Following on the revelations of late last week, the Securities and Exchange Commission commenced a civil action yesterday to freeze the assets of former Patterson-UTI Energy, Inc. chief financial officer, Jonathan Dwane “Jody” Nelson, who the SEC accuses of masterminding the embezzlement of $70 million from the Snyder, Texas-based contract drilling company (a copy of the complaint is here. In addition to the freeze order, the SEC obtained the appointment of a temporary receiver over Mr. Nelson’s assets. The SEC’s press release on the lawsuit provides more information regarding the alleged scheme than has been made public to date:

In its emergency lawsuit, the SEC alleged that Nelson, who resides in Dallas, Texas, orchestrated a massive phony-invoice scheme to embezzle more than $69 million from Patterson-UTI over five years. The SEC also named as relief defendants five Nelson-controlled companies alleged to have received proceeds from the scheme: XIT Land & Energy, Inc. (“XIT”), Chisum Travel Center, Ltd., Z8 Properties, Ltd., Three Stars Aviation, LLC, and Chisum Coach, Ltd.
The SEC’s complaint alleges that Nelson created false invoices that caused Patterson-UTI to pay millions of dollars to XIT, a company he secretly controlled that was not a legitimate Patterson-UTI vendor. To accomplish his scheme, Nelson circumvented Patterson-UTI internal controls by, among other things, forging another company official’s initials on payment documents. According to the complaint, Nelson finally confessed to Patterson-UTI on November 9 that he embezzled approximately $29 million, but company records show that he actually stole $69,434,342 from January 2001 through October 2005. To hide his scheme, Nelson, among other things, made false written representations to Patterson-UTI’s independent auditor about the accuracy of the company’s financial statements and signed false public certifications attesting to the truthfulness of the company’s quarterly and annual SEC reports.
As the complaint alleges, Nelson transferred the embezzled funds from an XIT bank account to other entities he controlled, including Chisum Travel, Z8 Properties, Three Stars Aviation and Chisum Coach. The SEC contends that Nelson used these funds to purchase an airplane, an airfield, a cattle ranch, homes, vehicles and a full-service truck stop, among other things. The SEC named XIT and these other entities as relief defendants solely to secure equitable relief to prevent them from dissipating or hiding the fruits of Nelson’s wrongdoing.

As Peter Henning notes, the SEC lawsuit is an almost certain precursor of a criminal indictment of Nelson, who may attempt to implicate others in the scheme as a bargaining chip over the length of his prison sentence. Stay tuned.