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Meanwhile Another Scandal Is Born: Wide-Ranging Ethics Scandal Emerges at Interior Dept (Money, Drugs and Sex)

By CHARLIE SAVAGE
Published: September 10, 2008

WASHINGTON — As Congress prepares to debate expansion of drilling in taxpayer-owned coastal waters, the Interior Department agency that collects oil and gas royalties has been caught up in a wide-ranging ethics scandal — including allegations of financial self-dealing, accepting gifts from energy companies, cocaine use and sexual misconduct.

In three reports delivered to Congress on Wednesday, the department’s inspector general, Earl E. Devaney, found wrongdoing by a dozen current and former employees of the Minerals Management Service, which collects about $10 billion in royalties annually and is one of the government’s largest sources of revenue other than taxes.

“A culture of ethical failure” besets the agency, Mr. Devaney wrote in a cover memo.

The reports portray a dysfunctional organization that has been riddled with conflicts of interest, unprofessional behavior and a free-for-all atmosphere for much of the Bush administration’s watch.

The highest-ranking official criticized in the reports was Lucy Q. Denett, the former associate director of minerals revenue management, who retired earlier this year as the inquiry was progressing.

The investigations are the latest installment in a series of scathing probes of the troubled program’s management and competence in recent years. While previous reports have focused on problems the agency has had in collecting millions of dollars owed to the Treasury, the new set of reports raises questions about the integrity and behavior of the agency’s officials.

In one of the new reports, investigators conclude that a key supervisor at the agency’s minerals revenue management office worked together with two aides to steer a lucrative consulting contract to one of the aides after he retired, violating competitive procurement rules.

Two other reports focus on “a culture of substance abuse and promiscuity” and unethical behavior in the service’s royalty-in-kind program. That part of the agency collects about $4 billion a year in the form of oil and gas rather than cash royalties.

Modeled on a private-sector energy company, the decade-old royalty-in-kind program transports, processes and resells the oil and gas on the open market. But while its officials interact with energy company executives, they are subject to government ethics rules, such as restrictions on taking gifts from sources with whom they conduct official business.

One of the reports says that the officials viewed themselves as exempt from those limits, indulging themselves in the expense-account-fueled world of oil and gas executives.

In addition, the report alleges that eight royalty-program officials accepted gifts from energy companies whose value exceeded limits set by ethics rules — including golf, ski and paintball outings; meals and drinks; and tickets to a Toby Keith concert, a Houston Texans football game and a Colorado Rockies baseball game.

The investigation also concluded that several of the officials “frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relationships with oil and gas company representatives.”

The investigation separately found that the program’s manager mixed official and personal business, and took money from a technical services firm in exchange for urging oil companies to hire the firm. In sometimes lurid detail, the report accuses him of having intimate relations with two subordinates, one of whom regularly sold him cocaine.

The culture of the organization “appeared to be devoid of both the ethical standards and internal controls sufficient to protect the integrity of this vital revenue-producing program,” one report said.

A spokeswoman for the Interior Department secretary, Dirk Kempthorne, referred inquiries to the Minerals Management Service. The service’s director, Randall Luthi, released a preliminary statement on Wednesday morning saying he had not yet seen the reports but had scheduled a mid-afternoon conference call with reporters.

“I will tell you that we requested this investigation in 2006 after an employee raised allegations of ethical lapses,” Mr. Luthi’s early statement said. “I look forward to having the opportunity to review the Inspector General’s findings so we can take the appropriate actions.”

A spokesman for Mr. Devaney declined to comment.

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At least one former employee named in the report, Jimmy W. Mayberry, pleaded guilty to a felony conflict-of-interest charge in August and faces a potential sentence of up to five years in prison and a $250,000 fine.

In late 2002, while he was about to retire from the government, Mr. Mayberry drafted a “statement of work” for a consulting contract to perform essentially identical functions to his own job. He then retired, started a company, and in June 2003 won the contract with the help of his former supervisor and another friend at the agency.

Danny Onorato, the attorney representing Mr. Mayberry, said his client has a sentencing date in November, but added that “we are not interested in having Mr. Mayberry speak.”

The report also recommended that the Justice Department seek felony charges against another official, Milton Dial, the friend who helped Mr. Mayberry win the contract and initially oversaw the consulting work. Mr. Dial retired in September 2004 and went to work for Mr. Mayberry’s new company in February 2005.

The report did not say how the Justice Department was handling Mr. Dial’s case. Efforts to reach Mr. Dial, whose telephone number is unlisted, were unsuccessful.

The inspector general also urged the administration to take administrative action against several of the officials in the royalty-in-kind program who accepted gifts from the oil companies, including either firing them or banning them for life from certain positions. Several have already been transferred out of the program but remain on the government payroll, it said.

But two of the highest-ranking officials who were targets of the investigations will apparently escape sanction. Both retired during the investigation, rendering them safe from any administrative punishment, and the Justice Department has declined to prosecute them on the charges suggested by the inspector general.

