Taking the law into their own hands

Citizens are wielding an obscure legal weapon to fight energy company profiteering

  • Jack Grynberg, left, shown here with Grynberg Petroleum vice president Deba Bhattacharyya, has sued some 300 oil and gas companies, charging they underreported production and underpaid royalties to the government.

    Glenn Asakawa, The Denver Post

  Bobby L. Maxwell, a former government auditor with a soft-spoken Tennessee drawl, is an unlikely candidate for a crime-fighting hero. But he is one of a select few practitioners of the mysterious art of qui tam — an obscure legal doctrine that allows citizens to sue companies that defraud the government.

For 27 years, Maxwell worked as an auditor for the federal Minerals Management Service (MMS), which collects royalties from oil and gas companies for the federal treasury. Maxwell, who most recently served as a supervisor in the MMS office in Lakewood, Colo., grew frustrated with the agency’s inaction in prosecuting royalty fraud. He is now pursuing a citizen lawsuit against Kerr-McGee, the Oklahoma City-based oil and gas giant, alleging that the company cheated the federal government out of $12 million in royalties by underreporting the value of oil it pumped out of the Gulf of Mexico.

Companies like Kerr-McGee have been under an unwelcome glare of public scrutiny following recent allegations that many of them are shortchanging the federal government and U.S. taxpayers, even as they’re recording record profits. Producers are required to pay the government 12 to 16 percent of the value of the oil and gas they pump from on- and offshore federal leases. But a Jan. 23 investigative report in The New York Times revealed that the sale prices companies are reporting to the government — which are used to calculate federal royalty payments — are lower than the prices they’re reporting to their shareholders.

Now, members of Congress, including House Resources Committee chairman Rep. Richard Pombo, R-Calif., are calling for an investigation. But for years, citizens like Bobby Maxwell have been quietly using qui tam (pronounced kee-TAM) to wage their own war against alleged tax cheats.

"That’s the whole purpose (of the doctrine)," says Maxwell: "to encourage someone else to step in, in the place of the government, and get the job done."

Bounty hunters

Michael Porter, the Denver attorney who represents Maxwell, says that qui tam originated in British common law: "If someone’s cheating the king and you can prove it, you can file your own suit and" — as a way of encouraging citizens to take such cases to court themselves — "get a percentage of what’s recovered."

In the United States, the doctrine is embodied in the False Claims Act, a Civil War-era law originally intended to prevent defense contractors from defrauding the government. Since then, it has been used to fight a variety of fraud, including a 1999 case in which the postmistress in tiny Poncha Springs, Colo., pop. 466, successfully challenged an insurance company’s surreptitious efforts to take advantage of discount bulk-mail rates. The most stunning successes of the act, however, have come in cases against the oil and gas industry, which has paid out penalties or settlements totaling hundreds of millions of dollars.

The False Claims Act provides for triple damages to be collected from convicted cheaters, and allows judges to award citizen litigants up to 30 percent of the damages. In Bobby Maxwell’s case, that cut could be as much as $10.8 million.

But Maxwell says that blowing the whistle on fraud — particularly as a government employee — always brings the risk of retaliation. "There’s a huge (personal) risk," he says. "I think there’s a great many people who are aware of fraud against the government (but) never come forward because they don’t want to take the risk."

Maxwell speaks from experience. In 2002, while still an auditor at the MMS office in Oklahoma City, he was assigned to check the production numbers that Kerr-McGee reported to the federal government. After discovering evidence that the company had underpaid millions of dollars in royalties, Maxwell repeatedly called his superiors’ attention to the problem — but they never pursued the company for payment.

The mother of all false-claims suits

In 2003, Maxwell briefly left MMS, but returned to take a higher-level job in Lakewood. The following year, he recused himself from any MMS cases involving Kerr-McGee and sued the company as a private citizen. After the specifics of the lawsuit were made public in January 2005, however, the MMS eliminated Maxwell’s position.

MMS spokesman Patrick Etchard says that the government declined to pursue Kerr-McGee after "extensive reviews of the allegations," and that it axed Maxwell’s job as part of a plan to consolidate its office. But four months afterward, MMS paid an undisclosed amount to Maxwell to settle a wrongful termination lawsuit.

And although Maxwell had lost his job, he still had a multimillion-dollar case. That case is still winding its way through the courts, and Kerr-McGee spokesman John Christiansen says his company "intends to defend vigorously against the lawsuit."

Meanwhile, a far bigger false-claims case is playing out in Wyoming. Jack Grynberg, the president and CEO of Denver-based oil and gas producer Grynberg Petroleum, has brought 73 separate lawsuits against some 300 companies in his own industry, including Kerr-McGee, Shell and ExxonMobil.

Grynberg says that when he discovered the extent to which oil and gas companies underreport production, it "just pissed the hell out of me." He turned to the False Claims Act in 1997, after reading about it in The Wall Street Journal, and used it to sue a carbon dioxide producer called the BOC Group for cheating on Colorado state royalties; BOC eventually settled the case for $6 million. Grynberg’s 73 cases in Wyoming allege some $30 billion in underpayment, which, under the triple-damage provision of the False Claims Act, could total the biggest false-claims penalty ever.

The writer is an HCN associate editor.

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