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Some observations from the Peters case against InterOil

March 27th, 2010 · 8 Comments

Need to be pointed out…

  1. Let’s not forget no new claims have been made, the Peter’s case is from the mid 1990s and has been reported by InterOil
  2. Let’s not forget that these plaintiffs (now reduced to one, Peters) were already very richly rewarded
  3. Let’s not forget that Raymond James’ sense is that it is a ‘nuisance lawsuit based on matters that allegedly took place a decade ago
  4. Let’s not forget the reasons for Mulacek to try to get the Nikiski Partnership into bankruptcy
  5. Let’s not forget that the judge didn’t rule that attempt being in bad faith (contrary to what Minkow and Lobdell argue)
  6. Let’s not forget that a another case (the Martin case) resulted in a change of ownership, rather than an IOC liability
  7. Let’s not forget that Peters doesn’t have any incentive to bankrupt InterOil
  8. Let’s not forget there are no new claims being made today
  9. Let’s not forget that there might be a statue of limitation applicable to the Peters case
  10. Let’s not forget that the court case (due in Septemper 2010 and not May 2010, as Lobdell has it), it might take a long time, the outcome unsure, and appeals are possible to stretch that even further
  11. Let’s not forget that IOC has not put aside any reserves for potential losses from the lawsuit. They evidently think it’s not relevant for the company
  12. Let’s not forget that both Minkow and Lobdell (who is financed by Minkow) are short (see their websites).
  13. Let’s not forget that the plaintiffs are going after InterOil shares, they obviously think they are worth a great deal, but the shorts think they are worth nothing.
  14. Let’s not forget the “quality” of Lobdell’s prior “reporting” on InterOil (see here)

Some points need a little expansion, see below.

Some necessary background knowledge:

There are two transcripts from the court case

Two more relevant cases:

Now, let us expand on some of the points above:

1&2) The Peters case is the lawsuit

  • The partnership originally acquired this non-operating refinery for $2 million and essentially, it went from Alaska to Beaumont and now it’s in Papua New Guinea. And to get it operating, it took another $280 million to get this refinery up and running. So it was purchased for $2 million, then it took approximately $280 million to get it up and running (Transcript p.11)
  • The first thing the Limited Partners got is: they got cash of a million dollars, so that’s already been paid to the Limited Partners so they got cash of half of their investment out; They also got the right to obtain $2.6 million of shares in InterOil Corporation. Approximately $1.5 million of those shares have already been distributed to partners. The current value of that $1.5 million shares is $100 million. (p.11-2)
  • There is still some stock to be distributed to the Limited Partners. And that is approximately $70 million. The number actually — I think you’ll hear the testimony, the money — the stock that is still there is between 70 and $80 million. That represents the 1.1 million shares yet to be distributed. And because it hasn’t been — because it’s still — we call that “restricted stock” because it’s not tradable yet (p.12). In addition to those assets, we have derivative claims that, according to the Fifth Circuit, are property of this estate. And those are the claims that Mr. Farrell’s clients were bringing in State Court prior to the filing of the bankruptcy (p.13).

3&4) A frivolous case?

  • That was what it seemed to Raymond James, and we have to say, people who already turned a little over $2M (based on 40 Nikiski Partners which would be a little over $50K per head) into $100+ million with substantially more to come, what do they have to complain about? We are not the only ones questioning that and it’s perhaps understandable that Mulacek goes the length to fight that claim by filing the entity on which the claim rest, the Nikiski Partners, for bankruptcy.
  • Lobdell makes much of the Nikiski lawyer arguing the potential damages to InterOil of the Peters case but these were dramatized as to make it more likely for the judge to agree with the Nikiski bankruptcy
  • That dramatization of potential damages was heavily disputed by Farrell, the laywer for the Peters group (see under 6&7 below)
  • You know, something like the plaintiffs in the Peters case dramatizing their supposed lack of sufficient returns on their original Nikiski Partners investment, in which they somehow want to turn less than $2M into $1.3B (the maximum damages they demand)?
  • After what happened to IOC’s share price on March 26, there can also be little doubt as to why Mulacek wanted to keep this as low key as possible. According to Lobdell’s iBiz article: [“Mulacek also moved to keep under seal all information relating to InterOil because testimony and exhibits would be introduced “that will show how certain events impact the value and volatility of InterOil stock [and publication] of this … in itself unnecessarily create[s] volatility in InterOil’s stock prices.”] Well, that’s indeed what happened on Friday the 26th of March

