Chevron Clears Ecuadorian Legal Hurdle

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For months the world has been riveted on events related to the Gulf of Mexico tragedy involving the likes of BP (NYSE: BP  ) , Transocean (NYSE: RIG  ) , and Halliburton (NYSE: HAL  ) . But another episode involving Big Oil and the pollution it may have caused has been playing out more quietly, primarily in the courts of Ecuador and the U.S.

On Tuesday, however, as a result of a ruling by a Manhattan-based judge, the plot in the Ecuadorian case has thickened. The ruling, in the form of a temporary restraining order issued by U.S. District Judge Lewis Kaplan, could have a profound effect of protecting Chevron (NYSE: CVX  ) , the second-largest U.S. oil company, from severe damage or worse.

Where'd this all begin?
But let's go back a ways in the Chevron case. As you may recall, a lawsuit between Ecuador and Chevron began in 1993 stemming from claims that Texaco -- itself a major integrated oil and gas producer at one time -- was responsible for considerable environmental damage from its operations in the South American country from 1964 to 1990.

Chevron maintains that any remaining pollution was attributable to Petroecuador, the country's oil company, which continued to work in the area long after Texaco's departure. The suit against Texaco was originally filed in 1993 and then refiled when Chevron acquired its fellow American producer in 2001.

This long-running case essentially now has sprouted whiskers. And along the way it has been the subject of considerable intrigue and apparent shenanigans. In the interest of time and space, I'll touch briefly on just a few of the elements that have made the case an Ecuadorian version of a James Bond adventure.

Bond -- James Bond
For instance, in 2009, apparently without Chevron's knowledge, a contractor for the company, Diego Borja, and American businessman Wayne Hansen met on several occasions with Ecuadorian Judge Juan Evangelista Nunez, who then was presiding over the case, or with politician Patricio Garcia, or with both. What the Ecuadorians didn't realize was that, Bond-style, the meetings were secretly filmed by cameras hidden in a pen and a watch.

Borja and Hansen were ostensibly seeking remediation work on the polluted acreage, and Garcia made it clear that he would require $3 million in bribes to deliver the appropriate contracts. In the process, he reportedly noted that the funds would be divided between the judge, the "presidency," and the suit's plaintiffs. Judge Nunez has since been forced down from overseeing the case.

Next, one of the key pieces of evidence being touted by the plaintiffs involved a report concerning the contamination, supposedly written by Richard Cabrera, a court-appointed "independent expert." It was Cabrera's heavily relied-upon report that estimated Chevron's liability at $27 billion. It also appears that, according to Chevron, Cabrera "is the majority owner of an oilfield remediation company."

A counter to the sanctity of Cabrera's report turned out to be the filing by Chevron's attorneys Gibson Dunn of 19 Section 1782 actions, which facilitate the issuance of subpoenas for testimony in the U.S. from those involved in overseas litigation. While judges have the authority to deny 1782 actions when they think the evidence is insufficient, all such requests by Gibson Dunn were approved.

In one instance, an expert who had previously worked for the plaintiffs stated that two reports he was alleged to have authored maintaining contamination at the sites of four Texaco wells were not his work. Also, a forensic linguist concluded that, while Cabrera is not fluent in English, the report ascribed to him was written in English and then translated into Spanish.

Squabbling plaintiffs
At the same time, several parties on the plaintiff side have been operating under a cloud or have been at sword's point with one another lately. Chevron has released numerous documents that the company maintains demonstrate that Steven Donziger, the previous lead attorney for the plaintiffs, had knowingly doctored evidence, a charge that Donziger denies. Nevertheless, he has recently reduced his role in the case in favor of Patton Boggs, a respected Washington, D.C., law firm.

Joseph Kohn, a Philadelphia lawyer who funded the plaintiff's case from its inception, severed his ties with Donziger and his group in July. Apparently Kohn had recommended to the other parties slightly more than a year ago that they settle with Chevron for an amount near $1 billion, a far cry from the $27 billion that Cabrera's report had called for. Funding in the case for the Ecuadorian side is now coming from London-based Burford Capital, a hedge fund that invests in legal actions in exchange for a portion of the awards received.

As you'd expect from a now 18-year-old case, there are far more details and adventures that could be rendered. Nevertheless, with the receipt of evidence having been closed by the Ecuadorian court in December, Chevron believes a judgment is imminent. And given all that's occurred thus far, it's clear that Chevron could be the recipient of a "home cooking" verdict from Ecuador that would be expensive for the company.

Beyond that, since Chevron has no assets in Ecuador, enforcement of an anti-Chevron decision would require that the plaintiffs look to such countries as Russia, Nigeria, Australia, the U.K., or several other countries, for enforcement. Hence the imposition of Judge Kaplan's 28-day judgment, which Chevron will seek to have extended at a Feb. 17 hearing.

In rendering Tuesday's verdict, the judge observed that there was evidence that the plaintiffs' lawyers were planning a "helter-skelter disruption for the sake of disruption." That, he said, is "not in the public interest."

The bottom line
Whether you point to ExxonMobil (NYSE: XOM  ) and ConocoPhillips (NYSE: COP  ) in Venezuela, or Royal Dutch Shell (NYSE: RDS-A  ) in Russia, it's clearly becoming both more common and more difficult for Western oil companies to do business in sovereign nations. I, however, am betting that Chevron will emerge from its ordeal in Ecuador relatively unscathed. As such, I believe Fools should hold their positions in this active and soundly managed company.

Chevron is a Motley Fool Income Investor recommendation. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies named above. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2011, at 3:37 PM, CanadaDreamer wrote:

    Very good commentary - probably the best I've read in a long while about the extortion being foisted on CVX. I won't be surprised if they file a RICO claim against the plaintiffs - this lawsuit is clearly a sham.

  • Report this Comment On February 09, 2011, at 8:31 PM, thaitaco wrote:

    Excellent subnosis. Thank you.

  • Report this Comment On February 10, 2011, at 9:11 AM, Kdena wrote:


  • Report this Comment On February 10, 2011, at 10:18 AM, cerech wrote:

    If you look into the documents. For any settlement, the government of Ecuador gets 60%, the lawyers get 40% and the natives get 0.

  • Report this Comment On February 12, 2011, at 4:02 PM, lawarticle wrote:

    Its true! You must see more article!

  • Report this Comment On February 12, 2011, at 4:13 PM, lawarticle wrote:

    Very nice information! Thanks a lot! Its Very helpful!

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