Poseidon, based in Calgary, was a fast-growing company that supplied fluid storage tanks for drilling companies.MIKE FUENTES
A former executive of oil services company Poseidon Concepts Corp. has agreed to pay $75,000 (U.S.) to settle allegations he participated in a financial fraud that overstated the failed company's revenue by $100-million (Canadian) in 2012.
The U.S. Securities and Exchange Commission announced a settlement Friday with Joseph Kostelecky, who was executive vice-president at Poseidon in charge of the company's U.S. operations, where most of the overstated revenue was originated.
Also Friday, the Alberta Securities Commission announced allegations against Mr. Kostelecky and three other Poseidon executives, including former chief executive officer Lyle Michaluk, former chief financial officer Matthew MacKenzie and former chief operating officer Clifford Wiebe.
The Alberta regulator has accused the four men of breaching disclosure rules, and accuses Mr. Michaeluk and Mr. MacKenzie of signing false financial statement certifications.
The ASC also accuses Mr. Kostelecky of fraud and failing to maintain proper financial records.
The SEC said in its complaint, filed in U.S. District Court in North Dakota, that Mr. Kostelecky was among those responsible for wrongly booking $100-million in revenue for contracts that were "either non-existent or uncollectible."
The SEC said Mr. Kostelecky directed accounting staff to record revenue for inadequately documented transactions and gave "false assurances" to several members of Poseidon's management in Canada that the U.S. transactions were valid.
Poseidon, based in Calgary, was a fast-growing company that supplied fluid storage tanks for drilling companies. The company disclosed in early 2013 that it had to massively restate its financial statements for the first nine months of 2012, eliminating between $95-million and $106-million of $148-million of total revenue it had previously reported for the period.
The company's share price collapsed when the restatement was announced, and Poseidon was later delisted from the Toronto Stock Exchange. The company eventually filed for bankruptcy.
Mr. Kostelecky, 53, lives in Dickinson, N.D., where Poseidon had an office.
The SEC complaint said Mr. Kostelecky "knowingly or recklessly" directed U.S. accounting staff to record revenue for take-or-pay contracts without supporting documentation. The contracts gave clients guaranteed access to fluid tanks at a discounted price, but they had to pay even if they didn't take delivery of them.
Mr. Kostelecky was Poseidon's only U.S.-based executive officer and was in charge of all sales and operations for the division, supervising about 40 employees.
The SEC said Mr. Kostelecky either directly negotiated or approved all the U.S. take-or-pay contracts and knew many recorded transactions "simply did not exist or were otherwise uncollectible."
The overstatements from the U.S. division comprised 64 per cent to 72 per cent of Poseidon's total revenue for the first nine months of 2012.
The SEC complaint said the accounting problems came to light in 2012 after Poseidon hired a new operations controller, who began to ask questions about uncollected receivables and whether there were signed contracts for deals. An invoicing clerk told the controller she had kept a list of contracts that were recorded as revenue when she hadn't received a copy of the contract.
The controller started calling clients in the summer of 2012, the SEC complaint says, and discovered many of them had no contract with the company, and some had no idea what Poseidon was. During a series of meetings in September and October, Mr. Kostelecky continued to insist the contracts existed and others had made errors, the SEC said.
Poseidon issued its third-quarter financial statements on Nov. 14 "without adequate adjustments for the inflated take-or-pay revenues and receivables," the SEC complaint said.
Within days, the SEC said an independent director on the Poseidon board learned from the operations controller about large amounts of uncollectible receivables. A special committee of the board was formed and launched an investigation, which led to the restatement.
As part of his settlement with the SEC, Mr. Kostelecky agreed to pay $75,000 (U.S.) in penalties and has been permanently banned from acting as a director or officer of a public company in the United States. He agreed to settle the charges without admitting or denying the SEC's allegations.
The Alberta Securities Commission has scheduled a first hearing in its case for April 2.
Janet McFarland