Yet more drama has been unfolding in the ongoing soap opera involving Tommy Thompson (through his wholly-owned Columbus America Discovery Group (CADG)) and the SS Central America (SS CA). The latest round of intrigue is being revealed in court records from Ohio, as well as in Norfolk's US District Court where admiralty law is applied to the SS Central America salvage.
In the most recent round, CADG's attorney, Richard Robol, is attempting to undermine a motion by Ira Kane, the court-appointed Receiver representing the interests of Recovery Limited Partnership (RLP), to substitute RLP for CADG in the original admiralty arrest of the SS Central America (Columbus-Am. Disc. Grp., Inc. v. Unidentified, Wrecked, and Abandoned Sailing Vessel, No 2:87cv2363). Recall that RLP and its Receiver, Ira Kane, represent some of Thompson's original investors and creditors. RLP is the entity that engaged Odyssey Marine Exploration (NASDAQ:OMEX) to complete salvage work on the SS CA.
Kane's motion is important because the party which is judged to have arrested the vessel is the salvor-in-possession and retains exclusive rights to salvage the SS Central America. If the motion is granted, then RLP is judged the plaintiff (the rightful salvor) in the original arrest of the SS CA, and Odyssey can remain its contractor. If the motion is denied, it still appears likely that RLP (and Odyssey) will retain control of the SS CA salvage, but the legal intricacies are somewhat confusing and demand further explanation.
There's quite a lot of history pertinent to this case, and Chief Judge of the US District Court, Eastern District of Virginia, Rebekah Beach Smith (the presiding judge in this admiralty matter) is fully cognizant of this history. I believe that this background must play an important role in how Judge Smith views the respective arguments, so it is useful to review some of this history.
Columbus America Discovery Group, Inc. is wholly owned by Tommy Thompson. Think of CADG as the management company that would ostensibly represent the interests of those for which it served as an agent. In this case, CADG managed the recovery of the SS CA as an agent for RLP investors - thus, CADG was named as plaintiff in the original arrest of the SS CA. Though the initial recoveries by CADG were conducted successfully, the business side of the arrangement was horribly mismanaged. Tommy Thompson was unwilling to open his books to investors. He allegedly kept two sets of books, didn't report certain inventory, may have stolen some of the gold coins that were salvaged, and also may have taken kickbacks from a marketing agency. Thompson failed to appear in court two years ago and has been a fugitive from justice ever since. His last known residence was a mansion he rented (for cash) in Vero Beach, FL. The mansion was raided in 2012, but Thompson escaped capture and has been on the run since.
The lawyer for CADG is Richard T. Robol. Robol has been with Thompson from the beginning and allegedly has close ties to the fugitive. Indeed, quoting as follows from a recent court action of Robol, it almost sounds as if the two are partners-in-crime:
Robol's unreasonable reliance on the statements of his clients, his failure to verify the truthfulness of his representations to this Court, and his firsthand knowledge of the falsity of his statements, compels this Court to conclude that he acted in bad faith, and further acted to commit a fraud upon the Court.
Accordingly, the Court concludes that Robol acted in bad faith, and his conduct is sanctionable under the Court's inherent power. He advanced meritless claims, by representing to this Court and the Court of Appeals, on multiple occasions, that his clients had no other inventories, or indeed that such inventories ever existed; he knew, or should have known, that such claims were meritless; and he was motivated by an improper purpose, by unreasonably relying on his clients and failing to fulfill his obligations to this Court, thus "disrupting the litigation" and "hampering the enforcement of a court order." Metz, 655 F.3d at 489.
Robol's conduct, moreover, rises beyond mere bad faith to the level of "fraud on the court." The Court finds that DPC [Dispatch Corporation] has succeeded in proving, by clear and convincing evidence, that the misconduct here was done by an officer of the Court, directed at the judicial machinery itself, intentionally false, willfully blind to the truth, or in reckless disregard thereof, a positive averment or concealment when under a duty to disclosure, and did in fact deceive the Court. See Gen. Med., 475 F. App'x at 71.
