Anadarko was part of $25 billion scheme, U.S. says

Anadarko Petroleum Corp. (APC)’s Kerr-McGee Corp. faces testimony from more than 50 witnesses in a trial starting today over an alleged scheme that enriched the company by $25 billion while polluting sites from New York to New Mexico.

The suit, brought by Kerr-McGee’s bankrupt spin-off Tronox Inc. (TROX) against Anadarko in 2009, and taken over by the Justice Department on behalf of the Environmental Protection Agency, seeks to recover $25 billion to clean up 2,772 polluted sites and compensate around 8,100 tort claimants who say they’ve been harmed by the toxins. It will test whether money can be recovered from a successor to a polluting company, even when a bankruptcy has ostensibly cleaned the slate.

The bench trial in Manhattan bankruptcy court, scheduled to run 33 days, will include over 60 witnesses including bankers, scientists and a mayor who says Kerr-McGee’s toxins destroyed his town.

“I’m not sure I’ve seen another case like this,” said Jason Hutt, partner in the environmental strategies group at Bracewell & Giuliani LLP in Washington. Hutt, who once represented a potential buyer of Tronox, isn’t involved in the current case. “EPA is taking the position that the cherry- picking of assets from a mixed bag and the leaving of liabilities to the public is not going to fly,” he said.

Seven Decades

The lawsuit says Kerr-McGee fouled 2,772 sites during seven decades of producing chemicals, fertilizer and plutonium pellets. It seeks damages from Anadarko because Kerr-McGee no longer exists — after putting its liabilities into Tronox in a 2005 spin-off, it sold its remaining oil and gas assets to Anadarko three months later for $19 billion. Managers also went to the oil and gas giant, in what the suit alleges was a “two- step fraudulent scheme” to transfer assets to Anadarko where they would be out of reach of future creditors of Tronox.

Tronox filed for bankruptcy in 2009, saying its pigment- making business couldn’t support liabilities from Kerr-McGee’s old chemicals businesses, many of which had been discontinued before Tronox was even created.

The Justice Department intervened, saying the EPA should get any lawsuit proceeds because it was owed unknown billions for pollution that Kerr-McGee had refused to clean up over the course of decades, making it Tronox’s largest creditor. Kerr- McGee had hidden many polluted properties, some of which were referred to as “secret sites,” the U.S. said. Most were wood- treatment sites where creosote was used, including one in Rome, New York.

Maximize Value

Anadarko says Kerr-McGee was reorganizing to separate the chemical business from the oil and gas business and maximize shareholder value. “All relevant parties believed that both businesses were healthy,” lawyers for Anadarko wrote in court papers.

When Tronox exited bankruptcy in 2011, it settled all its liability with the EPA by paying $320 million and granting the U.S. 88 percent of any recovery to clean polluted lands, and 12 percent for tort victims who say they were harmed by the pollution.

The lawsuit seeks $15 billion in assets allegedly transferred in 2005, plus $10 billion in interest and appreciation, according to a lawyer involved in the case. U.S. Bankruptcy Judge Allan Gropper, overseeing the trial, ruled at a pretrial hearing May 8 that the fraudulent transfer claim is limited to the wholly-owned Kerr-McGee unit, because Anadarko has kept it isolated within its corporate structure.

Still the Owner

“If a multibillion judgment is entered against Kerr-McGee, Anadarko is still the sole owner,” David Zott, a lawyer for the U.S. and Tronox, said after Gropper’s ruling.

The Woodlands, Texas-based Anadarko, among the biggest U.S. independent oil and gas companies by market value, has taken $525 million in charges this year for estimated losses from the case.

“We conduct our business with the utmost integrity, and we are confident in the merits of our case,” Anadarko General Counsel Bobby Reeves said in a March 15 statement.

Witnesses for Anadarko will include Kerr-McGee’s former Vice President of Safety and Environmental Affairs, George Christiansen, who may testify that his department made reasonable estimates about environmental costs.

Luke Corbett, a Kerr-McGee chief executive from 1997 to 2006 who currently sits on Anadarko’s board, may testify that at the time of Tronox’s spin-off, his expectation was that it would be a successful independent business.

Eve of IPO

Corbett will also testify that Apollo Group Inc. was interested in buying the company up until the eve of the IPO, and Robert Wohleber, chief financial officer of Kerr-McGee from 1999 to his retirement in 2006, will testify that Apollo was willing to pay $1.3 billion for the company, according to court papers.

The lawsuit, which doesn’t bring charges against individuals, alleges that Corbett, who made $200 million, and Wohleber, who made $20 million, were among top managers that profited from the two-step scheme. In a related lawsuit brought by former Tronox shareholders in Manhattan district court, a settlement was reached among former Kerr-McGee officers and directors, Anadarko said in its quarterly report April 30. Insurers for Tronox, Anadarko and Kerr-McGee will pay, and Anadarko didn’t disclose the amount or further terms of the settlement.

