jmicoe.injmicoe.in/pdf20/M.A. HRM SEM-III.pdf · Created Date: 4/6/2020 6:21:56 PM
In re Miller Energy Resources, Inc. Securities Litigation...
Transcript of In re Miller Energy Resources, Inc. Securities Litigation...
II.."., AUG 16 ?UH
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TENNESSEE
AT KNOXVILLE
Clerk, U. S. District Court Eastern District ot Tennessee
At Knoxville
STEVEN ARLOW, Individually and on Behalf
Civil Action No.: 3 ( C 3?O
of All Other Persons Similarly Situated,
Plaintiff, JURY TRIAL DEMANDED
V. CLASS ACTION
MILLER ENERGY RESOURCES, INC. f/k/a MILLER PETROLEUM, INC., SCOTT M. BORUFF, and PAUL W. BOYD,
Defendants
CLASS ACTION COMPLAINT
Plaintiff Steven Arlow ("Plaintiff'), individually and on behalf of all other persons
similarly situated, by his undersigned attorneys, for his complaint against defendants, alleges the
following based upon personal knowledge as to himself and his own acts, and information and
belief as to all other matters, based upon, inter alia, the investigation conducted by and through
his attorneys, which included, among other things, a review of the defendants' public documents,
conference calls and announcements made by defendants, United States Securities and Exchange
Commission ("SEC") filings, wire and press releases published by and regarding Miller Energy
Resources, Inc. formerly known as Miller Petroleum, Inc. ("Miller" or the "Company"),
analysts' reports and advisories about the Company, and information readily obtainable on the
Internet. Plaintiff believes that substantial evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for discovery.
NATURE OF THE ACTION
1. This is a federal securities class action on behalf of a class consisting of all
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 1 of 37 PageID #: 1
persons other than defendants who purchased Miller securities between December 21, 2009 and
August 8, 2011, both dates inclusive (the “Class Period”), seeking to recover damages caused by
defendants’ violations of the federal securities laws and to pursue remedies under the Securities
Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 against the Company and certain of
its top officials.
2. Miller is an oil and gas exploration, production, and drilling firm. The Company
operates in the Southern Appalachian Basin and Alaska.
3. On July 28, 2011, analysts Melissa Davis and Janice Shell of TheStreetSweeper
issued an article questioning the Company’s valuation of certain assets. Citing a number of
sources, including interviews with industry experts, Shell and Davis stated that Miller and its
officers and directors had fraudulently overstated the value of certain assets.
4. On this news, Miller shares plummeted $2.63 or more than 37% in two
consecutive trading sessions, to close at $4.41 on July 29, 2011.
5. On August 1, 2011, Miller disclosed that its annual report on Form 10-K, filed
just three days earlier, should no longer be relied upon as the “10-K was filed with the SEC on
July 29, 2011, prior to KPMG LLP completing its review of the annual report and issuing their
independent accountants’ report on the financial statements.”
6. On these revelations, Miller shares declined an additional $1.04 or more than
23.5%, to close at $3.37 on August 2, 2011.
7. On August 9, 2011, Miller disclosed that for the fiscal quarters ended July 31,
2010 and October 31, 2010, it “failed to properly record depletion, depreciation and amortization
expense related to leasehold costs, wells and equipment, fixed assets and asset retirement
obligations and did not properly record the state tax credits expected from our Alaska
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 2 of 37 PageID #: 2
2
operations.” Moreover, for the fiscal quarter ended January 31, 2011, the Company had
“inappropriately recorded revenue on a gross basis for overriding royalty interests.”
8. On these additional revelations, Miller shares declined an additional $0.37 or
more than 13%, to close at $2.36.
9. Throughout the Class Period, Defendants made false and/or misleading
statements, as well as failed to disclose material adverse facts about the Company's business,
operations, and prospects. Specifically, Defendants made false and/or misleading statements
and/or failed to disclose that: (1) the value of the Alaskan assets acquired by the Company were
substantially less than claimed by the Company; (2) the Company improperly accounted
depletion, depreciation and amortization expenses related to leasehold costs, wells and
equipment, fixed assets and assets retirement obligations and did not properly record the state tax
credits expected from its Alaska operations; (3) the Company improperly accounted revenue on a
gross basis for overriding royalty interests rather than recording revenue on a net basis; (4) the
Company improperly accounted sufficient compensation expenses on equity awards; (5) the
Company improperly calculated the liability for its derivative instruments; (6) the Company
failed to consolidate an entity that controls; (7) the Company lacked adequate internal and
financial controls; and (8) as a result of the foregoing, the Company’s statements were materially
false and misleading at all relevant times.
10. As a result of Defendants' wrongful acts and omissions, and the precipitous
decline in the market value of the Company's securities, Plaintiff and other Class members have
suffered significant losses and damages.
JURISDICTION AND VENUE
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 3 of 37 PageID #: 3
3
11. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act (15 U.S.C. §78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17
C.F.R. §240.10b-5).
12. This Court has jurisdiction over the subject matter of this action pursuant to §27
of the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. §1331.
13. Venue is proper in this District pursuant to §27 of the Exchange Act, 15 U.S.C.
§78aa and 28 U.S.C. §1391(b) as the shares of Miller were publicly traded in this District.
Moreover, Miller’s principal place of business is located within this District.
14. In connection with the acts, conduct and other wrongs alleged in this Complaint,
defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
including but not limited to, the United States mail, interstate telephone communications and the
facilities of the national securities exchange.
PARTIES
15. Plaintiff as set forth in the attached certification, purchased Miller securities at
artificially inflated prices during the Class Period and has been damaged thereby.
16. Defendant Miller is a Tennessee corporation, with its principal place of business
located at 3651 Baker Highway, Huntsville, TN 37756. Until May 6, 2010, Miller was traded on
the OTC Bulletin Board (“OTC”). On May 6, 2010, Miller’s common stock began trading on
the NASDAQ Global Market (“NASDAQ”) under the trading symbol “MILL.” The stock was
trading under the name of Miller Petroleum, Inc. d/b/a Miller Energy Resources. On April 12,
2011, Miller’s common stock began trading on the New York Stock Exchange (“NYSE”) under
its ticker symbol “MILL” and under its new name Miller Energy Resources, Inc.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 4 of 37 PageID #: 4
4
17. Defendant Scott M. Boruff (“Boruff”) has been the Company’s Chief Executive
Officer (“CEO”) and director since August 2008. Defendant Boruff was the Company’s
President from June 26, 2010 to June 8, 2011.
18. Defendant Paul W. Boyd (“Boyd”) has been the Company’s Chief Financial
Officer and Treasurer since 2008.
19. The defendants referenced above in ¶¶ 17 - 18 are sometimes referred to herein as
the “Individual Defendants.”
SUBSTANTIVE ALLEGATIONS
Background
20. Miller is a high-growth oil and natural gas exploration, production and drilling
company operating multiple projects in North America. Miller's focus is in the Cook Inlet area of
Alaska and in the heart of Tennessee's Appalachian Basin. In 2009, the Company formed both
Miller Energy GP, LLC and Miller Energy Income 2009-A, LP (“MEI”). MEI was organized to
provide the capital required to invest in various types of oil and gas ventures including the
acquisition of oil and gas leases, royalty interests, overriding royalty interests, working interests,
mineral interests, real estate, producing and non-producing wells, reserves, oil and gas related
equipment including transportation lines and potential investments in entities that invest in such
assets except for other investment partnerships sponsored by affiliates of MEI. The Company,
through a subsidiary, owns 1% of MEI, however due to the shared management of the Company
and MEI, it consolidated this entity.
21. On December 16, 2009, the Company issued a press release entitled, “Tennessee
firm acquires more than $300 million in Alaskan oil and gas assets.” The Company stated the
following, in relevant part:
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 5 of 37 PageID #: 5
5
Miller Petroleum, Inc. dba Miller Energy Resources ("Miller"), (OTC
Bulletin Board: MILL.OB) announced today that it has acquired certain
former Alaskan assets of Pacific Energy Resources ("Pacific Energy")
through a Chapter 11 U.S. Bankruptcy proceeding in Delaware.
Miller has acquired total reserves of over 13.2 million barrels of oil and
15.5 BCF of natural gas, including total proved reserves of 5.6 million
barrels of oil and 3.7 BCF of Natural Gas. The discounted net present
value of the Alaska reserves that Miller has acquired is over $325 million
dollars, including $119 million dollars of proven reserves, $185 million of
probable reserves and $23 million in possible reserves.
