Features Archive - Respond to this Article

September 1999 - Volume 31 Issue 8


Shooting the Whistleblower
How Congress is sabotaging an effort to stop oil companies from cheating taxpayers
by Eric Umansky

In 1986, Robert Berman, then a senior economist at the Interior Department, got a memo from the office of Gray Davis, then the Controller for the state of California. California was concerned it was getting underpaid by oil companies who were drilling for oil on public land. Berman looked into the issue, and, as he puts, "was bothered by the result."

Oil companies are required to pay a royalty on any oil they take from public land, which amounts to billions of dollars per year. But it looked to Berman like the companies were purposely under-reporting the price of the oil they were extracting. Under the law, the government relied on oil companies to self-report the price of oil they took out of any public land, federal or state. There were a number of safeguards to make sure that oil companies reported a fair price. But the regulations were very complex and required expensive bird-dogging on the part of the government. Not exactly the perfect system. At the same time, Berman remembers, there was concern about the high costs of all the monitoring needed to make sure oil companies were paying the government a fair price. As a result, the Interior Department was getting some heat over its budget.

"I had an idea," says Berman, recalling his thinking 13 years ago, "Why don't we start looking at market prices, because the oil commodities market just opened up." In other words, Berman's suggestion was both radical and very simple: Forget about all the current complex regulations with their near-blind faith in oil companies billing themselves fairly, and just make them pay royalties based on what people would pay for the oil on the open market. This would ensure that the government got what it deserved and would reduce the cost of enforcement.

Perhaps as a result of standard bureaucratic inertia, the Interior Department did its best to ignore Berman's idea for years. According to Berman, when he finally did find hard evidence of oil companies purposely cheating on oil royalties, Interior issued a report agreeing with him, only to have the report revised and deny any underpayments. Finally, says Berman, "I was ordered not to work on oil valuations anymore."

But it turns out Berman was right. Over the past 13 years oil companies have had to pay billions of dollars in settlements to states and the federal government after it was discovered that they had underpaid for the oil they extracted. And though Berman somewhat exaggerates his role in identifying the problem, his idea to simplify the payment process has also proven to be right on. Many states have adopted the "market price" idea; and the Interior Department finally proposed adopting it in early in 1997 (and billed oil companies $257 million in back payments).

The total savings from Berman's idea is $66 million a year. So you'd think he'd win an employee of the month award and bask in office glory for ferreting out fraud. Instead, Congress has blocked the Interior Department from adopting the new rules time and again. And now, led by oil-state congressmen, all of whom have gotten chunks of cash from the oil industry, Congress has launched a diversionary investigation against Berman. Like much of congressional action on this issue, the investigation is a favor to the oil industry, and the idea behind it is clear: If someone catches you stealing, and you can't question their testimony, attack their integrity as a witness.

Oil companies and Congress want you to think this is a complex story with "no easy answer." But it's really very simple: Oil companies have been cheating the government out of billions of dollars, and Congress is helping them do it.

Crude Cut
Oil companies have a great gig. When they take oil from federal land, they're supposed to pay a royalty to the government for every barrel they take. It's a fairly modest price, generally about 12.5 percent of the total value of the oil. But Big Oil (and given that it isn't all oil companies, but just the largest -- or vertically integrated -- ones, the term is more than just hyperbole) has been scamming the system for years. The government regulations around oil royalties were (and still are) so complex and weighted in favor of oil companies that it was easy to under-report the cost of oil taken from government land. The oil companies have taken advantage of that fact. Their self-reported prices, called "posted prices," are consistently significantly lower than what is being paid on the open market. And that's illegal.

There are plenty of smoking guns in this story, but this one, if not the most remarkable, is certainly the most colorful. Harry Anderson, a now retired Arco executive, admitted last month in testimony that as part of his job he lied about royalties:

Q: "At your deposition five years ago, did you testify that it was Arco's position that posted price represented fair market price?"

A: "Yes."

Q: "And from your personal point of view was that a fully accurate statement?"

A: "No."

A little later on, Anderson explained why he fibbed five years ago:

"I was an Arco employee. My plan was to get to retirement. We had seen on numerous occasions the nail that stood up getting beat down. I was there to drink the milk, not count the cows."

In early 1997, the tide started to turn against the oil companies. They were forced to settle and cough up huge back payments, including $350 million in California and $3.7 billion in Alaska. Meanwhile the Interior Department decided to fix the regulations and proposed new rules adopting Bob Berman's idea: Make oil companies pay based on the standard market price on oil they drill on government land.

