SEC SETTLES FINANCIAL FRAUD CASE ENJOING YEARS OLD CONDUCT

The SEC filed another settled, years-old, financial fraud case on Friday. This time the case was filed against the El Paso Corporation, two of its subsidiaries and five of its former executives. SEC v. El Paso Corporation, Civil Action No. 4:08-CV-02191 (S.D. Tex. July 11, 2008). In addition to the company, the complaint named subsidiaries El Paso CGP Company LLC and El Paso Exploration & Production Co. and Rodney D Erskine, former president of El Paso’s Exploration and Production business segment, Randy L. Bartley, the former senior vice president of El Paso’s Exploration and Production business Segment, and Steven L. Hochstein, John D. Perry and Bryan T. Simmons, former vice presidents of El Paso’s Exploration and Production business segment.

The complaint is based on alleged fraudulent conduct which occurred between 1999 and 2003, largely in the two subsidiary defendants. In 2004, the company restated its financial statements, correcting its filed financial statements.

Four years after El Paso’s restatement detailing the errors, the SEC filed its complaint. The Commission alleged that El Paso materially overstated its proven oil and gas reserves, overstated its standardized measure of future cash flows and overstated its capitalized costs relating to its natural gas and oil producing activities.

The inflated results were accomplished in three key ways: 1) the company improperly attributed proved reserves to unproved oil and gas reserves; 2) they improperly recorded reserves as proved without having sufficient supporting geological or engineering data as required by SEC rules; and 3) the company failed to reduce reserves despite negative drilling and production data.

This conduct followed pressure from Messrs. Erskine and Bartley to maximize oil and gas reserves. The vice presidents in the Exploration and Production segment in turn certified false reports. According to the complaint, the inadequate internal controls of the company facilitated the overstatements. In 2001, Defendant Erskine adopted a reporting structure in which reserve estimates were made in the geographical districts and certified by the vice presidents. This structure contributed to the inflated results.

To resolve the case:

• El Paso consented to the entry of an injunction prohibiting violations of Section 17(a)(2) of the Securities Act and the books and records provisions of the Exchange Act.

• The two subsidiaries consented to the entry of an injunction prohibiting violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and the Exchange Act books and records and internal control provisions.

• Messrs. Erskine and Bartley consented to the entry of injunctions prohibiting future violations of Section 17(a)(2) of the Securities Act and various Exchange Act books and records and internal provisions. In addition, Mr. Erskine consented to the entry of an order requiring him to pay a $75,000 civil penalty, while Mr. Bartley consented to the entry of an order requiring him to pay a $40,000 penalty.

• Messrs. Hochstein, Perry and Simmons each consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions of the Securities Act and the Exchange Act and the books and records and internal control provisions of the Exchange Act. In addition, each consented to the entry of an order requiring the payment of a $40,000 civil penalty.