Fraud on the court refers to "the most egregious conduct involving a corruption of the judicial process itself." 11 Charles Alan Wright et al., FEDERAL PRACTICE & PROCEDURE § 2870 (West 2011).
If you read the details in the sanction you'll see that Robol represented for years to the court that CADG had turned over all documents in its possession related to the gold inventory from the SS CA salvage operations. Robol also represented that CADG had turned over all documents related to the downstream monetization of the gold. This information would be crucial in showing how Tommy Thompson had allegedly defrauded investors. Yet, when the Receiver was allowed, under court order, to retrieve all of the CADG files (which were held at Richard Robol's property) the Receiver discovered within hours of examining these files both original inventory documents and downstream marketing documents which had not been furnished to the court by Robol.
What is pertinent in this ruling is that Judge Algenon L. Marbley of the US District Court, Southern District of Ohio, found that Robol had not only acted in bad faith, but had committed a fraud upon the court in a matter concerning CADG and the salvage of the SS CA. One would have to imagine that in any judge's eyes, an attorney representing a company wholly owned by a fugitive from the law who has himself committed a fraud against the court in the same matter would lack a certain amount of credibility. The case will be decided based on its merits and the law, but this context is important nonetheless because often there is room for subjective judgment in interpretation of the law.
One final note of context. Robol has represented to Judge Smith in the Norfolk, VA, US District Court, that he has had no communication with Thompson. In fact, the judge notes in her order from April 1, that "CADG's lack of response means there is no formal opposition to this motion." Yet, Robol appears to be working hard to undermine the Receiver's efforts to salvage some value for the original investors, not only in court filings but elsewhere as well. The big mystery is understanding who is behind this effort, if not Thompson and CADG.
My guess is that certain Odyssey short-sellers became involved with Robol upon learning about the SS CA recovery. This might explain the timing of the action and how the effort is being financed. It also might explain why Robol goes on the attack against Odyssey in his motion to consolidate. It's a little odd for Robol to attack Odyssey when his real issue is with the Receiver who is assuming his client's salvage rights. He is asserting that Odyssey is not fit for the task, but in so doing he is also implicating the Ohio court for not doing its job, since that judge signed off on Odyssey's contract. As we will discuss later, the federal court judge in Virginia (Judge Smith) has already rejected Robol's argument as to Odyssey's fitness.
Parts of Robol's motion to consolidate read as if a short had written them (this is my own, biased guess). The attack is highly ironic, because Robol cites some findings from the Black Swan case against Odyssey, such as the company's failure to reveal inventory, which sound almost exactly like Robol's own bad faith and fraudulent activities. The difference is that the federal government had surreptitiously worked to undermine Odyssey's case, irreparably biasing key participants, while Robol doesn't appear to have suffered from the same handicap.
It's helpful to understand the timeline of events that have transpired with respect to RLP and CADG in the courtroom this year. Below are some of the key documents that have emerged, presented in chronological order with links.
