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Weatherford Settles SEC’s Allegations Of Accounting And Reporting Fraud For $140 Million
10/03/2016On September 27, 2016, Weatherford International Ltd. (“Weatherford”), the world’s seventh-largest oilfield services company, agreed to pay $140 million to settle accounting and reporting fraud claims brought by the Securities Exchange Commission (“SEC”). In the Matter of Weatherford International PLC, Admin. Proc. File No. 3-17582 (Sept. 27, 2016). In a settled order instituting administrative proceedings, the SEC alleged that Weatherford used deceptive accounting practices to inflate its earnings by over $900 million between 2007 and 2012, and accused Weatherford’s former vice president of tax, James Hudgins, and former tax manager, Darryl Kitay, as bearing personal responsibility. Neither Weatherford nor the two individuals acknowledged wrongdoing as part of the settlement.
The SEC alleged that, from 2007 to 2010, while touting its tax structure to investors as a key competitive advantage, Weatherford issued materially false and misleading statements about certain key financial indicators to disguise that Weatherford’s tax structure was not as successful at reducing the company’s tax expense and effective tax rate (“ETR”) as it was purported to be. For example, the SEC claimed that after Weatherford forecast an ETR of 20% for FY 2007, Hudgins and Kitay brought the company’s ETR in line with the projections by falsely recording $439.7 million in “intercompany dividends,” which are excluded from taxable income. The SEC claimed that they repeated the fraud in 2008 and 2009 by making unsubstantiated adjustments of $286.6 million and $303.7 million to ensure that Weatherford’s ETR was consistent with prior projections. As a result of the allegedly fraudulent accounting and reporting, Weatherford restated its financial results on three separate occasions during 2011 and 2012.
The SEC considered Weatherford’s cooperation and remedial efforts in determining whether to accept the company’s offer. These efforts included retaining outside counsel to conduct an investigation after the first and second restatements and retaining separate outside counsel, by the Audit Committee, to conduct an independent investigation pursuant to Section 10A of the Exchange Act. Weatherford shared the results of those investigations with the Commission. Additionally, the SEC noted, Weatherford expended “significant resources” in order to remediate weaknesses in its internal controls for accounting of income taxes. Weatherford replaced Hudgins and its CFO with more experienced accounting professionals and modified its reporting lines to ensure appropriate review of all accounting for income taxes.
In addition to the monetary settlement, the SEC is requiring Weatherford to comply with a number of undertakings, including: (1) reporting to the Commission for a two-year term the company’s compliance with SEC regulations and GAAP regarding its accounting of income taxes, financial reporting, and any remediation efforts, and reporting any significant deficiencies in the design or operation of these systems to the SEC upon discovery; (2) preserving all documentation regarding certifications and reports for seven years and making those documents available to the SEC upon request; and (3) cooperating fully with the Commission with respect to this or any related proceeding, including the production of requested information, documents, or cooperative personnel without a subpoena.
In addition to the $140 million penalty and significant undertakings assessed to Weatherford, which neither admitted nor denied the SEC’s allegations, Hudgins agreed to pay a $125,000 fine plus $209,607 in disgorgement and interest, and Kitay agreed to pay a $30,000 fine. The settlement order also bars Hudgins from serving as an officer or director of a public company for five years, and both Hudgins and Kitay are suspended from appearing before the SEC as accountants for at least five years.
