Friday, August 10, 2007

SEC Files Securities Fraud Charges Against Former Executives for Revenue Inflation

The SEC filed civil fraud charges against three former senior executives of Nicor, Inc., an Illinois natural gas distribution company.  The alleged scheme involved manipulating the value of the company's natural gas inventory through the LIFO (last-in-first-out) method -- how's that for exciting accounting.  The defendants are the former CEO, CFO, and treasurer of the company, and according to the SEC Litigation Release (here):

[The defendants devised] a method by which Nicor could profit by accessing its low-cost last-in, first-out ("LIFO") layers of gas inventory. As a result, from 1999 through 2002, the former officer defendants engaged in or approved improper transactions, and made material misrepresentations in financial statements and documents filed with the Commission. They also failed to disclose material information regarding Nicor's rigged reductions in gas inventory levels that enabled it to improperly manipulate its earnings and to increase Nicor's revenues under a performance-based utility rate plan. In addition, the former officers materially understated Nicor's expenses during the first and second quarters of 2001 by improperly bundling a weather-insurance contract with an agreement to supply gas to Nicor's insurance provider at below-market prices. Moreover, they caused the losses on the supply agreement with the insurance provider to be improperly charged to Nicor's utility customers. These improper transactions enabled Nicor to understate its expenses and to manipulate its earnings to achieve its earnings targets. As a result of the manipulative scheme, Nicor materially overstated its reported income for the years ending 2000 and 2001, and for each of the quarters within those years and the financial statements filed with those reports.

Nicor settled an SEC complaint in March 2007 by agreeing to pay a $10 million civil penalty. (ph)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2007/08/sec-files-secur.html

Civil Enforcement, Fraud, Securities | Permalink

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Comments

I noticed your remark about exciting accounting. Most people will agree with you, but as a forensic accountant, all this financial nerditry (if that's a word) is fascinating to me! I'm glad a friend pointed me to your blog site.

Posted by: Ron Hickman | Aug 14, 2007 4:45:48 PM

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