The Securities and Exchange Commission (SEC) has notified Goodyear that the agency's staff intends to recommend civil or administrative enforcement against the company stemming from the tire maker's 2003 restatement of earnings.
The notification-referred to as a ``Wells notice''-was disclosed Aug. 16 and points to alleged violations of the Securities and Exchange Act of 1934 relating to the maintenance of books, records and internal accounting controls, the establishment of disclosure controls and the periodic SEC filing requirements, Goodyear said. Former CFO Robert Tieken and former chief accounting officer Stephanie Bergeron also received individual Wells notices. They retired in May 2004 and December 2003, respectively. Chairman and CEO Robert Keegan was not issued a Wells notice, a spokesman said. Goodyear's stock price tumbled 3.4 percent on Aug. 16 with the news to close at $16.91.
The SEC launched its investigation in November 2003 after Goodyear disclosed the month before that it would restate its results back to 1998. The SEC upgraded it to a formal investigation in February 2004. By that May, Goodyear had reduced its past earnings by $280.8 million. A final restatement in late 2004 of $19.8 million led to a final tally of $300.6 million restated.
Fallout from the Wells notice is still to be determined.
While the notice indicates the SEC staff intends to recommend to the commission that it bring enforcement action, Goodyear has time to respond to the staff's investigation before a formal recommendation is lodged.
Eugene Goldman, a Washington, D.C., attorney who represents companies before the SEC and previously had worked in the SEC's Division of Enforcement, said the Wells notice is not the civil equivalent of an indictment.
``There are times when the Wells notice goes out and no action's brought,'' he told Tire Business. ``There are times when a Wells notice goes out and identifies which sections the staff is thinking of recommending to the commission (for) what charges should be brought, and you have less charges or different charges at the end of the day.''
He said it's hard to determine how often no action comes about after a Wells notice, but a major recent case in point is General Mills Inc. The cereal company announced June 2 that the SEC had terminated its investigation into General Mills' sales practices and related accounting after issuing a Wells notice in February 2004.
Mr. Goldman said Goodyear now would have an opportunity to settle with SEC staff as well.
In a note to investors, JP Morgan analyst Himanshu Patel called the Wells notice a ``procedural development that should not be alarming,'' though it could involve a monetary penalty.
``(Goodyear) now has the opportunity to respond to the SEC before it makes a formal recommendation,'' Mr. Patel noted. ``In some ways, it brings the SEC one step closer to completing its (Goodyear) accounting investigation.''
A Goodyear spokesman also characterized the notice as another step in the entire restatement and investigation process. ``The important thing is this is the next step in the process that began two years ago,'' he told Tire Business. ``It doesn't have any impact on Goodyear's turnaround. We are still focused on improving the business and all the things that we've been doing.''
The restatement stems from a couple issues. The tire maker initially found errors in its inter-company billing and with the 1999 implementation of an enterprise resource planning (ERP) computerized accounting system. By December 2003, Goodyear said it uncovered potential accounting problems in Europe, and by the following February the investigation spread beyond Europe to other overseas operations. In March 2004 the company took disciplinary action against several unnamed senior managers in its European Union division.
``We continue to implement ongoing improvements in our financial controls,'' the spokesman said, adding Goodyear is cooperating with the SEC's investigation.
The potential enforcement action generally has three penalty tiers, Mr. Goldman explained. The first and lowest tier applies to violations that don't involve fraud or substantial investor losses and carries fines of $50,000 per violation. The second tier applies to violations that include fraud, deceit or deliberate disregard of regulatory requirements but without significant shareholder losses and carries fines of $250,000 per violation. Finally, the most severe tier deals with fraud and significant shareholder losses and imposes fines of $500,000 per violation. The violations can be multiplied by items such as the number of financial reports affected or by other metrics, but the fines also have room for negotiation.
After reviewing Goodyear's statement about the Wells, Mr. Goldman said the SEC staff pointed to a series of sections of the Securities and Exchange Act of 1934 and SEC Rules that hint at potential reporting violations by Goodyear. But the list does not include the critical section denoting fraud, he said.
``It doesn't look like they're leaning toward the top end'' of the tier system, he said, though the severity of any fines from the first two tiers would depend on how many violations the SEC is pursuing.
The question of whether the potential for enforcement could hurt Goodyear just as dealers and investors are feeling fairly confident about the tire maker's success is yet to be determined. Some analysts suggested that this development might simply be putting a period on the restatement process, and Mr. Goldman said that process already has cost Goodyear once.
``If the company's already restated, then they've already taken a hit in the marketplace,'' he said. ``The issue is whether the SEC has uncovered additional things that would cause them to restate more.''
Indeed, at the time of the initial restatement, Goodyear's stock price tumbled to $6.19 on Oct. 23, 2003, and took a long, slow road up to its recent high of $18.49 on Aug. 5.
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Timeline of Goodyear's financial restatements
* October 2003-Goodyear announces it will restate five years' worth of earnings, estimating a reduction in net income of up to $100 million. More than 25 lawsuits-mostly by shareholders-were soon after filed in U.S. District Court.
* November 2003-Goodyear posts a third quarter loss of $105.9 million as well as a restatement of $84.7 million for 1998 through the first half of 2003. The tire maker also disclosed that the Securities and Exchange Commission (SEC) launched an informal investigation of the restatement.
* December 2003-Goodyear delays its amended 2002 10-K filing after finding more accounting issues in Europe, a move that at the time threatened the tire maker's ability to satisfy parts of its contract with the United Steelworkers.
* February 2004-The SEC sends notice to Goodyear that it has issued a formal order of investigation as Goodyear expands its investigation of improper accounting issues to other overseas operations beyond Europe.
* March 2004-The company takes disciplinary action against several unnamed senior managers in its European Union division.
* May 2004-As it belatedly posts a net loss in 2003 of $802.1 million, Goodyear also adjusts its net income down further by $196.1 million, bringing the total of its restatements to $280.8 million.
* June 2004-Goodyear again delays reporting financial results as its financial department scurries after the massive investigation and restatement.
* March 2005-As it reported net income for 2004 of $115 million, Goodyear also noted in its 2004 10-K filing that it restated net income by $19.8 million, $12.9 million of which was related to accounting issues at its Australian affiliate, South Pacific Tyres (SPT), bringing the final tally to $300.6 million. Goodyear also said that the shareholder lawsuits were consolidated into three separate actions that the company asked to be dismissed in November 2004.
* August 2005-Goodyear receives a ``Wells notice'' from the SEC indicating that the agency's staff intends to recommend enforcement action against the tire maker.