McDermott seeks large bonuses for senior management while in bankruptcy

Photo: Nandu Chitnis

McDermott has filed a motion with the Bankruptcy court seeking approval for an employee retention plan for both senior executives and key employees who are not executives. CEO David Dickson could receive $6.3 million in 2020 if the company hits its targets.



As a reminder, the company, which is based in west Houston, awarded Mr Dickson a $3.375 million cash retention bonus only last October. The company filed for Chapter 11 bankruptcy in January 2020, at which point the company paid out the last 30% of that award, even though it wasn’t technically earned.

Quarterly retention bonuses

The retention bonuses will be paid quarterly in cash. The senior executives and their target bonuses are as follows;

  • David Dickson (CEO) – $6.3 million
  • Chris Krummel (CFO) – $1.2 million
  • John Freeman (Chief Legal Officer) – $1.1 million
  • Samik Mukherjee (COO) – $1.3 million
  • Ian Prescott (Senior VP, Asia Pacific) – $423,000

The bonuses are dependent on the following performance metric;

  • Adjusted EBITDA  (27.5%)
  • Available cash balance (27.5%)
  • Technology Business sale proceeds (15%)
  • Safety (15%)
  • Achievement targets (15%)

The maximum payout is 200% of target, so Dickson could get $12.6 million.

The incentive scheme runs until the end of 2020, irrespective of whether McDermott exits Chapter 11 before then.

In October 2019, senior management got $7 million in bonuses

Freeman, Mukherjee and Prescott also got retention bonuses in October, similar to the targets above. Then-CFO Stuart Spence got $1.3 million, only to leave the company two weeks later. He got to keep his bonus, of course. If Mr Krummel got a bonus at that time, it wasn’t disclosed.

What’s particularly galling to me, is that, in October, when McDermott got their expensive financing and gave out the retention bonuses, the company was forecasting adjusted EBITDA for 2019 of $474 million. By the time they filed for bankruptcy three months later, that figure had been reduced to $183 million. They did meet their 2019 free cash flow forecast – an outflow of $1.2 billion – but only because they held back $300 million in payments to vendors.

There’s no real details on the key employees scheme, other than payments will be in fixed amounts, paid quarterly.

[UPDATE 02-16-20 Having reviewed the document filed with the bankruptcy court there are 13 employees in the senior executive plan. In the key employee plan there are 1,112 employees expected to receive a retention bonus worth a total of $79.4 million, an average of $71,403 each].

A reminder of how the company got into this mess

The bankruptcy stems from McDermott’s disastrous acquisition of fellow Houston company, CB&I in May 2018 for $4.1 billion ($2.4 billion cash, $1.7 billion stock). CB&I had a lot of legacy Engineering & Construction projects that have turned out to be much less profitable than McDermott expected at acquisition.

The costs to complete estimated at acquisition on just 3 projects (Cameron LNG, Freeport LNG and Calpine Power) increased by over $1 billion. As a result, the goodwill on CB&I ended up being $4.8 billion. McDermott wrote down $2.1 billion in goodwill 7 months after acquisition. That’s a quick destruction of shareholder value!

After the deal closed, Mr Dickson received a 25% increase in base salary to $1.125 million and a $1.125 cash bonus for completing the acquisition.

SEC filing – McDermott bankruptcy bonuses

20-30336 doc 367 – McDermott incentive scheme filed with Bankruptcy court

Houston tax preparer found guilty of fraud

Winfred Fields, a west Houston tax preparer, has been found guilty of 15 counts of fraud and tax violations. This follows a two-week jury trial.



Fields operated tax and book-keeping businesses from an office on Richmond Avenue in the Westchase area of Houston. They operated under the business names of Fields Enterprises, Your Tax Professionals and The Tax Boss.

Fields falsely claimed that offshore oil workers from the UK, Spain and New Zealand, who were working on vessels on the Outer Continental Shelf of the USA, were exempt from US tax. He charged a fee of $2,500 for each crew member’s first return and a $1,000 fee for each return thereafter. Fields required direct receipt of the funds so that he could negotiate the checks and take his fee off the top.

