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The king of bankruptcy: How did Houston natural gas mogul Jack Stanley
go from $1.2 billion in debt in 1983 to $2 billion to the good eleven years
later?
Cartwright, Gary. Texas Monthly 23.7 (Jul 01, 1995): 96.

Abstract (summary)
THE AMAZING THING ABOUT THE TRIAL WAS THAT people were swearing under oath that Jack Stanley was
a crook and nobody in Houston seemed to notice. True, Jack Stanley was not a name one read in Maxine
Mesinger's column in the Chronicle or heard on the ten o'clock news. Remaining mysterious and enigmatic
is part of Stanley's armor, his secret of survival. Nevertheless, the 56-year-old owner and chief executive
of TransAmerican Natural Gas is one of the richest and most powerful players in the oil and gas game. He
is also one of the most ruthless, if you believe the testimony of three witnesses, one of whom was his son
Billy, who until recently was his heir apparent. (excerpt)

Full Text
THE AMAZING THING ABOUT THE TRIAL WAS THAT people were swearing under oath that Jack Stanley was
a crook and nobody in Houston seemed to notice. True, Jack Stanley was not a name one read in Maxine
Mesinger's column in the Chronicle or heard on the ten o'clock news. Remaining mysterious and enigmatic
is part of Stanley's armor, his secret of survival. Nevertheless, the 56-year-old owner and chief executive
of TransAmerican Natural Gas is one of the richest and most powerful players in the oil and gas game. He
is also one of the most ruthless, if you believe the testimony of three witnesses, one of whom was his son
Billy, who until recently was his heir apparent.
Testifying last fall in a multiparty lawsuit in Houston's 190th District Court, Billy Stanley and two other
former high-ranking TransAmerican employees alleged that the company had systematically cheated
royalty owners and drilling partners, hidden assets from the bankruptcy court, forged and destroyed
documents, broken into the offices and homes of employees, wiretapped the phones of employees and of
parties in litigation, and bribed public officials. Though the Houston Chronicle reported some of these
allegations in an article several weeks after the trial, not a word appeared in the media during the many
weeks of testimony.
Legally, TransAmerican and Jack Stanley are separate entities, but in practice, this giant drilling, pipeline,
and refinery corporation is as much a part of Stanley as his heart, lungs, and soul. He built the company
from scratch, starting in the late fifties, when he leased a service station in his hometown of Springfield,
Massachusetts. Stanley turned 1 service station into a chain of 230, bought a refinery in Louisiana,
negotiated drilling leases in South Texas, built a pipeline, and started building an ammonia plant in Corpus
Christi. His gas leases near Laredo, in what is called the Lobo Trend, were among the most productive
ever discovered in the country, and in three decades he had built what is now the third largest producer
of natural gas in Texas. Finally, reckless ambition caught up with him. In 1975, when the price of ammonia
plunged, Stanley's company filed for bankruptcy. By 1979, however, he was back running full tilt. In 1983
his company again filed for Chapter 11, emerging four years later when his creditors agreed on a
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reorganization plan, under which the company operated until 1992.


Oil and gas patch folks marvel at Stanley's tenacity and gall. Despite two monster-size bankruptcies that
tied up his assets for eight of the past twenty years, he somehow maintained absolute control of his
empire, a feat that may be unprecedented in the annals of high finance. In the spring of 1994 Forbes
estimated his wealth at $2 billion. How can a man whose company claimed debts of $1.2 billion in 1983 be
$2 billion to the good eleven years later? His enemies--and the number is astonishing--believe that he did
it through fear, intimidation, and fraud.
He used that most modern of American weapons, the lawsuit. Stanley waged wars of attrition against his
creditors, exhausting their will and financial resources through countless suits, motions, and delays. By
the late eighties, TransAmerican was involved in suits and countersuits with hundreds of royalty owners,
drilling partners, and suppliers. On July 30, 1987 in a story by Charles F. McCoy and Matt Moffett, the Wall
Street Journal reported that the company was sometimes referred to as Transylvania. Time and again,
Stanley was able to cloud the issue by making himself appear to be the prey rather than the predator.
When Texas Drilling Company of Abilene tried to collect on a $70 million debt in the mid-eighties, Stanley
accused the company of conspiring to put him out of business and countersued for $500 million. The Wall
Street Journal reported that the judge called the behavior of Stanley and his lawyers "inexcusable" and
"contumacious" and threw the case out. But Stanley's message had been delivered: Mess with him and
he'll make your life living hell. This scorched-earth policy was so successful that, also according to the Wall
Street Journal, it is being emulated by other high-profile bankrupts, including the Hunt brothers in Dallas.
Most of the people and institutions who were owed money by TransAmerican agreed to settle, sometimes
for a quarter on the dollar. Testimony in Houston showed that $450 million of the $1.2 billion of debt that
Stanley had listed in his most recent bankruptcy filings was wiped off the books through "debt
forgiveness." That didn't include the millions of dollars in settlements with royalty owners and others who
believed they had been cheated by TransAmerican (TA) or settlements with the State of Texas or the IRS.
"Seldom have the burdens of a Chapter 11 case fallen so heavily on the creditors--and so lightly on the
debtor," noted the Wall Street Journal.
In Houston last fall, a jury heard about a side of Jack Stanley that had never been made public. After the
trial, Judith Whitman, who chaired the jury, said, "It's absolutely amazing what Jack Stanley got away
with."
THE BITTER QUARREL THAT PLAYED itself out in the Houston courtroom started in the summer of 1989,
when three former employees of TransAmerican accused Jack Stanley's company of defrauding customers
and creditors. Before leaving TA and forming their own consulting firm, BDS Associates, Richard Bloodgood,
Alton Davis, and Vic Stone had copied 28,000 pages of documents and 440 computer disks. They claimed
that the documents were copied for their own protection. Stanley claimed that the documents were taken
to be used by the consulting firm, most of whose clients were litigants against TransAmerican. Stanley
filed a $500 million lawsuit against BDS and tried to get criminal charges brought against the former
employees. He claimed that they had stolen "trade secrets" and were using their consulting firm to
conspire against him.
Stanley's contention that the BDS partners had conspired to wreck him was partially true. They had turned
over allegedly incriminating information to state and federal law enforcement officials and had offered their
insider knowledge of how things worked at TA to litigants with lawsuits against the company. Nobody had
been closer to the heart of TA's financial machinery. Stone had been the company's chief financial officer,
Bloodgood the comptroller, and Davis the supervisor of gas-revenue accounting. Both Bloodgood and
Davis quit the company as a matter of conscience, but Stone was fired. TransAmerican says it fired Stone
because he was a troublemaker. Stone says the trouble was that he refused to sign two documents he
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believed were fraudulent.


