Tree Ring Circus
1986 Houston businessman Charles Hurwitz buys a lumber company in California. 1989 The feds investigate Hurwitz for his role in the failure of a Texas savings and loan. 1990 Environmentalists organize Redwood Summer to protest Hurwitz’s logging practices. 1995 The feds sue Hurwitz for more than $1 billion in an effort to get control of his redwoods. 2005 A federal judge dismisses the suit and awards Hurwitz $72 million in damages. Your tax dollars at work.
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In July 1995, six and a half years after the investigation had started, Hurwitz precipitated a crisis by refusing to sign yet another agreement allowing the FDIC more time to pursue its case against him. The FDIC had thirteen days to decide either to sue him or give up its claim. At that point, Allen McReynolds, special assistant to the Secretary of the Interior, brought his agency’s considerable influence to bear. In an emergency meeting with the FDIC, he lobbied hard to sue Hurwitz, saying, “The administration wants to do the deal.” But in spite of such personal lobbying, the FDIC’s own lawyers still could not bring themselves to recommend suing. This is strikingly apparent in the draft of the FDIC’s own “authorization to sue” memorandum, dated July 24, 1995. In it, the FDIC’s deputy general counsel Jack Smith argues that “there is a very high probability that the FDIC’s claims will not survive a motion to dismiss” and recommends not pursuing a suit on the FDIC’s proposed claims. The chances, said the FDIC’s own lawyers, were roughly seven to one against winning. A week later, following an almost comical series of board meetings in which chairman Helfer personally leaned on the agency’s directors and the “authorization to sue” memorandum was rewritten so that it now recommended suing, the FDIC brought suit against Hurwitz for $250 million. It did so in strong language, vilifying him for failure to put money into the thrift as he had promised, manipulation of stock, illegal quid pro quo arrangements with Drexel, and reckless and negligent management.
Four months later, in December 1995, the OTS brought its own suit for $858 million, based on virtually the exact claims. It named not just Hurwitz but Maxxam, Federated Development, and five former directors of United Savings. The real difference, though—and this was the essence of the FDIC’s plan—was that the OTS’s suit would be tried in an administrative law court by a single judge who both worked for the OTS and had never ruled against it. (The FDIC would pay all expenses and get all proceeds of a victory.) As soon as the OTS sued, the FDIC backed off, seeking to stay its own case in Judge Hughes’s court. Hughes, smelling a rat and hounded now by Hurwitz’s lawyers, who realized that the OTS was secretly working for the FDIC, refused.
Over the next two years, as the trial cases heated up and lawyers burrowed furiously into the guts of the old savings and loan, pressure to make Hurwitz settle his claim by giving up his redwoods only intensified. The FDIC, realizing how bad it would look if people were to learn the real reason for its actions, clammed up in public and officially took the position that debt for nature had nothing to do with its suit. But privately its staffers continued to push its agenda. In one memo, FDIC assistant counsel Jeff Williams thought it would be a good idea to “tie him [Hurwitz] up in lengthy depositions” with a “moderately aggressive discovery plan of our own that inconveniences him.”
One of the more fascinating memos of that era was written by Kathleen McGinty, then the head of the White House—based Council on Environmental Quality—Clinton’s top environmental adviser. The memo was a briefing for Clinton’s September 1996 meeting with Don Henley, who was funding a series of ads in the New York Times advocating debt for nature. At one point, McGinty advises Clinton to tell Henley that “our goal is to acquire as much of the old growth redwoods as we can, but for now, our immediate focus is on the Headwaters Forest. However, much depends on the nature of our ongoing negotiations with Hurwitz.” Significantly, she advises the president to steer clear of actually endorsing debt for nature.
The OTS trial took place in Houston and ran from 1997 to 1999, consumed 119 days in court, and produced two million documents, 30,000 pages of court transcripts, and 2,400 exhibits. Of the 119 days, almost all were taken up by the OTS’s presentation of its case. Hurwitz’s defense required only 12 days. The judge, Arthur L. Shipe, was known for never having ruled against the OTS in any banking-related case. No administrative law judge had ever ruled against the OTS, in fact. But this time his conclusions were unambiguous. In 2001 Shipe dismissed every claim the OTS had brought, peppering his 249-page ruling with such statements as “In one of its least responsible claims, Enforcement accuses Respondents of ‘stripping . . . USAT’s balance sheet of valuable assets to fund the expansion of Maxxam.’ . . . There is not a scintilla of evidence to support this sensational allegation.” Or, later: “I find it inconceivable that any regulatory agency takes this stance.”
There were no gray areas in Shipe’s decision, no close or agonizing calls. Its meaning was clear: The OTS had brought a completely baseless case. Of course, that’s exactly what the FDIC’s own lawyers had told its board in July 1995. Officially, Hurwitz settled with the OTS in 2002 for roughly $200,000 and change, admitting no guilt. Compared with the $858 million the OTS had sought, the amount was so small as to be meaningless—the equivalent of a couple of weeks of legal fees. Hurwitz effectively won the case outright.
If that wasn’t victory enough, a few months before Shipe’s ruling, the Committee on Resources of the U.S. House of Representatives had unleashed a scathing report, based on its December 2000 hearing and thousands of subpoenaed documents, on what committee staff members called “a federal plan to extort privately owned redwood trees.” The report was certainly political, the work of Republicans at whom Hurwitz had been hammering to help him thwart the Democratic conspiracy to strip him of his redwoods. Whatever the politics of the hearing, its subpoenas had produced a treasure trove of internal FDIC documents showing just how and why it had brought its case. In November 2002 the FDIC, sensing which way the wind was blowing, simply walked away from its case. But Hurwitz had no intention of dropping it. He counterclaimed, arguing that the FDIC had brought a wrongful suit and asking for monetary sanctions against the agency.
