United States v. Armada Petroleum Corp.

• Decision Date: 20 August 1982
• Docket Number: Civ. A. No. H-81-2023.
• Citation: 562 F. Supp. 43
• Parties: UNITED STATES of America and Department of Energy Audit Director James Louthan, Petitioners, v. ARMADA PETROLEUM CORPORATION, Anthony Wright, Respondents.
• Court: U.S. District Court — Southern District of Texas

562 F. Supp. 43

UNITED STATES of America and Department of Energy Audit Director James Louthan, Petitioners, v. ARMADA PETROLEUM CORPORATION, Anthony Wright, Respondents.

Civ. A. No. H-81-2023.

United States District Court, S.D. Texas, Houston Division.

August 20, 1982.

Jose A. Berlanga, Asst. U.S. Atty., Houston, Tex., for petitioners.

Frank B. Davis, Andrews & Kurth, Houston, Tex., for respondents.

MEMORANDUM AND ORDER

CARL O. BUE, Jr., District Judge.

This is an action to enforce an administrative subpoena issued by the United States Department of Energy ("DOE"). The subpoena was issued in the course of an audit of respondent Armada Petroleum Corporation ("Armada"), a reseller of petroleum products. Petitioners brought this proceeding pursuant to Section 645 of the Department of Energy Organization Act of 1977, 42 U.S.C. § 7255 (Supp.1981); Section 13(e) of the Federal Energy Administration Act of 1974, 15 U.S.C. § 772(e) (1976); and Section 5(a)(1) of the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. § 754(a)(1) (1976).¹ Jurisdiction is based upon Section 645 of DOEA, 42 U.S.C. § 7255 (Supp.1981); upon 15 U.S.C. § 772(e)(2) (1976); and upon 28 U.S.C. § 1345 (1976).

Petitioners allege that the requested information regarding purchases, sales, exchanges, and other acquisitions and dispositions of crude oil is necessary to determine compliance with DOE rules and regulations providing for the allocation and pricing of crude oil. Respondents challenge the subpoena on various grounds: (1) lack of authority by the DOE to issue the subpoena; (2) improper purpose of issuing the subpoena; and (3) irrelevance of information sought. By order of January 4, 1982, the Court denied respondents' motion for discovery but directed that three essential witnesses would be produced by the government for the hearing. After hearing evidence on January 18, 28 and 29, 1982, the Court took the matter under advisement and afforded the parties an opportunity to file further memoranda.

For reasons set forth below, the Court concludes that the petition for enforcement must be stayed pending the outcome of criminal proceedings which have been instituted against respondents.

Background

Respondent, Armada, is a reseller of crude oil, and for the period encompassed by the subpoena, Armada was subject to the mandatory petroleum allocation and price regulations promulgated by the DOE.

The DOE was established by Congress in August 1977, and within that agency there exists the Economic Regulatory Administration ("ERA"). This department has the responsibility to determine compliance with the DOE regulations and to institute appropriate enforcement proceedings for those energy companies which have not complied with the Act. The department devises "target lists" of potential corporations to be audited, and the audit directors in the local divisions have authority to open audits of any corporation found on the target list. Commonly, the first step in initiating a civil audit will be a notice sent from the local audit director to the firm indicating that an audit will take place at the corporate place of business. Alternatively, the director has the discretion to issue a subpoena requesting that the company produce the needed records. The audit is then conducted, and if no civil violation is found, the audit is closed. If the audit does reveal a civil violation, further steps are taken to remedy the overcharges.

When the civil auditors discover what they suspect to be a willful violation, the matter is referred to the Office of Special Investigations, a department under the General Counsel of the DOE. In these instances, the ERA may pursue the civil penalties for inadvertent overcharges while the Office of Special Investigations examines concurrently the potential willful violation. There is often a joint effort between the two departments, and many times the civil auditors assist the special investigators in their inquiries.

If after all available information is gathered and the Office of Special Investigations makes a decision that there is credible evidence to indicate criminal activity, the matter is referred to the Justice Department for prosecution. This is an agency decision, but it will be made upon the recommendation of the Director of the Special Investigations, presently Jerome Wiener.

