Friday, November 9, 2012

Shareholder Shocker: Chevron's Assets Frozen in Argentina

Reposted from Eye on the Amazon

Hell frozen overIf you're a Chevron shareholder, you must be wondering at this point WTF is going on over at corporate headquarters. The internet exploded Wednesday with news that an Argentinian judge ordered seizure of Chevron's in-country assets in what could be the first of many rulings enforcing a $19 billion judgment from an Ecuadorian court on behalf of indigenous and farmer communities who have suffered decades-long contamination, health problems, and rights abuses stemming from the company's Amazon drilling operations. Chevron shares closed down $1.64 on Thursday and may keep nose-diving over the long term.

Judge Adrian Elcuj Miranda froze 100% of Chevron's capital in Argentina, 100% of dividends, all of its share in pipeline operator Oleoductos del Valle SA, 40% of Chevron sales to Argentine refineries, and 40% of Chevron bank accounts in Argentina. The move was a major victory for the 30,000 plaintiffs who have been forced to scour the planet seeking Chevron assets because the oil giant has refused to pay the $19 billion damage award ordered by Ecuadorian courts after it was found guilty for spilling over 18 million gallons of crude and dumping billions of gallons of toxic waste water into the fragile rainforest ecosystem, poisoning local indigenous and farmer communities. The verdict was handed down by a court of Chevron's own choosing and based on much of the company's own evidence after almost two decades of litigation which includes some 64,000 soil and water samples.

For any Chevron shareholder, the news must have been shocking, because senior management has long downplayed – or outright failed to disclose – the potential financial impact of the verdict. Since 2008 the company has recycled the same language in its 10-K, misleading shareholders on the legal and factual merits of the case, selectively disclosing only favorable court rulings, and refusing to disclose material impact of enforcement actions against its assets in multiple countries. In essence, downplaying and dismissing any impact the case could have financially on the company.

However, in a sworn affidavit presented to the New York's Second Circuit Court, Chevron Deputy Comptroller Rex Mitchell stated that efforts by plaintiffs to recognize and enforce the judgment would cause "significant, irreparable damage to Chevron...irreparable injury to Chevron's business reputation and business relationships," and that "seizure of Chevron assets, such as oil tankers, wells, or pipelines, in any one of these countries, would disrupt Chevron's supply chain and operations; and seizures in multiple jurisdictions would be more disruptive."

Randy Mastro, Chevron's hit man from the legal firm Gibson, Dunn & Crutcher pleaded to a New York judge at a February 2011 hearing, "It seems obvious to us that there will be irreparable harm from seizing boats, seizing ships, seizing tankers, disrupting the distribution stream of Chevron that will affect it not only in the one jurisdiction but around the world…[It] could end up being one of the biggest forced asset seizures in history and could have a significant disruptive impact on the company's operations…Your Honor, it is obvious [that Chevron will suffer] irreparable harm both in terms of disruption of operations, business reputation and good will, and an inability to ever get that money back…So we are definitely right now in a position of that nightmare is here, irreparable harm is imminent…[We] are facing the ultimate Sword of Damocles, and it is over our heads…The Sword of Damocles is not over our heads, it's touching our foreheads.”

If you are a Chevron shareholder, don't you want to know that? Don't you have the right to hear that? So which is it Chevron – an irreparable threat, or a non-issue? Chevron is either lying to its shareholders, or the New York judiciary. Is Chevron committing perjury or investor fraud? Either way, someone at Bollinger Canyon Road has some explaining to do.

The long arm of the law is finally catching up to Chevron, and its executives and legal team knew it was coming. The company even argued before the same judge in New York that the communities may use the Inter-American Convention on the Execution of Preventive Measures, a treaty that allows for the automatic freezing of assets of a defendant that fails to abide by the law and refuses to pay a final foreign judgment. Indeed, this treaty from the 1970s, is exactly what Judge Miranda used as the basis of his order. Seems that would have been important information to tell your shareholders.

