Fighting Mad

Tycoon Jack Grynberg says the energy industry has stolen millions from him -- and billions from the government. What if he's right?

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."

But not all of Grynberg's pupils have taken his lessons to heart. Ten years ago, he says, he gave a lecture in Cheyenne on the primary ways pipeline companies can cheat their suppliers. Among those in attendance was Johnnie Burton, then the director of Wyoming's Department of Revenue -- and now on the hot seat as the director of the Minerals Management Service.

"At the end," Grynberg recalls, "I turned to her, just making conversation, and asked, 'Did you understand what I described?' She said, 'Not a word.'"

I n 1996, when Grynberg's False Claims Act case was still in its infancy, the Colorado State Land Board solicited expert opinion on whether it should mount a similar lawsuit. The land board was interested because it relies on oil and gas royalties to help fund schools and other projects. In response to the inquiry, the Colorado Oil and Gas Conservation Commission consulted its staff of professional engineers, many of whom had worked in the industry, and recommended steering clear of Grynberg's crusade.

"We find the referenced lawsuit to be baseless and without merit," a COGCC memo stated. "It misrepresents the processes of measuring, buying and selling natural gas under field conditions in the real world. Colorado should distance itself as far as possible from this lawsuit."

Several of the items Grynberg was complaining about, such as downstream probes, bypass lines and analog meters, are widely used in the pipeline industry; some are even specified in the contracts. While the industry's long-accepted standards for measuring gas "may not be perfect," the memo argued, a better solution would be to push for more modern methods in new contracts rather than litigating them. Proving in court that the standards were rigged would be no easy task.

A decade later, Grynberg still hasn't had the opportunity to prove his case in court. The litigation has been mired in procedural problems from the start. He originally filed his complaint as a single lawsuit against a small host of defendants in Washington, D.C. In 1997 U.S. District Judge Thomas Hogan dismissed it, saying Grynberg had taken a "shotgun approach" and not made his allegations specific enough.

Grynberg then filed dozens of separate qui tam lawsuits in federal courts in eight states, including Colorado. Most of the cases ended up being consolidated under the jurisdiction of Judge William Downes in Wyoming. Denver attorney and former magistrate judge Bruce Pringle, appointed as a special master in the case, waded through thousands of pages of defense motions and briefs, many of them arguing that Grynberg didn't have standing to sue the companies under the False Claims Act.

A basic obstacle for any whistleblower plaintiff is what's known as the "original source" problem. In order to keep opportunists from simply lifting allegations of fraud from a government report or newspaper article and filing "parasitic" false-claims actions, the law requires that the plaintiff have firsthand information about the alleged fraud that hasn't already been publicly disclosed. In practice, meeting those qualifications can be difficult; the U.S. Supreme Court is expected to tackle the issue next month in the case of former Rocky Flats employee Jim Stone, who's been trying to collect on a whistleblower case against Rockwell International since 1989.

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