Tulsa World: Kivisto's attorney disputes findings of SemGroup examiner's report

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Kivisto's attorney disputes findings of SemGroup examiner's report

Tom Kivisto speaks to the media July 26, 2008. MIKE SIMONS/Tulsa World

By ROD WALTON World Staff Writer
Published: 4/27/2009 2:38 PM
Last Modified: 4/27/2009 5:46 PM

Documents: View a PDF of Kivisto's attorney's response to the examiner's report.

Complete coverage: Read all the stories and documents related to the SemGroup collapse.

The attorney for former SemGroup LP CEO and co-founder Tom Kivisto finally fired back Monday against parts of the April 15 U.S. examiner’s report that accused his client of misdeeds leading to the Tulsa company’s financial collapse and bankruptcy.

Tulsa attorney John Tucker alleged that the report, consolidating a fourth-month probe by former FBI Director Louis Freeh’s investigation group, ignored balance and industry insight in favor of finding a scapegoat for SemGroup’s woes. Kivisto is accused of leading a risky and secretive oil futures trading strategy that bankrupted the company he helped form in 2000.

More than anything, Tucker added, the Freeh document shows a lack of knowledge about its complex business subject.

“It’s a pretty inept report,” he said. “They’ve got to find a scapegoat.”

A document countering many of the Freeh report allegations starts off with the purported cause of the bankruptcy, according to a copy received Monday by the Tulsa World. The Freeh Group alleges that close

to $3 billion in margin calls on failed oil futures trades paved the way to SemGroup’s Chapter 11 filing, while Tucker argued that it was Bank of America’s premature decision to pull its line of credit.

“If BofA, the lead member of SemGroup’s banking facility, had not precipitously pulled SemGroup’s credit line without notice or warning, then SemGroup would have made larger profits in the second half of 2008 ... thereby saving countless jobs,” Tucker’s document reads.

Other energy companies had trading strategies similar to SemGroup, Tucker contended. SemGroup allegedly stuck to a imbalanced “short position” on the direction of oil prices even as futures rose to $147 per barrel in July 2008, according to reports.
Some of the company’s defenders have theorized that the market pullback to $100 and below eventually would have paid off for SemGroup.

SemGroup’s lack of liquidity forced it to transfer its New York Mercantile Exchange trading book to coverage by the Barclay’s financial firm in the week before bankruptcy, according to reports. That transfer forced the company to take a running paper account and convert it to at least $2.4 billion in realized losses, records show.

“SemGroup’s losses on its trading book were mark-to-market (tied to the ever-changing value of commodities) “until BofA pulled SemGroup’s credit and it was forced to novate the book to Barclay’s and therefore recognize the losses,” the statement by Kivisto’s attorney reads. “The facts will show that Barclay’s purchase was extremely profitable.”

To “novate” the book means that Barclay’s was substituted for SemGroup on every contract, Tucker explained. SemGroup made a payment of more than $100 million to Barclay’s as part of the agreement, he said, which acted as insurance since Barclay’s now was responsible for the trades.

The Freeh report also ignores a May 2007 report by Houston attorney James Bowen that analyzed SemGroup’s risk management and trading checks and balances, Tucker said, although the report is included among bankruptcy court documents. The report was done for Bank of America, according to the document.

“SemGroup has excellent documentation of policies to ensure that all transactions are captured, booked and reconciled,” Bowen wrote.

Until SemGroup transferred its trading book to Barclay’s and had to recognize its losses, the company was not in violation of its loan covenants, Tucker said.

The attorney also called it “inappropriate” and “irrelevant” that the U.S. examiner’s report included his allegedly “intimate relationship” with SemGroup trader Mia Oven.

The examiner alleged that Kivisto hired inexperienced traders like Oven and Jim Coen in his effort to control the trading strategy and keep it secret, according to that report.

Oven and Coen may have been inexperienced in the beginning, but they proved to be valuable employees who benefited the company, Tucker pointed out. Oven and Coen received $1.5 million and $2 million in bonuses, respectively, in 2007, according to the examiner’s report.

The decision to choose Oven and Coen as traders and train them was a matter of the company’s practice of promoting from within, Tucker said.

Kivisto, fellow co-founder and former Chief Financial Officer Greg Wallace and former SemGroup treasurer Brent Cooper all refused to talk to the U.S. examiner’s investigators, according to the report. The three are accused of working together to mislead creditors, clients and even other employees.

Tucker believes that they had no choice about declining to speak considering that, in their view, the report seems to “cherry-pick” information to fit the theory that his client ran the company into the ground.

Freeh’s report focuses on failed short positions in the Nymex oil futures trades, but ignores more profitable long positions in over-the-counter transactions that did not require margin calls, Tucker said. He also complained the report throws in seemingly damning e-mails about trading from ConAgra and Prudential Bache without a proper context that would show SemGroup’s trading in a more positive light.

SemGroup also has prevented Kivisto from gaining access to similar documents and even getting personal items back from his office, Tucker added.

“It’s very difficult to answer detailed questions based on memory alone,” Tucker said. “It’s just not fair.”

Tucker filed an objection to Freeh’s report shortly before the document was released through the bankruptcy court in Delaware. The Tulsa attorney said it was likely he would make another filing on Kivisto’s behalf at some point in the future.

SemGroup executives have said recently they are drafting a plan that would take at least part of SemGroup out of bankruptcy. This is in contrast to the company's initial court filing last summer, which indicated the intention was to sell all assets.

New York investor John Catsimatidis has promised another plan that would preserve much of the company and keep it in Tulsa.

No details on either of the plans have emerged.

By ROD WALTON World Staff Writer

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Reader comments for this story have been moved to the most updated version of the story, now under the headline "Kivisto lawyer says report slanted," which was published on 4/28/2009. So far, 17 comments have been made.