Several other Latin American countries have signed the treaty and may present new vulnerabilities for Chevron across the region. The communities have already filed enforcement and seizure motions in Brazil and Canada, with more to come. And, despite Chevron claims to shareholders that it has no assets in Ecuador, a judge recently awarded what plaintiffs believe to be up to $200 million in company assets in the country.

Even more stunning is the reaction of Chevron spokesman James Craig to the Argentine embargo, who feigned ignorance saying that he was "unaware of a filing by the plaintiffs or a court order in Argentina," but if there was one, it wouldn't be applicable to Chevron's subsidiary assets. Craig is either lying through his teeth, or so woefully unaware of the fate that is befalling his own company that it's astounding he still has a job. Of course, Chevron continues to reward the laundry list of folks who have managed to put the company in this position.

The order from Judge Miranda is just that – similar to an order to garnish the wages of a deadbeat dad. There wasn't a hearing, or a retrial of the case, and there won't be. The case has happened. Chevron was found guilty, and the judgment was upheld on appeal. Despite having every opportunity over 19 years of litigation to defend itself in a forum of its own choosing, Chevron thumbed its nose at the verdict, and simply refuses to pay, forcing communities to go anywhere and everywhere to collect funds they desperately need for an environmental clean up, clean water, and health care.

Even more ridiculous was Craig's statement that the plaintiffs had no right to go after Chevron's subsidiaries. Of course they do. The embargo order from the Ecuadorian court clearly states the plaintiffs' right to seek Chevron subsidiary assets, and explicitly mentions its Argentinian assets. More than 80% of Chevron's assets are subsidiaries, which is why the company counts them and their revenues as part of the parent company. See here and here. Maybe Craig contracted Romnesia after Chevron's $2.5 million donation to a GOP SuperPAC.

It's hard to tell who is more out of touch with reality – Chevron management or advisors and pundits that guaranteed a Mitt Romney victory. But as we saw with Tuesday night's election and Wednesday's Argentinian announcement, reality has come crashing down on insular, inside-the-bubble mentality.

There are only two explanations – and neither provides confidence for Chevron shareholders. Company management is either in total denial, living blissfully with its collective heads in the sand, and got caught with its pants down after underestimating the resolve and mettle of the rainforest residents. Or, there is a concerted effort to keep shareholders in the dark about the true fallout the company faces as the Ecuadorians move country by country to collect what is rightfully theirs.

As we've suggested here before, this $19 billion liability is the giant albatross around CEO John Watson's neck, and it's of his own making. After all, he oversaw the purchase of Texaco and its Ecuador's liability as head of Mergers and Acquisitions. His poor handling of the case is now a major threat to his legacy, and to the survival of his company.

Chevron spokesperson Donald Campbell infamously said in 2009 that the company would fight the case "until hell freezes over, and then we'll fight it out on the ice." Sounds like John Watson should start looking for his skates.

– Kevin Koenig

Friday, November 2, 2012

Don't Cry for Me, Argentina

Visiting the cemetary

Reposted from Eye on the Amazon

It's been another rough week for Chevron, the second largest U.S. oil company. The San Ramon oil giant reported this morning that its third quarter earnings had dropped by a third. But that's not the worst of it.

Chevron got a rude awaking Wednesday morning with news that Ecuadorian indigenous and farmer communities will seek to freeze some $2 billion of the company's assets in Argentina. This latest legal action is part of the communities' efforts to force Chevron to pay a $19 billion damages award handed down from Ecuadorian courts that found Chevron guilty of massive environmental contamination and rights abuses in the country's Amazon rainforest.