Jan 3, 2014: RLP filed Motion to Substitute Parties, requesting that RLP be substituted as plaintiff for CADG in the original admiralty arrest of the SS CA. This Motion would make RLP salvor-in-possession (rather than CADG) in the admiralty court if approved. link
April 1, 2014: Judge Smith issued an Order to show cause, requesting that RLP demonstrate why its Motion to Substitute Party shouldn't be denied by the court. link
April 17, 2014: Judge Smith issued an Order to Issue Warrant of Maritime Arrest. This order establishes a new admiralty arrest of the SS CA, naming RLP as plaintiff, using artifacts and gold salvaged by Odyssey to make the arrest. link
May 7, 2014: Judge Smith heard arguments regarding the Motion to Substitute. The judge established a three-week period for submissions and replies from the respective attorneys regarding the Motion. She also ruled that Odyssey was qualified to continue with the recovery, but made no decision with respect to whether or not RLP was violating the original arrest. Judge Smith ordered that per admiralty rules, arrested items be turned over to US Marshals for custodial purposes, and that a written report be filed by RLP monthly regarding salvage operations and copies sent to CADG's attorney. (order issued 5/9)
May 9, 2014: Judge Algenon L. Marbley issued an Opinion and Order in US District Court, Southern District of Ohio, ruling that Richard T. Robol, CADG's attorney, had deliberately misled the Court with respect to the SS Central America proceedings. Marbley sanctioned Robol, finding that he had not only acted in bad faith, but had also committed a fraud upon the Court. link
May 9, 2014: Richard Robol submitted a Brief in Support for Motion to Consolidate cases. Robol had filed a motion to have the two separate admiralty cases (CADG's and RLP's) heard as one. The memo gives him an opportunity to make his case as to why CADG should still be considered salvor-in-possession, and why RLP and OMEX are unfit for their roles. link
As stated in the introduction, the issue at hand is the motion to substitute RLP for CADG in the admiralty arrest of the SS CA in Judge Smith's Norfolk court. The plaintiff in a valid admiralty arrest is awarded salvage rights to the vessel, and a permanent injunction is put in place which prohibits other salvors from interfering.
If the motion is granted, then it is game over for Robol and CADG. RLP would become the salvor vis-a-vis the original arrest. Yet, even if the motion is denied, it is very likely that RLP will remain the salvor, so the argument is more about legal technicalities than anything else (though OMEX short-sellers will no doubt argue against this view). In other words, regardless of the court's decision, Odyssey is likely to remain a contractor to RLP under terms of its court-approved agreement.
There are good and valid reasons to argue that RLP's Motion for Substitution should be approved. The argument is that at the time that CADG was granted the admiralty arrest for the SS Central America, it was solely an agent of RLP. According to three separate Orders from Ohio Courts, CADG had exclusively acted as the agent to RLP, and because of this relationship RLP was the legal owner of the salvage rights to the SS CA, regardless of CADG's present relationship with RLP. This makes sense because the money to salvage the SS CA came from RLP investors, they ought to own the salvage rights.
In Judge Smith's Order to Show Cause, the judge notes that the award of salvage rights is the jurisdiction of her Admiralty Court, and not the Ohio court. Judge Smith also believes that RLP's contract with CADG terminated years ago, so CADG may not be an exclusive agent to RLP at present. This wording in the Order to Show Cause muddies the water somewhat. Still, the fact remains that the Ohio court has ruled that CADG was the exclusive agent to RLP when the arrest was made, and this is a strong and convincing argument for present day substitution.
The argument for substitution is convoluted and somewhat difficult to handicap. The good news for RLP and OMEX investors is that even if Judge Smith rules against the Motion to Substitute, she has already tipped her hand multiple times showing an intent to rule in favor of the new admiralty arrest made by RLP.
The first evidence of such is the fact that the judge issued an Order for the new arrest. It's difficult to imagine that she would issue a new arrest while understanding that there is a permanent injunction which still exists around the old arrest (initiated in Norfolk's court), unless she had strong feelings that the old arrest was no longer valid.
Second, in her Order to Show Cause, Judge Smith argued strongly in support of the idea that CADG had not maintained its status as salvor-in-possession. In relevant part, Judge Smith's Order reads:
In order to maintain exclusive salvage rights, a salvor-in-possession must "exercise due diligence and be reasonably successful in his attempts."
In this case, there is nothing in the record to suggest that CADG has been diligent in exercising its salvage rights. On the contrary, RLP has represented to the court that CADG is a "defunct entity."
Indeed, as discussed supra Part II.A., there is nothing in the record to suggest there has been any salvage activity for well-over a decade.
In order to maintain exclusive rights to a shipwreck, a salvor must demonstrate that its efforts are "(1) undertaken with due diligence, (2) ongoing, and (3) clothed with some prospect for success" Link Since Judge Smith is on the record stating that CADG has not shown diligence or activity in salvaging the SS CA, there appears to be no reason to believe that the exclusive rights CADG once enjoyed should remain with that entity. This would also explain why Judge Smith ordered a new admiralty arrest on the SS CA.
