Chevron suit is not
worth it, lawyers sayThe state says authors of
an incriminating study didn't
have enough information
The law firm hired by the Cayetano administration to pursue a tax fraud case against ChevronTexaco Corp. says there is no case and that the firm would not pursue a lawsuit even if the state paid it for the work on an hourly basis.
A report released yesterday by the state attorney general's office said that two accounting professors did not have access to enough information when they reported that the state could seek $563 million from Chevron over back taxes. Chevron owes the state nothing, according to Chicago law firm Winston & Strawn, which conducted an investigation for the state on contingency.
No other state has sued Chevron over the allegations of tax fraud, and other states have been watching Hawaii's move. "I think we're in front of the wave on this one," said Hugh Jones, a Hawaii deputy attorney general assigned to the case.
The two professors, Jim Wheeler and Jeff Gramlich, released a national report in September that said Chevron evaded billions of dollars in state and federal taxes.
The professors relied on a few documents that became public from a battle between Chevron and the Internal Revenue Service in the 1990s. The professors said Chevron inflated its costs for crude oil from an Indonesian joint venture that Chevron had with Texaco before the two companies merged in 2001.
Caltex, the joint venture, paid higher taxes in Indonesia on its income and received a kickback from the Indonesian government in the form of free oil, the professors said.
The IRS took a $675 million payment from Chevron to settle a tax audit in 1994. The professors argued that Chevron owed more than it paid and that the case could be reopened because they believed there was evidence of fraud. The professors' report covered the tax years from 1970 to 2000.
Chevron provided internal documents and sworn statements that led Winston & Strawn to conclude there was no case that the state can pursue, according to the attorney general's office. The state does not intend to make the evidence public, since taxpayer information is confidential.
The state's report said the bulk of Chevron's $675 million IRS settlement was related to issues that had nothing to do with the Caltex matter.
The attorney general's report, announced by First Deputy Attorney General Richard Bissen Jr., said in summary that:
>> Chevron paid fair market value prices for Indonesian crude oil since 1990 and did not pay inflated prices.Chevron said yesterday that it is pleased the state found no basis for legal action, and that it cooperated fully with the investigation. "We are gratified that after reviewing ChevronTexaco's tax filings and other related documents, Winston & Strawn has affirmed what we have always believed: The allegations were without merit," Chevron said.>> Chevron has already paid a tax adjustment to Hawaii, covering 1983 to 1986, when the Indonesian kickback arrangement occurred. The state is not disclosing what it received from Chevron. The professors assumed that the kickback occurred in additional years.
>> Even if the professors were correct in all of their economic assumptions, the state would be owed less than $4 million, not $563 million, because of a technical tax calculation error. The professors erroneously assumed a direct relationship between the amount of Indonesian oil Chevron imported to Hawaii and the company's tax liability.
The decision to drop the case, initiated in the closing days of the Cayetano administration, is sure to rankle Chevron's critics.
Hawaii has had a contentious relationship with Chevron over the state's relatively high gas prices, and Cayetano sued Chevron and other oil companies over antitrust allegations in 1998. The companies denied wrongdoing, and the state eventually settled the case for far less than it was seeking.
Former Attorney General Earl Anzai hired Winston & Strawn to investigate the tax matter on a contingency-fee basis. Winston was to pay for all litigation costs.
Some Democratic state legislators said pursuing a case made sense, since the state had nothing to lose in filing a lawsuit.
In January, Sen. Ron Menor, chairman of the Senate Commerce, Consumer Protection and Housing Committee, said, "I believe it really is a slam dunk."
Winston advised the state that despite "initial optimism" it believes litigation by Hawaii against Chevron has no grounds.
"It is clear that the evidence that the professors thought was there simply was not," Gov. Linda Lingle said yesterday.
"We came in with an open mind, and I know there was a feeling with some in the Legislature that this was a quick way to get some money into the coffers, and while that would have been nice, we wanted it to be clear that we are not going to pursue something if there is no evidence there," Lingle said.
State officials have been working on how to explain their decision to drop such a high-dollar, complex case amid strict restrictions of confidentiality. The state got a report from Winston in early June.
Wheeler, one of the two professors and a Lanikai resident who is retired from the University of Michigan, said he does not believe much of the information in the attorney general's report and that he will review it in the coming days.
Wheeler acknowledged that he and co-author Gramlich did not have access to a lot of the relevant information in the matter. Wheeler said he wants to see the information.
Jones said the state did not seek Chevron's consent to release its confidential tax information to the public because the state is confident of the work of Winston & Strawn. "There's just nothing here," Jones said.
Winston & Strawn has not received compensation for its initial work on the case, as specified by its state contract, but Bissen said yesterday that the attorney general's office wants to reimburse the firm somehow.