SEC Charges Chicago-Area Alternative Energy Company for Accounting and Disclosure Violations

The Securities and Exchange Commission today charged a Chicago-area alternative energy company, its former CEO, and its CFO for accounting and disclosure violations that prevented investors from knowing that reduced business from two significant customers had caused substantial declines in the company’s long-term financial prospects.

The SEC alleges that senior management at Broadwind Energy anticipated substantial impairment of intangible assets associated with these customer relationships and privately shared this information with the company’s auditors, investment bankers, and lender.  Yet it wasn’t until several months later that Broadwind Energy finally recorded a $58 million impairment charge in its financial statements and disclosed it publicly to investors.  In fact, Broadwind Energy conducted a public offering of its stock without disclosing the impairment in its registration statement.  When the information was disclosed in an annual report two months after the offering, Broadwind Energy’s stock price declined 29 percent.

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Illinois, Broadwind Energy’s then-CEO J. Cameron Drecoll approved and certified public filings containing the misrepresentations and misleading omissions when he should have known that the intangible assets were impaired.  Broadwind Energy’s CFO Stephanie K. Kushner, who was newly hired at the time, failed to take the steps necessary to ensure that the financial statements and disclosures were accurate.

Broadwind Energy, Drecoll, and Kushner agreed to settle the SEC’s charges.  The company agreed to pay a $1 million penalty, and Drecoll and Kushner agreed to pay nearly $700,000 in combined disgorgement and penalties.

“Broadwind Energy had received significant evidence that its intangible assets were impaired ahead of a public offering of its stock, but failed to inform the investing public,” said Timothy L. Warren, Associate Regional Director of the SEC’s Chicago office.  “Investors deserve to see the full financial picture when making an investment decision.”

The SEC’s complaint also alleges that Broadwind Energy committed other violations arising from accelerated revenue recognition practices and inadequate disclosures.  The deterioration in customer relationships that produced the impairment charge also compromised the ability of one of Broadwind Energy’s subsidiaries to meet monthly debt covenants associated with its primary credit facility.  To avoid default and other negative consequences, subsidiary personnel accelerated revenue until Broadwind Energy could raise funds to retire the credit facility through the public stock offering.  Broadwind Energy failed to disclose this practice and its effect on future revenue in the registration statement used in the offering.  In addition, as a result of the transactions, Broadwind reported $4 million of improperly recognized revenue.

The SEC’s complaint charges Broadwind Energy with violations of Section 17(a)(2) of the Securities Act of 1933 and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13.  Drecoll was charged with violations of Section  17(a)(2) of the Securities Act and Rule 13a-14 under the Exchange Act, and Drecoll and Kushner were charged with controlling Broadwind Energy’s violations.  Without admitting or denying the SEC’s allegations, Broadwind Energy agreed to pay the penalty of $1 million, Drecoll agreed to pay disgorgement and prejudgment interest of $543,358 and a penalty of $75,000, and Kushner agreed to pay disgorgement and prejudgment interest of $23,109 and a penalty of $50,000.  The settlements are subject to court approval.

The SEC’s investigation was conducted by Paul M. G. Helms and Timothy T. Tatman in the Chicago Regional Office, and the case was supervised by Kathryn A. Pyszka.