The case took nearly five years to reach the courtroom and was massively complicated. One reason for
the long delay was that TransAmerican went all the way to the Texas Supreme Court in an unsuccessful
attempt to suppress the documents that Bloodgood, Stone, and Davis had copied. If the documents got
into the hands of royalty owners, the damage could be enormous. Jim Harrington, an oil and gas expert
hired by BDS's lawyers, testified that a group of Price Waterhouse accountants, using a model of TA's
accounting system, had calculated that TA had underpaid royalty owners at least $35 million.
By the time the case reached the court of district judge Eileen O'Neill in August 1994, TA had paid a
$275,000 settlement to Bloodgood, leaving Stone and Davis to fight it out with their former employer. As
part of his settlement, Bloodgood agreed to help TA. Stone and Davis were represented by two Houston
attorneys, William Powell and Ray Berk, respectively, who had filed a countersuit against TransAmerican.
Because both parties had filed suit, each was a plaintiff and also a defendant.
For the better part of seven weeks, TA attempted to make its case that partners in BDS stole trade
secrets and used them for profit, and that Stone and Davis had violated confidentiality agreements
specified in their employment contracts. TA contended that they had conspired with a number of Jack
Stanley's old enemies, including Oscar Wyatt of Coastal Oil and Gas Corporation and executives at El Paso
Natural Gas, to destroy TransAmerican through a diabolical plot that TA's lawyers called the Armageddon
Strategy. BDS's part of the proceedings lasted about three weeks and focused on attempts to prove that
the documents revealed fraud and illegal conduct by TransAmerican and that since TA was committing a
crime, Stone and Davis were justified in revealing confidential information.
At 56, VIC STONE LOOKED EVERY bit the corporate executive, close-cropped gray hair, a well-cut suit,
steely eyes. In 1986 TA recruited Stone as its new chief financial officer at a salary of $185,000. It didn't
bother him that the company was in bankruptcy. Though he recognized the huge challenge he faced, the
environment at TransAmerican seemed relatively safe. But the job didn't work out as Stone had hoped. In
his testimony to the jury in Houston, Stone said he had discovered that TA was cheating and lying to
creditors, systematically cheating royalty owners, concealing evidence from litigants, and falsifying
documents.
When he started at TA, Stone said, he was told that his job was to close the company's credibility gap
with its creditors. After three years under Chapter 11, the gap was enormous. In 1983 TA had defaulted
on a $750 million package of loans put together by Continental Illinois bank, a default that contributed in
no small way to the collapse of Continental Illinois and helped destroy the careers of dozens of oil and
gas patch bankers. But it wasn't just Continental Illinois and its thirteen banking partners that had taken
the hit. Companies as large as Westinghouse and General Electric and as small as mom-and-pop
hardware stores had felt the sting, and many of the small operations had gone under. The Wall Street
Journal reported that when Houston attorney Hugh Ray, who represented one of Stanley's unsecured
creditors, distributed a notice to other creditors, about five hundred were returned as undeliverable.
"They may have died or moved or gone out of business," he said. "But that's five hundred people who will
never get a penny out of this."
At the time of his employment, Stone told the jury, the creditors committee had "grave doubts" that the
figures they had been seeing in the monthly reports from TA were accurate. The court had allowed TA to
operate as a "debtor in possession," which meant that instead of appointing a trustee police the
operation, the judge had permitted TA to do the job itself.
The bankers believed that the court had entrusted the henhouse to the fox. In documents filed with the
bankruptcy court the year before Stone was hired, the bankers had charged Stanley with a long list of
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wrongdoings, including concealing and diverting assets and filing false reports with the court. Money that
should have gone to creditors was funneled instead to companies set up in the names of his wife and
children, the bankers claimed. Stanley also took steps to make sure that he would remain comfortable,
even if his creditors weren't. He sold his home to one of the companies and leased k back for $1,000 a
month--$4,000 less than the mortgage payments. Although TA denied the bankers' allegations, Stanley
reluctantly compromised with the creditors, appointing an independent board of directors for
TransAmerican--the first ever to oversee a Stanley-owned enterprise. This must have been a bitter pill to
swallow, but not nearly as bitter as the alternative, which was liquidation.
The bankers believed--and Stone confirmed--that Stanley was deliberately attempting to undervalue his
company as a ruse to avoid liquidation, that he had directed his accountants to cook the books. Stone
showed the jury a letter written to him in 1986 by John Nabors, TransAmerican's chief outside attorney,
suggesting that in the disclosure statement that Stone was helping draft for the creditors, the overall
liquidation value should be under $500 million. "In order to present something that was unattractive to
the creditors in terms of liquidation...the value had to be under $500 million," Stone explained. Stone
believed this was far below the company's real liquidation value, which he had calculated to be about
$720 million. But Vic Stone thought of himself as "a team player," and he ended up testifying at a
bankruptcy hearing in 1987 that the figure was only $450 million. "I could have waked away from the
company, quit my job...but I didn't," Stone admitted to the Houston jury seven years later. "I was a
coward. I needed the work."
Stone went down a long list of "accounting irregularities' that he discovered after he took the job. The
purpose of these irregularities, Stone told the jury, was to create a cash flow that would permit Stanley to
expand his business outside the jurisdiction of the bankruptcy court. About the same time that Stanley
filed for bankruptcy in 1983, Stone said, TransAmerican formed an affiliated company called Southwest
Texas Services. The purpose of the company, or so it appeared to Stone, was to divert money from
creditors. Moreover, Stone discovered, the company was selling goods and services to TransAmerican at
inflated prices. Stone said that when he told Nabors and TA president Craig Shephard that Southwest
Texas Services was gouging the company, they told him to mind his own business. Within a few years,
