NEW YORK (Reuters) - U.S. energy trader SemGroup LP SEMGP.UL spiraled into bankruptcy last year after its top executives lied about its liquidity problems and mismanaged a speculative oil trading strategy, according to a report from the company's court-appointed examiner on Wednesday.
SemGroup, once the 14th-largest privately-held U.S. company and parent of SemGroup Energy Partners LP SGLP.PK, collapsed last year after $3.2 billion in bad bets on oil prices.
In a 258-page report filed with the court on Wednesday, Louis Freeh, a former head of the U.S. Federal Bureau of Investigation who was appointed in October to investigate the firm’s collapse, accused SemGroup’s co-founders and top executives of engaging in risky sales of crude oil options while bypassing the firm’s self-imposed controls and misrepresenting the trading to lenders and SemGroup’s management committee as normal hedging activity.
The Freeh report paints a picture of a trading strategy that was “overwhelmed” as oil prices hurtled to record levels of $147 a barrel last July.
Freeh accused the company’s chief executive, Thomas Kivisto, of hiring commodities traders with little or no experience, and ordering them to keep short bets on oil prices going based on his conviction that oil prices would return to “normal” levels.
One former trader, James Coen, told Freeh that Kivisto’s strategy consisted of never realizing trading losses, but instead rolling losing positions forward to mask liabilities, in what amounted to even larger directional bets on oil prices.
The report said Kivisto paid the traders bonuses, sometimes in excess of $1 million, to keep the strategy going, and flouted the firm’s requirements to seek management committee approval for his own and other executive bonuses. It said Kivisto and other executives determined most bonuses themselves -- including bonuses in excess of $17 million a year that Kivisto paid to himself in 2006 and 2007.
Freeh said Kivisto, SemGroup’s former CFO Gregory Wallace, and former treasurer Brent Cooper had refused his requests for interviews, and invoked their fifth-amendment privilege against self-incrimination during the examiner’s depositions.
STRAINED RELATIONSHIP WITH BANKS
The Freeh report details the mounting concerns of SemGroup’s oil futures brokers in mid-2008 as oil prices skyrocketed and the unrealized losses on SemGroup’s trading book shot up.
A May email from Prudential Bache Securities, one of SemGroup’s brokers, quoted by the report asked SemGroup to justify its “large naked options position (that) would not appear to be hedging physical assets.”
The report also said Wallace told Goldman Sachs' GS.N J.Aron commodities unit around June 2008 that concerns about the company's liquidity were "exaggerated."
Goldman had been discussing a potential private placement investment in SemGroup, but, according to the report, became concerned as it found SemGroup’s trading losses were nearing $2 billion, with margin calls burning through its capital. The report said executives also misled SemGroup’s management committee by saying its trading was based on physical inventory.
Last July, Goldman broke off its business relationship with SemGroup, and Kivisto was removed as CEO of SemGroup and escorted from the building by security guards, according to the report.
Just minutes ahead of the filing of the examiner’s report, attorneys for Kivisto filed an objection to the release of the report, which has been kept secret among parties in the case for two weeks. John Tucker, an attorney for Kivisto, said in a statement that process may have compromised the integrity of the report.
"It is shocking that the Examiner allowed Goldman Sachs, Bank of America BAC.N and others directly involved in the actions that caused the company to fail to review his report and remove information they do not want released," Tucker said.
“Neither the SemGroup CEO, Mr. Kivisto, nor the CFO, Mr. Wallace, was permitted to review and comment about missing information or incorrect statements or to offer correction of errors.”
Representatives for Goldman and Bank of America were not immediately available for comment.
Freeh said SemGroup’s creditors could potentially bring suits against its former executives for fraud, making false statements, unjust enrichment, breach of fiduciary duty, breach of contract and corporate waste.
Included among those seeking recompense from SemGroup are dozens of oil producers, including Oklahoma-based Samson Resources, who claim they collectively sold SemGroup more than $400 million in crude in the two months before Chapter 11, and were never paid.
SemGroup, based in Tulsa, Oklahoma, is hoping to emerge from bankruptcy protection later this year as a public company after reorganizing its debt.
(U.S. Bankruptcy Court, District of Delaware, No. 08-11525)
Additional reporting by Phil Wahba in New York and Robert Campbell in Mexico City, Editing by Bernard Orr & Ian Geoghegan
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