AN OIL TRADER ON A SLIPPERY SLOPE
Employees at Arochem International Inc. couldn't have asked for a better boss than Roy William Harris. For two years running, the 38-year-old former oil trader sprang for a lavish Christmas dinner at a fancy Connecticut inn. In 1990, Harris handed out door prizes including a weekend in Puerto Rico for two and a helicopter trip to Atlantic City. Last December, the prizes included a catered dinner for four at home. But on Christmas Eve, Arochem's employees were shocked to learn that the board had suspended Harris and another Arochem officer and got the local police to bar them from the building.
That was only the beginning. In May, the U.S. Attorney's office for the Southern District of New York charged Harris, known to friends as "Will," with one of the country's largest bank frauds. Prosecutors claim Harris and others from his now-defunct Stamford (Conn.) company defrauded a consortium of five banks led by Chase Manhattan Bank of more than $ 150 million. The alleged scheme included making up collateral and diverting assets to dummy corporations. Already, Arochem's chief financial officer, Vincent J. Dispenza, has pleaded guilty to conspiring with Harris and two others to "mislead the banks so that they would maintain, or even increase, their credit."
The criminal case is not only sweeping but precedent-setting. Harris is the first to be indicted under the harsh "financial kingpin" statute, passed in the wake of the thrift scandals. The federal law carries a fine of up to $ 10 million and a prison term of from 10 years to life.
Harris declined to be interviewed by BUSINESS WEEK. His defense lawyer, Lawrence Iason, says Harris has pleaded innocent and that his side will come out when the case goes to trial in early November. Yet Harris' story raises troubling questions about the ease with which a smooth-talking, credible fellow may have conned some of the world's most powerful lenders -- and how the lenders, as well as the auditors and board, minimized danger signs because they had such a big stake in Arochem's operations. "It could have been stopped all along," charges Arochem board member Edwin E. Wells. More than two years before the feds brought charges, Wells filed a civil suit against Harris with many of the same allegations.
`GOLDEN CHILD.' Harris made his reputation in the oil business after graduating from Kansas State University in 1976. The Wichita native got hired by Koch Industries Inc., the mammoth oil and gas concern. By January, 1979, he had risen from trainee to trader. Months later, he landed a job as a commodities trader with Phibro Energy Inc., a unit of Salomon Inc.
There, Harris "was a golden child," says a trader who worked with him. Harris was made a Phibro director in 1985, and two years later he was named president of Hill Petroleum Co. -- now called Phibro Energy USA Inc. -- which owns and operates refineries. At Phibro, Harris was known for "trading the market hard." But unlike other aggressive performers, Harris was extremely personable. "He'd charm the hell out of you," says the trader.
Harris' charm wasn't foolproof, though. In 1987, he urged the directors of Phibro and Salomon to buy and refurbish a bankrupt petrochemical complex in Puerto Rico. When they balked, he left to buy it on his own.
To make the deal fly, he needed cash. Harris turned to Ed Wells, who was then an investment banker with Allen & Co. Wells had done deals with Harris before. The banker brought in the Johnsons, a wealthy California oil family that invested through entities known collectively as the Victory Group. Run by Robert Johnson until he died in 1990, and then his son, Eric, Victory gave Arochem $ 17.4 million. An additional $ 17 million came from the Government Development Bank for Puerto Rico.
By 1988, Harris had formed two privately held companies: Arochem International, which ran the refinery, and Arochem Corp., which provided management services to International. Harris owned 60% of the companies' stock.
Arochem was supposed to be a refining business, not a trading firm. And investors wanted to make sure it stayed that way. The loan agreements with the Government Development Bank bar the company from engaging in speculative trading as a separate business and beyond normal hedging. They also prohibit Arochem from owning or operating any business other than the petrochemical facility or related concerns.
PROBE. But Harris dived into the market almost from the start, say Wells and former Arochem employees. "He ran the place aggressively," says Claude Amideneau, who handled the refinery's marketing. "He's a big oil trader. He takes big, big positions."
