Now, before you think too much about silver, let's switch gears and return to a topic that I've discussed in previous OI updates, beginning exactly one year ago. It's what I call the Chevron Witch Trial, a so-called "environmental justice" lawsuit being prosecuted against Chevron, by U.S. attorneys, in Ecuador. Right now, the proposed damage award against Chevron is in the vicinity of $27 billion -- no typo, $27 billion.
Even though we don't hold Chevron in the OI model portfolio, I think the news I'm about to relate is very important to investors. It reflects on the kinds of obstacles that are out there, hindering energy development across this world.
The news in this update also offers a sobering lesson in how "lawfare" can come out of nowhere, let alone make its way through national-level court systems. That is, unscrupulous parties can engage in pure fraud, under color of judicial proceedings, and strike at any large, deep-pocketed resource company. As I'll describe below, this is not just my view. It's the finding of fact by a U.S. federal court.
Going Back to the Texaco Days
Here's a quick summary of what's happened so far. In the early 1990s, a U.S. lawyer from New York, named Steven Donziger, sued the former Texaco company in U.S. federal courts over alleged environmental contamination from oil operations in Ecuador.
Yes, Texaco operated in Ecuador, beginning in the 1960s. But starting in 1977, the Ecuadoreans began a systematic program to nationalize Texaco assets. By the early 1990s, Texaco was entirely out of Ecuador. Oil development in Ecuador, from 1977 through the 1980s and into the 1990s, was controlled by the state-owned oil company, Petro-Ecuador.
When Texaco finally withdrew from Ecuador, it made an agreement with Petro-Ecuador and the Ecuadorean government to remediate a portion of the list of old oil sites. Texaco cleaned up many former oil sites, and the balance of the oil sites were left for Petro-Ecuador to clean up.
Texaco kept up its part of the bargain, cleaned up the sites and even received a "release" of claims from the national government in Quito. But that didn't stop attorney Donziger -- fresh out of Harvard Law School, Class of 1991 -- from suing Texaco.
The "environmental justice" claim is a novel legal concept that they teach at enlightened places like Harvard. In this case, it's along the lines that Texaco's energy development adversely affected the Ecuadorean environment and local residents. After much preliminary litigation, the case was dismissed in the U.S. and re-filed in Ecuador.
Dealing With the Situation In Ecuador
Texaco merged with Chevron in 2001. Chevron then became the named defendant in the Ecuadorean lawsuit, even though Chevron never operated down there.
The details of the Ecuador lawsuit are technically complex, and very voluminous. I'll just summarize and note that the proceedings are ongoing, with hundreds of thousands of pages of exhibits and testimony. Litigating this case has pretty much "been" Mr. Donziger's entire legal career.
The long and short of it is that there are still many areas in Ecuador that are a huge mess from oil operations. But the source of the current environmental problem in Ecuador sure as heck isn't Chevron. Indeed, the problem appears to be the shoddy industrial practices of long-time domestic energy operator Petro-Ecuador.
What's the real problem? Well, for many years Petro-Ecuador has paid over the bulk of its operating capital to the government. Hence Petro-Ecuador has chronically under-invested in maintenance and safe operations.
Indeed, much of the "evidence" in the Ecuador trial displays problems that are recent, if not ongoing. That is, the damage occurred long after Texaco departed the scene, and is objectively and entirely attributable to Petro-Ecuador.
The Fake "Expert"
Well, now we're down in Ecuador, dealing with a species of patriotic emotion known as resource nationalism. It's hard for anyone -- especially an appointed judge -- to point the finger too close to home. After all, even Ecuadorean judges have to eat lunch.
So the judge passed the buck by naming a so-called "expert witness," Richard Cabrera, to advise the court on the scope of damages, injuries, and monetary claims.
Here's where things get really interesting. Turns out that this "expert witness," Mr. Cabrera, is a complete fake. At least, his "expert report" is a complete fake. How do we know?
For some strange reason, New York-licensed attorney Donziger allowed himself to be filmed by a documentary film-maker named Joe Berlinger. Mr. Berlinger was making a movie about environmental issues related to oil development. I suppose that Mr. Donziger wanted to be a movie star or something.
A couple months ago, Chevron obtained the out-takes of the movie -- the stuff that never made it past the cutting room floor. Here's what one of Mr. Berlinger's out-takes shows attorney Donziger saying about how he approaches his dealings with the Ecuadorean justice system:
"Hold on a second, you know, this is Ecuador. . . . You can say whatever you want and at the end of the day, there’s a thousand people around the courthouse, you’re going to get what you want. Sorry, but it’s true. ... Because at the end of the day, this is all for the Court just a bunch of smoke and mirrors and bullshit. It really is. We have enough, to get money, to win."
