Storm of Controversy Continues to Brew over InterOil
William Lobdell
The controversy over what the future holds for InterOil (NYSE: IOC) has heated up in recent days, with news surfacing of the bad-faith bankruptcy filed by a company controlled by InterOil CEO Phil Mulacek; wild allegations revealed in a massive fraud lawsuit against Mulacek, InterOil and other companies he controls; published claims that InterOil may be one giant fraud; and a story Monday alleging an InterOil geologist had told his peers the prospects for an InterOil gas discovery in Papua New Guinea were much dimmer than what the company had boasted to Wall Street.
One fact that InterOil fans and skeptics can agree on is this: Mulacek's integrity and business history are critical factors in assessing the company's future success. No one can say for certain if InterOil's gas fields in Papua New Guinea contain any commercial gas or oil or, if they do, if the gas can be extracted in a manner to make them commercially viable.
So let's set aside for the moment the allegations leveled by Mulacek's detractors and the rosy visions of InterOil's future envisioned by his supporters.
Instead, let's rely on a sampling of Mulacek's own words, admissions and proven facts contained in court records and company documents to get a sense of his trustworthiness as a chief executive officer.
Fact No. 1: Mulacek raised $2 million from InterOil's original investors by claiming that a 40-year-old, used refinery in Alaska could be up and running in another country within a year. "As proposed, this should allow the recapture of all project equity within one year of start-up operations," and after two years, the $2 million investment could be "worth up to $118 million." Eventually, he said, the plans call for an expansion to allow a refining capacity of 150,000 barrels per day.
The refinery took almost a decade to become operational in Papua New Guinea, now operates at a 36,000-barrels-per-day capacity, and InterOil turned its first profit in 2009.
Fact No. 2: Here's what Mulacek promoted in InterOil's 1999 annual report. “I am pleased to report progress on the upstream side as well. In March 2000, the company accounted that the exploratory drilling of the Stanley-1 well ... had identified nine to 10 meters of good reservoir quality and potential gas deliverability. Including this discovery well, a total of three exploration wells have been drilled on three separate prospects, all of which are considered to be gas or condensate discoveries.”
It should sound familiar. Over the years, InterOil has issued many similar statements about the company's test wells. More than a decade later, none of them has produced any commercial gas or oil.
Fact No. 3: Mulacek admitted in a 2008 deposition that he gave his grandfather's Bahamian company -- Commodities Trading International (CTI) -- what was ultimately 5.1 million unrestricted shares of InterOil in exchange for, at most, a $250,000 piece of used refinery equipment. (Some dispute that the grandfather's offshore company gave any money at all for the purchase).
Nine months after the original $250,000 purchase, Mulacek valued the equipment at $15 million, more than 6,000% of its purchase price, and gave his grandfather's offshore company the 5.1 million shares of InterOil stock. If exchanged at its peak, that stock would have been worth an estimated $225 million.
Fact No. 4: Mulacek explained in a deposition that the piece of equipment bought for $250,000 was valued at $15 million as a way to "uplift" the value of InterOil-related entities.
Fact No. 5: In a court document, Mulacek originally denied any knowledge of CTI, even though he later admitted acting as an agent for his grandfather's offshore company.
Fact No. 6: The court documents show how the original investors received 1.31 restricted shares of InterOil stock for each $1 invested, while CTI secretly received 20.73 unrestricted shares for each $1 it allegedly invested. (Mulacek has yet to provide evidence that CTI actually purchased the $250,000 piece of equipment, court records show.)
Fact No. 7: Mulacek set up another corporation during InterOil's formation that ultimately gave family, friends and himself 226,000 unrestricted shares of InterOil in exchange for little consideration, court documents show. When asked in a deposition why he, his family and friends received more favorable treatment than InterOil's original investors, Mulacek replied, "I don't know."
Fact No. 8: Mulacek has signed a number of contracts and agreements, involving what's now InterOil, in which he represented both sides of the transaction.
