SEC DROPS SIGNIFICANT CLAIMS IN SETTLING FINANCIAL FRAUD CASE
The SEC settled a 2007 financial fraud action brought against Thomas Fisher, former Chairman, CEO and President of Nicor, Inc., after dropping its primary claims against the executive. SEC v. Fisher, Case No. 07-cv-4483 (N.D. Ill. Filed Aug. 9, 2007). The case continues as to two other executives.
Following the receipt of an anonymous whistleblower fax by public utility advocacy group Citizen’s Utility Board, a memorandum was furnished to Nicor detailing claims of financial fraud from 1999 through 2002. The board of directors of Nicor, a gas utility holding company, appointed a special committee which conducted an investigation that concluded in October 2002. The company immediately issued a press release accepting the findings of the inquiry and in March 2003 restated its financial statements. The Commission filed a settled action alleging financial fraud by the company and its controller a few days later in which both defendants consented to injunctions and agreed to pay substantial financial penalties.
Subsequently, the current action was filed against Mr. Fisher, along with Kathleen Halloran, the former EVP and CFO of the company, and George Behrens, the former VP of Administration and Treasurer of Nicor. The complaint, which repeatedly references actions by “Fisher, Halloran and Behrens,” alleges a financial fraud which caused the falsification of Nicor’s annual reports for 2000 and 2001 and eight quarterly reports from March 2000 through June 2002.
According to the Commission, “Fisher, Halloran, and Behrens” participated in devising a method by which the company could profit by accessing its low-cost last-in, first-out or “LIFO” layers of gas inventory. Beginning in 1999 and continuing through 2002, Nicor failed to disclose “rigged reductions in gas inventory levels that enabled it to improperly manipulate its earnings . . .” This scheme increased Nicor’s revenues under a plan administered by the Illinois Commerce Commission. The three named defendants also understated the expenses of the company during the first quarter of 2001 by improperly bundling a weather-insurance contract with an agreement to supply gas to its insurance provider at below market prices. The losses from that agreement were charged to the customers of the company, contrary to the dictates of the ICC. By overstating revenue and understating expense the company was able to meet earnings targets.
“Fisher, Halloran, and Behrens” also failed to make disclosures required by GAAP, according to the complaint. Specifically, the three failed to disclose the effects of LIFO inventory liquidations on income despite the fact that in at least one instance they amounted to 23% of pre-tax income. The MD&A sections of Nicor’s reports for 2000 and 2001 also failed to discuss the impact of the increases from the liquidation of its LIFO inventory or inform investors that the liquidation of its low cost inventory could not be sustained.
The four count complaint alleges violations by “Fisher, Halloran and Behrens” of Exchange Act Section 10(b) (Count I), Securities Act Section 17(a)(1) (Count II), Securities Act Sections 17(a)(2) and (3) (Count III) and aiding and abetting violations of Exchange Act Section 13(a)(Count IV). The relief requested included statutory injunctions, disgorgement, prejudgment interest and civil penalties.
To settle the action, Mr. Fisher consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 17(a)(2) and (3) (Count II) and from aiding and abetting violations of Exchange Act Section 13(a) (Count IV). He also agreed to pay disgorgement and prejudgment interest in the amount of $825,000. The Commission dropped its claim in Count I, based on Exchange Act Section 10(b), and Count II, based on Exchange Act Section 17(a)(1). The demand for a civil penalty was also dropped. As is customary, the SEC’s Litigation Release does not explain the reason for dropping the most significant counts in the complaint or the demand for a penalty. See also Litig. Rel. 21603 (July 28, 2010).