In addition, Miller has acquired onshore and offshore production and
processing facilities, an offshore energy platform, over 600,000 net acres
of land with thousands of acres of 3-D geologic seismic data,
miscellaneous roads, pads and facilities all of which originally cost almost $300 million to build and install over the last 5 years.
Miller will operate the facilities through its 100% owned subsidiary, Cook Inlet Energy LLC ("Cook") , which has been approved by the State of
Alaska as the long-term operator for the Alaskan oil and gas wells. Miller
has hired through Cook, the operating team who had overseen the
operations of these assets from early 2000 until the present.
Acquisition Details
Miller Energy Resources paid a total of $2.25 million dollars for the
Alaskan oil and gas assets, and an additional $2.22 million dollars for contract cure payments, bonds and other local, federal and State of Alaska
requirements to operate the facilities. Miller's acquisition multiples of the
Purchase/Reserves is $0.35 per Proved MBOE and $0.06 per Proved
MCFE. Including Proved, Probable and Possible Reserves makes the
acquisition multiples of this purchase only $0.14 per BOE and $0.023 per MCFE.
***
The acquisition increases Miller's total reserves 32 times, from 0.504
MMBOEs to 16.330 MMBOEs, and increases the Net Present Value
(discounted at 10%) of Revenue of Miller's Oil and Gas Reserves from
$4.99 million dollars (before the acquisition) to $331.13 million dollars at
closing, an increase of 66 times. Miller has increased its acreage from
54,506 net acres (pre-acquisition) to 656,506 net acres at closing....
The Alaska assets that Miller acquired from Pacific Energy were
originally acquired from Forest Oil Corp. in 2007 for $464 million. In
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 6 of 37 PageID #: 6
6
2009, Pacific Energy declared bankruptcy and later abandoned its assets in
Alaska in September 2009. In October 2009, Miller entered into an agreement to acquire the majority of Pacific Energy's Alaskan assets. In
November 2009, the U.S. Bankruptcy Court approved the sale and the
acquisition closed on December 11, 2009. Also on December 10, 2009, Miller Petroleum, Inc. acquired 100% of the membership interests in Cook
Inlet Energy, LLC, an Alaska limited liability company from its members.
As consideration, Miller issued the sellers, who were unrelated third
parties, stock warrants to purchase three million five hundred thousand
(3,500,000) shares of Miller common stock, plus $250,000 and certain
expense related to the acquisition.
***
"The results of these acquisitions increases our reserves by 32 fold and
significantly strengthens our balance sheet," commented Boruff, "Initial
production is estimated to be 280 barrels of oil a day. Our three month
target is over 800 barrels a day with a goal of pushing production over
1,100 barrels daily by the fourth quarter of 2010 which would generate
more than $30 million dollars annually in gross revenue for Miller."
Materially False and Misleading
Statements Issued During the Class Period
22. On December 21, 2009, the Company filed a quarterly report for the period ended
October 31, 2009 on Form 10-Q with the SEC, which was signed by Defendants Boruff and
Boyd and represented the Company’s quarterly financial results and financial position. In
addition, pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”), the Form 10-Q contained signed
certifications by Defendants Boruff and Boyd, stating that the financial information contained in
the Form 10-Q was accurate, and that they disclosed any material changes to the Company’s
internal control over financial reporting.
23. The Form 10-Q also represented the following:
On December 11, 2009, the Company acquired former Alaskan assets of
Pacific Energy Resources ("Pacific Energy") valued at more than $300
million through a Delaware Chapter 11 Bankruptcy proceeding. The
Company paid a total of $2.25 million to acquire and obtain the Alaskan
oil and gas assets which include onshore and offshore production
facilities, $119 million in proven energy reserves, $185 million in
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 7 of 37 PageID #: 7
7
probable energy reserves and $23 million in possible energy reserves,
providing total reserves of $327 million. The purchased assets includes the
West McArthur River oil field, the West Foreland natural gas field, and
the Redoubt unit with the Osprey offshore platform, all located along the
west side of the Cook Inlet. Also included in the asset purchase are
602,000 acres of oil and gas leases as well as completed 3D seismic
geology and other production facilities. At closing Miller paid Pacific
Energy a purchase price of $2.25 million and provided $2.22 million for bonds, contract cure payments and other federal and State of Alaska
requirements to operate the facilities. The Company will operate the
facilities through its recently acquired wholly-owned subsidiary, Cook
Inlet Energy LLC ("Cook"), which has been approved by the State of
Alaska as the long-term operator for the Alaskan oil and gas wells. In October 2009, the Company entered into an agreement to acquire the
majority of Pacific Energy's Alaskan assets. In November of 2009, the
Court approved the sale and the acquisition closed on December 11, 2009.
On December 10, 2009, the Company acquired 100% of the membership
interests in Cook Inlet Energy, LLC, an Alaska limited liability company
from the owners of this entity. As consideration for these companies we
issued the sellers, who were unrelated third parties, stock warrants to
purchase three million five hundred thousand (3,500,000) shares of our
common stock. The Warrants are to be issued in three tranches with
vesting features ranging from immediate to four years and with exercise
prices ranging from $0.01 to $2.00. In addition, within 90 days of closing,
the Company is to deliver $250,000 in cash to satisfy certain expenses as
well as reimbursement for reasonable out of pocket expenses. Under the
terms of the stock purchase agreement, the sellers agreed not to engage in
oil and gas operations for a period of three years following the closing
date. We also agreed that each of the sellers, Mr. David M. Hall, Walter J.
Wilcox II and Troy Stafford, would continue their employment with the
acquired company for at least three years from the closing date of the
transaction at their specifically defined compensation and benefit levels. In
addition, Mr. Hall was appointed as a member of the Company's Board of
Directors and as Chief Executive Officer of Cook Inlet Energy, LLC., Mr.
Hall will receive an annual salary of $195,000.
24. On December 23, 2009, the Company filed a Form 8-K represented the following
in connection to the Pacific Energy Alaska Assets Acquisition:
On December 10, 2009, Miller Petroleum, Inc. (“Miller” or the “Company”) acquired 100% of the membership interests in Cook Inlet
Energy, LLC (“CIE”), an Alaska limited liability company from the
owners of this entity. This company was created to acquire the assets of
from Pacific Energy Alaska Operating LLC and Pacific Energy Alaska
Holdings, LLC (“PER”) from the Chapter 11 U.S. bankruptcy filing. The
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 8 of 37 PageID #: 8
8
owners of membership interests in CIE were David M. Hall, Walter J. Wilcox, II and Troy Stafford (collectively the “Sellers”). As consideration
for this company Miller issued the Sellers, who were unrelated third
parties, stock warrants to purchase three million five hundred thousand
(3,500,000) shares of Miller’s common stock. The warrants were priced
and vested as follows: Tranche 1 - 1,000,000 warrants with an exercise
price of one cent ($0.01) immediately vested as of the date of closing;
Tranche 2 - 1,500,000 warrants with an exercise price of one dollar
($1.00) vesting one year after closing; Tranche 3 - 1,000,000 warrants
with an exercise price of two dollars ($2.00) vesting two years after
closing. 350,000 of Tranche 1 warrants shall be delivered to an escrow account in the name of Miller and the sellers and is to be delivered to the
sellers upon release of certain potential claims by a former financial
advisor of CIE. As additional consideration, Miller agreed to place into
escrow, within 90 days of closing $250,000 in cash, which is to be delivered to the sellers upon the release of certain potential claims by a
former financial advisor of CIE. Miller shall also deliver to the Seller,
reasonable and normal out of pocket expenses that the Sellers have
incurred since December of 2008 through December 10, 2009.
***
On December 10, 2009, Miller’s wholly-owned subsidiary, Cook Inlet
Energy, LLC acquired certain Alaskan oil and gas assets from Pacific
Energy Alaska Operating LLC and Pacific Energy Alaska Holdings, LLC
(“Pacific Energy”) through a Chapter 11 U.S. Bankruptcy proceeding in
Delaware. Miller acquired total reserves of over 13.2 million barrels of oil
and 15.5 BCF of natural gas, including total proved reserves of 5.6 million
barrels of oil and 3.7 BCF of natural gas as reported by the Pacific Energy
in their most recent reserve report of January 1, 2009. The discounted net
present value of the Alaska reserves that Miller acquired is over $327
million dollars, including $119 million dollars of proven reserves, $185
million of probable reserves and $23 million of possible reserves, as stated
in its most recent reserve report as of January 1, 2009.