Fact No. 9: Mulacek sent a letter in 2008 to nearly all of the original investors in what's now InterOil, asking them to help fight a "frivolous" lawsuit filed against him and the companies he controls. He proposed that they sign a waiver that would hold him harmless for any past actions and ask the court to dismiss the suit. Trusting Mulacek, most signed away their rights. But 19 of those investors later rescinded their agreements and signed up as plaintiffs in the fraud suit after being informed of its merits by the plaintiffs' attorney. This caused a lawsuit filed by three investors in 2005 to swell last year to 26 plaintiffs, who now seek up to $1.3 billion in derivative claims for Nikiski Partners, the forerunner to InterOil.
Fact No. 10: Mulacek recently filed a bad-faith bankruptcy for Nikiski Partners because he wanted the civil fraud suit filed against him and the companies he controls derailed and swept into federal court. Mulacek and his attorneys testified that even a $50 million judgment would be "devastating" to InterOil. The bleak future for InterOil painted by Mulacek and his attorneys in bankruptcy court if the plaintiffs received a favorable verdict wasn't reflected in the sterile language contained in InterOil's 2009 annual report. That filing simply states that, if the plaintiffs "succeed in obtaining a judgment in the amount they seek ($125 million), it could have a material adverse effect on the Company or its subsidiaries." In court, Mulacek's attorney said a judgment in that amount would mean the end of InterOil.
Fact No. 11: A federal judge said in December that Mulacek's credibility was "diminished" when the executive argued in court papers that one of the reasons for the bankruptcy was the threat of $42 million in damages from another lawsuit, this one brought in 2006 by InterOil's former chief financial officer. In reality, that case had been settled before the bankruptcy filing.
In Judge Marin Isgur’s words: "I think it just diminishes his credibility that both (lawsuits) were put out (as reasons for the bankruptcy filing) but only one had any possible validity given that (Paul A. "Andy") Martin had fully settled."
Fact No. 12: Two days before filing bankruptcy, Mulacek dumped $1.5 million in InterOil stock held by the company for which he sought bankruptcy protection. The company, Nikiski Partners, had more than $70 million in net assets when it filed for bankruptcy. Mulacek waited 40 days to report the insider transaction.
Fact No. 13 (Baker's Dozen): In 2009, Mulacek agreed to personally pay $1.6 million to settle claims brought by one of the original investors (a married couple whose claim was picked up in bankruptcy court), despite calling the fraud lawsuit "frivolous" and barred by the statue of limitations.
Here are 10 basic questions that InterOil shareholders should ask Mulacek -- no matter what they think is in the ground in Papua New Guinea:
1) Why did you strike a deal with your grandfather's company in which CTI got 5.1 million shares of InterOil stock in exchange for a $250,000 piece of equipment that you decided to value at $15 million? Was that a major and obvious conflict of interest? And why did you keep your family connection to CTI secret from most of your original investors?
2) Why did your attorney say in a 2006 legal document that you had "no knowledge" of CTI, even though you were an agent for the offshore company?
6) And why was this group of people treated more favorably than
your original investors?
7) Was it ethical or moral to dump $1.5 million in InterOil stock held by Nikiski Partners two days before you tried to put it into bankruptcy? And why wait 40 days to report the insider transaction?
8) If you and your attorneys argue in court that a significant judgment in the civil fraud case against you and the companies you control would be devastating (one attorney said it would be the end of InterOil), have you given shareholders and Wall Street analysts (who are calling the lawsuit insignificant) proper disclosure?
9) What do you say about all the tantalizing information in InterOil's press releases -- which are similar to your 1999 statement in InterOil's annual report (see above) -- that have never panned out?
10) Why did you personally agree on June 3, 2009, to pay $1.6 million to settle claims brought by one of the original investors (a married couple whose claim was picked up in bankruptcy court) in what’s now InterOil if the civil fraud case was "frivolous"?
