Statement in Response to Result of Kerr McGee Litigation

Statement:

“Kerr McGee has indicated they will likely appeal the verdict. The Minerals Management Service maintains its original position that Kerr McGee paid the royalties it owed to the U.S. government.”

January 24, 2007
 

 
Qs and As Concerning Mr. Bobby Maxwell and the Kerr McGee Lawsuit

Q1. Why didn’t MMS pursue Mr. Maxwell’s claim that Kerr McGee was underpaying royalties owed to the U.S. government?

A1. MMS, the Department of the Interior’s Office of the Inspector General, and the U.S. Department of Justice investigated and analyzed Mr. Maxwell’s claim. The United States declined to intervene in the qui tam lawsuit that Mr. Maxwell brought under the False Claims Act (U.S. ex rel . Maxwell v. Kerr-McGee Chemical Worldwide, LLC, No. 04-F-1224 (D. Colo.)).

MMS, the OIG and the DOJ have also investigated the other FCA claims and declined to intervene.

Q2. Mr. Maxwell says very explicitly that the overall auditing and compliance review effort has slowed markedly in the past five years, that his complaint about Kerr-McGee is simply a "symptom of the illness,'' which he describes as a "passivity'' and an "unwillingness to take risks'' on the part of MMS when the outcome is even slightly uncertain. Why is he wrong?

A2. MMS pursues a vigorous audit and compliance review program that generated an annual average of more than $125 million over the last 24 years. That’s a total of more than $3 billion dollars that flowed to the American public as a result of MMS’s audit and compliance efforts. Without MMS’s diligence, that money would have not been recovered.

In FY 2006, MMS reviewed and/or audited 72.5 percent of all Federal and Indian royalty payments within three years from the date of receipt of payment, using a system that targets the largest properties and payors. This represents a dramatic increase in the amount of revenue reviewed and/or audited within three years, up from 46 percent in FY 2003 and 10.5 percent in FY 2002. This work is in addition to legacy audit work completed beyond the 3-year cycle.

Q3. What is the best evidence that MMS is aggressively pursuing all the money that oil and gas drillers owe?

A3. In November, 2005, an independent certified public accounting firm issued a clean audit opinion of MMS’s audit program with no material weaknesses, and no reportable conditions. The results are clear and irrefutable, MMS is accomplishing its job on behalf of the American public. MMS routinely bills for interest. In fact, in FY 2006, MMS issued over 3,800 late payment interest bills for a net amount of $7 million.

What’s also clear is that our mission requires us to act in the best interests of the American public. As government employees, we are responsible for ensuring that oil and gas companies pay everything they owe to the U.S. Treasury.

From FY 2002-2006, our minerals revenue program accounted for, substantiated, and disbursed royalties totaling $44.6 billion. From 2002-2005, MMS and State and Tribal auditors completed 1,214 audits. That compares to 784 audits completed for the prior four year period.

Q4. If Mr. Maxwell recovers additional millions of dollars for the government, would the Interior Department still contend that he was wrong to bring his case?

A4. In the case of MMS audits, our procedures require that auditors who detect fraud must report it to the MMS’s Office of Enforcement who in turn must report it to the Department of Interior’s Office of Inspector General. Alternatively, the auditors can go directly to the OIG. Mr. Maxwell and the other auditors who filed qui tam lawsuits did not follow these required procedures.

Q5. Why is it troubling for federal auditors to file lawsuits as private citizens?

A5. The auditors seek to profit personally using information they are paid by the taxpayers to collect. Audits conducted by Federal agencies are governed by standards developed and published by the Government Accountability Office (GAO). These standards provide an overall framework for ensuring that auditors have the competence, integrity, objectivity, and independence in planning, conducting, and reporting on their work.

A False Claims Act claim filed by an MMS auditor against an oil or gas company that he or she is responsible for auditing results in a conflict of interest that causes both the auditor and MMS to be in violation of auditing standards set forth by the Government Accounting Office. That conflict of interest exists because the auditor stands to gain personally by receiving a percentage of the additional royalties collected from the company against which he files a false claim.

