UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
RELEASE No. 38858 / July 22, 1997
ACCOUNTING AND AUDITING ENFORCEMENT
RELEASE No. 938 / July 22, 1997
File No. 3-9349
_____________________________ : In the Matter of : ORDER INSTITUTING : PROCEEDINGS PURSUANT TO PONDER INDUSTRIES, INC., : SECTION 21C OF THE MACK PONDER, CHARLES E. : SECURITIES EXCHANGE ACT GREENWOOD, and MICHAEL A. : OF 1934, MAKING FINDINGS DUPRE, : AND IMPOSING A CEASE-AND- : DESIST ORDER Respondents. : _____________________________:
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Ponder Industries, Inc. ("Ponder" or the "Company"), Mack Ponder, Charles E. Greenwood ("Greenwood") and Michael A. Dupre ("Dupre") (collectively, the "Respondents").
In anticipation of the institution of these administrative proceedings, each respondent has submitted an Offer of Settlement, which 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, the Respondents, without admitting or denying the findings set forth herein, except that they admit to the jurisdiction of the Commission over them and over the subject matter of these proceedings, consent to the entry of the findings and to the imposition of the remedial sanctions set forth below.
On the basis of this Order Instituting Proceedings ("Order") and the Respondents Offers of Settlement, the Commission finds the following: 1
1. Ponder, a public company since 1990, is a Delaware corporation with its principal place of business in Alice, Texas. Ponder's common stock, of which 7,126,770 shares were outstanding as of October 20, 1995, is registered pursuant to Section 12(g) of the Exchange Act and is traded on the National Association of Securities Dealers Automated Quotation System and on the Boston Stock Exchange. For its fiscal year ended August 31, 1995, Ponder reported a net loss of $3.1 million, primarily attributable to a $3.8 million loss from discontinued operations in Azerbaijan. Revenues for the year were $6.7 million.
2. Mack Ponder, 71, founded Ponder in 1981 and has been a director since the Company's founding. He was the Company's President from 1981 to 1991, its Chairman of the Board and Chief Executive Officer ("CEO") from 1991 to 1993, and its President and CEO from 1993 until September 1995. Mack Ponder is currently retired.
3. Greenwood, 72, was the Chief Financial Officer ("CFO") at the time Ponder filed its Form 10-Q for the third quarter of fiscal 1992. Greenwood retired in 1989, but returned to Ponder in 1991 as Vice President, CFO and Assistant Secretary until he retired again in November 1992. In January 1995, Greenwood once again resumed the duties of CFO at the Company, upon the resignation of Dupre. In May 1996 Ponder hired a new CFO and Greenwood retired.
4. Dupre, 52, was Ponder's CFO at the time Ponder filed its Form 10-K for fiscal 1993. He had previously prepared Forms 10-Q and 10-K for another publicly held company.
Ponder materially misstated its net income (loss) before taxes and its assets in its Form 10-Q for the quarter ended May 31, 1992, in a press release issued on August 11, 1992, (the "Press Release") and in its Form 10-K for the fiscal year ended August 31, 1993. Ponder improperly recognized revenue from, and improperly capitalized costs associated with, its operations in Azerbaijan. The misstatements resulted from Ponder's failure to consider the pivotal contingencies in its contract for operations in Azerbaijan and from Ponders continued capitalization of costs associated with that contract after Ponder terminated it. As a result, Ponder reported, for the quarter ended May 31, 1992, net income before taxes of $1.1 million, instead of a net loss before taxes of $1.1 million. In the Press Release, Ponder projected net earnings of $4.1 million for fiscal 1992, which improperly included more than $8 million in revenues from operations in Azerbaijan. In its Form 10-K for fiscal year 1993, Ponder improperly reported a net loss before taxes of $1.2 million instead of a $2.8 million loss.
1. Ponder Agreed to Provide Services in Azerbaijan
Ponder has been in the oil well fishing business since 1981, leasing out its specialized tools and providing its expertise to oil producers to remove obstacles clogging oil well bore holes. Historically, most of Ponder's business has been in the U.S. In April 1992, however, Ponder entered into an agreement with Megaoil U.S.A. ("Mega"), a subsidiary of Vista Group U.S.A., Inc. ("Vista"), to furnish services for oil and gas production in Azerbaijan.