The oil industry realized that their scam was threatened. So they met on February 20, 1997 to brainstorm. According to a memo sent by one concerned participant to the Interior Department and obtained by The Washington Monthly, the goal of the meeting was to find ways to "prevent [the new regulations] from becoming effective on whatever procedural (not substantive) grounds are available." [Emphasis in original.]

A lawyer named Pat Holloway who represented a small oil company (which has filed suit against some of the larger companies) blew the whistle on the meeting. He says he was concerned that "it would appear to be a violation of the antitrust laws for the chief executive officers of the major oil companies to meet and combine (i.e., conspire) among themselves to try to keep federal royalty oil prices depressed below values." [Emphasis in original]

A number of plans were hatched. Some would be very bad P.R. if made public: "It was suggested that the IPAA-API [oil lobby organizations] consult with the tobacco industry on legal tactics, since that industry has so much more experience litigating against government regulations." The memo also recounted what became perhaps the best suggestion of the meeting. "There was talk of using influence on the Appropriations Committee to block the expenditures needed to implement the proposed regulations."

Over the past three years, the Appropriations Committee has blocked the Interior Department from implementing its new rule three different times, and a fourth time is in the works. On each occasion they snuck riders into massive appropriations bills. Added at the last minute so that most people wouldn't notice, the riders barred the Interior Department from fixing its own regulations.

The congressmen explained that they were blocking the regulations because the new rule would result in a "backdoor tax increase." Actually, it's precisely the opposite: The taxpayers own the land, and oil companies are cheating us out of our money by refusing to pay the royalties on the oil they extract from it. The new regulations don't even increase the percentage of the royalties that go to the government. The only thing they do is make the process simpler, so that it's tougher for oil companies to cheat. So why is Congress opposing it? Unintentionally or not, they are making it possible for oil companies to continue defrauding the taxpayers.

The most recent example is also the worst. In April 1998 Senator Kay Bailey Hutchison (R-Texas) pulled the old "attach a rider to an appropriations bill" trick. Except this rider, which like the others barred Interior from passing its new regulations, didn't appear in either the House or Senate versions of the bill. According to The Washington Post, Hutchison, whose largest single supporter is the oil industry (it's given her about $1.2 million over the past five years) inserted the rider during a late-night House-Senate conference. Neither the House nor the Senate got a chance to vote on it. "I just believe it's a matter of principle that Congress passes laws and regulators implement them," she explained.

That's a high-sounding phrase. What she appears to mean is that the regulators are straying onto Congress' turf by amending the regulations. (Forget for a moment that government agencies regularly update their own regulations.) But it ignores the crucial fact that year after year, Hutchison and others in Congress have refused to fix the problem -- while preventing the Interior Department from doing anything about it.

The congressmen couldn't go on blocking a sensible plan forever (though they seem to be trying to hold out until the oil-friendly Compassionate Conservative gets elected). So they've tried another tactic. Senator Murkowski (R-Alaska) and Congressman Young (R-Alaska) have proposed an alternative solution for oil royalties: in-kind payments. The idea is to have oil companies pay royalties in oil instead of cash. Sounds simple, except in order for it to work, a whole new federal infrastructure would be required to physically handle the oil. According to an Interior Department analysis, this fabulous new system would cost the government between $90 and $250 million per year.

In a nice touch, Young and Murkowski's home state opposed the in-kind plan. The Alaska Department of Natural resources circulated a memo saying "the legislation is a bad idea and will cost Alaska money." Unlike Young and Murkowski, the Alaskan bureaucrats don't depend on campaign contributions from Big Oil. Apparently the pressure from the folks back home worked, at least on Congressman Young. The House version of the proposal exempts one state from the boneheaded plan: Alaska.

The in-kind plan isn't just more expensive; it's also contrary to the philosophy of its sponsors. Since most supporters of the plan are Republicans, you might think they would support keeping power out of the hands of a centralized federal bureaucracy. Not in this case. A whole new bureaucracy would have to be created to manage their in-kind payment plan.

Why is Congress so intent on letting oil companies rip off the government? Here's one clue: All the congressmen leading the attack against the new oil-price rules are among the top recipients of oil industry money. They are also, not surprisingly, almost all from oil states. In turn, many of those senators and congressmen are chairs of the key committees involved in this issue. Rep. Don Young (R-Alaska), chairman of the House Resource Committee and a supporter of the impractical in-kind payment plan, received $119,000 from the industry in 1997-98. Senate Energy Chairman Murkowski got $176,000 in 1997-98. Oil was Young's biggest industry sugar-daddy, and Murkowski's second biggest.

