Update 8/7/15: David. M. Hall has resigned his post as Miller Energy COO.
Charges stem from overstatement of oil and gas properties acquired in Alaska in 2009
Charges of accounting fraud and falsely inflating asset values are being brought against Miller Energy Resources Inc. and certain related parties by the US Securities and Exchange Commission.
Specifically, the SEC alleges that Miller Energy Resources Inc., its former CFO, Paul W. Boyd, and its current COO, David M. Hall, inflated values of oil and gas properties, resulting in fraudulent financial reports for the Tennessee-based company. Boyd joined Miller in 2008 after serving as CFO for a Knoxville, TN-based startup company. He left Miller in 2011. The audit team leader at the company's former independent auditor, Carlton W. Vogt III, also was charged in the matter.
In an order instituting administrative proceedings, the SEC’s Division of Enforcement alleges that after acquiring oil and gas properties in Alaska in late 2009, Miller Energy overstated their value by more than $400 million, boosting the company’s net income and total assets. The allegedly inflated valuation had a significant impact, turning a penny-stock company into one that eventually listed on the New York Stock Exchange, where its stock reached a 2013 high of nearly $9 per share. Miller received a notice from the Commission on April 28, 2015, indicating that the staff of the Commission had made a preliminary determination to recommend that the Commission pursue a civil action against the company related to that acquisition.
"Financial statement information is the cornerstone of investment decisions. We've charged that Miller Energy falsified financial statement information and grossly overstated the value of its Alaska assets and that the company's independent auditor failed to conduct an audit that complied with professional standards," said William P. Hicks, Associate Regional Director of the SEC's Atlanta office. "The SEC will aggressively prosecute such conduct."
Currently, the Alaska-focused exploration and production company is struggling to avoid bankruptcy. With its stock closing at an average trading price of under $1 since late Apil, the company was delisted from the New York Stock Exchange.
In an earnings release last week, current Miller Energy CEO Carl Geisler said, despite current circumstances, the company does not intend to file for bankruptcy. On the current state of the company, Geisler said, "we are working to reposition an increasingly strained balance sheet. The math is stark but not damning." While continued oil price uncertainty weighs on the comapany's situation, he said, the company continues "to pay in effect for capital financing and drilling plans that at least in retrospect, left us poorly positioned for the market conditions that arose in late 2014 and persist today."
In a December 2014 interview with OGFJ, Geisler--who had joined Miller as CEO just a few months prior in September--was significantly more upbeat about the company's ability to weather an industry downturn. When asked about declining oil prices and the potential for an even further pullback, Geisler pointed to operating costs, hedges, and Alaska-specific incentives as "cushion to absorb the recent oil price downdraft," aiding in its ability to “ride out any short-term decline in oil prices better than our non-Alaska peers.”
Miller Energy paid $2.25 million and assumed certain liabilities to purchase the Alaska properties and later reported them at a value of $480 million, according to the SEC’s Division of Enforcement. Then-CFO Paul W. Boyd allegedly relied on a reserve report that did not reflect fair value for the assets. He also is alleged to have double-counted $110 million of fixed assets already included in the reserve report. The report by a petroleum engineering firm allegedly contained expense numbers that were knowingly understated by David M. Hall, the CEO of Miller Energy's Alaska subsidiary and Miller Energy's COO since July 2013. Hall is alleged to have altered a second report to make it appear as though it reflected an outside party’s estimate of value.
The Division of Enforcement alleges that the fiscal 2010 audit of Miller Energy’s financial statements was deficient due to the failure of Carlton W. Vogt III, the partner in charge of the audit. Vogt was then at Sherb & Co LLP, a now defunct firm that was suspended by the SEC in 2013 for conduct unrelated to its work for Miller Energy. Vogt issued an unqualified opinion of Miller Energy’s 2010 annual report and is alleged to have falsely stated that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board and that Miller Energy’s financial statements were presented fairly and conformed with US generally accepted accounting principles.
The SEC is seeking to obtain cease-and-desist orders, civil monetary penalties, and return of allegedly ill-gotten gains from the company, Boyd, and Hall. It also is seeking to bar Boyd and Hall from serving as public company officers or directors and to bar Boyd and Vogt from public company accounting.
The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.