Wide-Ranging Ethics Scandal Emerges at Interior Dept.

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Wide-Ranging Ethics Scandal Emerges at Interior Dept.

By Charlie Savage

New York Times

September 11, 2008

http://www.nytimes.com/2008/09/11/washington/11royalty.html?hp

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

appropriate actions.'

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

Shell-provided lodging.

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.