SECURITIES ACT OF 1933
Release No. 8452 / August 3, 2004

SECURITIES EXCHANGE ACT OF 1934
Release No. 50137 / August 3, 2004

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 2072 / August 3, 2004

Admin. Proc. File No. 3-11574


In the Matter of

Halliburton Company, and Robert Charles Muchmore, Jr.,

Respondents.



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ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 (the "Securities Act") and Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act") against Halliburton Company ("Halliburton" or "the company") and Robert Charles Muchmore, Jr. ("Muchmore") (collectively, "Respondents").

II.

In anticipation of the institution of these proceedings, Halliburton and Muchmore have submitted Offers of Settlement (collectively, "Offers") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except that Halliburton and Muchmore admit the Commission's jurisdiction over them and over the subject matter of these proceedings, Halliburton and Muchmore consent to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order, as set forth below.

III.
FINDINGS

On the basis of this Order and Respondents' Offers, the Commission finds that:1

A. Respondents

Halliburton is a Delaware corporation headquartered in Houston, Texas. Halliburton's shares are registered with the Commission under Section 12(b) of the Exchange Act and trade on the New York Stock Exchange. During the relevant period Halliburton had two primary reporting segments, the Energy Services Group and the Engineering and Construction Group ("E&C"). The Energy Services Group provides exploration and logistical solutions for the exploration, development and production of oil and gas. Brown and Root Energy Services ("BRES") was a business unit of the Energy Services Group. E&C provides a wide range of industrial construction services to energy, industrial and government customers.

Muchmore, age 50, is a resident of Houston, Texas. During the relevant period, Muchmore was the controller of Halliburton. As controller, Muchmore's principal duties included responsibility for Halliburton's accounting and financial reporting. Although no longer Halliburton's controller, Muchmore remains a Halliburton employee.

B. Facts

1. The Evolution of Halliburton's Engineering and Construction Business

Prior to mid-1997, the business unit, BRES, and reporting segment, E&C, generally conducted business under two types of contracts: "fixed fee" and "cost-plus." Cost plus contracts provide for reimbursement to the contractor of all reasonable costs, plus an agreed upon profit payable to the contractor. Under fixed fee contracts, contractors perform for a fixed, agreed-upon fee intended by the parties to encompass all reasonable costs foreseen at the time of the contract's execution. The contractor's profit equals the margin by which the fee exceeds the contractor's costs; if those costs exceed the fee, the contractor incurs a loss on the contract. Fixed fee contracts offer, therefore, an opportunity to make larger profits - assuming the contractor can control its costs; conversely, fixed fee contracts expose the contractor to greater risk of losses in the event that the contractor cannot control costs or incurs unforeseen costs. Under either type of contract, the contractor may incur costs that were not envisioned when the contract was executed; however, under a cost plus contract, the contractor is more likely to recoup from the customer those unforeseen costs.

In mid-1997, BRES commenced several large scale fixed fee Engineering, Procurement and Construction ("EPC") projects that, according to the company, were greater in scope and complexity than the company's previous fixed-fee contracts. The earliest of these projects involved the construction of a gas production plant in the Middle East; the company's customer was a joint venture between a national oil company and a multinational oil company.2 The contract called for completion of the project by mid 1999, at a cost of approximately $169 million. By the fourth quarter of 1997, BRES' estimated cost overruns had placed the project in an approximate $20 million loss position, as a result of which Halliburton recorded $20 million of losses in the fourth quarter of 1997. The $20 million loss gave rise to a corresponding $20 million reduction in Halliburton's fourth quarter 1997 operating income. BRES continued to estimate cost overruns on certain EPC contracts throughout 1998 and 1999.

2. Halliburton Changed its Accounting for Cost Reimbursement Claims, but Failed to Disclose the Change over a Six-Quarter Period

For at least five consecutive years, dating back to 1993, Halliburton disclosed in its Forms 10-K filed with the Commission that "claims for additional compensation are recognized during the period such claims are resolved." This statement of practice, regarding the company's recognition of revenue from claims for costs, never varied during that period. Pursuant to the practice, before the claim was resolved, the company generally recorded losses caused by project cost overruns; only after the claim was resolved would the company recognize the claim as an offset against the project's cost overruns.

