(Anchorage Daily News (Alaska) (KRT) Via Thomson Dialog NewsEdge) Dec. 31--One of Alaska's most prominent Native corporations is accusing a leading contractor of misappropriating and otherwise unlawfully taking more than $40 million from the Anchorage firm it hired him to run.
Anchorage-based Cook Inlet Region Inc. and its partner, Houston-based Nabors Industries, are embroiled in a massive lawsuit against John Ellsworth, the longtime president of Alaska Interstate Construction, or AIC.
The case has drawn the attention of federal prosecutors, who have subpoenaed some of the evidence.
The dispute stems from Ellsworth's management of AIC from 1998 to 2005. The company specializes in building roads, bridges, dams and other facilities, primarily for oil and mining companies.
CIRI and Nabors, a publicly traded drilling and oil-field services company, jointly owned 80 percent of AIC for the six years in question. Ellsworth owned the remaining 20 percent. As the big partners took steps to force out Ellsworth in April 2005, he and an aide directed the shredding of nearly three tons of company documents.
CIRI and Nabors say the shredding destroyed evidence, but believe there's still ample proof that Ellsworth wasted millions of dollars in company funds by:
--Giving free rides and free vacations to friends, family and politicians on corporate jets and at an exclusive Alaska fishing lodge. One lodge guest was U.S. Sen. Ted Stevens, who said Thursday he has directed his staff to review whether his stay or stays there complied with Senate ethics rules.
--Using company credit cards for personal or undocumented purchases.
--Making excessive charitable donations, and, in the case of $34,000 given to the private Pacific Northern Academy where his child attended school, claiming the deduction on his personal income taxes.
--Paying undeserved bonuses.
--Allowing conflicts of interest that had him negotiating with himself when he entered into contracts with his own companies on behalf of AIC.
--Walking away from a potentially lucrative contract on an Exxon Mobil project in Russia that was snatched up by the Anchorage company Veco.
--Helping another Native corporation compete with AIC in Alaska while he was governed by a non-compete contract.
Ellsworth strongly denies the allegations and asserts that he was given free rein by former CIRI president Carl Marrs to operate Alaska Interstate as if it were his own. He has countersued, accusing CIRI and Nabors of trying to cheat him out millions of dollars and of restraint of trade.
Neither Ellsworth nor CIRI president Margie Brown would talk about the case because it is being actively litigated. Nabors representatives in Alaska didn't return calls.
In a court filing last month, the attorney for CIRI and Nabors, Tim Petumenos, revealed that he was ordered to appear before a federal grand jury and bring with him the transcripts of Ellsworth's pretrial testimony and an expert report that documents Ellsworth's alleged mismanagement and improper tax deductions.
The grand jury subpoena was signed by assistant U.S. attorney Karen Loeffler, who has prosecuted tax and white-collar cases since the North Slope Borough corruption scandal 20 years ago. The central focus of that case were two consultants who acted as middlemen between borough officials and favored contractors. The middlemen were convicted of taking kickbacks from contractors and paying bribes to borough officials.
Loeffler, who declined to comment, is not known to be working on the Alaska corruption investigation by the FBI and the Justice Department's Public Integrity Section that has resulted in searches of legislative offices and Veco, subpoenas in the fishing industry and criminal charges against an Anchorage state representative.
Since it was filed 19 months ago, the CIRI-Nabors-Ellsworth civil case has grown to more than 40 volumes in state Superior Court in Anchorage. The suit was described in court recently by one of Ellsworth's lawyers, Joseph Sheehan of Fairbanks, as "the most complex litigation this jurisdiction has ever seen."
The documents fill a rolling cart in the courthouse, and the lawyers have not gotten around yet to filing the transcripts of hundreds of hours of depositions in the case.
The case may have some of the longest words ever filed in court as well, the result of its Russian ventures having names like "OOO Sakhalinmorneftemontazh Alaska" or the separate company, "OAO Sakhalinmorneftemontazh." At a recent hearing, Superior Court Judge Sen Tan resorted to hand movements during a discussion of the complex relationships between some of the entities.
It's not certain all the facts will be aired. The case can still be settled before the scheduled trial date early next year, though a mediation effort in Houston failed earlier this month.
