SEC hits energy giant for $140M

The Securities and Exchange Commission hit Weatherford International with its biggest financial penalty of the year, alleging that deceptive accounting practices used by the oil field services company to inflate profits extended beyond gross negligence to outright fraud.

Weatherford, which has its main operations in Houston, agreed to pay $140 million to settle charges that it overstated its earnings by nearly $1 billion between 2007 and 2012 and had virtually no oversight over its tax department, where the deceptive practices were centered. Over the past decade, only two other companies paid bigger penalties over allegations of financial fraud: BP, which paid $525 million in 2012 for misleading investors during the Deepwater Horizon tragedy, and

Computer Sciences Corp. of Tysons, Va., which paid $190 million last year to settle charges that it manipulated financial data to boost its profits.

“Weatherford denied its investors accurate and reliable financial reporting by allowing two executives to choose their own numbers when the actual financial results fell short of what was previously disclosed to analysts and the public,” Andrew Ceresney, director of the SEC’s enforcement division, said in a statement.

The settlement does not claw back incentive bonuses that top executives received based on the falsified earnings. The SEC said it is continuing the investigation, but would not provider further details.

Weatherford declined comment Tuesday, except to confirm the matter is resolved. In an SEC filing, Weatherford said it agreed to settle without admitting or denying the charges. Weatherford acknowledged the investigation last year in regulatory filings,

A separate probe

The SEC said its investigation into Weatherford’s accounting practices coincided with a separate investigation into allegations that Weatherford bribed Middle Eastern and African officials several years ago to win business. In 2013, the company paid more than $250 million to settle the bribery charges brought by several federal agencies, including $65 million to the SEC.

Bill Herbert, a senior energy analyst at the investment research firm Piper Jaffray & Co., said Weatherford grew too far, too fast during a global energy boom, apparently cutting corners as it tried to compete with larger rivals, such as Schlumberger and the Houston companies Halliburton and Baker Hughes. Today, Herbert said, the company is in much better shape under chief financial officer, Krishna Shivram, who joined in 2013.

“What plagued the company five to 10 years ago,” Herbert said, “was a big mismatch between its global ambitions and its internal controls.”

Weatherford, the world’s fourth largest oil services company, has struggled financially in recent years, slashing 35,000 jobs — more than half its workforce — since the beginning of 2014. The company still employs about 32,000 worldwide.

Founded in Texas 75 years ago, Weatherford has its main operations in Houston, but is now headquartered in Switzerland. In recent years, it has hopped from Bermuda, to Switzerland, to Ireland as a way to lower its taxes.

Earlier penalties

Weatherford regularly touted its favorable effective tax rate to analysts and investors as one of its key competitive advantages. But the SEC’s investigation found that Weatherford understated its taxes between 2007 and 2012 by as much as $154 million a year to inflate earnings to match the company’s earlier projections, meet analysts’ expectations — and boost its stock price.

In its charges, the SEC specifically named James Hudgins, who was Weatherford’s vice president of tax, and Darryl Kitay, a tax manager, for allegedly making fraudulent taxation adjustments. The SEC said the two men devised a complicated series of tax transactions to hide their tracks. Weatherford’s outside auditor repeatedly questioned the financial adjustments, but didn’t determine they were false until 2011.

The SEC imposed a penalty of more than $330,000 on Hudgins, whom the agency called the “architect of Weatherford’s tax structure,” and barred him from serving as an officer or director or a public company for five years. In an email, Hudgins’ attorney, Philip Hilder, said his client “cooperated fully with the SEC’s investigation and settled the matter without admitting to any charge, including fraud.”

Kitay, who could not be located for comment, received a $30,000 penalty.

Weatherford is named for the Texas town west of Fort Worth where the company was founded. Its current iteration is the product of 1998 merger of Weatherford Enterra and EVI Inc. Bernard DurocDanner has served as chairman and chief executive since then.

Weatherford’s stock fell 30 cents, or about 5 percent, to $5.21 per share on Tuesday. The stock is down more than 75 percent from the summer of 2014, when it traded at about $23 a share.