Fields agreed to provide the remainder of the refund proceeds to the foreign clients. He did that for a while, but ultimately stopped forwarding any money to the workers.

The jury heard that Fields fraudulently obtained $3.1 million in tax refunds from the IRS. He kept approximately $1.3 million for himself.

Up to 20 years in prison

Sentencing is set for May 2020. At that time, Fields faces up to 20 years for one count of conspiracy to commit mail and one count of wire fraud. For the other 13 tax fraud convictions, he also faces up to three years in federal prison. He may also be ordered to pay restitution to his victims and up to $250,000 in fines.

Not the first time Fields has been in trouble

This isn’t the first time that Fields has been in trouble with the authorities. Back in 2008, he settled charges with the Securities and Exchange Commission (SEC) over his role in a ‘Pump and Dump’ scheme involving Aimsi Technologies, a Tennessee-based company. Fields was required to pay disgorgement of $350,000 and prejudgment interest of $64,000.

In December 2006, Fields settled with the SEC over his role in a different ‘Pump and Dump’ scheme involving a company called OSF Inc. He was barred from serving as an officer or director of a public company for five years.

 

https://www.justice.gov/usao-sdtx/pr/jury-convicts-tax-preparer-fraud-and-tax-violations

Houston economy showed steady growth in 2019

Jobs in Houston in 2019 grew by 1.6 percent (49,000 jobs).  This is according to the latest economic indicators published by the Federal Reserve of Dallas. That rate is actually below the metro’s historical average of 2.1 percent.The main sectors to change were:

  • Professional & business services (+21,400)
  • Education and health services (+10,800)
  • Construction (+8,600)
  • Trade transportation and utilities (-1,700)
  • Mining – meaning E&P (-1,000)



The Houston unemployment rate dropped slightly to 3.7 percent in December. That’s above the Texas and US rates (both 3.5 percent).

According to NAI Partners, the overall Houston office vacancy rate stood at 21.1 % at the end of December. That is down 0.7 per cent on the previous quarter, but up slightly year-on-year. The market actually absorbed 843,000 sq ft in 2019, the highest yearly figure since 2014. This was overshadowed by the 1.7 million sq ft of new office space coming onto the market. Currently, a further 3.3 million sq ft is under construction (38% spoken for).

Houston’s industrial vacancy rate at the end of December was 6.9% (41 million sq ft) , up 1.5% on a year ago. The rising vacancy rate was also caused by 9.6 million sq ft of new construction completed in 2019.

https://www.dallasfed.org/research/indicators/hou/2020/hou2002.aspx

NAI Partners – Houston office Q4 19 Market overview

NAI Partners – Houston Industrial Q4 19 Market overview

 

 

Seismic company states that former management misappropriated nearly $17 million

SAExploration Holdings has restated its annual report for 2018 and selected financial data going back to 2014. As a result, at December 31, 2018, stockholders’ equity swung from equity of $15.4 million, as originally reported, to a deficit of $17.4 million!



Furthermore, the company states that former CEO Jeff Hastings and former CFO Brent Whiteley misappropriated $16.6 million between 2012 and 2019. Not surprisingly, the company stated that the Securities and Exchange Commission and the Department of Justice are conducting parallel investigations.

SAEX is a global provider of seismic data and processing services. It has its head office in west Houston. It currently has a market capitalization of $13 million.

At some point in 2019, the SEC started an investigation in relation to revenue recognition, accounts receivable and tax credits. In August 2019, the Board established a special committee of independent directors to oversee an external investigation with respect to the matter.

Vendor and customer secretly controlled by CEO and CFO

The special committee identified that Global Equipment Solutions, one of the company’s vendors in 2015 and 2016, was actually formed by Brent Whiteley and controlled by Mr Whiteley and/or Mr Hastings. The company paid $12 million to this entity in these two years.  $5.9 million of this ended up being a capital contribution to a company called ASV. The company had originally recorded third party revenue from ASV in 2015 and 2016 of $84 million and $57 million respectively.

