The SEC has fined a Tennessee based energy company $5 million for financial accounting and reporting fraud as well as audit failures related to the valuation of oil and gas assets the company acquired in Alaska. The energy company agreed to terminate the registration of its securities with the SEC and suspend any continuing reporting obligations as well as cease and desist from further securities violations (In the Matter of Miller Energy Resources, Inc., Release No. 33-10002, January 12, 2016).
The energy company. Miller Energy Resources, Inc., operates and develops oil and gas wells in north and south central Alaska. Prior to its Alaska operations, the company operated oil and gas assets in the Appalachian region of east Tennessee until selling them in November 2014 for $3.3 million in cash. Its securities were listed on the NYSE, until delisted in September 2015. On October 1, 2015, Miller filed a bankruptcy petition under Chapter 11.
Miller acquires Alaska properties. The SEC’s action stems from the December 2009 acquisition by Miller of oil and gas properties in Alaska from a bankrupt California energy company through a competitive auction. Miller paid $2.25 million in cash and assumed certain liabilities for the property.
On March 22, 2010, Miller filed Form 10-Q for its fiscal third quarter ended January 31, 2010 and reported a value of $480 million for the Alaska acquisition, consisting of $368 million for oil and gas properties and $110 million for fixed assets. Miller also reported an after-tax $227 million bargain purchase gain which boosted net income for the quarter to $272 million.
In contrast, the company reported a $556,097 loss for the same period a year before. Miller, founded in 1967 as an oil and gas exploration and production company that went public via a reverse merger in 1996, regularly had a stock price that traded below one dollar per share.
The newly booked value of the Alaska acquisition had a significant impact on Miller Energy’s stock price, according to the SEC. The company’s stock price increased 982 percent higher after the acquisition.
Value materially overstated. According to the SEC, Miller materially overstated the value of its Alaska assets by more than four hundred million dollars.
When computing their estimate of fair value, Miller and the CFO failed to consider the existence of numerous, readily apparent data points strongly indicating that the assets were worth substantially less than the $480 million value Miller Energy recorded, according to the SEC.
The SEC alleged that Miller and the CFO requested and improperly used a reserve report prepared by an independent petroleum engineer firm to record the value of the acquired oil and gas properties. This was done although the reserve report itself stated that the numbers were not an estimate of fair market value.
The company and CFO also provided expense projections that were significantly lower than past actual experience. By understating the expense numbers, Miller overvalued its oil and gas properties by tens of millions of dollars, the SEC said.
Fixed assets double counted. In addition to the $368 million value recorded for the oil and gas properties, Miller also erroneously recorded a separate value of $110 million for acquired fixed assets, such as facilities and pipelines ancillary to the oil and gas reserves. However, because the fixed assets were integral to the operations of the acquired properties, their values were captured in the reserve report’s cash flows. Consequently, by separately valuing the same operating assets, Miller overstated the value of the Alaska assets by as much as $110 million.
Fraudulent valuation. Miller also allegedly refashioned a preexisting insurance study to make it appear that its own value of $110 million derived from a third party. The numbers in the fixed asset study were given to an insurance broker as far back as 2007 and were used as starting points for other types of estimates. The CFO knew or knowingly disregarded the fact that the insurance study did not reflect fair value or any analysis by the insurance broker, according to the SEC order.
As a result of the fraudulent valuation, Miller filed with the Commission financial reports that materially misstated the value of its assets.
The release is No. 33-10002.
MainStory: TopStory AccountingAuditing DirectorsOfficers Enforcement FraudManipulation
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