In or about January 1992, Vista represented to Ponder that it had entered into a joint venture agreement (the "Joint Venture Agreement") with the Azerbaijan Oil Company ("AOC"), to drill for oil and rework wells located in two specified fields, and that the Joint Venture Agreement had been properly registered with the Azerbaijan government. Vista was to assign its rights under the registered Joint Venture Agreement to Mega. Vista was seeking companies to perform the needed oil services while it handled the negotiations, political connections, liaison functions and government regulations.
Thereafter, Ponder undertook little investigation of Vista or Mega, the authenticity of the Joint Venture Agreement or the realities of doing business in Azerbaijan. Ponder obtained less information about Vista than it normally did about those with whom it did business in Texas. The purported Joint Venture Agreement was in Russian. No one at Ponder could read it and Ponder did not obtain a translation before commencing operations in Azerbaijan. Ponder did not seek any advice about conducting business in Azerbaijan. Moreover, in spite of the fact that the Soviet Union had only recently been dissolved and political instability in the former Soviet republics was widely reported, Ponder made no effort to obtain information about the political situation in Azerbaijan.
Notwithstanding this lack of investigation, in April 1992 Ponder entered into a service agreement with Mega (the "Contract") to provide services and operating funds to Mega. Under the terms of the Contract, Ponder's receipt of payment was contingent on several factors. The Contract provided that Ponder was to be paid only from the proceeds of oil produced and such payments were dependent upon the successful production of oil, sales of such oil and conversion of the proceeds into a usable currency. At the time Ponder signed the Contract, Ponder had only oral assurances that arrangements for storage, transportation, sale of oil, or exchange of proceeds would ever be made, and had no assurances regarding the productivity of the wells.
2. Ponder Overstated Revenues, Income and
Assets for the Third Quarter of Fiscal 1992
Ponder began reworking oil wells in Azerbaijan on May 15, 1992. Two weeks later, at the end of the third quarter of fiscal 1992, still no arrangements had been made for the sale of oil and no verifiable information had been received on any amounts produced.
On June 23, 1992 Ponder filed its Form 10-Q for the quarter ended May 31, 1992, in which Ponder described the Contract and, in a footnote, acknowledged the contingencies. Nevertheless, Ponder recognized revenue and other income pursuant to the Contract of $864,000 and $1,351,000 for services and reimbursable costs, and recorded corresponding accounts receivable totaling $2,215,000. Largely due to the revenues recognized from Mega, Ponder reported income before taxes for the quarter of $1,088,000.
Regulation S-X requires that financial statements filed with the Commission pursuant to Section 13(a) of the Exchange Act be prepared in accordance with generally accepted accounting principles ("GAAP") or such financial statements will be presumed to be misleading or inaccurate. GAAP provides that revenue may be recognized when it is both realizable and earned, unless the circumstances are such that the collection of the revenue is not reasonably assured. 2
Ponder's recognition of revenue and other income under the Contract at the end of the third quarter of fiscal 1992 was not in accordance with GAAP. Ponder was to be paid only from the net proceeds from the sale of oil production. Numerous contingencies existed at the end of the quarter that indicated that collection of the amounts due Ponder was not reasonably assured. Accordingly, Ponder's recognition of revenue and other income under the Contract was improper and resulted in an overstatement of net income before taxes of $2,215,000. If Ponder had accounted for its operations in Azerbaijan in accordance with GAAP, Ponder would have reported a loss before taxes of $1,127,000 instead of net income before taxes of $1,088,000.
Greenwood admitted that the contingencies had to be met before Ponder could receive any funds and that recognizing revenue was his decision. He relied only on the facts that Ponder had issued invoices to Mega and that, under the Contract, Mega was obligated to pay. Mack Ponder believed that because Ponder had begun the work and in reliance only on the oral representations of Vistas president, Ponder would ultimately be paid.
