| UNITED STATES OF AMERICA |
| Before the |
| SECURITIES AND EXCHANGE COMMISSION |
| |
| SECURITIES EXCHANGE ACT OF 1934 |
| Release No. 77342 / March 10, 2016 |
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| ACCOUNTING AND AUDITING ENFORCEMENT |
| Release No. 3753 / March 10, 2016 |
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| ADMINISTRATIVE PROCEEDING |
| File No. 3-17163 |
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| |
| In the Matter of |
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| Joseph R. Allred, CPA, |
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| Respondent. |
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| ORDER INSTITUTING CEASE-AND-DESIST |
| PROCEEDINGS PURSUANT TO SECTION |
| 21C OF THE SECURITIES EXCHANGE ACT |
| OF 1934, MAKING FINDINGS, AND |
| IMPOSING A CEASE-AND-DESIST ORDER |
| |
| |
| I. |
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| The Securities and Exchange Commission (“Commission”) deems it appropriate cease- |
| and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities |
| Exchange Act of 1934 (“Exchange Act”) against Joseph R. Allred (“Respondent” or “Allred”). |
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| II. |
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| In anticipation of the institution of these proceedings, Respondent has submitted an Offer |
| of Settlement (the “Offer”) 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, and without admitting or denying the findings |
| herein, except as to the Commission’s jurisdiction over him and the subject matter of these |
| proceedings, which are admitted, and except as provided herein in Section V, Respondent consents |
| to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the |
| Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order |
| (“Order”), as set forth below. |
| |
| 2 |
| III. |
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| On the basis of this Order and Respondent’s Offer, the Commission finds1 that: |
| |
| SUMMARY |
| 1. This proceeding concerns failures by Magnum Hunter Resources Corporation |
| (“MHR” or “the Company”) and its management to properly implement, maintain, and evaluate |
| internal control over financial reporting (“ICFR”) for the fiscal year-ended December 31, 2011 and |
| to maintain ICFR sufficient to keep pace with MHR’s growth from at least the fiscal year-ended |
| December 31, 2011 through the quarter-ended September 30, 2013. MHR’s failures resulted in |
| part from Ronald D. Ormand (“Ormand”) and David S. Krueger (“Krueger”) improperly |
| evaluating the severity of identified control deficiencies. |
| 2. This proceeding also concerns Sarbanes-Oxley Act of 2002 (“SOX”) consulting |
| services provided by Allred. Allred advised MHR management that MHR did not have material |
| weaknesses in its ICFR. Allred did not have an adequate basis for this assessment. This, at least in |
| part, caused the violations by MHR, Ormand, and Krueger. |
| B. RESPONDENT AND RELATED ENTITIES AND INDIVIDUALS |
| i. Respondent |
| 3. Allred is a resident of Arlington, Texas and is a partner at a PCAOB-registered |
| public accounting firm. Allred was responsible for the firm’s engagement that provided SOX |
| consulting and internal auditing services to MHR from 2009 through 2012. These services |
| included assisting MHR with documenting, evaluating, testing, and improving accounting and |
| reporting processes. |
| ii. Other Relevant Entities and Individuals |
| 4. MHR is a Delaware corporation headquartered in Irving, Texas that operates as an |
| independent oil and gas company engaged in the exploration and production of oil and gas in the |
| United States. At all relevant times, MHR’s stock was registered with the Commission pursuant to |
| Section 12(b) of the Exchange Act and traded on the New York Stock Exchange (“NYSE”). At all |
| relevant times, MHR filed periodic reports with the Commission, including Forms 10-K and 10-Q, |
| pursuant to Section 13(a) of the Exchange Act and related rules thereunder. On December 15, |
| 2015, MHR filed a Form 8-K disclosing that the Company and certain subsidiaries had filed |
| voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. |
| 5. Ormand is a resident of Houston, Texas and was MHR’s Chief Financial Officer |
| (“CFO”) from May 2009 through July 2013. |
| |
| 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not |
| binding on any other person or entity in this or any other proceeding. |
| |
| 3 |
| 6. Krueger is a resident of Flower Mound, Texas and was MHR’s Chief Accounting |
| Officer (“CAO”) from October 2009 through October 2012. He was previously licensed as a CPA |
| in the states of Arkansas and Oklahoma. |
| 7. Wayne Gray, CPA (“Gray”) is a resident of Plano, Texas and a former partner at |
| a PCAOB-registered public accounting firm. Gray was the engagement partner responsible for |