5) The judge didn’t rule that to bring Nikiski Partners to bankruptcy had been done in ‘bad faith’

  • [The court: I find that the actions that were taken by the Debtor were a reasonable extension of existing law. I do not find, although I found that there was subjective bad faith on the part of the Debtor, I think the way that the Debtor went about this was forthright. I think the Debtor immediately sought the appointment of an examiner or a trustee. I think the Debtor immediately did not try to enforce a settlement as in the SGL case or do other things that would mean that this was not a reasonable attempt before me. I just reject it, but I don’t think it’s sanctionable under Rule 11. And I want it clear from my findings today that we’re
    not going to come back on a Rule 11 motion. Because I don’t think that we had the kind of hidden subterfuge that would justify those kind of sanctions and that it was a reasonable extension of existing law for the Debtors to attempt to do it. It just didn’t work.So I’m dismissing and remanding.] [Closing Arguments p.46-7]

6)  IOC’s liability?

  • It seems a bit of a stretch for people who put up a little under $1M (the plaintiffs comprise 46% of the Nikiski interest which invested $2M) in a venture to buy 20% of a refinery would now be able to lay claims on almost half of InterOil, to put it mildly. But that is to assess the merits of the Peters case. Here is what the judge in the Nikiski bankruptcy case had to say:
  • [The court: “It is true that the lawsuit could ultimately cause a decline in value of the InterOil stock, and I think that’s where Mr.
    Kirkendall focused mostly. But it’s also true that the lawsuit, reviewing the totality of the evidence, would more likely result in a
    change in the percentage of ownership of InterOil rather than somebody seizing the assets of InterOil
    . Much as the change in percentage ownership occurred with the Martin settlement; after the Martin settlement Mulacek owned less, others owned more, InterOil was left unaffected under the evidence that I have before me. Moreover, I think that we walk down a dangerous path when we deal not with whether the asset itself is endangered but with whether the value of the asset is endangered.”][Closing
    Arguments
    , p.36]
  • The maximum what the Peters group is demanding is $1.3B, but since they represent only 46% of the Nikiski Partners, it’s only 46% of that ($598M). [Holzer: “if there was $100 million settlement and Mr. Farrell represents, say, 46 percent, then 46 percent would go to his clients, the other 54 percent would go straight back to the people that would be liable for it so, in effect, you’d have a $46 million settlement.”] [p.37 of the Transcript] This was not disputed by Farrall, the laywer of the Peters group.
  • That $100M, or rather, figures “substantially below $100M” were already discussed in various settlement discussions between the Peters group and Mulacek:
  • [BY MR. FARRELL: Q Mr. Mulacek, isn’t it a fact that in the various settlement discussions that have occurred about trying to settle the derivative claims that the numbers that were being discussed were substantially below $100 million?] [Transctript p.155]
  • Note that Farrell is the laywer of the Peters group. So we have the curious situation that the defendants (Mulacek) are arguing the potential damages of the Peters claim to InterOil (for tactical reasons) while the Peters group themselves heavily disputes these!
  • [Farrell, Peters Group lawyer: “The lawsuit is not impacting InterOil’s ability to conduct business one iota. The evidence I will put on will show that since the lawsuit’s been on file, InterOil’s stock price has soared to it’s all time high of $70 in the last week, $68 today, that it’s raised tens of millions, hundreds of millions of dollars in investments with this lawsuit being out there. The lawsuit is not interfering with InterOil’s ability to operate today and any prospect at some point in the future it might cause a problem could be dealt with in the future. But we’re one step removed from that. We’re not InterOil. InterOil is not here.”] [Transctript p.62]

