EDITORS NOTE: On November 15 2012, one of the hottest Canadian energy stocks called Poseidon Concepts announced horrible quarterly results that cut the stock from $13.25 that day to open at $6.  I sold it right away that next day as there is never just one cockroach.  It would go right off the board–to zero within months.  Sadly, I was one of the people who looked management in the eye and believed them when they said earlier in the year that their increasingly long dated receivables were good. The company sold frack water tanks.  It remains the largest loss in the OGIB portfolio history.  The Alberta Securities Commission has scheduled a first hearing in its case for April 2.

By: Mike Caswell
Reprinted with Permission from Canjex Publishing
(originally appeared February 9 2015 at www.stockwatch.com)

The U.S. Securities and Exchange Commission and the Alberta Securities Commission have filed parallel cases stemming from the 2013 collapse of Poseidon Concepts Corp., a now defunct oil services company. The SEC claims that one of the company’s senior executives, Joseph Kostelecky, orchestrated a financial fraud that involved recording about $100-million (U.S.) in improper revenues. The revenues were based on contracts that were uncollectible or did not even exist, according to the SEC.

The allegations come about two years after Poseidon, a former Toronto Stock Exchange listing, collapsed amidst a massive revenue restatement. The company reported on Feb. 14, 2013, that between $95-million and $106-million of its revenue for the first nine months of 2012 was incorrect. The resulting restatement wiped out most of the company’s $148-million in revenue for the period. The stock, which had traded as high as $16.90 in 2012, hit 27 cents that month. Two months later the company delisted from the TSX, and it is now defunct.

The charges are contained in a civil complaint that the SEC filed on Friday, Feb. 6, in the District of North Dakota. The complaint names as a defendant Mr. Kostelecky, a 53-year-old North Dakota resident who served as an executive vice-president at Poseidon. He was in charge of the company’s sales and operations in the U.S., where it generated most of its revenues. He supervised about 40 employees and was the company’s only U.S. executive.

As part of his job, Mr. Kostelecky personally negotiated a substantial number of sales contracts with Poseidon’s U.S. customers, the SEC says. He gave explicit directions to members of the U.S. accounting staff about recording revenues from those contracts. Many of the arrangements he purportedly had with customers did not include any formal documentation, according to the complaint.

The problems, as described by the SEC, began to appear in the third quarter of 2012. The company’s Canadian office had hired a new operations controller, and that controller started to seriously question Mr. Kostelecky about whether some of the company’s receivables were collectable. Those receivables, which were called “take-and-pay” contracts, were becoming increasingly large and dated, the complaint states. Mr. Kostelecky, however, maintained that the customers had signed contracts.

This did not satisfy the controller, who started to contact customers directly. According to the SEC, she quickly discovered some substantial inconsistencies, the most blatant being that the company appeared to have no agreement at all with some customers. The seriousness of the situation was best described in an e-mail she wrote to Poseidon’s chief financial officer on Aug. 30, 2012. The message, as quoted by the SEC, read in part: “In a lot of cases I have been talking to customers who we have millions of dollars in receivable balances who have no idea who Poseidon is. … I have absolutely no confidence that we will be paid any of the [take-or-pay] contract revenue that we have entered, (likely in the 60 million dollar range).”

The fraud, as described by the SEC, was fully exposed when the company’s board formed a special committee to look into the receivables. The committee hired Ernst & Young to examine the situation. Based on Ernst & Young’s findings, the company reported that most of its revenue for the nine months ended Sept. 30, 2012, should not have been recorded in its financial statements.

The SEC’s complaint seeks appropriate civil penalties, a permanent officer and director ban, and injunctions barring future violations. Mr. Kostelecky settled the case simultaneously with the SEC filing it, agreeing to the ban, injunction and to pay a $75,000 (U.S.) civil penalty. He did not admit to any wrongdoing.

In addition to the SEC case, Mr. Kostelecky is among the respondents in an administrative action the ASC filed on Friday, Feb. 6. The ASC case also names the company’s former chief executive officer, Lyle Michaluk; its former chief financial officer, Matthew MacKenzie; and its former chief operating officer, Clifford Wiebe. The ASC says that Mr. Michaluk and Mr. MacKenzie falsely certified that the company’s financial statements were correct. Mr. Wiebe acquiesced in the company’s failure to comply with its disclosure requirements, according to the regulator. A hearing has not yet been scheduled in that case.

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