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Land Grab Cheats North Dakota Tribes Out of $1 Billion, Suits Allege

A flurry of lawsuits allege the federal government failed to prevent energy companies from swindling the tribes.

| Tue Feb. 26, 2013 4:06 AM PST
Fort Berthold in North Dakota

This story first appeared on the ProPublica website.

Native Americans on an oil-rich North Dakota reservation have been cheated out of more than $1 billion by schemes to buy drilling rights for lowball prices, a flurry of recent lawsuits assert. And, the suits claim, the federal government facilitated the alleged swindle by failing in its legal obligation to ensure the tribes got a fair deal.

This is a story as old as America itself, given a new twist by fracking and the boom that technology has sparked in North Dakota oil country. Since the late 1800s, the U.S. government has appropriated much of the original tribal lands associated with the Fort Berthold reservation in North Dakota for railroads and white homesteaders. A devastating blow was delivered when the Army Corps of Engineers dammed the Missouri River in 1953, flooding more than 150,000 acres at the heart of the remaining reservation. Members of the Three Affiliated Tribes—the Mandan, Hidatsa and Arikara—were forced out of the fertile valley and up into the arid and barren surrounding hills, where they live now.

But that last-resort land turns out to hold a wealth of oil, because it sits on the Bakken Shale, widely believed to be one of the world's largest deposits of crude. Until recently, that oil was difficult to extract, but hydraulic fracturing, combined with the ability to drill a well sideways underground, can tap it. The result, according to several senior tribal members and lawsuits filed last November and early this year in federal and state courts, has been a land grab involving everyone from tribal leaders accused of enriching themselves at the expense of their people, to oil speculators, to a New York hedge fund, to the federal government's Bureau of Indian Affairs.

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The rush to get access to oil on tribal lands is part of the oil industry's larger push to secure drilling rights across the United States. Recent estimates show that the U.S. contains vast quantities of oil and gas. As fracking has opened new fields to drilling, and the U.S. has striven to get more of its energy from within its borders, leases from Louisiana to Pennsylvania have been gobbled up. Now the pressure is increasing on one of the last sizeable holdouts—lands owned by Native Americans.

A review of tribal and federal records as well as lawsuit documents reveals a dizzying array of lowball, non-competitive deals brokered by numerous companies, often entwined with the tribal council and with individual landholders on the reservation. But at heart the alleged practices are simple: Tribal leaders and outsiders set up companies to buy drilling rights cheap and flip them later for spectacular profits—in one case earning as much as a 200-fold return in just four years.

"Hundreds of millions of dollars were lost," said Tex Hall, the current chairman of the Three Affiliated Tribes, in an interview. "It's just a huge loss and we'll never get it back."

At the center of that particular alleged scheme, according to one of the suits, was Spencer Wilkinson, Jr., longtime manager of 4 Bears Casino, a time-worn warehouse of slot machines, swirling cigarette smoke and stained carpets that serves as the reservation's entertainment nexus and its financial hub. Wilkinson also sat on the board of the tribe's development corporation, where he was charged with finding new opportunities to enhance the economy of the reservation.

According to interviews with tribal members, former employees of the Three Affiliated Tribes, and a class action lawsuit filed in federal district court in Bismarck, ND against Wilkinson and others, Wilkinson used his access to casino funds—and to the development corporation—to gain influence and craft an oil deal that would leave him one of the richest men on the reservation.

In 2006 he became an owner of a company, Dakota-3, with Richard Woodward, a white consultant who, records show, was receiving more than $20,000 a month from tribal funds for his work at the development corporation. Together, the suit and other legal filings allege, Wilkinson and Woodward planned to raise money and buy up rights to much of the remaining land not yet slated for drilling, all the while maintaining their work with the tribes and employing Wilkinson's relationship with the council to help get the oil leases approved.

Leases for oil rights generally work like this: A company purchases the right to drill for oil underneath an acre of land by paying a one-time upfront payment, called a bonus, and a percentage of the profits earned on the well, known as a royalty. On Indian lands additional laws also apply, dictating who can negotiate for whom and how the government has to oversee the agreements.

Wilkinson declined to comment and Woodward could not be reached. Wilkinson has filed a motion to dismiss the case. The suit alleges that Wilkinson and others aided and abetted the U.S. government in failing to fulfill its fiduciary responsibility to the tribes; Wilkinson's motion argues, among other things, that the government had no such responsibility. Woodward has not yet filed a response to the suit in court.

Many details of Dakota-3's deals remain murky. There is limited transparency into tribal government affairs, no public access to documents, no annual reporting on accounts, and limited communication about what tribal council members discuss in their meetings.

But, according to separate lawsuits and records filed with the North Dakota Secretary of State, Dakota-3 partnered with an Oklahoma-based oil speculator named Robert Zinke and his company Zenergy to buy leases and form additional joint venture companies. Documents from two law suits mention the involvement of the New York based hedge fund Och-Ziff Capital Management Group but do not specify the firm's role. The hedge fund is publicly traded and, according to its web site, has more than $33 billion under management.

A spokesman for Och-Ziff declined to comment, and Zinke did not return a telephone message.

The interlinked companies, the documents show, purchased drilling rights to some 42,500 acres of lands owned by individuals and families through dozens of separate small deals. Those rights were ultimately controlled by Dakota-3, which also purchased from the tribal council drilling rights to another 44,000 acres of lands managed by the council. Altogether, Dakota-3 accumulated rights to about a fifth of the 420,000-odd acres of leasable land on the reservation, having bought much of those rights for as little as $50 per acre and royalties of around 18 percent. At about the same time, records and interviews show, other companies were purchasing drilling rights to land on and near the reservation for $300 to $1,000 per acre plus royalties as high as 22.5 percent.

One of the lawsuits alleges that the difference in the one-time bonus payments, plus the difference in royalty payments, "could mean billions of dollars" over the life of the oil field.

In late 2010, an Oklahoma-based oil production company, Williams, bought Dakota-3 for $925 million. At the time of the purchase, Dakota-3 was pumping a small amount of oil, but the bulk of its assets were the drilling rights. Two lawsuits allege that by buying Dakota-3, Williams effectively paid more than $10,000 per acre for those rights—as much as 200 times what Dakota-3 had paid for the leases.

At issue is not just the question of how Dakota-3 managed to win the tribal council's approval for the deal, but whether the federal government should have stepped in to ensure that the tribes were paid higher rates.

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