# UNITED STATES OF AMERICA

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URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3Aefc0e560585a9eb9

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 100154 / May 15, 2024
ADMINISTRATIVE PROCEEDING
File No. 3-17582
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In the Matter of
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Weatherford International PLC, f/k/a
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Weatherford International LTD., James :
Hudgins, CPA, and Darryl Kitay, CPA :
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Respondents.
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ORDER APPROVING PLAN
OF DISTRIBUTION

ADMINISTRATIVE PROCEEDING
File No. 3-17628

In the Matter of
Ernst & Young LLP, Craig R.
Fronckiewicz, CPA, and Sarah E.
Adams, CPA
Respondents.

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On September 27, 2016, the Commission issued an Order Instituting Public
Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act
of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the
Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a
Cease-and-Desist Order (the “Weatherford Order”)1 against Weatherford International PLC,
f/k/a/ Weatherford International LTD. (“Weatherford”), James Hudgins, CPA, and Darryl Kitay,
CPA (collectively, the “Weatherford Respondents”). In the Weatherford Order, the Commission
found that, between 2007 and 2012, Weatherford, a large multinational provider of oil and
natural gas equipment and services, issued false financial statements that inflated its earnings by
over $900 million in violation of Generally Accepted Accounting Principles (“GAAP”). As a
result, Weatherford was forced to restate its financial statements on March 8, 2011, and again in
February and July 2012. As a result of the conduct described in the Weatherford Order, the
1

Securities Act Rel. No 10221 (Sept. 27, 2016).

Commission ordered the Weatherford Respondents to pay a total of $140,364,067 in
disgorgement, prejudgment interest, and civil money penalties. Pursuant to Section 308(a) of the
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) the Weatherford Order created a Fair Fund for
distribution of the amounts ordered to harmed investors.
On October 18, 2016, the Commission issued an Order Instituting Public Administrative
and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange
Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and
Imposing Remedial Sanctions and a Cease-and-Desist Order (the “E&Y Order” and together
with the Weatherford Order, the “Orders”)2 against Ernst & Young LLP, Craig R. Fronckiewicz,
CPA, and Sarah E. Adams, CPA (collectively, the “E&Y Respondents” and together with the
Weatherford Respondents, the “Respondents”). According to the E&Y Order, the E&Y
Respondents violated the federal securities laws and engaged in improper professional conduct
while serving as the external auditor, coordinating (i.e., signing) partner, and tax partner,
respectively for Weatherford in connection with its 2007-2010 financial statements. As a result
of this conduct, the Commission ordered the E&Y Respondents to pay a total of $11,840,107 in
disgorgement, prejudgment interest, and civil money penalties to the Commission, and created a
Fair Fund, pursuant to Section 308(a) of the Sarbanes-Oxley.
On November 30, 2017, the Commission issued an Order consolidating the Weatherford
and Ernst & Young Fair Funds into a single Fair Fund for distribution to harmed investors, for a
total Fair Fund in the amount of $152,204,174 (the “Fair Fund”).3
On August 2, 2018, the Secretary, pursuant to delegated authority, issued an order
appointing Miller Kaplan Arase LLP as the Tax Administrator of the Fair Fund.4
On July 16, 2020, the Division, pursuant to delegated authority, issued an order
appointing Epiq Systems, Inc. as the Fund Administrator of the Fair Fund and setting the bond
amount.5
On November 17, 2022, the Division, pursuant to delegated authority, published a Notice
of Proposed Plan of Distribution and Opportunity for Comment (“Notice”),6 pursuant to Rule
1103 of the Commission’s Rules on Fair Fund and Disgorgement Plans (the “Commission’s
Rules”). The Notice advised all interested persons that they may obtain a copy of the proposed
plan of distribution (“Proposed Plan”) from the Commission’s public website at
http://www.sec.gov/litigation/fairfundlist.htm or by submitting a written request to Adriene
Mixon, Esq., Assistant Chief Litigation Counsel, United States Securities and Exchange
Commission, 444 South Flower Street, Suite 900, Los Angeles, CA 90071. All persons who
desired to comment on the Proposed Plan could submit their comments, in writing, no later than
December 19, 2022. The Commission received three public comments during the comment
period (the “Comment Letters”).
2

