In a recent post (here), I wrote about the September 18, 2007 petition submitted to the SEC by several environmental groups, seeking to persuade the SEC to institute rules requiring companies to assess and fully disclose their financial risks from climate change. These groups clearly want to use the SEC’s disclosure requirements to pressure companies on climate change related issues. But while these groups want to increase companies’ disclosure, existing disclosure requirements already require companies to make environmental disclosures (refer here), and the SEC has recently shown an increased willingness to police environmental financial disclosures and to hold corporate officials responsible for disclosure violations.
In connection with the most recent environmental disclosure-related enforcement proceeding, the SEC announced on June 29, 2007 (here) its settlement with several former ConAgra Foods executives. The enforcement action pertained to a variety of different financial disclosures, but among other things the SEC specifically alleged that the former ConAgra officials “reversed $35 million in ConAgra’s excess legal and environmental reserves to income”; that ConAgra’s then-CFO should have know that the “accounting for $23.8 million of this reduction was not in accordance with GAAP”; and that the company’s 10-Q reflecting the reserve reduction “misleadingly failed to disclose that at least $23.8 million of these reserves were excess in prior periods.” These issues were among a variety of improper practices that the SEC alleged “resulted in ConAgra materially misstating its financial performance.” The former CFO agreed to pay a disgorgement of $425,531, as well as interest and other forfeitures and penalties.
The ConAgra settlement joins two other settlements that the SEC has entered in recent years involving environmental financial disclosures. Perhaps the most noteworthy of these prior actions is the accounting fraud proceeding the SEC brought against Safety-Kleen and several of its former top officials. As described in the SEC’s September 12, 2002 press release announcing the entry of judgment (here), the SEC alleged that the former officials engaged in a number of improper accounting adjustments to avoid an anticipated earnings shortfall.
As detailed in the SEC’s complaint (here), among the accounting improprieties alleged was the Safety-Kleen officials’ creation of “ficticious income” by “reducing several environmental reserve accounts.” The former CFO later pled guilty to criminal securities and bank fraud.
In another recent proceeding involving environmental financial disclosures, the SEC announced on November 29, 2006 (here) the institution and settlement of proceedings against Ashland, Inc. and its former Director of Environmental Remediation. The SEC found that the former official had improperly reduced Ashland’s estimates for environmental remediation at numerous chemical refinery sites. The reductions decreased Ashland’s total reserve estimates by approximately $160 million in both 1999 and 2000. The SEC found that there was no reasonable basis for the reduction, which had the effect of materially understating Ashland’s environmental remediation reserves and overstating net income. Ashland agreed to certain internal control changes and the former official was prohibited from further involvement in Ashland’s financial reporting. (I previously wrote about the Ashland case here because of the involvement in the case of a corporate whistleblower.)
As noted in a July 26, 2007 Jenner & Block memorandum entitled “Recent SEC Enforcement of Environmental Financial Disclosure” (here),
The SEC seems to have turned its attention on environmental financial disclosures and corporations and corporate executives should take special note of the heightened attention that the SEC is now giving to these disclosures. Although the SEC has not announced any new guidelines or initiatives, corporations and corporate executives should certainly be cognizant of the increased number of civil and criminal actions being brought by the SEC against corporations and officials who fail to observe existing environmental reporting requirements.
The SEC’s “heightened attention” to environmental disclosure issues preceded the recent petition in which the environmental groups seek increased climate change related disclosures. In other words, the SEC has already demonstrated its willingness to police existing environmental disclosure requirements. While the existing requirements do not explicitly address climate change issues or requirements, corporate officials should, as the Jenner memo put it, “certainly be cognizant” of the increased vigilance the SEC has shown on environmental disclosure issues, even in the absence of any new guidelines or initiatives. Even if, as seem likely, the SEC takes no action on the environmental groups’ climate change disclosure petition, reporting companies will still face potential scrutiny regarding their environmental disclosures relating to climate change issues.
On a related note, Hunton & Williams has published an October 2007 memorandum entitled “Climate Change Now on Court Dockets” (here) summarizing pending climate change-related litigation.