Nicor Inc. and its former controller agreed Thursday to pay more than $10 million to settle charges brought by the Securities and Exchange Commission (SEC) that they engaged in improper transactions, made material misrepresentations and failed to disclose material information regarding Nicor's gas inventory in order to meet earnings targets and increase the company's revenues under a performance-based rate (PBR) plan administered by the Illinois Commerce Commission.

Last July Nicor reached a tentative agreement with the SEC, agreeing to pay the $10 million fine (see Daily GPI, July 10, 2006). The settlement negotiations followed a two-year investigation that began in 2002, which in 2004 resulted in Nicor dismissing four employees in connection with their involvement in "potentially fraudulent" conduct in its PBR that it said then may have violated SEC rules (see Daily GPI, Aug. 10, 2004).

According to the SEC, the Chicago-area gas distributor and Jeffrey Metz, who served as COO and as a vice president, were involved in a financial fraud scheme from 1999 to 2002.

"Nicor manipulated its financial performance by engaging in sham transactions and attempting to disguise these transactions as legitimate in a complex fraudulent scheme," said the SEC's Merri Jo Gillette, director of the Midwest regional office.

The 19-page filing Thursday (Case No. 07C 1739) in U.S. District Court for the Northern District of Illinois Eastern Division stated that between 1999 and 2002 Nicor, aided and abetted by Metz, violated the antifraud and reporting provisions of federal securities laws. The SEC noted that 90% of Nicor's consolidated operating income in a typical year is gas distribution. Under its traditional regulatory framework, Nicor does not profit on the sale of gas, and it has no incentives to access the value of its low-cost last-in-first-out (LIFO) gas inventory.

However, in 1999, the SEC said Nicor, acting through Metz and senior officers, devised a way to profit from its LIFO inventory. From 1999 through 2001, the SEC said Nicor entered into a series of improper transactions designed to shift inventory off the books to create the appearance that the company had sold a "substantial" portion of its LIFO inventory, allowing Nicor to meet its earnings targets. Additionally, the SEC stated that Nicor through Metz failed to disclose that it had recorded material credits to income resulting from LIFO liquidations.

"By entering into these transactions, Nicor inflated its reported income for the year ending 2000 and 2001, and for each of the quarters of those years...and the financial statements filed with those reports," the SEC stated.

Nicor neither admitted nor denied any wrongdoing. It agreed under the settlement to pay more than $9.0 million in fines and Metz agreed to pay more than $60,000. The fines paid by Nicor and Metz will be placed in a Fair Fund for distribution to affected shareholders. Metz agreed to an order barring him from serving as an officer or director of a public company for five years, and Nicor also agreed to be permanently enjoined from violating the antifraud and reporting provisions of the federal securities laws.

Nicor recorded a charge of $10 million to its 2Q2006 earnings in connection with the expected SEC penalty.

The SEC said its investigation is continuing. It offered no other details on whether other former employees may be charged.

"The commission's action underscores its continued resolve to impose tough sanctions and hold corporations and individual wrongdoers accountable for their conduct," said the SEC's Linda Thomsen, director of the Division of Enforcement.

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