other suspect vendors and oil-field supply companies began to do business with TransAmerican--Somex,
Petrolith Drilling Fluids, Petrolith Pipe, Petrolith Mud. "What's irregular about it," Stone explained, "is that
these companies were all controlled by or through Mr. Stanley..." Millions of dollars were changing hands,
and none of the money was going to the creditors.
Because of a formula error in the computer program, Stone learned, TransAmerican had been underpaying
royalty owners by deducting excessive severance tax from their checks. Stone corrected the formula,
which he assumed was his job, and suggested that retroactive payments be made to royalty owners.
According to Stone, when Jack Stanley learned what he had done, Stanley hit the ceiling. "Mr. Stanley
called me into his office and told me that I was never again to make another change in accounting practice
without his approval," Stone recalled. He added that Stanley had told him, "If the royalty owners have a
problem, we'll negotiate it with them. They'll have to sue us." As an aside, Stone informed the jury that
suing a company in bankruptcy is particularly difficult.
By the summer of 1987, royalty owners and drilling partners began to suspect that TransAmerican wasn't
paying all that it owed and demanded to look at the company's books. The company stalled, usually
forcing the royalty owners to file suit, at which time the company was likely to countersue. In the
meantime, Stone requested that his comptroller, Richard Bloodgood, examine the methods being used to
calculate royalty payments and drilling program payouts. Bloodgood responded with a memo listing fifteen
separate accounting problems, a finding that if corrected, would have cost TA millions. The memo was
directed to Stone, with copies to Stanley and others. But when Craig Shephard saw the memo, Stone
testified, he ordered Bloodgood to rewrite it and direct it not to Stone but to the legal department--and
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remove Shephard's name and the names of Jack Stanley and his wife, Eileen, from the distribution list. If
the jury was wondering why an accounting problem would be bucked to legal, Stone supplied the
explanation: "That was the practice TransAmerican used whenever they had problems or sensitive
material...They put it through the legal department so it would not be discoverable, so that royalty
owners, the State of Texas, you name it, in litigation could not get to it because it was under the
privileged communication rule of attorney-client."
The summer of 1987 was a critical time for Jack Stanley. The creditors were about to agree on a plan of
reorganization that would allow the company to emerge from bankruptcy, Stone testified, and everyone
was waiting for the plan to be approved. In the meantime, Stone apparently waited and hoped for the
best. But five months after the plan went into effect, Stone said, the company was still having accounting
irregularities and fielding embarrassing questions from royalty owners, the state comptroller, and
creditors. By March 1988, Stone had decided that he couldn't play the game anymore. That's when he
refused to sign two documents that he believed were fraudulent--a tax settlement agreement with the
state and the monthly compliance report for the creditors committee. As a result, Stone told the jury, he
was fired.
ALTON DAVIS, 42, WAS, BY NATURE, more trusting than his friend and going companion Vic Stone. Before
deciding to be an accountant, he had studied theology at Houston Baptist University. At the time that
Stone and other executives were working on the reorganization plan, Davis was just a foot soldier doing
what he was told. According to his testimony in Houston, Davis was told to commit perjury, lie to and
conceal records from the royalty owners and their auditors, destroy documents, and commit perjury a
second time--which is where he finally drew the line.
Davis told the Houston jury that in the summer of 1987 the company ordered him to testify in
TransAmerican's long, complicated, and extremely bitter lawsuit with El Paso Natural Gas. The litigation
was actually two suits resulting from two disputed contracts--a farmout agreement and a gas purchase
contract--negotiated between the two gas industry giants. First, El Paso claimed that TransAmerican had
breached the farmout agreement by which TA drilled and shared profits on commonly held leases at La
Perla Ranch in South Texas. Then TA countersued El Paso for breaching the gas purchase contract. Davis
was called as a witness in the farmout part of the case and asked to explain to the court how TA
calculated payouts on the La Perla leases. Although Davis was at that time supervising payout accounting,
all the figures used to calculate payouts came from the revenue department. Davis told the Houston jury
that before testifying in the El Paso case, he was supplied with both questions and answers. Partly
because of Davis' testimony, TA won a judgment of about $500 million.
After the El Paso judgment, Davis was promoted to supervisor of revenue accounting, and about a year
later he realized that the testimony he had given was false. Davis told the Houston jurors that he went to
TA president Craig Shephard and to his own immediate superior, Alton Sauls, with this alarming news.
According to Davis, Sauls told him that "we were going to do what we had to do to keep our jobs and,
regarding El Paso, that was to say nothing, that if anyone ever found out about it, that it wouldn't make
any difference anyway. The trial was over and TransAmerican had received a judgment..." (TA did not call
Sauls to refute Davis' accusations. However, the opposing counsel deposed Sauls, and a brief segment of
his video testimony was shown to the jury.) Davis also testified that Shephard told him to do nothing, say
nothing, keep it to himself, and not worry.
That was the beginning of the end of Alton Davis' innocence. He had been aware of some accounting
irregularities, but he regarded them as sloppy bookkeeping. Eventually he saw them as deliberate and
systematic fraud. After that, he told the jury, he was ordered to routinely stall royalty owners and others
who were hounding TA for audit records and, if necessary, to conceal or lie about records. "My job had
become one basically of having to lie on a daily basis," he said.
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In testifying about what came to be called the December 1988 Price Fraud, Davis told the jury that Craig
Shephard called him to his office in January 1989 and ordered him to tear up two December invoices that:
were ready for mailing. Shephard wanted him to draw up new invoices--at a lower price. Davis couldn't
believe what he was hearing: Was the company president really asking him to charge customers less than