PRODIGY AND GRIZZLY
AIC has a long, colorful history. The company traces back to Alaska International Construction, owned by Alaska aviation magnate Neil Bergt and later the Enserch Corp. of Dallas. In the early 1980s, AIC was the largest construction company in Alaska, famed for the $90-million-plus Endicott oil field it built in a single construction season for Sohio by creating gravel islands in the Beaufort Sea.
The company figured prominently in the North Slope Borough scandal when the government alleged it was extorted into paying a $19,000 kickback to the late Lew Dischner, a lobbyist and borough consultant who went to prison in the case. The former president of AIC, William Fowler, testified in 1989 under a full grant of immunity that he laundered the payment to Dischner through phony invoices and his twin brother's company.
Ellsworth, who worked for the company then, has listed Fowler as an expert witness in the current case. Among other subjects, Fowler will testify on the "reasonableness" of Ellsworth's use of aircraft and the Golden Horn Lodge.
Ellsworth, 54, has worked in construction since his first job as an oiler at 18. "I have worked at Prudhoe since 1973 and this is the only type of work I know," he said in an affidavit last year. "I have no formal education beyond high school."
In an interview from Homer, where he is retired, Bergt described the young Ellsworth who came to work for him as a "prodigy" who quickly moved up the ladder because he got the job done, and more.
"If we said we'd move 50,000 (cubic) yards (of gravel) a day, that s.o.b. would move 75,000," Bergt said. "But no one could get along with him. He had a personality like a grizzly bear."
Ben Kent, a Nabors executive in Alaska, said in a confidential report back to headquarters in Houston on Jan. 3, 2005, that Ellsworth "has been the main principal and instrumental in the success of the company."
"Mr. Ellsworth is known to be well connected in the business community, politically active, and will do anything to get a job," said Kent's report, filed as an exhibit in the lawsuit. Kent didn't return a phone call seeking further comment.
In 1987, Ellsworth formed the new AIC, buying the company's assets from Enserch, Bergt said. Following in the footsteps of the predecessor company, Alaska Interstate did $25 million in earthmoving work at the Red Dog mine in 1990 and 1991 and had other projects on the North Slope.
In 1992, with oil companies culling contractors and encouraging political activism among the ones still standing, Ellsworth and his AIC employees emerged among the top contributors to political campaigns, according to a Daily News investigation at the time. For example, his office manager, Cindy Scott, now Cindy Hitchcock, reported making $14,000 in contributions, even though she didn't vote.
The newspaper investigation said the contributions fit the pattern of seemingly independent donations illegally reimbursed by an employer.
Ellsworth, Scott and other workers denied that was the case. But in 1995 the Alaska Public Offices Commission levied a $98,000 fine -- still the largest campaign-finance penalty on record in Alaska.
The Federal Elections Commission levied its own $40,000 fine for illegal contributions to federal candidates in 1992. The political contributions came from the company and Ellsworth but were disguised in the names of Scott and other employees to skirt federal limits on corporate and excessive donations, the FEC ruled.
In 1995, CIRI and Nabors bought the company from Ellsworth and hired Ellsworth to run it, according to court documents. Marrs, who became CIRI president in 1994, said in an affidavit that three years later, they "enticed" Ellsworth back by offering 20 percent of the company to Pacific Diversified Investments Inc., a company wholly owned by Ellsworth and one of the defendants in the lawsuit.
"My instructions to PDI were to run the business as though it owned the business 100 percent," Marrs testified in the affidavit. "I did that because I knew Mr. Ellsworth, as its president, was both very knowledgeable and capable in the business, as well as being entirely trustworthy. To my knowledge, that instruction was never revoked, (and) neither PDI nor John Ellsworth as its president ever breached that trust."
Marrs didn't return several calls to his office and his attorney.
Marrs said in the affidavit that AIC and its main owners, CIRI and Nabors, "benefited tremendously from allowing PDI that freedom." In testimony last year, he described AIC as one of CIRI's most successful ventures, bought with very little cash and returning $60 million in profits between 1995 and 2004.
JETS AND A LODGE
But rumblings were being heard. One of Ellsworth's companies began obtaining corporate jets and provided them to AIC, ostensibly to manage transportation for the contract on Sakhalin Island in the Russian Far East. In all, seven or eight jets, including four Gulfstream IIIs, were obtained, leased or flown on behalf of AIC, though apparently not more than two at any given time, according to court documents.