Ever since the 2011 decision – from a court of Chevron's choosing and based on much of the company's own evidence – Chevron has been on the lam, running from the law, and forcing some 30,000 Amazonians to go global to get the long fought justice they deserve. Between 1967 and 1991, the company deliberately dumped more than 4.3 billion gallons of toxic waste water, 18 million gallons of crude, and left behind some 1,000 super fund style sludge pits full of carcinogens. The result? Indigenous communities and their rainforest lands devastated, a public health crisis with no clean drinking water, and an epidemic of cancer and other ailments that have plagued the region for the last three decades. The communities are seeking a full environmental clean up, potable water, and funds for health services.

Adding insult to injury, Chevron deployed every legal tactic in the book to kill the case, and then extra judicial Michael Clayton-style tactics like threatening the judge, intimidating witnesses, and collaborating with Ecuador's military to stop inspections on contaminated sites. But, the global dragnet to hold Chevron accountable is closing in.

Unfortunately for the company, its assets are hiding in plain sight. Armed with an order from Ecuador's appellate court demanding Chevron pay up and comply with the sentence, the communities have filed in Canada, Brazil, and now Argentina to enforce the judgment, which could freeze bank accounts, dividends, oil sales income, or other assets as a way of meeting part of the $19 billion damage award. According to lead Ecuador lawyer Pablo Fajardo, winner of a CNN Hero Award and Goldman Environmental Prize, the process is more advantageous in Argentina due to the Inter-American Convention on the Execution of Preventative Measures, which allows for the automatic freezing of assets of a defendant that fails to abide by the law and refuses to pay a final foreign judgment. A judge can authorize seizure without even a hearing for Chevron.

As Enrique Bruchou, the highly regarded Argentine council for the Ecuadorians explains, "We will win this case. And it's going to set an example for the world that we in Latin America have grown up now and that we need to be treated as equals."

Left with little wiggle room, Chevron has signed a MOU with state run YPF to explore for unconventional crude, a move many see as a way to curry favor with the government of Cristina Fernandez.

Bruchou continued, "We don't want this politicized. This has nothing to do with the Republic of Argentina. This is the communities of Ecuador going against Chevron," he said. "I don't think we will see interference because frankly this is a civil matter, combined with the human rights abuses, which is an issue very dear to the heart of the Argentines."

What is shocking is the egregious mismanagement of the case by Chevron executives, who instead of resolving the issue years ago – to great relief of communities and company shareholders – has doubled down on a losing litigation strategy, even rewarding counsel with millions in bonuses after losing the case. While Chevron cared little about Ecuador because it is no longer producing petroleum here (though the courts gave the communities their first victory in ordering some $200 million of Chevron assets in country be turned over), the company has major upstream and downstream assets in Canada, Brazil, and Argentina, as well as other countries that communities may attempt to confiscate Chevron holdings.

The global enforcement efforts of the communities are now jeopardizing major Chevron growth plans, access to future reserves, and putting the company at a competitive disadvantage. Which is why outraged shareholders are urging the company to resolve the issue, and lambasting senior management for its bungling of the case. The company's public response to the Argentine filing was laughable: a few targeted purchases on Google news to try to offset the negative headlines and press stories, and a whiny statement attempting to claim that the judicial systems of countries like Canada, Brazil, and Argentina were inferior to those of the United States. What Chevron doesn't seem to realize is that the law is on the side of the communities, and there are more than 180 countries around the world where Chevron assets are now liabilities.

In this global game of cat and mouse, the playing field favors the plaintiffs, where Chevron must bat 1000%, and it's already 0 for 1. And, in a recent blow, the U.S. Supreme Court recently refused to hear a Chevron appeal to block Ecuadorian efforts to enforce the judgment around the world.

However, it has been a long and winding road toward justice, and many of the afectados-those affected by Chevron's reckless drill and dump practices – have lost their lives in the fight. Today in Ecuador is Dia de los Difuntos, or Day of the Dead, and tomorrow marks the 19th anniversary of the year the case was first filed in New York courts. To remember and celebrate the lives of those who have passed away, and commemorate their historic David vs. Goliath struggle, the communities will be holding a memorial in the town cemetery of Enokanqui.

– Kevin Koenig