Exchange Act Rel. No. 79109 (Oct. 18, 2016).
Order Consolidating Fair Funds, Exchange Act Rel. No. 82185 (Nov. 30, 2017).
4
Order Appointing Tax Administrator, Exchange Act Rel. No. 83766 (Aug. 2, 2018).
5
Order Appointing Fund Administrator and Setting Bond Amount, Exchange Act Rel. No. 89333 (July 16, 2020).
6
Exchange Act Rel. No. 96340 (Nov. 17, 2022).
3

2

After considering the Comment Letters received on the Proposed Plan, the Commission
staff and Fund Administrator, recommends that the Proposed Plan be approved without
modification.
After careful consideration, the Commission concludes that the Proposed Plan should be
approved without modification.
I.
A.

Public Comments on the Proposed Plan

By letters dated December 16, 2022, ISS Securities Class Actions Services (“SCAS”) and
Chicago Clearing Corporation (“CCC”), both objected to paragraphs 85 and 86 of the Proposed
Plan, the procedures to be followed with respect to Third-Party Filers.7 By letter also dated
December 16, 2022, Venture Recapture Partners (“VRP”) objected to paragraph 22 of the
Proposed Plan, which excludes claim purchasers from the distributions. In addition, the
Commission received two non-public comments objecting to the Proposed Plan; however, those
comments reference conduct that falls outside of the relevant time period of the Proposed Plan
and therefore, warrant no modification to the Proposed Plan.
1.

Objections to Paragraphs 85 and 86

By its Comment Letters, SCAS and CCC request edits to the Proposed Plan that would
allow Third-Party Filers to collect distribution payments on behalf of harmed investors and
deduct their fees from these distribution payments before remitting the remainder of the funds to
harmed investors. The commenters request these changes to facilitate their payment for services,
claiming alternative methods of payment to be “extremely difficult, if not impossible.” The
Comment Letters also explain that Third-Party Filers help maximize participation in
distributions, and that retail investor participation in Commission distributions will plummet if
Third-Party Filers do not participate. CCC states that its clients have chosen to pay for CCC’s
third-party filing services through contingency fee arrangements.
The Commission has considered these comments and has determined that requirements
of paragraphs 85 and 86 are necessary to protect against risks to the Fair Fund and protect
harmed investors. Commission distribution plans are qualified settlement funds under Section
468B(g) of the Internal Revenue Code, 26 U.S.C. § 468B(g), and related regulations, 26 C.F.R.
§§ 1.468B-1 through 1.468B-5 and Third-Party Filers are not entitled to deduct their fees from
the Commission’s distribution payments.

7

A Third-Party Filer is defined in the Proposed Plan as a third-party, including without limitation a nominee,
custodian, or an intermediary holding in street name, who is authorized to, and submits, a claim(s) on behalf of one
or more Potentially Eligible Claimants. Third-Party Filer does not include assignees or purchasers of claims, which
are excluded from receiving Distribution Payments under paragraph 22 [Excluded Parties]. Proposed Plan, ¶ 34.