the price agreed on in the contract? Davis learned that TransAmerican had a good--if devious--reason: If
bills went out for prices specified in the contract, TA would reach what accountants call an "all-in cash
price" of $2 per thousand cubic feet (mcf) for the month of December. That dreaded number--$2 per mcf-automatically increased TA's monthly minimum payment to its creditors from $3 million to $5 million. Davis
said that Shephard told him to destroy the original invoices and any copies of contracts that supported
the higher prices. He told the jury that he and Alton Sauls stayed until midnight drafting new invoices and
new income statements. But Davis didn't destroy the old invoices. He hid them in his desk drawer and
took them with him when he resigned.
According to documents filed by TA in another case, the late eighties were particularly sensitive times at
TA because of a so-called brother-in-law deal that Jack Stanley had made with his bitter rival, Oscar
Wyatt, to sell gas to Wyatt's Coastal Corporation at favorable prices. The deal had been more or less
forced on Stanley in 1987, when Wyatt, in a brilliant stroke of one-upmanship, tried to undercut TA's plan
of reorganization by having Coastal file a competing plan, which made the creditors a better offer than
Stanley's company was prepared to make. Stanley believed that Wyatt had been trying to get even with
him since the sixties, when the two had quarreled over a purchase contract between Coastal and
Stanley's Gasland chain. In the seventies, of course, Stanley had scored big on his rival by hitting it rich in
the Lobo Trend, which was practically in Wyatt's back yard. Thus, if Coastal had succeeded in co-opting
TA's plan of reorganization, Wyatt would have finally grabbed TA's drilling leases. Instead, Wyatt backed
off, in exchange for an agreement by which TA guaranteed Coastal a supply of cut-rate gas. Not
surprisingly, his agreement created a new flurry of lawsuits for TA. Landowners and drilling partners sued,
claiming that TA was selling the gas from leases in which they held a common interest, thereby forcing
them to pay a percentage of a settlement to which they were not a party. TA also sued Coastal on the
claim that Oscar Wyatt had misled Jack Stanley into accepting an unfavorable gas-pricing index. That suit
was settled and a new pricing index was agreed on--which led to yet more litigation. Stanley eventually
freed himself of the entanglement by agreeing to pay Coastal $13,750 a day until 1997.
Davis testified that what finally persuaded him to quit TransAmerican was a 1988 case in Zapata County in
which TA was attempting to force an elderly widow in Alabama named Monica Kolaya to accept
considerably less in royalties than what Davis had calculated she was owed. Davis told the Houston jurors
that when he was deposed in that case, Alton Sauls gave him instructions to say nothing about the issue
of underpayments to royalty owners, especially the part about the Coastal settlement. He remembered
that Sauls had said that before TransAmerican paid any royalty owners for any underpayments, "they
were going to make them sue them and pursue them until they beat them down and then make them
settle for less than what they were owed if they could." Davis did as he was ordered during the
deposition, revealing as little as possible without actually lying. But when it came time to testify in Zapata
County, Davis said, he informed TA's lawyers that if called, he would tell the truth. (An attorney for TA
testified at the Houston trial that this did not happen.) Instead of Davis, the lawyers called a woman from
TA's land management department, who was forced to admit to Monica Kolaya's attorney, Richard J.
Hatch, Sr., of Corpus Christi, that she was merely reading from a document that she had been given. The
court found for Hatch's client and rendered a judgment of $1.7 million.
Hatch would soon discover, however, what other lawyers who have tangled with Jack Stanley have
discovered: It ain't over till it's over. TransAmerican hired another lawyer, Carlos Zaffirini, who filed a
motion for a new trial based on a procedural error. Judge Manuel Flores apparently had no choice except
to set aside his own judgment. Hatch was devastated. His client was too old and too sick to return to
Texas for another trial. Declaring, "I'd had all the justice I could take in Zapata," Hatch refiled Kolaya's
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case in federal court. A federal judge ordered TA to settle with Kolaya, which it did, for $1 million.
Unfortunately, she didn't live to enjoy it. Within the year, Kolaya was dead.
BILLY STANLEY WASN'T PART OF the BDS suit--he has his own suit and countersuit with his father--but he
didn't have to be asked twice to testify. When Jack Stanley forced him out of TransAmerican and then
disowned him in 1992, Billy tried to kill himself. He has since become consumed with putting his father
behind bars, even if it means that he has to go with him. Billy has told his story to the FBI, the U.S.
Attorney, and the Environmental Protection Agency, as well as journalists, investors, and anyone else who
will listen. He freely admits having operated a criminal enterprise from 1988 until 1992, the four years that
he ran TransAmerican's Laredo office for his father. The question seems to be, Was Jack Stanley a dupe or
the evil brains behind his son's enterprise? TransAmerican has pulled out all the stops to keep Billy quiet.
Returning to the courtroom of Judge Flores, who had set aside his own judgment in the Kolaya case, the
company prevailed on Flores to issue a temporary restraining order prohibiting Billy from publicly repeating
his allegations. Billy went right on talking.
Billy, who is now 32, told the jury in Houston that he was sent to Laredo in 1988 to be his father's "eyes
and ears." His instructions were to keep watch on Southwest Texas Services and TA's drilling operation
and its network of pipelines, and to identify and fire would-be troublemakers. Billy arrived at a strategic
moment-shortly after the reorganization plan was approved. His credit exhausted, Jack Stanley was
desperate for new sources of revenue, and Laredo was his cash cow.
On his father's orders, Billy explained to the jury, he set up more than two dozen service and supply
companies (known in the gas patch as soap, dope, and rope outfits) whose mission was to funnel money
away from creditors and redirect it to his father. On occasion, these companies sold goods and services to
TA at inflated prices. On other occasions, they collected for pipe that was never delivered. Billy went on to
describe how wells were drilled on land leased to Lynn Petroleum, a company owned by Billy, his brother,
and two sisters but operated by their father, who made all the business decisions. Money to pay for
