U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18817 / August 3, 2004
Accounting and Enforcement Release No. 2074 / August 3, 2004
SEC Files Suit against Halliburton's Former Chief Financial Officer for Failing to Disclose Accounting Change that Materially Increased Halliburton's Reported Income
In the Matter of Halliburton Company and Robert Charles Muchmore, Jr.,
Securities Exchange Act of 1934 Release Number 50137
Securities Act of 1933 Release Number 8452
Securities and Exchange Commission v. Gary V. Morris, Civil Action No. H-04-3096, U.S.D.C./Southern District of Texas (Houston Division)
Securities and Exchange Commission v. Halliburton Company and Robert Charles Muchmore, Civil Action No. H- , U.S.D.C./Southern District of Texas (Houston Division)
On August 3, 2004, the Commission announced that it filed a civil action in federal district court against Gary V. Morris, the former chief financial officer of Halliburton Company (Halliburton or the company). Halliburton is a Texas-based provider of products and services to the petroleum and energy industries. The Commission alleges in its complaint that Morris, at the time Halliburton's highest-ranking financial officer, improperly failed to ensure that Halliburton disclosed a change in its accounting that had the effect of materially increasing the company's reported income in 1998 and 1999. The Commission also alleges that Morris participated in the preparation of earnings releases and in analyst teleconferences in which the company, improperly, touted its quarterly income results without clarifying that those results were materially affected by the accounting change. In its lawsuit, the Commission is seeking a permanent injunction and a civil money penalty against Morris.
The Commission alleges in its complaint that, commencing in the second quarter of 1998, Halliburton changed its accounting in connection with several large projects to enable it to begin offsetting cost overruns with estimated recoveries on claims the company had not yet resolved with its customers. According to the complaint, although permitted under Generally Accepted Accounting Principles in appropriate circumstances, this practice was a significant departure from Halliburton's longstanding public disclosure regarding its recognition of claims revenue. As alleged in the complaint, in the previous five consecutive years, dating back to 1993, Halliburton disclosed in its Forms 10-K that it recognized revenue from such claims only after the claim was resolved with the customer; pursuant to that practice, until the claim was resolved the company recorded losses caused by cost overruns.
According to the Commission's complaint, as a result of Halliburton's undisclosed change in accounting practice, cost overruns and resulting losses on several projects were reduced or eliminated, triggering material increases to Halliburton's income: in its 1998 Form 10-K, by 46.1%, and in its Forms 10-Q for the second and third quarters of 1998, by 24.8% and 5.7%, respectively, and in its Forms 10-Q for the first, second and third quarters of 1999, by 14.8%, 7.5% and 11.6%, respectively. Additionally, the Commission alleges that the change in claims recognition policy materially enhanced Halliburton's publicly disclosed 1997-1998 quarter-to-quarter income comparisons. According to the complaint, despite the material impact of the accounting change on Halliburton's reported income, the company did not disclose the change until March 2000, in its 1999 Form 10-K - almost two years after the change went into effect. In its civil suit, the Commission alleges that Morris violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (Securities Act) and aided and abetted Halliburton's violations of the reporting provisions of the Securities Exchange Act of 1934 (Exchange Act): Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
On August 3, 2004, the Commission issued a cease-and-desist order (Order) relating to Halliburton's disclosure failures and to the role of Halliburton's former controller, Robert Charles Muchmore, in those failures. The settled Order requires that Halliburton and Muchmore cease and desist from committing or causing violations and future violations of Section 17(a)(2) of the Securities Act and that Halliburton cease and desist from committing or causing, and Muchmore cease and desist from causing, violations and future violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Halliburton and Muchmore consented to the Order without admitting or denying the findings contained in the Order. Halliburton and Muchmore also agreed to pay civil penalties of $7.5 million and $50,000, respectively. The Commission's Order noted that the penalty, in part, reflects the Commission's view that there were unacceptable lapses in the company's conduct during the course of the investigation, which had the effect of delaying the production of information and documentation necessary to the staff's expeditious completion of its investigation.
SEC Complaint in this matter (Halliburton Company and Robert Charles Muchmore, Jr.)
SEC Complaint in this matter (Gary V. Morris)