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Suits Say Interior Department Impeded Audits for Oil Leases
NY Times
Published: September 21, 2006

WASHINGTON, Sept. 20 — Four government auditors who monitor leases for oil and gas on federal property say the Interior Department suppressed their efforts to recover millions of dollars from companies they said were cheating the government.

The accusations, many of them in four lawsuits that were unsealed last week by federal judges in Oklahoma, represent a rare rebellion by government investigators against their own agency.

falling_collections (7K)The auditors contend that they were blocked by their bosses from pursuing more than $30 million in fraudulent underpayments of royalties for oil produced in publicly owned waters in the Gulf of Mexico.

"The agency has lost its sense of mission, which is to protect American taxpayers," said Bobby L. Maxwell, who was formerly in charge of Gulf of Mexico auditing. "These are assets that belong to the American public, and they are supposed to be used for things like education, public infrastructure and roadways."

The lawsuits have surfaced as Democrats and Republicans alike are questioning the Bush administration's willingness to challenge the oil and gas industry.

The new accusations surfaced just one week after the Interior Department's inspector general, Earl E. Devaney, told a House subcommittee that "short of crime, anything goes" at the top levels of the Interior Department.

In two of the lawsuits, two senior auditors with the Minerals Management Service in Oklahoma City said they were ordered to drop their claim that Shell Oil had fraudulently shortchanged taxpayers out of $18 million.

A third auditor, also in Oklahoma City, charged that senior officials in Denver ordered him to drop his demand that two dozen companies pay $1 million in back interest.

And in a suit that was filed in 2004, Mr. Maxwell charged that senior officials in Washington ordered him not to press claims that the Kerr-McGee Corporation had cheated the government out of $12 million in royalties.

On Wednesday, Interior officials denied that the agency had suppressed any valid claims and implied that the auditors simply wanted a share of any money recovered through their lawsuits.

"If these auditors believed there were fraud and or false claims on the part of the companies they were auditing, they should have followed the proper procedures," the Interior Department said in a written statement. "Instead, they opted to pursue private lawsuits under which, if they prevail, they could receive up to 30 percent of the monies recovered from the companies."

In defying their own agency, the Interior Department's auditors sued the oil companies under a federal law, called the False Claims Act, that was created to allow individuals to expose fraud against the government. People who successfully recover money for the government in such cases are entitled to a portion. A losing company is required to pay triple the amount of recovered money as well as back interest — potentially more than $120 million in the cases brought by the auditors.

Destin Singleton, a spokeswoman for Shell, said the company had not seen the suits and could not comment. John Christiansen, a Kerr-McGee spokesman, said, "We believe the case is without merit and we are defending against it."

In dollar terms, the suspected underpayments amount to a tiny fraction of the $8 billion in royalties that companies paid last year for oil and gas extracted from federal lands.

But the lawsuits come at a time when the Interior Department is already under fire from Congress, accused of covering up ethical lapses and managerial incompetence.

"These accounts, coming from the front lines, point a big red arrow at the large problem of taxpayers being stiffed," said Senator Ron Wyden, Democrat of Oregon, who has been investigating the accusations.

"If it was one isolated instance, you could say that's somebody who had a bad experience and was frustrated," Mr. Wyden said. "But when you have three or four professional, nonpolitical, independent auditors all bringing the same message, that is too important to ignore."

By any measure, the Interior Department under President Bush has placed top priority on increasing oil and gas production in the United States. Under its business-friendly agenda, the department has increased incentives for drilling in risky areas, has speeded approvals for drilling applications and has campaigned to open more coastal areas for oil exploration.

Lawyers who have specialized in lawsuits under the False Claims Act said they had never seen a group of government investigators use the law against their own agency.

"Most whistle-blowers are insiders at a company who spot something that government auditors have missed," said James Moorman, president of Taxpayers Against Fraud Education Fund, a nonprofit organization supported by lawyers that specializes in the False Claims Act.

 "But here you have auditors saying, ‘We did our job, we found the problems and our superiors don't want to hear about it,' '' Mr. Moorman said. "If it were just one auditor, you could dismiss it. But with four auditors, that's a pattern of practice."

In their suits, the auditors contend that they had no choice but to go outside the agency because their supervisors ordered them to "cease work" on five separate investigations and drop their claims.

Documents recently unsealed in Mr. Maxwell's case against Kerr-McGee, which is scheduled for trial in November, show that federal officials abandoned his claims at almost the same moment that state auditors in Louisiana reached the same conclusions as Mr. Maxwell.

