AKRON-The Securities and Exchange Commission has notified Goodyear its staff intends to recommend civil or administrative action against the company stemming from the tire maker´s 2003 restatement of earnings.
The notice-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, the company said.
Former Chief Financial Officer 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 didn´t receive a notice, a spokesman said.
Goodyear´s stock price tumbled 3.4 percent with the news to close at $16.91 on Aug. 16.
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.
Fallout from the SEC move still is to be determined. Goodyear has time to respond to the staff´s investigation before a formal recommendation is lodged.
The Wells notice is not the civil equivalent of an indictment, said Eugene Goldman, a Washington attorney who represents companies before the SEC and previously had worked in the SEC´s Division of Enforcement.
"There are times when the Wells notice goes out and no action´s brought," he said. "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.
Goldman said Goodyear now would have an opportunity to settle with the 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," Patel said. "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 pro-cess. "The important thing is this is the next step in the process that began two years ago," he said. "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 of issues. The tire maker initially found errors in its inter-company billing and with the implementation of an enterprise resource planning computerized accounting system in 1999. 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. Goodyear is cooperating with the SEC investigation.
The potential enforcement action generally has three penalty tiers, Goldman said. 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.
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 notice, 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, Goldman 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. But some analysts suggested that this development might simply be putting a period on the restatement process, and 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."
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.