The controversy over what the future holds for InterOil (NYSE: IOC) has heated up in recent days, with news surfacing of the bad-faith bankruptcy filed by a company controlled by InterOil CEO Phil Mulacek; wild allegations revealed in a massive fraud lawsuit against Mulacek, InterOil and other companies he controls; published claims that InterOil may be one giant fraud; and a story Monday alleging an InterOil geologist had told his peers the prospects for an InterOil gas discovery in Papua New Guinea were much dimmer than what the company had boasted to Wall Street.
One fact that InterOil fans and skeptics can agree on is this: Mulacek's integrity and business history are critical factors in assessing the company's future success. No one can say for certain if InterOil's gas fields in Papua New Guinea contain any commercial gas or oil or, if they do, if the gas can be extracted in a manner to make them commercially viable.
So let's set aside for the moment the allegations leveled by Mulacek's detractors and the rosy visions of InterOil's future envisioned by his supporters.
Instead, let's rely on a sampling of Mulacek's own words, admissions and proven facts contained in court records and company documents to get a sense of his trustworthiness as a chief executive officer.
Fact No. 1: Mulacek raised $2 million from InterOil's original investors by claiming that a 40-year-old, used refinery in Alaska could be up and running in another country within a year. "As proposed, this should allow the recapture of all project equity within one year of start-up operations," and after two years, the $2 million investment could be "worth up to $118 million." Eventually, he said, the plans call for an expansion to allow a refining capacity of 150,000 barrels per day.
The refinery took almost a decade to become operational in Papua New Guinea, now operates at a 36,000-barrels-per-day capacity, and InterOil turned its first profit in 2009.
Fact No. 2: Here's what Mulacek promoted in InterOil's 1999 annual report. “I am pleased to report progress on the upstream side as well. In March 2000, the company accounted that the exploratory drilling of the Stanley-1 well ... had identified nine to 10 meters of good reservoir quality and potential gas deliverability. Including this discovery well, a total of three exploration wells have been drilled on three separate prospects, all of which are considered to be gas or condensate discoveries.”
It should sound familiar. Over the years, InterOil has issued many similar statements about the company's test wells. More than a decade later, none of them has produced any commercial gas or oil.
Fact No. 3: Mulacek admitted in a 2008 deposition that he gave his grandfather's Bahamian company -- Commodities Trading International (CTI) -- what was ultimately 5.1 million unrestricted shares of InterOil in exchange for, at most, a $250,000 piece of used refinery equipment. (Some dispute that the grandfather's offshore company gave any money at all for the purchase).
Nine months after the original $250,000 purchase, Mulacek valued the equipment at $15 million, more than 6,000% of its purchase price, and gave his grandfather's offshore company the 5.1 million shares of InterOil stock. If exchanged at its peak, that stock would have been worth an estimated $225 million.
Fact No. 4: Mulacek explained in a deposition that the piece of equipment bought for $250,000 was valued at $15 million as a way to "uplift" the value of InterOil-related entities.
Fact No. 5: In a court document, Mulacek originally denied any knowledge of CTI, even though he later admitted acting as an agent for his grandfather's offshore company.
Fact No. 6: The court documents show how the original investors received 1.31 restricted shares of InterOil stock for each $1 invested, while CTI secretly received 20.73 unrestricted shares for each $1 it allegedly invested. (Mulacek has yet to provide evidence that CTI actually purchased the $250,000 piece of equipment, court records show.)
Fact No. 7: Mulacek set up another corporation during InterOil's formation that ultimately gave family, friends and himself 226,000 unrestricted shares of InterOil in exchange for little consideration, court documents show. When asked in a deposition why he, his family and friends received more favorable treatment than InterOil's original investors, Mulacek replied, "I don't know."
Fact No. 8: Mulacek has signed a number of contracts and agreements, involving what's now InterOil, in which he represented both sides of the transaction.
