SemGroup examiner pins collapse on former execs
U.S. energy trader SemGroup LP SEMGP.UL spiraled into bankruptcy last year after its top executives lied about its liquidity problems and mismanaged a speculative oil trading strategy, according to a report from the company’s court-appointed examiner on Wednesday.
SemGroup, once the 14th-largest privately-held U.S. company and parent of SemGroup Energy Partners LP, collapsed last year after $3.2 billion in bad bets on oil prices.
In a 258-page report filed with the court on Wednesday, Louis Freeh, a former head of the U.S. Federal Bureau of Investigation who was appointed in October to investigate the firm’s collapse, accused SemGroup’s co-founders and top executives of engaging in risky sales of crude oil options while bypassing the firm’s self-imposed controls and misrepresenting the trading to lenders and SemGroup’s management committee as normal hedging activity.
The Freeh report paints a picture of a trading strategy that was “overwhelmed” as oil prices hurtled to record levels of $147 a barrel last July.
Freeh accused the company’s chief executive, Thomas Kivisto, of hiring commodities traders with little or no experience, and ordering them to keep short bets on oil prices going based on his conviction that oil prices would return to “normal” levels.
One former trader, James Coen, told Freeh that Kivisto’s strategy consisted of never realizing trading losses, but instead rolling losing positions forward to mask liabilities, in what amounted to even larger directional bets on oil prices.
The report said Kivisto paid the traders bonuses, sometimes in excess of $1 million, to keep the strategy going, and flouted the firm’s requirements to seek management committee approval for his own and other executive bonuses. It said Kivisto and other executives determined most bonuses themselves — including bonuses in excess of $17 million a year that Kivisto paid to himself in 2006 and 2007 quick cash.
Freeh said Kivisto, SemGroup’s former CFO Gregory Wallace, and former treasurer Brent Cooper had refused his requests for interviews, and invoked their fifth-amendment privilege against self-incrimination during the examiner’s depositions.
STRAINED RELATIONSHIP WITH BANKS
The Freeh report details the mounting concerns of SemGroup’s oil futures brokers in mid-2008 as oil prices skyrocketed and the unrealized losses on SemGroup’s trading book shot up.
A May email from Prudential Bache Securities, one of SemGroup’s brokers, quoted by the report asked SemGroup to justify its “large naked options position (that) would not appear to be hedging physical assets.”
The report also said Wallace told Goldman Sachs’ J.Aron commodities unit around June 2008 that concerns about the company’s liquidity were “exaggerated.”
Goldman had been discussing a potential private placement investment in SemGroup, but, according to the report, became concerned as it found SemGroup’s trading losses were nearing $2 billion, with margin calls burning through its capital. The report said executives also misled SemGroup’s management committee by saying its trading was based on physical inventory.
Last July, Goldman broke off its business relationship with SemGroup, and Kivisto was removed as CEO of SemGroup and escorted from the building by security guards, according to the report.
Just minutes ahead of the filing of the examiner’s report, attorneys for Kivisto filed an objection to the release of the report, which has been kept secret among parties in the case for two weeks. John Tucker, an attorney for Kivisto, said in a statement that process may have compromised the integrity of the report.
Filed under: legal by Specialist