3. Ponder Ceased Operations in Azerbaijan
and Issued Materially False Press Release
Following Ponder's filing of the Form 10-Q for the third quarter of fiscal 1992, Mack Ponder became aware of problems with the Azerbaijan operations and attempted to get Vista to provide written verification of the success of the operation. Ponders independent auditor met with Vistas president in Oklahoma City on June 26, 1992. At the meeting, Vistas president claimed that production, storage and an arranged sale of the oil were all in place, but did not provide any substantiating documentation. Ponders auditor tried to verify Vista's representations by contacting Mega's accountants, who also were unable to verify Vistas claims.
Ponder was forced to stop work in Azerbaijan in July 1992. Although Mack Ponder became aware of the work stoppage, he was unable to obtain a complete explanation, only that it had something to do with a change in government in Azerbaijan and the new government's delay in honoring Mega's Joint Venture Agreement.
Without having received any accounting or payment from Mega, and with work in Azerbaijan at a halt, Ponder issued a Press Release on August 11, 1992, forecasting net earnings "on GAAP accounting" for the fourth quarter ending August 31, 1992, of $4,077,000 or $.75 per share. 3 The Press Release projected net earnings for fiscal 1992 of $4,054,831 or $.75 per share after taxes. These projections assumed recognition of more than $8 million in revenues from Mega, which Ponder had billed Mega to date. The Press Release did not disclose that Ponders operations in Azerbaijan had ceased indefinitely.
The Press Release had a material positive effect on the market for Ponder stock. On August 10, 1992, the day before the Press Release, Ponder's stock closed at $2 1/2. The next day (August 11), it closed at $3 3/4, up 50%. The next day (August 12) it closed at $4 5/8, up another 23%. Volume also increased dramatically from 16,500 shares on August 10, to 68,000 shares on August 11, to 204,200 shares on August 12.
Mack Ponder reviewed and approved the Press Release prior to its release. Even though Mack Ponder believed that Ponder would receive the revenue predicted in the Press Release, he knew that there remained several contingencies which would have to be met before Ponder would receive any payment.
Ponder's recognition of income from Mega, as projected in the Press Release, was inconsistent with GAAP. Even though a small quantity of oil had been produced, the amount could not be verified and none had been sold. Moreover, work had come to a halt, rendering Mega unable to fulfill its promise to commence payments in August 1992. Accordingly, Ponder's receipt of payment was even more uncertain. Ponder's $4 million net earnings projection for the year ended August 31, 1992, included more than $8 million in revenues from Mega which the Company had no legitimate basis to recognize.
4. Ponder Terminated Agreement With Mega
And Sought New Contracts in Azerbaijan
In December 1992, Ponder filed its Form 10-K for fiscal 1992. Ponder reversed the revenue previously recognized in the Form 10-Q for the third quarter of fiscal 1992 and reported $2.12 million in capitalized costs associated with Azerbaijan, which included $1.63 million of expenses incurred in performance of the contract with Mega. Ponder attributed the reversal of revenue to the restrictions placed on the movement of oil by the new Azerbaijan government.
Ponder began seeking a new joint venture without Mega and ultimately terminated the Mega Contract. In its Form 10-Q for the second quarter of fiscal 1993, Ponder reported that "further investigation" revealed that Mega never had a valid joint venture agreement and, therefore, Ponder deemed its Contract with Mega "null and void." Ponder also reported that it had obtained a new registered joint venture without Mega and that Ponder was negotiating a new service contract with the AOC. However, by the end of the 1993 audit, Ponder's negotiations with the AOC had not proceeded beyond a draft service contract which contained no provision for the costs incurred by Ponder under the Mega Contract.
5. Ponder's Misstatement For Fiscal 1993
In its fiscal 1993 Form 10-K, Ponder reported $2.95 million in capitalized costs associated with operations in Azerbaijan, representing $1.63 million of expenses incurred in fiscal 1992 in connection with Mega, as well as additional expenses incurred in fiscal 1993 in attempting to negotiate a new joint venture and a new service contract and in maintaining equipment. Because significant uncertainties existed about the future economic benefit of the $1.63 million of costs incurred in fiscal 1992 in connection with Mega, according to GAAP Ponder should have treated those costs as an expense. As both Mack Ponder and Dupre knew, Ponder reported in its Form 10-Q for the quarter ended February 28, 1993 that the Contract with Mega was "null and void." Although Ponder was engaged in efforts to establish a new registered joint venture and to obtain new contracts to perform services in Azerbaijan, at the time of the filing of the Form 10-K for fiscal 1993, both Mack Ponder and Dupre knew that no such service contracts had been finalized and no party was obligated to pay Ponder for its $1.63 million of costs incurred in fiscal 1992 in connection with Mega.
