An informal Securities and Exchange Commission (SEC) inquiry into Linn Energy (Nasdaq: LINE) and LinnCO LLC (Nasdaq: LNCO) has buffeted the company’s stock and could derail the $4.3 billion acquisition of Berry Petroleum Co. (NYSE: BRY), some analysts say.

The scrutiny centers on LINE's use of non-GAAP accounting and could affect the use of LNCO stock for Berry. The Berry acquisition is to be paid for using shares and acquired debt.

Bernard Colson, an analyst with Global Hunter Securities LLC, said July 5 that BRY shareholders were likely “seriously questioning this deal given the significant deterioration in value experienced by LNCO shares since the deal announcement in February.

“We are removing the BRY acquisition from our model at this time,” he said.

LinnCO, which voluntarily disclosed the SEC inquiry, said that the timing of LinnCo's proposed merger with Berry is now difficult to predict. “LinnCo and LINN remain committed to the completion of the transaction,” a company news release stated.

A LinnCo spokesman did not respond to requests for comment.

Though the company’s stock has been falling since May, LINN’s problems began in earnest after reports that it uses non-GAAP accounting “to mask considerable weakness from a cash flow perspective, which could ultimately have a big impact on the stock as the price is in large portion supported by its juicy dividend yield,” Forbes reported.

LINN posted a net loss of $221.9 million in the first quarter, but using non-GAAP accounting actually delivered positive adjusted EBITDA and earnings per share of $0.16 cents, despite a $0.96 cent loss on a GAAP basis. “LINN chose to exclude unrealized losses on commodity derivatives worth $188.6 million,” Forbes said.

Colson noted that on Feb. 21, LNCO closed at $39, valuing BRY at $48.75. On July 3, it closed at $26.95, valuing BRY at $33.69, a plunge of 31%.

“We believe that BRY shareholders are not likely to vote “yes” on the ballot concerning the acquisition unless there was a significant change in terms,” Colson said.

Colson lowered the price target for LINE to $23 from $34 after “brutal” trading sessions and said the new price target reflected the current price but that “we would still reduce positions as we believe the equity is likely to trade lower in front of multiple headwinds.”

However, on July 8 Linn stock jumped 10% on reports that analysts believe the company appears to be playing by financial rules. On July 9, the price appeared to be holding steady.

Bank of America Merrill Lynch analysts upgraded the stock to “buy” and said they don't think Linn has inflated or distorted the cash flow the company pays to its investors through dividends, The Street reported.

A spokesperson for Bank of America Merrill Lynch Global Research said media policy doesn’t permit the company to share equity specific research externally. A columnist on seekingalpha.com also defended the company, noting that Linn Energy is the 11th largest independent oil and gas company in the United States with a market capitalization of $7.8 billion.

Along with $14 billion in acquisitions, Linn has also organically grown production by 30% in 2011 and 15% in 2012. The company has also provided, at the current stock price, a yield of 8.7%, seekingalpha.com said. “This is more than three times the 10-year treasury bond yield and even more compared to the S&P 500's (SPY) dividend yield.”

Kolja Rockov, Linn executive vice president and chief financial officer, told Oil and Gas Investor Magazine for its May 2012 issue that the company had the capacity to conduction transactions in the “multiple billions, easily.”

“Given the right opportunity, we can raise a tremendous amount of money. We’ve got a lot of firepower for acquisitions,” Rockov said.

The company has also capture margins that have allowed it to “grow our distribution 73% in a gas market that’s gone from $8 to $2,” he said. LINN and LinnCo announced July 1 that the SEC Fort Worth Regional Office had commenced a private, non-public inquiry regarding the companies. Within days, multiple law firms announced they were conducting investigations on behalf of purchasers of Linn securities.

On the same day LINN disclosed the investigation, LINN and LinnCo announced April distributions and dividends of $0.2416 per unit, or $2.90 per unit on an annualized basis, for all of its outstanding units. The distribution will be payable July 15.

The SEC 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,” the companies said. “LINN and LinnCo are cooperating fully with the SEC in this matter.”

The Berry transaction, which is structured as a stock-for-stock merger of Berry with LinnCo followed by the acquisition of the Berry assets by Linn, is expected to be tax-free to Berry shareholders. The transaction is the first acquisition of a public C-Corp by an upstream LLC or master limited partnership (MLP).

Under the terms of the agreement, LinnCo would issue 1.25 common shares for each common share of Berry outstanding prior to the merger. The consideration to be received by Berry shareholders is valued at $46.2375 per Berry share based on LinnCo's closing price as of Feb. 20, 2013. That would be a premium of 19.8% to the Berry closing price on Feb. 20, and a premium of 23.1% to its one month average price at that date

Linn management would acquire Berry's long-life, low-decline mature assets, pairing them with Linn’s portfolio in California, the Permian Basin, East Texas, the Rockies and elsewhere. Linn’s production would increase by about 240 million cubic feet equivalent (MMCfe) per day, an increase of about 30%.

Berry’s reserves are about 75% oil, which results in a meaningful increase in liquids exposure to 54% from its current level of 46%.