The fallout continues from El Paso Corp.’s announcement to revise downward its oil and gas reserves by 41%, with at least three class action lawsuits filed by the end of the week. El Paso announced the changes late Tuesday, and investor confidence has eroded since (see Daily GPI, Feb. 19).

Atlanta-based Chitwood & Harley LLP’s class action lawsuit was filed late Thursday against Chairman Ronald Kuehn Jr., CEO Douglas Foshee and CFO D. Dwight Clark in U.S. District Court for the Southern District of Texas (No. H-04-0635).

Chitwood’s complaint asserts violations of the Securities Exchange Act of 1934 and violations of various generally acceptable accounting practice (GAAP) and industry rules. Specifically, the complaint charges the defendants with “issuing materially false and misleading statements regarding El Paso’s financial results and reported reserves,” and as a result of their conduct, “El Paso was able to inflate its stock price, maintain its credit rating, and maintain its status in the energy industry as a leader.”

According to a statement by Chitwood, “the magnitude of the writedown of the reserves shocked the market and, quoting one analyst, ‘suggests to us that prior management had significantly overstated the productive capacity of the company’s gas reserves.’ Another analyst is quoted as alleging that El Paso had ‘prematurely booked’ certain reserves before securing necessary permission to develop the assets.”

Another class action lawsuit, filed Friday by New York-based Fruchter & Twersky LLP, also was filed in Texas’s southern district court (No. 04-632). It alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, “by issuing a series of material misrepresentations to the market” in a period between 2000 and Feb. 17 “thereby artificially inflating the price of El Paso securities.”

Specifically, Fruchter’s lawsuit alleges that the defendants “caused El Paso to report in its public filings, press releases and other public statements favorable financial results by, among other things, artificially inflating the company’s reported reserves as it relates to oil and natural gas.” It alleges that among other things, the “defendants failed to disclose that the company’s estimates were based on improperly manipulated reported reserve estimates that deviated from industry standards and resulted in a knowingly false high estimate of reported reserves.”

El Paso has contacted the Securities and Exchange Commission (SEC) about the reserve changes and it has hired an outside law firm to investigate the inflated reports. However, Rodney D. Erskine, who was president of El Paso Production Co. during the period in question, resigned last November (see Daily GPI, Nov. 17, 2003). Lisa A. Stewart, an Apache Corp. veteran, was hired as president of El Paso’s production and non-regulated operations and took over Feb. 1 (see Daily GPI, Jan. 13).

UBS analyst Ronald Barone said in a research note that he found it “interesting” that El Paso was apparently blaming the revision and ceiling test charges on its merger with The Coastal Corp. two years ago (see Daily GPI, Feb. 1, 2001). Erskine had worked for Coastal until the merger when he joined El Paso.

In its last regulatory filing before the El Paso merger was completed, Coastal stated in its year-end 2000 SEC filing that for the sixth consecutive year it had added proved reserves “that were more than triple our production volumes.” In the filing, Coastal reported proved natural gas reserves of 4.2 Tcfe, about 21% higher than in 1999.

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