25. On March 15, 2010, the Company issued a press release entitled, “Miller Energy
Resources’ Assets Increase to $492 Million.” The Company represented the following in
relevant part:
Miller Petroleum, Inc. dba Miller Energy Resources (“Miller”), (OTC BB:
MILL) announced today that it has a total pro forma asset value of over
$492 million, including oil and natural gas reserves valued at $372 million
based upon an average net sales price of $61.18 per barrel of oil and $4.75
per mcf of natural gas. The increase is a direct result of the acquisition in
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 9 of 37 PageID #: 9
9
December 2009 of oil and gas assets from Pacific Energy Resources
through a Chapter 11 U.S. Bankruptcy proceeding in which Miller
acquired onshore and offshore production and processing facilities, an
offshore energy platform, over 600,000 net lease acres of land with
hundreds of miles of 2-D and 3-D geologic seismic data, miscellaneous roads, pads and facilities. On March 3, 2010 Miller announced that its
Alaskan operations were producing more than 800 BOED.
“The Alaska acquisition has led to phenomenal growth at Miller and
greatly strengthened our balance sheet,” said Scott M. Boruff, Miller CEO.
“Over the last year Miller has increased its asset value over forty times, its
total oil and natural gas reserves ninety times, and its lease acreage by a
factor of twelve. In addition, production at our Alaska operations
continues to exceed original projections which will translate into greatly
increased revenues at Miller over the coming year.”
Ralph E. Davis Associates, a Houston-based independent petroleum
engineer firm, prepared the reserve report on Miller’s Cook Inlet
properties. Based upon this reserve report, in Alaska, Miller has estimated
total reserves of 16.4 million barrels of oil and 13.9 billion cubic feet of
natural gas, including proven (1P) reserves of 9.4 million barrels of oil and
4.9 billion cubic feet of natural gas, probable (2P) reserves of 5.9 million
barrels of oil and 4.0 billion cubic feet of natural gas, and possible (3P)
reserves of 1.1 million barrels of oil and 5.0 billion cubic feet of natural
gas.
26. On March 22, 2010, the Company filed a quarterly report for the period ended
January 31, 2010 on Form 10-Q with the SEC, which was signed by Defendants Boruff and
Boyd and represented the Company’s quarterly financial results and financial position.
Specifically, the Company represented a net income of $271.9 million or $9.51 per diluted share
and revenue of $1.2 million, compared to a net loss of $901,943 or ($0.04) per diluted share and
revenue of $612,838. The net income for the quarter included a gain of $472.5 million from the
Pacific Energy acquisition. In addition, pursuant to SOX, the Form 10-Q contained signed
certifications by Defendants Boruff and Boyd, stating that the financial information contained in
the Form 10-Q was accurate, and that they disclosed any material changes to the Company’s
internal control over financial reporting.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 10 of 37 PageID #: 10
10
27. The Form 10-Q also represented the following:
On December 10, 2009, the Company acquired former Alaskan assets of
Pacific Energy Resources ("Pacific Energy") valued at more than $479
million through a Delaware Chapter 11 Bankruptcy proceeding. The
Company acquired the Alaskan oil and gas assets, which include onshore
and offshore production facilities, $215 million in proven energy reserves,
$122 million in probable energy reserves and $31 million in possible energy reserves, providing total reserves of $368 million. The purchased
assets include the West McArthur River oil field, the West Foreland
natural gas field, and the Redoubt unit with the Osprey offshore platform,
all located along the west side of the Cook Inlet. Also included in the asset
purchase are 602,000 acres of oil and gas leases as well as completed 3D
seismic geology and other production facilities. At closing Miller paid
Pacific Energy a purchase price of $2.25 million and provided $2.22
million for bonds, contract cure payments and other federal and State of
Alaska requirements to operate the facilities. The Company will operate
the facilities through its recently acquired wholly owned subsidiary, Cook
Inlet Energy LLC ("Cook"), which has been approved by the State of
Alaska as the long-term operator for the Alaskan oil and gas wells. In October 2009, the Company entered into an agreement to acquire the
majority of Pacific Energy's Alaskan assets. In November of 2009, the
Court approved the sale and the acquisition closed on December 10, 2009.
On December 10, 2009, the Company acquired 100% of the membership
interests in Cook Inlet Energy, LLC, an Alaska limited liability company
from the owners of this entity. As consideration for this company we
issued the sellers, who were unrelated third parties, stock warrants to
purchase three million five hundred thousand (3,500,000) shares of our
common stock. The Warrants were issued in three tranches with vesting
features ranging from immediate to four years and with exercise prices
ranging from $0.01 to $2.00, the fair value of the warrants issued were
determined to be $2,071,655 and were expensed as a cost of the
transaction. In addition, the Company was obligated to deliver $250,000 in
cash by March 10, 2010 to satisfy certain expenses as well as
reimbursement for reasonable out of pocket expenses. As of the date of
this filing, this obligation is still outstanding. Under the terms of the stock
purchase agreement, the sellers agreed not to engage in oil and gas
operations for a period of three years following the closing date. We also
agreed that each of the sellers, Messrs. David M. Hall, Walter J. Wilcox II
and Troy Stafford, would continue their employment with the acquired
company for at least three years from the closing date of the transaction at
their specifically defined compensation and benefit levels. In addition, Mr.
Hall was appointed as a member of the Company's Board of Directors and
as Chief Executive Officer of Cook Inlet Energy, LLC., Mr. Hall will receive an annual salary of $195,000.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 11 of 37 PageID #: 11
11
28. On March 24, 2010, the Company issued a press release announcing its financial
results for the third quarter ended January 31, 2010. The Company reported net income of
$271.9 million, or $9.51 per fully diluted share and revenue of $1.3 billion, as compared to net
income of $75.6 million, or $0.35 EPS and revenue of $1.4 million for the same period a year
ago.
29. On July 28, 2010, the Company filed an annual report for the period ended April
30, 2010 on Form 10-K with the SEC, which was signed by, among others, Defendants Boruff
and Boyd, and represented the Company’s annual financial results and financial position. In
addition, pursuant to SOX, the Form 10-K contained signed certifications by Defendants Boruff
and Boyd, stating that the financial information contained in the Form 10-K was accurate, and
that they disclosed any material changes to the Company’s internal control over financial
reporting.
30. The 10-K also representing the following:
On December 10, 2009, the Company acquired former Alaskan assets of
Pacific Energy Resources (“Pacific Energy”) valued at more than $479
million through a Delaware Chapter 11 Bankruptcy proceeding. The
Company acquired the Alaskan oil and gas assets, which include onshore
and offshore production facilities, $215 million in proven energy reserves,
$122 million in probable energy reserves and $31 million in possible energy reserves, providing total reserves of $368 million. The purchased
assets include the West McArthur River oil field, the West Foreland
natural gas field, and the Redoubt unit with the Osprey offshore platform,
all located along the west side of the Cook Inlet. Also included in the asset
purchase are 602,000 acres of oil and gas leases and licenses as well as
completed 3D seismic geology and other production facilities. At closing
Miller paid Pacific Energy a purchase price of $2.25 million and provided
$2.22 million for bonds, contract cure payments and other federal and
State of Alaska requirements to operate the facilities. The Company will
operate the facilities through its recently acquired wholly-owned
subsidiary, Cook Inlet Energy LLC ("Cook"), which has been approved by
the State of Alaska as the long-term operator for the Alaskan oil and gas
wells. In October 2009, the Company entered into an agreement to acquire
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 12 of 37 PageID #: 12
12
the majority of Pacific Energy's Alaskan assets. In November of 2009, the
Court approved the sale and the acquisition closed on December 10, 2009.
