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Wide-Ranging Ethics Scandal Emerges at Interior Dept.
By Charlie Savage
New York Times
September 11, 2008
WASHINGTON - As Congress prepares to debate expansion
of drilling in taxpayer-owned coastal waters, the
Interior Department agency that collects oil and gas
royalties has been caught up in a wide-ranging ethics
scandal - including allegations of financial self-
dealing, accepting gifts from energy companies, cocaine
use and sexual misconduct.
In three reports delivered to Congress on Wednesday,
the department's inspector general, Earl E. Devaney,
found wrongdoing by a dozen current and former
employees of the Minerals Management Service, which
collects about $10 billion in royalties annually and is
one of the government's largest sources of revenue other than taxes.
'A culture of ethical failure' besets the agency, Mr.
Devaney wrote in a cover memo.
The reports portray a dysfunctional organization that
has been riddled with conflicts of interest,
unprofessional behavior and a free-for-all atmosphere
for much of the Bush administration's watch.
The highest-ranking official criticized in the reports
was Lucy Q. Denett, the former associate director of
minerals revenue management, who retired earlier this
year as the inquiry was progressing.
The investigations are the latest installment in a
series of scathing probes of the troubled program's
management and competence in recent years. While
previous reports have focused on problems the agency
has had in collecting millions of dollars owed to the
Treasury, the new set of reports raises questions about
the integrity and behavior of the agency's officials.
In one of the new reports, investigators conclude that
a key supervisor at the agency's minerals revenue
management office worked together with two aides to
steer a lucrative consulting contract to one of the
aides after he retired, violating competitive procurement rules.
Two other reports focus on 'a culture of substance
abuse and promiscuity' and unethical behavior in the
service's royalty-in-kind program. That part of the
agency collects about $4 billion a year in the form of
oil and gas rather than cash royalties.
Modeled on a private-sector energy company, the decade-
old royalty-in-kind program transports, processes and
resells the oil and gas on the open market. But while
its officials interact with energy company executives,
they are subject to government ethics rules, such as
restrictions on taking gifts from sources with whom
they conduct official business.
One of the reports says that the officials viewed
themselves as exempt from those limits, indulging
themselves in the expense-account-fueled world of oil
and gas executives.
In addition, the report alleges that eight royalty-
program officials accepted gifts from energy companies
whose value exceeded limits set by ethics rules -
including golf, ski and paintball outings; meals and
drinks; and tickets to a Toby Keith concert, a Houston
Texans football game and a Colorado Rockies baseball game.
The investigation also concluded that several of the
officials 'frequently consumed alcohol at industry
functions, had used cocaine and marijuana, and had
sexual relationships with oil and gas company representatives.'
The investigation separately found that the program's
manager mixed official and personal business, and took
money from a technical services firm in exchange for
urging oil companies to hire the firm. In sometimes
lurid detail, the report accuses him of having intimate
relations with two subordinates, one of whom regularly
sold him cocaine.
The culture of the organization 'appeared to be devoid
of both the ethical standards and internal controls
sufficient to protect the integrity of this vital
revenue-producing program,' one report said.
A spokeswoman for the Interior Department secretary,
Dirk Kempthorne, referred inquiries to the Minerals
Management Service. The service's director, Randall
Luthi, released a preliminary statement on Wednesday
morning saying he had not yet seen the reports but had
scheduled a mid-afternoon conference call with reporters.
'I will tell you that we requested this investigation
in 2006 after an employee raised allegations of ethical
lapses,' Mr. Luthi's early statement said. 'I look
forward to having the opportunity to review the
Inspector General's findings so we can take the
A spokesman for Mr. Devaney declined to comment.
At least one former employee named in the report, Jimmy
W. Mayberry, pleaded guilty to a felony conflict-of-
interest charge in August and faces a potential
sentence of up to five years in prison and a $250,000 fine.
In late 2002, while he was about to retire from the
government, Mr. Mayberry drafted a 'statement of work'
for a consulting contract to perform essentially
identical functions to his own job. He then retired,
started a company, and in June 2003 won the contract
with the help of his former supervisor and another
friend at the agency.
Danny Onorato, the attorney representing Mr. Mayberry,
said his client has a sentencing date in November, but
added that 'we are not interested in having Mr. Mayberry speak.'
The report also recommended that the Justice Department
seek felony charges against another official, Milton
Dial, the friend who helped Mr. Mayberry win the
contract and initially oversaw the consulting work. Mr.
Dial retired in September 2004 and went to work for Mr.
Mayberry's new company in February 2005.
The report did not say how the Justice Department was
handling Mr. Dial's case. Efforts to reach Mr. Dial,
whose telephone number is unlisted, were unsuccessful.
The inspector general also urged the administration to
take administrative action against several of the
officials in the royalty-in-kind program who accepted
gifts from the oil companies, including either firing
them or banning them for life from certain positions.
Several have already been transferred out of the
program but remain on the government payroll, it said.
But two of the highest-ranking officials who were
targets of the investigations will apparently escape
sanction. Both retired during the investigation,
rendering them safe from any administrative punishment,
and the Justice Department has declined to prosecute
them on the charges suggested by the inspector general.