In the original 10-k filing, nearly all of that revenue from ASV in 2016 was still outstanding as a receivable in 2018. There was also a convoluted explanation about how the customer – ASV wasn’t named in the 2018 financial statements – was going to pay SAEX using monetization of exploration tax credits from the state of Alaska. That got the attention of the SEC. In the restated financials, this receivable was written off and ASV has been consolidated as a variable interest entity.

Consulting firm secretly controlled by CFO

Furthermore, from 2012 to 2019, payments of $4.1 million were made to a company called RVI Consulting. This was secretly controlled by Mr Whiteley. The payments were originally recorded as legal and professional expenses.

The special committee also identified the misappropriation of $0.5 million in 2013 in relation to the reimbursement of the individual tax liability of Mr Hastings.

In total, the amount of funds that the company states was misappropriated was $16.6 million ($12+$4.1+$0.5 million).

The company fired Mr Whiteley in August 2019. It suspended Mr Hastings on the same day and terminated him in November 2019.

The aftermath

The company has spent $6.9 million in legal and professional fees in relation to the SEC investigation in the nine months ended September 30, 2019. For good measure, the Alaskan Department of Revenue is also conducting an investigation into the issuance of tax credits and may impose its own sanctions.

The company has been selling off assets to try and improve its financial situation. In November it sold its assets in Australia for $9 million. In January, 2020 it sold certain seismic data assets for $15 million plus a possible earnout of $5 million.

At September 2019, the company had debt of $119 million and negative equity of $31 million.

https://www.sec.gov/Archives/edgar/data/1514732/000156459020003869/0001564590-20-003869-index.htm

Houston accounting firm barred from performing public company audits

LBB Associates and its managing partner and majority partner, Carlos Lopez, have been barred by the Securities and Exchange Commission from performing public company audits. Or in the language of the SEC ‘LBB and Lopez are denied the privilege of appearing or practicing before the Commission as accountants’.



LBB, based in NW Houston, has two partners and approximately eight accountants on staff. It has about 28 public company clients. The stock of these clients is generally not publicly-traded but the clients follow SEC rules and filing requirements.

The case arose out of the collapse of an audit client, Behavioral Recognition Systems in 2015. At the time, that company was owned by Ray Davis. The SEC later filed a complaint against BRS and Davis. It alleged that they engaged in a fraudulent scheme to raise $28 million from BRS investor funds and divert $7.8 million for Davis’s personal use. The SEC alleged that Davis used the funds to purchase ancient jewelry, gold and other artifacts. Davis allegedly tried to cover his tracks by submitting fake consulting invoices to BRS from two related companies that he controlled.

The alleged fraud was discovered shortly after Davis sold the company in July 2015. However, Davis died in July 2018 before the case could be concluded.

The SEC started disciplinary proceedings against LBB in January 2019, alleging professional misconduct. The primary allegation was that Lopez relied on BRS management representations concerning the related party transactions and failed to perform any audit work around them.

Without admitting or denying the findings of the SEC, LBB and Mr Lopez agreed to the sanctions imposed. After two years, Lopez and LBB may apply to the Commission to be reinstated. However such future work would have to be reviewed by an independent audit committee of the public company.

https://www.sec.gov/litigation/admin/2020/34-88140.pdf

Houston man guilty of Hurricane Harvey fraud

Robert Kaitho, 56, has pleaded guilty to money laundering in connection with his scheme to defraud the Small Business Administration (SBA).

Kaitho applied for government assistance in reference to a property in NE Houston. Kaitho stated that the house sustained damage in Hurricane Harvey, when, in fact, it hadn’t. He falsely represented to the SBA that he would use the disbursed funds to rehabilitate the affected property.



SBA disbursed a federally-funded disaster loan to Kaitho for $71,100. He used the money to pay $25,000 to a mortgage company. Kaitho, who grew up in Kenya, also made a $30,633 wire payment to an individual located in Kenya.