On December 10, 2009, the Company acquired 100% of the membership
interests in Cook Inlet Energy, LLC, an Alaska limited liability company
from the owners of this entity. As consideration for this company we
issued the sellers, who were unrelated third parties, stock warrants to
purchase three million five hundred thousand (3,500,000) shares of our
common stock. The Warrants were issued in three tranches with vesting
features ranging from immediate to four years and with exercise prices
ranging from $0.01 to $2.00, the fair value of the warrants issued were
determined to be $2,071,655 and were expensed as a cost of the
transaction. In addition, the Company was obligated to deliver $250,000 in
cash by March 10, 2010 to satisfy certain expenses as well as
reimbursement for reasonable out of pocket expenses. As of the date of
this filing, this obligation is still outstanding. Under the terms of the stock
purchase agreement, the sellers agreed not to engage in oil and gas
operations for a period of three years following the closing date. We also
agreed that each of the sellers, Messrs. David M. Hall, Walter J. Wilcox II
and Troy Stafford, would continue their employment with the acquired
company for at least three years from the closing date of the transaction at
their specifically defined compensation and benefit levels. However,
subsequent to the balance sheet date, Mr. Stafford left the Company. In
addition, Mr. Hall was appointed as a member of the Company's Board of
Directors and as Chief Executive Officer of Cook Inlet Energy, LLC.,
Mr. Hall will receive an annual salary of $195,000.
31. On July 30, 2010, the Company issued a press release announcing its financial
results for the year ended April 30, 2010. For the year, the Company reported net income of
$249.5 million, or $8.29 per fully diluted share and revenue of $5.9 million, as compared to net
income of $8.4 million, or $2.56 per fully diluted share and revenue of $1.6 million for the same
period a year ago. The income included a gain of $461.1 million from the Company’s
acquisitions.
32. Defendant Boruff commented the following in the release:
The progress and accomplishments at Miller over the past year are nothing
short of extraordinary. We will look back on this as a watershed year in
Miller’s development, having made significant progress on key initiatives
and positioning us for growth in 2010 and beyond.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 13 of 37 PageID #: 13
13
33. On September 13, 2010, the Company filed a quarterly report for the period ended
July 31, 2010 on Form 10-Q with the SEC, which was signed by Defendants Boruff and Boyd
and represented the Company’s quarterly financial results and financial position. Specifically,
the Company reported net income of $682,907 or $0.02 per fully diluted share, and revenue of
$5.2 million, compared to a net income of $72,213 or $0.00 per fully diluted share, and revenue
of $527,620 for the same period a year ago. In addition, pursuant to SOX, the Form 10-Q
contained signed certifications by Defendants Boruff and Boyd, stating that the financial
information contained in the Form 10-Q was accurate, and that they disclosed any material
changes to the Company’s internal control over financial reporting.
34. On December 10, 2010, the Company filed a quarterly report for the period ended
October 31, 2010 on Form 10-Q with the SEC, which was signed by Defendants Boruff and
Boyd and represented the Company’s quarterly financial results and financial position.
Specifically, the Company reported a net loss of $1.7 million or ($0.05) per fully diluted share,
and revenue of $6.7 million, compared to a net loss of $156,024 or ($0.01) per fully diluted
share, and revenue of $333,4040 for the same period a year ago. In addition, pursuant to SOX,
the Form 10-Q contained signed certifications by Defendants Boruff and Boyd, stating that the
financial information contained in the Form 10-Q was accurate, and that they disclosed any
material changes to the Company’s internal control over financial reporting.
35. On February 4, 2011, the Company announced the appointment of KPMG as its
registered independent public accounting firm after dismissing its’ previous independent public
accounting firm, Sherb & Co. LLP.
36. On March 18, 2011, the Company filed a Form 8-K disclosing the non-reliance of
its previously filed financial statements for the quarterly periods ended July 31, 2010 and
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 14 of 37 PageID #: 14
14
October 31, 2010 as it “failed to properly record depletion, depreciation and amortization
expenses related to leasehold costs, wells and equipment, fixed assets and asset retirement
obligations and did not properly record the state tax credits expected from our Alaska
operations.” Moreover, the Company disclosed the following:
Accordingly, our unaudited consolidated balance sheet at July 31, 2010 and the unaudited consolidated statement of operations and unaudited
consolidated statement of cash flows for the three month period ended
July 31, 2010 as contained in our Quarterly Report on Form 10-Q for the
three month period ended July 31, 2010, together with our unaudited
consolidated balance sheet at October 31, 2010 and the unaudited
consolidated statement of operations and unaudited consolidated statement
of cash flows for the three and six month periods ended October 31, 2010
as contained in our Quarterly Report on Form 10-Q for the three and six
month periods ended October 31, 2010 will be restated. We expect that
the correction of these accounting errors will increase our depletion,
depreciation and amortization expenses for the three month period ended
July 31, 2010, and the three and six month periods ended October 31,
2010. These increases of non-cash operating expenses will increase our
loss from operations and net loss in each of the periods. In addition, we
expect the correction of the state tax credits will result in an increase of
income tax expense for the three month period ended July 31, 2010 and
the three and six month periods ended October 31, 2010. The
misstatements described herein, which led to this restatement, resulted
from a material weakness that existed at the date of management’s most
recently issued report on internal control over financial reporting.
37. On March 22, 2011, the Company issued a press release announcing its financial
results for the third quarter ended January 31, 2011. The Company reported net income of
$909,950, or $0.02 per fully diluted shares and revenue of $7.8 million, as compared to net
income of $272 million, or $9.51 per fully diluted shares and revenue of $1.2 million for the
same period a year ago.
38. On March 22, 2011, the Company filed a quarterly report for the period ended
January 31, 2011 on Form 10-Q with the SEC, which was signed by Defendants Boruff and
Boyd and reiterated the Company’s previously reported quarterly financial results and financial
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 15 of 37 PageID #: 15
15
position. In addition, pursuant to SOX, the Form 10-Q contained signed certifications by
Defendants Boruff and Boyd, stating that the financial information contained in the Form 10-Q
was accurate, and that they disclosed any material changes to the Company’s internal control
over financial reporting.
39. The statements referenced in ¶¶ 22 - 34; 36 - 38 above were materially false
and/or misleading because they misrepresented and failed to disclose the following adverse facts,
which were known to defendants or recklessly disregarded by them that: : (1) the value of the
Alaskan assets acquired by the Company were substantially less than claimed by the Company;
(2) the Company improperly accounted depletion, depreciation and amortization expenses
related to leasehold costs, wells and equipment, fixed assets and assets retirement obligations and
did not properly record the state tax credits expected from its Alaska operations; (3) the
Company improperly accounted revenue on a gross basis for overriding royalty interests rather
than recording revenue on a net basis; (4) the Company improperly accounted sufficient
compensation expenses on equity awards; (5) the Company improperly calculated the liability
for its derivative instruments; (6) the Company failed to consolidate an entity that controls; (7)
the Company lacked adequate internal and financial controls; and (8) as a result of the foregoing,
the Company’s statements were materially false and misleading at all relevant times.
THE TRUTH BEGINS TO EMERGE
40. On July 28, 2011, TheStreetSweeper published an article discussing Miller’s
purchase of the Alaskan assets for $4.5 million and then pegging “the value of those assets at
more than $350 million on its books.” The article continued, in relevant part:
Despite that alarming track record, however, Miller has managed
to convince investors that the company finally hit the jackpot – by
snagging valuable assets that its previous owners (now bankrupt)
initially could not sell – this time around. Miller’s stock, which fetched
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 16 of 37 PageID #: 16
16
mere pennies on the lowly Pink Sheets just a few short years ago, now
commands $7 a share after snagging a coveted spot on the premiere New
York Stock Exchange. The company currently boasts a handsome market
value of $280 million, almost 12 times its prior-year sales, even though it
relied on a gigantic gain on its new Alaskan assets for the only dramatic
profit that it has ever recorded since going public through a reverse merger
almost 15 years ago.
But experts contacted by TheStreetSweeper , including skeptics in both the energy and financial sectors, have expressed clear doubt about those
numbers. For example, an executive at Nabors Industries (NYSE: NBR) -- a $7.6 billion energy giant that decided against buying those assets for
itself -- estimated that Miller actually wound up with just $25 million to
$30 worth of assets, offset by $40 million worth of liabilities, through that
transaction instead.
“That deal had been on the Street for over a year; everybody and their
brother had looked at it,” said Jordan “Digger” Smith, who manages energy projects for Nabors – which actually operated Miller’s new
properties – all across the country. “I’m a geologist, with 54 years of
experience, and I can’t see how anybody can write that up on their books
for $350 million ... There are not $350 million worth of assets there.”
*** So far, Miller has yet to supply audited financial statements showing that
KPMG – a respected Big Four firm hired almost six full months ago – has
verified the hefty valuation that the company placed on its new assets and
the impressive profit that resulted from the enormous gain that it recorded
on that acquisition deal. Miller is still relying on the blessing from its prior
auditor Sherb & Co., notorious for approving the books of dubious
Chinese reverse-merger companies, to lend credibility to those figures
instead.