| providing MHR’s external auditing services for the December 31, 2009 through June 30, 2012 |
| reporting periods. Gray is a CPA licensed in the state of Texas. |
| C. FACTS |
| i. Statutory requirements regarding ICFR |
| 8. Section 13(b)(2)(B) of the Exchange Act makes public companies responsible for |
| devising and maintaining a system of internal accounting controls sufficient to provide reasonable |
| assurance that transactions are recorded as necessary to permit preparation of financial statements |
| in conformity with GAAP. See 15 U.S.C. §78m(b)(2)(B). |
| 9. Exchange Act Rule 13a-15(a) requires issuers, including MHR, to maintain ICFR.2 |
| See 17 C.F.R. 240.13a-15(a). Rule 13a-15(f) defines ICFR as: |
| [A] process designed by, or under the supervision of, the issuer’s principal |
| executive and principal financial officers, or persons performing similar functions, |
| and effected by the issuer’s board of directors, management and other personnel, to |
| provide reasonable assurance regarding the reliability of financial reporting and the |
| preparation of financial statements for external purposes in accordance with |
| generally accepted accounting principles[.] 17 C.F.R. 240.13a-15(f). |
| 10. Exchange Act Rule 13a-15(c) requires management—together with the |
| participation of principal executive and principal financial officers (or persons performing similar |
| functions)—to evaluate the effectiveness of ICFR as of the end of each fiscal year. See 17 C.F.R. |
| 240.13a-15(c). Under Rule 13a-15(c), management may satisfy its obligations by conducting an |
| evaluation in accordance with interpretive guidance issued by the Commission in Release |
| No. 34-55929, Commission Guidance Regarding Management’s Report on Internal Control Over |
| Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (the |
| “2007 Guidance”). |
| 11. Item 308 of Regulation S-K requires management to provide an annual report that |
| contains its assessment of the effectiveness of ICFR and any material weakness in ICFR. Under |
| Item 308, “[m]anagement is not permitted to conclude that the registrant’s [ICFR] is effective if |
| there are one or more material weaknesses in the registrant’s [ICFR].” 17 C.F.R. 229.308. |
| |
| 2 Rule 13a-15(c) applies to issuers whose securities are registered under Section 12 of the |
| Exchange Act and who are required either to file annual reports under Section 13(a) or 15(d) of |
| the Exchange Act for the prior fiscal year or filed an annual report for the prior fiscal year. |
| 4 |
| 12. Item 308 of Regulation S-K further instructs that the registrant “must maintain |
| evidential matter, including documentation, to provide reasonable support for management’s |
| assessment of the effectiveness of the registrant’s [ICFR].” The 2007 Guidance similarly states |
| that “[m]anagement is responsible for maintaining evidential matter, including documentation to |
| provide reasonable support for its assessment.” |
| 13. Rule 1-02(a)(4) of Regulation S-X defines categories of ICFR deficiencies based |
| on the severity, as follows: |
| A “material weakness” is a “deficiency, or a combination of deficiencies, in [ICFR] |
| such that there is a reasonable possibility that a material misstatement of the company’s |
| annual or interim financial statements will not be prevented or detected on a timely |
| basis.” See 17 C.F.R. 210.1-02(a)(4) (emphasis added). A misstatement is reasonably |
| possible if the chance of a misstatement is more than remote but less than likely. See |
| 2007 Guidance at 34-35, n. 47 (citing Financial Accounting Standards Board Statement |
| No. 5, Accounting for Contingencies3). |
| A “significant deficiency” is a “deficiency, or a combination of deficiencies, in [ICFR] |
| that is less severe than a material weakness, yet important enough to merit attention by |
| those responsible for oversight of the registrant’s financial reporting.” Id. |
| |
| 14. The “severity of a deficiency in ICFR does not depend on whether a misstatement |
| actually has occurred but rather on whether there is a reasonable possibility that the company’s |
| ICFR will fail to prevent or detect a misstatement on a timely basis.”4 See 2007 Guidance at 35 |
| (emphasis added). |
| 15. Item 308(a)(3) of Regulation S-K requires public companies such as MHR to |
| annually provide a report of management that discloses material weaknesses that have been |
| identified by management. They are not required to publicly disclose significant deficiencies. |
| 16. Exchange Act Rule 13a-14 requires that every Form 10-Q and 10-K include |
| certifications signed by each principal executive and principal financial officer (or persons |
| performing similar functions). See 17 C.F.R. 240.13a-14. The certifying officers must confirm |
| that the Form 10-Q or 10-K does not contain any untrue statement of a material fact or omit to state |
