SEC Energy Sector Enforcement: Investigation Trends and Priorities

SEC Energy Sector Enforcement: Investigation Trends and Priorities

The energy sector has been under increased scrutiny by the Securities and Exchange Commission (SEC) in recent years. With a focus on environmental, social and governance (ESG) issues, the SEC has ramped up enforcement actions against energy companies related to climate change disclosures, cybersecurity practices, and accounting fraud. Let’s take a look at some of the key trends and priorities driving SEC investigations in the energy industry.

Climate Change Disclosures

One major enforcement priority for the SEC is the accuracy and completeness of climate change disclosures. In 2022, the SEC proposed new rules that would require public companies to provide certain climate-related information in their registration statements and periodic reports, including greenhouse gas emissions and climate-related risks.[1] Although these rules haven’t been finalized yet, the SEC is already aggressively pursuing cases where energy companies may have misled investors about the financial risks posed by climate change or their strategies to reduce emissions.

For example, in 2022 the SEC charged two oil and gas companies, WPX Energy and Anadarko Petroleum, with misleading investors by overstating their efforts to reduce methane emissions. According to the SEC, both companies publicly touted their commitment to reducing emissions but failed to disclose higher rates of methane emissions at some of their operations. WPX agreed to pay a $2 million penalty while Anadarko agreed to pay $17 million.[2]

The SEC also settled charges against mining company Rio Tinto for making misleading claims about the carbon storage capacity of an aluminum smelting technology. Rio Tinto agreed to pay a $1 million penalty.[3] These cases signal that the SEC is closely evaluating the accuracy of climate change statements and will hold companies accountable for “greenwashing.”

Cybersecurity Practices

Another major SEC focus is cybersecurity practices and disclosures in the energy industry. The SEC brought several significant enforcement actions in 2022 related to cybersecurity failures at energy companies.

In one case, the SEC charged pipeline operator Magellan Midstream Partners with failing to disclose a cyberattack that resulted in the misappropriation of confidential customer data. Magellan agreed to pay $2 million to settle the charges.[4]

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The SEC also fined renewable energy company Array Technologies $500,000 for inadequate disclosure controls around a cyberattack. According to the SEC, Array failed to properly evaluate and disclose the attack in its filings.[5]

These cases highlight the SEC’s focus on ensuring that energy companies have proper cybersecurity controls and provide timely and transparent disclosures to investors about cyber incidents. More enforcement actions in this area are likely in 2023.

Accounting Fraud

Accounting fraud remains an ongoing concern for the SEC across all industries, including energy. In 2022, the SEC charged several oil and gas companies with accounting violations related to estimates of oil and gas reserves.

For example, the SEC accused Permian Basin oil producer Magnolia Oil & Gas of overstating its proved reserves in SEC filings. Magnolia agreed to pay a $2.5 million penalty to settle the charges.[6]

The SEC also charged shale drilling company SandRidge Energy with fraudulently overstating its oil and gas reserves. SandRidge consented to a cease-and-desist order and paid a $5 million penalty.

These cases indicate the SEC is closely scrutinizing reserve estimates and other metrics that could artificially inflate company valuation. Expect more enforcement efforts aimed at fraudulent accounting practices in 2023.

Insider Trading

Insider trading also remains an ongoing focus for the SEC across the energy sector. In 2022, the SEC charged former investment banker Brijesh Goel with insider trading ahead of a acquisition of Houston-based oil and gas company Buckeye Partners. Goel allegedly obtained confidential information about the deal from his employer and purchased Buckeye securities, profiting over $280,000 when the deal was announced. The SEC is seeking disgorgement of ill-gotten gains from Goel.

This case demonstrates the SEC’s commitment to rooting out insider trading, especially related to mergers and acquisitions which are common in the energy industry. Information on deals often leaks, tempting insiders to profit illegally.

Microcap Fraud

The SEC also continues to be vigilant about fraud and manipulation schemes involving microcap companies, including those in the energy industry. Microcap companies often have limited assets and operations, making them targets for stock manipulation.

In 2022, the SEC suspended trading in the securities of microcap company SunHydrogen after questions arose about the accuracy of SunHydrogen’s press releases related to its hydrogen fuel cell technology. This action was aimed at protecting investors from potentially manipulative trading.

Expect the SEC to continue monitoring microcap energy companies closely for signs of fraudulent behavior like stock promotion schemes, misleading statements, and market manipulation.

Key Takeaways

In summary, SEC enforcement priorities in the energy sector include:

• Scrutinizing climate change disclosures and emissions claims
• Evaluating cybersecurity practices and incident disclosure
• Targeting accounting fraud and reserve estimate manipulation
• Pursuing insider trading related to mergers and acquisitions
• Monitoring microcap companies for fraud and manipulation

Energy companies should ensure they have robust controls around financial reporting, cybersecurity, and disclosure procedures. Failing to accurately disclose risks or misconduct could lead to SEC enforcement actions, penalties, and reputational damage.

With climate change and ESG rising as priorities under SEC Chair Gary Gensler, energy companies will continue to face heightened scrutiny. Understanding the SEC’s areas of focus can help inform risk management, compliance and disclosure strategies.

References

1. SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors
2. SEC Charges Two Oil and Gas Companies with Misleading Statements About Climate Commitments
3. Rio Tinto Charged With Fraud Over Misleading Climate-Related Disclosures
4. SEC Charges Pipeline Operator With Failing to Disclose Cybersecurity Incident
5. SEC Charges Renewable Energy Company With Inadequate Internal Accounting Controls Related to Cybersecurity
6. SEC Charges Oil and Gas Company and Former CEO With Overstating Proved Reserves
7. SEC Charges Shale Drilling Company and Former CEO With $480 Million Fraudulent Scheme to Overstate Oil and Gas Reserves
8. SEC Charges Former Investment Banker With Insider Trading Ahead of Energy Acquisition
9. SEC Suspends Trading in Securities of Hydrogen Fuel Cell Company