Supreme Court reinstates major fraud judgment against Ellsworth

The Alaska Supreme Court has reversed a lower court ruling and reinstated what may be the largest civil fraud judgment in state history.

In a decision released Feb. 10, the Supreme Court overturned Alaska Superior Court Third District Judge Sen K. Tan and found he erred by nullifying a jury’s award of $7.3 million in damages to Nabors Alaska Services Corp. and Cook Inlet Region Inc. subsidiary Peak Alaska Ventures Inc.

The Supreme Court affirmed the jury’s original finding of “fraud and willful misconduct” against Pacific Diversified Investments and its owner John Ellsworth. Through PDI, Ellsworth managed general contractor Alaska Interstate Construction, or AIC, and had a 20 percent ownership of the company.

The Supreme Court ruling entitles Nabors, CIRI and AIC to a claim of treble damages, attorneys’ fees and prejudgment interest that will likely push the size of the judgment well past $30 million.

The Supreme Court also reversed Tan’s post-trial ruling that the jury’s finding of fraud against Ellsworth did not constitute a “material breach” of the operating agreement, and Tan’s decision declaring Ellsworth and PDI to be the prevailing party and awarding him attorneys’ fees in the case.

Peak and Nabors purchased AIC in 1995 from Ellsworth, who continued to operate the company under a management agreement through PDI. In 1998, then-CIRI President Carl Marrs converted an upcoming bonus for Ellsworth into a 20 percent ownership interest in AIC and he managed the company until April 30, 2005. Peak and Nabors each own 40 percent of AIC.

In finding Ellsworth’s fraudulent actions as manager of AIC did not constitute a material breach, Tan ruled that Nabors and Peak were still bound by the ownership agreement and ordered them to pay Ellsworth the premium price of $12 million for his 20 percent share of the company.

The Supreme Court lowered that amount to $4 million.

“The decision vindicates AIC’s, CIRI’s and Nabors’ long-standing reputations as principled business partners and honest corporate citizens that deal in good faith with customers, owners and the public,” said AIC President Steve Percy in a statement released through CIRI.

Ellsworth, who owns oilfield services firm Alaska Frontier Constructors, declined to comment on the Supreme Court ruling.

CIRI (through its subsidiary Peak), Nabors and AIC sued Ellsworth and PDI in 2005 alleging fraud and breach of their operating agreement with Ellsworth to manage AIC.

In 1998, AIC began leasing two aircraft from Ellsworth’s company, PDI. Those aircraft leases were at the center of the case, as Peak and Nabors presented forensic accounting testimony alleging more than $17 million in damages caused by Ellsworth and PDI at the Superior Court trial.

The alleged damage claims were derived from leases billed at rates that exceeded market value, for services not received or otherwise fraudulent, improper or fraudulent credit card charges and expenses unrelated to AIC business and for assets sold at below market value after Peak and Nabors took over management of the company in 2005.

According to the court record, Ellsworth began charging AIC fees of $100,000 per month in 2002 for the use of one aircraft regardless of the amount it was used by AIC. Evidence introduced at trial established neither Peak nor Nabors gave approval for these charges, and their forensic accounting firm estimated these charges resulted in $6 million in overpayments.

Similarly, a second jet lease for which Ellsworth charged AIC $125,000 per month was estimated to result in $9.8 million in overpayments.

Also among the evidence presented at trial was that Peak and Nabors discovered that some 6,000 pounds of documents had been shredded shortly before Ellsworth was removed as the manager of AIC.

Prior to the Superior Court trial, Ellsworth conceded overbilling AIC by more than $1.9 million for aircraft use, but also argued that the overbilling did not constitute a material breach of the agreement because the company still made a profit under his management.

Following the Superior Court trial, both sides filed motions for judgment notwithstanding the jury’s verdict. Such motions are filed to ask the judge to overturn all or some of a verdict.

Peak and Nabors filed their motion alleging the jury’s verdict finding fraud and willful misconduct against Ellsworth was inconsistent with the concurrent finding those actions did not constitute a material breach of the agreement.

Ellsworth asked Tan to set aside the jury’s damage award based on the verdict finding his actions were not a material breach of his agreement with Peak and Nabors.

Tan sided with Ellsworth, denying the claims of Peak and Nabors and nullifying the jury’s award of $7.3 million in damages. The Supreme Court found both those rulings to be in error.

Andrew Jensen can be reached at andrew.jensen@alaskajournal.com.