Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, October 5, 2009

Vendor of Newpark Resources Settles Accounting Fraud Charges with SEC

On October 2, 2009, the Eastern District of Louisiana entered a final judgment of permanent injunction and other relief against defendant Joe E. Penland, a Texas resident and the owner of a third-party vendor of Newpark Resources, Inc. ("Newpark"), an oil and gas company based in Houston, Texas. Penland was the principal of Quality Mat Company, a Newpark vendor, and was charged in the complaint along with Newpark principals for violations of the federal securities laws. The final judgment permanently enjoined Penland from future violations of the antifraud provision of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and from future violations of Exchange Act Rule 13b2-2, which prohibits lying to auditors. The final judgment also permanently enjoined Penland from aiding and abetting accounting violations of others as set forth in Sections13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The final judgment ordered that Penland pay a civil penalty in the amount of $70,000. Penland consented to the entry of the order without admitting or denying the allegations of the Commission's complaint.

According to the Commission's Complaint, Matthew W. Hardey, a former Chief Financial Officer for Newpark, and L. Cyrus DeBlanc, a former Chief Financial Officer for Newpark subsidiary Soloco LLC, conspired with Quality Mat president Joe E. Penland to engage in a fraudulent accounting scheme that allowed Newpark in fiscal year 2003 to avoid writing off approximately $4.2 million in aging debt. As a result, Newpark reported approximately $500,000 of net income instead of a significant loss for that fiscal year. The Commission's Complaint alleged that, in 2002 and 2003, Newpark recognized $4.2 million in revenue based on sales of its primary product — industrial mats used to lay temporary roads at drilling sites — to Quality Mat and another vendor, Easy Frac. The Complaint alleged that neither vendor had made any payment on the sales through the end of 2003, and that Hardey, DeBlanc and Penland devised and executed a scheme to funnel money to Quality Mat and Easy Frac through sham transactions that would then allow the vendors to pay their debts to Newpark.

According to the Complaint, one of the sham transactions took place in 2004 and involved Dura-Base Nevada, LLC and Dura-Base de Mexico, two Newpark subsidiaries created to begin mat rentals in Mexico. The Complaint asserted that Newpark purchased the entire initial inventory of mats for the Dura-Base business from Quality Mat, and that the decision to purchase the approximately 6,175 mats from Quality Mat was a pretext meant to give the appearance of a legitimate business transaction to Newpark's repurchase, at the original sales price, of 1,500 mats sold to Quality Mat in 2002 and 600 mats sold to Easy Frac in 2003. The Complaint claimed that, in an attempt to perpetuate the pretext, Hardey also misled Newpark's auditors about the basis for buying the Dura-Base inventory from Quality Mat by falsely claiming that Quality Mat had contractual rights in Mexico that Newpark would have to buy in order for the Dura-Base venture to go forward. According to the Complaint, this ruse was necessary to allow Newpark to buy back the mats at the original sales price without suffering any adverse accounting consequences. Under this scheme, Newpark could account for the repurchases as if they had taken place at Newpark's manufacturing cost, but still pay Quality Mat the original purchase price for the mats by assigning the difference in value to the intangible asset allegedly created by the repurchase of Quality Mat's contract rights.

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