June 4, 1995 in Nation/World

The Collapse Of Gulf Two Blamed For Toxic Legacy Financiers Accused Of Draining Gulf, Leaving Taxpayers, Retirees With Bills

By The Spokesman-Review
 

Just five years ago, the company that ran North Idaho’s most famous mine had $200 million in the bank.

Gulf Resources & Chemical Corp. was poised to take its business global.

In Shoshone County, it promised to pay its share in cleaning up the toxic waste that 100 years of mining left behind. Gulf assured retired miners that pensions and health benefits were taken care of.

Today, Gulf is broke.

Taxpayers are stuck paying tens of millions of dollars to clean up a 21-square-mile area surrounding the Bunker Hill mine. Retirees face cuts in the health insurance they thought was secure.

About the only people making money from Gulf these days are bankruptcy lawyers, who charge up to $425 an hour - more than most pensioners get in a month.

What went wrong?

The key players in Gulf’s demise aren’t talking, but the story can be pieced together from internal company documents, court records and interviews.

It is a tale right out of the 1980s, when international takeover artists combed the globe looking for cash-rich companies to line their portfolios.

Most of all, it’s a story of two men, both British financiers, accused of using the historic mining, oil and gas company as their personal bank account.

David John Rowland, a global dealmaker who kept a 100-foot yacht near his Monte Carlo home, bought a controlling interest in Gulf in 1989. He was succeeded in 1991 by Graham Ferguson Lacey, a high school dropout and founder of the Church of Nations.

Today, both men - and those who worked for them - are accused by Gulf of mismanagement and, in some cases, outright fraud. Gulf filed a lawsuit last year in federal court in Coeur d’Alene on behalf of its creditors, who are trying to get back millions of dollars they contend were squandered. The lawsuit names Rowland, Lacey and the individual directors who worked for them, among others.

Attorneys for Rowland and Lacey say the lawsuit’s allegations are unproven.

While legal arguments continue, one thing is clear: Gulf’s treasury bled dry in just five years. As angry shareholders protested and the federal government looked on, Gulf’s money ended up overseas, far from creditors’ reach.

From 1989 to 1992, the company spent millions on New Zealand real estate, United Kingdom hotels, a Scottish castle, and sunken treasure in the Arabian Sea.

Company executives got handsome paychecks and their choice of cars - BMW or Mercedes-Benz. They relaxed on Rowland’s yacht in the French Riviera.

Today, while Gulf’s former kingpins pursue new business ventures, grey-haired pensioners in Coeur d’Alene sit through monotonous bankruptcy hearings, straining to hear news about their medical benefits.

“But the money is gone,” said Sig Segarini of Kellogg, a former Bunker Hill smelter worker. “There’s nothing we can do. Where is all that money now?”

Disaster strikes

The Bunker Hill mine and smelter formed the nucleus of the world’s richest silver region. Legend says the mine was discovered in 1885 by Noah Kellogg.

Nearly a century later, in its 1980 heyday, Bunker Hill employed 2,100 people and boasted a $50 million annual payroll. It was Washington Water Power Co.’s largest customer and the Union Pacific Railroad’s biggest shipper.

Bunker Hill bused Kellogg children to Sunday school and little league games. Employees got low-interest home loans, their mortgages paid down through payroll deductions.

Loyalty among workers was fierce. Silver Valley residents still refer to the mining company as “Uncle Bunker.” Some bristle at any talk of the mine’s costly legacy - widespread heavy metal contamination throughout central Shoshone County.

Gulf Resources bought Bunker Hill in a hostile takeover in 1968. The lead, zinc and silver mine soon became Gulf’s money machine.

Disaster struck five years later.

A fire destroyed pollution controls at the smelter, yet production continued. The result: tons of lead dust spewed onto Kellogg, Wardner and Smelterville.

Residents later learned that even before the fire, Bunker Hill had calculated its potential liability for poisoning Kellogg children. The hypothetical liability was estimated at $7 million for 500 kids. Profits in 1974 exceeded $25 million.

The federal government now holds a dozen or so companies responsible for the region’s heavy metal contamination. Gulf is considered a primary polluter because it operated the Silver Valley’s only smelters, which are blamed for much of the pollution.

The company set aside millions for cleanup, and spent millions more restoring the site. But most of the mess remains.

Only by protecting the company’s cash could Gulf be sure to cover the cleanup costs, as well as meet obligations to pensioners and investors.

It didn’t.

A speculator finds Gulf

Gulf was just the kind of company attractive to an investor like David Rowland.

By 1988, Gulf was a holding company with nearly $200 million in the bank. After selling off a stable of subsidiaries, including Bunker Hill, the company was poised to find new, bigger business ventures.

Rowland by that time had already made his fortune, earning a reputation as a speculator along the way.