According to GAAP, in order for Ponder to classify the costs incurred with Mega as an asset, those costs must have a "probable future economic benefit4." "Probable" is defined as "that which can reasonably be expected or believed on the basis of available evidence or logic." 5
The $1.63 million of costs which Ponder incurred in connection with Mega did not have a "probable future economic benefit" for at least two reasons. First, the majority of those costs consisted of operating expenses incurred in the performance of a purported contract between Ponder and Mega. Ponder had declared that contract null and void. Consequently, there existed no valid contract under which any party was obligated to reimburse Ponder for the costs incurred, or to pay fees billed, pursuant to the contract with Mega. Second, the draft service contract which Ponder was negotiating during the 1993 audit did not contain any provision for the recovery of costs incurred, or fees billed, by Ponder in the performance of the terminated contract.
Due to the degree of uncertainty, the passage of time and the termination of the Contract under which the costs had been incurred, the $1.63 million of capitalized costs incurred in performance of the contract with Mega during fiscal 1992 should have been reversed by the end of fiscal 1993. As a result, Ponder should have recorded a loss before taxes of $2.82 million instead of a loss of $1.18 million. Furthermore, Ponder's non-GAAP treatment resulted in an overstatement of assets by 14%, $13.56 million instead of $11.92 million.
E. LEGAL DISCUSSION
1. Applicable Law
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe the making of materially false and misleading statements, including statements in periodic reports and press releases, in connection with the purchase and sale of any security. An issuer may also violate Section 10(b) and Rule 10b-5 by failing to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. Materially false and misleading projections can be the basis for Section 10(b) and Rule 10b-5 liability. Violations of Section 10(b) and Rule 10b-5 require proof of scienter. The scienter of a corporation may be imputed from the scienter of the corporations senior officers.
Section 13(a) of the Exchange Act requires issuers to file periodic reports with the Commission containing such information as the Commission prescribes by rule. Rules 13a-1 and 13a-13 thereunder require issuers to file annual and quarterly reports, respectively. Regulation S-X requires that annual reports include financial statements audited by independent public accountants and that quarterly reports include periodic revenues, income and net earnings. Regulation S-X also requires that financial statements filed with the Commission pursuant to Section 13(a) be prepared in accordance with GAAP or such financial statements will be presumed to be misleading or inaccurate. Exchange Act Rule 12b-20 requires that reports 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. Scienter is not required to prove a violation of Section 13(a).
Section 13(b)(2)(A) of the Exchange Act states, in pertinent part, that every reporting company must make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer.
Section 21C of the Exchange Act authorizes the Commission to issue an order requiring a person to cease and desist from committing or causing violations of the Exchange Act where those persons knew or should have known that their acts or omissions would contribute to such violation.
2. Ponders Violations
Ponder violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by filing false and misleading financial statements in its Form 10-Q for the quarter ended May 31, 1992 and by including false and misleading projections of net earnings in the Press Release. Ponder's misstatements, which were disseminated to the trading market, were material. In the Form 10-Q, Ponder improperly reported income before taxes of $1,088,000 instead of a loss before taxes of $1,127,000. Ponder also improperly reported total assets of $15,311,000 instead of total assets of $13,096,000, an overstatement of 17%. In the Press Release, Ponder improperly included more than $8 million in revenues from Mega when it projected net earnings of $4,054,831 for fiscal 1992.
Ponder acted with the requisite scienter in misstating its financial results in the Form 10-Q for the third quarter of fiscal 1992 and in issuing the materially misleading Press Release. With respect to the Form 10-Q, Ponder's scienter is imputed from Mack Ponder and Greenwood. With respect to the Press Release, Ponder's scienter is imputed from Mack Ponder.
