We don't normally see disclosures this good. Frequently we see much larger companies use 100 words or less to disclose and/or give updates on their SEC probes. Despite the extra - and helpful - verbiage, this company's attorneys still managed to leave out the information needed for investors to understand exactly what's at issue!
We know there were internal controls problems, a delayed audit, even changes in the CFO and auditor. But for all the great detail, investors are left to fend for themselves regarding exactly what kinds of internal controls issues, what kinds of accounting problems, etc. The company never actually says, at least not in this disclosure (we did not check earlier disclosures which may have given this detail). We also know the investigation started out as informal but became formal later.
If you know anyone at Magnum Hunter Resources, send them our best. They surely deserve recognition and high praise for such great disclosures. But they could and should have done better with this update.
One final thought before we go: If there's anything you take away from this note, it's this: Magnum Hunter demonstrates public companies can give a lot of detail about their SEC probes ... if they choose to. It remains a capital markets disgrace so many choose not to and, worse, that so many investors put up with it.
From the 8-K filed 03-Apr-2015 --
Item 8.01 Other Events.
Background
As previously disclosed, in April 2013, after experiencing delays in the completion of the audit of its financial statements for fiscal year 2012, the Company dismissed its independent registered public accounting firm and engaged another independent registered public accounting firm to complete the audit. The new independent registered public accounting firm successfully completed the audit within 60 days of its engagement and issued an unqualified opinion on the Company’s financial statements for fiscal year 2012. In June 2013, following completion of the audit, the Company filed its 2012 Annual Report on Form 10-K with the SEC. The 2012 Annual Report on Form 10-K identified, generally consistent with the Company’s prior disclosures, certain material weaknesses in the Company’s internal control over financial reporting. However, in connection with the reporting in the Form 10-K of these material weaknesses, the Company was not required to restate any of its financial statements previously filed with the SEC.
Following the filing of the Company’s 2012 Annual Report on Form 10-K, management of the Company, under the direction of the Company’s Chairman and Chief Executive Officer, together with its new Chief Financial Officer hired in July 2013, implemented a comprehensive plan to remediate the material weaknesses identified in the Form 10-K and otherwise improve the Company’s internal control environment. This plan included a substantial expansion and upgrading of the Company’s accounting and financial reporting personnel and systems. As of December 31, 2014, the Company had remediated all of the previously identified material weaknesses. As disclosed in the Company’s 2014 Annual Report on Form 10-K, the Company’s management, under the supervision of the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 and concluded that it was effective. Additionally, the Company’s independent registered public accounting firm audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 and expressed its opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, as set forth in the report of the independent registered public accounting firm included in the Company’s 2014 Annual Report on Form 10-K.
Update Regarding Previously Disclosed SEC Inquiry
As previously disclosed, in April 2013, the Company received a letter from the staff (the “Staff”) of the SEC’s Division of Enforcement stating that the Staff was conducting an inquiry regarding the Company’s internal controls, change in outside auditors during 2012 and 2013 and public statements to investors and asking the Company to preserve documents relating to these matters. In December 2013, the Company received a document subpoena from the Staff relating to the issues identified in the April 2013 letter. During 2014, the Staff issued additional subpoenas for documents and testimony, and it has taken testimony from certain individuals. The Company has fully complied and cooperated with the Staff’s requests and subpoenas.
In connection with the Staff’s inquiry, on March 24, 2015, the Company received a “Wells Notice” from the Staff, stating that the Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company. On that date, the Staff issued similar Wells Notices to Gary C. Evans, the Company’s Chairman and Chief Executive Officer, J. Raleigh Bailes, Sr., a director of the Company and former Chairman of the Company’s Audit Committee, the former chief financial officer of the Company who was in office at the time of the Company’s decision to dismiss its prior independent registered public accounting firm and the former chief accounting officer of the Company who had resigned from that position with the Company in October 2012.
The Wells Notice issued to the Company states that the proposed action against the Company would allege violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 13a-l, 13a-13, and 13a-15(a) thereunder. The proposed actions against the individuals would allege violations of those same provisions, as well as violations of Section 13(b)(5) of the Securities Exchange Act of 1934 and Rules 13a-14 and 13a-15(c) thereunder. The proposed actions described in the Wells Notices do not include any claims for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 or Rule 10b-5 thereunder or under Section 17(a)(1) of the Securities Act of 1933. The Wells Notices state that the Staff’s recommendation may involve a civil injunctive action, public administrative proceeding, and/or cease-and-desist proceeding, and may seek remedies that might include, among other things, a cease-and-desist order, injunctions, disgorgement with pre-judgment interest and civil money penalties, as well as potential administrative remedies against Mr. Bailes under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice.
A Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows the recipient the opportunity, through a “Wells Submission”, to provide the recipient’s reasons of law, policy or fact as to why the proposed enforcement action should not be filed and to address the issues raised by the Staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding.
The Company intends to respond to its Wells Notice in the form of a Wells Submission, as well as to continue to engage with the Staff regarding the issues raised in the Wells Notice. The Company intends to set forth in its Wells Submission why it believes an enforcement action against it should not be commenced. As stated above, in connection with the Company’s dismissal of its prior independent registered public accounting firm and the filing of the Company’s 2012 Annual Report on Form 10-K, the Company was not required to restate any of its financial statements previously filed with the SEC and the Company’s new independent registered public accounting firm issued an unqualified opinion on the Company’s financial statements for fiscal year 2012.
The Company is unable to assess with confidence or certainty how long the SEC process will last or its ultimate outcome, including whether any action will be filed by or any settlement will be reached with the SEC, the amount of any potential monetary penalties, the nature of any other possible remedies against the Company, or any other impact on the Company as a result of the proposed or any actual enforcement action. The Company expects that the individuals also will make Wells Submissions in response to their notices.
While the Wells Notices do not specify the factual bases for the claims that would be included in the proposed actions, the Company believes that the issues raised by the Wells Notices relate primarily to the Company’s internal control over financial reporting during certain periods prior to the filing of the Company’s 2012 Annual Report on Form 10-K, which, as stated above, identified certain material weaknesses in the Company’s internal control over financial reporting. However, as stated above, as of December 31, 2014, the Company had remediated all of the previously identified material weaknesses.