The son of a scrap metal merchant, Rowland was tagged for petty larceny at age 14 in Britain, where he was born, Gulf records say. British press reports say he became a millionaire in his early 20s, and then built immense wealth in real estate.

By the mid-1980s Rowland, now 49, was considered among England’s wealthiest people, with financial assets estimated in the tens of millions of dollars.

Wealth aside, Rowland was a private person who all but dropped out of the London financial press after his rise to prominence in the 1960s and 1970s.

According to British newspapers, he helped introduce his bankers to British royals at polo and racing events. He dabbled in casinos.

Rowland met with Gulf directors face-to-face over the Christmas holiday in 1988, proposing to buy control of the company with the help of borrowed money. Gulf’s directors rightly concluded that Rowland had global ambitions for the company’s cash.

Given Rowland’s reputation, directors studied him carefully.

Rowland proposed that his London property firm buy a third of Gulf’s stock, leaving him holding the largest share of the company. Gulf chairman Robert Boulton hired investigators to scrutinize Rowland’s background, as well as the men he planned to bring in to manage the company.

One investigation report, obtained by The Spokesman-Review, cast doubt on his character. It revealed a reputation for risky investments and a disregard for shareholders. Rowland was portrayed as an exploiter of legal loopholes in rules regarding take-overs.

Gulf directors also were warned in the same report that the demise of a fuel company called Williams Hudson was linked, in part, to Rowland’s speculative trading.

Board minutes summarize how directors viewed Rowland as they approved the takeover: “Mr. Rowland is a man of great experience and talent and, although he has a notable reputation as a speculator, the transaction ought to be approved.”

And so it was: The board endorsed the takeover on March 3, 1989.

Before the deal was final, directors put in place a standstill agreement - a covenant intended to limit Rowland’s use of Gulf money. The board also made sure the company’s director and officer liability insurance was current.

Today, the lawsuit against Rowland and Lacey accuses Gulf’s directors of ignoring that standstill agreement, allowing Rowland to do as he pleased.

The takeover gave Rowland’s property firm, Inoco Plc. of London, controlling interest in Gulf. Rowland became chief executive. He appointed half of Gulf’s board of directors - three men who worked with him at Inoco.

The complexity of the takeover characterized future deals. Rowland controlled Inoco through an investment firm in Panama called Monaco Group Fund S.A.

Monaco, in turn, was at that time governed by “trustees of settlements whose beneficiaries are Rowland and his children,” Gulf records say.

It is not clear whether directors could have stopped the takeover.

Rowland bought his stake in Gulf from shareholders who wanted to sell, having moved on to other investments. “The board acted with as much diligence as it could at the time,” one insider said recently.

Forbes magazine remarked on the deal in hindsight, saying in 1990 that Gulf let a fox guard its henhouse.

Looking for deals

On the morning of Sept. 15, 1989, at the French resort town of Cap Ferrat, Rowland pitched a grand plan for Gulf’s treasury.

It was six months after the takeover and Rowland was making his move.

According to board minutes, he told directors he wanted to “quickly and prudently increase the size of Gulf in order that (Idaho environmental) costs represent a tolerable proportion of net worth.”

To do that, Rowland planned to put Gulf’s cash to work.

The company’s long-time employees believed Gulf was ready to buy one or more big companies. Takeover targets were code-named Insect and Stonehenge.

“We’ve got $240 million and we’re looking for deals,” Gulf vice president Larry Mehl boasted to Forbes magazine a few weeks after the Cap Ferrat meeting.

In the spending spree that followed, Gulf dropped nearly $100 million.

When not tending to business, officers and directors relaxed on Rowland’s 100-foot luxury yacht, named after his daughter, Venetia.

Acquaintances describe Rowland as a hard-nosed dealmaker. In his strategy report, Rowland argued that his appointed directors could better serve the company by becoming paid officers. Rowland at first received no salary, but Gulf bore his expenses in Monaco - $400,000 in two years.

The company also leased the London headquarters of his property firm, Inoco, which became Gulf’s European office, as well as an office in New York City. Almost overnight it seemed, Boston-based Gulf had offices in Monte Carlo, London and New York.

Rowland pegged the price of taking Gulf global at $3 million a year. Today, Gulf’s lawsuit against Rowland claims that the money paid for, among other things, limousines, dry-cleaning, meals, salaries and overnight stays at the new overseas offices.

A month after the Cap Ferrat meeting, Rowland and other managers of Gulf’s United Kingdom subsidiary, Gulf Resources (U.K.) Plc., hired a chauffeur. Some officers later complained about a shortage of vacation time, board minutes say.

Rowland, in his strategy report, said such spending would boost Gulf’s image.

At Cap Ferrat, Rowland got a $50 million revolving fund to play the stock markets. He introduced the idea of investing millions in depressed New Zealand real estate. Directors also approved Rowland’s bid to sell his family’s stake in a United Kingdom retailer, Storehouse Plc., to Gulf.

