Risk & Compliance

Earnings Bloated at Gas Distributor

Nicor and its former controller reach a settlement with the Securities and Exchange Commission regarding a scheme to increase revenues and meet ear...
Stephen TaubMarch 29, 2007

Nicor, a natural gas distributor, and Jeffrey Metz, a former assistant vice president and controller, have agreed to settle civil fraud charges with the Securities and Exchange Commission.

The SEC alleged that from 1999 to 2002, they engaged in improper transactions, made material misrepresentations, and failed to disclose material information regarding Nicor’s gas inventory. Their goal, according to the commission, was to meet earnings targets and increase revenues under a performance-based rate plan administered by the Illinois Commerce Commission.

“Nicor manipulated its financial performance by engaging in sham transactions and attempting to disguise these transactions as legitimate in a complex fraudulent scheme,” said Merri Jo Gillette, director of the SEC’s Midwest Regional Office, in a statement.

The SEC complaint alleged that Nicor, acting through Metz and other senior officers, entered into a series of improper transactions to shift inventory off its books and profit by accessing a substantial portion of its low-cost, last-in-first-out (LIFO) layers of inventory.

These transactions allowed Nicor to ensure that it met earnings targets by inflating its income for 2000 and 2001, and for each of the quarters within those years, as reported in its financial statements for those periods, according to the commission.

The SEC also alleged that Nicor failed to disclose, either in the “management’s discussion and analysis” section of its financial reports or in the accompanying financial statements, that it had recorded material, non-recurring income resulting from LIFO liquidations.

Without admitting or denying the allegations in the SEC complaint, Nicor agreed to pay $10 million, which will be distributed under the “fair funds” provision of Sarbanes-Oxley. The company also agreed to be permanently enjoined from violating the antifraud and reporting provisions of the federal securities laws.

Metz, who also settled the charges without admitting or denying the SEC allegations, agreed to a permanent injunction, a five-year officer-and-director bar, and a payment of more than $60,000, which includes surrendered bonuses and a civil penalty. His payment, too, will be distributed under the fair funds provision.