JPMorgan Settles Claims It Cheated Shale-Rights Owners

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Drilling in the Eagle Ford Shale Formation
The dispute centered on payments for rights to drill in the Eagle Ford, a shale formation that underlies much of central and southwest Texas that has helped put the U.S. in competition with Saudi Arabia and Russia for title of world’s largest oil producer. Photographer: Eddie Seal/Bloomberg

JPMorgan Chase & Co. settled a lawsuit by Texas mineral-rights owners who accused it of cutting sweetheart deals with oil company clients to cheat them out of $681 million in compensation.

The dispute centered 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 U.S. 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 commercial-banking clients Petrohawk Energy 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 U.S.

Deal talks between the bank and the trust stalled and forced the start of a trial Nov. 12 in state court in San Antonio while negotiations continued. The settlement was completed Nov. 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 yesterday 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.

Terms Undisclosed

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 $40 million from the bank.

The trust beneficiaries claimed they got only $32.5 million on rights that yielded benefits worth $1.1 billion because JPMorgan wanted to curry favor with its oil company clients at their expense. The bank rejected the claims as speculation and hindsight.

The trial, initially set for Nov. 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.

Fundamentally Unfair

“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 land in 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.

Bonus Payments

The energy companies, through JPMorgan, paid trust beneficiaries as little as $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 from exploiting the Eagle Ford flowed to subsequent buyers, leaving the original mineral owners shut out with comparatively little.

Leasing Policies

JPMorgan was also accused in the case of violating the trust’s customary leasing policies so that bank customers were allowed to lock up the bargain-priced drilling rights for far longer than usual. That prevented the trust from reselling the rights to its dormant acreage and cashing in on rapidly escalating prices.

JPMorgan denied claims of “self-dealing,” claiming the plaintiffs’ allegations were based on the benefit of hindsight.

“A trustee’s duties and responsibilities are not to be judged by hindsight,” Gall, JPMorgan’s lead lawyer, said in opening statements. “There’s no Monday-morning quarterbacking.”

The South Texas Syndicate Trust has 275 beneficiaries, who either inherited or purchased some of the 30,000 shares of mineral rights underlying range land accumulated by six Minnesota businessmen who came to Texas in 1906. Surface rights to the property were sold in 1950, and today the beneficiaries are scattered throughout the U.S. and overseas.

The case is Meyer v. JP Morgan Chase Bank, 2018-CI-10977, District Court, Bexar County, Texas (San Antonio).

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