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The Roller-Coaster Ride for LINN Energy Investors Continues

Matt DiLallo
July 2, 2013

It's been quite the roller-coaster year for investors in LINN Energy (NASDAQ: LINE). The company has made its share of headlines this year, which started with the announcement of a $4.3 billion joint bid with its affiliate LinnCo (NASDAQ: LNCO) for Berry Petroleum (NYSE: BRY). Most of its other headlines have come from the mounting pressure from short sellers, which have been questioning the company's hedging and accounting practices. Now, this news flow has caught the eye of the SEC which has commenced an informal inquiry to look into the company's practices.

According to a press release from LINN Energy: 

The SEC has requested the preservation of documents and communications that are potentially relevant to, among other things, LinnCo's proposed merger with Berry Petroleum Company, and LINN and LinnCo's use of non-GAAP financial measures and hedging strategy. The SEC has stated that the fact of the inquiry should not be construed as an indication that the SEC or its staff has a negative view of any entity, individual or security. LINN and LinnCo are cooperating fully with the SEC in this matter.

As an investor in both LINN and LinnCo, as well as someone who has followed the company quite closely, I can't say that I'm surprised by the move. The allegations that short sellers have been making are quite serious, basically insinuating that LINN is in a sense a pyramid scheme. The SEC really should be looking into this just to make sure those allegations aren't actually true. 

This used to be how quiet it was around LINN Energy. Source: LINN Energy

Unfortunately, this is adding a bigger dose of uncertainty to the company in the short term. Longer term, there is a silver lining as this whole process should eventually bring some more clarity to LINN's business, including whether or not it was correct in how it accounted for the items that short sellers are pointing out. 

The tough part for investors will be dealing with the uncertainty that must be endured until the investigation runs its course. Investors should actually brace themselves for the possibility that the informal investigation by the SEC could lead to a more formal investigation if its staff believes that wrongdoing occurred, which could then lead to an enforcement action as well as requiring the company to fix any past mistakes. 

While we don't know how long it will take the SEC to complete its investigation, nor do we know what it will find, investors really should welcome this process because the SEC is there to protect our interests. If nothing is amiss, then LINN's management team and long-term investors will be vindicated. Meanwhile, if something does come up that needs to be fixed, investors will be best ser