Crossing Over

How government watchdogs became the energy industry's party animals

There's more than one way to explain the latest scandal erupting within the Bush administration. The release last week of three reports from the inspector general's office of the Department of the Interior, detailing graft, drugs, unethical sexual liaisons and brazen conflicts of interest within a federal program in charge of collecting billions in energy royalties, has Democrats hollering for congressional investigations and Republicans deploring a decline in moral fiber.

If you're Representative Tom Tancredo, you blame the whole thing on "a few bad apples" in the Lakewood office of the Minerals Management Service, the Interior agency in charge of $10 billion in annual royalties from oil and gas leases offshore and on federal lands. According to the inspector general, nineteen MMS employees assigned to the "Royalty in Kind" program violated government ethics standards by accepting gifts, booze, meals and trips from energy-company executives; two, known as "the MMS chicks" at industry functions, were literally in bed with people who worked for the companies they were supposed to regulate.

If you're Senator Ken Salazar, you question the oversight of Gregory W. Smith, the program's director, who allegedly bought cocaine at the office, engaged in sex with two subordinates and ran an energy consulting business on the side, in violation of Interior ethics policies — but whom the Department of Justice declined to prosecute.

Or you could just take the MMS employees' own explanation for their innovative approach to minerals management. Several told investigators that they had, in effect, exempted themselves from federal ethics requirements in order to build more efficient partnerships with the private sector. They had come to see their division as a player in the energy industry rather than its watchdog.

Sound screwy? Maybe. But think back. Long before Katrina and Iraq, before the September 11 attacks or even hanging chads, a certain Texas governor campaigning for higher office promised to be the first MBA president. His administration would run government more "like a business," he said. And he would take steps to grow the economy and create more jobs by removing regulatory hurdles that kept the private sector from being all it could be.

After the 2000 election, the idea took root in several federal agencies. Unfortunately, the new era of government-as-business turned out to be mostly monkey business. The Department of the Interior became a particularly troubled battleground, with several key positions filled by former energy-industry lobbyists and deregulation ideologues ("Grazin' Hell," April 7, 2005). And within Interior, MMS quickly became the center of controversy for its oh-so-business-friendly approach to energy-industry accounting.

Although oil and gas prices and production have soared in recent years, the amount of money MMS collects from auditing the leases on public lands has sharply declined, from an average of $176 million annually in the 1990s to $46 million in the years 2002 through 2005 ("Fighting Mad," November 16, 2006). MMS officials say that's because they've turned over some auditing responsibilities to state agencies and Indian tribes. But some MMS auditors claim they were discouraged from pursuing cases of possible fraud involving big energy companies — and sometimes threatened with demotion or dismissal if they persisted. The first to go public with the charges was veteran auditor Bobby Maxwell, who was instructed by his superiors to drop an investigation of Kerr-McGee over a disputed $12 million, then saw his job abruptly eliminated ("Duke of Oil," September 8, 2005).

The notion of replacing aggressive auditing with a kinder, less adversarial system actually dates back to the Clinton administration, but the Royalty in Kind program didn't get under way until the Bush years. Under RIK, the government collects a substantial portion of its royalties in the form of actual oil and gas production rather than cash; it can then sell the commodities on the open market or add them to strategic reserves. The move was supposed to eliminate price disputes and allow the agency to operate more like a private-sector producer rather than a bureaucracy. But DOI Inspector General Earl Devaney's reports reveal that the new paradigm worked well for the energy companies and the MMS employees involved — while the taxpayers got the business, so to speak.

If stellar managers lead by example, consider the lessons in self-dealing entrepreneurship offered by RIK supervisor Greg Smith. In 2002 Smith took an outside consulting job with an engineering firm, Geomatrix, at the rate of $75 an hour. He told his MMS bosses he would be involved in technical work for the firm and advising on "overall areas of business activity in the energy field using publicly available information." Geomatrix execs, however, told investigators they didn't hire Smith for technical expertise but as an "entree" to prospective clients, and other interviews indicate that he used his influence as an MMS official to arrange meetings between Geomatrix and potential energy-industry clients.

Geomatrix paid Smith $30,000 over the course of fourteen months; there's evidence that he used a proprietary MMS database, government-funded trips and other federal resources on behalf of his work for Geomatrix during that time. The company curtailed his services, the inspector general's reports suggest, after it became clear that prospects were only meeting with the company because of Smith's position at MMS and showed no interest in Geomatrix when Smith was no longer in the picture.

Smith's outside activities apparently didn't hinder his efforts to boost morale around the Federal Center. An RIK employee told investigators that Smith purchased cocaine from her at work, referring to it as "office supplies," and boosted her performance bonus by $250 for her efforts. (Smith denied both of these allegations while admitting to cocaine use outside of work.) Another employee claimed that Smith coerced her into performing oral sex on him in a moving car. Smith, who's now retired from MMS, admitted that he had "downplayed" certain matters in his own interviews with investigators because he didn't want to "self-incriminate."

Some of Smith's subordinates had outside consulting gigs, too. One, Stacy Leyshon, operated a sex-toy business on the side and reportedly "bragged that she made more money with this business than her salary at MMS." As the person in charge of marketing RIK oil, Leyshon also raked in more trips, meals and gifts from energy companies than any other MMS employee, a total of 45 gifts from "prohibited sources" valued at $2,887. As the reports note, none of the gifts were all that unusual — a golf tournament, free luggage — but their "prodigious frequency" was.

Leyshon and other employees had no trouble defending their chronic shmoozing at industry functions. It was all about networking, building relationships and gathering market intelligence; Leyshon defended it as "the RIK way of doing business." But some industry sources disagreed, telling investigators that little or no business was conducted at the events the MMS chicks attended. "It was about the skiing," said one.

Yet the intimate relations Leyshon and another female MMS staffer developed with energy-industry types apparently coincided with efforts to fix hitches in government contracts, usually in the private sector's favor. "Sexual relationships with prohibited sources cannot, by definition, be arms-length," the report primly states, before unleashing an astonishing figure: Of 121 contract amendments approved by Leyshon, only three favored the government. The others cost her agency $4.4 million.

The true costs of trying to run MMS like a business — a hard-charging, hard-partying, corrupt corner of the energy business — may never be known. Agency critics have estimated that the combined losses of public revenue from fewer audits, sweetheart leases and the agency's new compliance review procedures, which depend on self-reporting by energy companies, amount to billions of dollars.

The agency's failures have also created new opportunities for entrepreneurship. Fired auditor Maxwell, for example, decided to pursue his claims of underpaid royalties on the government's behalf, even without its help. He filed a False Claims Act case against Kerr-McGee in Denver's federal court and obtained a jury verdict in the government's favor of $7.5 million. The verdict was tossed out on a technicality, but last week, as Devaney's reports were being released, the Tenth Circuit Court of Appeals reinstated the award. With penalties and fees, the judgment could be worth as much as $40 million — and Maxwell and his attorneys could end up with a third of that, for taking care of business the government didn't want.

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