B-228982, Dec 16, 1988

B-228982: Dec 16, 1988

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We recognize that making such a decision is within the discretionary authority of the former Administrator. In our view the administrative process would have been better served in this instance if his written statements had provided an explanation of which arguments raised by Fina were so persuasive as to outweigh his own attorneys' assessment of the merits of the case. Subcommittee on Oversight and Investigations Committee on Energy and Commerce House of Representatives: This is in reply to your request. We recognize that making such a decision is within the discretionary authority of the former Administrator. In our view the administrative process would have been better served in this instance if his written statements had provided an explanation of which arguments raised by Fina were so persuasive as to outweigh his own attorneys' assessment of the merits of the case.

B-228982, Dec 16, 1988

MISCELLANEOUS TOPICS - Environment/Energy/Natural Resources - Regulatory agencies - Enforcement - Administrative discretion DIGEST: The former Administrator of the Department of Energy's Economic Regulatory Administration exercised his administrative discretion in deciding to withdraw a draft Proposed Remedial Order without litigation, contrary to the recommendation of his staff. We recognize that making such a decision is within the discretionary authority of the former Administrator, but in our view the administrative process would have been better served in this instance if his written statements had provided an explanation of which arguments raised by Fina were so persuasive as to outweigh his own attorneys' assessment of the merits of the case, or a rebuttal of the specific evidence and legal arguments presented by ERA staff that he felt lacked credibility.

Honorable John D. Dingell Chairman, Subcommittee on Oversight and Investigations Committee on Energy and Commerce House of Representatives:

This is in reply to your request, set forth in a letter to the former Administrator of the Department of Energy's Economic Regulatory Administration (ERA), /1/ and the subject of a discussion with Mr. David Finnegan of your staff on November 15, 1988, that the General Accounting Office provide you with a legal opinion on the propriety of certain ERA actions in connection with its decision to withdraw a draft Proposed Remedial Order (PRO) in its case involving American Petrofina, Inc. (Fina).

As part of our review of this matter, we obtained from ERA copies of documents we considered relevant, including copies of the draft PRO, Fina's memorandum opposing its enforcement, an ERA staff memorandum rebutting Fina's response, and the former Administrator's memorandum to the file and reply to you. /2/ This written record reveals that both Fina and ERA made arguments in support of their positions. In our judgment ERA presented a strong case for proceeding Fina. It appears, however, that the former Administrator does not agree with this assessment, since he withdrew the draft PRO with no further action.

According to his written statements, in making this administrative decision he took into account the merits of both positions, concluded, in essence, that ERA's case might not be legally supportable, and withdrew the draft PRO. We recognize that making such a decision is within the discretionary authority of the former Administrator, but in our view the administrative process would have been better served in this instance if his written statements had provided an explanation of which arguments raised by Fina were so persuasive as to outweigh his own attorneys' assessment of the merits of the case, or a rebuttal of the specific evidence and legal arguments presented by ERA staff that he felt lacked credibility.

BACKGROUND

In 1982, ERA and Fina entered a consent order resolving all issues of compliance with petroleum price and allocation statutes and regulations that were in effect from 1973 through 1981. ERA's audit and investigation of Fina had focused on certain crude oil resale transactions in 1979 and l980, and in settlement of any violations that may have occurred during that time, Fina paid about $14 million in cash remedies.

According to the information set forth in the draft PRO, some time in 1985 ERA learned, for the first time, that during the period covered by the consent order, Fina entered into transactions that violated the former regulations, and then knowingly concealed these transactions during ERA's original audit of its records. Since the consent order allows subsequent enforcement actions based on such concealment, /3/ ERA investigated the matter during 1985. As a result of this investigation, the agency prepared a draft PRO covering the issues of the alleged knowing concealment of the questioned transactions. On March 30, 1987, the former Administrator decided not to proceed with the draft PRO, and it is this decision that you have asked us to review.

DISCUSSION

The Draft PRO

The draft PRO prepared by ERA staff presents the case for proceeding against Fina. In brief, the draft PRO sets forth allegations, supported by sworn affidavits, that during the period January 1979 through November 1980, Fina engaged in prohibited "tie-in" crude oil resale transactions with nine crude oil resellers. As described in the draft PRO, the "tie- ins" were linked transactions involving contingent sales of domestic price -controlled crude oil to the resellers by Fina, and Fina's purchase from the same resellers, at a discount, of crude oil exempt from price controls and entitlements purchase requirements. The draft PRO states that as a result Fina received "unlawful premiums for its price-controlled crude in the form of discounts on exempt certified crude totaling $359,313,068." Draft FRO at 21.