Commencing in the second quarter of 1998, shortly after BRES commenced its EPC projects, the company changed its accounting practice, by offsetting cost overruns on the BRES EPC contracts with estimated recoveries on claims that had not been resolved with customers. Although permitted under GAAP in appropriate circumstances, this practice was a departure from Halliburton's longstanding stated practice of recognizing income only from "resolved" (i.e., "approved") claims. Under this new practice, the company began offsetting project cost overruns with revenue from unapproved claims in instances in which the company believed that the claims were probable of collection, and reliably estimable, pursuant to SOP 81-1 (.65)("unapproved claims").3 As a result of the change in accounting practice, cost overruns and resulting losses on several EPC contracts in the BRES business unit were reduced or eliminated. By reducing or eliminating the losses, Halliburton increased its income.4

The company's change in its claims recognition practice resulted in a material increase in Halliburton's publicly disclosed income, as set forth in its second and third quarter 1998 Forms 10-Q, its 1998 Form 10-K, and its first, second and third quarter 1999 Forms 10-Q; the change also resulted in materially more favorable publicly disclosed 1997-1998 quarter to quarter income comparisons. Although the accounting change is permitted under GAAP in appropriate circumstances, Halliburton failed to inform investors, until March 2000, when the company filed its 1999 Form 10-K/A, that the unapproved claims on the BRES EPC contracts were a component of the company's earnings. In the interim - spanning six quarters - none of Halliburton's periodic Commission filings disclosed the change in the company's claims recognition practice or the impact of that change on the company's financial presentation.5

3. The Amounts Attributable to Halliburton's Undisclosed Change in Accounting were Material to the Company's Income as Reported in its 1998 and 1999 Commission Filings

Halliburton's recording in 1998 and 1999 of unapproved claims on the BRES EPC contracts resulted in a material increase in the income the company reported in its Forms 10-Q for the second and third quarters of 1998, its Forms 10-Q for the first, second and third quarters of 1999, and in the company's 1998 Form 10-K.6 That impact is set forth in the table, below. Respondent Muchmore signed all of the filings as Halliburton's controller.

Impact on Pre-tax Income (in millions)

Year

Filing

Reported Pre-Tax Income

Reported Pre-Tax Income - Without Component of Unapproved Claim Revenue

$ Difference

% Difference

1998

 

 

 

 

 

 

Form 10-Q [Q2]

$228.70

$183.30

$45.40

24.8%

 

Form 10-Q [Q3]

($609.50)

($646.20)

$36.70

5.7%

 

Form 10-K

$278.80

$190.90

$87.90

46.1%

1999

 

 

 

 

 

 

Form 10-Q [Q1]

$149.00

$129.80

$19.20

14.8%

 

Form 10-Q [Q2]

$146.00

$135.80

$10.20

7.5%

 

Form 10-Q [Q3]

$103.00

$92.30

$10.70

11.6%

4. Halliburton's Public Disclosures regarding its Income in the Second and Third Quarters of 1998 Omitted Information regarding the Unapproved Claims Component of Income and were, therefore, Materially Misleading

The references to Halliburton's income, and the 1997-1998 income comparisons contained in Halliburton's second and third quarter 1998 Forms 10-Q, earnings releases, and analyst teleconferences, were materially misleading. The references were misleading for two reasons: First, for at least five consecutive years, Halliburton publicly presented in its Commission filings a statement of claims recognition practice that never varied in content: "Claims for additional compensation are recognized during the period such claims are resolved." Despite changing the accounting practice in mid-1998, the company did not disclose the change in that quarter. In fact, it was not until the passage of six quarters that Halliburton disclosed the change in its 1999 Form 10-K, filed in March 2000.7 Second, Halliburton's statement of its historical claims recognition practice was not expunged from the mix of public information, because Halliburton incorporated the statement by reference in its Forms 10-Q for the second and third quarters of 1998.8

Thus, the only statement of Halliburton's claims recognition practice in the public domain during the second and third quarters of 1998 was that the company recognizes claims "during the period such claims are resolved." This statement of accounting practice, out-of-date with respect to the BRES EPC contracts, was incorporated by reference in, and rendered materially misleading, the public information Halliburton issued regarding its income in the second and third quarters of 1998, including information in its second and third quarter 1998 Forms 10-Q, earnings releases and analysts' teleconferences.

