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SEC Investigation Report Sinks EchoStar

EchoStar Communications Corp. stock began a freefall Thursday, dropping nearly 8% ($2.39 per share) after a published report said the No. 2 direct-broadcast satellite service provider was under investigation by the Securities and Exchange Commission regarding improper accounting.

According to a report by Bloomberg News Thursday citing unnamed sources, EchoStar’s audit committee launched its own internal investigation after its auditors, KPMG LLP, questioned the accounting of several transactions with suppliers and suspect consulting payments made by the company to a friend of its chairman and CEO, Charlie Ergen.

As a result, Bloomberg said, the SEC has launched its own inquiry into Ergen’s role in EchoStar’s accounting.

The Bloomberg report did not elaborate on the type of supplier transactions being investigated, nor did it specify the amounts of the consulting fees in question.

EchoStar spokesman Steve Caulk declined to comment on the Bloomberg report.

The specter of an SEC investigation and possible improper accounting sent shareholders for the exits Thursday. EchoStar shares fell as much as 7.8% ($2.39 per share) in morning trading, before climbing back slightly to $28.43 per share (down 7.1%, or $2.16 per share) in the early afternoon.

Most analysts were surprised about the possible inquiry into EchoStar’s accounting but downplayed the significance until more details are released.

“It is worth noting that [EchoStar’s] accounting policies have tended to be more conservative than cable companies and peer DirecTV [Inc.],” Citigroup Smith Barney cable and satellite analyst Niraj Gupta said in a research report. “Accordingly, we would be surprised if the investigation leads to any findings of material accounting issues. Having said that, the investigation is likely to remain an overhang on the stock until details become available.”

Oppenheimer & Co. Inc. cable and satellite analyst Tom Eagan said it is hard to determine the impact of the investigation without all of the information, adding that if the report is true, while SEC investigations are always serious, if the consulting-fees issue is merely a question of timing -- when EchoStar recorded them on its books -- investors have little to worry about.

“If it is timing of payments, it isn’t as big an issue,” Eagan said. “It it’s amount of payments, it’s a bigger issue, only because that could affect free cash flow.”

Eagan also wondered if the investigation could force EchoStar to postpone its fourth-quarter earnings announcement, scheduled for March 17.

“I’ll bet we’ll hear if not Friday, than early next week, whether they’re going to be able to file their fourth-quarter [results] or not,” he added.