Sentencing is set for June 1. At that time, Kaitho faces up to 10 years in federal prison and a $250,000 maximum possible fine.

https://www.justice.gov/usao-sdtx/pr/houstonian-convicted-scheme-linked-hurricane-harvey

Two Houston residents sentenced in ‘Pump and Dump’ Securities Fraud

Two Houston-area residents have been sentenced for their role in a $40 million ‘Pump and Dump’ securities fraud. John Brotherton of League City was sentenced to 60 months while Charles Grob received a sentence of 12 months.




Brotherton and Grob were also ordered to forfeit $1.9 million and $242,907 respectively, and serve three years of supervised release following their sentences. The court also ordered each man to pay restitution to the victims of the fraud. The amount will be determined at a later date.

Brotherton pleaded guilty in February 2019, while Gobb admitted his guilt in December 2018.

Five others – Andrew Ian Farmer, 41, Thomas Galen Massey, 49, Eddie Douglas Austin Jr., 69, and Carolyn Price Austin 65, all of Houston; and Scott Russell Sieck, 61, of Winter Park, Florida, also pleaded guilty for their respective roles in 2018 and will be sentenced later this year.

Chimera Energy

The original indictment involved the stock of a Houston oilfield services company called Chimera Energy Corp. In the summer of 2011, Farmer met Grob and Mr Grob agreed to become the CEO. Chimera was incorporated and a sham Initial Public Offering was conducted in December 2011 and January 2012.

Farmer and his associates recruited individuals to act as straw investors in the IPO which, in total, raised $75,000.  In correspondence with the FINRA regulator, Farmer concealed the extent of his involvement and got clearance from a broker-dealer to publish quotations for the stock. Farmer then got the straw investors to transfer their stock to entities he controlled.

During 2012, Farmer issued fake press releases touting cutting edge technologies in ‘NEW SAFE FRACKING that uses ZERO WATER’.  The share price rose to a high of $1.55 and Farmer sold 6 million shares for $4.6 million. The SEC suspended trading in October 2012 and announced initial charges in 2014.

Superseding indictment

A superseding indictment was filed in July 2017 which accused the defendants of ‘pump and dump’ schemes in 11 other penny stocks. Those schemes operated between September 2011 and June 2016 and caused losses of $40 million.

Brotherton participated in “war room” strategy meetings during which he and others formulated the “story arcs” for the various Issuers. He also coordinated promotions for the Group’s pump-and-dump schemes through late 2013. Brotherton later rejoined the Group’s scheme in 2015 in which he assisted in formulating promotional strategies and received distributions of illicit stock sale proceeds.

https://www.justice.gov/usao-sdtx/pr/two-sentenced-securities-fraud-conspiracy

Indictment – Farmer et al

Houston oilfield services company going dark

Parker Drilling (market cap $270 million) will voluntary delist its common stock from trading on the New York Stock Exchange, effective February 10, 2020. This is commonly referred to as ‘going dark’.



The company has annual revenues of $600 million and provides drilling services worldwide, using both company-owned and customer-owned rigs. It also has a rental tools division.

The company was formed in 1934 in Tulsa. It went public in 1978 and moved its head office to Houston in 2001. In December 2018, the company entered bankruptcy proceedings. At that time the shares were delisted from the NYSE.

Chapter 11 resulted in debt being reduced from $585 million to $210 million, with the bondholders gaining a controlling equity stake. Existing shareholders ended up owning only a small fraction of the new equity. After the company came out of bankruptcy in March 2019, the company’s shares regained their listing on the NYSE.

The company has now elected to buy out the small shareholders to get its number of stock holders below 300. Below that level, the company is not required to file public reports with the SEC. By delisting the company expects to save $800,000 per year.

The company is currently without a CEO. Back in July 2019, the company announced it was parting with longtime CEO, Gary Rich, at the end of 2019. Mr Rich received a cash severance of $1.5 million (1x base salary and target bonus). At the time of the announcement, the company said it would engage a search firm to find a successor. No successor has yet been named.