Ellsworth also began leasing the Golden Horn Lodge, a remote fishing lodge owned by four of Alaska's best connected businessmen: developer Bob Penney, former bank president Edward Rasmuson, insurance broker Carl Brady Jr. and CIRI board member and Wasilla land developer William Prosser. Penney's son Henry said the lodge, with about 10 guest rooms, sits on five acres of the only private land on Mikchalk Lake in Wood-Tikchik State Park and is surrounded by mountains.
In a deposition, Ellsworth said Marrs asked him to lease the lodge starting with the 2001 summer season.
"I believe that CIRI wanted to use Golden Horn Lodge as a place to bring customers, politicians, whatever the case may be, and I was asked to facilitate that," Ellsworth said. "Carl Brady, one of the owners of the lodge, brought over a lease for the first year ... it was a three-year deal."
Paul Ficca, an accountant hired as an expert witness by CIRI and Nabors for the lawsuit, said the $1.8 million cost of the three-year lease amounted to an improper business expense for AIC. The IRS appeared to agree. According to another document filed in the case, the IRS said after an audit of AIC that the company improperly took $557,966 in business expense deductions for lodge operations in 2001.
"Everything there was 'comped' -- nobody paid anything," said Bruce Nordenson of Seldovia, who managed the lodge with his wife Rhonda in 2001 and 2002. The lodge employed two guides, two pilots and a person to clean and help cook, he said. It was also supported by AIC employees in Anchorage who provided supplies, including liquor, according to Nordenson and the lawsuit.
Nordenson said the list of guests would have shown up in the guest book but the register disappeared while he still worked there. He assumed someone had stolen it for the signature of California Gov. Arnold Schwarzenegger, who vacationed there with his family as a guest before his election. Nordenson said Sen. Ted Stevens, R-Alaska, "was pretty regular," at least a couple of times a summer.
"I think most of the politicians were having to do with CIRI," he said.
Bruce Nordenson said Rhonda Nordenson, Carl Marrs' sister, took over by herself in 2003 when the couple split up. She told the Daily News she couldn't talk about the lodge because of the litigation.
In a prepared statement issued Thursday, Stevens said he was a guest at Golden Horn "on more than one occasion in the early part of this decade." Stevens said he believed he and his staff complied with the law and Senate rules when he took those trips.
"However, as a result of the inquiry from the Daily News, I have asked my staff to conduct an immediate review of how we handled those trips. That review has been delayed because it has been several years since these trips occurred, and many members of my staff are traveling over the holiday recess. As soon as that review is completed, if I determine that the handling of these trips was not as it should have been, we will take necessary corrective action."
The Senate ethics handbooks prohibits senators or their staff from accepting more than $50 worth of hospitality from a corporation, though there are exceptions.
NEW BROOM ON BOARD
A group of reform-minded shareholders, calling themselves the Alliance for the Future of CIRI and led by former chief executive Roy Huhndorf and a former CIRI senior executive, Bob Rude, seized upon the jets and lodge expenses as early as 2001 in campaigns for positions on the CIRI board.
"We say Yes to a complete audit of the way shareholders' money has been spent on executive jets, lavish lodges, limousines, excessively expensive dinners and other extravagant officer and director perks," the Alliance wrote in a 2002 board election newsletter. Neither Huhndorf nor Rude would agree to interviews because of the litigation.
After gaining strength on the board, the Alliance pressure led Marrs to leave CIRI on Dec. 31, 2004.
Ben Kent, a Nabors executive in Alaska, saw the new CIRI board and Marrs' departure as an opportunity to assert some control over Ellsworth and AIC. In his Jan. 3, 2005, report to Houston headquarters, he frequently cited Ellsworth's routine failures to communicate with Nabors and CIRI as required by his contract, describing it as "unnerving and demoralizing" for the owners.
"With the departure of Carl Marrs and less political support at CIRI's board level, there might be a possibility to reestablish some type of effective and meaningful communication with Mr. Ellsworth," Kent wrote. Still, Kent conceded that AIC's before-tax profit under Ellsworth from 1999 through 2004 was nearly $63 million on revenues of $347 million.