One of Muchmore's chief responsibilities was to ensure the accuracy of the Forms 10-Q, which he reviewed and signed. In addition, Muchmore, with the assistance of Halliburton finance personnel under his supervision, prepared Halliburton's quarterly earnings releases, together with the scripts that were used by several Halliburton senior officers in the company's quarterly analysts' teleconferences - that Muchmore attended.

a. The Second Quarter of 1998

i. Form 10-Q

Halliburton's Form 10-Q for the second quarter of 1998 did not disclose that the offset of cost overruns by unapproved claims resulted in income to the company in the second quarter 24.7% greater than without the offset. In addition, the Income Statement in the filing reflected a 34% 1997-1998 quarter-to-quarter increase in Halliburton's net income; without taking into account unapproved claims, the quarter-to-quarter increase would have been only 6.7%. The company also stated in the filing's MD&A "Results of Operations" that Energy Services Group's (the division encompassing BRES) operating income in 1998 was 24% greater than in 1997. Without taking into account unapproved claims, Energy Services Group's operating income would have actually decreased 4.5%.

ii. Earnings Release

The second quarter earnings release omitted the same information. The company's second quarter 1998 earnings release, issued July 22, 1998, is entitled: "Halliburton 1998 Second Quarter Net Income Up 34 Percent." As previously mentioned, without unapproved claims, Halliburton's net income increased only 6.7%. The company also stated in the release: "The Energy Group's 1998 second quarter operating income increased 24 percent to $198.3 million compared to the prior year period." The release contained no clarification that, without unapproved claims, the Energy Group's operating income actually decreased 4.5%. Finally, the company stated in the release, "For the six-month period ending June 30, 1998, net income increased 38% to $254.3 million." The release contained no clarification that without unapproved claims, net income over the six-month period would have increased only 22.4% in 1998, as compared to 1997, not 38%.

The company also stated in its second quarter earnings release: "Halliburton Company reports 1998 second quarter net income of $136.5 million ($.51 per share diluted), an increase of 34 percent compared to $101.9 million ($.40 per share diluted) earned in the 1997 second quarter." The earnings release contained no clarification that, without unapproved claims, Halliburton's EPS would have been $.41, not $.51, which was the analysts' consensus EPS estimate.

iii. Analysts' Teleconference

The company's statements in the second quarter analyst teleconference conducted on July 22, 1998, and based on a prepared script, also omitted material information regarding unapproved claims as an offset against cost overruns. The company stated that its net income "was up 34%" as compared to the second quarter of 1997. As previously mentioned, without unapproved claims, Halliburton's net income in the quarter increased only 6.7%. The company also indicated in the teleconference that the Energy Group's second quarter 1998 operating income increased 24% to $198.3 million, compared to the second quarter of 1997. Investors were not told that without unapproved claims, the Energy Group's operating income would have actually decreased 4.5%, as compared to the second quarter of 1997. Finally, the company said, again based on the script, that the company's EPS for the quarter was $.51. The company failed to clarify that without unapproved claims, Halliburton's EPS would have been only $.41.

The company also reported in the teleconference BRES' operating results. The company stated that BRES' operating income had increased 40% over the second quarter of 1997. There was no clarification that without unapproved claims, BRES' operating income would have actually decreased approximately 148%. Moreover, the company failed to clarify that the 5.5% operating income margin for BRES would have been -2% without unapproved claims.

b. The Third Quarter of 1998

i. Form 10-Q

Halliburton's Form 10-Q for the third quarter of 1998 did not disclose that the offset of cost overruns by unapproved claims resulted in income to the company in the third quarter 5.7% greater than without the offset. In addition, the company included in the MD&A section of the filing, entitled "Results of Operations," a statement that "Energy Services Group's operating income decreased 8% to $262.7 million in the third quarter of 1998 compared with $287 million in the same quarter of the prior year." There was no clarification in the Form 10-Q that without the unapproved claims, the Energy Services Group's operating income would have actually decreased 21% in 1998, as compared to its operating income in the third quarter of 1997.

