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What: Shares of Magnum Hunger Resources Corp (NYSE:MHR) are down more than 10% after the company disclosed that it had received a Wells Notice from the SEC. The notice said that regulators had made a preliminary decision to recommend an enforcement case against the company, its CEO, a board member and two former executives.
So what: A Wells Notice is simply a letter the SEC sends when it plans to bring an enforcement action against a company or individuals. It indicates that the SEC staff has determined that it may bring civil action against a company or a person and therefore the notice is intended to give an opportunity for the recipient to provide information that could rebut the pending enforcement action.
In Magnum Hunter's case, the notice relates to the filing of the company's 2012 Annual Report. Prior to filing that report it dismissed its previous registered public accounting firm, causing the filing to be delayed. The company believes the issues raised at the time with its internal controls, which identified a material weakness, is the primary purpose of this enforcement action. That's why the company intends to respond to the Wells Notice with a Wells Submission, which will detail how the company had remedied all of the identified weakness by the end of last year.
Now what: Investors' first reaction is usually to sell any time a company's financial controls are questioned by the SEC. However, if this Wells Notice is indeed related to the 2012 issue, it would appear that it's a bit late, as the company has already fixed these problems. That said, until the company is given the all-clear from the SEC, this pending enforcement action will likely act as a weight on Magnum Hunter's stock.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.