Ponder violated the issuer reporting and record keeping provisions of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder by materially misstating its assets and income before taxes in its Form 10-Q for the quarter ended May 31, 1992 and in its Form 10-K for fiscal 1993. In the Form 10-Q, Ponder improperly recognized $2.2 million in revenues and income from operations in Azerbaijan, thereby reporting a profit instead of a loss for the quarter. In its Form 10-K, Ponder understated its loss and overstated total assets by 14% by improperly capitalizing $1.63 million of costs associated with operations in Azerbaijan.
3. Mack Ponders Violations
Mack Ponder violated Section 10(b) of the Exchange Act and Rule 10b-5 in connection with Ponder's filing of the Form 10-Q for the third quarter of fiscal 1992 and in connection with its issuance of the Press Release. Mack Ponder approved the Press Release and was aware that Ponder had recognized revenue from Mega in its Form 10-Q and had projected revenues from Mega in the Press Release.
Mack Ponder participated in making, and approved, the decision to recognize income from the Azerbaijan operations in the Form 10-Q. However, as of the end of the third quarter of fiscal 1992, Mack Ponder was aware that there remained several contingencies to Ponder receiving payment for work it had performed.
As of August 11, 1992, the date of the Press Release, Mack Ponder was aware that operations in Azerbaijan had halted and that the contract had numerous contingencies. In view of this information, Mack Ponder acted with the requisite scienter in approving issuance of the Press Release.
Mack Ponder also caused Ponder's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 of the Exchange Act in connection with Ponder's Form 10-Q for the third quarter of 1992 and in connection with Ponder's Form 10-K for fiscal 1993. Mack Ponder participated in making, and approved, the decision to recognize the Azerbaijan revenues and to capitalize the costs incurred in fiscal 1992 associated with the operations with Mega in the Form 10-K for fiscal 1993. However, throughout fiscal 1993, Mack Ponder knew that Ponder's operations in Azerbaijan remained at a standstill. Further, he also knew that, as Ponder reported in its Form 10-Q for the quarter ended February 28, 1993, agreements with Mega were "null and void," that no new service contract had been finalized, and that, even under the draft service contract being negotiated, no party would be obligated to pay Ponder for the costs previously incurred in connection with Mega.
4. Greenwoods Violations
Greenwood violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and caused Ponder's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, by participating in the filing of materially false and misleading financial statements in Ponder's Form 10-Q for the quarter ended May 31, 1992. Greenwood was aware of the uncertainties of Ponder's involvement in Azerbaijan because of the Company's lack of information about Mega. Greenwood was aware that Ponder had been unsuccessful in obtaining credit information about Megas principal. Greenwood was aware of the contingencies to payment in the Contract, including production and sale of oil and conversion of proceeds to a recognizable currency. Greenwood was also aware that , as of the end of the third quarter of fiscal 1992, Ponder had been performing services in Azerbaijan for only two weeks and that no monies had been received. In view of this information, Greenwood acted with the requisite scienter in determining to recognize the revenue and signing the false Form 10-Q.
5. Dupres Causation of Ponders Violations
Dupre caused Ponder's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder in connection with Ponder's Form 10-K for fiscal 1993. Dupre knew or should have known that capitalization of costs was not in conformity with GAAP. Nevertheless, Dupre prepared and signed the Form 10-K in which the costs incurred in 1992 associated with the contract with Mega were capitalized, contrary to GAAP.
On the basis of this Order and the Offers of Settlement submitted by the Respondents, the Commission finds that:
A. Ponder violated Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder;
B. Mack Ponder violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and caused Ponders violations of Section 13(a) of the Exchange Act and rules 12b-20, 13a-1 and 13a-13 thereunder;
C. Greenwood violated section 10(b) of the Exchange Act and Rule 10b-5 thereunder and caused Ponders violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and rules 12b-20 and 13a-13 thereunder;
D. Dupre caused Ponders violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder;
Based on the foregoing, the Commission deems it appropriate to accept the Offers of Settlement submitted by the Respondents and accordingly,
IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that:
A. Ponder cease and desist from committing or causing any violation or any future violation of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder;
B. Mack Ponder cease and desist from committing or causing any violation or any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from causing any violation or any future violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder;
C. Greenwood cease and desist from committing or causing any violation or any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from causing any violation or any future violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder;
D. Dupre cease and desist from causing any violation or any future violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder;
By the Commission.
Jonathan G. Katz