For almost two years, minority shareholders of U.S.-based Isramco Inc. have been waging a legal battle against the company's controlling ownership, in a tangled case that could have been lifted right out of a thriller.
Isramco Inc. shares are traded on Nasdaq at a company value of $196 million. It owns about 1,500 oil wells in the United States, mostly in Texas and New Mexico. The company is controlled by Jacob (Kobi ) Maimon and Haim Tsuff, who also control Israel's Isramco Negev 2 Limited Partnership, which holds a 28.7% stake in the massive Tamar natural gas field.
Elements of the story begin to be aired this week as the sides face off in a Houston courtroom. The drama kicks off with the testimony of Dennis Holifield, a key witness for the plaintiffs who resigned from the company last month after serving six months as its vice-president and general counsel.
Upon resigning, he enlisted as a whistleblower for the U.S. Securities and Exchange Commission. Holifield's gripping deposition on his impressions of the company's doings was attached to an objection filed by investor Yuval Lapiner against a proposed settlement between the litigants.
According to Holifield, it became clear to him that Isramco is corrupt and that its subsidiaries have been terribly mismanaged.
"There is clear evidence of concealment, self-dealing, fraud, malfeasance, misrepresentation of material facts, deliberate non-payment of monetary obligations, failure to timely file required reports, filing of false reports, intentional mismanagement of valuable assets, and countless other failures," he writes.
Holifield also accuses the company of defrauding investors with regard to the company's U.S. oil reserves by juggling output between wells and by holding a secret Swiss account at FIBI Bank, accessible only by Tsuff. Holifield's litany of charges against company management extends to tax fraud, secretive payments to offshore companies and a vast range of other misdoings.
Holifield states that it became clear to him that the company was directed solely and exclusively by Tsuff, its CEO, and that he witnessed "a clear pattern of conduct to evade laws and regulations, misuse [of] power, misuse of the assets of the company, and to commit fraud."
He goes on to describe a situation whereby Tsuff, a resident of Israel and Holland, exercised tight control over company management from afar through extensive use of emails and text messages with his confidants - the company's assets manager, Amir Sanker, and CFO Edy Francis.
The sale of MediaMind
Isramco's board of directors decided in February 2011 that IsramTec, a fully-owned subsidiary, would sell its MediaMind Technologies stock, with the proceeds going toward paying down related-party loans, attests Holifield. Tsuff, however, subsequently asked him to transfer the shares to the company's Swiss bank account, he claims, but technical obstacles prevented this from occurring.
The shares were eventually sold to DG Acquisitions, an Israeli company, for $16.1 million. The company was required to pay 24% tax on the sale but would have been exempt had the shares been purchased after August 2010 - when MediaMind was floated on the NASDAQ. According to Holifield, he was told by the company's CFO that the shares were bought in 2000 and duly listed that date on the form, despite documentation that some of the stock was acquired in the initial public offering.
When the bank transfer for $12.2 million (after tax withheld ) was received, Francis accused Holifield of "losing" $4 million. Holifield says he reminded Francis that the stock was bought in 2000, adding that he wouldn't file a false report, but states that Francis then "made it very clear that both he and Tsuff expected to get the exemption and the tax was withheld because I 'filled the paperwork out wrong.'"
The vice-president of Isramco Inc. responded: "The company is trying to obtain [through the accounting firm of Ernst and Young] a withholding tax exemption from the Israeli income tax authorities in accordance with the law, and Mr. Holifield's grievances on the subject aren't at all clear to us.
"The company accepted a purchase offer for its MediaMind shares [generating tens of millions of shekels in profit for the company ). The company used some of the proceeds to pay off loans extended by its parent companies [in accordance with a decision by the company's board] and some was used for the company's ongoing operations. Mr. Holifield's claim about this is entirely unclear."
The sale proceeds weren't used to return loans to related parties, according to Holifield. A good part of the money was directed toward financing work in the oil fields. Francis and Tsuff rejected Holifield's request to record the change in the money's designated use and to inform the board members. When he raised the issue with Tsuff again in September he was told: "I run the company, not the directors, not the stockholders - no one but me."
Holifield also claims that Tsuff and Francis "acted in concert to defraud the directors of compensation rightfully and lawfully due them, totally ignoring the action of the Compensation Committee in increasing the compensation."
Another matter withheld from the board, as outlined in Holifield's deposition, was the formation of a limited liability company (LLC ) for servicing oil wells. The LLC was intended to become an 80% owned subsidiary of Isramco.
Holifield also says that he was instructed by Francis to establish three LLC entities registered in New Mexico - AAA Well Service, AAA Oilfield Service, and AAA Fishing and Tool Rental. "This is a series of transactions that became more complex over time, and showed a series of deceptions and concealments by management," he charges.
Holifield claims he "was 'allowed' into this series one transaction at a time [basically manipulated by senior management]," adding: "It is very important to note that other than Tsuff himself, none of the other board members was informed of or consulted on any of these transactions."
In settling the lawsuit brought by shareholders, Isramco Inc. agreed to improve its corporate governance such that related party transactions would require board approval, and unrelated external directors would be appointed. Holifield alleges that Tsuff, Francis and Sanker gave the impression that none of them "had any intention whatsoever to actually follow any of the corporate governance reforms agreed to," considering these, and the lawsuit settlement, as being merely "window dressing."
Isramco Inc. calls this assertion "a baseless and outright lie," adding: "It should be pointed out that Tsuff, along with company management, is working to implement the agreed settlement. The company is investing much effort in applying proper corporate governance standards."
The moving oil claims
One of Holifield's claims is that Isramco transferred oil from one well to another in New Mexico, to fool the regulators into thinking all its wells were operational.
For years, Isramco failed to meet the rules of the New Mexico Oil Conservation Division, because of the small number of active wells it was operating.
The division began taking action against Isramco in 2009, after which the company undertook to get a minimal number of wells operational within two years. To do so, the company has to carry out annual mechanical integrity tests on each well. If a well fails the test, the company has to carry out repairs and make it productive again - or relinquish it.
Holifield claims Isramco lied about the state of some of its wells. The JFG1 well was stated to have been restored to production using a pump-jack system. Holifield claims the only thing it pumped was water. Isramco had three barrels of crude oil transferred from another site before the division inspector's arrival, he alleges.
JFG1 wasn't the only unit to miraculously start pumping oil, he avers: The same happened with the Bess 2 well, which failed its mechanical integrity testing, but there is no documentation of repair to the leak it had sprung. Again, Holifield says, a pump was brought in that produced only water, and again, oil was brought from elsewhere.
The company stated in response that Holifield claims of oil being brought from a productive well to a dry one before inspections are groundless and attests to his lack of familiarity with the material.
The Swiss bank account
It was with the sale of the MediaMind shares that Holifield first became aware of the company's Swiss bank account, to which only Tsuff had access and signatory rights. Transfers to and from the account were frequent and he never knew why, Holifield testified. When he asked Francis if the account had been properly disclosed to the authorities, he never received an answer, he says.
Isramco commented that it has a Swiss account and, like all its accounts, that the Swiss account has been disclosed to the tax authorities and is audited.
The company's chief finance officer added that Holifield's allegations are groundless, "to put it mildly": He had been employed by the company for just six months and his claims were raised after his termination, together with personal charges about his employment terms, the CFO said, adding that Isramco complies with all SOX regulations. There were no unexplained payouts to any offshore company; all payments were documented, he said.