Further, the draft PRO alleges that these transactions were deliberately concealed by Fina in its contemporaneous records of its crude oil resales, since these records falsely identified the parties with whom Fina had negotiated and transacted its crude oil resales. The draft PRO states that the concealment and misrepresentation in Fina's records was accomplished in each of the transactions at issue by the insertion of a third party into the actual linked contingent sales between Fina and the crude resellers, and concluded that this deliberate use of a three-party structure, and false or misleading statements to ERA personnel by Fina officials, prevented ERA from discovering in its initial audit the improper "contingent nature of Fina's crude oil resales to and purchases from the same reseller." Id. at 23, 27.

In support of these allegations and conclusions, the draft PRO cites sworn testimony from former Fina employees who were involved in the transactions. According to the draft PRO, one former official stated that the insertion of a third party in each transaction at issue began after Fina senior management determined that the tie-in transactions might be considered illegal by DOE. "It was decided that a third party was inserted between Fina and its trading partner the DOE would not discover the contingent or tie-in nature of the transactions." Id. at 14. The same former Fina official stated that the insertion of a third party in each transaction was intended to "help camouflage the deal (from D0E)." Id. at 24.

Also, according to the draft PRO, other former employees consistently stated that they were instructed to negotiate tie-in sales with resellers in which Fina required the resellers to sell a larger volume of discounted or exempt crude oil to Fina than the volume of price-controlled crude oil Fina was selling to the reseller, and to insert in the sales contracts a supposed third party to each transaction. Id. at 13-19.

The draft PRO prepared by ERA staff presents a clear, factually supported case for proceeding against Fina. ERA staff set forth in the draft PRO facts it believed provided sufficient evidence of knowing concealment by Fina of actions amounting to violations of the price and allocation rules to justify the unusual step of initiating a new enforcement proceeding against the company, as permitted under the terms of section 503 of the 1982 consent order.

Fina's Memorandum Opposing

Enforcement of the Draft PRO

According to the former Administrator's statements, after preparation of the draft PRO was complete, as part of an agreement between Fina and ERA's solicitor, Fina's attorney were provided with an opportunity to review the draft PRO and present their factual and legal arguments against enforcement by ERA of the draft pRO. On February 13, 1987, Fina submitted a lengthy Memorandum in Opposition to the Filing of Enforcement Action, and an executive summary of the memorandum.

In these documents Fina argued that the alleged violations were not knowingly concealed and are not newly discovered, and therefore do not meet the standards necessary to overcome the original consent order to allow enforcement of the draft PRO. Some of Fina's arguments are, in brief, that Fina believed the questioned transactions were lawful, and it did not intend to conceal regulatory violations when it insisted on a three-party structure; that Fina's busines records reflect the relationship of the sale and purchase sides of what it calls "tier trades"; that Fina disclosed to ERA auditors that the sales and purchases were linked; and that ERA could have discovered the alleged violations before it entered the consent order. Fina Memorandum, at 3 6.

Response of ERA Staff to Fina's Memorandum

ERA's staff analyzed the evidence in its possession and in Fina's memorandum, and, in a March 20, 1987, Memorandum to the Administrator from ERA's Associate Solicitor, concluded "Fina "knowingly concealed ... violations' from DOE prior to entering into the 1982 consent order. Fina's arguments to the contrary are without merit." Staff Memorandum, at 1, In its response to Fina's memorandum, the staff presented detailed arguments rebutting Fina's assertions. This rebuttal described actions by Fina that ERA's attorneys believed demonstrate that Fina knowingly concealed from auditors facts which would have revealed the linkage between the seemingly unrelated purchase and sale transactions, such as directing the auditors only to documents that did not reveal the integrated nature of the transactions, and failing to provide the names of the "straw man" third parties it inserted into the linked transactions.

In its response, ERA staff also presented factual and legal rebuttals to Fina's asserted "good faith" defense to its use of a nominal third party in the "tier trades." This response analyzed the Getty Oil decision /4/ on which Fina relied, and noted that it recognized ERA's authority to look behind the form of a transaction to its economic substance. ERA staff presented evidence that Fina's insertion of the third party in the "tier trades" did nothing but superficially change their form, effectively concealing but not affecting the underlying substance of the integrated two-party agreements. Staff Memorandum, at 7-9.

In addition, ERA staff described and rebutted what it considered to be "misrepresentations" made by Fina in its memorandum concerning the origin of Fina's use of three-party' tier trading, and the corporation's recordkeeping practices with respect to these transactions. For example, in the ERA staff's view, Fina's description of its tie-in transactions as a kind of cost-cutting measure is misleading, since no matter how they are described, the transactions were designed to evade the requirements of the entitlements regulations. Id. at 10-11. According to ERA staff, Fina's statement that the transactions were independent sales and purchases, not exchanges, is another misrepresentation. The staff memorandum points out that they were not separate transactions, since:

"the agreement for both sides of each integrated deal was negotiated at the same time with the same reseller. Fina merely arranged the trades to appear as if it was dealing with two different firms." Id. at 11-12.