Murkowski and Young are great examples of the power campaign money exerts on politics. Their home state has recovered billions of dollars in oil underpayments. Alaska even issued comments to Interior supporting the proposed rules to prevent underpayment in the future. But the Senator and Congressman are doggedly refusing to let the Interior Department implement those rules.

It doesn't hurt that the lobbyists for Big Oil know what they're doing and are extremely knowledgeable about the Interior Department. In fact, three of the top lobbyists for oil are former Interior officials. Perhaps that's also why Congress decided to investigate Bob Berman, the Interior Department official who first raised the red flag about oil companies cheating the government back in 1986.

Smear Tactics
The Project on Government Oversight (POGO), a government watchdog group that supports whistle blowers, was late to the oil royalty game. By the time it started working on the issue in the early 1990s, some states already had been in litigation for years, and some had already won or settled for hundreds of millions of dollars. POGO joined in with a few others and filed suit against 16 oil companies for the lost revenue across the country.

POGO's suit was filed under the False Claims Act (FCA). Passed during the Civil War, the law was designed to fight war-profiteering. It gives the average citizen the power to sue on behalf on the government for fraud. In other words, it gives bounty hunters a fee. You find somebody ripping off the government, you get a cut of the settlement. The law, which had been watered down to the point of irrelevance over the years, was strengthened in 1986 by Sen. Grassley (R-Iowa) and Rep. Berman (D-Calif. -- and no relation to the Interior Department's Bob Berman). Since then, it has helped whistle-blowers to uncover billions of dollars in fraud.

When POGO used the FCA to file suit in 1996, they asked Bob Berman and Bob Spier, another government worker who had blown the whistle on oil royalty underpayments, if they wanted to join in the suit. Both declined, according to POGO, because they were afraid of being ostracized at work or even losing their jobs. After all, the suit would embarrass the government -- exposing the fact that if Uncle Sam had been paying attention, he could have prevented billions of dollars from being stolen by oil companies.

POGO went ahead with its lawsuit and, as first reported in Platt's Oilgram Daily, a trade paper, it promised Berman and Spier each a third of any of the money that might come out of the lawsuit. POGO says it was just doing the right thing. The whistle-blowers, regardless of whether or not they joined the suit, deserved to be rewarded for their work over the years.

When somebody files an FCA suit against a company supposedly defrauding the government, the Justice Department can join in if it thinks the suit is valid and worth its time. (It only jumps into a fraction of the FCA cases people file.) That's exactly what happened in this case. And in August 1998, Mobil Oil settled with POGO and the Department of Justice for about $45 million. (POGO's suit against the other 15 companies is still ongoing.) POGO got a $1.1 million cut of settlement as its finder's fee. And, as the watchdog had promised, it gave Berman and Spier a third of the money each.

A few months later, The Washington Times saw the story and smelled blood. Unlike the trade press, which didn't put a negative spin on the payments, the conservative Times attacked. Reported by Audrey Hudson and Jerry Seper, its series ran under headlines like "'Forbidden' Windfall Payment Unprecedented, Experts Say." In the paper's seven articles on the payments, exactly one expert has been quoted on the record criticizing the payments: Bill Hogan, an investigator for the Center for Public Integrity. Hogan says the Times called him out of the blue and he knew nothing about the payment. He now says somewhat cagily, "Now that I've looked into the issue, I understand POGO's point of view."

When Congress heard about the Times stories, a collective smile must have crossed many of their faces. Led by Young in the House and Murkowski in the Senate, Congress tried to connect the issue of the payments and the proposed new rules. In a letter to Interior Secretary Bruce Babbitt, Senator Murkowski said that as a result of POGO's payments to the whistle-blowers, "the legitimacy of the oil valuation rule-making is tainted." In other words, they claimed that POGO essentially paid off the whistle-blowers to influence the Interior Department's decision to update its regulations.

That's a very serious charge. There's also plenty of evidence to show it's not true. Berman and Spier were arguing for the new rules long before they ever got in contact with POGO. There was no need to "pay them off." What's more, by the time both men were contacted by POGO, neither Berman nor Spier was working on the new rules. The Interior Department, in a letter to one of the complaining Senators, tried to set the record straight: "Based on the information that is currently available to us, the two employees in question were not involved in drafting the first proposed oil valuation rule ... nor did they participate in developing subsequent versions of the proposed rule." And though POGO supports the new rules (and who besides oil companies wouldn't?), it doesn't have any financial stake in them.

