The Alaska Supreme Court on Friday rejected a lower court ruling that the Native corporation Cook Inlet Region Inc. had to pay damages to a former business partner, John Ellsworth, who cheated it out of more than $7 million.
In reversing the 2007 trial court ruling, the Supreme Court said that Ellsworth's "fraud and willful misconduct" instead required him to pay millions in damages to Alaska Interstate Construction, an oil-field contractor owned 50-50 by CIRI and drilling giant Nabors Industries. Ellsworth managed AIC and, for a time, was a minority owner in it.
Tim Petumenos, a former prosecutor who fought Ellsworth in the lengthy Superior Court civil case, said he expects the high court decision will result in a net win for CIRI and Nabors in the mid-$20 million range.
"The Alaska Supreme Court in this decision set the public record straight about the integrity and business practices of key Alaska oilfield service operators," CIRI said in a prepared statement Monday. "AIC, CIRI and Nabors were direct victims of Mr. Ellsworth's fraud and misconduct and AIC's business has suffered because of his unfair trade practices and breaches of duty."
Ellsworth, who now owns Alaska Frontier Constructors, an oil-field contractor in Anchorage, and his attorney, Paul Stockler, didn't return messages requesting comment.
Anchorage-based CIRI and Nabors Industries, a company once headquartered in Houston but now based offshore in Bermuda, bought Alaska Interstate Construction from Ellsworth in 1995, then asked him to stay on and run it. Three years later, CIRI and Nabors gave him 20 percent of AIC as an encouragement to continue its profitable operations.
Ellsworth, who had no formal education beyond high school, had been with the company since at least the early 1980s as an employee, then bought it out in 1987. 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.
But its practices turned out to be illegal -- Ellsworth was secretly reimbursing employees for their donations. He and his employees were fined a then-record $98,500 by the Alaska Public Offices Commission.
As CIRI's employee and then partner, Ellsworth continued to play loose, according to evidence in the court case. The two larger partners charged that Ellsworth cheated them with lavish spending and by using his own companies to provide services to AIC, like jet leases, then charging well above market rates and sometimes double billing. They also accused him of paying improper bonuses, shredding evidence of financial abuses, forging documents, and stealing away a key contract and other company assets when he was ousted in 2005, in violation of a non-compete clause in his contract.
The lawsuit became a watershed for CIRI, marking the end of the Carl Marrs era in a public airing of the excesses of the time. Marrs was CIRI chief executive from 1995 to 2004, and was responsible for overseeing Ellsworth.
"Marrs never actively supervised or scrutinized ... Ellsworth, but rather allowed him carte blanche to manage AIC," the Supreme Court decision said.
At the same time, Ellsworth allowed Marrs and other CIRI officials to use the AIC jets and a fishing lodge in the Bristol Bay region leased by AIC at Marrs' request. Then-U.S. Sen. Ted Stevens was a regular guest at the lodge, paying for a four-day stay in 2002 from campaign funds but nothing for similar visits in 2001 and 2003 until the Daily News inquired about the matter in 2006.
Marrs testified that AIC under Ellsworth was one of the CIRI's biggest money makers, so he allowed Ellsworth to operate unchecked. But Roy Huhndorf, the chief executive of CIRI before Marrs, testified that he came out of retirement and returned to CIRI out of concern that Marrs and Ellsworth were wasting shareholder money on extravagances.
Huhndorf joined the CIRI board in 2002 and in 2004 led the effort to not renew Marr's contract. With Marrs gone, Ellsworth wanted to leave AIC, precipitating the angry breakup when CIRI began to examine AIC, Huhndorf testified.
"The superior court found that (Ellsworth's management company) did not expect the operating agreement to be enforced and that it would not have been enforced if Marrs remained at the helm of CIRI..." the Supreme Court decision noted.
The trial lasted more than two months. When the case concluded before Superior Court Judge Sen Tan in October 2007, it was Ellsworth and his attorney, Paul Stockler, who declared victory.
"We got 100 percent of what we asked for," Stockler said at the time.
Stockler and Ellsworth left the courtroom ahead about $4 million -- $12 million on the plus side for Ellsworth's share of his one-time ownership of Alaska Interstate and legal fees minus $7.8 million that he unlawfully took from the company when he managed it for CIRI and Nabors.
But their fortunes were reversed by the unanimous 4-0 Supreme Court decision (one justice represented a witness in the case before joining the court and didn't participate). Now CIRI and Nabors will likely get their legal fees paid by Ellsworth on top of the jury verdict against Ellsworth and his management company, Pacific Diversified Investments, for fraud and breach of fiduciary duty. The verdict was for $7.3 million, but the state's Unfair Trade Practices Act multiplies it by three, to nearly $22 million.
Judge Tan said the treble damage award of the act didn't apply, but the Supreme Court overruled him.
CIRI and Nabors will still have to pay Ellsworth for his 20 percent stake in AIC, but at AIC's market value at the time, not the extra premium he won in 2007. The jury had ruled that Ellsworth should get the premium price because it was part of his operating agreement with CIRI and Nabors.
But the Supreme Court said Ellsworth breached the operating agreement by his fraud and therefore wasn't entitled to the extra payment. Instead, Ellsworth's share of the company, based on market value, was just under $4 million, the Supreme Court said.
The Supreme Court sent the case back to Tan to determine legal fees.
Reach Richard Mauer at rmauer@adn.com or 257-4345.
By RICHARD MAUER
Anchorage Daily News