Plaintiffs’ 52 witnesses will include Roger Addison, in- house counsel of Kerr-McGee from 1977 to 2005, who may testify that he worked on “Project Focus,” in order to isolate the liabilities so the oil and gas assets couldn’t be used to satisfy them. According to court papers filed by the U.S., Project Focus began in 2001, and Anadarko hired Merrill Lynch in 2002 to look at ways it could buy Kerr-McGee’s oil and gas assets without the 70 years’ worth of chemical liabilities.

Navaho Nation

Perry Charley, a member of the Navajo Nation, may testify that Kerr-McGee, the biggest producer of uranium on the reservation from 1952 to the mid-60s, cleaned only surface physical hazards, such as open mine shafts, without restoring the land, while Navajo continued to swim in contaminated water and consume animals they grazed on the contaminated land.

James Haddock, former mayor of Avoca, Pennsylvania, where Kerr-McGee operated a plant that made creosote, an oily wood preservative, is expected to testify that after years trying to redevelop Kerr-McGee’s creosote site after it closed in 1996, he was finally told Kerr-McGee kept rejecting his proposals because it was concerned about environmental contamination.

There was a suspicion in the town for years that the smell from the Kerr-McGee plant might be causing what seemed to be an unusually high rate of cancer in children, Haddock said in a phone interview.

It Reeked

“Certain days it reeked, you could smell it everywhere in the town,” Haddock said.

About 8,100 claimants seeking $2 billion are being considered by a trust that will distribute the 12 percent to qualifying tort victims. Many are related to Avoca and Columbus, Mississippi, where Kerr-McGee also operated a creosote plant.

Gropper has said he won’t take testimony about health damages from Kerr-McGee’s toxins, however. He denied the U.S.’s request to introduce two other witnesses from Avoca, who claimed their cancers are related to the creosote plant.

“I recognize plaintiffs want to put a human face on the environmental issues, but at the end of the day the issues here relate to numbers, solvency, and specifics other than individuals’ medical conditions,” Gropper said at a May 2 pretrial hearing.

Responsibility

One focus of the trial will be how many sites Kerr-McGee was actually responsible for. Overruling objections from Anadarko, Gropper granted the U.S.’s request to use testimony from Dr. Neil Ram, an environmental engineer who has spent 38,000 hours analyzing sites that Kerr-McGee formerly owned, operated, or used for waste disposal. Ram estimated that in 2005, 372 of Kerr-McGee’s approximate 2,700 toxic sites would have cost $1.5 billion to $1.7 billion to clean up. Anadarko had asked to bar any reference to 2,400 other former Kerr-McGee sites the U.S. said Tronox eventually became responsible for.

“A challenge in the case will be the defense from Anadarko that many of these sites were unknown to it and Kerr-McGee,” said John Hueston, a former federal prosecutor in the trial of Enron Corp. executives who is overseeing legal strategy for the U.S. and Tronox.

The so-called “badges of fraud” that show there was an intent to defraud creditors will also be at issue, Hueston said.

Choking a Flower

Chris Watson, a Lehman Brothers Holdings Inc. managing director in 2005 who advised Kerr-McGee on its spin-off of Tronox, drew a picture of a weed choking a flower on several occasions — evidence, the U.S. says, that there was fraudulent intent because Kerr-McGee’s executives knew they were creating Tronox with too many liabilities, destining it to fail. Watson stated that the weed of Kerr-McGee’s environmental liabilities would kill the flower of Tronox, Robert Gibney, a current Tronox vice president, is expected to testify by deposition, according to court papers.

“Eventually, this weed is going to choke off the flower,” Watson cautioned, according to court documents.

The U.S. also said in court papers that Corbett and Wohleber had a reference to potential bankruptcy deleted from papers prepared by Lehman Brothers that mentioned the possibility of a bankruptcy for Tronox. In a draft presentation of a July 12, 2005 board meeting, Lehman noted that Kerr-McGee’s separation from the legacy liabilities was “complicated under a bankruptcy scenario.”

“We have reviewed the slides with Luke [Corbett], only one change — delete the last line on the right hand side of page 2, which reads “Complicated under bankruptcy scenario.”, Wohleber wrote in an email, according to court papers filed by the U.S. under seal March 16. The documents were later unsealed April 11. Lehman complied, the U.S. said.

Document Destruction

Corbett and Wohleber also destroyed documents at the time Kerr-McGee was acquired by Anadarko, violating a March 2006 tolling agreement between the U.S. and Kerr-McGee which required Kerr-McGee to preserve documents related to the spin-off, the U.S. said. A tolling agreement is one which agrees to suspend a statute of limitations on a lawsuit so that a potential plaintiff can win more time to assess a potential damage claim.

Lawyers for Anadarko said in a court hearing May 2 that there is no evidence the destroyed documents are relevant to the case.

“The evidence will show that the effort to attribute the Tronox Chapter 11 filings to purportedly massive and unknown environmental and tort liabilities is a litigation tactic, engineered post hoc,” lawyers for Anadarko wrote.