| |
| 3 FASB Statement No. 5 is available at |
| http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220126761&acceptedDis |
| claimer=true. It defines “reasonably possible” as: “The chance of the future event or events |
| occurring is more than remote but less than likely.” FASB No. 5 at 4. It defines “remote” as: |
| “The chance of the future event or events occurring is slight.” Id. |
| |
| 4 See FR-77, Commission Guidance Regarding Management’s Report on Internal Control Over |
| Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (June |
| 27, 2007) (“Commission Guidance”), available at http://www.sec.gov/rules/interp/2007/33- |
| 8810.pdf. |
| |
| 5 |
| a material fact necessary to make the statements made, in light of the circumstances under which |
| such statements were made, not misleading. Id. Ormand certified MHR’s 2011 Form 10-K and |
| March 31, 2012 and June 30, 2012 Forms 10-Q. |
| 17. As detailed further below, MHR engaged Allred's firm to assist its management |
| with the documentation, testing, and evaluation of the company’s ICFR in 2010, 2011, and 2012. |
| Notwithstanding MHR’s reliance on the firm's services, MHR’s management—including Ormand |
| and Krueger—were ultimately responsible for its conclusions about the effectiveness of MHR’s |
| ICFR. |
| ii. MHR’s Rapid Growth and Strained Accounting Resources |
| 18. MHR’s rapid growth strained its accounting resources. For example, MHR grew |
| from $6 million in revenues in 2009 to $23 million in 2010, largely as the result of an $82 million |
| acquisition in February 2010. In connection with the issuance of the external auditor’s report on |
| MHR’s 2010 year-end audit results, Gray informed Ormand, Krueger, and MHR’s Audit |
| Committee in February 2011 that MHR’s accounting department was experiencing “manpower |
| issues” and lacked sufficient personnel to complete all required tasks on a timely basis. |
| 19. Between December 2010 and April 2011, MHR acquired another $70 million in oil |
| and gas properties and leasehold mineral interests. MHR also completed two other acquisitions in |
| April and May 2011 for an aggregate purchase price of approximately $565 million. In 2011, |
| MHR booked over $100 million in revenues—largely as a result of these acquisitions. This rapid |
| growth created a significant burden on MHR’s accounting department. For example, beginning in |
| November 2011 MHR failed to complete its standard monthly close process and began formally |
| closing its books on a quarterly basis with only sporadic monthly closes in 2012. |
| iii. MHR’s ICFR assessment as of December 31, 2011 |
| a. Allred identified MHR’s insufficient accounting staffing as a control deficiency |
| as of December 31, 2011. |
| 20. Allred led consulting engagements to document and test MHR’s ICFR. In February |
| 2012, his firm issued a written report on MHR’s ICFR to certain MHR managers—including |
| Ormand and Krueger—and MHR’s Audit Committee. The report identified problems in MHR’s |
| accounting department, including that the “accounting and financial reporting team has |
| experienced significant delays in preparing financial statements and reports.” As a result, Allred's |
| team could not complete its testing activities within the time period originally scheduled. The |
| report further stated that two balance sheet account reconciliations for the month ending October |
| 2011 were not reviewed and approved in a timely manner and that management review of the |
| consolidated October 2011 financial statements had not been formally documented. |
| 21. As of December 31, 2011, the report identified control deficiencies within MHR’s |
| accounting function, including: (a) instances in which reconciliations were not prepared, reviewed, |
| or approved on a timely basis; (b) failures to document the completion of required monthly |
| management reviews; and (c) significant delays in preparing financial statements and reports due |
| to “inadequate and inappropriately aligned staffing.” The report stated: |
| 6 |
| [T]he potential for error in such a compressed work environment presents |
| substantial risk. With complex financial and reporting structures there are few |
| individuals within the team with the capacity to perform many tasks and there is |
| little time for senior rep orting personnel to review, analyze, and evaluate because |
| they are performing transaction level reporting tasks. (emphasis added) |
| 22. The report concluded, without explanation, that MHR’s staffing deficiency |
| represented only a significant deficiency—rather than a material weakness. The report did not |
| explain how a deficiency that created a “substantial risk” of a financial statement error did not rise |
| to the level of a material weakness, defined as a deficiency in ICFR that creates a reasonable |
| possibility of a material misstatement not being prevented or detected on a timely basis. |
