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And sifting through the papers in the Todd Peters et al. v. Phil Mulacek et al. lawsuit, one gets a better sense of why Mulacek attempted a legal Hail Mary three months ago and had one of the companies he controls file for bankruptcy protection, a move Mulacek's attorneys said was calculated to get the Peters' litigation swept into federal bankruptcy court and derail a potentially massive judgment. (See iBusiness Reporting’s original story here.)
Among the bombshells, the documents show: Mulacek denied knowledge of a company that he represented and was owned by his grandfather; Mulacek allegedly had given large chunks of InterOil stock away to his family, friends and himself for little or no investment; a former InterOil chief financial officer claimed that he was kept in the dark about major transactions involving InterOil; Mulacek represented both sides of deals he put together; and the former CFO alleged that Mulacek had InterOil stock secretly stashed in an offshore company as insurance in case of an unfavorable IRS audit.
The 26 plaintiffs -- original investors in Nikiski Partners, a forerunner to InterOil -- are asking up to $1.3 billion in derivative claims, meaning the suit was brought forth on behalf of all Nikiski investors. In legal arguments, Mulacek and his attorneys said even a $50 million verdict would be "devastating" for InterOil and its future, which will rely heavily on raising close to $10 billion in capital for gas drilling, pipelines and a liquified natural gas (LNG) plant, all in Papua New Guinea.
"If they had a judgment against them for $1.3 billion or $275 million, or any judgment of any significant amount, certainly a judgment within the range that the plaintiffs are seeking, (InterOil) will not finish the drilling, they will not build the pipelines, they will not build the LNG facility -- InterOil will go away," said William A. 'Trey' Wood, III, attorney for Nikiski Partners in bankruptcy court.
The Peters plaintiffs objected to Nikiski’s bankruptcy filing, calling it a “transparent attempt” to delay litigation by forcing the case into bankruptcy court. They said in court papers that it was no coincidence that the filing came one business day before the court-ordered and long-delayed deposition of Ronald Mulacek, Phil’s father, in the Peters’ case.
Two days before filing for bankruptcy, Mulacek, through his holdings in Nikiski Partners, dumped nearly $1.5 million worth of InterOil stock, according to the Canadian Securities Commissions. The insider transaction was filed 40 days after it took place.
A federal bankruptcy judge in late December dismissed the bankruptcy attempt by the financially healthy Nikiski Partners (with net assets of more than $70 million), ruling it was filed in bad faith.
Since InterOil evolved from Nikiski and a web of other companies -- including ones based in the Bahamas and Cayman Islands -- in the mid-1990s, Nikiski’s sole function has been to passively hold investment units that can be ultimately converted to InterOil stock.
The latest trial date for the Peters' case has been scheduled for Oct. 18.
In legal filings, InterOil has denied the allegations contained in the Peters' case, calling them, among other things, frivolous and also barred by the statute of limitations.
The Peters' documents detail how a seemingly insignificant seven-page complaint filed by three Nikiski investors who wanted access to the partnership's accounting has erupted into litigation with 26 plaintiffs -- original investors who raised $2 million to buy a shuttered oil refinery in Alaska -- whose damages pose a threat to the financial well-being of InterOil, a darling of Wall Street in 2009 despite the fact that it hasn't found any commercial oil or gas in more than a decade of exploration in Papua New Guinea.
The vast majority of the plaintiffs didn't join the suit until 2008 and 2009, claiming it wasn't until then that they learned they had been allegedly defrauded. This was one reason why the plaintiffs argue the statue of limitations has not run out on their claims.
Here are some of the previously unreported revelations -- many undisputed facts and some allegations -- found in the documents filed in the Peters' case.
In legal papers filed on June 27, 2006, Mulacek claimed "no knowledge of an entity named 'Commodities Trading International Inc.' ... Defendants have no knowledge of this entity and have no documents in its possession or subject to its control, production of the documents from Commodities Trading International Inc. would be impossible."
In later filings, Mulacek admitted that Commodities Trading International (CTI) was a Bahamian company founded by his grandfather and that Mulacek himself served as its agent.
The court documents show that Mulacek, acting on behalf of the investors and as an agent of CTI, gave his grandfather's Bahamian corporation in 1996 nearly 5.2 million shares of what essentially was unrestricted InterOil stock in exchange for used refinery equipment that had been recently bought for $250,000. (It's in dispute whether the capital came from CTI or funds from Nikiski Partners).
Nine months after the $250,000 purchase, Mulacek valued the equipment -- called a reformer and used to convert oil into unleaded gas -- at $15 million, allowing CTI to receive the 5.1 million shares.
This undisputed transaction -- which inflated the cost of the reformer by more than 6,000% and gave his grandfather's company 5.1 million shares in return -- is at the heart of the plaintiffs' case. They allege that their money was used to buy the equipment and the paperwork forged to secretly benefit a Mulacek family member. (Mulacek, as an agent of CTI, signed the purchase agreement.) In other words, the 5.1 million shares of InterOil stock should have been theirs.
Mulacek tries to explain the deal in his deposition on Feb. 21, 2008:
Q: What happened between February of 1996 and November of 1996 to take a reformer that was purchased for $250,000 and give it a value of $15,327,834?
