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El Paso Ex-Executives Settle Charges Over Reserves

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El Paso Ex-Executives Settle Charges Over Reserves

By RUSSELL GOLD
July 12, 2008; Page B6

Five former El Paso Corp. executives agreed to pay fines to settle federal civil charges that they overstated the company’s oil and natural-gas reserves, making it appear the company had more untapped fields and better prospects than was warranted.

The Texas company, however, wasn’t fined but did agree to an injunction against future securities-law violations. El Paso had reported the matter to the Securities and Exchange Commission. It had previously restated nearly five years of earnings and took a cumulative $1.7 billion charge to equity in 2003 and 2004.

The SEC alleged the former executives overstated reserves — a critical measure of an oil company’s prospects — essentially by claiming to have found oil and gas that geological and drilling data didn’t support. Under the settlement, the executives didn’t admit guilt but agreed to pay a cumulative $235,000 in fines.

Last month, the SEC proposed new reserves-reporting rules that would allow companies to use new technology to calculate proved reserves and disclose new categories of probable and possible reserves, in addition to proved reserves. A proved reserve is a known quantity of oil or gas that the company believes it could pump from the ground using current technology and commodity prices. Since wells can behave in an unpredictable manner, estimates of proved reserves can turn out to be too low or too high.

The treatment of El Paso stands in stark contrast to how the SEC handled Royal Dutch Shell PLC in 2004, when it also faced charges of inflating reserves. Shell, which ultimately reduced its proved reserves by 22.5%, paid about $150 million in fines to the SEC and British regulators.

El Paso, which reduced its stated reserves by 35%, faces no fine.

Beginning in 2003, El Paso implemented several steps to restructure a company badly damaged by a costly move to energy trading. The company sold off numerous assets to pay down its debt and stanch the flow of red ink. “As far as we’re concerned, this is a legacy issue. We’re glad it is behind us at this point,” said spokesman Richard Wheatley.

Two of the former executives, Rodney D. Erskine and Randy L. Bartley, were charged under a part of securities law that alleges fraud by negligence. The other three, Steven L. Hochstein, John D. Perry and Bryan T. Simmons, were charged with fraud either by intent or severe recklessness, according to SEC officials. Under the settlement, none of the men admitted or denied wrongdoing.

Mr. Erskine’s attorney, Larry R. Veselka, said his client “decided to accept the settlement as the most expeditious and efficient means of resolving the matter.” Attorneys for the other four men didn’t respond to a request for comment.

Write to Russell Gold at [email protected]

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