Risk & Compliance

SEC, Ex-execs of NorthWestern Settle

Among other charges, regulator says CFO, controller and two other execs should not have allowed the utility to claim its new computer system was "f...
Stephen TaubApril 26, 2007

The Securities and Exchange Commission settled charges against four former officers, including two former finance executives, of NorthWestern Corp. for actions that the SEC says ultimately resulted in the company’s bankruptcy in 2003.

The SEC alleged that Merle D. Lewis, NorthWestern’s former chief executive officer; Richard R. Hylland, former chief operating officer; Kipp D. Orme, former chief financial officer, and Kurt D. Whitesel, former controller, overstated the performance of NorthWestern and its key telecommunications subsidiary, Expanets, Inc. in 2002 during the same period that NorthWestern completed securities offerings totaling more than $800 million.

After restating its financial results for the first three quarters of 2002, and disclosing Expanets’ true financial position and results of operations, NorthWestern declared bankruptcy in 2003.

Without admitting or denying the allegations, each of the four individuals consented to the entry of a final judgment permanently enjoining him from violating or aiding and abetting violations of the provisions he allegedly violated, and to a five-year officer and director bar.

Lewis and Hylland each agreed to pay $150,000 in civil penalties, Orme agreed to pay a $100,000 civil penalty, and Whitesel consented to pay a $25,000 civil penalty.

Last month, the company settled an administrative proceeding with the SEC stemming from its restatement for the first three quarters of 2002.

According to the SEC, the Sioux Falls, South Dakota-based utility filed reports for that period that “materially misstated” its financial position. The commission also alleged that NorthWestern’s reports also misrepresented or did not disclose required information about its non-utility businesses: Expanets, a communications and data provider, and Blue Dot Services, which offers air conditioning, heating, plumbing, and related services.

In its announcement regarding the former officers, the SEC alleged that, in NorthWestern’s quarterly filings, debt and equity offering filings, and other public information, the four individuals were responsible for overstating performance and concealing problems at Expanets and NorthWestern. The Commission also alleged that each of them knew or was reckless in not knowing about the inaccuracy of NorthWestern’s public claims that Expanets’ new computer system was “operational” or “fully operational.”

The Commission also claimed that each of the four individuals knew or was reckless in not knowing that Expanets had failed to take appropriate charges for uncollectible accounts receivable and billing adjustments related to the computer system problems, resulting in the overstatement of NorthWestern’s income from continuing operations by 90 percent in the second quarter of 2002 and 109 percent in the third quarter of 2002.

In addition, the Commission alleged that each defendant was responsible for NorthWestern’s failure to disclose that a material portion of Expanets’ and NorthWestern’s income was derived from the reduction of various accounting reserves and through Expanets’ receipt of unusual non-compete payments.

The SEC also accused the individuals of failing to disclose significant intercompany cash advances to its subsidiaries during the first half of 2002, which impacted the company’s liquidity position and demonstrated the subsidiaries’ continuing financial difficulties.

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