***
Miller’s own audit committee actually reported some “accounting errors”
in the company’s financial statements this March -- the month after hiring
KPMG – when it warned of a likely restatement, adjusted for increases in
both expenses and losses, going forward. Miller has gone on to miss the
deadline for filing audited financials since that time, quietly violating a
covenant in a new credit agreement and technically defaulting on the
terms of that $100 million funding deal in the process.
41. On this news, Miller’s securities plummeted $2.63 or more than 37% in two
consecutive trading sessions, to close at $4.41 on July 29, 2011.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 17 of 37 PageID #: 17
17
42. On July 29, 2011, after the market closed, the Company filed an annual report for
the period ended April 30, 2011 on Form 10-K with the SEC, which was signed by, among
others, Defendants Boruff and Boyd, and represented the Company’s annual financial results and
financial position.
43. The Form 10-K disclosed the following concerning the restatement for the
quarterly periods end July 31, 2010, October 31, 2010 and January 31, 2011:
The Company has restated its unaudited consolidated balance sheets as of
July 31, 2010, October 31, 2010 and January 31, 2011 and our unaudited consolidated statements of operations and cash flows for the quarterly and
year to date periods then ended. We failed to properly accrete our asset
retirement obligations in each of the first two quarters of fiscal 2011. In
these periods we also failed to properly record depletion, depreciation and
amortization expenses related to leasehold costs, wells and equipment,
fixed assets and asset retirement obligations and did not properly record
the state tax credits expected from our Alaska operations. In the third
quarter of fiscal 2011 it was determined that we failed to properly classify
royalty expense, failed to properly record sufficient compensation
expenses on equity awards, did not properly calculate the liability for our
derivative liability, and did not properly consolidate an entity we control.
44. The Form 10-K also disclosed the following:
In connection with a review of our Annual Report on Form 10-K for the
year ended April 30, 2010, the staff of the SEC has concluded that we
omitted required audited financial statements of three acquired businesses,
including ETC, KTO and CIE, from our Forms 8-K reporting these
acquisitions. Until such time as we file audited financial statements, the
staff has advised us it considers those Forms 8-K to be materially deficient
and that it will not waive these financial statement requirements. As a
result, we are unable to utilize a “short-form” registration statement on
SEC Form S-3. In addition, until such time as the audited financial
statements of the acquired businesses are filed, the staff of the SEC has
advised us it will not declare effective any registration statements or post-effective registration statements. We believe that the acquisitions of ETC
and KTO were not material and did not rise to the level which required
audited financial statements. Further, the CIE assets and liabilities were
acquired through bankruptcy and via the newly formed CIE. These oil
and gas producing assets were not operational for several months prior to
the acquisition, were consolidated in, as they were part of a larger
enterprise, and as accounting records were not adequately maintained by
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 18 of 37 PageID #: 18
18
Pacific Energy Alaska Operating LLC and Pacific Energy Alaska
Holdings, we were unable to carve out historical operational results on
these specified assets. At the time of acquisition of these assets, we
determined that the resulting assets and liabilities were not a separate
business for purposes of preparing pro forma financials with historical
results for the past year and / or related stub period and our Current Report
on Form 8-K/A as filed included only a pro forma balance sheet to reflect
the acquisition. We do not believe we will be able to obtain audited
financial statements on this acquisition for the periods provided in
Regulation S-X.
***
While we have designed a system of internal controls to supplement our
existing controls during our ongoing implementation of Section 404 of the
Sarbanes-Oxley Act of 2002 ("SOX 404"), we have been unable to
complete testing of these controls and accordingly lack the documented
evidence that we believe is necessary to support an assessment that our
internal control over financial reporting is effective. Without such testing,
we cannot conclude that there are any additional significant deficiencies or
additional material weaknesses, nor can we appropriately remediate any
such deficiencies that might have been detected. In addition, during the
analysis of our internal controls in connection with our implementation of
SOX 404, we did identify a number of control weaknesses, the
remediation of which is material to our internal control environment and
critical to providing reasonable assurance that any potential errors could
be detected. Those identified control weaknesses include:
We do not maintain a sufficient complement of personnel with an
appropriate level of accounting knowledge, experience and training in the
selection and application of U.S. GAAP and SEC reporting requirements
commensurate with our financial reporting requirements.
We do not maintain sufficient policies and procedures to prevent and/or
detect material misstatements over cut-off of accruals.
KPMG LLP has not issued a report on the Company’s internal control
over financial reporting.
***
On December 10, 2009, the Company acquired the Alaskan business of
Pacific Energy Resources (“Pacific Energy”) valued at more than $479
million through a Delaware Chapter 11 Bankruptcy proceeding. The
Company acquired the Alaskan business, which include onshore and
offshore production facilities, $215 million in proven energy reserves,
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 19 of 37 PageID #: 19
19
$122 million in probable energy reserves and $31 million in possible energy reserves, providing total reserves of $368 million. The purchased
operations include the West McArthur River oil field, the West Foreland
natural gas field, and the Redoubt unit with the Osprey offshore platform,
all located along the west side of the Cook Inlet. Also included in the
purchase are 602,000 acres of oil and gas leases and licenses as well as
completed 3D seismic geology and other production facilities. At closing
Miller paid Pacific Energy a purchase price of $2.25 million and provided
$2.22 million for bonds, contract cure payments and other federal and
State of Alaska requirements to operate the facilities. The Company will
operate the facilities through its recently acquired wholly-owned
subsidiary, Cook Inlet Energy LLC ("Cook"), which has been approved by
the State of Alaska as the long term operator for the Alaskan oil and gas
wells.
On December 10, 2009, the Company acquired 100% of the membership
interests in Cook Inlet Energy, LLC, an Alaska limited liability company
from the owners of this entity. As consideration for this company we
issued the sellers, who were unrelated third parties, stock warrants to
purchase three million five hundred thousand (3,500,000) shares of our
common stock. The Warrants were issued in three tranches with vesting
features ranging from immediate to four years and with exercise prices
ranging from $0.01 to $2.00, the fair value of the warrants issued were
determined to be $2,071,655 and were expensed as a cost of the
transaction. In addition, the Company was obligated to deliver $250,000 in
cash by March 10, 2010 to satisfy certain expenses as well as
reimbursement for reasonable out of pocket expenses. As of the date of
this filing, this obligation is still outstanding. Under the terms of the stock
purchase agreement, the sellers agreed not to engage in oil and gas
operations for a period of three years following the closing date. We also
agreed that each of the sellers, Messrs. David M. Hall, Walter J. Wilcox II
and Troy Stafford, would continue their employment with the acquired
company for at least three years from the closing date of the transaction at
their specifically defined compensation and benefit levels. However,
subsequent to the balance sheet date, Mr. Stafford left the Company. In
addition, Mr. Hall was appointed as a member of the Company's Board of
Directors and as Chief Executive Officer of Cook Inlet Energy, LLC., Mr.
Hall will receive an annual salary of $195,000.
45. The Form 10-K also included the following Report of Independent Registered
Public Accounting Firm and Consent of Independent Registered Public Accounting Firm from
KPMG:
The Board of Directors
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 20 of 37 PageID #: 20
20
Miller Energy Resources, Inc.:
We have audited the accompanying consolidated balance sheet of Miller
Energy Resources, Inc. and subsidiaries (the Company) as of April 30,
2011, and the related consolidated statements of operations, stockholders’
equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of April 30, 2011, and the results of their operations and cash
flows for the year ended April 30, 2011, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP Knoxville, Tennessee July 29, 2011
***
We consent to the incorporation by reference in the registration statement
(No. 333-171106) on Form S-8 of Miller Energy Resources, Inc. of our
report dated July 29, 2011, with respect to the consolidated balance sheet
of Miller Energy Resources, Inc. and subsidiaries as of April 30, 2011, and the related consolidated statement of operations, stockholders’ equity, and
cash flows for the year then ended, which report appears in the April 30,
2011 annual report on Form 10-K of Miller Energy Resources, Inc.
