- The Washington Times - Tuesday, August 3, 2004

The Securities and Exchange Commission yesterday concluded an investigation of Halliburton Co. without charging Vice President Dick Cheney, its former chief executive, although it extracted a $7.5 million settlement from the company and charged two Cheney subordinates with misleading investors.

After a two-year investigation in which the commission staff took sworn testimony from Mr. Cheney and 22 other witnesses and reviewed more than 340,000 company documents, the SEC found the company did not disclose an important accounting change that inflated reported income by 46 percent in 1998, when Mr. Cheney headed the company.

The decision not to pursue the vice president, while charging two of his subordinate finance officers, raises questions of fairness, coming at a time when the CEOs of Enron, WorldCom, Martha Stewart Living Omnimedia and other companies are facing criminal charges and jail terms for their parts — both large and small — in securities fraud cases, former federal prosecutors say.

“What we’ve learned over the last few years from Enron to Arthur Anderson to WorldCom is when investors are uninformed, you have disasters,” said Roscoe Howard, a former Bush Justice Department prosecutor.

In other SEC and Justice Department cases, “what they really want are for CEOs to be made more responsible for what happens in their companies,” he said. “There was a time when CEOs basically acted with a sense of plausible deniability” about the details of complicated accounting transactions, but that time has passed.

SEC enforcement director Steven Cutler defended the agency’s light-handed treatment of Mr. Cheney, who participated in teleconference calls to investors where misleading financial information was provided, though the SEC credited him with “cooperating fully” in the investigation.

“We brought the charges that we believed were appropriate and warranted by the evidence,” Mr. Cutler said.

A key distinction with the government’s case against Enron CEOs Kenneth L. Lay and Jeffrey Skilling, he said, is that the accounting change at issue in the Halliburton case was not in itself illegal or fraudulent — only the failure to disclose it to investors.

The SEC has treated CEOs in similar situations the same way, he said, pointing to a case the SEC brought against Edison Schools in 2002, where the company but not the CEO was charged for failing to disclose a legal accounting change to investors.

In the Halliburton case, the change turned what had been operating losses into major income gains and profits in five quarters of 1998 and 1999 when Wall Street expectations for quarterly earnings were growing increasingly grandiose.

In a move to smooth out and brighten the earnings picture from quarter to quarter, Halliburton booked uncollected revenues that it expected to collect to offset losses in some quarters.

Before that, the company had booked revenues from uncollected billings for cost overruns on construction projects only during the quarter when the bills were paid, and had disclosed that to investors.

The result was the company’s pretax income appeared 46 percent, or $88 million, higher than it otherwise would have been during 1998 in the company’s 10K filing with the SEC, the complaint charges. Reported income for five quarters in 1998 and 1999 was from 5.7 percent to 24.8 percent higher.

The SEC said Halliburton Chief Financial Officer Gary V. Morris and controller Robert C. Muchmore Jr. were responsible for the accounting change and scripted the teleconference calls with investors.

Mr. Muchmore and Halliburton agreed to fines in a cease-and-desist order without admitting guilt. The case against Mr. Morris is proceeding in court.

“Mr. Morris intends to defend himself vigorously,” said Tim McCormick, Mr. Morris’ attorney. An attorney for Mr. Cheney said he was not involved in the accounting change or the decision not to disclose it.

Accounting changes that have such a major impact on earnings are normally cleared or even authorized by the CEO, securities lawyers say.

Even in some cases where the CEOs pleaded ignorance on accounting matters, the SEC has held them to task. In the Enron case, for example, Mr. Lay is being charged for “recklessly” not knowing that statements he made to investors were misleading.

“Politics may have spared Cheney from necessary enforcement action,” said Joan Claybrook, president of Public Citizen, founded by Ralph Nader. “The CFO and controller both reported to Cheney, and he ultimately should be held responsible.”

She added that the settlement with Halliburton is too small in light of the company’s $120 million overstatement of revenues at a time when it had losses in its oil services business.

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