Fact No. 9: Mulacek sent a letter in 2008 to nearly all of the original investors in what's now InterOil, asking them to help fight a "frivolous" lawsuit filed against him and the companies he controls. He proposed that they sign a waiver that would hold him harmless for any past actions and ask the court to dismiss the suit. Trusting Mulacek, most signed away their rights. But 19 of those investors later rescinded their agreements and signed up as plaintiffs in the fraud suit after being informed of its merits by the plaintiffs' attorney. This caused a lawsuit filed by three investors in 2005 to swell last year to 26 plaintiffs, who now seek up to $1.3 billion in derivative claims for Nikiski Partners, the forerunner to InterOil.
Fact No. 10: Mulacek recently filed a bad-faith bankruptcy for Nikiski Partners because he wanted the civil fraud suit filed against him and the companies he controls derailed and swept into federal court. Mulacek and his attorneys testified that even a $50 million judgment would be "devastating" to InterOil. The bleak future for InterOil painted by Mulacek and his attorneys in bankruptcy court if the plaintiffs received a favorable verdict wasn't reflected in the sterile language contained in InterOil's 2009 annual report. That filing simply states that, if the plaintiffs "succeed in obtaining a judgment in the amount they seek ($125 million), it could have a material adverse effect on the Company or its subsidiaries." In court, Mulacek's attorney said a judgment in that amount would mean the end of InterOil.
Fact No. 11: A federal judge said in December that Mulacek's credibility was "diminished" when the executive argued in court papers that one of the reasons for the bankruptcy was the threat of $42 million in damages from another lawsuit, this one brought in 2006 by InterOil's former chief financial officer. In reality, that case had been settled before the bankruptcy filing.
In Judge Marin Isgur’s words: "I think it just diminishes his credibility that both (lawsuits) were put out (as reasons for the bankruptcy filing) but only one had any possible validity given that (Paul A. "Andy") Martin had fully settled."
Fact No. 12: Two days before filing bankruptcy, Mulacek dumped $1.5 million in InterOil stock held by the company for which he sought bankruptcy protection. The company, Nikiski Partners, had more than $70 million in net assets when it filed for bankruptcy. Mulacek waited 40 days to report the insider transaction.
Fact No. 13 (Baker's Dozen): In 2009, Mulacek agreed to personally pay $1.6 million to settle claims brought by one of the original investors (a married couple whose claim was picked up in bankruptcy court), despite calling the fraud lawsuit "frivolous" and barred by the statue of limitations.
Here are 10 basic questions that InterOil shareholders should ask Mulacek -- no matter what they think is in the ground in Papua New Guinea:
1) Why did you strike a deal with your grandfather's company in which CTI got 5.1 million shares of InterOil stock in exchange for a $250,000 piece of equipment that you decided to value at $15 million? Was that a major and obvious conflict of interest? And why did you keep your family connection to CTI secret from most of your original investors?
2) Why did your attorney say in a 2006 legal document that you had "no knowledge" of CTI, even though you were an agent for the offshore company?
3) How could you sign agreements and/or contracts representing both
sides of the transactions?
4) Is it ethical to "uplift," in your words, a company by inflating
the value of an asset by 6,000% within nine months?
5) What did you, your family and friends give to an
InterOil-related company in exchange for 226,000 shares of unrestricted
InterOil stock?
7) Was it ethical or moral to dump $1.5 million in InterOil stock held by Nikiski Partners two days before you tried to put it into bankruptcy? And why wait 40 days to report the insider transaction?
8) If you and your attorneys argue in court that a significant judgment in the civil fraud case against you and the companies you control would be devastating (one attorney said it would be the end of InterOil), have you given shareholders and Wall Street analysts (who are calling the lawsuit insignificant) proper disclosure?
9) What do you say about all the tantalizing information in InterOil's press releases -- which are similar to your 1999 statement in InterOil's annual report (see above) -- that have never panned out?
10) Why did you personally agree on June 3, 2009, to pay $1.6 million to settle claims brought by one of the original investors (a married couple whose claim was picked up in bankruptcy court) in what’s now InterOil if the civil fraud case was "frivolous"?
Comments
Post a Comment
Please free to leave comments.