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PDFSince Interoil Corp.’s (NYSE: IOC) inception in 1997, CEO Phil Mulacek has made a habit out of doing business with family members and leaving many of the relationships undisclosed.
For instance, during a three-year period ending in 2005, InterOil paid Direct Employment Services Corp. (DESC) nearly $1.8 million for unspecified "services" provided by "executive officers and senior management." InterOil disclosed that 50% of DESC was owned by Christian Vinson, who was serving at the time as InterOil’s COO and a director of the company.
But InterOil didn't reveal other related-party facts. For starters, Vinson is Mulacek's brother-in-law. Vinson, who has been with InterOil from the beginning, now serves as InterOil’s executive vice president of corporate development and government affairs, a role that places him in charge of dealing with Papua New Guinea's corrupt government.
Was it nepotism or experience that landed Vinson the executive and director positions of an oil-and-gas exploration company? His previous job was manager of a modest, automated machine shop in suburban Chicago.
In addition, InterOil failed to disclose that (according to Texas corporate filings) Mulacek's brother, Pierre Mulacek, was DESC's vice president and director for the three years InterOil spent $1.8 million with DESC.
Moreover, in company filings, DECS listed its headquarters in the same building as InterOil's corporate headquarters outside of Houston.
The connections don’t end there. In 2005, when Pierre Mulacek served as DESC vice president and director, InterOil purchased DESC for $1,000. Meanwhile, two former DESC executives went on to land top posts at InterOil. Bill Jasper, previously a vice president at DESC, now serves as both InterOil’s president and the company’s COO. Another former DESC vice president, Collin Visaggio, has gone on to become InterOil's CFO. On InterOil’s website, however, the biographies of Vinson, Jasper and Visaggio never mention their work at DESC.
Today, InterOil remains in a joint venture with PNG Drilling Ventures Limited, a Barbados company whose ownership is shrouded in secrecy. PNG has the same mailing address as InterOil, according to public filings, and its trustee, lawyer Dale Dossey, was an attorney used by InterOil’s own CEO.
This isn't the first time a basically anonymous investment company used InterOil's mailing address as its own. Eurostar Fund, Ltd. and Biltrust, Ltd. at one time owned significant portions of InterOil stock, according to regulatory filings and court documents.
Both companies listed InterOil's headquarters as their mailing address on shareholder documents. But in a 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 in the fraud litigation.
In court documents, the lawyers for many of InterOil's original investors allege that Biltrust and Eurostar were owned and/or controlled by Mulacek's grandfather and used as "instruments to funnel large amounts of publicly tradable stock to Phil Mulacek’s family and friends."
In a recent deposition, Mulacek was asked what he knew about Biltrust.
Q: Are you familiar with a company called Biltrust Limited?
A: It's just -- I think it was on a top 20 shareholder (list for InterOil).
Q: Do you have any knowledge as to who owns Biltrust Limited?
A: No, sir.
Q: And you have never heard of Biltrust Limited other than seeing their name of the --
A: -- No, it was one of the exchanges with CTI (his grandfather's Bahamian company that counted Mulacek as its agent). Make an exchange and that was it.
Q: You mean CTI exchanged some shares with Biltrust?
A: I don't know the exact, but I think so, yes, sir.
Q: Do you -- well, let me take it one step at a time. Do you personally have any direct, indirect, legal, beneficial, any kind of ownership whatsoever in a company called Biltrust Limited?
A: No.
Q: Do you have any right to receive any money from a company called Biltrust Limited?
A: No.
Q: And you have no knowledge whatsoever as to who the owners or the beneficial owners of Biltrust Limited might be.
A: No, it was instructed with (his grandfather's attorney) at the time with -- through -- CTI. That's all I know.
Q: -- So you at least know that Biltrust Limited has some --
A: Yes, sir.
Q: -- connection with CTI.
A: Yes, sir.
Q: But the exact nature, even the general nature of that connection, you have no knowledge.
A: No.
Q: Do you have any idea why on shareholders records that Biltrust's address would be listed as the InterOil offices in The Woodlands (outside of Houston)?
(This portion of Mulacek's deposition contained in court documents ends here.)
InterOil never reported any related-party transactions involving PNG, Eurostar or Biltrust.
Two InterOil-related companies that Mulacek controls -- Petroleum Independent and Exploration Corp. (PIE) and Nikiski Partners -- feature just three officers: Mulacek, his wife Kathleen and his brother Pierre.
This arrangement does make for a certain efficiency. Acting for Nikiski Partners, the trio in December decided after a "10- to 15-minute meeting" to file what a federal judge has ruled was a bad-faith bankruptcy. The move was an attempt to derail fraud litigation against Mulacek and the companies he controls, according to testimony by Kathleen Mulacek, and "secure InterOil stock and to prevent InterOil from going bankrupt" in case of a large judgment.
Mulacek's panache for nepotism can be traced back to the beginnings of InterOil, and has become the subject of amassive fraud lawsuit filed against Mulacek and the companies he controls. (Click here and here for detailed stories).
In 1997, court documents show, a Mulacek-controlled company quietly gave family and friends 226,000 shares of unrestricted InterOil stock for little consideration. The family connection was not reported to initial investors, however, with the ties only later revealed during the discovery phase of fraud litigation.
Specifically, in 1997, InterOil gave 5.1 million shares of stock valued at $15 million to a Bahamian company owned by Mulacek's grandfather and controlled by Mulacek in exchange for a $250,000 piece of equipment allegedly bought by the off-shore company. (The actual buyer of that equipment remains in dispute). The family connection was not reported to initial investors or in filings. Again, most of the initial investors learned of the related-party transaction only recently because of litigation.
The court documents show that those 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 that it invested.
Disclosure: After uncovering information contained in this story, William Lobdell took a short position in InterOil. All facts in Lobdell's InterOil stories have come from public information.