drilling came from TransAmerican; it was transferred to Lynn Petroleum through one of Billy's companies.
Billy's companies purchased rigs, equipment, and land with TA's money and shipped equipment to
companies owned by family members, and sometimes to Jack Stanley's Good Hope Refinery in Louisiana.
Billy told the jury that it was company policy at TA to lay off 10 percent of the accounting personnel every
three months: Jack Stanley fired people as object lessons on what happens to workers who don't play
ball. Vic Stone, for example. Billy told the Houston jury that his father got rid of Stone--and then sued him-because "Vic couldn't keep his mouth shut and he had to shut him up." Billy described to the jury how he
established a system called Laredo Healthcare Associates, again on instructions from his father, and used
the medical records of employees to decide which ones to fire. "Basically, anybody with a claim over five
thousand dollars was terminated," Billy said.
Billy also told the jury that on his father's instructions he delivered large amounts of cash to South Texas
wheeler-dealer Clinton Manges. Billy said that the money was supposed to be used to bribe former
congressman Albert Bustamante of San Antonio, former railroad commissioner Lena Guerrero, Louisiana
governor Edwin Edwards, and other politicians and judges. In the Wall Street Journal story, Jack Stanley
admitted making political contributions to Edwards but denied bribing anyone.
The first of Billy's front companies was called Somex, founded with money Billy drew from TransAmerican.
Somex soon proved inadequate, and more companies had to be formed. These were eventually
consolidated under a holding company called World Energy. The reason that Jack Stanley wanted so many
companies, Billy testified, was to make "the board feel more comfortable" that TransAmerican was
soliciting competitive bids. Apparently the board did not realize that Billy himself prepared all the invoices,
manipulating the bidding and deciding which of his several companies would get TA's business. Billy
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testified that his father told him not to worry about the board, "that anytime he wanted to get rid of them
they would be gone."
Billy's run in Laredo ended in 1992, when his father decided to take part of TransAmerican public.
Desperate for new capital to support the moribund refinery in Louisiana, Stanley lumped TransAmerican's
oil and gas reserves into a new entity called TransTexas. (Since then, Stanley has sold roughly 13 percent
of his stock in TransTexas.) One problem with taking the company public was that a disclosure statement
had to be led. This meant that World Energy had to vanish, Billy told the jury. He testified that in October
1992 he met with TA's outside auditors, who told him to make World Energy "go away." Billy, who testified
that up until this point he owned 25 percent of World Energy, went to his father's home in Kingwood for a
showdown. There are two accounts of what happened next. Billy told the Houston Chronicle that his
father drummed him out of the company, "divorced" him, and ordered him to change his name. Jack told
the jury that Billy tried to shake him down for 25 percent of TransAmerican in return for his silence. A few
months later, Billy tried to kill himself. Today he runs a boat business in Naples, Florida, and conducts his
vendetta against his father.
CRAIG SHEPHARD, WHO HAD LEFT his position as president of the company in 1991, was called back into
service by TransAmerican's attorneys to refute the charges made by Davis and Stone and set the stage
for the jury as to what this case was really about. From TA's point of view, the case was about what it
termed the Armageddon Strategy--a conspiracy that TA alleged was cooked up by Oscar Wyatt, with help
from an attorney named Jonathan Cox. Winning the BDS case depended in part on how well the TA
lawyers could sell this theory to the jury, and this in turn would have a profound effect on how well the
Armageddon scenario played to future juries at future trials.
Here is the substance of the Armageddon Strategy. Its linchpin was TransAmerican's settlement with El
Paso Natural Gas. TA said that El Paso had tricked it into settling too quickly and that the trick had cost TA
millions. Though Shephard did not lay out the details of the Armageddon Strategy, he spent much of his
first three days on the stand reviewing the El Paso litigation, in which the court awarded a $500 million
judgment to TA in 1988. El Paso had appealed the judgment, and by the fall of 1989, TA still hadn't
received a penny. TA was extremely hard-pressed for cash and still owed the banks $780 million. The
banks were squeezing Stanley for a big payment. Moreover, Stanley was still required to sell gas to the
hated Wyatt at below-market prices while also fighting off a lawsuit involving a pipe supply company
called Toma. Toma happened to be represented by Jonathan Cox, a lawyer identified by TA as "a longtime
friend and acquaintance" of Oscar Wyatt's. This was where the dots of the alleged conspiracy began to
connect: In March 1989 Richard Bloodgood and Vic Stone were hired-Alton Davis was still at TA--to review
documents that Toma had obtained in its lawsuit with TransAmerican. TA alleged that in May Wyatt
persuaded El Paso Natural Gas to hire Cox, who retained BDS, which allegedly began to supply El Paso
with "stolen" documents, which allegedly gave El Paso the leverage it needed to force TA to settle. On
June 21, the conspirators allegedly met in Wyatt's hotel suite in Houston perhaps to celebrate Wyatt's
imminent takeover of TransAmerican.
TransAmerican's lawyers contend that the company-ignorant of the alleged conspiracy-agreed in
December to settle with El Paso Natural Gas for $300 million, plus El Paso's leases at La Perla Ranch,
worth approximately $100 million. Though it was not part of the BDS case, another document sheds light
on the events leading up to Stanley's decision to settle. In a letter banks and other creditors dated
December 20, 1989, Stanley solicited the banks' commitment to write off his $780 million debt in return for
a $250 million payment out of the El Paso settlement and the promise of another $269 million the
following year: In other words, if Stanley agreed to settle now, the banks would "forgive" $261 million. In
the letter, he also offered to purchase $80 million in debt from non-bank creditors, for fifty cents on the
dollar. Assuming that these offers were accepted-and the fact that there was a settlement suggests that
they were--TA was able to arrange $301 million in debt forgiveness, which diminishes Stanley's argument
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that a premature settlement cost him millions.