| 23. Krueger and Ormand accepted the assessment that MHR’s insufficient accounting |
| staffing represented a significant deficiency. Both Krueger and Ormand also relied on the absence |
| of an actual identified material error in MHR’s financial statements as evidence that a material |
| weakness did not exist as of December 31, 2011. Neither Krueger nor Ormand prepared any |
| documentary evidence to supplement the documentation created by Allred's team. Consequently, |
| the only documentation that supports MHR management’s assessment of the effectiveness of |
| MHR’s ICFR as of December 31, 2011 is the documentation created by Allred's team and |
| provided to MHR management. |
| 24. Because MHR management concluded that the control deficiency only rose to the |
| level of a significant deficiency, rather than a material weakness, MHR did not publicly disclose |
| the deficiency but instead stated that its ICFR was effective. |
| |
| b. Gray Misapplied the Applicable Standard When Determining the Severity of |
| MHR’s Control Deficiency as of December 31, 2011. |
| 25. Gray failed to conduct the 2011 audit of MHR’s ICFR in accordance with PCAOB |
| Auditing Standards No. 3, Audit Documentation (“AS3”), and No. 5, An Audit of Internal Control |
| Over Financial Reporting That Is Integrated with An Audit of Financial Statements (“AS5”) and |
| improperly approved the issuance of the external auditor’s audit report containing an unqualified |
| opinion on MHR’s ICFR as of December 31, 2011. |
| 26. In February 2012, a year after first raising concerns over MHR’s accounting |
| “manpower issues,” Gray reported to MHR’s Audit Committee a “[d]elay in closing the books due |
| to [the] Company manpower shortage relative to [the] volume of financial activity.” This resulted |
| in “[n]umerous top-side adjustments” creating significant audit inefficiencies. |
| 27. Gray, as engagement partner, further reported that: |
| We believe there is not adequate internal control over financial reporting due to |
| inadequate and inappropriately aligned staffing. This factor increases the |
| possibility of a material error occurring and being undetected and reduces the |
| Company’s ability to file its 10-K on time. |
| 7 |
| 28. Despite assessing that there was “not adequate internal control over financial |
| reporting due to inadequate and inappropriately aligned staffing,” Gray concluded that this control |
| deficiency rose to the level of a significant deficiency—rather than a material weakness. The audit |
| work papers failed to adequately document the basis for this conclusion. They also failed to |
| explain how the fact that MHR did “not [have] adequate internal control over financial reporting” |
| was not indicative of a material weakness, defined as weakness that creates a reasonable possibility |
| (i.e., “more than remote but less than likely”) of a material error not being detected or corrected on |
| a timely basis. |
| 29. When reporting audit results on the effectiveness of MHR’s ICFR as of |
| December 31, 2011 to MHR’s Audit Committee, Gray identified MHR’s “inadequate and |
| inappropriately aligned staffing” as a significant deficiency rather than as a material |
| weakness. |
| 30. Gray determined that MHR’s inadequate and inappropriately aligned accounting |
| staff did not constitute a material weakness because, among other things: (i) the audit work did not |
| identify material errors for the reporting period, and (ii) he understood that MHR had recently |
| hired additional accounting staff and that the existing staff, while overworked, was competent. |
| 31. However, this was a misapplication of the applicable standards. As the engagement |
| partner who led the audit of the effectiveness of MHR’s ICFR, Gray improperly applied the |
| definitions of “material weakness” and “significant deficiency” codified in Rule 1-02(a)(4) of |
| Regulation S-X and Appendix A of AS 5. The severity of a deficiency does not depend on |
| whether an error actually occurred. AS 5, ¶ 64. |
| 32. Notwithstanding the systemic importance of an entity-level control, the written |
| analysis was deficient for two reasons. First, it failed to apply the appropriate standard for defining |
| a material weakness. Second, it failed to evaluate the severity of MHR’s control deficiency in |
| accordance with AS 5 because it did not adequately consider: (a) the misstatement that might result |
| from having insufficient accounting staff; (b) MHR’s ability to prepare accurate financial |
| statements based on the possible future consequences of the deficiency; (c) the amounts and |
| transactions exposed to the deficiency; or (d) the volume of activity exposed to the deficiency that |
| occurred in the current period or that is expected in future periods. AS 5, ¶¶ 62-70. |
| 33. Gray also failed to adequately document the basis for his conclusion. Under AS 3, |