An element of Harris' defense will likely be that the trades he made were a reasonable and crucial part of Arochem's unanticipated but expanding business. Harris claimed the broader operations would boost profits. Wells and Victory didn't buy that. They called the strategy shift a way to justify, conceal, and finance the speculative trading.
On Jan. 25, 1989, Wells and Robert Johnson hired an oil consultant to probe Harris' trading. The consultant, J. Richard Perkins, a former Chevron Corp. executive, combed the company's daily trading records given to Arochem's lenders and other documents. On Mar. 13, 1989, he sent one of a series of memos to Arochem's board. It concluded that Arochem was engaging in "massive" speculative trading that violated the company's loan covenants and jeopardized its viability. "Harris wanted to be the new Phibro," Perkins says now.
Together, Wells and Victory may have stopped Harris. But within weeks of the Perkins memo, the partners were bitter adversaries. Victory wanted out of Arochem and had offered to sell its stake to Wells. When the sale fell through, Victory offered to sell to Harris instead.
Wells soon became a voice in the wilderness and a man obsessed. He went to Arochem's auditor, Ernst & Young, and demanded a meeting. Harris asked the auditors to stay away. Wells went to the Government Development Bank in Puerto Rico. But based on statements by Arochem's management and Ernst & Young, plus other inquiries, the bank found insufficent evidence for concern. And Wells filed his suit. He alleged that Harris was milking Arochem and engaging in improper speculative trading and that he and the board were covering it up -- charges they are still fighting.
Philip R. Kaplan, a lawyer for Victory, says Wells lacked credibility because of his interest in controlling Arochem. "He had the suspicions, but he didn't have the goods," he says. Perkins has another explanation: "Harris sold the concept of Wells as a disgruntled shareholder."
While Wells kept the spotlight on Arochem's trading, Harris set about diverting the company's cash into his own pocket, charges the indictment. Documents show that in the fall of 1989, Harris arranged for a series of prearranged options trades with John Moller, president of USA Petroleum. USA documents show that $ 2.7 million paid by Arochem to USA was sent from USA's account in Bermuda to Harris' personal account at Irving Trust Corp. After Wells -- and later the board -- questioned Harris about a "kickback," he repaid the money.
Despite the charges and Wells's suit, Chase was ready to approve a $ 245 million revolving-credit line, along with the four other banks -- Skopbank, Swiss Bank, Banque Indosuez, and Bank Brussels Lambert. Through their lawyer, the banks declined comment.
On Jan. 2, 1990, a lawyer for Wells wrote Chase's then-chairman, Willard C. Butcher, and the bank's general counsel, urging them to "give the most careful scrutiny" to Chase's participation. The letter alleged that the Wells suit was "supported by unmistakable evidence of willful, fraudulent conduct," including false and misleading financial reports. It also claimed that law enforcement authorities were investigating.
From Chase's perspective, the charges rehashed the Wells suit, which it concluded was unfounded. What's more, Arochem's 1989 audited financial statements -- which Chase reviewed before approving the loan -- dismissed the suit in a footnote. But the feds concede Chase could have done more digging. "You would have expected more scrutiny if you were applying for a $ 250,000 loan than they had on this one," says a law enforcement official.
By April, Harris, Dispenza, and two other Arochem executives had secretly agreed to hide Arochem's true financial status from the lenders and auditors, according to Dispenza's Mar. 31 plea.
Dispenza told the judge that he personally falsified crucial financial statements known as "borrowing base reports" -- the same type of documents that Perkins reviewed. Submitted to Chase about every two weeks, the reports were supposed to list Arochem's net trading positions and collateral. But they were totally fabricated, the government claims. In one case, phony invoices and warehouse receipts showed that Arochem had contracts for $ 60 million worth of crude oil that it held in Malaysia. The contract and oil never existed, yet the borrowing base reports listed them for months, Dispenza testified.
Harris also began setting up a string of offshore companies that he controlled. One was Arochem International Ltd., a Cayman Islands oil-trading and -financing company. On four occasions from June to October, 1991, Harris allegedly transferred about $ 3.7 million from AI Ltd.'s Swiss bank accounts to his personal account at the Bank of New York, the indictment charges. Christine Broderick, a former Arochem cash manager, recalls writing up one transfer for $ 500,000. At the time, AI Ltd. owed Arochem money, and the $ 3.7 million "far exceeded" AI Ltd.'s net equity, prosecutors charge.
