ROMANIA: An oil fortune bound in red tape

G. Philip Stephenson does not cut the figure of an Eastern European oil baron, clashing with formerly communist security officials over the legality of his budding empire.

Stephenson is a talkative, Texas-bred lawyer and former U.S. Treasury official who in the past four years has tried, with some success, to create a personal fortune from the privatization of Romania's oil industry. But his success has drawn the attention of Romanian prosecutors and demonstrated the potential and pitfalls of private investment in developing economies in Eastern Europe.

Last year, he and Dinu Patriciu, his Romanian partner in Rompetrol Group NV, that country's second-largest oil company, became the targets of a criminal investigation in Bucharest. Patriciu has spent a day in jail, and Stephenson has been publicly identified as a target of the investigation.

The story of how Stephenson became a target of Romanian anti-corruption officials began in Washington 13 years ago. The mixing of politics and money in the 1990s gave rise to a number of private investment partnerships here -- Carlyle Group being the most prominent -- that helped change Washington careers and fortunes.

Stephenson, a native of Houston and a Harvard law graduate, moved to Washington in the late 1980s to work as a corporate lawyer for the Republican-connected law firm Baker Botts LLP. When George H.W. Bush was elected president, he spent 18 months at the Treasury Department's Office of International Affairs. That job gave Stephenson a close look at the rapidly evolving economies of Eastern Europe. When Bush was voted out of office, Stephenson did what many political appointees in Washington did in the 1990s: He used his Washington contacts and experience to launch a private equity fund.

He raised money from friends and associates -- including Carlyle Group's Edward J. Mathias; Ed Rogers, a White House official in the senior Bush's administration; former U.S. ambassador to Germany Richard R. Burt; and several large institutional investors. Rogers's and Burt's Republican lobbying firm, Barbour Griffith & Rogers LLC, is working for Rompetrol.

The result was International Equity Partners LP, a private equity fund to buy private companies in India and Romania. By 1998, he had raised $20 million to invest in Romania and Moldova. In 1997, Burt introduced Stephenson to Patriciu, a former member of the Romanian parliament who had begun investing in Romanian privatization efforts. Patriciu became a partner in the fund. After the collapse of the communist regime in Romania in 1989, the economy and government began a fitful and sometimes chaotic process of privatization of state-owned industries.

"It was blood-in-the-streets time," Stephenson said of the mid-1990s. "But there was opportunity everywhere if you could stomach it."

Mathias, who has no business relationship with Stephenson now, remembers him as "very smart, very enterprising and very willing to take on risk."

Prosecutors in Romania allege Stephenson and Patriciu evaded taxes and illegally profited from the privatization of Rompetrol. No charges have been filed. Patriciu and Stephenson say the investigation is a sham, triggered by their refusal to buy refineries owned by well-connected Romanian businessmen. The controversy has drawn the attention of officials considering whether to admit Romania into the European Union pact and has drawn statements of concern from the U.S. State Department.

Last month, Stephenson, deputy chief executive and 20 percent owner of Rompetrol, was in Washington visiting old friends in government and out. In those conversations and in meetings with reporters, he is trying to draw international attention to his situation, thereby persuading Romanian prosecutors to, as he puts it, "do the right thing and finish up this trumped-up investigation."

"We want a fair, open, transparent and expeditious process," said Rompetrol's attorney, Obie L. Moore, a Bucharest-based lawyer for the international firm Salans. "Otherwise, if we don't, Romanian reality could drastically change."

Disturbing turn

For Stephenson, the case took a disturbing turn in May when his partner, Rompetrol chief executive and 80 percent owner Patriciu, was arrested and taken into custody for 24 hours before a court denied a prosecutor's request to detain him for 30 days. News of the arrest hammered the stock of Rompetrol's main publicly traded subsidiary. It has since recovered.

"Virtually all of my personal wealth is tied up in this company," Stephenson said. He estimated his stake in Rompetrol at about $100 million on paper. "The stakes for me in this are just about everything."

Rompetrol was privatized in 1993, and Patriciu bought control of it in 1998. Stephenson's Romania fund bought a minority stake for $3 million in 2000, the last of three investments made by the fund. Stephenson left his private equity fund in 2001 to join Rompetrol full time. He moved to Romania in December of that year.

In 2002, International Equity Partners sold its stake in Rompetrol to a European investor -- for a profit, Stephenson said. Patriciu and Stephenson bought 100 percent control of Rompetrol's holding company late last year.

Rompetrol in 1999 began buying Romania's state-owned oil-mining and -refining assets, using cash from its existing business, foreign equity investments and borrowing. In 2001, it bought the government's stake in Romania's largest oil refinery, Petromidia, for about $50 million. Petromidia drove much of the company's subsequent financial success: The company revamped operations at the refinery and invested significantly in its expansion. By last year, Rompetrol had $1.1 billion in revenue and was profitable. It began trading publicly in April 2004 with a market value of about $500 million. By the end of this year, it will have 300 filling stations in Romania.

But the Petromidia deal's success drew the attention of the government. Government officials say Rompetrol did not live up to its commitments when it bought the Petromidia refinery and did not pay all the taxes it owed, in effect ripping off the Romanian government.

In a recent interview, Stephenson chalked up the criminal investigation to private competitors -- "the Romanian oil mafia," in his words -- who wanted Rompetrol to buy their companies at inflated prices. "They threatened to ruin us by releasing damaging information to the government," he said. One of his competitors also owns a Bucharest newspaper that has kept up a steady stream of stories accusing Rompetrol of illegality, he said.

He cited an official finding by Romania's ministry of privatization that Rompetrol is in compliance with its privatization agreement for Petromidia. Stephenson said that by accusing the company of failing to pay taxes, prosecutors are seeking to criminalize a contract dispute that has largely been resolved. "It's as if they are saying, 'Thanks for fixing our broken refinery and putting in all that money and technology and sweat for four years, but now that it is a moneymaker, we would like it back,' " he said.

Rompetrol is also getting support from other foreign investors in Romania. And in June the U.S. State Department asked the Romanian government "to observe due process, to be open and objective" in its handling of the Rompetrol case. Rompetrol last month filed a grievance against the government, claiming that its conduct violated a treaty between Romania and the Netherlands, where Rompetrol is incorporated. If a settlement can't be reached in 90 days, Rompetrol has the right to demand World Bank arbitration.

Romanian Embassy officials in Washington and the Ministry of Justice in Bucharest did not respond to phone calls and e-mails.

In June, Romanian President Traian Basescu, who campaigned on a strong anti-corruption platform, criticized foreign pressure to hold back on the anti-corruption work there, saying such efforts are essential for Romania to enter the European Union by 2007. "If political parties, business lobby groups and the media rise against state institutions trying to deal with major corruption, thus hindering lawful actions of these institutions, then E.U. integration will certainly remain just a dream," he said, according to press reports.

Stephenson said Rompetrol's case has some similarities to that of Yukos, the private Russian oil company that oil executive Mikhail Khodorkovsky bought on the cheap in the 1990s, only to be sentenced to nine years in a Russian prison earlier this year. But, he added, Romania is not like Russia.

"In five years here, I've never been personally threatened," Stephenson said. "Your opponents may write bad things about you and convince the government to investigate you, but there's no business killings there."

He also expressed confidence that he and Rompetrol will be cleared of any wrongdoing. The company has publicly responded in detail to all of the government's charges.

"Transparency is our ally," Stephenson said.

• 185 Corruption
• 187 Privatization