U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21137 / July 16, 2009
Accounting and Auditing Release No. 3012 / July 16, 2009
Securities and Exchange Commission v. Matthew W. Hardey, L. Cyrus DeBlanc, and Joe E. Penland, Civil Action No. 09-cv-4414 (E.D. La. July 15, 2009)
SEC CHARGES TWO FORMER FINANCE EXECUTIVES OF NEWPARK RESOURCES, INC. AND PRINCIPAL OF KEY NEWPARK VENDOR IN FRAUDULENT ACCOUNTING SCHEME
The Securities and Exchange Commission filed a civil action against two former finance executives of Newpark Resources, Inc. ("Newpark"), an oil and gas company based in Houston, Texas, as well as the principal of Quality Mat Company, a Newpark vendor, for violations of the federal securities laws. According to the Complaint, Matthew W. Hardey, a former Chief Financial Officer for Newpark, and L. Cyrus DeBlanc, a former Chief Financial Officer for Newpark subsidiary Soloco LLC, conspired with Quality Mat president Joe E. Penland to engage in a fraudulent accounting scheme that allowed Newpark in fiscal year 2003 to avoid writing off approximately $4.2 million in aging debt. As a result, Newpark reported approximately $500,000 of net income instead of a significant loss for that fiscal year.
The Commission's Complaint alleges that, in 2002 and 2003, Newpark recognized $4.2 million in revenue based on sales of its primary product — industrial mats used to lay temporary roads at drilling sites — to Quality Mat and another vendor, Easy Frac. The Complaint claims that neither vendor had made any payment on the sales through the end of 2003, and that Hardey, DeBlanc and Penland devised and executed a scheme to funnel money to Quality Mat and Easy Frac through sham transactions that would then allow the vendors to pay their debts to Newpark.
According to the Complaint, one of the sham transactions took place in 2004 and involved Dura-Base Nevada, LLC and Dura-Base de Mexico, two Newpark subsidiaries created to begin mat rentals in Mexico. The Complaint asserts that Newpark purchased the entire initial inventory of mats for the Dura-Base business from Quality Mat, and that the decision to purchase the approximately 6,175 mats from Quality Mat was a pretext meant to give the appearance of a legitimate business transaction to Newpark's repurchase, at the original sales price, of 1,500 mats sold to Quality Mat in 2002 and 600 mats sold to Easy Frac in 2003. The Complaint claims that, in an attempt to perpetuate the pretext, Hardey also misled Newpark's auditors about the basis for buying the Dura-Base inventory from Quality Mat by falsely claiming that Quality Mat had contractual rights in Mexico that Newpark would have to buy in order for the Dura-Base venture to go forward. According to the Complaint, this ruse was necessary to allow Newpark to buy back the mats at the original sales price without suffering any adverse accounting consequences. Under this scheme, Newpark could account for the repurchases as if they had taken place at Newpark's manufacturing cost, but still pay Quality Mat the original purchase price for the mats by assigning the difference in value to the intangible asset allegedly created by the repurchase of Quality Mat's contract rights.
The Complaint alleges that the other sham transaction, which took place during 2004 and 2005, involved Quality Mat sending fictitious invoices to Newpark purportedly for bulk lumber sales. According to the Complaint, in early 2004, Penland agreed to convert Quality Mat's outstanding debt from the 2002 sales to notes receivable. One of the notes required monthly payments of $52,409, which Quality Mat began making in March 2004. Between May 2004 and July 2005, the bulk lumber invoices, which were sent monthly, averaged $52,409, but there were no purchase orders or delivery tickets backing up the alleged sale. The Complaint alleges that Hardey, DeBlanc and Penland devised this scheme to provide Quality Mat with funds to continue making payments on this note, thus allowing Newpark to keep the debt on its books.
The Complaint alleges that Hardey and DeBlanc each: violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rule 10b-5; violated the falsification of accounting records and circumvention of internal controls provision of the Exchange Act, Section 13(b)(5), and Exchange Act Rule 13b2-1; and aided and abetted Cardinal's violations of the reporting, record-keeping, and internal controls provisions of the Exchange Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The Complaint also alleges that Hardey and DeBlanc misled Newpark's auditor in violation of Exchange Act Rule 13b2-2 and that Hardey signed officer certifications to Newpark's periodic filings in violation of Exchange Act Rule 13a-14. The Complaint alleges that Penland aided and abetted violations of Section 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and directly violated Exchange Act Rule 13b2-2.
The Complaint asks the Court to enter permanent injunctions and to levy civil monetary penalties against all defendants. The Complaint also asks that the Court permanently prohibit Hardey and DeBlanc from acting as officers or directors of a public company pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act. The Commission acknowledges the cooperation of Newpark in its investigation.