/s/ KPMG LLP Knoxville, Tennessee July 29, 2011
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 21 of 37 PageID #: 21
21
46. On August 1, 2011, before the market opened, the Company filed a Form 8-K
disclosing that its Form 10-K for the year ended April 30, 2011 that was filed on July 29, 2011
should not be relied upon. Specifically, the Company disclosed the following:
On July 30, 2011, the Audit Committee of the Board of Directors of Miller
Energy Resources, Inc. determined that our consolidated balance sheet at
April 30, 2011, and our consolidated statements of operations,
stockholders’ equity and cash flows for the year then ended, as well as the
report of KPMG LLP dated July 29, 2011 on such statements, all as
included in our 2011 10-K, should not be relied upon. The 2011 10-K was filed with the SEC on July 29, 2011 prior to KPMG LLP completing its
review of the annual report and issuing their independent accountants’
report on the financial statements, as well as the consent to the use of their
report filed as Exhibit 23.3.
We expect to file an amended Annual Report on Form 10-K/A for the year
ended April 30, 2011 (the “Amended 2011 10- K”) as soon as possible. We expect that the audited financial statements which will appear in the
Amended 2011 10-K will contain revisions from those which appeared in
the 2011 10-K to include corrections to errors in such financial statements,
including a revised consolidated statements of cash flows. We do not
expect any material changes to our consolidated balance sheet at April 30,
2011 or our consolidated statements of operations for the year ended April
30, 2011 in the Amended 2011 Form 10-K from that which appeared in
the 2011 10-K.
***
On July 28, 2011, the Audit Committee of the Board of Directors of Miller
Energy Resources, Inc. determined that our unaudited consolidated
balance sheets at January 31, 2011, October 31, 2010 and July 31, 2010
and our unaudited consolidated statements of operations and cash flows
for the quarterly and year to date periods then ended, could no longer be
relied upon as a result of errors in those financial statements. We failed to
properly classify royalty expense, failed to properly record sufficient
compensation expense on equity awards, did not properly calculate the
liability for our derivative instruments, and did not properly consolidate an
entity we control.
Our unaudited consolidated balance sheets at January 31, 2011, October
31, 2010 and July 31, 2010 and our unaudited consolidated statements of
operations and cash flows for the quarterly and year to date periods then
ended were restated in our 2011 10-K as filed on July 29, 2011, and will
be included in our Amended 2011 10-K to be filed as discussed above.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 22 of 37 PageID #: 22
22
The misstatements described herein, which led to this restatement, resulted
from a material weakness that existed at the date of management’s most
recently issued report on internal control over financial reporting.
47. Later in the day, Defendant Boruff issued an open letter to Miller shareholders.
The letter stated the following in relevant parts:
This morning, the company filed an 8-K disclosing that the 2011 10-K
was filed with the SEC on July 29, 2011 prior to KPMG LLP completing
its review of the annual report and issuing their independent accountants'
report on the financial statements, as well as the consent to the use of their
report filed as Exhibit 23.3. A form of KPMG's opinion dated July 29,
2011 was inadvertently included in the filing, when in fact, they had not
yet released the report. Accordingly, the Form 10-K is not a complete SEC
filing.
This also means that we are not considered timely filed by the NYSE
listing standards and expect to receive a letter from NYSE informing us of
this fact this week. As disclosed on July 15, 2011 when we filed for an
extension for our 10-K, we needed additional time to complete our
financial statements due to increased revenues and operating expenses. In
addition, we now expect that the audited financial statements which will
appear in the Amended 2011 10-K will also contain revisions from those which appeared in the 2011 10-K that was filed on Friday, July 29th to include corrections to errors in such financial statements, including a
revised consolidated statements of cash flows. We expect to file an
amended Annual Report on Form 10-K/A for the year ended April 30,
2011 as soon as possible. The 8-K also disclosed certain previously
disclosed restatements with respect to the first three quarters of fiscal
2011. Those restatements were made in the 10-K.
48. On these revelations, Miller shares fell an additional $1.04 or more than 23.5%, to
close at $3.37 on August 2, 2011.
49. On August 3, 2011, The StreetSweeper published a second article on Miller. The
article stated the following in relevant part:
Late Friday, with its stock hammered on questions raised by
TheStreetSweeper in a big investigative report, Miller Energy Resources
(NYSE: MILL) rushed to soothe nervous investors with a clean – but
premature – audit opinion on a tardy annual report that otherwise looked
like an ugly mess.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 23 of 37 PageID #: 23
23
That formal 10K filing included a crucial blessing from KPMG that lent credibility to financial statements previously approved only by a tainted
small-time auditor, notorious for validating the books of dubious Chinese-reverse merger companies, instead. Three days later, however, Miller
quietly published an 8K on its company website – absent for up to an hour
(or more) from the official website operated by the U.S. Securities and
Exchange Commission – revealing that KPMG had yet to even complete
its audit of the financial statements that it had reportedly approved. Miller
further disclosed that its own audit committee had determined over the
weekend, a period marked by hopeful celebrations among relieved
investors, that the company’s brand-new financial statements – as well as
the audit attributed to KPMG and the consent to use that audit report -- “should not be relied upon” because of looming revisions down the road.
Miller’s stock, which recorded double-digit gains on reports of the audited
financials early Monday morning, soon began to tank on news of the 8k
filing before that document even surfaced – where investors could easily
find it – on the SEC website. The shares plummeted from a high of almost
$5 to a low beneath the $3 mark, sinking a total of 42.8% in less than two
hours, after the company dropped its alarming bombshell. Although the
stock has since clawed its way back toward $3.50 a share, it still fetches
half the price that it commanded before TheStreetSweeper first exposed Miller as a risky company less than a week ago.
Peter J. Henning, a law professor who formerly served as a senior attorney
for the enforcement division of the SEC, suggested that the company
could face even more pain – including possible backlash from securities regulators and its new auditing firm alike – as a result of its recent actions.
“The SEC is going to notice this,” said Henning.... “You can’t file a 10K
without audited financials; that’s a precondition ... I suspect that KPMG
will want to know how this happened and, if they don’t get straight answers, they will be gone.
“It looks like somebody, somewhere, had to have lied,” concluded
Henning.... “It’s hard not to draw any conclusion other than that this was
basically fraud.”
For its part, Miller waited until the final hour of trading on Monday before
it even began to publicly address the company’s bizarre actions. In an
open letter to shareholders, Miller CEO Scott Boruff finally came forward
to portray the recent 10K filing as an unfortunate accident. Specifically, he
claimed that “a form of KPMG’s audit opinion” had been “inadvertently
included” in the 10K (by unnamed parties) because the auditing firm had
not actually released that report – and its consent to use it – to the
company yet.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 24 of 37 PageID #: 24
24
To skeptics, however, that excuse looks rather lame at best (and downright
fabricated at worst). After all, they note, Miller had already spent an extra
two weeks finalizing that report ahead of a widely anticipated release that
had attracted considerable attention by the time that it occurred. Far from
another routine 10K filing, critics emphasize, this particular annual report
– the first-ever reviewed by a Big Four auditing firm – could bring fresh
credibility to a company that had raised escalating suspicions after
bursting free from the penny-stock arena to secure a listing on the Nasdaq
and ultimately the prestigious New York Stock Exchange.
In short, critics note, Miller found itself operating under a powerful
microscope – with even CNBC monitoring the once-obscure company –
by the time that it finally released its overdue report. Miller’s four highest-ranking executives, as well as six outside directors, all signed off on that
annual report the day before its release. After that, video footage shows,
the CEO then personally assured CNBC that the company would file its
audited 10K just hours before that long-awaited annual report finally
appeared. The report included a so-called “comfort letter” from KPMG,
dated on the same day as the 10K itself, which upheld the validity of those
financial statements.
As outlined above, however, Miller would soon reveal (through both an
8K and a letter from its chief) that the company never secured a formal
blessing from its auditor before filing its annual report at all. As a result,
Miller explained, the company has yet to file a “complete” annual report – which requires audited financial statements – and now fails to meet listing
standards established by the NYSE for stocks that trade on that preeminent
exchange.
With Miller already bracing for a warning letter from the NYSE as early
as this week, critics say, the company could soon find itself scrambling –
but potentially failing – to protect its coveted listing on the world’s leading
stock exchange.
***
The Ugly Truth
Even when Miller first issued its new financial statements, skeptics felt,
the clean audit opinion from KPMG looked like nothing more than a
pretty decoration on a rather ugly annual report.
For starters, that filing reveals, Miller already faces a crackdown by SEC
regulators demanding omitted financial statements for three acquired
companies – including a core Alaskan subsidiary that reshaped its parent’s
books – before they will approve the crucial paperwork necessary for
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 25 of 37 PageID #: 25
25
additional stock sales. Miller claims that it was unable to supply the
financial reports for its new Cook Inlet Energy (CIE) unit in Alaska, an
addition that now accounts for the vast majority of the assets and revenues
on its books, because the former owner of those assets failed to maintain
proper records before filing for bankruptcy and abandoning its operations.
