants’ accounting devices did not reflect the reality of Penn West’s true
economic activity and made no attempt to do so. Instead, the accounting adjustments were aimed at moving large amounts of operating expenses to other parts of the company’s financial statements so that Penn West’s operating cost efficiency looked better than it really was. Defendants each took steps to conceal their scheme from others within Penn West and Penn West’s independent auditor. As a result of Defendants’ fraud and concealment, Defendants consistently underreported Penn West’s operating expenses in their annual and quarterly filings with the SEC during the Relevant Period," said the SEC complaint. 

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. Grab 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.

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