A: I don't know. I mean, you're saying why is there a basis? I mean, it's --
(Skip)
A: I think there was more to the value. We were trying to uplift the value for P.I.E. (a Mulacek-controlled company), the crude unit and the whole enterprise in negotiations with Enron, Total and all the different parties. So that's what it is on this spreadsheet.
The court documents show how the original investors received 1.31 restricted shares of InterOil stock for each $1 invested, while CTI secretly received 20.73 unrestricted shares for every $1 it invested.
"If the Nikiski investors had been provided the same treatment, a $50,000 investment would have yielded 1,036,000 shares instead of 63,300 shares," the plaintiffs' attorneys wrote.
Through another Mulacek-controlled company, his family and friends received 226,000 shares of unrestricted InterOil stock for little consideration, according to various legal documents. Here's an excerpt from Mulacek's deposition:
Q: Explain to me how it is fair, just and ethical for your family limited partnership … your brother and your sister to be getting shares of InterOil Corporation, the publicly traded company, in April of 1998 at the same time the original Nikiski investors are being restricted in their ability to exchange their interests and get shares in the public company.
A: I think there was two separate cases. I know this was a coordination by Andy (Martin, then CFO), so I’m not exactly what the reason for it, and I don’t know that today. So you’re asking me to speculate on something that I’m -- I can’t recall the basis of this stock and the requirement from it. I know there’s --
Q: I’m not asking you to speculate about anything. If you don’t know, just tell me you don’t know.
A: I don’t know.
At least two contracts included in the documents showed that Mulacek represented both sides of deals involving companies he controlled. For instance, in a transfer of stock shares between InterOil and CTI, Mulacek signed the agreement as both the transferor and the transferee. The plaintiffs alleged that his "crippling conflicts of interest" caused him to enrich family, friends and himself to the detriment of the original investors.
And while InterOil officials and their Wall Street backers this week downplayed the Peters case as frivolous, Mulacek himself agreed on June 3, 2009, to pay $1.6 million to settle claims brought by one of the original investors (a married couple whose claim was picked up in bankruptcy court) in what’s now InterOil.
Included in the court documents is testimony from Paul A. "Andy" Martin, InterOil's former CFO (he left the company in 2000), who recently settled a $42 million lawsuit he filed against Mulacek and the companies he controls for an undisclosed amount.
Martin alleged that Mulacek never allowed him to see details of key transactions that helped to form InterOil, including any "agreements and documents" about the deal with Commodities Trading International.
"The details surrounding CTI's ownership of shares was one of the topics about which Phil Mulacek was the most secretive," Martin wrote in an affidavit filed on July 8, 2009. "He made clear that he was not going to share with me any detailed information about the role of CTI ... and that I should not inquire about them."
In a deposition on Aug. 2, 2006, Martin alleged that Mulacek and his brother Pierre in late 1996 worked feverishly to pump up the perceived value of InterOil, which was about to go public, "mainly by building in a huge contingency" budget.
Martin testified that the plan worked. He said InterOil had planned to raise between $25 million and $30 million at $12 per share. The offering raised $60 million at $14.25 a share, according to Martin.
Martin claimed that InterOil raised so much stock that Mulacek said he was going to put 880,436 shares "under the name of CTI or all these other offshore companies he ended up with."
Martin alleged that Mulacek wanted to create the secret fund in case the InterOil venture had an unfavorable tax audit.
A: Phil became concerned that one day the IRS might come back and disallow (the tax write-offs), and we might have a huge tax liability. So he said I’m going to put a bunch of shares into CTI and we just -- and the company will just refer to it as P&A stock, P&A standing for P.I.E. (a company controlled by Mulacek) and APRI (an InterOil investment partner run by a close confidant of Mulacek's). And he said we’re going to put these shares aside. And let me explain one more thing as I finish here. And if the IRS never comes back, then we’ll secretly distribute them out to you later. And he referred to it as CTI stock, and he referred to it as P&A stock.
Q: That’s the stock that he was going to give to you?
A: Yes, sir, and (four others, including Mulacek), all offshore, all real quiet.
Plaintiffs' attorneys also have been trying to unravel who's behind two companies -- Eurostar Fund, Ltd. and Biltrust, Ltd. -- that at one time owned significant portions of InterOil stock. Both companies listed InterOil headquarters for their mailing address on shareholder documents. But in his deposition, Mulacek said he had never heard of Eurostar, and he "recalled only that Biltrust, Ltd. might be connected with his grandfather, and that (an attorney his grandfather used) had called him and asked him to sign papers on behalf of Biltrust, Ltd.," according to papers filed by plaintiffs' attorneys.
InterOil’s 2009 annual report, released earlier this month, reported that a favorable judgment from the plaintiffs in the Peters case could result in damages exceeding $125 million. The report doesn’t mention the $275 million to $1.3 billion range that the plaintiffs of the Peters case are seeking in damages -- figures Mulacek's attorneys used in the bankruptcy proceedings. Nor does it say that any judgment of a "significant amount" would cause InterOil to "go away," as Mulacek's attorneys argued in bankruptcy court.
The Peters suit wasn't mentioned in InterOil's annual reports for 2005 and 2006. In 2007 and 2008 annual reports, InterOil mentions the suit but said a judgment for the plaintiffs would have no material adverse impact.
* Disclosure: After uncovering information contained in this story, William Lobdell took a short position in InterOil.