In rebuttal of Fina's assertion that the transactions were treated as separate sales and purchases in Fina's contract and accounting records, the staff memorandum notes that it was only in these records that they were so treated, and that-- this was accomplished by the use of the straw- man device. Further, Fina stated that while its contract and accounting records did not cross-reference the two sides of the "tier trades," records of the negotiations of the contracts were recorded in "traders' notebooks and other records." ERA staff point out that traders' notebooks are not accounting records and would not ordinarily be examined as part of an audit, and that Fina did not produce them in response to data and document requests of ERA auditors. Id at 14-15.

In concluding, the staff memorandum stated:

"We believe, based on the entire record heretofore developed, that DOE is in a strong position to prevail in any litigation, administrative or judicial, on both the concealment and the violation issues."

Former Administrator's Decision

On the basis of statements in his file memorandum and his reply to you, the former Administrator believes that in exercising its enforcement authority, ERA

"must take the weight of its gathered evidence and evaluate what the trier of facts and law will do with its allegations. If the agency is not confident that it has a sufficient case to go forward, it should not then proceed."

Memorandum to the File, at 2. According to the former Administrator, ERA's review of "gathered evidence" included an analysis of the evidence set forth in the memorandum (and supporting materials) provided to ERA as part of the agreement with Fina's attorneys, which gave ERA a chance to examine facts and information not previously available, and which Fina would have "presented as affirmative defenses had ERA gone forward with the PR0." October 2, 1987 letter, at 3.

After considering the factual and legal arguments set forth in Fina's memorandum, and weighing them against the allegations in the draft PRO and the factual and legal arguments in the ERA staff's rebuttal memorandum, the former Administrator concluded, in essence, that there was a lack of sufficient credible evidence of knowing concealment by Fina, and that the questioned actions were subject to conflicting but reasonable inferences. Memorandum to the File, at 2 4. On the basis of these conclusions, and of existing policy against reopening a consent order that "could be construed as covering these violations" (id. at 2), and "because ERA was no longer confident that it had a legally supportable case" (October 2, 1987 letter, at 3), he decided that the 1982 consent order barred the issuance of a PRO, and the draft PRO was not issued. Memorandum to the File, at 2. The former Administrator set forth the rationale for his decision in his file memorandum, and in his October 1987 letter to you, concluding, in essence, that DOE's case lacked credibility in light of the evidence presented by Fina. He did not describe in either document, however, the particular facts and arguments presented by Fina that he found sufficiently persuasive to outweigh his own attorneys' considered opinion that DOE was in a strong position to prevail in any litigation. He also did not provide a rebuttal of the specific evidence and legal arguments against Fina's case provided by ERA staff.

We have been advised informally that the former Administrator never did provide a detailed, written explanation for his rejection of his staff's recommendation to pursue enforcement. In addition, there is no recorded statement of the basis for his conclusion that Fina's actions were "subject to conflicting but reasonable inferences," that there was a "lack of credible evidence of knowing concealment" by Fina, and that ERA no longer had a legally supportable case.

As we stated at the outset, based on our review of the written record provided to us, in our judgment ERA has presented a strong case for proceeding against Fina. The former Administrator obviously reached a contrary conclusion, and withdrew the draft PRO without further action. We recognize that making such a decision is within the discretionary authority of the former Administrator, but in our view the administrative process would have been better served in this instance if his written statements had provided an explanation of which arguments raised by Fina were so persuasive as to outweigh his own attorneys' assessment of the merits of the case, or a rebuttal of the specific evidence and legal arguments presented by ERA staff that he felt lacked credibility.

We trust this opinion has been responsive to your concerns. As agreed to by Mr. David Finnegan of your staff, this opinion will be available for public distribution 30 days from today.

/1/ The Administrator of ERA resigned his position in December 1987.

/2/ We also obtained copies of memoranda prepared by ERA's Office of the Solicitor, which examined in detail the legal considerations raised by Fina in its memorandum, and concluded that ERA could and should pursue enforcement of the draft PRO. The cover memorandum to the former Administrator, dated April 3, 19B7, states that it was prepared at his request. The detailed legal analysis attached to it has the same date. We note, however, that the former Administrator's memorandum to the file, which contains his decision not to issue the draft PRO, was dated March 30, 1987. Since we have no way of determining whether memoranda were known to or considered by the former Administrator when he made his decision, we have not referred to them in this opinion.

/3/ Section 503 of the Fina Consent Order states in part: "DOE ... reserves the right to initiate an enforcement proceeding or to seek appropriate penalties for any newly discovered regulatory violations committed by Fina, but only on the ground that Fina knowingly concealed such violations. ...."

/4/ Getty Oil Co. v. DOE, 569 F.Supp. 1204 (D. Del. 1983), aff'd, 749 F.2d 734 (TECA 1984), cert. denied, 469 U.S. 1209 (1985).