This story was updated at 5:25 p.m. EDT.
Interior Department employees accepted gifts from oil and gas companies, participated in "a culture of substance abuse and promiscuity" and considered themselves exempt from federal ethics rules, new reports by the department's inspector general say.
The reports -- the result of three different investigations against more than a dozen current and former employees of the Minerals Management Service, which collects about $10 billion in royalties annually -- found a "relatively small group of individuals" wholly lacking in government ethical standards and management that provided passive or purposeful ignorance, Inspector General Earl Devaney wrote in a memo to Interior Secretary Dirk Kempthorne.
The investigation discovered that nearly a third of the entire staff of MMS's royalty-in-kind (RIK) program socialized with and received a wide array of gifts and gratuities from oil and gas companies with which the agency was conducting official business. The RIK program allows companies to pay royalties in the form of oil and gas rather than cash.
The dollar amount of the gifts was not enormous, but the gifts were accepted with "prodigious frequency." Two RIK marketers received gifts and gratuities on at least 135 occasions from four major oil and gas companies with which they were doing business.
"When confronted by our investigators, none of the employees involved displayed remorse," the memo says.
The investigation also found drug and sex abuse both inside the program and "in consort with industry." One supervisor, Greg Smith, engaged in illegal drug use and had sexual relations with subordinates. Several staff members admitted to illegal drug use as well as illicit sexual encounters, and some had sexual relationships with industry contacts.
"Alcohol abuse appears to have been a problem when RIK staff socialized with industry," it said.
One of the employees, Jimmy Mayberry, has already pleaded guilty to a criminal charge. The cases against two others, Greg Smith and Lucy Querques Dennett, were referred to the Justice Department's public integrity section, but that office declined to prosecute them.
Three senior executives, Mayberry, Dennett and Milton Dial, were good friends who remained "calculatedly ignorant" of the rules governing post-employment restrictions, conflicts of interest and federal acquisition regulations, to ensure that two lucrative MMS contracts would be awarded to the company created by Mayberry and later joined by Dial.
"Dennett manipulated the contracting process from the start," the letter says.
Some employees have escaped any actions against them by retiring "with the usual celebratory send-offs," which were undeserved, the memo says.
The investigation took more than two years and cost nearly $5.3 million. More than 250 witnesses were interviewed and about 470,000 pages of documents and e-mails were reviewed. It took so long due to the criminal nature of some allegations, long discussions with Justice and the refusal of Chevron Corp. to cooperate with the investigation, Devaney wrote.
The most serious problem uncovered was a "pervasive culture of exclusivity, exempt from the rules that govern all other employees of the federal government."
"Not only did those in RIK consider themselves special, they were treated as special by their management," the letter says. The reporting hierarchy of RIK bypassed "the one supervisor whose integrity remained intact throughout, Debra Gibbs-Tschudy," and reported directly to Washington, D.C. The unethical conduct was "apparently invisible" to former MMS Associate Director Dennett.
Devaney said that 99.9 percent of Interior employees are ethical, but the few highlighted in the reports "cast a shadow on an entire bureau."
He recommended administrative corrective action for the individuals, an enhanced ethics program and code of conduct for the RIK program and changing the program's reporting structure. MMS Director Randall Luthi said the agency has already begun implementing some of those recommendations.
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Luthi told reporters the agency had asked for the investigation in 2006. He said he takes the reports very seriously and will work to fix the problem before he leaves office in January. The inappropriate actions took place before the spring of 2006, he said, when an employee brought concerns about inappropriate actions to managers. He said the agency has made progress since then.
"This is not the program that was going on in 2006," Luthi said.
The agency pulled employees who might have been involved out of the RIK program when the investigation began, he said. The agency will now take 90 days to consider what action, up to dismissal, it will take against the remaining seven or so employees cited in the reports who still work there.
The reports come as the latest in a series of harsh criticisms of MMS.
"Simply stated, short of a crime, anything goes at the highest levels of the Department of the Interior," Devaney told the the House Government Reform Energy and Resources Subcommittee in 2006.
Management problems at MMS had become so severe that the agency appeared to be held together with a "Band-Aid approach," Devaney also found.
Senate Energy and Natural Resources Chairman Jeff Bingaman (D-N.M.) called the improper activities in the reports "extremely troubling."
"From my vantage point, this investigation raises very serious questions about management and organization at the Interior Department," Bingaman said. "American taxpayers deserve to have confidence that their interests are being protected when it comes to collecting royalties from the production of public oil and gas resources, especially given the potential for expanded domestic drilling."
Bingaman said he would push for basic reforms in any drilling bill that is considered.
House Natural Resources Chairman Nick Rahall (D-W.V.) blasted the agency.
"The activities at the RIK office are so outlandish that this whole IG report reads like a script from a television miniseries -- and one that cannot air during family viewing time," he said. "It is no wonder that the office was doing such a lousy job of overseeing the RIK program; clearly the employees had 'other' priorities in that office."
Click here to read Devaney's memo to Kempthorne.
Click here to read the IG report on MMS's federal business solutions contracts.
Click here to read the IG report on MMS's oil marketing group.
Click here to read the IG report on Greg Smith.
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