Though originally part of TransAmerican's allegations against BDS, the Armageddon Strategy was
withdrawn from the suit during pretrial proceedings. Nevertheless, TA's lawyers were still able to
introduce the strategy during Vic Stone's testimony by propping a large diagram near the jury box,
graphically illustrating the alleged plot and all its octopus-like tentacles. What the jury in Houston did not
know was that TransAmerican had already taken the Armageddon Strategy to Hidalgo County in the form
of a $1 billion lawsuit against El Paso Natural Gas, Wyatt, Coastal Corporation, and others. Cox and BDS
were not named in that suit, but in order to win in Hidalgo County, it was vital that TransAmerican win--or
at least not lose--the BDS case in Houston.
Attorney Tom Alexander, hired by TransAmerican one day before the trial began partly for his skills at
cross-examination, hammered away at Cox, Stone, and Davis but never got them to acknowledge that
any of the documents the BDS partners had copied while employed at TransAmerican were turned over to
El Paso Natural Gas or any other litigant. Davis and Stone admitted that they had examined thousands of
documents for El Paso: El Paso had sixteen boxes of them, collected during its suit with TA. The problem
was, El Paso didn't know how to decipher the documents. That's where the insider knowledge of Stone
and Bloodgood came into play. The nearest thing to a smoking gun that TA's lawyers were able to
introduce at the Houston trial was a confidential report on TransAmerican's reserves that somehow got
into El Paso's hands. A witness also testified that another report submitted by BDS to El Paso contained
several documents that were identical to the copied documents but could not swear they were the same.
During his time on the witness stand, Craig Shephard denied every accusation that Stone and Davis had
made. TA never cheated or attempted to cheat the State of Texas, royalty owners, or anyone else. There
had been some accounting questions, but they had all been addressed in the proper manner. Most of the
claims made against TA by royalty owners came about because of changes in the gas industry brought on
by changes in government policy. Shephard never asked Stone to sign the company's settlement
agreement with the state after the severance tax audit. In fact, Shephard said, Stone's termination had
nothing to do with refusing to sign documents. He was fired because he lacked "interpersonal skills" in
managing people and because he had used abusive language and threatened or coerced employees.
Eventually the "chemistry" between Stone and his superiors had "deteriorated to the point" that firing him
seemed the only alternative. Shephard had no explanation why none of these complaints was recorded in
Stone's personnel file. Until the final week of the trial, TransAmerican called no witnesses offer firsthand
accounts of Stone's behavior. In rebuttal, however, TA called Barbara Gray, who had been a law partner
and colleague of John Nabors' for several years. Gray told the jury how Stone had been "emotionally
abusive" to her while they were working on the reorganization plan and how Stone had become "very
belligerent" and caused a scene during a meeting of about twenty lawyers.
Shephard denied that he had ever asked Davis to destroy records and insisted that the so-called
December Price Fraud wasn't fraud at al but an adjustment, an example of good business practice. Gas
prices had gone up significantly in December 1988, pushing the company's average price above $2. If the
company could find a way to sell a volume of gas at a lower price, the average gas price would be leveled
into the future. Shephard told the jury that there were other instances when TA averaged or levelized gas
prices to manage cash flow. However, Randall J. St. Aubyn, who negotiated gas sales for TA at the time,
testified that he couldn't remember another occasion in which the company sold gas for less than the
contract price.
Outside auditors for TransAmerican disputed Billy Stanley's claim that World Energy and other affiliates
had defrauded TA. But the only other witnesses who disputed Billy were called during rebuttal. Alan
Drane, who is married to Billy's sister Donna and worked for Billy at World Energy in early 1992, told the
jury that Billy's reputation for truth and veracity was "very poor." Edwin Donahue, who became the chief
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financial officer at TransTexas when the company was formed in 1993 and who had prepared Jack
Stanley's tax return for years, told the jury that no money was diverted from World Energy or the other
companies to Jack Stanley or any other member of the family. He acknowledged that World Energy and its
affiliates had done business with TransAmerican-the volume of business had gotten so high that the
board of directors became concerned and had it sharply reduced-but he never had any indication that TA
didn't get a "fair deal" from Billy's companies. In cross-examination, Donahue acknowledged that
Southwest Texas Services, a subsidiary of a company owned by Jack's wife, Eileen, "could haven done
business with other companies owned by members of the Stanley family.
ON A RARE VISIT TO THE WITNESS stand, Jack Stanley came across as a man who takes very good care of
himself. He carried his lanky frame with an apparent self-awareness, as befits a man who runs six miles
each day before breakfast. People who know Stanley say that when the mood suits him, he can be
charismatic and engaging, that he has a dry, sometimes caustic sense of humor. This was perhaps one of
those occasions. When TransAmerican's lead attorney, Don Jackson, asked him what it was like to owe
more than $1 billion, Stanley' glanced at the jury, let his face go slack, and replied, "Everyone is going to
expect me to say it wasn't much fun. It wasn't."
Briefly, he gave the jurors an outline of his rags-to-riches story, how he grew up in Springfield,
Massachusetts, how he turned a job pumping gas into a chain of gas stations, and how, in response to
the gasoline shortage in 1971, he bought the Good Hope Refinery, just upriver from New Orleans. Two
years later he went looking for oil in the Lobo Trend and instead he hit one of the country's great pockets
of natural gas. To date, he told the jury, TA had drilled 1,100 successful wells, produced two trillion cubic
feet of gas, and paid $700 million in royalties.
He explained that his second bankruptcy, in 1983, happened not because of TA's drilling operation but
