Friday, March 26, 2010

Barry Minkow (ZZZZ Best Fraudster) on InterOil CEO's Bad Faith Bankruptcy of Nikiski Partners (IOC)

This is the movie Shia LaBeouf should have done.
From Minkow's iBusiness Reporting:
A company controlled by Phil Mulacek, chief executive officer of InterOil Corp. (NYSE: IOC), filed a "bad-faith" federal bankruptcy in December in an attempt to derail a potentially massive civil judgment in a fraud case against him and companies he controls, according to court documents filed in Houston.

Less than a month after the filing, federal Judge Marvin Isgur in Houston ruled that Nikiski Partners—a corporation whose $2 million investment in a used oil refinery gave birth to InterOil, one of Wall St.’s high-flying stocks in 2009—had filed the bankruptcy in “bad faith.” (Read transcript here.)

Two days before filing for bankruptcy, Mulacek, through his holdings in Nikiski Partners, dumped nearly $1.5 million worth of InterOil stock, according to the Canadian Securities Commissions. The insider transaction was filed 40 days after it took place.

Since InterOil evolved from Nikiski and a web of other companies in the mid-1990s, Nikiski’s sole function has been to passively hold investment units that can be ultimately converted to InterOil stock.

InterOil, an oil and gas business founded in 1997, is one of the more controversial companies on the New York Stock Exchange. InterOil’s boosters claim the company has discovered gas fields in Papua New Guinea that will soon be commercially viable and drive the stock as high as 300 (it closed at 70.89 Thursday and had been one of 2009’s high-flying stocks).

Even Shia LaBeouf, who stars in the upcoming "Wall Street" movie, touted the stock to a journalist by texting: "IOC's momentum is major, and it will surprise to the upside."

Critics point out that InterOil has not produced any commercial gas or oil after spending hundreds of millions of dollars, drilling test wells for seven years, and publishing a flurry of optimistic press releases.

In the bankruptcy filing, Nikiski Partners declared $71.5 million in assets and just $5,751 in debts, but argued it needed bankruptcy protection so the 5-year-old civil case could be swept into federal bankruptcy court to avoid a judgment that would be "devastating," as Mulacek termed it, to InterOil stock--Nikiski's only asset....MORE

I especially like the dual argument that the complaints were frivolous and that the statute of limitations had run out.

The judge's opinion is indeed interesting. From the closing arguments and Opinion:

1 THE COURT: Thank you. All right. I'm not going to
2 have a closing argument by the Peters Plaintiffs.
3 I studied the case really hard and I've worried about
4 the case really hard since the trial. I've read all of the
5 exhibits; I've read the depositions. And in the end I conclude
6 that the case should not be here and that we should remand the
7 adversary proceeding. Let me give the reasons why.
8 First, with respect to subject matter jurisdiction I
9 think that our subject matter jurisdiction was properly
10 invoked. The Debtor is eligible to file a Chapter 11 petition
11 and the petition is properly filed. I simply don't accept the
12 view that the good-faith test is one as to which our subject
13 matter jurisdiction is challenged. If the petition is filed in
14 bad faith, we dismiss the case. But in the meantime, we have a
15 legally valid petition that invokes the protection of the Court
16 through Section 1334 subject matter jurisdiction. And I want
17 the record clear that I do find we have subject matter
18 jurisdiction on the filing of the petition.
19 The determination of whether to dismiss a petition
20 and whether to appoint an examiner are both core matters under
21 28 U.S.C., Section 157. Dismissal may occur under either
22 Section 1112 or Section 305 of the Bankruptcy Code. And
23 although the Section 305 matter was only brought by one of the
24 parties I think yesterday when Mr. Farrell filed his
25 supplement, I considered Section 305 sua sponte prior to the


1 time that it's filed based on the evidentiary record and today
2 dismiss the case both under Section 1112 and under Section 305.
3 I wanted to go ahead and have the closing arguments
4 really to see whether or not the Debtor and its advocates could
5 change the preliminary decision that I had made before I came
6 out today. But nothing that they have had said has persuaded
7 me that the case should not be dismissed, and so I'm basically
8 terminating the hearing and not giving closing arguments to the
9 other side.
10 The following constitute my findings of fact and
11 conclusions of law in addition to the coreness and the subject
12 matter jurisdiction:
13 In evaluating whether a petition is filed in good
14 faith the Court must examine both objective and subjective
15 tests. On an objective basis I find that there was a very
16 substantial and material lawsuit, the Peters suit, that named
17 the Debtor and sought joint and several damages against the
18 Debtor that exceeded the Debtor's ability to pay if a judgment
19 had been rendered. Moreover, the settlements with other
20 Plaintiffs by Codefendants of the Debtor demonstrated that the
21 lawsuit was material and would likely result in a judgment
22 against the Debtor in excess of its ability to pay.
23 The cases cited by the Peters group, particularly
24 SGL Carbon, which was I think their primary case, but other
25 cases as well such as the Fraternal Composite (phonetic) case,


1 I simply don't find are directly applicable. Both of the cases
2 specifically state that a debtor would be allowed to file based
3 on a reasonable expectation of extremis. And with the ongoing
4 settlements with similarly situated Plaintiffs it may have been
5 objectively reasonable for the Debtor to have filed bankruptcy
6 if that was their true motivation. In any event, I think the
7 burden of proof was on the Peters Plaintiffs to demonstrate bad
8 faith, not the other way around. And I cannot find bad faith
9 on an objective basis because of the Tenth Amended Petition.
10 However, on a subjective basis I find that the case was not
11 filed in good faith.
12 The Debtor had alleged at the December hearing,
13 December 18th hearing, that it filed to avoid direct liability
14 of the Debtor on both the Peters and the Martin lawsuits. On
15 cross examination Mr. Mulacek acknowledged that the Martin
16 lawsuit had already been settled. The fact that it was used as
17 a rationale when it had already been settled diminishes the
18 Debtors' credibility as to whether the Peters lawsuit for which
19 there might have been an objective rationale was a true
20 motivation. And I think it just diminishes his credibility
21 that both reasons were put out but only one had any possible
22 validity given that Martin had fully settled.
23 Mr. Mulacek -- and this came out a little bit in
24 Mr. Wood's statement this morning -- repeatedly testified that
25 he had no knowledge of how InterOil was dealing with this


1 lawsuit because his personal conflict, InterOil did not allow
2 him to make decisions regarding the lawsuit. But Mr. Mulacek
3 and his wife and his father, each of who had identical
4 conflicts, decided that they could put the Debtor into
5 bankruptcy in order to try and resolve the lawsuit. How they
6 could vote in one entity but not in the other is beyond me. I
7 don't believe that they can legitimately exercise their general
8 partner authority over the Debtor in good faith, put it into a
9 bankruptcy when the primary purpose of the bankruptcy, I
10 ultimately conclude, was to protect the liability of others in
11 the lawsuit, not of Nikiski.
12 I think that these are difficult findings because
13 I've already found that objectively they might possibly have
14 gotten here if they had really done this for the purpose of
15 saving Nikiski. I just don't believe them that that was their
16 subjective reason.
17 The true purpose of the filing was to resolve the
18 lawsuit. I don't think there's any question both sides agree
19 that was the conclusion. The issue is for whose benefit did
20 they try and resolve the lawsuit. And I conclude based on the
21 testimony and the other evidence that I've reviewed before me
22 that the actual motive was to benefit the downstream entities
23 and Mr. Mulacek personally rather than to benefit the Debtor
24 Nikiski itself....MORE