ii. Earnings Release

The third quarter earnings release omitted the same information. In the company's third quarter 1998 earnings release, issued on October 29, 1998, the company stated: "The Energy Services Group's 1998 third quarter operating income was $263 million, off eight percent from the 1997 quarter." The release contained no clarification that without unapproved claims, Energy Services Group's operating income would have decreased 21% to $226 million. The company also stated in the release: "Halliburton Company announces that the company earned $195 million ($.44 per diluted share) in the 1998 third quarter, compared to $218 million ($.50 per diluted share) in the 1997 third quarter, before recognition of special charges." The company did not mention in the release that without unapproved claims, Halliburton would have earned only $172 million - a difference of 13.3%. Finally, the earnings release contained no clarification that, without unapproved claims, Halliburton's EPS for the quarter would have been $.39, not $.44, which was the analysts' consensus estimate.

iii. Analysts' Teleconference

The company's statements in the third quarter analyst teleconference, conducted on October 29, 1998, and again based on the prepared script, also omitted material information regarding the unapproved claims component of Halliburton's earnings. The company stated: "From an operating income standpoint for the Energy Services Group, operating income declined 9% to $263 million for the quarter." Investors were not told that without unapproved claims, the Energy Services Group's operating income would have declined 21%. The company reported: "Our [Halliburton's] earnings per share were $.44." The company failed to clarify that, without unapproved claims, Halliburton's EPS would have been only $.39.

The company also stated at the teleconference: "[R]evenues for this group [BRES] are up 33%. We continue to be very, very pleased with the direction and growth of this aspect of our business even in a down market. And I think it [BRES] continues to be one of the real hidden stars within the Halliburton portfolio of businesses that we have." The company omitted mention that unapproved claims, which offset cost overruns, were a positive component of Halliburton's earnings. The script continues: "For [BRES], operating income increased 17% over the prior year. Margins are now starting to get back into the territory that we thought they would toward the end of the year with its [BRES'] margins for the third quarter being 8.6%." There was no clarification that, without unapproved claims, BRES' operating income would have actually decreased approximately 54% (from $52.7 million to $24 million), not increased 17% (from $52.7 million to $60 million). Moreover, without unapproved claims, BRES' operating margins would have been only 3.6%.

5. Halliburton's Ultimate Disclosure of its Accounting Change was Misleading

In the 1999 Form 10-K Halliburton filed with the Commission on March 14, 2000, Halliburton disclosed for the first time the change it made, six quarters earlier, in its accounting for unapproved claims. In the filing, the company stated that, in 1998, the company accrued $89 million in unapproved claims, and in 1999, $98 million in unapproved claims. The company did not disclose in the 1999 Form 10-K, however, $34 million of unapproved claims that the company recognized in 1999 in connection with joint venture projects. The omission flattened the ascending curve of unapproved claims recognized by the company: instead of reporting $132 million in unapproved claims in 1999, the company reported $98 million - a $9 million, as opposed to $43 million increase over the 1998 figure.

IV.
LEGAL DISCUSSION

A. Halliburton's Violations of Section 17(a)(2) of the Securities Act

Section 17(a)(2) of the Securities Act prohibits making untrue statements of fact and misleading omissions of facts in the offer or sale of a security.9 To constitute a violation of Section 17(a)(2), the alleged untrue statements or omitted facts must be material. Information is deemed material upon a showing of a substantial likelihood that the misrepresented or omitted facts would have assumed significance in the investment deliberations of a reasonable investor. Basic, Inc. v. Levinson, 485 U.S. 224 (1988). Establishing violations of Section 17(a)(2) does not require a showing of scienter. Aaron v. SEC, 446 U.S. 680 (1980).

Halliburton violated Section 17(a)(2) of the Securities Act in connection with its second and third quarter 1998 Forms 10-Q, earnings releases, and analysts' teleconferences. For at least five consecutive years, Halliburton publicly presented in its Commission filings a statement of claims recognition practice that never varied in content: "Claims for additional compensation are recognized during the period such claims are resolved." Despite making a significant change to its practice in mid-1998 with respect to the BRES EPC contracts, the company (1) eliminated its historical statement of practice without explanation in 1998 and (2) did not disclose the change until the passage of six quarters. There was no way for the investing public, or for analysts following Halliburton, to discern the fact that, over the relevant six-quarter period, the company had offset cost overruns through the application of SOP 81-1 (.65), and that the offsets materially increased Halliburton's reported income. A reasonable investor, or potential investor, would have wanted to know this information in making a decision regarding an investment in Halliburton.

