The Securities and Exchange Commission (SEC) last week charged Nicor Inc.’s former CEO, CFO and treasurer with committing financial fraud between 1999 and 2002.
The civil lawsuit, filed Thursday in U.S. District Court for the Northern District of Illinois Eastern Division (No. 07C-4483), alleges ex-CEO Thomas Fisher, ex-CFO Kathleen Halloran and former treasurer George Behrens “engaged in or approved improper transactions, and misrepresented Nicor’s gas inventory in order to meet earnings targets and increase the company’s revenues under a performance-based utility rate (PBR) plan” administered by the Illinois Commerce Commission (ICC).
The SEC is seeking injunctive relief, disgorgement, civil penalties and officer and director bars against the former Nicor officers.
“Fisher, Halloran and Behrens engaged in a scheme to manipulate Nicor’s earnings through fraudulent transactions and mislead investors by making improper disclosures regarding Nicor’s financial performance. This case, like others, shows that the commission will not tolerate accounting ploys and misleading disclosures by senior officers who are intent on making their numbers,” said the SEC’s Merri Jo Gillette, director of the Chicago regional office.
According to the 31-page complaint, the trio in 1999 devised a method by which Nicor could profit by accessing its low-cost last-in, first-out (LIFO) layers of gas inventory. As a result, the former officers engaged in or approved improper transactions, and made material misrepresentations in financial statements and documents filed with the SEC.
The executives, said the SEC, also failed to disclose material information regarding Nicor’s rigged reductions in gas inventory levels that enabled it to improperly manipulate its earnings and to increase Nicor’s revenues under a PBR plan. In addition, the former officers are said to have materially understated Nicor’s expenses during the first and second quarters of 2001 by improperly bundling a weather-insurance contract with an agreement to supply gas to Nicor’s insurance provider at below-market prices. They also were said to have caused the losses on the supply agreement with the insurance provider to be improperly charged to Nicor’s utility customers.
The SEC said the improper transactions enabled Nicor to understate its expenses and to manipulate its earnings to achieve earnings targets. As a result of the manipulative scheme, Nicor materially overstated its reported income for the years ending 2000 and 2001, and for each of the quarters within those years and the financial statements filed with those reports.
Additionally, the former officers are charged with failing to make disclosures required by generally accepted accounting practices (GAAP) about the effects of LIFO inventory liquidations on Nicor’s reported income. Nicor, through Fisher, Halloran and Behrens, also failed to disclose in either the “Management’s Discussion & Analysis” section of its 2000 and 2001 annual and quarterly reports, or in financial statements filed with those reports, that it had recorded material increases to income resulting from the liquidation of its LIFO inventory, and that the continued liquidation of Nicor’s low-cost inventory was not sustainable, the complaint stated.
In March, Nicor and its former controller Jeffrey Metz agreed to pay more than $10 million to settle charges brought by the 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 the PBR plan administered by the ICC (see NGI, April 2).
Nicor reached a tentative settlement with the SEC last year and agreed to the fine (see NGI, 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 plan that it said then may have violated SEC rules (see NGI, April 26, 2004).
Fisher, 61, served as chairman, CEO and president of Nicor and of Nicor’s principal subsidiary, Nicor Gas. He began his career with Nicor in 1967, and over the course of his career, Fisher served as CFO of both companies as well as vice president of operations. He retired in April 2005.
Halloran was CFO and executive vice president of Nicor and Nicor Gas between May 1999 and November 2003. Before 1999, she also held other financial-related positions at Nicor, including the positions of treasurer and controller. In November 2003 Halloran, 54, was named chief risk officer. She resigned from the company in August 2004.
Behrens, 51, had been Nicor’s vice president of administration and treasurer, and before stepping into those positions, he served as Nicor’s vice president and controller. He resigned in June 2006.
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