Exclusive: More on the Interior Department's Sex and Oil Scandal

| Thu Sep. 11, 2008 9:00 PM EDT

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Chances are you've heard about the bacchanal known as the Minerals Management Service. The arm of the Interior Department charged with collecting some $10 billion a year in royalties from oil and gas companies, it has been caught up in scandal after scandal, including this week's revelations that top employees were in bed (and not just figuratively) with the oil officials they were supposed to regulate. In between glacially slow-to-arrive FOIA requests, I've been looking into MMS and its weird party culture off and on for more than a year. Here's a few juicy details that you won't read in the Inspector General's report.

The IG tells us about two MMS oil marketers, Stacy Leyshon and Crystel Edler, who became known among oil executives as the "MMS Chicks." Between 2002 and 2006, each received more than $2,700 in gifts on more than 60 occasions from oil companies, including meals, booze, lodging, and golf outings. Leyshon, who slept with two oil company employees, operated a sex toys side business known as "Passion Parties" (think Tupperware parties, but with dildos) and bragged that it paid more than her day job at MMS. She told the IG that nobody in the oil industry had purchased sex products from her (though three subordinates at MMS had). However, that account is contradicted by former MMS Deputy Junius Walker, a high-ranking employee who worked in Leyshon's Denver office before retiring. "She's selling that stuff to oil and gas companies," he told me last year. "I mean, that's what she was doing. She was going around, going down to the oil and gas companies, putting on presentations. . .They were having a really, really good time."

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The highest ranking official criticized in the IG reports was Lucy Querques Denett, the former associate director of the minerals revenue management department, who retired earlier this year. The reports found that Denett worked with two employees to steer a lucrative consulting contract to one of them after he retired, violating competitive procurement rules. The other employee later retired to work on the same contract.

Denett's eagerness to look out for her aides went further than this, several sources told me. Oil royalty auditor Bobby Maxwell, who gained national attention in 2006 for his $50 million False Claims Act case against the department and oil company Kerr-McGee, told me he had wanted to audit contracts signed between oil companies and the department's problem-plagued Royalty In Kind division, which collects $4 billion a year in oil and gas instead of cash royalties. But in 2002 the RIK department refused to hand over the contracts, Maxwell says, and Denett told him, "Leave it alone." He says she never explained why RIK couldn't be audited.

That year Denett also began hobbling her auditors in other ways. Since 1996, they'd operated by pouring over oil and gas leases looking for irregularities. Federal law allows MMS to demand that an oil company correct all of its production figures if an auditor finds evidence of royalty underpayments "based on repeated, systemic reporting errors for a significant number of leases." These demand letters to industry are known as orders for restructured accounting. Maxwell's office would typically send out two of the orders each month, often resulting in the collection of millions in unpaid royalties, but in 2002 Denett stopped signing off on them. Dennis Roller, audit manager for the North Dakota state auditors office, told me he faced the same problem, and asked Denett why she'd stopped approving them. He says she told him, "'Well, I have a hard time defining 'significant' and 'systemic.'" The change meant that auditors now had to pore over every lease individually, even when they'd identified a recurring error--an impossible feat with the department's limited resources, Maxwell says. He estimates the change has caused MMS to lose "tens of millions, if not hundreds of millions of dollars over the years."

Denett and Leyshon could not be reached for comment today and the MMS did not return a call.

This stuff just scratches the surface of the MMS free-for-all. So far the grand prize for depravity goes to former RIK manager Gregory Smith, who pitched the oil companies he regulated to do business with his outside consulting firm, slept with two subordinates, and bought cocaine from another RIK employee while on the job (DOJ, where are you?). Of course, last time I checked, there was also an ongoing GAO investigation, four False Claims Act cases pending against MMS in Oklahoma City, and a DOJ investigation of a Virginia-based MMS employee who allegedly traveled to Atlanta to have sex with someone he'd met in a teen online chat room who he thought was a 13-year-old girl.

"Unfortunately, as the Inspector General pointed out, the conduct of a few has cast a shadow on an entire agency," Interior Secretary Dirk Kempthorne said in a statement today. That's certainly true, but given how long this mess has been brewing, eliminating the bad apples has got to start at the top.

Front-page photo from flickr user Orin Optiglot used under a Creative Commons license.