3

The Commission has determined that the requirements of paragraphs 85 and 86,
demonstrating that the preferred method of payment is directly to the Eligible Claimant and
prohibiting the offset of Third-Party Filer compensation from Distribution Payments, are
necessary to reduce risks to the Commission’s distribution program and to harmed investors and
therefore, are fair and reasonable. Section 21(d)(4) of the Exchange Act evidences Congress’s
intent that certain practices prevalent in private securities litigation, such as compensation of
attorneys and other private parties from investors’ compensation, should not be carried over to
the distribution of Commission disgorgement funds.
Congress entrusted the Commission with the responsibility of distributing Commission
settlement funds, and the Commission has procedures in place to efficiently and effectively
distribute these government settlement funds while protecting the funds from waste and fraud.
Distribution Payments should not be sent to Third-Party Filers because the Commission does not
have visibility into how these funds are handled once in the Third-Party Filers’ possession.
Furthermore, the Third-Party Filers are not subject to the controls and oversight procedures
prescribed in the distribution plan, and all of the safeguards implemented by the Commission and
Congress to protect investors can no longer protect the funds once in the Third-Party Filers’
possession. For the above reasons, the Commission concludes that paragraphs 85 and 86 which
preclude the sending of distribution payments to Third-Party Filers, and which preclude the
offset of Third-Party Filer compensation from Distribution Payments, are appropriate as a means
to protect the integrity of Commission distributions.
In addition, the Commission has previously considered similar comments on several
occasions. In each of these cases,8 the Commission has upheld the provisions as necessary to
reduce risks to the Commission’s distribution program and to harmed investors and approved the
proposed plan without modification.
Accordingly, the Commission again finds those paragraphs fair and reasonable and
approves them without modification.
2.

Objections to Paragraph 22

VRP objects to paragraph 22 of the Proposed Plan as excluding VRP from participating
in the Fair Fund distribution despite having purchased the “right” to obtain recovery in good
faith arms-length transactions. VRP requests that paragraph 22 be altered to clearly permit
purchasers of claims to be eligible for a distribution from the Fair Fund. The Commission has
considered this objection and concludes that it does not require modification to the Proposed
Plan.
The purpose of a Commission plan of distribution is to distribute a fund formed for the
benefit of harmed investors. See Section 308(a) of the Sarbanes Oxley Act of 2002, in the
context of Fair Funds: [a fund] “established for the benefit of victims of” federal securities law
8

In the Matter of MagnaChip Semiconductor Corporation, et al., Exchange Act Rel. No. 97470 (May 10, 2023), In
the Matter of The Kraft Heinz Co., Exchange Act Rel. No. 96578 (Dec. 23, 2022), and In the Matter of Wells Fargo
& Co., Exchange Act Rel. No. 90898 (Jan. 11, 2021).

4

violations. The Commission believes the best way to ensure that distribution payments are made
for the benefit of investors is to relate the harm caused by the misconduct underlying its
enforcement actions to the specific investors who suffered the harm, and to compensate those
investors for as much of that harm as the distribution fund makes possible.
Paragraph 22 of the Proposed Plan does not take a position on investors selling their
claims. Rather, the Proposed Plan specifies to whom the distribution payment will be made.
The fact that VRP has purchased recovery rights from a liquidating entity does not make VRP a
harmed investor. Rather, VRP is simply a purchaser for profit of the possibility that the true
harmed investors may receive a distribution payment.
Furthermore, here the harmed investors have been identified as those who traded in
Weatherford common stock from February 25, 2009 to November 12, 2012 and suffered a loss
after corrective disclosures were issued, following the falsification of records that resulted in
inflated earnings reports. There were more than $900 million in losses to injured investors; yet
the Fair Fund is comprised only of $152 million. There are insufficient funds to fully
compensate all of the injured investors; therefore, it is likely that this will be a pro rata
distribution in which harmed investors receive partial compensation for their harm.
Consequently, excluding purchasers of potential distribution payments in favor of implementing
a methodology that provides maximum compensation to injured investors, given the amount of
funds available, is fair and reasonable.
B.

Approval of the Proposed Plan

For the reasons stated above, the Commission finds that the Proposed Plan is fair and
reasonable and should be approved without modification.
II.
Accordingly, it is hereby ORDERED, pursuant to Rule 1104 of the Commission’s Rules,9
that the Proposed Plan is approved, and the approved Plan of Distribution shall be posted
simultaneously with this Order on the Commission’s website at www.sec.gov.
By the Commission.

Vanessa A. Countryman
Secretary

9

17 C.F.R. § 201.1104.

5

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Aefc0e560585a9eb9. Public record. Not legal advice.