Under federal regulations, companies are supposed to pay the federal government a royalty of 12 percent or 16 percent on oil and gas they extract from federal lands or coastal waters.

Mr. Maxwell's job was eliminated in 2004. He received a settlement from the government and is now living in Hawaii.

A much-praised auditor who recovered hundreds of millions of dollars over a 20-year career, Mr. Maxwell concluded in late 2002 that Kerr-McGee had used a clever marketing deal to reduce its apparent sales receipts and royalty payments.

Under the marketing deal, Mr. Maxwell contended, Kerr-McGee sold its oil at $1 to $3 a barrel below market prices to a company called Texon. Mr. Maxwell's auditing team said that Texon was making up for Kerr-McGee's shortfall by providing marketing and administrative services. In effect, Mr. Maxwell contended, Kerr-McGee was being paid in both cash and services but only paying royalties on the cash portion.

Interior officials initially encouraged Mr. Maxwell when he raised the concerns about Kerr-McGee in early 2003. "I am sure we can make the case," wrote John Price, then head of the agency's appeals division, in an e-mail message to Mr. Maxwell.

But a few days later, lawyers in the Interior Department's solicitor's office urged him to drop the case. "Although I did not understand the reasoning, it was made clear to me that the agency did not want the order issued," Mr. Maxwell wrote in an affidavit for his suit. "The next day, Mr. Price telephoned me and reiterated to me that if I issued the order, the director would be very upset with me."

But Louisiana auditors were investigating the same practices in connection with royalties on state-owned land, and had concluded that Kerr-McGee was lowballing its sales price by $1.50 to $3 a barrel. Louisiana officials demanded more than $1 million in additional state royalties from the company, and eventually settled for $600,000.

In two of the lawsuits that were unsealed last week in Oklahoma, senior auditors in Oklahoma City said they had been ordered to drop claims that Shell Oil had underpaid by $18 million.

The suits were brought by Joel F. Arnold, a supervisory auditor who oversees a team of offshore auditors based in Oklahoma City, and Randall L. Little, a senior auditor on Mr. Arnold's team in Oklahoma City.

Like Mr. Maxwell, both of the Oklahoma auditors have more than two decades of experience in government and industry and have received numerous government awards for the money they have recovered.

In one suit, Mr. Little contends that he found evidence from his audit that Shell had reduced the sales value of oil from six leases by fraudulently inflating transportation costs. One practice, they said, allowed Shell to improperly escape $15 million in royalties. A second practice allowed Shell to save $3.8 million by claiming transportation costs for oil that was being delivered to the government at its own production site in the Gulf.

The Justice Department, which reviews such suits and sometimes joins them, declined to participate in these cases. But it did not urge the courts to dismiss the suits, as some senior Interior Department had wanted.

None of the Oklahoma auditors would agree to an interview. Elizabeth Sharrock, a lawyer for Mr. Arnold and Mr. Little, said both men had already been removed from their usual jobs and were afraid of being fired.

But according to their suits, the auditors presented their findings about Shell last October to their supervisor in Houston, Lonnie Kimball. Mr. Kimball, according to court papers, initially told the auditors to "go straight to Shell" with the complaints.

But in January, after meeting with a Shell executive, Mr. Kimball abruptly reversed course and told the auditors to "cease work on all false claims" against Shell.

In its statement on Wednesday, the Interior Department acknowledged that the auditors had been told not to send "issue letters" — an official notification that a company appears to have underpaid royalties.

But it said that other auditing offices had been investigating the issues and taken certain actions. "In fact," it said, "our actions to date include: issuing late-payment interest bills; continuing an ongoing audit; and determining that an issue was not supported by the regulations."

Interior officials did not say how much money they had recovered from companies named by the auditors. But the agency's own statistics indicate that revenue from auditing and enforcement plunged after President Bush took office.

From 1989 through 2001, according to a report by the Congressional Budget Office, auditing and other enforcement efforts generated an average of $176 million a year. But from 2002 through 2005, according to numbers that the department provided lawmakers last May, those collections averaged only $46 million.

In another clash, frustrated federal auditors have complained that the Interior Department no longer allows them to subpoena documents from oil companies.

"Subpoenas are a very powerful tool to get the information you need, but I don't think they've approved a single subpoena in years," Mr. Maxwell said in an interview. "In the good old days when we were able to issue subpoenas on our own, each of us was able to recover millions of dollars a year."

Agency officials acknowledged that they have not issued any subpoenas in the last three years. "Enforcement of subpoenas by the courts can take years and be very costly," the agency said in a written response to questions. "We have not found them to be a very effective tool."

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