because he decided to turn the refinery at Good Hope into a state-of-the-art operation that could refine
heavy, high-sulfur crude oil from Venezuela and Mexico. Most of the money for this renovation came from
the $750 million loan from Continental Illinois--on which he was paying 23 percent interest.
Though the refinery played no role in the BDS suit, it has played a major role in Jack Stanley's life. If
Laredo was his cash cow, the refinery was his albatross. It has been widely reported that Good Hope had
a terrible environmental record and that explosions and fires were common. Eleven years ago it was
mothballed. Even so, Stanley has poured more than $1 billion into efforts to reactivate the refinery and
tried to borrow hundreds of millions more. In July 1994 he attempted to raise $530 million through a bond
offering that failed to attract the necessary investors. In November 1994 he tried again, this time with a
scaled-down $400 million offering. It failed too. TransAmerican says that the bonds were pulled down to
await better market conditions, but Billy's public comments no doubt caused some investors to back off.
Boosted by funds from the public sale of TransTexas stock, the refinery reopened in 1994 but shortly
before Christmas was forced to lay off about eight hundred workers, in effect shutting down the operation
again. Nobody has been able to explain Jack Stanley's obsession with the refinery, but Billy has a theory.
"It's his huge ego," Billy told me. "The refinery is something he started but couldn't finish. That's never
happened before, and he can't stand it."
Point by point, Stanley denied to the jury the accusations made against him. He said that it was
"absolutely untrue" that he ever told Stone that he couldn't make accounting changes without Stanley's
personal approval. Nor did Stone ever advise him that there was something fraudulent going on with TA's
royalty accounting: "Absolutely not, he never did any such thing." On the contrary, Stanley assured the
jury, he made a point to avoid personal dealings with TransAmerican's accounting department. "I do not
have any education in accounting," he said. He had never even heard the phrase "cook the books"
before.
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And, no, there was never a plan during the bankruptcy to increase cash flow by cheating royalty owners.
"It was totally the opposite," he explained. "We needed to keep the royalty owners satisfied....we have
renew those leases....You have a moral responsibility to pay whatever the royalties are." In fact, some of
his best friends were royalty owners. "Except for a few cases," he said, his relations with the royalty
owners have been "excellent."
Curiously, Jack Stanley was asked little about Billy or Billy's activities in Laredo, nor did he volunteer much.
He merely said that Billy was "estranged from the family." Outside the courtroom he has denied any
association with Somex, World Energy, or any of Billy's ventures. "I had no interest in it whatsoever," he
told the Houston Chronicle. "None. Zero."
NEAR THE END OF OCTOBER 1994, the jury in Judge O'Neill's court found that TransAmerican's conduct was
fraudulent and illegal and awarded Vic Stone and Alton Davis $8.1 million. Because BDS had profited from
the documents they had copied, the jury also awarded TransAmerican $200,000. TransAmerican filed a
motion for mistrial based on the contention that Judge O'Neill had dismissed one of the original jurors and
appointed an alternate without holding a hearing to allow attorneys to question the juror who was
dismissed. On November 8, Eileen O'Neill was defeated for reelection by John Devine, a largely unknown
Republican with no experience on the bench.
But one more remarkable thing was yet to happen. During the final week of December, in one of her last
orders of business before stepping down, Judge O'Neill granted TA's motion for a mistrial. She said that
"with an extremely heavy heart" she was ruling that the proceedings between BDS Associates and
TransAmerican had been wasted effort.
Badly shaken by the decision, Berk and Powell, the attorneys for Davis and Stone, asked Judge Devine to
overturn the ruling of his predecessor. They pointed out what they considered a conflict of interest. Don
Jackson, who had been hired by TA as its lead attorney three months before the start of the trial, was a
former colleague and a longtime friend of Eileen O'Neill's and had served on the steering committee and
the finance committee in both of her election campaigns. Powell argued that TransAmerican had "a history
of working the system, of arranging to practice in front of certain judges and hiring certain lawyers." But
under Texas law, Jackson did not have a conflict of interest. For that matter, neither did Powell, who was
forced to acknowledge that he had also contributed to O'Neill's campaign. Devine had no choice but to
uphold O'Neill's decision.
The case has been transferred to the court of Judge Scott Brister for retrial, starting August 21. In a
summary judgment, Brister has weakened BDS's case somewhat by ruling that the former employees can
not justify taking the documents and using them for profit merely because the documents demonstrate
fraud or illegal conduct. Brister's ruling is a double-edged sword, however: In the new trial, the burden of
proof falls on TA to show which documents BDS profited from rather than showing that BDS profited from
the documents as a whole.
IN FEBRUARY JACK STANLEY FINALLY made investors an offer they couldn't refuse--a $300 million junk
bond offering with a promised yield of up to 18.5 percent, plus a bonus of stock in the company. These are
interest rates not seen since the leveraged-buyout frenzy of the late eighties. The refinery at Good Hope
has again been rescued, at least for the present.
Floyd Norris, who writes the Market Watch column in the New York Times, observed, ((Mr. Stanley's
agreement to pay rates as high as 18.5 percent can be viewed as a sign of confidence, or of a willingness
to gamble with other people's money. He says he isn't worried: 'If I lose $200 million or $300 million, it
won't affect the way I live.'" If Jack Stanley's career proves anything, Norris added, "It is that sometimes
an entrepreneur can do well even when his creditors don't." Or, to say it another way, Jack Stanley
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doesn't mind bankruptcy because that's where the money is.