Whose "Expert" Report?
Oh really? I suppose that's what those pesky Rules of Ethics mean when they refer to an attorney's obligation of "candor towards the tribunal?" It's all "smoke and mirrors and bullshit," right?
Now, based on the movie out-takes, Chevron wants to depose a man in North Carolina named Charles Champ. Who's that? Well, he runs a small company called Champ Science and Engineering. And it turns out that Mr. Champ worked as an "environmental consultant" for attorney Donziger.
Oh, it gets much better. In the out-takes from the Berlinger film, Mr. Champ is shown as he discusses writing the "expert report" that Mr. Cabrera eventually submitted to the court. In other words, the evidence -- on film, no less -- indicates that attorney Donziger's "consultant," Mr. Champ, had a hand in ghost-writing the "expert" report submitted by Mr. Cabrera.
So much for an independent expert report, eh?
Opposing Deposing -- and a White Hot Federal Court Decision
Mr. Champ, as you might imagine, does NOT want to be deposed by Chevron. Must be some issue about either telling the truth, or possibly facing federal criminal charges for perjury. So Mr. Champ went to court in North Carolina to oppose the Chevron subpoena.
Last week, on August 27, the federal court in the Western District of North Carolina held a fact-hearing on the merits of Mr. Champ's objection to being deposed. Here's what the Honorable Dennis Howell, a U.S. Magistrate Judge wrote in his decision:
"As the court stated during the hearing, it was clear from the materials presented that Mr. Champ played a key supporting role in such plaintiffs’ efforts to write the court appointed independent expert’s report for him, masking his own opinions and any documents as those of the expert. Further, the court determined that Mr. Champ’s expertise, which appears to be remediation and the cost of clean up of oil spills, amount to shared expertise on what was likely the ultimate object of the litigation, an award of damages.
So here we have a federal judge, determining that the "expert report" in a $27 billion lawsuit was ghost-written, with the purpose of running up large damage claims against Chevron. Wow.
Somebody is in a LOT of trouble. Having spent many years of my life practicing law, including practice in U.S. federal courts, I have to say that I think this judge is kind of mad at Messrs. Champ and Donziger.
There's more. Indeed, the federal judge was just warming up. He continued:
"(It) is very clear from the words used by plaintiffs’ lawyer (Mr. Donziger) in the meeting - - some few weeks before the expert sitting in the room was in fact appointed by the court - - that Chevron did not know that the expert report was being ghostwritten by experts for the party opponent, that it would be important for no one at the meeting to tell Chevron that such had occurred, and, to the amusement of those in attendance at the meeting, Chevron would not realize what had happened to them with the independent report."
As findings of fact go in a federal court, I have a hard time putting any sort of "happy face" on this decision, towards the plaintiffs and their New York attorney Mr. Donziger.
"Bigger Problems Than An Oil Spill"
Really, how does one get out from behind this eight-ball? Mr. Donziger had better be talking with his malpractice insurance carrier, if not his favorite criminal defense counsel. Because the federal judge wasn't finished. Here goes:
"While this court is unfamiliar with the practices of the Ecuadorian judicial system, the court must believe that the concept of fraud is universal, and that what has blatantly occurred in this matter would in fact be considered fraud by any court. If such conduct does not amount to fraud in a particular country, then that country has bigger problems than an oil spill."
Hmmm... "What has blatantly occurred in this matter would in fact be considered fraud by any court." Can a federal judge be any more clear?
OK, if it's not clear, then maybe the judge made his point towards the end of the decision, when he ruled against any use of "attorney-client privilege" to stay proceedings during any appeal by Mr. Champ:
"(It) appears that any consulting expert privilege has been waived and that the crime-fraud exception prevents assertion of any other privilege by respondent, requiring the disclosures and testimony requested."
The "crime-fraud exception?" You don't really have to know the details of this concept, except maybe for your bar-exam. If you're interested, you can look it up.
The actions and issues in this matter probably rise to the level of an indictable federal offense. Bottom line is that none of this is good for either Mr. Champ, nor attorney Donziger, nor for their lawsuit against Chevron .
Still, despite this measure of justice for Chevron in a U.S. federal court, the California-based company is still in the crosshairs of the Ecuadorean judicial system. There's still $27 billion in play. That's the world in which we live.
And that's all for now. Thanks for reading. Have a good Labor Day weekend.
Byron W. King
P.S. As I mentioned in the article, plaintiffs' attorney Steven Donziger is a graduate of the Harvard Law School, Class of 1991. Coincidentally, one of Mr. Donziger's classmates was none other than Barack H. Obama, now President of the United States. Which goes to show that sometimes you can choose your President of the United States, but you can't choose your classmates.
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