FUNNY VALENTINE. Broderick says the banks should have realized the AI Ltd. transactions didn't pass the smell test. "They could have found this stuff if they just asked," she charges. "It was all in front of them." Chase declined to comment citing pending litigation.
Chase stuck by Harris even as Arochem's house of cards began to collapse in the fall of 1991. On Oct. 8, Arochem sought to have its trades cleared by Shearson Lehman Brothers Inc. -- even though a week earlier Shearson had declared Arochem in default under its margin agreements and had demanded immediate repayment. After Shearson refused to clear the trades, Chase came to the rescue. It granted Arochem a$ 5 million loan -- guaranteed by Harris -- to pay the margin requirements and close the trades. The incident triggered a New York Mercantile Exchange probe.
By 1992, Harris and Dispenza were out, and investigators had interrogated Arochem employees. Meanwhile, Arochem and Chase retained Arthur Andersen & Co. to look for evidence of misconduct. A source close to Arochem says Arthur Andersen has already estimated that the company's trading losses through 1990 totaled more than $ 100 million. Arthur Andersen had no comment.
On Valentine's Day, the banks forced Arochem into bankruptcy and recently persuaded the bankruptcy judge to liquidate it. Chase, which has about $71 million at risk, blames its losses on Ernst & Young, which signed off on Arochem's financials from 1989 through 1991. The bank sued the auditors for fraud and negligence. But Ernst & Young claims it is a victim of an elaborate fraud and, in part, blames the banks. "The lenders had their own procedures to regularly monitor the existence of the collateral," says spokesperson Mort Meyerson. "We did our job properly."
For now, Harris is spending his days in his opulent Greenwich (Conn.) home waiting for the November trial. His former employees, who lost their jobs when the company collapsed, still find it tough to think badly of their old boss. It would be one thing, they say, if Harris set out to milk Arochem for his personal gain, quite another if he simply got caught short in the oil markets. Harris' former secretary, Kay DuBois, bets it was the latter. "He's a gambler who forgot his limits in a quest to save the company," she says. "I hope I'm right."FRAUD AT AROCHEM?
JULY-DECEMBER, 1987 Roy William Harris leaves Phibro Energy. Harris, a
38-year-old oil trader, forms Arochem International in Stamford, Conn., to buy
a refinery in Puerto Rico
NOVEMBER, 1988 The Government Development Bank for Puerto Rico lends Arochem
$17 million. The loans bar Harris from speculative trading unrelated to the
refinery business DECEMBER, 1988-MARCH, 1989 The Arochem board probes Harris
about speculative trading. An oil consultant finds that the trading jeopardizes
Arochem's viability. Harris disputes the findings
MARCH, 1989 The board splits over control of Arochem. In a reversal, the
Victory Group, a California investment vehicle with two board seats, sides with
Harris and agrees to sell him its Arochem stake
AUGUST, 1989 A dissident director, Edwin E. Wells, sues Harris and later the
board alleging a massive scheme to misstate Arochem's financial condition and a
cover-up. The board and Harris fight the case
JANUARY, 1990 Wells warns Chase Manhattan that Harris may be committing fraud
and is under investigation by prosecutors. Chase dismisses the charges as
unfounded. With four other banks, Chase approves a $245 million credit line to
FEBRUARY, 1990-DECEMBER, 1991 Harris sets up offshore companies under his
control. He allegedly diverts millions of dollars from Arochem into the
companies' Swiss bank accounts. Harris and other Arochem executives allegedly
submit false reports to the banks. Harris denies any wrongdoing
JANUARY-SEPTEMBER, 1992 The banks force Arochem into liquidation. Arochem's
chief financial officer pleads guilty to bank fraud, implicating Harris.
Prosecutors indict Harris for bank fraud and other crimes, and he pleads
innocent. Chase sues Ernst & Young for signing off on Arochem's financials. The
firm claims Chase is partly at fault
NOVEMBER, 1992 The Harris trial is set to begin in New York
Michele Galen in New York