Lawsuit against former Furie owners seeks $100M
A lawsuit seeking more than $100 million from the former owners and executives of a once bankrupt Cook Inlet natural gas producer leads with allegations of defrauding investors and ends with claims of inflated reserve estimates and twice-committed state tax credits.
Filed Aug. 6 in the Texas District Court of Harris County by the Virginia-based firm Clingman and Hanger Management, the litigation trustee in the bankruptcy case for Furie Operating Alaska, the suit names as defendants former Furie leaders Kay Rieck, Lars Degenhardt, David Elder, Thomas Hord, and Theodor van Stephoudtas well as companies owned by other ex-Furie executives who allegedly benefited from the schemes.
Rieck, described in the complaint as the “de facto head of Furie,” and other defendants roughly between 2013 and 2018 executed “a brazen scheme to divert Furie’s cash (provided by outside lenders) to entities secretly owned by them,” the suit alleges.
“Together, (Rieck and others) caused Furie to drill for fictitious gas using a company they secretly owned, sell gas at a loss to Owned-owned entities and pledge/transfer valuable tax credits to Owned-owned entities without consideration. At the same time, the defendants artificially inflated Furie’s ‘proved’ gas reserves estimates so they could continue drawing compensation from Furie,” the complaint states.
Former Furie executives for whom the Journal could find contact information did not return calls in time for this story. A response to the complaint has not yet been filed in Harris County, according to court records.
According to the complaint, the malfeasance largely started after the company invested hundreds of millions of dollars into drilling work and facilities that included the Julius R platform in the offshore Kitchen Lights field. It was the first new Cook Inlet platform in decades when it was installed in 2015.
Attorneys for the litigation trustee in Furie’s 2019 Chapter 11 bankruptcy case claim Rieck and several of the defendants consistently formed new businesses and partnerships to stall creditors and regulators. For example, David Elder, once Furie’s chief financial officer, also filled the same role for Furie Drilling LLC, Furie Operating LLC, Furie Petroleum Co. LLC and Advanced Funding Capital LLC.
Rieck is listed in the complaint as a German national living in the United Arab Emirates. He owned Deutsche Oel und Gas, a reported member of Furie.
The company drilled its first exploration wells in Cook Inlet in 2011 and 2012 but mostly came up empty in their search for natural gas. The KLU-3 well drilled in 2013, however, struck commercial quantities of gas and spurred Furie’s subsequent development, according to the complaint and Journal reports from the time.
Furie leaders followed their 2013 discovery with an aggressive drilling campaign for a small explorer while also installing the Julius R platform and an onshore production facility.
A 2013 independent audit of the reserves discovered with the KLU-3 well concluded Furie had found nearly 60 billion cubic feet of gas with a net present value of $54 million. A reserve audit performed weeks later by Sierra Pine Resources International LLC, also a defendant in the suit, concluded Furie had 276 billion cubic feet of undeveloped gas worth roughly $315 million.
Current Furie CEO and owner John Hendrix, who purchased the company out of bankruptcy for $5 million last year, estimated the development cost of the platform to be in the $200 million range.
Then Furie Vice President Bruce Webb — also the public face of the company at the time — told the Journal in 2015 that approximately $500 million was invested by Furie in the Kitchen Lights Unit once the platform work was complete.
Webb sued Furie in June 2018 alleging a hostile work environment, retaliation and bad-faith business dealings in a complaint that outlines similar business arrangements as the Aug. 10 filing. Webb dropped the suit in U.S. District Court of Alaska roughly two months later before attorneys for Furie formally responded to the lawsuit.
According to the latest complaint, Furie originally borrowed $160 million from Energy Capital Partners in 2014 to build the platform, a gathering line and other gas production facilities but overspent its budget on the work by about $175 million, which was covered with another Energy Capital loan as well as one from ING Bank that was backed by State of Alaska tax credits earned for drilling and development work.
Furie leaders in 2016 attempted to use tax credit certificates already held by Energy Capital and ING to secure a bond offering of up to $170 million but generated no revenue from the offering.
The complaint also alleges Rieck used tax credit transfers that were supposed to be recorded with the state but weren’t as equity at his banks.
Furie’s current owner Hendrix emphasized in an emailed statement that the new iteration of the company he leads is not impacted by the latest lawsuit.
Longtime Alaska oil and gas attorney and industry analyst Brad Keithley wrote in an emailed response to questions about the case that he found three potential fraud claims for the State of Alaska to pursue if state officials believe they can recoup some of the tax credit money the state sent to Furie over the years.
Company leaders claimed to be owed $103 million in unpaid tax credits when they filed bankruptcy in 2019 but it’s unclear exactly how much the state paid the company in total because of taxpayer confidentiality laws.
Furie leaders largely blamed the unpaid credits — first partially vetoed by Gov. Bill Walker in 2015 — for the company’s struggles leading up to the bankruptcy filing.
The company also had significant gas production issues in the winter and early spring of 2019 that kept it from meeting its contractual obligations to gas buyers.
If the allegations are accurate, Furie likely committed fraud on the state by claiming reimbursable drilling costs incurred in a bad-faith effort; breached the implied obligation of good faith and fair dealing; and fraudulently sought tax credits for drilling costs beyond its actual expenses, according to Keithley.
A major question for state attorneys, however, is whether or not the U.S.-based defendants have assets worthy of pursuing, he wrote.
When asked about the suit and whether or not Department of Law officials believe the state could recoup tax credit funds based on the allegations, Law spokeswoman Grace Lee wrote via email that the attorney general’s office represented the state in Furie’s bankruptcy proceedings and “reserved all rights to audit and nullify tax credits that were not appropriately applied for under state law.”
Elwood Brehmer can be reached at [email protected].