U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20091 / April 25, 2007
Accounting and Auditing Enforcement
Release No. 2601 / April 25, 2007
SEC v. Merle D. Lewis, (United States District Court for the District of South Dakota, Civil Action No. 07 - 4057)
SEC v. Richard R. Hylland, (United States District Court for the District of South Dakota, Civil Action No. 07 - 4058)
SEC v. Kipp D. Orme, (United States District Court for the District of South Dakota, Civil Action No. 07 - 4060)
SEC v. Kurt D. Whitesel, (United States District Court for the District of South Dakota, Civil Action No. 07 - 4059)
SEC Charges Four Former Officers of NorthWestern Corporation with Financial and Disclosure Fraud
The Securities and Exchange Commission today filed separate complaints against four former officers of NorthWestern Corporation ("NorthWestern"), a Midwestern utility company headquartered in South Dakota. The Commission's complaints, each filed in the United States District Court for the District of South Dakota, allege that Merle D. Lewis, NorthWestern's former chief executive officer; Richard R. Hylland, NorthWestern's former chief operating officer; Kipp D. Orme, NorthWestern's former chief financial officer; and Kurt D. Whitesel, NorthWestern's former controller; overstated the performance of NorthWestern and its key telecommunications subsidiary, Expanets, Inc. ("Expanets"), in 2002 during the same period that NorthWestern completed securities offerings totaling more than $800 million. The Commission's complaints further allege that, 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.
The Commission alleges that, in NorthWestern's quarterly filings, debt and equity offering filings, and other public information, these four defendants were responsible for overstating performance and concealing problems at Expanets and NorthWestern. The Commission alleges that each defendant 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 further alleges that each defendant 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% in the second quarter of 2002 and 109% in the third quarter of 2002. The Commission also alleges 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. Finally, the Commission alleges that each defendant was responsible for NorthWestern's failure 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.
The Commission's complaints charge Lewis, Hylland, Orme and Whitesel with violations of Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaints also charge each defendant with violating Exchange Act Rule 13b2-1, and with aiding and abetting NorthWestern's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder. The complaints further charge Lewis, Hylland and Whitesel with violating Section 13(b)(5) of the Exchange Act, and charge Lewis, Orme and Whitesel with violating Exchange Act Rule 13b2-2. The Commission seeks permanent injunctions, civil penalties and officer and director bars against each defendant.
Lewis, Hylland, Orme and Whitesel, without admitting or denying the allegations in the Commission's complaints, each 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 consented to pay $150,000 in civil penalties, Orme consented to pay a $100,000 civil penalty, and Whitesel consented to pay a $25,000 civil penalty.
For additional information on related Commission actions, see Sec. Exch. Act Rel. No. 34-55416 (March 7, 2007).