Within Congress the Subcommittee on Investigation and Oversight, headed by Congressman John D. Dingell, holds hearings to determine whether the various executive agencies are carrying out their duties pursuant to the respective statutes. Such hearings were held in February through September of 1981 with emphasis on enforcement of the DOE regulations by ERA and the Office of Special Investigations. Congressman Dingell requested documents from the ERA, and, additionally, he and his subcommittee members questioned both administrators from the ERA and the Office of Special Investigations. The Congressman was highly interested in the progress of matters concerning crude oil resellers, but there never was any direction or even suggestion by Congressman Dingell that the ERA issue a subpoena to or open an audit of Armada.

In February 1978, when the Office of Special Investigations was created, there was an on-going inquiry by the DOE as to Armada's potential willful violations. This investigation was referred to the Department of Justice, and in 1979 two criminal indictments were returned which involved Armada.² In one indictment, respondent Armada was named as a defendant in an alleged scheme to defraud the United States for actions during the period of August 1974 to June 1976. The substance of the alleged scheme was a conspiracy to falsely sell lower priced domestic "old" crude oil, that produced before 1973, as the higher priced "new" oil, that produced after 1973. In the other indictment which covered the period of August 1975 to December 1977, Armada's president and part owner, James E. Fisher, was named in a similar conspiracy concerning allegedly fraudulent transactions between Uni Oil, Inc., and Armada.

A second investigation was opened by the Office of Special Investigations which examined Armada's activities during 1978. This matter was eventually referred to the Department of Justice sometime in 1980. No indictment has been returned as to these events.

The third and present investigation by the Office of Special Investigations was begun in April 1980, and a draft referral concerning the activities of Armada during 1979 was presented to Jerome Weiner, the director of Special Investigations Division. There was participation in the preparation of this document by officers from both the ERA and Special Investigations Division. After the draft referral was presented to Jerome Weiner, it was the agency's decision that such referral would not be sent to the Department of Justice but that additional work in securing more records was needed.

Accordingly, it appears that a series of criminal charges have been levied against Armada: an indictment covering August 1974 to June 1976; a second indictment covering August 1975 to December 1977; a referral to the Department of Justice covering activities of 1978; and a draft referral covering 1979.

With regard to the subpoena which is the basis of the present action, it was James Louthan, Audit Director for the Houston Crude Reseller Division, who authorized the audit of Armada. Further, it was Louthan who made the decision to issue a subpoena to Armada requiring production of records for the civil audit.

Louthan met in October 1980 with the other audit directors from Tulsa and Dallas and with the regional director, L.K. Jones. They were provided by the national ERA office with a list of the 75 largest crude reselling firms, and Armada was one of the 75. The purpose of the meeting was to devise a work plan for audits to be completed in the year of 1981. It was Louthan's decision to put Armada on the work plan because Armada had not been audited since 1975.

In the fall of 1980 after the work-plan meeting, Louthan made the determination to issue the subpoena to Armada. Neither Congressman Dingell, nor any person representing Congressman Dingell, nor any official from DOE, nor any official within the Department of Justice ever contacted Louthan with directions to begin an audit of Armada or to issue the subpoena. Louthan discussed the subpoena with Roy Errons in the Houston Office of Special Investigations and with Ed Shaddock, Assistant Counsel for the Houston Crude Reseller Office. Louthan knew that there were prior indictments involving Armada, and he followed the DOE's policy of contacting the Office of Special Investigations that office would, in turn, obtain clearance from the Department of Justice before proceeding with new matters. This clearance came in early February 1981, and thereafter Louthan issued the subpoena.

During the same period, on or about February 1, 1981, Gordon Harvey, Assistant Administrator for the ERA, sent a facts message to the various divisions. Such message contained the names of companies which had not yet been audited. It carried some urgency and established the policy that the local divisions must use greater diligence in completing their audits. This message had no bearing on Louthan's decision to issue the subpoena, as that decision had been made by Louthan some months prior. The policy set forth by Harvey stemmed from the decontrol of oil and gas prices in January 1981, and the DOE needed to finish any uncompleted work on violations occurring before that date.

The subpoena which was issued on February 6, 1981, requested documents from the period of February 1976 through January 1981. On February 13, 1981, Armada submitted a Request for Review of Subpoena, and on the same date it filed with the DOE two requests under the Freedom of Information Act as to whether the subpoena should be rescinded. The DOE notified Armada that the requests had been...