Stanley is still one of the most powerful players in the oil and gas game.
Copyright Mediatex Communications Corporation Jul 01, 1995

Indexing (details)
Subject

Southwest;
Personal profiles;
Natural gas industry;
Entrepreneurs

Location

US, TX, Houston

People

Stanley, Jack

Classification

8510: Petroleum industry


2130: Executives

Title

The king of bankruptcy: How did Houston natural gas


mogul Jack Stanley go from $1.2 billion in debt in 1983 to
$2 billion to the good eleven years later?

Author

Cartwright, Gary

Publication title

Texas Monthly

Volume

23

Issue

Pages

96

Publication year

1995

Publication date

Jul 01, 1995

Year

1995

Section

Publisher

Texas Monthly, a Division of Emmis Publishing, LP

Place of publication

Austin

Country of publication

United States

Publication subject

General Interest Periodicals--United States

ISSN

01487736

CODEN

TEMOD4

Source type

Magazines

Language of publication

English

Document type

PERIODICAL

Accession number

95-66023

ProQuest document ID

226956366

Document URL

http://search.proquest.com/docview/226956366?
accountid=63064

Copyright

Copyright Mediatex Communications Corporation Jul 01,


1995

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Last updated

2014-05-22

Database

ProQuest Research Library

Copyright 2014 ProQuest LLC. All rights reserved. Terms and Conditions

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