Wednesday, March 31, 2010

Freeh Report Shows Carlyle Profited Before SemGroup Darkened

The Carlyle Group and joint venture energy partner Riverstone Holdings paid $105 million for 30% of SemGroup in January 2005. Three years later SemGroup went bankrupt on billions in bad energy bets. Dow Jones Financial News reported:

Because it bought and sold oil and gas, SemGroup was legitimately expected to hedge its business activity against price volatility. A bankruptcy court probe found SemGroup was trading for the sake of trading, and losing big.

Funny, hedging pricing risk was never mentioned in SemGroup's SEC filings. Their 2008 10-K only mentions interest rate swaps, not energy prices.

As of February 2008, SemGroup paid Carlyle/Riverstone $107 million in dividends. That's $2 million more than the initial investment, a significant disappointment for a private equity underwriter (PEU) expecting sugar plums.

$88 million prior to February 2008
$19 million in February 2008 (30% of 56% of the $100 million distribution)
$107 million total

Louis Freeh investigated SemGroup's implosion.

Examiner Louis Freeh said SemGroup executives actively hid the losses from the firms that held seats on its management committee.
Some losses stacked up in Westback Purchasing Co, a firm controlled by Thomas Kivisto, the SemGroup chief executive who was the mastermind of the trading strategy.
Westback Purchasing is not listed as a subsidiary of SemGroup in their 2008 10-K. How much is Price Waterhouse Coopers at risk for this financial audit? How about SemGroup's CEO Kevin Foxx and CFO Michael Brochetti? If this misrepresentation isn't criminal behavior under Sarbanes-Oxley, what is?

Note the fired CEO, Thomas Kivisto, is different from the CEO attesting to the 2008 SEC filing, Kevin Foxx. How many CEO's did SemGroup have?

While many investors made their money back through dividends, creditors are stuck with more than $1 billion in unpaid bills.

How did private equity dice rolling and fence swinging contribute to SemGroup's bad bets. Was there pressure to make fast cash to pay off PEU investors like Carlyle? Did it express itself in dysfunctional ways?

This deal has a PEU odor, one not suppressed by Freeh's attempted err freshening. For those interested in the latest iteration of SemGroup, it's now Blueknight Energy Partners.

"Happy PEU investing to all and to all a Blue Night."

Update 4-22-12:  Louis Freeh is "investigating" MFGlobal's failure.

Update 8-28-12:  Freeh sold his firm(s), effectively monetizing his holdings in a PEU like manner.

Update 3-23-14:  Court documents put a new spin on "free shares.":