Fighting Mad

Some of the problems at MMS, including the botched offshore leases, date back to the 1990s. But the agency's critics say the situation has deteriorated under the Bush administration, which has cut back on auditors and placed former energy-industry lobbyists in key positions at Interior ("Grazin' Hell," April 7, 2005). "This looks like an agency that has been captured by the industry it is supposed to oversee," commented Representative Henry Waxman of California, the ranking Democrat (and soon-to-be chairman) of the House's Committee on Government Reform, during last summer's hearings.

Nearly a third of domestic oil production and a fourth of domestic gas comes from leases administered by MMS. Yet with oil and gas prices and production soaring in recent years, the amount the agency collects from its audit activities has sharply declined -- from an average of $176 million annually in the 1990s to $46 million in the years 2002 through 2005.

MMS officials say that's because they've handed over more auditing responsibilities to Indian tribes and state agencies and are collecting more royalty payments in the form of crude oil or gas rather than cash, a system known as "royalty-in-kind." In addition, they're conducting more "compliance reviews" rather than full-fledged audits in the name of efficiency.

But tribal leaders and watchdog groups have questioned the compliance-review procedure, since it depends on self-reporting by the energy companies. "It's not a real audit," says POGO's Beth Daley. "It's basically a pass for the company. If nobody double-checks, they can report whatever they want, and taxpayers are at risk. The oil and gas industry has figured out ways to game the system."

Or as former MMS auditor Bobby Maxwell told Westword last year: "Government is doing less, so the companies can do more -- more cooking of the books."

Maxwell worked for MMS for more than two decades and was regarded as one of the agency's top performers. Four years ago he was told by his superiors not to pursue an inquiry into oil royalty payments by Kerr-McGee, which Maxwell believed to be $12 million short. While working as a program manager in the MMS Lakewood office, Maxwell decided to file a False Claims Act lawsuit against Kerr-McGee on his own. Shortly after Kerr-McGee attorneys received a copy of his complaint, Maxwell was told that his position was being eliminated. He later received a substantial settlement from the government over his termination and is now preparing to go to trial against Kerr-McGee.

It's highly unusual for a government employee to file a false-claims action alleging fraud against his own agency. But since Maxwell made headlines last year, four other MMS auditors have filed similar actions in Oklahoma; two claim they were instructed not to pursue a fraud case against Shell Oil. The Department of Justice intervenes in only about a quarter of whistleblower-initiated false-claim cases, known as qui tam lawsuits. The DOJ hasn't intervened in any of the rogue auditors' cases, but it hasn't moved to dismiss them, either -- despite the obvious displeasure at Interior over the employees' rebellion.

"That's a very significant signal I don't think anyone has picked up on," says Moorman of the False Claims Act Legal Center. "Sometimes Justice doesn't intervene because it doesn't look like fraud to the government, but in some cases it's because they can't get the cooperation of the agency that's been defrauded."

Close to 80 percent of qui tam cases filed over the past twenty years have involved health-care issues, such as Medicaid fraud, or defense-contractor frauds. But the number of actions involving royalty underpayments by energy companies is growing, and so are the stakes. One case in the late 1990s involving twelve major oil companies eventually led to a $400 million settlement.

Regulators have long recognized that the potential for fraud in the natural-gas industry is even greater than it is in the oil business. A Senate investigation into royalty shortfalls on tribal lands in the 1980s reported that the MMS "failed to safeguard Indian oil and gas properties against wholesale theft and gross under-reporting of production volume by industry." The same probe found "a vast opportunity...for theft and mismeasurement in the natural gas area."

Now in its eleventh year of wandering the wasteland of the courts, Grynberg's False Claims Act litigation is fundamentally different from the auditors' lawsuits and most qui tam claims. He's attempting to demonstrate "wholesale theft" through mismeasurement at the wellhead, rather than just in the creative accounting that follows. It's a daring argument, but whether he can persuade a federal appeals court that it deserves a fair hearing is another matter.

"Jack has been refining his methodology for detecting royalty underpayments over many years," notes Daley. "There seems to be something there. He certainly has shed light on many points of interest where fraud could be taking place."