One of those who will not be prosecuted is Ms. Denett,
the former associate director of minerals revenue
management. The report alleges that she manipulated the
contracting process to steer the deal to Mr. Mayberry,
her friend and former special assistant.
Six other companies submitted bids for the contract,
spending more than $90,000 on their proposals. A
Department of the Interior ethics official who later
reviewed the sequence of events described the
arrangement as one in which 'the fix is in throughout -
this is tainted from the beginning, that is totally
improper,' the report said.
Ms. Denett did not return a message left at her home on
Wednesday with her husband, Paul Denett, who was the
top procurement official in the White House Office of
Management and Budget until he resigned this month. He
declined to comment.
But the report quotes Ms. Denett repeatedly telling
investigators such things as 'obviously I did it and it
doesn't look proper' and that in retrospect she had
made a 'very poor' decision. She also told them that
'she had been preoccupied with a very stressful
personal issue at the time,' which the report did not spell out.
The other high-ranking official the Justice Department
has declined to prosecute is Gregory W. Smith, the
former program director of the royalty-in-kind program.
Mr. Smith worked in Colorado and reported directly to
Ms. Denett, who was based in Washington, D.C.
The report said that from April 2002 to June 2003, Mr.
Smith improperly used his position with the royalty
program to help a technical services firm seek deals
with the same oil and gas companies. The services firm
paid Mr. Smith more than $30,000 for asking the oil
companies to hire it, the report said.
Mr. Smith requested and received approval to take on
the outside work, but the report says he misled the
office into thinking he would be performing technical
consulting, rather than marketing the firm to companies
with which he also conducted official business
The report accuses Mr. Smith of improperly accepting
gifts from the oil and gas industry, of engaging in sex
with two subordinates, and of using cocaine that he
purchased from his secretary or her boyfriend several
times a year between 2002 and 2005. He sometimes asked
for the drugs and received them in his office during
work hours, the report alleges.
The report also says that Mr. Smith lied to
investigators about these and other incidents, and that
he urged the two women subordinates to mislead the
investigators as well.
In discussions with investigators, the report said, Mr.
Smith acknowledged buying cocaine from his secretary
and having a sexual encounter with her at her home, but
denied discussing drugs at work. He also denied telling
anyone to lie, saying that he only told people that 'no
one has a right to know what I do on my personal time.'
The report omits any response from Mr. Smith about
alleged sexual misconduct with another female
subordinate, although it notes that 'a substantial
amount of information obtained through the federal
grand jury process' was not included in the report.
Repeated efforts to reach Mr. Smith, who resigned in
May 2007, were unsuccessful. His home phone number was
continually busy, and his attorney, if he has one,
could not be identified.
The Justice Department press office did not immediately
return a call seeking an explanation for why
prosecutors decided not to bring charges against Ms.
Denett or Mr. Smith.
The report also details cozy relationships between
energy companies and other officials in the royalty-in-
kind program office.
The report found that 19 officials - about one-third of
the program's staff - accepted gratuities from oil
companies, which was prohibited because they conducted
official business with the industry. Eight of the 19
accepted gifts that exceeded maximum limits for gifts
for government employees - no more than $20 for any one
item and no more than $50 from any source per year.
On one occasion in 2002, the report said, two of the
officials who marketed taxpayers' oil got so drunk at a
daytime golfing event sponsored by Shell that they
could not drive to their hotels and were put up in
The same two women also 'engaged in brief sexual
relationships with industry contacts,' the reports'
cover memo said, adding that 'sexual relationships with
prohibited sources cannot, by definition, be arms-length.'
On one occasion, the report said, the royalty-in-kind
program allowed a Chevron representative who won a bid
to purchase some of the government's oil to pay
taxpayers a lower amount than his winning offer because
he said he had made a mistake in his calculations. A
report from Mr. Devaney's office earlier this year
found that the program had frequently allowed companies
that purchase the oil and gas to revise their bids
downward after they won contracts. It documented 118
such occasions that cost taxpayers about $4.4 million in all.
On another occasion, the new report said, one of the
officials shared information about the confidential
price a pipeline company was charging the government.
The report said that the officials told investigators
that the gifts and socializing did not affect how they
treated the companies in their official duties.
They also said did not view socializing with oil
company representatives and taking gifts as
inappropriate because they said they needed to be part
of the marketing culture in order to market the
program's oil and gas.
But the report presents evidence that the officials
knew their behavior crossed the line. One of the
royalty-in-kind employees said a supervisor told them
not to talk to other government officials about their
travel activities because the others might report them
to the inspector general.
In addition, in 2006 Mr. Smith convened a study group
to draft a proposal to exempt the office from regular
government ethics rules. Although Ms. Denett sponsored
the group, she told investigators she did not know that
officials were accepting gifts from the industry. The
proposal was never implemented.
Several of the lower-ranking program officials have
been transferred out of their old jobs, the report
said. It recommended a series of reforms to make clear
that such behavior is inappropriate and illegal.
The investigations took over two years and cost more
than $5 million. Inspector general personnel reviewed
over 470,000 pages of documents and emails and
interviewed 233 witnesses and subjects - including
employees of the government and oil companies.
While most of the oil companies allowed investigators
to interview their employees, the cover letter noted,
one major firm, Chevron, would not cooperate. A
spokesman for Chevron said he would check into the case
but did not immediately provide an explanation.