| “[a]udit documentation should be prepared in sufficient detail to provide a clear understanding of |
| its purpose, source, and the conclusions reached.” AS 3, ¶ 4. “The auditor must document the |
| procedures performed, evidence obtained, and conclusions reached with respect to relevant |
| financial statement assertions.” AS 3, ¶ 6. “Audit documentation must clearly demonstrate that the |
| work was in fact performed.” AS 3, ¶ 6. |
| 34. The only written audit documentation assessing the severity of MHR’s accounting |
| staffing deficiency was a summary spreadsheet purportedly identifying all MHR control |
| deficiencies for the 2011 reporting period. It documented the conclusion that MHR’s control |
| deficiency did not rise above a significant deficiency for three main reasons: (i) MHR hired a |
| controller and several senior level accountants during the latter part of 2011; (ii) MHR was in the |
| 8 |
| process of integrating two major acquisitions completed in the second quarter of 2011 and the |
| delay in the close process was mostly due to integration across entities; and (iii) individual analysis |
| of two identified audit adjustments did not support a conclusion of a more severe control |
| deficiency. |
| 35. In doing so, Gray failed to evaluate MHR’s deficiencies in accordance with AS 5. |
| Auditors “must evaluate the severity of each control deficiency that comes to his or her attention to |
| determine whether the deficiencies, individually or in combination, are material weaknesses as of |
| the date of management’s assessment.” AS 5, ¶ 62 (emphasis in original). |
| c. MHR’s Management Retained Ultimate Responsibility for Evaluating the |
| Severity of Any Control Deficiencies. |
| |
| 36. MHR disclosed in its 2011 Form 10-K that: |
| Under the supervision and with the participation of our management, including our |
| Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness |
| of our internal controls over financial reporting as of the end of the period covered |
| by this report based on the framework in “Internal Control – Integrated |
| Framework” iss ued by the Committee of Sponsoring Organizations of the |
| Treadway Commission. Based on that assessment, our Chief Executive Officer and |
| Chief Financial Officer concluded that our internal controls over financial reporting |
| were effective as of December 31, 2011 to provide reasonable assurance regarding |
| the reliability of our financial reporting and the preparation of our financial |
| statements for external purposes in accordance with U.S. generally accepted |
| accounting principles. |
| See MHR Fiscal Year 2011 Form 10-K at p. F-53. |
| 37. When determining whether a deficiency constitutes a material weakness, |
| management should consider all relevant information,5 including information provided by outside |
| parties. While MHR management retained ultimate responsibility for assessing MHR’s ICFR, |
| including evaluating the severity of any deficiencies in ICFR,6 the information provided by Allred |
| and Gray was relevant to its assessment. In addition, MHR’s management was responsible for |
| maintaining documentation to support its assessment.7 |
| 38. Ormand and Krueger had knowledge of the stress placed on MHR’s accounting |
| department as a result of its rapid growth. Nonetheless, they did not sufficiently consider Allred’s |
| or Gray’s findings in analyzing the severity of the control deficiencies, or the appropriateness of |
| Allred’s and Gray’s conclusions in light of all other information which they were aware. |
| |
| 5 2007 Guidance at 37. |
| |
| 6 17 CFR 240.13a-15(c). |
| |
| 7 Instruction No. 2 to Item 308 of Regulation S-K. |
| 9 |
| Additionally, as discussed further below, MHR failed to maintain required evidential matter— |
| including documentation—providing reasonable support for its assessment. |
| d. MHR’s Documentation Indicated That Krueger Failed to Review MHR’s Q3 |
| 2011 Form 10-Q on a Timely Basis. |
| 39. One of the consequences of MHR’s staffing deficiency resulted in Krueger signing |
| off on MHR’s third quarter 2011 Form 10-Q five days after the Form 10-Q was filed with the |
| Commission. Because Krueger was the CAO—and highest ranking officer with an accounting |
| background—responsible for reviewing MHR’s periodic reports prior to filing them with the |
| Commission, MHR had no compensating control8 in its ICFR. |
| e. MHR Failed to Adequately Document its Assessment of ICFR. |
| 40. Item 308 of Regulation S-K requires and the 2007 Guidance states that |
| management must maintain documentation to provide reasonable support for its assessment of the |
| effectiveness of the company’s ICFR. |
| 41. However, in its year-end 2011 assessment, MHR failed to generate or maintain |
| documentation supporting its basis for determining the severity of its accounting staff deficiency. |
