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SEC Charges Oil and Gas Company With Accounting Fraud: Enforcement

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The Securities and Exchange Commission charged a Canadian-based oil and gas company and three of its former top finance executives for their roles in an extensive, multiyear 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. This alleged fraudulent movement caused Penn West 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. Penn West was one of Canada’s largest oil producers at the time.

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. 

“As alleged in our complaint, Penn West’s widespread accounting abuses were directed by its most senior accounting executives,” said Gerald W. Hodgkins, Associate Director in the SEC’s Enforcement Division. “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.”

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’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.

SEC Charges Former Chief Operating Officer of Oxford City Football Club in Offering Fraud

The SEC announced fraud charges against the former chief operating officer of a Florida-based penny stock company that falsely claimed to be “the largest publicly traded diversified portfolio of professional sports teams in the world.”

The SEC’s complaint alleges that, from approximately July 2013 to July 2015, Diana P. Lovera and others at Oxford City used pressure tactics and a boiler room of salespeople to raise approximately $6.6 million from more than 150 investors, many of whom were unaccredited, through the sale of millions of unregistered shares of Oxford City stock.

Lovera was charged criminally in a parallel case. She pled guilty to conspiracy to commit mail and wire fraud and was sentenced to 20-month prison term, which she is now serving, and ordered to pay, jointly and severally with other defendants, approximately $6.31 million in restitution.

To settle the charges, Lovera agreed to the entry of a final judgment, subject to court approval, that permanently enjoins her from violating the charged provisions of the federal securities laws; imposes a conduct-based injunction, a penny stock bar, and an officer-and-director bar; and orders her to pay disgorgement of $81,374 plus prejudgment interest of $3,343, which will be deemed satisfied by the restitution order entered against her in the criminal case. Lovera also consented to an SEC order imposing a permanent associational bar.

Federal Court in North Carolina Orders Marbury Advisors and Owner to Pay More than $4.4 Million for Fraudulently Soliciting Customers

The Commodity Futures Trading Commission announced that Judge Loretta C. Biggs of the U.S. District Court for the Middle District of North Carolina entered an Order of Final Judgment by Default against Defendants Tracy Lee Thomas, formerly of Naples, Florida, and Marbury Advisors Inc., a Cayman Islands corporation.

The court’s order finds that the defendants fraudulently solicited over $ 1.1 million from customers, lost those funds trading, and provided customers with false reports or statements indicating their investments were profitable.

The court’s order, which stems from a CFTC complaint filed March 22, 2016, requires Thomas and Marbury, jointly and severally, to pay restitution of $1,110,413 and a civil monetary penalty of $3,331,239, which represents triple the monetary gain to defendants. The order also imposes permanent trading and registration bans and prohibits defendants from further violations of the Commodity Exchange Act, as charged.

SEC Charges Three with Insider Trading in Stock of Ariad Pharmaceuticals

The SEC announced insider trading charges against two former senior employees and the spouse of a former employee of Ariad Pharmaceuticals Inc., a company based in Cambridge, Massachusetts, engaged in the business of developing and marketing drugs to treat cancer.

According to the SEC’s complaints, filed in federal court in Boston, the defendants traded in Ariad’s stock in advance of announcements about U.S. Food and Drug Administration decisions that impacted the sales and marketing of the company’s main product.

Harold Altvater, whose wife was an Ariad employee, illegally traded Ariad stock on the basis of nonpublic information he learned from her. By purchasing shares ahead of a positive announcement and selling shares ahead of negative announcements, Altvater avoided losses and obtained insider profits totaling $102,026.30. Altvater also advised a friend to trade Ariad stock on the basis of non-public information learned from Altvater’s wife, enabling the friend to obtain profits of $4,188. The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties in its complaint against Altvater.

Maureen Curran, Ariad’s former senior director of pharmacovigilance and risk management, sold Ariad stock in December 2012, after she had attended meetings with the FDA and had learned material nonpublic information regarding a forthcoming FDA decision to require Ariad to include a safety warning on its product label. By selling in advance of Ariad’s announcement, Curran avoided $9,420 in losses. Susan Dubuc, Ariad’s former associate director of pharmacovigilance and risk management, alerted certain of her relatives in October 2013, one day before Ariad publicly announced a pause in all clinical trials for its FDA-approved drug. By selling in advance of Ariad’s announcement, Dubuc’s relatives avoided $2,888 in losses.

Without admitting or denying the SEC’s allegations, Curran and Dubuc have consented to the entry of final judgments. The judgment against Curran will require her to pay disgorgement of $9,420, prejudgment interest of $1,408 and a civil penalty of $9,420. The judgment against Dubuc will require her to pay disgorgement of $2,888, prejudgment interest of $310 and a civil penalty of $2,888. The settlements with Curran and Dubuc are subject to court approval.

SEC Obtains Final Judgment Against Defendants in Crowdfunding Scheme

The SEC announced that it has obtained a final judgment against Ascenergy LLC, Joseph Gabaldon, and Alanah Energy LLC.

Ascenergy and Gabaldon engaged in a deceptive scheme on crowdfunding websites and the company’s website to solicit investors to purchase overriding royalty interests in five initial, undeveloped oil and gas wells, according to the SEC’s complaint. According to the complaint, Ascenergy raised approximately $5 million from approximately 90 investors worldwide. The complaint alleges that Ascenergy and Gabaldon made multiple, material misrepresentations about the company, the nature of the offering, and the use of investor funds.

The SEC also alleges that Alanah and Pyckl LLC – both of whom have been charged as relief defendants – have received, possessed, or benefited from investor funds.

Without admitting or denying the allegations in the SEC’s complaint, Ascenergy and Gabaldon consented to the entry of a final judgment ordering them, jointly and severally, to pay disgorgement of $5,112,473, prejudgment interest of $197,217, and civil penalties of $1.55 million and $320,000 each, respectively.

The final judgment also orders Alanah to pay disgorgement of $103,890 with prejudgment interest of $4,670.

CFTC Enters into Non-Prosecution Agreements With Former Citigroup Global Markets Traders

The CFTC announced that it entered into non-prosecution agreements with Jeremy Lao of New York, New York, Daniel Liao of Minato-Ku, Japan, and Shlomo Salant of New York, New York. In their non-prosecution agreements, Lao, Liao and Salant each admits that he engaged in the unlawful disruptive trade practice of “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution) in U.S. Treasury futures markets while trading for Citigroup Global Markets Inc. in 2011 and 2012.

The non-prosecution agreements emphasize Lao’s, Liao’s and Salant’s timely and substantial cooperation, immediate willingness to accept responsibility for their misconduct, material assistance provided to the CFTC’s investigation of Citigroup, and the absence of a history of prior misconduct.

On Jan. 19, 2017, the CFTC announced a settlement with Citigroup for spoofing and related supervision failures and imposed a $25 million civil monetary penalty. Relatedly, on March 30, 2017, the CFTC announced settlements with former Citigroup traders Stephen Gola and Jonathan Brims for spoofing and imposed civil monetary penalties of $350,000 and $200,000, respectively, along with six-month trading bans.

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