Tenth Circuit reinstates False Claims Act suit against Kerr-McGee

The Tenth Circuit Court of Appeals has ruled in favor of Bobby Maxwell, a former auditor with the U.S. Department of the Interior, who had filed a False Claims Act suit against Kerr-McGee, alleging that the oil and gas producer had defrauded the government by underpaying royalties for federal offshore oil leases. A federal jury in Denver returned a verdict of $7.5 million in Maxwell’s favor, but the district court judge dismissed the suit, ruling that the court did not have jurisdiction in the matter because the information underlying Maxwell’s whistleblower suit had previously been disclosed. The Tenth Circuit disagreed, holding “that the limited disclosure of information to a government official under a duty of confidentiality is not a public disclosure,” and concluded: “We hold that insofar as the communication does not release the information into the public domain such that it is accessible to the general population, it is not.” Under the False Claims Act, the award against Kerr-McGee, now part of Anadarko Petroleum Corp., is to be tripled, and could exceed $30 million.

In 2002, Maxwell, a senior auditor in the Minerals Management Service (MMS) of the Interior, was assigned to a team investigating royalty reporting by Kerr-McGee regarding crude oil produced from federal offshore leases. The investigation concluded that Kerr-McGee “had substantially underpaid its federal oil royalties” by about $10 million. After Kerr-McGee disputed the findings, Maxwell drafted an order for payment of additional royalties, but his bosses at the MMS failed to issue the order. With no other recourse, in June 2004, Maxwell filed his whistleblower lawsuit alleging that “Kerr-McGee knowingly made false and/or fraudulent statements on the monthly royalty reports submitted to the MMS and ‘understated and underpaid’ its federal royalties.”

The Tenth Circuit’s decision came down the same day that internal watchdogs released reports on the Interior Department’s mismanagement of oil leases, reports which could fuel criticism that the Bush administration has ignored allegations that oil companies have cheated taxpayers out of tens of billions of dollars in fees for the rights to drill on federal lands. The Interior Department’s inspector general has disclosed that officials of the agency’s Minerals Management Service had engaged in illicit sex and drug use with oil company employees and had accepted thousands of dollars in gifts, golf and ski outings, meals and drinks while overseeing the leasing and royalty payments.

The federal government didn’t even want to intervene in Maxwell’s suit. Although the U.S. Attorney in Colorado strongly advised the Justice Department in Washington D.C. to support Maxwell’s whistleblower claim, senior level officials there decided against it. The office was then run by former Attorney General Alberto Gonzales. It has been reported that the Justice Department has participated in just a few of the 80 whistleblower cases brought against the oil industry since 1995. Former MMS auditors have alleged in some of these False Claims Act suits that high-ranking Interior Department officials blocked them from issuing routine subpoenas seeking company records that could document the fraudulent underpayment of royalties.

Whistleblower suits are generally less successful without the Justice Department’s intervention, and if a whistleblower prevails on his or her own, the U.S. Government receives a smaller share of the damages. That will be true in Maxwell’s case, where the government chose not to intervene in the suit. As for Maxwell, under the qui tam provision of the federal False Claims Act, he will receive a considerable sum as his share of the recovery.

For the full story, go to the Project on Government Oversight.