The mysterious winners of a $644 million arbitration against PDVSA

CORRECTION 21 October 2015:

I have learned that the billion-dollar contract referred to in this report was not just for ship rental. It was also for the provision of ship crews, divers, and geotechnical engineers, and other professionals for the full project of pipeline mapping, repair and replacement.

AND AN UPDATE: Pdvsa said in its 2014 annual report that it paid this award.

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PDVSA, Venezuela’s state oil company, released financial statements last month. One of the more remarkable items in there was a $644 million loss for an arbitration award in a case that I had never heard about before — and no Venezuela expert I’ve talked to had heard about, either. This is all that PDVSA has ever disclosed about the case:

In November 2013, the award related to the arbitration request filed by Gulmar Offshore Middle East LLC and Kaplan Industry Inc. was issued against PDVSA, corresponding to early unilateral termination of contract by PDVSA. The award established a compensation of $644 million.

That is a tremendous amount of money. I wrote last week in REDD Intelligence (subscription needed to read) about what this surprise means for Venezuela’s country risk. Here, I’m going to focus instead on what we know about the companies that won this money.

I had only heard of Gulmar Offshore as one of a long list of companies with assets that Venezuela expropriated back in 2009. I had never heard of Kaplan, as it was misspelled in the initial announcement (good English analysis here) as “Kapplan.”

Gulmar was, and is, a company that leases vessels for undersea projects in the oil industry. It was later purchased by Oaktree Capital Management (more on them later). Back in 2009, I had a hard time reaching them; for this article the one phone number I found didn’t even ring and Oaktree’s lawyer didn’t respond to an e-mailed request for comment.

Kaplan is more difficult to pin down. Bloomberg said that Kaplan was a gas-cylinder manufacturer from New Jersey. Oops! That’s Kaplan Industries.

Kaplan Industry website, unchanged since 2010

No, this was Kaplan Industry. At the top of its web page, it says it’s “An engineering design firm.” Then in the text, it’s “a leading independent international development consultancy.” The confusion may have come about as the website was thrown together, almost entirely plagiarized from other sites. The home page is from Adam Smith International, some of the “About” page is from Secunda Canada, and the line “Having fun inspires creativity, which rouses fresh ideas that we take to our clients” is from Zain Public Relations. Yes, having fun inspires creativity. And nothing demonstrates creativity like “copy-paste.”

No one answered at any of the three phone numbers listed on the website. Company president Vince Hulan didn’t respond to e-mails sent to the address on the website, including one e-mail asking specific questions about the plagiarism and other concerns raised in this article. Four lawyers connected to the company and its principals also failed to return calls and e-mails.

The Kaplan website is really amusing if you try to take it seriously. It says Kaplan works all over the world but I have found no evidence of Kaplan offices in any country other than Panama. It says Kaplan is an engineering firm but provides no evidence that anyone involved in the company is an engineer, and Kaplan didn’t respond to my question of whether they had any engineers on staff. The “Fleet” page and “Contact” page are just Times New Roman apologies for being “under construction,” and the page has a background image straight outta 1996. A laugh riot, but now a potentially very rich laugh riot. Worth a closer look.

Happily, the job of learning about Kaplan (and the Kaplan-Gulmar Consortium) is made easy by the fact that Kaplan and one of its principals were involved in three US federal lawsuits, the paperwork for which can be downloaded from the US’s PACER system. Those files reveal the timeline of how Kaplan got involved in Venezuela.

In 2007, Kaplan and Gulmar signed an association agreement. Together, they negotiated a lucrative contract with PDVSA. They agreed to lease three vessels to the Venezuelans for five years. The ships were the Gulmar Eagle, the Boa Rover (later to be replaced by the Gulmar Pelican), and the Adams Arrow. These vessels were for surveying and pipe maintenance and construction in Lake Maracaibo. The total fee for the contract was to be a little over $1 billion. You might remember that 2007–2008 was a time when oilfield services were overpriced. Prices kept rising with the oil bubble. PDVSA executive Jose Luis Parada signed the five-year leases May 23 2008, with oil trading above $130 a barrel for the first time. Around then, President Hugo Chávez was crooning about peak oil and how the “fair price” for oil was $100 a barrel. I don’t know if the $1 billion figure was just a result of the inflated prices of the time or whether PDVSA overpaid atop that. In any case, $1 billion.