"As much as Mr. Ellsworth has made a lot of money for the company, including his own 20 percent share of ownership, in addition he also made a lot of money to himself as a Manager/Consultant," Kent wrote. From 1996 to 2003, Ellsworth and his companies received $18.4 million in direct payments from AIC, said Kent, using available information before the private investigators and forensic accountants went through the books and records.
One of the CIRI-Nabors experts, former Securities and Exchange Commissioner Charles Cox of Chicago, said Ellsworth's "self-dealing" reduced profits by 37 percent.
"The work of other experts retained by plaintiffs together with my review of certain financial documents demonstrates that Mr. Ellsworth engaged in massive self-dealing -- the use of AIC resources for his own personal benefit -- that breached his duty to AIC," Cox wrote in his report.
Cox and the other experts cited numerous examples, ranging from the 15 or so trips that Ellsworth's wife Janice took on the company plane to Santa Barbara, Calif., to $696,083 in undocumented credit card charges for himself and other employees, to charging a fee to AIC for a jet he no longer possessed.
A MASSIVE SHRED JOB
Five months after Marrs' departure, CIRI and Nabors decided they'd had enough of Ellsworth. On April 7, 2005, CIRI president Mark Kroloff and Nabors Alaska President James Denney told Ellsworth they planned to boot him as of May 1.
On April 28, 2005, two days before Ellsworth's involuntary departure, AIC purchasing agent Ken Gridley was called into Ellsworth's office.
"He told me there was going to be a change and he was no longer going to direct AIC," Gridley said in an affidavit.
Several hours later, Cindy Hitchcock, Ellsworth's long-term office manager, told Gridley to research mobile document shredding services available in Anchorage. In an affidavit, she said she was just following AIC's normal document retention schedule.
In the "three or four times" between 1998 and 2005 that AIC got rid of obsolete documents, Ellsworth testified, the company ordered a Dumpster from a garbage company.
"You filled them, and then they picked them up when it was possible, which might take days to fill."
Not this time.
"I was having lunch with my husband at Schlotzsky's and noticed a truck drive by with the name 'Shred Alaska,' " Hitchcock said. "Before that, I did not know there were companies that would come to your office to shred old files."
Gridley called Shred Alaska for rates and availability. They told him they could come by the next week.
"I hung up and relayed this information to Ellsworth and Cindy who were still in the room," Gridley said in his affidavit. "Ellsworth told me that he wanted (the shredding) done that day or at the latest the following day, which would have been Friday. I called Shred Alaska back and they agreed to come out that afternoon."
The documents were at a warehouse at 649 W. 54th Ave. Gridley, Hitchcock and another employee met the shredders there.
"We started with a pallet of boxed documents from Sakhalin," Gridley said. "Next we moved to the mezzanine level where Cindy was directing which boxes were to be destroyed. Finally we removed documents form the file cabinets in the file room and shredded them."
The Shred Alaska invoice was filed as evidence. The company billed AIC $1,604.96 to make confetti from 5,732 pounds of documents.
"There is no evidence that any documentation relevant to this litigation has been destroyed," Ellsworth's lawyers argued. It's a "red herring" to claim otherwise, they said.
In an interview, Cindy Hitchcock said that there was nothing unusual in the document destruction -- it was a routine practice.
"I mean, I was just doing my job," she said. "I didn't do anything wrong."
Hitchcock said she couldn't recall whether she also ordered the shredding of any documents in Ellsworth's personal companies such as Pacific Diversified Inc. or his aircraft service company, Anchorage Aviation Center. But Petumenos ridiculed the notion that the shredding was routine.
"Why would a manager who was just removed from his position decide to do housecleaning two days before leaving?" he asked in one court filing. "The evidence clearly reveals that Ellsworth had a significant amount of animosity as a result of his removal. The notion that he wanted to assist (CIRI) and (Nabors) in the transition by cleaning out old documents is simply not believable."
"Doing simple math, it would appear that Shred Alaska destroyed about 300 boxes of documents," Petumenos said. "This is enough to fill up several rooms. ... There are hundreds of boxes of documents that are unaccounted for. The document destruction was so voluminous that it took two commercial trucks the size of two garbage trucks to handle the load."
The real reason, Petumenos suggested, is that Ellsworth wanted to make it harder for the company to compete in the future and also to uncover "evidence of his mismanagement."