| It thus did not adequately document its basis for concluding that the deficiency was a significant |
| deficiency—rather than a material weakness. This was true even though MHR management, and |
| Ormand and Krueger specifically, had been informed that: (a) there was a “substantial risk” of an |
| error (by Allred); and (b) “there is not adequate internal control over financial reporting” (by |
| Gray). |
| 42. The control deficiency caused by MHR’s inadequate accounting staffing was |
| particularly important because it was an entity-level control. Because it was an important control |
| that could affect other controls throughout the company, it needed to be fully understood and |
| defined in order to determine the nature, extent, and severity of the deficiencies. |
| f. MHR Management Misapplied the Appropriate Definition When Determining |
| the Severity of MHR’s Control Deficiency as of December 31, 2011. |
| 43. Ormand and Krueger failed to apply the appropriate standard when determining the |
| severity of MHR’s internal control deficiency. As detailed above, while actual errors may inform |
| assessments of control deficiencies, the presence of an actual error is not a prerequisite to |
| concluding that a material weakness exists. Rather, management is to consider whether there is a |
| reasonable possibility that a material misstatement will not be timely detected or prevented. In |
| addition, the effectiveness of a company’s ICFR is assessed at a specific point in time—as of the |
| end of the fiscal reporting period. Planned or anticipated remedial efforts are irrelevant to the |
| analysis. |
| |
| 8 “Compensating controls are controls that serve to accomplish the objective of another control |
| that did not function properly, helping to reduce risk to an acceptable level.” 2007 Guidance at |
| n. 49. |
| 10 |
| 44. Ormand and Krueger improperly assessed the severity of the control deficiency |
| caused by MHR’s “inadequate and inappropriately aligned staffing” as of December 31, 2011. |
| MHR management should have assessed whether a reasonable possibility existed that a material |
| misstatement of the company’s financial statements would not be prevented or detected on a timely |
| basis. |
| iv. MHR’s Disclosure of the Existence of Material Weaknesses |
| a. MHR Restates its June 30, 2012 Form 10-Q and Discloses Material |
| Weaknesses. |
| 45. On November 14, 2012, MHR filed an amended Form 10-Q restating its June 30, |
| 2012 financial statements to correct a material error related to stock-based compensation and |
| certain other errors. MHR disclosed that management concluded that material weaknesses existed |
| as of June 30, 2012 related to (i) a lack of sufficient, qualified personnel to design and manage an |
| effective control environment; (ii) MHR’s period-end financial reporting process; and (iii) controls |
| over calculation and review of share-based compensation expense. MHR also disclosed |
| management’s plans to remediate and improve the company’s ICFR and disclosure controls and |
| procedures. |
| 46. Before restating, MHR’s Audit Committee met on October 19, 2012 to understand |
| how the company had materially understated option based compensation expense in the second |
| quarter. Ormand reported that the person responsible for reviewing the calculation signed off |
| without reviewing it. Also at that meeting, Gray “restated that the root cause [of the error] was |
| inadequate and inappropriately aligned staffing of the accounting department.” |
| b. MHR’s Disclosed Material Weaknesses in its September 30, 2012 Form 10-Q. |
| 47. On November 13, 2012, MHR’s Audit Committee met and approved the |
| company’s Form 10-Q for the third quarter-ended September 30, 2012. That filing disclosed the |
| same three material weaknesses existed at September 30, 2012 that had been disclosed in MHR’s |
| amended June 30, 2012 Form 10-Q. |
| c. MHR Delinquently Files its 2012 Form 10-K and Discloses Material |
| Weaknesses. |
| 48. MHR delinquently filed its 2012 Form 10-K on June 14, 2013. In it, MHR |
| disclosed fourteen material weaknesses as of December 31, 2012, including that “[i]n certain areas |
| the Company did not have sufficient personnel with an appropriate level of knowledge, experience |
| and training commensurate with the growth of the Company's corporate structure and financial |
| reporting requirements” and not upgrading “resources around internal audit, tax, financial reporting |
| and certain accounting areas.” |
| 49. MHR’s internal analysis of the material weaknesses posed by its understaffed |
| accounting department, as disclosed in its 2012 Form 10-K, recognized that the “significant |
| deficiency identified at year-end 2011 does not appear[] to be remediated. Personnel do not appear |
| to have the competence and training necessary for their assigned level of responsibility.” |
| 11 |
