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El Paso Settles SEC Charges of Overstated Reserves

The Securities and Exchange Commission (SEC) Friday charged Houston-based El Paso Corp., two subsidiaries and five former employees with fraud for materially overstating the company's proved oil and natural gas reserves and misleading investors.

The SEC civil action, filed in federal district court in Houston, charged that El Paso's ex-employees lacked the required supporting data when they estimated reserves and ignored negative drilling results and production trends demonstrating that some fields weren't producing as projected. SEC staff launched a formal investigation of El Paso's reserves calculations in early 2004 (see NGI, July 23, 2007).

El Paso, subsidiaries El Paso CGP Co. LLC and El Paso Exploration & Production Co., and former employees have agreed to settle the SEC's enforcement action. El Paso did not admit or deny any of the claims.

As part of the settlement, El Paso and parties all consented to permanent injunctions against violations of the antifraud and other provisions of the federal securities laws. Rodney D. Erskine, former president of El Paso Exploration & Production, agreed to pay a $75,000 penalty; and Randy L. Bartley, former senior vice president, agreed to pay a $40,000 penalty. Former vice presidents Steven L. Hochstein, John D. Perry and Bryan T. Simmons will each pay $40,000 in penalties under the terms of the agreement.

The SEC's civil complaint said that in an environment of weak internal controls, El. Paso assigned proved reserves to unproved reservoirs, attributed proved reserves to wells and undrilled locations without sufficient underlying data, and failed to take into account negative drilling and production trends when estimating and reporting its proved reserves.

In 2004 El Paso was forced to restate its financial statements for the years 1999 through 2002, and the first nine months of 2003, reducing its previously reported proved natural gas and oil reserves over that time period by more than 35% [or by 1.8 Tcf] and cutting its cumulative earnings through Sept. 30, 2003 by $1.7 billion (see NGI, Oct. 4, 2004).

"Although proved reserves are estimated, that does not mean 'anything goes,'" said Linda Chatman Thomsen, director of the SEC's Division of Enforcement. "Public companies must follow the rules for reserves estimation and reporting, and today's action emphasizes the commission's commitment to ensuring transparency and uniformity when companies report that information to investors."

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