The Origins of Katy Industries, Inc.
Katy Industries had an elegant business model, devised by its chairman and CEO, Wallace Carroll. Starting in the 1940s manufacturing gauges to meet war demand, Carroll soon embarked on a program of judicious acquisitions, including the struggling Missouri-Kansas-Texas railroad—the “MKT” from which the parent company eventually took its name. While turning around the railroad’s prospects, Carroll used its residual operating losses as a tax shelter for other promising investments. The company’s holdings soon grew to encompass areas as far afield as electrical equipment, industrial machinery, consumer products, and oil and gas exploration.
Katy’s Business Dealings in Indonesia
This last venture brought Carroll into contact with another massive conglomerate, driven by an altogether different set of considerations. Pertamina, Indonesia’s state-owned oil company, was more than a conduit for converting natural resources into government funds. Under the direction of its President-Director, Lt. General Dr. Ibnu Sutowo, it took upon itself the role of “national development corporation” with projects ranging from steel production to rice farming, hotels to hospitals, monuments to mosques—all made possible thanks to Indonesia’s innovative use of production-sharing agreements, under which foreign companies were contractors receiving a share of extraction rather than owners paying royalties to the government. As the value of oil increased in the early 1970s, Pertamina’s pockets were burning.
An Oil Production Sharing Contract Violates the FCPA
The country’s actual development planners—technocrats known as the “Berkeley Mafia”—weren’t happy with Pertamina’s freewheeling style, but there was only so much reining-in they could do. With its lax bookkeeping and generous spoil-sharing, the company was able for a time to maintain both broad societal approval and the indulgence of President Suharto, even amid swirling allegations of corruption and waste. Things came to a head in February 1975 when it failed to make payment on a relatively minuscule loan of $40 million from a small Texas bank. An investigation revealed massive overleveraging, and Dr. Ibnu ended up under house arrest for a few months before receiving an honorable dismissal from his leadership role in March 1976.
The SEC’s charging documents don’t identify the Pertamina official to whose home Carroll traveled in March 1975 to discuss contract terms—including the appropriate kickback (13.33% of net profits, though payments stopped after 1976). Permanent injunction aside, the entire affair seems little more than a footnote in Katy’s history. Not so much the so-called Pertemina Crisis, whose bailout ended up basically wiping out Indonesia’s foreign exchange reserves.
This post is part of "The FCPA Files" series, examining key enforcement cases under the Foreign Corrupt Practices Act and the lessons they offer for modern compliance. |
For decades, John O’Halloran was the man to see if you wanted something done in Trinidad and Tobago. He had many nicknames—“Johnny O”, “Cockfighting Johnny” and, most notoriously, “Mr. Ten Percent”—and a comfortable home on Flamboyant Avenue in the hills outside Port of Spain. Whatever his official role—from minister of petroleum to chairman of the country’s racing authority—O’Halloran had the ear of Dr. Eric Williams, founder of the People’s National Movement party and Prime Minister from independence in 1962 until his death in 1981.
Among O’Halloran’s many schemes, perhaps the most baleful was the sweetheart deal he arranged for Tesoro Petroleum, a then-small Texas oil company that in 1968 acquired a 49.9% share in the country’s petroleum production with an initial investment of $50,000, the full $10 million to be paid from future profits. When the price of oil soared in the 1970s, the company’s revenues ballooned. O’Halloran got his $2 million—ten percent of the deal’s initial value—and payments continued to be made over the years to a range of “finders” and “consultants” with a hand in the concession’s administration.
The country lived well during the boom years, but the party ended with the oil glut of the 1980s. Recession led to significant cutbacks in salaries and cost-of-living adjustments, and in 1986 the PNM lost its previously unchallenged grip on parliament to the newly formed National Alliance for Reconstruction. Tesoro had left the market by then, selling its share of the operation back to the government in exchange for 3.23 million barrels worth about $200 million. O’Halloran was also out of the picture, having fled to Canada in 1982 after the death of his protector, where he himself passed away in 1985.
The new government, through the efforts of Attorney General Selwyn Richardson, started digging around. They were able to recover a few million from O’Halloran’s son in Canada, and began piecing together the full story behind the Tesoro arrangement. (The SEC’s 1980 consent agreement with Tesoro had addressed the matter only in passing, as one of a number of “finder/consultant” infractions in various countries.) The company eventually agreed to settle the matter for about $3.3 million. The merits of the settlement were under discussion in parliament on July 27, 1990 when the chamber was suddenly overtaken by armed insurgents mounting an attempted coup. The trauma lingers to this day.
This post is part of "The FCPA Files" series, examining key enforcement cases under the Foreign Corrupt Practices Act and the lessons they offer for modern compliance. |
It must have seemed like a great opportunity: three offshore wells in Qatar, pre-drilled, just waiting for someone to reopen them and carry the oil away. When he learned of the concession’s availability in 1975, Gene Holley—chairman of the Georgia Senate Banking and Finance Committee—reached out to an acquaintance, Roy Carver, from whom he had recently bought a private airplane. Holley was paper-rich thanks to some lucky pre-embargo investments in Texas oilfields, but he was also highly leveraged. Carver, a yacht enthusiast who had long-since made his fortune in retread tires, could provide enough liquidity to seize the moment.
As it turns out, the whole thing was a bit of a setup. The wells did have oil, but a sulfurous “sour” type that couldn’t be extracted without exorbitant precautions. That’s why the original investors had walked away—a fact surely known to Qatar’s Director of Petroleum Affairs, Ali Jaideh, when he first pitched the idea to Holley. Ali’s brother, Kassem, had been local agent for Sedco, the abandoned project’s Texas-based drilling contractor. After the project faltered, it was a Sedco executive who found Holley, introduced him to the Jaidehs, and helped hype the wells to the prospective new investors.
Carver and his estate would eventually countersue Sedco for the money he had sunk into the doomed venture, prevailing to the tune of about $13 million. What he couldn’t recover was the $1.5 million Ali had demanded be paid into his brother’s Swiss bank account as a condition of the deal’s approval.
The fact of the payment came to light when an ill-advised attempt to refinance the project was thwarted by the refusal of the new Director of Petroleum Affairs to renew the lease. (Ali Jaideh had moved on to become OPEC’s Secretary General in 1977.) Voicing his frustration in a side meeting with the U.S. Ambassador to Qatar and another foreign service officer, Carver recounted the earlier illicit payment and blurted out: “Who do I go see now, how do I get it done?” The Ambassador balked and the meeting soon ended. A year later, the DOJ obtained a permanent consent injunction.
Carver went back to his globetrotting lifestyle, passing away in Marbella, Spain in 1981. Holley got caught up in a bank fraud scheme and spent 16 months in prison before returning to his home in Augusta and a life of religious contemplation.
This post is part of "The FCPA Files" series, examining key enforcement cases under the Foreign Corrupt Practices Act and the lessons they offer for modern compliance. |