One of those who will not be prosecuted is Ms. Denett, the former associate director of minerals revenue management. The report alleges that she manipulated the contracting process to steer the deal to Mr. Mayberry, her friend and former special assistant.

Six other companies submitted bids for the contract, spending more than $90,000 on their proposals. A Department of the Interior ethics official who later reviewed the sequence of events described the arrangement as one in which “the fix is in throughout — this is tainted from the beginning, that is totally improper,” the report said.

Ms. Denett did not return a message left at her home on Wednesday with her husband, Paul Denett, who was the top procurement official in the White House Office of Management and Budget until he resigned this month. He declined to comment.

But the report quotes Ms. Denett repeatedly telling investigators such things as “obviously I did it and it doesn’t look proper” and that in retrospect she had made a “very poor” decision. She also told them that “she had been preoccupied with a very stressful personal issue at the time,” which the report did not spell out.

The other high-ranking official the Justice Department has declined to prosecute is Gregory W. Smith, the former program director of the royalty-in-kind program. Mr. Smith worked in Colorado and reported directly to Ms. Denett, who was based in Washington, D.C.

The report said that from April 2002 to June 2003, Mr. Smith improperly used his position with the royalty program to help a technical services firm seek deals with the same oil and gas companies. The services firm paid Mr. Smith more than $30,000 for asking the oil companies to hire it, the report said.

Mr. Smith requested and received approval to take on the outside work, but the report says he misled the office into thinking he would be performing technical consulting, rather than marketing the firm to companies with which he also conducted official business

The report accuses Mr. Smith of improperly accepting gifts from the oil and gas industry, of engaging in sex with two subordinates, and of using cocaine that he purchased from his secretary or her boyfriend several times a year between 2002 and 2005. He sometimes asked for the drugs and received them in his office during work hours, the report alleges.

The report also says that Mr. Smith lied to investigators about these and other incidents, and that he urged the two women subordinates to mislead the investigators as well.

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In discussions with investigators, the report said, Mr. Smith acknowledged buying cocaine from his secretary and having a sexual encounter with her at her home, but denied discussing drugs at work. He also denied telling anyone to lie, saying that he only told people that “no one has a right to know what I do on my personal time.”

The report omits any response from Mr. Smith about alleged sexual misconduct with another female subordinate, although it notes that “a substantial amount of information obtained through the federal grand jury process” was not included in the report.

Repeated efforts to reach Mr. Smith, who resigned in May 2007, were unsuccessful. His home phone number was continually busy, and his attorney, if he has one, could not be identified.

The Justice Department press office did not immediately return a call seeking an explanation for why prosecutors decided not to bring charges against Ms. Denett or Mr. Smith.

The report also details cozy relationships between energy companies and other officials in the royalty-in-kind program office.

The report found that 19 officials — about one-third of the program’s staff — accepted gratuities from oil companies, which was prohibited because they conducted official business with the industry. Eight of the 19 accepted gifts that exceeded maximum limits for gifts for government employees — no more than $20 for any one item and no more than $50 from any source per year.

On one occasion in 2002, the report said, two of the officials who marketed taxpayers’ oil got so drunk at a daytime golfing event sponsored by Shell that they could not drive to their hotels and were put up in Shell-provided lodging.

The same two women also “engaged in brief sexual relationships with industry contacts,” the reports’ cover memo said, adding that “sexual relationships with prohibited sources cannot, by definition, be arms-length.”

On one occasion, the report said, the royalty-in-kind program allowed a Chevron representative who won a bid to purchase some of the government’s oil to pay taxpayers a lower amount than his winning offer because he said he had made a mistake in his calculations. A report from Mr. Devaney’s office earlier this year found that the program had frequently allowed companies that purchase the oil and gas to revise their bids downward after they won contracts. It documented 118 such occasions that cost taxpayers about $4.4 million in all.

On another occasion, the new report said, one of the officials shared information about the confidential price a pipeline company was charging the government.

The report said that the officials told investigators that the gifts and socializing did not affect how they treated the companies in their official duties.

They also said did not view socializing with oil company representatives and taking gifts as inappropriate because they said they needed to be part of the marketing culture in order to market the program’s oil and gas.

But the report presents evidence that the officials knew their behavior crossed the line. One of the royalty-in-kind employees said a supervisor told them not to talk to other government officials about their travel activities because the others might report them to the inspector general.

In addition, in 2006 Mr. Smith convened a study group to draft a proposal to exempt the office from regular government ethics rules. Although Ms. Denett sponsored the group, she told investigators she did not know that officials were accepting gifts from the industry. The proposal was never implemented.

Several of the lower-ranking program officials have been transferred out of their old jobs, the report said. It recommended a series of reforms to make clear that such behavior is inappropriate and illegal.

The investigations took over two years and cost more than $5 million. Inspector general personnel reviewed over 470,000 pages of documents and emails and interviewed 233 witnesses and subjects — including employees of the government and oil companies.

While most of the oil companies allowed investigators to interview their employees, the cover letter noted, one major firm, Chevron, would not cooperate. A spokesman for Chevron said he would check into the case but did not immediately provide an explanation.