Perhaps the strangest aspect of the sanctions case was the FDIC’s refusal to admit that it had ever even considered taking part in anything like a debt-for-nature scheme. At both the congressional hearing and in Hughes’s court, FDIC lawyers—specifically general counsel William Kroener, staff attorney and lead United Savings investigator John Thomas, deputy general counsel Jack Smith, and liability section chief Jeffrey Williams—denied any involvement in such a scheme. Hurwitz’s counterclaim resulted in Judge Hughes’s groundbreaking $72 million ruling in August 2005. In it he accused the FDIC of lying and evading, of trying to keep from Hurwitz’s lawyers “every document showing the FDIC’s role in the plan,” and of switching numbers on document boxes to confuse the opposition. The FDIC has appealed the case to the Fifth Circuit Court of Appeals, which may rule on it this year. If it does, it will be only on the narrow question of whether the FDIC knew it was bringing a meritless case.
By the time Judge Shipe had ruled against the OTS and the FDIC had dropped its suit, thereby shutting down forever any hope of squeezing trees or money out of Hurwitz, the whole notion of debt for nature had become moot. In 1999, after negotiations led by California Democratic senator Dianne Feinstein to settle opposing lawsuits brought by the environmentalists and Hurwitz over the right to log, a final agreement was signed in which federal and state governments bought 7,500 acres—including the Headwaters—from Palco’s subsidiary Scotia Pacific for $480 million. While the FDIC and its political allies were busily scheming to strip Hurwitz of his trees through indirect means, the normal, constitutional process for taking land from an American citizen had already run its course. Hurwitz is reluctant to talk about the financial damage the FDIC and OTS lawsuits did to him, but he concedes that the government’s suit not only cost Maxxam a great deal of money but also hurt his ability to make money. “You go around and say to clients or investors or whoever, ‘Don’t worry about this billion-dollar lawsuit from the government,’” he says. “Maybe not everybody bought into that story. We were a lot more active in life before the lawsuit . . . And, look, I take things that aren’t great pretty well, better than most people. But no one enjoys this. No one likes this, saying you are raping trees and doing all of this stuff.”
Hurwitz’s friends say that he understates the damage. “The lost opportunities were substantial,” says close friend Bob Lanier, the former mayor of Houston, who advised Hurwitz on several occasions to settle. “Look at the company’s earnings before and after. Though he doesn’t show it much, it took a personal toll on him.” Says J. Livingston Kosberg, a Houston investor who once ran Gibraltar Savings and decided to settle rather than fight: “Fifteen years of struggling for a victory took a great deal out of him. The cloud over his head limited his ability to accomplish things he would have been able to accomplish.” Hurwitz’s empire is indeed a pale shadow of what it was before the lawsuits began. The prime example of this is Kaiser Aluminum, once his largest holding, with more than $2 billion in revenue, which went bankrupt in 2002. Though it is likely to emerge from bankruptcy this year, it is a total loss for Maxxam. The company was the victim of asbestos litigation (120,000 suits), rising retiree medical and pension liabilities, a weak aluminum market, and a general economic downturn after September 11.
Pacific Lumber, meanwhile, by far Hurwitz’s largest remaining asset, is beset again by environmentalists. As part of the Headwaters Agreement, Hurwitz and Palco had set aside nearly seven thousand acres of old-growth forests for fifty years and promised not to log where spotted owls and marbled murrelets nested or in areas prone to landslides or within 170 feet of streams and rivers. In exchange, Palco got money for the trees and promises that the company would be able to log a certain number of trees per year and that there would be a simplified, one-stop approval process. Most important, there was a federally guaranteed “no surprises” rule that said that no new laws would change the agreement. It was the most restrictive environmental agreement ever signed by a natural-resources company. Clinton and Hurwitz had each been involved in the negotiations, speaking personally by phone.
Still, many environmentalists hated the Headwaters Agreement and continued to fight it. The environmental lobby soon got state law changed so that California’s water agencies could overrule the deal. Palco was suddenly looking at a whole new set of water quality restrictions. Meanwhile, a federal court in Washington, D.C., threw out the no-surprises rule, and in 2003 a state court eviscerated the Headwaters Agreement’s habitat conservation and sustainable yield plans. Though the latter case was overturned on appeal, it has taken its toll on the company.
“Palco faces bankruptcy,” says a March 2005 company white paper, meaning that if it can’t pay the interest on its $774 million debt, its bondholders will soon take control of the company’s 216,000-plus acres of timberland. Maxxam would likely end up with the town of Scotia and the sawmills, in addition to its other holdings, which include several hundred million dollars of investments, real estate holdings in several states and Puerto Rico, and Sam Houston Racetrack, in Houston. But the company will be a fraction of what it once was. Hurwitz, bloodied but still optimistic, wants Palco to survive. “It is a great business model,” he says with a confident smile. “Great forests, great people.” How does he plan to solve the problems caused by the new water regulations? “We are going to do what we have to do,” he says. “We have a signed contract with the federal and state governments saying we can cut 176 million board feet per year. A signed contract. We also have a letter from the president of the United States, the Secretary of the Interior, and the governor of California saying that economics will overrule everything else to make it work.”
Soon after our interview, the company filed a lawsuit against the State of California for breaking the promises it made as part of the Headwaters Agreement. For Palco, and for Hurwitz, it seemed like a familiar place: sunk deep in litigation, with everything on the line.
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