Key moments in the Kaplan-Gulmar adventure in Venezuela, mapped to WTI oil price from 2007 to 2009.

By August, prices had dropped below $130 again. By the end of the year, prices had collapsed to less than $40. Late in the year, PDVSA stopped paying its bills to just about everyone. In May 2009, as service companies threatened to stop work over outstanding debts, the government seized the vessels, along with assets of 73 other maritime companies on the shores of Lake Maracaibo. The state refused to let the ships leave the lake for months, saying they had been nationalized. They finally sailed away in December. Papers filed in the US cases said the vessels fulfilled 14 months of the five-year contract, and three months of that plus demobilization costs were paid for by a bank guarantee that PDVSA provided up front. So it appears that this arbitration was basically over 11 months of work by three vessels, followed by several months of their being improperly held in Lake Maracaibo.

Unfortunately, details of the case that ended with this bonanza award isn’t in the public record. (Dear arb lawyers, I can see you reading, and I know you want to send me documents, right?) All we know for sure is what PDVSA says: the award was for the early termination of the contracts. Given the size of the contract, a $644 million award is the right order of magnitude, but it sounds huge, considering that the companies executed less than a quarter of the work.

I’m not sure, but it sounds to me like Kaplan and Gulmar won not because they were unpaid for their hard work but rather because they wrote good contract. For the money lost in this award, PDVSA could have just kept paying the fees and kept those vessels active in Lake Maracaibo. But I digress. What’s more interesting is that Kaplan was involved in this billion-dollar deal in the first place.

Executive accused of self-dealing

In 2007, when Kaplan was negotiating this deal, a gentleman named James Joseph Mermis was CEO of the Houston-based offshore drilling company Superior Deepwater. He took the company public in 2007, but it collapsed in 2008 as it was unable to sustain the rapid growth it had experienced in the wake of hurricanes Katrina and Rita.

Superior blamed Mermis and other executives for contributing to the company’s failure. The company sued and accused him and other executives of looting the place for personal gain. He left Superior in January, 2008, according to the company lawsuit against him.

Shareholders also sued. One of their claims relates to Kaplan (my emphasis):

Prior to and around the time of the IPO, Mermis worked to obtain a Venezuelan project for the benefit of another company rather than for Superior. CW [confidential witness] 2, a former employee who was a receptionist and executive assistant during the Class Period, and CW 1 reported that, while Superior Offshore’s CEO, Mermis billed the Company for trips to Venezuela made to procure a client for the Kaplan Industry – the company that Mermis would eventually join after resigning from Superior Offshore.

Oh owly how I’ve missed you.

To repeat, they claim Mermis took trips to Venezuela to set up a deal for Kaplan, while still working as CEO of Superior — and even allegedly billed Superior for his travel. In a court filing, Mermis and his codefendants denied “each and every allegation” in that paragraph. Mermis and his lawyer in the case didn’t respond to two phone calls and an e-mail requesting additional comment.

As though that weren’t bad enough, the plaintiffs don’t recognize the depth of Mermis’s divided loyalties. He wasn’t just preparing a relationship with Kaplan for after he left Superior. Rather, he was working for Kaplan even while he worked for Superior. According to the company lawsuit, Kaplan started work as chief operating officer of Superior in February 2005. Just the prior month, Mermis’s name appeared as corporate secretary of a company on papers filed in Panama:

That is a page from the founding document of Kaplan Industry, copied from Panama public records. It shows that Mermis was the founding corporate secretary for Kaplan. The next document in the company file is from June 25, 2007, when a new corporate secretary was appointed. Assuming these records are accurate, Mermis was an officer of Kaplan when he became COO of Superior and stayed with Kaplan until two months after he became CEO of Superior.

