Drilling and oil exploration firm Patterson-UTI Energy, Inc., announced that an internal investigation has disclosed that upwards of $70 million may have been embezzled from the company by an officer through payment for phantom assets.  According to the company’s press release (here):

[A]s a result of information received by senior management of the Company on November 9, 2005, the Audit Committee of the Board of Directors of the Company has begun an investigation into unauthorized payments made by the Company for assets which were not delivered to the Company. The Audit Committee will engage legal counsel and forensic accountants to conduct the investigation. Based on preliminary findings, it appears that approximately $70 million may have been embezzled from the Company by a former officer over a period of more than five years. Because the investigation is just beginning the Company has not yet made a final determination as to the impact of these developments upon its previous financial results and assessment of internal controls.

The company issued a press release (here) just six days earlier, on Nov. 3, announcing "that John E. Vollmer, Senior Vice President-Corporate Development, has assumed the added responsibilities of Chief Financial Officer. Mr. Vollmer replaces Jonathan D. (Jody) Nelson who has resigned for personal reasons."  What were the personal reasons?  Nelson has not been identified as being involved in the $70 million embezzlement, but it would be difficult to siphon off that amount of money — even in a company with over $1 billion in annual revenues — without the infolvement of financial executives or, at a minimum, a complete breakdown in the company’s internal controls.  Tom Kirkendall on the Houston’s Clear Thinkers blog has a detailed post (here) on the topic.  (ph)

Mercury Interactive Corp. announced the appointment of a new CEO, CFO, and General Counsel as a result of an internal investigation that turned up substantial problems in reporting by officers of the dates on which options were granted.  According to the company’s press release (here):

From 1995 to the present, there have been forty-nine instances in which the stated date of a Mercury stock option grant is different from the date on which the option appears to have actually been granted. In almost every such instance, the price on the actual date was higher than the price on the stated grant date. These instances represent the overwhelming majority of the grants between January 1996 and April 2002. The misdating occurred with respect to grants to all levels of employees.

Chief Executive Officer Amnon Landan, Chief Financial Officer Douglas Smith, and General Counsel Susan Skaer were each aware of and, to varying degrees, participated in the practices discussed above. Each of them also benefited personally from the practices. While each of these officers asserts that he or she did not focus on the fact that the practices and their related accounting were improper, the Special Committee has concluded that each of them knew or should have known that the practices were contrary to the options plan and proper accounting. While the Special Committee is appreciative of and sympathetic to the far-reaching demands of these executives’ positions during this critical period, missing or overlooking a practice as basic and important as the proper granting of options is not acceptable.

The internal investigation also disclosed that Landan received a $1 million loan from the company in 1999 to fund an options exercise, but no documentation for the loan could be located, although the board approved an extension of the loan and it was ultimately repaid.  Needless to say, that type of disclosure will invite an SEC investigation and a torrent of securities fraud lawsuits.. 

Landan, Smith, and Skaer resigned, and the company will probably have to delay the filing of its quarterly and annual reports due to the internal weaknesses identified in the internal investigation — the press release notes that a timely filing of its Form 10-Q and 10-K is in "serious jeopardy." (ph)

The Wall Street Journal reports (here) that Santo Maggio, the former head of Refco’s securities unit, is cooperating in the government’s investigation of Phillip Bennett, former CEO of Refco who was charged with one count of securities fraud.  It was the revelation of accounting fraud related to receivables on the company’s books for which Bennett was responsible that led to the quick demise of the firm, which had been the largest futures trading firm.  The government charged Bennett in a single count criminal information in order to prevent him from leaving the country, and he has been confined to his Park Avenue apartment since the arraignment.  Under Federal Rule of Criminal Procedure 5.1(c), the government must present its evidence at a preliminary hearing within 20 days of Bennett’s initial appearance unless he consents to an extension or the government obtains a grand jury indictment.  Maggio’s cooperation will be important because the government generally seeks to avoid a preliminary hearing, and a broader indictment is likely. (ph)