Most read: Accounting scandal the Canadian WorldCom?

Law firms smell the blood in the water and are beginning to circle.

Most read: Accounting scandal the Canadian WorldCom?
At the end of July massive Calgary-based energy company Penn West shocked markets when a company, often considered a safe and stable investment, announced a review of its financial statements for 2014 and four years previous. The story seems likely to be with us for years, as a major Canadian accounting scandal gets underway.   

This past Friday Toronto law firm, Rochon Genova LLP announced that it is investigating a potential class action suit on behalf of shareholders. Rochon Genova is, along with Lieff Cabraser Heimann & Bernstein LLP of New York, conducting an investigation of Penn West on behalf of purchasers of Penn West securities on the Toronto and New York Stock Exchanges.

"We've come across restatements before. But this is massive. It goes back four or five years. It's one of the biggest energy companies in North America. The damages are huge," says Suzanne Chiodo, a securities lawyer with Rochon. "I don't want to speculate....but the suspicions are, and these suspicions have been in the papers, are that they wanted to bring their debt down. This has hurt everyone…including banks, and pension funds.

Penn West, of course, is the kind of security that used to be called a "widows and orphans" stock. Stable, safe, liquid, steady, it was the kind of thing you put in the portfolio and never thought about again. The popularity of the company, along with the popularity of energy stocks in general, likely means anyone invested in ETFs or mutual funds, owns a bit of PW. So no wonder the accounting scandal is reverberating in Canadian markets. Some have compared the re-statements to the WorldCom accounting scandal of the early 2000s in the U.S. That is, as an event, this is unexpected, it seems the accounting dodges are huge. The company involved is a major corporate Canadian entity.  

Looking back, the abrupt departure of the old CFO a year after a new CEO came in, is a reason for concern. Since then Penn West's audit committee found certain accounting entries that reduced operating costs that should have been categorized as operating expensese, not one-time capital accounting costs. This led to the improper classification of operating expenses in the fiscal years 2012 and 2013, necessitating a review of all financial statements issued for the fiscal years 2010 through 2014.  The company has decided to restate the company's annual financial statements for that time as well as the MD&A sections of its financials. The accounting mistake could mean the company is not in compliance with certain of debt and bank covenants. Penn West's share price on the TSX fell precipitously on heavy trading volume in the wake of the announcement, losing almost a fifth of its value in just one week. But things are likely to get worse for the company before they get better if the interest in the potential law suits transpire into real action.

"Institutions are sometimes reticent to come forward. [But] we just circulated the press release today...we’ve had huge interest already from pension funds and institutional investors. We have been in early talks,” says Chiodo.  Legal action could happen relatively quickly says Chiodo. “We want to do it sooner than later. Others are looking at this as well, so we want to act fast.”

Shareholders who wish to learn more about the proposed proceedings may contact Rochon Genova LLP at: [email protected]