7) Peters does not have an incentive to harm InterOil

  • [Farrell: “It might well be if I were stupid enough to try and bankrupt InterOil, and I respectfully suggest to the Court I’m not that stupid, which is what they seems to be suggesting, I recognize my clients ultimately have an interest in InterOil and that it’s in everybody’s interest to get this case resolved.”] [Transctript p.62-3]

So the bottom line:

  • There is no new info today, no new claims
  • The shorts hijacked this story, their only new “argument” is that IOC argued, for tactical reasons, that the Peters claim could bankrupt InterOil
  • But this was heavily disputed by… the Peters group themselves!
  • Which is not surprising because the Peters group (unlike the shorts!) doesn’t want to harm InterOil, they’re a shareholder and their claims depend on these shares being worth something (the more the better)
  • The claim is for a maximum of 46% of $275M-$1.3B
  • The comparable Martin case was settled by rearranging ownership, not at IOC’s expense and this is what the Judge deemed the most likely outcome
  • There was talk about settlement for an amount considerably less than $100M (and remember, the Peters group represents only 46% of that so an amount considerably less than $46M)
  • There might be a statue of limitations applicable anyway

Tags: IOC

8 responses so far ↓

  • 1 kencooksam // Mar 27, 2010 at 8:00 pm

    Thanks for taking the time

  • 2 ron // Mar 27, 2010 at 11:40 pm

    Puts it all in perspective. Great work!

  • 3 mersu36 // Mar 28, 2010 at 2:04 am

    I do not understand a couple of things. What does it mean to rearrange ownership? On whose expense would that be made? What is Mulacek’s share in IOC that could be rearranged to other parties should their claims be succesful?

  • 4 kencooksam // Mar 28, 2010 at 12:46 pm

    From IV
    We should be glad that this latest Minkow act happened on Friday so folks have plenty of time to research and understand the situation. Luck for lazy me, there are many clear-headed posters on this board contributing their time to clarify the confusing situation. Also, over on the Yahoo board, Greacesgate has paintakingly summarized the lawsuit claims into a few readable paragraphs ( http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_I/threadview?m=tm&bn=26290&tid=173619&mid=173619&tof=6&frt=2).
    Likewise, sharp-eyed Sltibbs (http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_I/threadview?m=tm&bn=26290&tid=172499&mid=172803&tof=10&rt=2&frt=2&off=1) pointed out the opinion of the judge on page 28-29

    ” But it’s also true that
    9 the lawsuit, reviewing the totality of the evidence, would more
    10 likely result in a change in the percentage of ownership of
    11 InterOil rather than somebody seizing the assets of InterOil.
    12 Much as the change in percentage ownership occurred
    13 with the Martin settlement; after the Martin settlement Mulacek
    14 owned less, others owned more, InterOil was left unaffected

    15 under the evidence that I have before me. ”

    By now it is quite obvious the lawsuit is Phil specific and there is no reason to believe the rest of IOC shareholders will be affected. At the worst , Phil may have to give away a little of his IOC shares and shorts got their much needed break to bail out. I think I will spend the rest of my weekend on something else than to read the argument of MINKOW and his men. (No wonder he call himself KOWman) I think I will pick up a few more shares come Monday for moral support of IOC.

  • 5 wapitidropiti // Mar 28, 2010 at 4:20 pm

    Unwarranted legal extortion that Phil could not tolerate. I don’t blame him. The result is that some of the shorts lost less. Back to the $70 range on Monday. IMHO

  • 6 admin // Mar 28, 2010 at 6:02 pm

    Mersu: rearrange ownership means Phil having to give up some of his shares at the expense of Peters should they lose the case.

    Ken: that quote was already in our article above 🙂

  • 7 us2u001 // Mar 28, 2010 at 6:47 pm

    Thanks again for your work on this ! Just feel bad for those selling into this well crafted short attack based on something that in the long run will have little impact on those same shares now in stronger hands. C’est la vie !!

  • 8 persistentone // Mar 29, 2010 at 8:58 pm

    The behavior described in the Peters case is fraud, if the facts are true:
    http://www.ibizreporting.com/storage/peterslawsuit10amended.pdf

    IOC may in fact have one of the greatest resource finds around, but why would anyone invest side by side with a management capable of doing the things that are described in that complaint?