Miller further states that it does not believe that it can obtain those audited
financials, either, “which will adversely impact our ability to raise
additional capital” unless the SEC – unbending so far – decides to change
its mind and waive those mandatory reports.
As a result, Miller now looks entirely dependant upon a new $100 million
credit facility to finance its big exploration plans. But Miller has failed to
meet a key obligation set forth in that credit agreement, records indicate,
which requires the company to supply audited financial statements no later
than 75 days after its fiscal year ends (a deadline that passed in mid-July)
in order to avoid a technical default. By tripping that covenant, records
suggest, Miller could see its interest rate on that loan – already steep at a
minimum of 9.5% -- jump to credit-card levels of 16.5% if the company retains ongoing access to those funds, rather than immediate demands for
repayment, at all.
From the start, records indicate, Miller faced onerous restrictions whether
the company remained in compliance with that credit agreement or not.
Under the terms of that deal, records show, Miller must request any new
funds from that account weeks in advance – while it waits, at the mercy of
its lenders, for a decision – and then use 90% of its net revenue, starting in
January, to begin paying off the money it has already borrowed along the
way. Miller will see that entire loan mature in mid-2013, or less than two
years from now, with the company apparently banking on a dramatic surge in revenue to cover the bill if it blows through the full $100 million by that
time.
Miller initially secured permission to borrow $35 million from that
account this June, records indicate, and has already spent at least $10.87
million of that money at this point. The company used a sizable chunk of
that total to repay an earlier short-term loan from PlainsCapitalBank,
secured with stock pledged by its CEO and his father-in-law (the founding
chairman), that was scheduled to mature just a few weeks later. By paying
off that loan in full, records indicate, Miller eliminated the brief risk taken
by those two insiders when they pledged a portion of their massive stock
holdings as security for a temporary credit line soon replaced by the
current facility.
When the CEO issued his letter to anxious shareholders on Monday,
however, he specifically emphasized that Miller insiders had “personally
put themselves on the line” by guaranteeing that loan from PlainsCapital
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 26 of 37 PageID #: 26
26
Bank without reminding investors that the company had since eliminated
that same risk by paying off the credit line.
***
The Red Flags
Miller actually delivered some weak financial results, overlooked by
many, before dropping its big bombshell on the market this week.
The company fell well short of its ambitious revenue targets, its 10K filing
shows, while reversing a year-ago profit (generated through a hefty, but
controversial, acquisition-related gain) by posting a sizable loss for the
latest fiscal year instead. Ever since Miller acquired its new Cook Inlet
Energy (CIE) subsidiary in Alaska back in late 2009, records show, the
company has indicated that it would likely generate $30 million worth of
annual revenue from those celebrated assets (purchased for just $4.5
million in a bankruptcy auction and then valued at more than $350 million on its books). As it turns out, however, Miller posted sales of barely $20
million – almost one-third lower than the company’s CIE revenue target –
from the oil and gas produced by all of its assets combined.
While Miller increased its annual revenue by $17 million last year, a
290% jump (from a modest base) that looks rather impressive on paper,
the company also increased its annual expenses by an even higher $20.7
million during that same period. Miller posted total expenses of $37.9
million, more than double the expenses reported for the previous year,
with the company spending more on overhead – particularly compensation
for its well-paid insiders and outside consultants – than it spent on actually
drilling for oil.
Miller spent $14.5 million last year on overhead, its new 10K filing
shows, compared to just $9.7 million on drilling activities during that
same period. The company recorded $5.16 million in stock-based
compensation alone – a total that excludes the generous cash payments
showered on its top executive – with that cost, totaling 12 cents a share,
basically accounting for the entire net loss (also 12 cents a share) suffered
by the company last year.
As CEO of the company, records show, Boruff received a compensation
package valued at $2.1 million all by himself. He scored $1.425 million of
that in cash – a sum approaching all of the unrestricted cash listed on the
company’s most recent balance sheet – after securing a hefty bonus that
more than tripled the cash payout that he would have otherwise received.
He also owns more than 4 million shares of Miller stock, records show, a
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 27 of 37 PageID #: 27
27
10% stake in the company that’s still worth roughly $13.5 million even
after the recent collapse.
50. On August 9, 2011, before the market opened, the Company filed a Form 10-K/A
for year ended April 30, 2011. The Company disclosed the following:
The Company has restated its unaudited consolidated balance sheets as of
July 31, 2010, October 31, 2010 and January 31, 2011 and our unaudited consolidated statements of operations for the quarterly and year to date
periods then ended. In each of the first two quarters of fiscal 2011, we
failed to properly record depletion, depreciation and amortization expense
related to leasehold costs, wells and equipment, fixed assets and asset
retirement obligations and did not properly record the state tax credits
expected from our Alaska operations. In the third quarter of fiscal 2011, it
was determined that we inappropriately recorded revenue on a gross basis
for overriding royalty interests (rather than recording revenue on a net
basis). The correction of this classification error resulted in a decrease to
“oil and gas revenue” and “oil and gas operating” of $824,746,
$1,036,987, and $1,429,499, respectively, for the quarters ended July 31,
2010, October 31, 2010, and January 31, 2011. We also determined that
we failed to properly record sufficient compensation expense on equity
awards, did not properly calculate the liability for our derivative
instruments, and did not properly consolidate an entity we control. The
consolidation of MEI resulted in a decrease to notes payable, an increase
to stockholders’ equity, and minor adjustments to cash, other assets and
accrued expenses.
The corrections recorded to restate the unaudited consolidated financial
statements as of July 31, 2010 include errors related to 2010 that were
identified during the review of our 2011 fiscal third quarter. Such errors
were originally corrected in the Company’s restated unaudited
consolidated financial statements for the first quarter ended July 31, 2010.
After identifying additional errors, we determined that the aggregate
impact of such errors was material to the unaudited consolidated financial
statements for the quarter ended July 31, 2010. Accordingly, the 2010
consolidated financial statements were revised to correct these errors,
which are considered immaterial to 2010. Such corrections to our unaudited consolidated financial statements for the quarter ended July 31,
2010 resulted in a decrease to “general and administrative” of $1,107,000
and a decrease to “depreciation, depletion, and amortization” of $715,306.
51. As a result of these revelations, Miller shares fell an additional $0.37 or more than
13%, to close at $2.36.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 28 of 37 PageID #: 28
28
PLAINTIFF’S CLASS ACTION ALLEGATIONS
52. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or
otherwise acquired Miller securities during the Class Period (the “Class”); and were damaged
thereby. Excluded from the Class are defendants herein, the officers and directors of the
Company, at all relevant times, members of their immediate families and their legal
representatives, heirs, successors or assigns and any entity in which defendants have or had a
controlling interest.
53. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, Miller securities were actively traded on the OTC,
NASDAQ, or NYSE. While the exact number of Class members is unknown to Plaintiff at this
time and can be ascertained only through appropriate discovery, Plaintiff believes that there are
hundreds or thousands of members in the proposed Class. Record owners and other members of
the Class may be identified from records maintained by Miller or its transfer agent and may be
notified of the pendency of this action by mail, using the form of notice similar to that custom-
arily used in securities class actions.
54. Plaintiff’s claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by defendants’ wrongful conduct in violation of
federal law that is complained of herein.
55. Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
Plaintiff has no interests antagonistic to or in conflict with those of the Class.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 29 of 37 PageID #: 29
29
56. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
• whether the federal securities laws were violated by defendants’ acts as
alleged herein;
• whether statements made by defendants to the investing public during the
Class Period misrepresented material facts about the business, operations and
management of Miller;
• whether the Individual Defendants caused Miller to issue false and misleading
financial statements during the Class Period;
• whether defendants acted knowingly or recklessly in issuing false and
misleading financial statements;
• whether the prices of Miller securities during the Class Period were artificially
inflated because of the defendants’ conduct complained of herein; and
• whether the members of the Class have sustained damages and, if so, what is
the proper measure of damages.
57. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
58. Plaintiff will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
• defendants made public misrepresentations or failed to disclose material facts
during the Class Period;
• the omissions and misrepresentations were material;
• Miller securities are traded in efficient markets;
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 30 of 37 PageID #: 30
30
• the Company’s shares were liquid and traded with moderate to heavy volume
during the Class Period;
• the Company traded on the OTC, NASDAQ, or NYSE, and was covered by
multiple analysts;
• the misrepresentations and omissions alleged would tend to induce a
reasonable investor to misjudge the value of the Company’s securities; and
• Plaintiff and members of the Class purchased and/or sold Miller securities
between the time the defendants failed to disclose or misrepresented material
facts and the time the true facts were disclosed, without knowledge of the
omitted or misrepresented facts.
59. Based upon the foregoing, Plaintiff and the members of the Class are entitled to a
presumption of reliance upon the integrity of the market.
COUNT I
(Against All Defendants For Violations of Section 10(b) And Rule 10b-5 Promulgated Thereunder)
60. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
61. This Count is asserted against defendants and is based upon Section 10(b) of the
Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.
62. During the Class Period, defendants engaged in a plan, scheme, conspiracy and
course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions,
practices and courses of business which operated as a fraud and deceit upon Plaintiff and the
other members of the Class; made various untrue statements of material facts and omitted to state
material facts necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading; and employed devices, schemes and artifices to
defraud in connection with the purchase and sale of securities. Such scheme was intended to,
and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiff and
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 31 of 37 PageID #: 31
31
other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of
Miller securities; and (iii) cause Plaintiff and other members of the Class to purchase Miller
securities and options at artificially inflated prices. In furtherance of this unlawful scheme, plan
and course of conduct, defendants, and each of them, took the actions set forth herein.
63. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the
defendants participated directly or indirectly in the preparation and/or issuance of the quarterly
and annual reports, SEC filings, press releases and other statements and documents described
above, including statements made to securities analysts and the media that were designed to
influence the market for Miller securities. Such reports, filings, releases and statements were
materially false and misleading in that they failed to disclose material adverse information and
misrepresented the truth about Miller’s finances and business prospects.
64. By virtue of their positions at Miller, defendants had actual knowledge of the
materially false and misleading statements and material omissions alleged herein and intended
thereby to deceive Plaintiff and the other members of the Class, or, in the alternative, defendants
acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose
such facts as would reveal the materially false and misleading nature of the statements made,
although such facts were readily available to defendants. Said acts and omissions of defendants
were committed willfully or with reckless disregard for the truth. In addition, each defendant
knew or recklessly disregarded that material facts were being misrepresented or omitted as
described above.
65. Defendants were personally motivated to make false statements and omit material
information necessary to make the statements not misleading in order to personally benefit from
the sale of Miller securities from their personal portfolios.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 32 of 37 PageID #: 32
32
66. Information showing that defendants acted knowingly or with reckless disregard
for the truth is peculiarly within defendants’ knowledge and control. As the senior managers
and/or directors of Miller, the Individual Defendants had knowledge of the details of Miller
internal affairs.
67. The Individual Defendants are liable both directly and indirectly for the wrongs
complained of herein. Because of their positions of control and authority, the Individual
Defendants were able to and did, directly or indirectly, control the content of the statements of
Miller. As officers and/or directors of a publicly-held company, the Individual Defendants had a
duty to disseminate timely, accurate, and truthful information with respect to Miller’s businesses,
operations, future financial condition and future prospects. As a result of the dissemination of
the aforementioned false and misleading reports, releases and public statements, the market price
of Miller securities was artificially inflated throughout the Class Period. In ignorance of the
adverse facts concerning Miller’s business and financial condition which were concealed by
defendants, Plaintiff and the other members of the Class purchased Miller securities at artificially
inflated prices and relied upon the price of the securities, the integrity of the market for the
securities and/or upon statements disseminated by defendants, and were damaged thereby.
68. During the Class Period, Miller securities were traded on an active and efficient
market. Plaintiff and the other members of the Class, relying on the materially false and
misleading statements described herein, which the defendants made, issued or caused to be
disseminated, or relying upon the integrity of the market, purchased shares of Miller securities at
prices artificially inflated by defendants’ wrongful conduct. Had Plaintiff and the other members
of the Class known the truth, they would not have purchased said securities, or would not have
purchased them at the inflated prices that were paid. At the time of the purchases by Plaintiff
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 33 of 37 PageID #: 33
33
and the Class, the true value of Miller securities were substantially lower than the prices paid by
Plaintiff and the other members of the Class. The market price of Miller securities declined
sharply upon public disclosure of the facts alleged herein to the injury of Plaintiff and Class
members.
69. By reason of the conduct alleged herein, defendants knowingly or recklessly,
directly or indirectly, have violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder.
70. As a direct and proximate result of defendants’ wrongful conduct, Plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company’s securities during the Class Period, upon the disclosure that the
Company had been disseminating misrepresented financial statements to the investing public.
COUNT II
(Violations of Section 20(a) of the
Exchange Act Against The Individual Defendants)
71. Plaintiff repeats and realleges each and every allegation contained in the
foregoing paragraphs as if fully set forth herein.
72. During the Class Period, the Individual Defendants participated in the operation
and management of Miller, and conducted and participated, directly and indirectly, in the
conduct of Miller’s business affairs. Because of their senior positions, they knew the adverse
non-public information about Miller’s misstatement of income and expenses and false financial
statements.
73. As officers and/or directors of a publicly owned company, the Individual
Defendants had a duty to disseminate accurate and truthful information with respect to Miller’s
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 34 of 37 PageID #: 34
34
financial condition and results of operations, and to correct promptly any public statements
issued by Miller which had become materially false or misleading.
74. Because of their positions of control and authority as senior officers, the
Individual Defendants were able to, and did, control the contents of the various reports, press
releases and public filings which Miller disseminated in the marketplace during the Class Period
concerning Miller’s results of operations. Throughout the Class Period, the Individual
Defendants exercised their power and authority to cause Miller to engage in the wrongful acts
complained of herein. The Individual Defendants therefore, were “controlling persons” of Miller
within the meaning of Section 20(a) of the Exchange Act. In this capacity, they participated in
the unlawful conduct alleged which artificially inflated the market price of Miller securities.
75. Each of the Individual Defendants, therefore, acted as a controlling person of
Miller. By reason of their senior management positions and/or being directors of Miller, each of
the Individual Defendants had the power to direct the actions of, and exercised the same to cause,
Miller to engage in the unlawful acts and conduct complained of herein. Each of the Individual
Defendants exercised control over the general operations of Miller and possessed the power to
control the specific activities which comprise the primary violations about which Plaintiff and
the other members of the Class complain.
76. By reason of the above conduct, the Individual Defendants are liable pursuant to
Section 20(a) of the Exchange Act for the violations committed by Miller.
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 35 of 37 PageID #: 35
35
PRAYER FOR RELIEF
WHEREFORE , Plaintiff demands judgment against defendants as follows:
A. Determining that the instant action may be maintained as a class action under
Rule 23 of the Federal Rules of Civil Procedure, and certifying Plaintiff as the Class
representative;
B. Requiring defendants to pay damages sustained by Plaintiff and the Class by
reason of the acts and transactions alleged herein;
C. Awarding Plaintiff and the other members of the Class prejudgment and post-
judgment interest, as well as their reasonable attorneys’ fees, expert fees and other costs; and
D. Awarding such other and further relief as this Court may deem just and proper.
DEMAND FOR TRIAL BY JURY
Plaintiff hereby demands a trial by jury.
Dated: August 15, 2011 BRAMLETT LAW OFFICES BY:
s/Paul Kent Bramlett_____________ PAUL KENT BRAMLETT #7387 P. O. Box 150734 Nashville, TN 37215-0734 Telephone: 615.248.2828 Facsimile: 866.816.4116 E-Mail: [email protected] TN SUP CT #7387/MS SUP CT #4291
POMERANTZ HAUDEK GROSSMAN & GROSS, LLP
Marc I. Gross Jeremy A. Lieberman 100 Park Avenue, 26th Floor New York, New York 10017-5516 Telephone: (212) 661-1100 Facsimile: (212) 661-8665
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 36 of 37 PageID #: 36
36
POMERANTZ HAUDEK GROSSMAN & GROSS, LLP
Patrick V. Dahlstrom One North LaSalle Street, Suite 2225
Chicago, Illinois 60602 Telephone: (312) 377-1181 Facsimile: (312) 377-1184
Attorneys for Plaintiff
Case 3:11-cv-00386 Document 1 Filed 08/16/11 Page 37 of 37 PageID #: 37
37