JPMorgan settles claims it swindled shale-rights owners
JPMorgan Chase & Co (JPMorgan) settled a lawsuit by Texas mineral-rights owners who accused it of cutting sweetheart deals with oil company clients to cheat them out of US$681 million in compensation.
The dispute centred on payments for rights to drill in the Eagle Ford, a shale formation underlying much of central and southwest Texas that has helped put the US in competition with Saudi Arabia and Russia for title of world’s largest oil producer.
Beneficiaries of the South Texas Syndicate Trust accused the bank, which was supposedly working on their behalf, of instead hatching favorable deals with commercialbankingclientsPetrohawkEnergy Corp and Hunt Oil Co for cut-rate prices on the trust’s rights in the Eagle Ford, the highest-yielding oil field in the US.
Deal talks between the bank and the trust stalled and forced the start of a trial November 12 in state court in San Antonio while negotiations continued.
The settlement was completed November 14 as jurors heard a third day of testimony, according to lawyers for both the bank and trust’s beneficiaries.
“The case was resolved with some conditions, and the jury was excused,” Dan Sciano, a lawyer for the trust beneficiaries, said in a phone interview.
Sciano said he was optimistic “a sufficient number of beneficiaries” will sign the accord at their annual meeting in San Antonio this weekend.
“Otherwise, we would not have dismissed the jury,” he said. Sciano declined to discuss the amount of the settlement.
Robert Carosella Jr, a spokesman for the New York-based bank, and its lawyer, Charles Gall, confirmed an agreement was reached without disclosing the terms.
The San Antonio Express News reported that the beneficiaries would receive US$40 million from the bank.
The trust beneficiaries claimed they got only US$32.5 million on rights that yielded benefits worth US$1.1 billion because JPMorgan wanted to curry favour with its oil company clients at their expense. The bank rejected the claims as speculation and hindsight.
The trial, initially set for November 7, was postponed as lawyers for both sides told Texas District Judge Larry Noll they had reached a tentative deal. The trial began after the two sides failed to complete the agreement.
Sciano said one reason the deal wasn’t completed by the trial’s start was JPMorgan’s last-minute demand for the trust to pay its legal fees in the lawsuit as well as investment banking expenses it incurred several years ago, when the bank tried to liquidate the trust without the beneficiaries’ knowledge.
“There were millions of dollars in fees and expenses that could’ve been charged back to the trust,” Sciano said.
“We felt that was fundamentally unfair, as the beneficiaries would get hit twice that way.”
The bank abandoned that demand in the final settlement, he said.
Energy companies have spent the past five years scrambling to accumulate and drill as many acres as possible across a vast swath of Texas range.
The 132,000 contiguous acres owned by the trust lie southwest of San Antonio at the heart of the Eagle Ford.
A discovery well drilled on the trust’s l and i n late 2008 put the oil play on the map by proving hydrocarbons could be commercially produced from the Eagle Ford through horizontal drilling and hydraulic fracturing, also known as fracking. Values of mineral rights across the region began to skyrocket as word of the discovery filtered out.
The energy companies, through JPMorgan, paid trust beneficiaries as little as US$200 an acre in bonuses for drilling rights on some of the property, which is on top of royalties the mineral owners get on any oil or gas pumped out.
Once JPMorgan’s commercial clients had the leases, they either produced the oil fields for their own benefit or flipped the drilling rights at much higher prices to other companies.
Some of the trust’s rights were later sold for as much as 70 times what the initial buyers paid, according to the lawsuit.
Ultimately, the trust beneficiaries complained, all of the financial gains f rom exploiting the Eagle Ford flowed to subsequent buyers, leaving the original mineral owners shut out with comparatively little. — Bloomberg