Fiduciary responsibility is for little people.

Was Kaplan even necessary?

Another odd aspect to the initial contract was that Gulmar could possibly have leased the ships directly to the Venezuelans. Kaplan has provided no evidence on its website, court filings or in response to my questions of any prior business experience. Again, court records help us understand.

After PDVSA seized the vessels, Kaplan sued Oaktree (Gulmar’s new owner) for breach of contract, alleging that Gulmar had secretly gone behind Kaplan’s back to try and cut Kaplan out of the contract. One document that Kaplan filed into the record was the association agreement, and another was was this letter to PDVSA from Gulmar. In it, Gulmar says Kaplan was responsible for some project management, human resources, and social programs. Gulmar says the two companies divided “the total amount” of “the contract” 60-40. I think that means Kaplan got 40% of the money.

“the scope of Gulmar was to perform the entirety of the technical work and its part of the contract was 60% of the total amount. The remaining 40% was the responsibility of Kaplan who were responsible for the administrative work Ojeda and the social program”

$400 million for administrative work and a social program. Nice work if you can get it. It’s not that weird for a small, inexperienced company to act as a sort of broker or middleman, but even so, that is a very large sales commission. If Kaplan was really necessary, why did Gulmar see fit to offer to renegotiate the contract without Kaplan?

Overcharging? Never

Third, after the expropriation, each member of the consortium accused the other of overcharging. Gulmar offered to keep the vessels (or something similar) operating in Venezuela for much lower fees, cutting Kaplan out of the deal. One excerpt:

In this case, the discount will be 44% below what the consortium charged.

Kaplan also accused Gulmar of overcharging. For example, Gulmar allegedly said deployment of the Adams Arrow would require a 10,000 mile trip from Singapore, when in fact the ship needed to travel only 2,000 miles. That resulted in “fraudulent” overcharging, Kaplan claimed in an arbitration case filed into the US court record. (Mind, Kaplan did not suggest returning the money to the client. Rather, Kaplan wanted a bigger cut of the cash for itself.)

Cui bono?

So who will get the money from this mammoth award, assuming PDVSA ever pays up?

Oaktree’s OCM European Principal Opportunities Fund II LP bought Gulmar in August 2010. Oaktree is an LA-based investment manager. Back in 2011, Opportunities Fund II was the “largest negative contributor” to Oaktree’s incentive compensation, cutting the incentive fund by $71.4 million. Maybe that will change someday — like the day when PDVSA gives it 60 percent (or whatever part) of $644 million.

Kaplan? Looking at old versions of its website on archive.org show it’s been unchanged since at least 2010. Panama paperwork shows that Randall Vincent “Vince” Hulan is still president, Jesus Ignacio Quintana Lopez is corporate secretary, Alejandro Kapetanakis is treasurer. (I am not sure but I’d guess that “Alejandro” in the Panama documents is the same person as Alexander Kapetanakis, the Florida lawyer who represented Kaplan in its case against Oaktree. He didn’t return a call and an e-mail seeking comment.)

We don’t know if there are other hidden investors behind Kaplan, or if the company has any debts. In any event, if they get 40%, that’s $256 million to divvy up.

Nagging questions

How could PDVSA sign, and then reneg on, a contract that put it on the hook for $644 million for at most 11 months’ rental on three ships? Where is the money going now? How much to Oaktree, how much to Kaplan? Are there unpaid debts that will come out of this payout, either legitimately or not? Did anyone (especially any Venezuelan officials) have a financial stake in this judgment? What were the arguments presented in the case? Was this purely based on the contract or did the aggrieved parties invoke any treaties? Has the award been paid? And finally, the question I explored over on REDD, are there more such contract disputes awaiting adjudication?

There is a happy ending here. At the beginning of July, Kaplan filed a motion with the US District Court for Southern Florida calling off its lawsuit against Oaktree. Now everyone can get along.