SEC filing – Parker Drilling delisting

 

Bryan bookkeeper charged with using company card for $850k personal use

James Day Burke, a bookkeeper with Rustex Inc, has been charged with using company credit cards for his own personal use. He was employed at the company from 2010 through August 2018. The fraud allegedly took place throughout the whole of that time.



Rustex is a small oilfield services company involved in the construction and maintenance of natural gas plants. It is based in Bryan, TX. It used Quickbooks for its accounting records.

Mr Burke charged expenses to the company credit cards and was responsible for paying the credit card issuers from the company bank account.

The information charge sheet alleges that Mr Burke stole $855,872.43 from Rustex. However, only one specific instance is identified in the information sheet, namely a $1,954 dental bill in August 2015.

If convicted, Mr Burke faces a possible sentence of up to 20 years in federal prison and a $250,000 maximum fine.

https://www.justice.gov/usao-sdtx/pr/former-oil-and-gas-employee-charged-using-company-card-850k-personal-use

SEC bars two Houston brokers involved in Ponzi scheme

The Securities and Exchange Commission (SEC) has barred Donald Mackenzie and Robert Davis from being associated with any registered financial broker. The case arose out of the collapse, in December 2017, of the Woodbridge Group of Florida in a $1.3 billion Ponzi scheme. Approximately 8,400 retail (mostly elderly) investors lost money.



Mackenzie owned Old Security Financial Group in Spring. Robert ‘Lute’ Davis was a Vice-President at the company. Old Security acted as an unregistered broker by selling securities of Woodbridge.

Mackenzie and Davis are two of 20 brokers around the country charged by the SEC as marketing the investments as ‘safe’ and ‘secure’. In fact, money from new investors was used to repay earlier ones.

The SEC alleges that Mackenzie and Davis sold investors two types of securities;

  • 12 to 18 month promissory notes bearing 5-8% interest that Woodbridge described as First Position Commercial Mortgages
  • 7 different private placement fund offerings with five-year terms.

Ads were placed in Texas Monthly and on KPRC AM 950 in Houston.

$2 million commissions

Between May 2014 and July 2015 Mackenzie and Davis received sales commissions of between 1-4% on the first type and 5% on the second type. However Woodbridge deliberately mischaracterized them as marketing bonuses. Mackenzie and Davis allegedly received $2 million in commissions earned as a result of raising $41 million through the sale of Woodbridge securities.

For now, without admitting or denying the findings of the SEC, Mackenzie and Davis have agreed to be barred from association with any broker, dealer or investment adviser. Also, they cannot participate in any offering of a penny stock.

The case is still ongoing in the District Court for the Central District of California. Mackenzie and Davis, if found guilty, may have to pay back the commissions as well as penalties.

Woodbridge CEO sentenced to 25 years

In October 2019, Robert Shapiro, the former CEO of Woodbridge, was sentenced to 25 years in prison. He pleaded guilty to tax evasion and running a $1.3 billion fraud. He admitted to taking between $25 million and $95 million of investors’ money. Shapiro used it to buy real estate in the Los Angeles area, global travel, jewelry and diamonds.

The SEC has settled with some of the other brokers involved in the scheme.

Run-ins with the regulators

Mackenzie and Old Security has had a number of run-ins over the years with courts and regulators.

  • 2001 – Old Security is sued by the SEC for commissions received for the sale of unregistered securities in Alpha Telecom. He was ordered to pay $79,000 in 2005.
  • 2005 – Sued for receiving commissions received for the sale of unregistered securities in Mobile Billboards. In 2008 a court in Atlanta ordered Mackenzie to pay $153,000.
  • 2012 – Texas Commissioner of Insurance ordered Mackenzie to pay a penalty of $20,000 for selling life insurance without a license.
  • 2016 – Mackenzie and Davis were fined $100,000 by the Texas State Securities Board for selling the Woodbridge securities in Texas even though they were not registered.

SEC Litigation – Mackenzie.pdf

SEC Litigation – Davis.pdf