Nonetheless, Congress started an investigation and subpoenaed POGO, charging that the payments corrupted the rule-making process. Young and Murkowski also called on the Interior Department to delay implementing the new rules until the investigation was complete and Congress was satisfied POGO hadn't subverted the process. Danielle Brian, Executive Director of POGO, denies that the group tried to influence anything with the payments. She pleads naivete: "To tell you the truth, and I feel a bit stupid here, I didn't even know about the rule-making when we filed suit and offered to share the money."

Congress's strongest evidence in support of the claim that Berman and Spier improperly influenced the making of the new rule is an e-mail by Spier suggesting that the Interior Department update its oil royalty regulations. The e-mail was from September 1996, two months before POGO agreed with Berman and Spier to share any settlement money. And as Brian points out, "there were thousands of comments submitted." According to the Interior Department, the rule-making proposal has already gone through seven rounds of comments and 17 workshops. "If Congress is going to blame to POGO for the new regulations it's transparently wrong," says Brian McMahon, a California-based lawyer who has been involved in an oil-royalty lawsuit since 1981. "Congress has been trying to block the new regulations for the past three years."

In fact, far from being paid off, Spier and Berman could have filed the suit on their own if they hadn't feared for their jobs. Government workers are allowed to file FCA suits as long as they're not investigators and as long as they've tried to go through the system to the maximum degree possible.

It should be noted that the Justice Department does have an ongoing investigation into the payments, though it didn't begin until Congress demanded one, six months after POGO had itself notified Justice of the payments. POGO may ultimately be spanked by the Justice Department for giving improper "gifts" to Spier and Berman. Even if that happens -- and it's unlikely -- it's not pertinent to the proposed new rule on oil prices, and certainly no reason to delay it. As Interior, which is helping Justice conduct the investigation, told Inside Energy, "We appreciate [Congress's] concern, but the two things have nothing to do with each other."

The real potential for conflict of interest doesn't lie with the whistle-blowers' involvement with the proposed rules at all. Instead the question, if there is one, should be whether Berman and Spier were slated to testify in POGO's suit. If that's the case, then Berman and Spier would have had a conflict of interest (though one totally unrelated to the proposed new oil royalty rules), since they would have stood to gain financially if POGO won the suit. When asked by the Monthly what role POGO was planning for Berman and Spier at the trial, Brian responded, "None."

Muzzling the Watchdog
Whatever its effect on the effort to fix the oil regulations, the investigation of POGO could also have an even larger consequence: the weakening of the False Claims Act itself. "This phony investigation makes my blood boil," says Tom Devine, a lawyer with the Government Accountability Project, a watchdog organization that works with whistle-blowers. "What these guys are doing is trying to gut the False Claims Act. It's the latest example of a timeless effort by industries that get caught with their pants down."

If that's what the oil interests and their friends in Congress are hoping for, it's worth noting that they're not the only ones. The health care and defense industries have been trying to shoo away the FCA for over a decade. When Senator Grassley sponsored the bill to revive and strengthen the FCA in 1985, the defense industry, under investigation at the time in over 40 cases of fraud, strongly opposed it. Even though the bill had strong support both inside and outside the Senate -- even President Reagan gave the proposed law a big thumbs up -- defense companies succeeded in delaying a vote on the bill for nearly a year.

Last summer the health care industry lobbied to be exempt from many of the provisions of the FCA, arguing that the law was being improperly used to fight simple billing mistakes. (According to government estimates, "improper" Medicare payments amount to $13 billion per year.) "The attempt to change the statute would have a devastating impact on our enforcement efforts," wrote Deputy Attorney General Eric H. Holder Jr. in a 1998 letter to Congress. The industry's whining almost paid off. An industry-supported bill gained 180 co-sponsors before President Clinton quashed it by threatening a veto.

Unlike other industries, oil companies haven't come out and directly opposed the FCA. But they've also been more successful. They, and their buddies in Congress, are attacking the messengers, the folks like Bob Berman who blow the whistle on fraud. In the long term, that may or may not discourage other whistle blowers and weaken the FCA. In the meantime, it will surely deflect attention from the real issue: Oil companies are cheating the government.

Eric Umansky is a contributing editor at Mother Jones magazine.

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