U.S. charges Obsidian, formerly Penn West, with accounting fraud

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Calgary-based Obsidian Energy Ltd. and three former employees are facing U.S. Securities and Exchange Commission charges for their roles in an alleged accounting fraud – issues the company says it flagged three years ago and has fixed.

Wednesday's action from the U.S. agency comes the same week Obsidian formally changed its name from Penn West Petroleum Ltd. – a move meant to mark the restructuring of the company, and an attempt to make a break from its past poor performance.

Like other oil producers, the company has also been battered by nearly three years of low crude prices.

"This is not the old Penn West," Paul Surmanowicz, capital markets lead at Obsidian Energy, said in an interview Wednesday.

"We understand that the SEC needs to look through this, and we're going to let the process run through. But we do feel that this is an issue from 2014 and there's no new information here."

Lawyers for the former employees also say the charges are without merit.

However the U.S. market watchdog says the Canadian energy company moved hundreds of millions in expenses from one ledger to another between 2012 and early 2014 to give the appearance it was spending less money than it actually was in its quest to get oil of out the ground.

The news of the U.S. commission actions affected the company's Toronto Stock Exchange performance Wednesday, with shares dropping more than 10 per cent following the SEC announcement.

By the end of the day, the stock had recovered somewhat to $1.66, or down 4.6 per cent from the beginning of the day.

The commission complaint filed in New York Wednesday demands a jury trial and alleges Obsidian "fraudulently moved hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts," according to a news release.

"The object of the scheme was to deceive the investing public by understating Penn West's publicly reported operating expenses and related financial metrics and making the company appear to be managing costs more efficiently than it actually was," said a court document filed by the SEC.

The U.S. agency also thanked the Alberta Securities Commission (ASC) for its assistance in the case.

However, its conclusions are not shared by the Calgary-based regulator. Alison Trollope, a spokeswoman for the ASC, said via e-mail Wednesday "our investigation led us to a different conclusion than that of the SEC." She declined further comment.

In 2014, Penn West made public details of accounting irregularities and launched a review of its financial statements. It eventually restated its financial reports for 2012, 2013 and the first quarter of 2014, and in 2016, paid $53-million to settle class action lawsuits with U.S. and Canadian investors.

The company has also sold assets and shrunk dramatically to reduce debt and survive the oil price downturn. Where it once had operations in four provinces, it now operates only in Alberta. It produces about 30,000 barrels of oil equivalent a day, compared with about 133,000 in 2013.

The U.S. SEC alleges the accounting fraud was orchestrated by three former senior executives: Penn West's former chief financial officer Todd Takeyasu, former vice-president of accounting and reporting Jeffrey Curran, and former operations controller Waldemar Grab.

The commission complaint charges Penn West, Mr. Takeyasu, Mr. Curran, and Mr. Grab with violating the anti-fraud, reporting, books and records and internal-controls provisions of U.S. federal securities laws between 2012 and the beginning of 2014 – a time when Penn West was one of Canada's largest energy companies.

According to legal documents filed by the commission, Penn West had also been considered one of the highest-cost producers in the oil and gas industry.

With the goal of improving Penn West's financial picture, the commission says the three men allegedly managed operating expenses to meet a budget target. "According to the SEC's complaint, they frequently met this target to the dollar by having the company record [a] large, round number, and unsupported adjusting journal entries. Within the company, this practice was referred to as 're-class to capital.'"

The SEC said it is seeking permanent injunctions and monetary relief against all the defendants, officer-and-director bars from Mr. Takeyasu and Mr. Curran and a clawback of incentive-based compensation awarded to Mr. Takeyasu.

On Wednesday, Mr. Takeyasu directed inquires to his U.S. lawyer, Richard Albert, who said the SEC claims against Mr. Takeyasu are without merit. "He looks forward to defending the case vigorously and prevailing in court," Mr. Albert said.

And in an interview, lawyer Helen Gredd also said the portrait the SEC's attempts to paint of Mr. Curran, her client, "bears no resemblance to reality. And we look forward to Jeff's full vindication in court."

The regulator said Mr. Grab is co-operating with the SEC and has agreed to a settlement. Mr. Grab agreed to the settlement without admitting or denying the allegations or findings.

The SEC said its investigation found no personal misconduct by Penn West's two former CEOs, Murray Nunns and David Roberts. The two men "have reimbursed the company for cash bonuses and certain stock awards they received during the period when the company allegedly committed accounting violations."