U.S. inaction on oil royalties suit could have cost millions

McClatchy NewspapersSeptember 12, 2008 

WASHINGTON — Senior Justice Department officials blocked the U.S. attorney in Colorado from supporting a whistleblower's suit last year, jeopardizing the government's prospects for recovering as much as $40 million from a major oil company for its alleged underpayment of royalties.

U.S. Attorney Troy Eid said Washington overruled his request to enter the case against the Kerr-McGee Corp. A lawyer for the whistleblower said he was told that decision was made "at the highest levels" of the Justice Department, then run by former Attorney General Alberto Gonzales.

"I recommended strongly that we intervene," Eid said. "My view did not prevail."

Moreover, McClatchy found that the Justice Department has participated in only a handful of the 80 whistleblower cases brought against the oil industry since 1995.

Whistleblower suits are generally less successful without the Justice Department's intervention, and if a whistleblower prevails on his own, taxpayers get a smaller share of the damages.

The disclosures come in the wake of scathing reports from internal watchdogs this week over the Interior Department's mismanagement of oil leases and are likely to fan criticism that the Bush administration has ignored allegations that oil companies have cheated taxpayers out of tens of billions of dollars in fees for the rights to drill on federal lands.

In three reports released this week, the Interior Department's inspector general disclosed that officials of the agency's Minerals Management Service had engaged in illicit sex and drug use with oil company employees and had accepted thousands of dollars in gifts, golf and ski outings, meals and drinks while overseeing the leasing and royalty payments.

Meanwhile, former MMS auditors have alleged in some of the 80 lawsuits that high-ranking Interior Department officials blocked them from issuing routine subpoenas seeking company records that could document the fraudulent underpayment of royalties.

Justice Department spokesman Charles Miller said the agency routinely investigates False Claims Act suits and intervenes as warranted, but that he could not comment on the pending Colorado case.

However, the allegations have prompted some to call on the Justice Department, which so far has charged only one lower-level MMS official, to form a task force and conduct a broad criminal investigation of the leasing and royalty-collection program.

At issue in Colorado was whether the federal government would join in a suit filed by a former senior auditor for MMS under the federal False Claims Act, which gives whistleblowers a share of any cash they recover for taxpayers. MMS collects as much as $10 billion in royalties each year from federal oil and gas leases.

In January 2007, a federal jury ruled that Kerr-McGee owed $7.5 million to former senior MMS auditor Bobby Maxwell and the federal government because the company had understated the proceeds of oil sales to hold down royalty costs.

After the jury's verdict, the presiding judge signaled he might overturn the verdict on grounds that Maxwell did not meet the law's strict definition of a whistleblower.

As a result, Richard LaFond, a Denver lawyer for Maxwell, said he urged the Civil Division chief in the U.S. Attorney's office, Lisa Christian, to intervene to protect taxpayers' interests by keeping the case alive.

LaFond and co-counsel Michael Porter estimated that the U.S. Treasury would lose as much as $40 million if the Justice Department did not intervene and they lost on appeal.

LaFond said that Christian agreed and she later told him she got approval from Eid, the U.S. Attorney, to take on the case.

His bosses in Washington, however, reversed him.

Eid told McClatchy that he did not know who in Washington made the decision or why. LaFond said that Christian told him the decision was made "at the highest levels . . . It was clear that this case had political stuff written all over it."

At the time, Gonzales was facing a firestorm of allegations that he was improperly firing U.S. attorneys and politicizing sensitive cases.

Kerr-McGee's lobbying registration filings show that the company spent $1.5 million in 2006 lobbying federal agencies, including the Justice Department and MMS. The filings do not specify the issues on which the company lobbied.

A spokesman for the former Kerr-McGee, which agreed in 2006 to a takeover by Houston-based Anadarko Petroleum Corp., did not respond to requests for comment Friday. The company has fought the allegations in court.

On March 30, 2007, U.S. District Judge Phillip Figa threw out the Colorado case, ruling that too many MMS officials knew about the allegations for Maxwell to qualify as a whistleblower under the False Claims Act. Even then, the judge still gave the Justice Department a few weeks to intervene.

On Wednesday, a federal appeals court in Denver reinstated Maxwell's suit against Kerr-McGee.

Justice Department spokesman Miller declined to comment about the failure to intervene, but he noted that the department filed a brief in the 10th U.S. Circuit Court of Appeals in Denver supporting Maxwell's jury award.

While the verdict was for $7.5 million, the law provides for the tripling of jury damage awards, plus penalties. Porter said the penalties could range up to $15.2 million.

When asked about criticism that the Justice Department has been too passive with respect to oil industry whistleblower suits, Justice's Miller pointed to two cases in which the department intervened, recovering a total of nearly $600 million.

However, the decision to intervene in the largest of those cases, against more than a dozen oil companies, was made during the Clinton administration.

Porter and LaFond asserted that last week's inspector general's reports reflect "the tip of the iceberg" in the oil-leasing scandal.

Jack Grynberg, the owner of a Colorado petroleum company with an extensive science background, said he has identified 68 ways in which companies "steal" natural gas and oil by underreporting the amount pumped. Grynberg has filed more than 70 False Claims Act suits accusing other oil companies of $200 billion in theft, but said the Justice Department intervened in only two.

State officials have voiced concerns, too. In 2003, a year before Maxwell sued Kerr-McGee, a Louisiana official analyzed the company's sale prices and emailed an MMS agent that that they were "far below" the market. The MMS agent said he was aware of the discrepancy.

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