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Magnum Hunter Facing SEC Scrutiny Regarding Financial Reporting

Magnum Hunter Resources Corp. said Friday the U.S. Securities and Exchange Commission (SEC) could take action against it following an inquiry into the company's financial reporting during 2012 and 2013.

In a Form 8K, Magnum said it had received a Wells Notice from the SEC on March 24 stating that the commission had made a preliminary determination to recommend enforcement action regarding alleged violations related to fraudulently receiving money, inadequate financial reporting and record keeping, among other things. A Wells Notice does not mean the SEC will act, instead it serves to notify the respondent of potential charges and offers an opportunity to respond.

The notice comes as part of a previously disclosed inquiry into Magnum’s internal controls, a change in outside auditors during 2012 and 2013 and public statements to investors during the period.

Specifically, Magnum management said it believes the notice is related to a delay in its audit of 2012 financial statements, when it elected to fire PricewaterhouseCoopers LLP (PwC) and hire another auditor. After the audit was completed in June 2013, the company filed its 2012 annual report, which identified material weaknesses in its internal controls over financial reporting that it said have since been resolved and did not require it to refile its financial statements with the SEC.

At the time, Magnum executives held a conference call to assure investors that there were no auditing issues, problems with its assets or financial trouble with its creditors.

Magnum also said notices were sent to CEO Gary Evans, a current board member, its former CFO and its former chief accounting officer. In its 8K, Magnum said it intends to respond to the SEC notice and would continue to work with the SEC staff. In its response, the company said it intends to set forth “why it believes an enforcement action against it should not be commenced.”

The Wells Notice, however, is the latest setback for Magnum. Its stock, traded on the New York Stock Exchange, has plunged from a 52-week high of $9.10/share to trade between $2-3/share in recent weeks. It said in March it would suspend all production operations because of the drop in commodity prices and it has struggled with a blowout, permitting issues and curtailed production volumes in recent months (see Shale DailyMarch 2). Management early this year told investors that it wasn't facing an imminent liquidity crisis following rumors at the time (see Shale DailyJan. 23).

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