At the time, the British retail business was in a slump.

Gulf’s lawsuit claims that Rowland manipulated Storehouse’s stock price by ordering millions of shares to be purchased for Gulf. Those buys created an artificial market for Storehouse stock, driving up the share price.

Monaco, Rowland’s family trust, then sold its own Storehouse shares to Gulf at the inflated price, the lawsuit claims.

Gulf’s long-time senior managers believed the stock buys were credible: the company was shopping for a takeover, they reasoned, so why not buy Storehouse?

For whatever reason, an American oil and gas company briefly entered the British retail business. And Rowland rescued his family trust from its Storehouse venture.

Yet sources familiar with the deal note its unlikely conclusion: Favorable currency exchange rates helped Gulf make money when its Storehouse shares eventually were sold. Profits would have been greater, however, had Gulf not bought Storehouse at an inflated price to begin with.

The kiwi connection

Gulf didn’t start hemorrhaging cash until late 1989.

It began innocently enough. Vice president Derek Moran faxed a memo from his London office to lawyers halfway around the world in New Zealand. The memo said Gulf’s bankers had wired $50 million to a trust account in Christchurch.

A deal was in the works.

Rowland had travelled to New Zealand that fall, after the Cap Ferrat meeting, to negotiate buying two dozen commercial properties in Aukland, Christchurch and Wellington. Market reports at the time predicted a turnaround in New Zealand real estate, depressed since a 1987 stock market crash.

The New Zealand real estate transactions were immensely complicated. Details still are argued by Gulf and firms that insured the company against mismanagement.

According to the lawsuit against Gulf’s former managers, here’s how one deal worked:

Shortly after the Cap Ferrat meeting, Gulf’s New Zealand lawyers were told to find Cook Islands shelf companies. The reason, one lawyer later told Gulf, was that “money needed to leave New Zealand through intermediaries” in the end, according to a written summary of the conversation.

Gulf today claims that two shelf companies - Felpark Ltd. and Kingsley Finance Ltd. - were used to skim millions off two series of New Zealand land deals. Felpark was paid supposed “finder’s fees” for acting as an intermediary in Gulf’s land buys.

Shelf companies are essentially corporate shells with no real business; they have a history of being used for money laundering and tax evasion.

The reason, one lawyer later told Gulf, was that “money needed to leave New Zealand through intermediaries” in the end, according to a writtem summary of the conversation.

Gulf today claims that two shelf companies - Felpark Ltd. and Kingsley Finance Ltd. - were used to skim millions off two series of New Zealand land deals. Felpark was paid supposed “finder fees” for acting as an intermediary in Gulf’s land guys.

The lawsuit against Rowland claims that he used the New Zealand lawyers to channel $9 million from a Gulf trust account to a Swiss bank.

Gulf has since filed claims with insurance carriers who sold coverage against fraud and mismanagement.

One insurance carrier suggests that Rowland and Inoco made deposits on the New Zealand property with their own money and were merely reimbursed by Gulf. Attorneys for Rowland and those who worked under him decline to discuss the matter. But they stress that Gulf’s fraud claim “merely contains allegations and not evidence or proven facts.”

Gulf did not hang on to its kiwi land for long.

Months later, the company exchanged the property for a majority stake in City Realties Ltd., a publicly traded New Zealand real estate concern.

Moran himself got a $50,000 bonus for his “efforts” in putting together the City Realties deal, according to board minutes.

In a series of transactions, Gulf ended up owning a 91 percent stake in City Realties. That company’s name has been changed to Gulf Resources Pacific Ltd. New Zealand authorities investigated Gulf’s entry into their country following insider trading allegations. Gulf and Rowland ultimately prevailed.

Today, Gulf Resources Pacific stock comprises nearly all of Gulf’s value - an estimated $55 million. That stock, held by Gulf and a subsidiary, is the prize fought over by pensioners, the federal government and investors.

After the land deals closed, Gulf assured former Idaho Gov. Cecil Andrus that its move to New Zealand was good business, not a ploy to escape creditors. Andrus still blames the federal government for allowing Gulf to dodge its Idaho debts by channeling money overseas.

But the Justice Department, through a spokesman, recently defended its handling of the affair.

“The public perception that this company was looted is a correct one… absolutely,” said spokesman Jim Sweeney. “But we have no legal authority to prevent a company from investing in foreign real estate.”

In response to bad press after the New Zealand move, Rowland himself promised that Gulf would not turn its back on North Idaho.

“We owe it to our shareholders to do all we can to increase the value of their shares,” Rowland wrote in a letter sent to Silver Valley families in 1990. “We are paying our bills, meeting our obligations and plan to keep doing so in the future.”

, DataTimes ILLUSTRATION: 3 Photos (1 color)


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