Energy Ink

Class action lawsuit against Penn West announced

Two law firms specializing in class-action lawsuits announce legal action as Penn West reviews accounting irregularities

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July 31, 2014

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Two Toronto-based firms specializing in class action lawsuits announced Thursday afternoon that they would jointly file a statement of claim against Penn West Petroleum Ltd.

Koskie Minsky LLP and Sutts, Strosberg LLP announced that they would commence a $400-million securities class action suit against Penn West, and asked anyone who bought shares in the energy company between March 2011 and July 2014 to contact their firms and join the suit.

The legal announcement comes two days after a Penn West press release said the company was beginning an internal review of its accounting practices and that “certain of the company’s historical financial statements and related management’s discussion and analysis must be restated.” It also said that this review may delay the release of its second quarter financial results and that the senior finance and accounting staff at the company who were originally responsible for the improper financial reporting had been dismissed.

The company’s share price dropped roughly 15 per cent when the markets opened Wednesday morning to the news that the company’s finance teams had improperly classified operating expenses, royalty expenses and property plant and equipment expenses between 2011 and 2013.

In a research note published Wednesday, FirstEnergy Capital Corp. analyst Katrina Karkkainen said, “While we have elected to wait until further information is available to update our estimates, given the uncertainty surrounding the ultimate financial impact of this review we have reduced our target price to $10.00 per share and maintain our market perform rating.”

Other analysts say they are trying to figure out if the accounting irregularities resulted from a deliberate attempt to deceive the market, or if they were simply being flexible with their classifications of capital and operating costs.

In its announcement, Penn West showed that for the fiscal year 2013, roughly $70 million in operating expenses were reclassified as property, plant and equipment and as capital expenditures. In 2012, $111 million were “reclassified” in the same way.

Over those two years, a further $100 million in operating expenses “were incorrectly reclassified as royalty expenses.”

As a result, the class action suit against Penn West alleges the company “made a misrepresentation in its public disclosure between 2010 and 2014.” In announcing their lawsuit, the firms said that Penn West “improperly stated to the public that its financial statements followed Generally Accepted Accounting Principles [GAAP] and International Financial Reporting Standards [IFRS].”

The Canadian Accounting Standards Board decided in 2007 that, beginning in 2011, “publicly accountable enterprises” would be required to switch from GAAP to IFRS accounting practices. Penn West’s accounting irregularities seem to have begun in 2011, at about the time that the new accounting standards came into effect.

In the same press release announcing its “management-initiated” accounting review Penn West board chair Rick George said, “We have acted quickly and effectively to review our accounting practices. We will take the steps necessary to correct our historical and financial statements and we will take the appropriate steps to ensure that we avoid a similar situation in the future.”

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