In addition, as stated above, the Department has a procedure in place to pursue allegations of fraud. Rather than follow that procedure, and have the OIG – pursue the fraud, the auditors chose the route which is more profitable to them than the taxpayers.

Q6. POGO, citing MMS budget documents, says the number of auditors has declined from 250 in 2001 to 185 in 2005? Is that correct?

A6. Since the end of FY 2001, MMS’s overall audit and compliance staff decreased from 420 Full Time Employees (FTE) to 369. The reduction of 65 full-time employees (FTE) cited in the FY 2007 Budget Justification applies to the Offshore and Federal Onshore compliance and audit staff members. However, of that 65 FTE, 14 were sent to the MMS Indian audit and compliance program. Of those remaining 51 FTE, 28 were reassigned to the RIK program, 21 were eliminated, and 2 were reassigned to Indian outreach.

Further, MMS is receiving an increasing percentage of revenues through its RIK program, thereby eliminating valuation issues that previously required substantial audit resources. During FY 2005, for example, MMS received about 32 percent of its revenues through RIK as compared to FY 2001 when MMS only received 15 percent.

Q7. What is the comparable number for 2006?

A7. The overall audit and compliance staff as of January 2006 was 363.

January 24, 2007
 

Background on Mr. Bobby Maxwell’s Case Against Kerr-McGee

Bobby L. Maxwell, an audit manager for the Minerals Management Service (MMS) in 2005, filed a False Claims Act (FCA) suit charging that Kerr-McGee violated federal royalty regulations by failing to market the oil produced from federal lands at the highest price for the benefit of the U.S. government and the company. Mr. Maxwell further claimed that MMS dissuaded him from pursuing any action against Kerr-McGee.

MMS procedures require that auditors who believe they have detected fraudulent actions must report it to the MMS’s Office of Enforcement who in turn must report it to the Department of Interior’s Office of Inspector General (OIG). Alternatively, the auditors can go directly to the OIG. Mr. Maxwell and the other auditors who filed qui tam lawsuits did not follow these required procedures.

A False Claims Act claim filed by an MMS auditor against an oil or gas company that he or she is responsible for auditing causes a conflict of interest because the auditor stands to gain personally by using information they are paid by the taxpayers to collect.

Upon review, MMS saw no regulatory basis for issuing an order on the issue raised by Mr. Maxwell. Once made aware of the suit, the Department of Justice independently reviewed Mr. Maxwell’s claim and declined to intervene.

January 24, 2007
 

Qui Tam Lawsuits

SUBJECT:  Summary and Discussion of Qui Tam Cases

I. SUMMARY

This memorandum summarizes False Claims Act (FCA) qui tam cases where, unbeknownst to the Government, MMS auditors used confidential materials, including documents provided by federal lessees during the course of federal audits, to formulate numerous private claims under the FCA.

II. DISCUSSION

The FCA, 31 U.S.C. §§ 3729-3733, allows private citizens (“relators”) to bring actions to redress damage to the United States caused by violations of the FCA. Under these so-called “qui tam” actions, relators are awarded up to 30 percent of the recovery from the government's damages, as well as attorney fees and costs from the defendants. Such rewards are only available to relators who bring new information to the government not already in the public domain. District courts have no subject matter jurisdiction when a relator's action is based on a “publicly disclosed” investigation or audit unless the relator is the original source for that disclosure. 31 U.S.C. § 3730(e)(4).

Qui tam cases are filed under seal under 31 U.S.C. § 3730(b), so that the United States may investigate the relator’s claims and decide whether to intervene. The government may decline to intervene under 31 U.S.C. § 3730(b)(4) or intervene under 31 U.S.C. §  3730(c)(3). If the government does not intervene, the relator may continue to pursue the action without the government, but the government still shares in any recovery. If the government intervenes, pursues the action, and prevails, the relator still recovers a percentage of the damages. After the government makes its decision the court unseals the case. The government also may move to dismiss the relator’s action under 31 U.S.C. § 3730(c)(2)(A) whether it intervenes or not.

January 24, 2007