Houston oilfield services corporation SAExploration is suing its long-time auditor for allegedly failing to detect a $100 million fraud scheme operated by the company’s former top executives for several years.
In a lawsuit filed Tuesday in Harris County District Court, SAE accused Pannell Kerr Forster of Texas of negligence, malpractice and “dereliction of duty” that resulted in SAE being forced into bankruptcy, subjected to multiple federal investigations, being delisted by Nasdaq and targeted for class action lawsuits.
SAE seeks $45 million in damages.
SAE’s former CEO, Jeffrey Hastings, pleaded guilty to accounting fraud and misappropriating tens of millions of dollars. He was sentenced to three years in prison. Brent Whiteley, SAE’s former general counsel, and Michael Scott, SAE’s former executive vice president of operations, also pleaded guilty and are awaiting sentencing.
SAE, a seismic data acquisition company, claims that the company’s “internal accounting controls and financials were riddled with red flags” that even a “minimally competent auditor” should have caught.
“PKF Texas’s epic failure, starting in 2014 and continuing for years, left SAE’s board of directors and audit committee in the dark about the recognition of improper revenue, embezzlement and securities fraud by certain co-conspiring officers,” the 26-page petition states. “During the critical time period, when board members could have intervened to preempt or mitigate the improper actions and embezzlement, PKF Texas was feckless, recklessly breaching the duties it owed to its client, SAE.”
Officials in the Houston office of PKF did not respond to requests for an interview.
“It’s disappointing that PKF has not acknowledged their role, but we are committed to holding them accountable,” said SAE CEO Forrest Burkholder. “People are always asking, where were the auditors? We think that’s a very good question.”
SAE leaders in 2019 discovered the fraud scheme that inflated company revenues by tens of millions of dollars using a fake business that had no website and operated out of a bedroom in rural Alaska.
The lawsuit claims that PKF asked no questions and “conducted no reasonable or diligent investigation” into the fake business.
“That failure ruined SAE,” the complaint states. “If PKF Texas had only fulfilled its professional obligations, much of the harm could have been avoided.”
“SAE’s internal accounting controls and financials were riddled with red flags,” the lawsuit claims. “But PKF Texas, employed by the board to audit those controls and financials, ignored the flags, resulting in enormous losses to SAE.”
SAE General Counsel David Rassin, who was hired in early 2020 to lead the company through the investigations and out of bankruptcy, hired Houston trial lawyer Andino Reynal to bring the lawsuit for SAE.
“The company has spent years rebuilding after what happened,” Rassin told The Texas Lawbook. “We want to move on, but feel ethically bound to see this through. We will never stop pursuing justice or restitution from the wrongdoers. PKF has refused to take responsibility for its role, so it’s time to put it to a jury.”
The case is SAExploration Holdings v. Pannell Kerr Forster of Texas and has been assigned to Harris County District Judge Rebeea Collier of the 113th District Court.