| v. MHR Remediates Inadequate and Inappropriately Aligned Staffing in the |
| Third Quarter 2013 |
| 50. On November 8, 2013, MHR filed its Form 10-Q for the quarter-ended September |
| 30, 2013. While concluding that the Company’s ICFR was not effective as of September 30, 2013, |
| management concluded that the material weakness that existed at quarter-end concerning |
| accounting staff inadequacies had subsequently been remediated. |
| D. VIOLATIONS |
| i. Allred Caused Ormand’s and Krueger’s Violations of Rule 13a-15(c) of the |
| Exchange Act. |
| |
| 51. As a result of the conduct described above, Allred caused Ormand and Krueger |
| to violate Rule 13a-15(c) of the Exchange Act, which requires an issuer’s management to evaluate, |
| with the participation of the principal executive and principal financial officers (or persons |
| performing similar functions) the effectiveness of the issuer’s ICFR as of the end of each fiscal |
| year. |
| |
| ii. Allred Caused MHR to Violate Sections 13(a) of the Exchange Act and Rules |
| 13a-1and 13a-15(a) thereunder. |
| |
| 52. As a result of the conduct described above, Allred caused MHR to violate |
| Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, which require issuers with classes |
| of securities registered pursuant to Section 12 registrants to file periodic reports with the |
| Commission and Rule 13a-15(a) which requires issuers to maintain ICFR. |
| |
| IV. |
| |
| In view of the foregoing, the Commission deems it appropriate to impose the sanctions |
| agreed to in Respondent’s Offer. |
| |
| Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: |
| |
| A. Respondent shall cease and desist from committing or causing any violations of and |
| any future violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-15(a) and (c) |
| thereunder. |
| |
| B. Respondent shall, within 14 days of the entry of this Order, pay a civil money |
| penalty in the amount of $15,000 to the Securities and Exchange Commission for transfer to the |
| general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely |
| payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. |
| |
| Payment must be made in one of the following ways: |
| |
| 12 |
| (1) Respondent may transmit payment electronically to the Commission, which |
| will provide detailed ACH transfer/Fedwire instructions upon request; |
| |
| (2) Respondent may make direct payment from a bank account via Pay.gov |
| through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or |
| |
| (3) Respondent may pay by certified check, bank cashier’s check, or United |
| States postal money order, made payable to the Securities and Exchange |
| Commission and hand-delivered or mailed to: |
| |
| Enterprise Services Center |
| Accounts Receivable Branch |
| HQ Bldg., Room 181, AMZ-341 |
| 6500 South MacArthur Boulevard |
| Oklahoma City, OK 73169 |
| |
| Payments by check or money order must be accompanied by a cover letter identifying |
| Allred as a Respondent in these proceedings, and the file number of these proceedings; a copy of |
| the cover letter and check or money order must be sent to David L. Peavler, Division of |
| Enforcement, Securities and Exchange Commission, 801 Cherry Street, Suite 1900, Fort Worth, |
| Texas 76102. |
| |
| C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be |
| treated as penalties paid to the government for all purposes, including all tax purposes. To |
| preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor |
| Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any |
| award of compensatory damages by the amount of any part of Respondent’s payment of a civil |
| penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a |
| Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting |
| the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the |
| Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed |
| an additional civil penalty and shall not be deemed to change the amount of the civil penalty |
| imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a |
| private damages action brought against Respondent by or on behalf of one or more investors based |
| on substantially the same facts as alleged in the Order instituted by the Commission in this |
| proceeding. |
| |
| V. |
| |
| It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section |
| 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by |
| Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other |
| amounts due by Respondent under this Order or any other judgment, order, consent order, decree |
| or settlement agreement entered in connection with this proceeding, is a debt for the violation by |
| 13 |
| Respondent of the federal securities laws or any regulation or order issued under such laws, as set |
| forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). |
| |
| By the Commission. |
| |
| |
| |
| Brent J. Fields |
| Secretary |
| |
| |
| |
| |