In fact, Halliburton incorporated by reference in its second and third quarter 1998 Forms 10-Q the discontinued claims recognition practice set forth in its 1997 Form 10-K/A. The representation resulting from the incorporated reference - that Halliburton was still following its stated unapproved claims recognition practice - was materially misleading. A reasonable investor would have erroneously inferred that the income figures and 1997-1998 quarter-to-quarter income comparisons contained in the filings and earnings releases, and discussed at the analysts' teleconferences, were in no way impacted by unapproved claims. In fact, they were materially impacted by such claims.

In addition, the company's incomplete disclosure of the amount of unapproved claims it recognized in 1999 was materially misleading. The omitted amount, $34 million, was material. The omission flattened the ascending curve of unapproved claim amounts: instead of reporting the actual $132 million in unapproved claims it used in 1999, the company reported only $98 million - a $9 million, as opposed to $43 million increase over the 1998 figure.

B. Halliburton's Reporting Violations: Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder

Section 13(a) of the Exchange Act requires issuers such as Halliburton to file periodic reports with the Commission containing such information as the Commission prescribes by rule. Exchange Act Rule 13a-1 requires issuers to file annual reports, and Exchange Act Rule 13a-13 requires issuers to file quarterly reports. Under Exchange Act Rule 12b-20, the reports must contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made are not, under the circumstances, materially misleading.10 The obligation to file reports includes the requirement that the reports be true and correct. United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.), cert. denied, 502 U.S. 813 (1991). The reporting provisions are violated if false and misleading reports are filed. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 67 (D.C. Cir. 1980). Scienter is not an element of a Section 13(a) violation. SEC v. Savoy Indus., Inc., 587 F.2d 1149,1167 (D.C. Cir. 1978).

Halliburton violated these provisions by failing to disclose in periodic reports it filed with the Commission its change in claims accounting. Specifically, Halliburton omitted the disclosure in its Forms 10-Q for the second and third quarters of 1998, and first, second and third quarters of 1999, and in the company's 1998 Form 10-K. Moreover, for the reasons stated in the preceding section, Halliburton's second and third quarter 1998 Forms 10-Q were materially misleading. Consequently, the company violated Exchange Act Rule 12b-20, in addition to Section 13(a) and Rules 13a-1 and 13a-13. Finally, the company's 1999 Form 10-K was materially misleading, due to the company's material omission of any reference to the $34 million of unapproved claims it recognized in 1999, in connection with joint venture projects.

C. Muchmore Caused Halliburton's Violations

By preparing and signing Halliburton's Forms 10-Q for the relevant quarters, and the 1998 and 1999 Forms 10-K, by assisting in the preparation and review of the relevant quarterly earnings releases and analysts' teleconference scripts, and by attending the analysts' teleconferences, Muchmore caused Halliburton's violations. Muchmore should have known that his failure to cause the company to disclose in timely fashion the change in its claims accounting would result in the public dissemination of materially misleading information and violations of the federal securities laws. Consequently, Muchmore caused Halliburton's violations of Section 17(a)(2) of the Securities Act, and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.

V.

The Commission finds that Halliburton violated, and that Muchmore caused Halliburton's violations of Section 17(a)(2) of the Securities Act, and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.

VI.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in the Respondents' Offers.11

Accordingly, it is hereby ORDERED that:

A. Respondent Halliburton cease and desist from committing or causing any violation and any future violation of Section 17(a)(2) of the Securities Act, and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; and that

B. Respondent Muchmore cease and desist from committing or causing any violation and any future violation of Section 17(a)(2) of the Securities Act, and from causing any violation and any future violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz
Secretary


Endnotes

These two requirements are satisfied by the existence of all the following conditions: (a) the contract or other evidence provides a legal basis for the claim; (b) additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor's performance; (c) costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and (d) the evidence supporting the claim is objective and verifiable, not based on management's "feel" for the situation or on unsupported representations. Paragraph 65 also contains the admonition, "The amounts recorded, if material, should be disclosed in the notes to the financial statements."