Good old common sense tells you the same thing. CADG hasn't touched the SS CA since Thompson abandoned it over twenty years ago. The sole owner of CADG is on the run from the law, allegedly having bilked RLP investors of millions of dollars. There is nothing left of the entity (1), with the exception of its lawyer who has been found guilty of committing a fraud upon the court in the matter, and who supposedly has had zero communication with the owner in decades. To argue that this entity still stands as an able-bodied salvor, which has not abandoned the site of the SS CA, lacks credibility.
Third, Judge Smith has allowed the salvage operations conducted by RLP and Odyssey to proceed while she considers whether this salvage operation is a violation of the injunction. Common sense, as well as the rule of law, dictate that if the judge thought that the salvage operations were in violation of the Norfolk court's previous injunction, she could not have allowed the operations to proceed until the matter was decided.
The worst case scenario for Odyssey is that Judge Smith would rule that the existing injunction should remain in place and that RLP could not be substituted for CADG in the arrest. In this case, CADG and Thompson would remain exclusive salvors of the wreck. To understand why this scenario is highly unlikely we should walk through the rationale needed to support this decision.
· The court would have to rule that CADG had actively maintained salvage operations on site despite the fact that the last known salvage was in 1991.
· The court would need to determine that CADG, a company wholly owned by a federal fugitive, is entitled to reap the rewards of the new salvage operations which were initiated by investors who were allegedly defrauded of tens of millions of dollars by Thompson and who spent years in expensive litigation to establish their legal right to salvage the SS CA.
· Judge Smith would have to establish reasoning for allowing Odyssey to proceed with and pay for an illegal recovery for the benefit of Thompson and his company, CADG.
· Even if the federal admiralty court (Judge Smith) ruled that all salvage rights belonged to CADG, the matter of CADG's ownership (and thus the value salvaged) would still revert to the state court in Ohio where the court has already ruled that CADG is an exclusive agent to RLP. Thus the salvaged value would, by law, be the property of RLP.
Short-sellers of Odyssey will undoubtedly attempt to cast court proceedings in a more sinister light, but the facts are the facts, the law is the law, and investors can read the documents and come to their own conclusions. It appears that the implications of these proceedings are technical in nature, and are unlikely to affect Odyssey's current operation or its court-sanctioned contract with RLP.
Interestingly, Robol's effort points to the fact that someone is very concerned that Odyssey will make a substantial salvage from the SS CA. Whether this effort is being driven by Thompson or OMEX short-sellers, we don't know. Whoever is driving the bus thinks there's a good reason to go through this potentially risky, costly, and time-consuming process to undermine RLP and OMEX.
My opinion is that shorts have driven Odyssey's stock lower since the announcement of the initial recovery from the SS CA reconnaissance dive on hopes that they could insert a fly into the ointment of this salvage mission vis-a-vis the courts. Given Judge Smith's order last Friday that Odyssey should continue its work, and all of the other corroborating evidence, it appears that the shorts will lose this battle.
Odyssey shareholders hope the firm will finish its pre-disturbance work on the SS CA before long and begin excavation. If so, we could hear about further recovery after the Odyssey Explorer returns to Charleston in the next week or so. Anyone betting that Odyssey will require an expensive and dilutive equity financing is likely to be disappointed.
(1) This isn't entirely true - Milt Butterworth, Thompson's brother-in-law who acted as chief photographer for CADG, was recently elevated to the status of President of CADG. We have zero understanding of how this promotion transpired since the only person who could have promoted Mr. Butterworth hasn't spoken with anyone in decades.
Disclosure: I am long OMEX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: A final note of disclosure: I am not a lawyer and this note is solely a reflection of my opinion based on my knowledge of the circumstances. I consulted with an experienced admiralty lawyer in making my assessment, and we are in broad agreement on these issues. All the same, these are my words, not his. The Author has obtained all information herein from sources he believes to be accurate and reliable. However, such information is presented "as is," without warranty of any kind - whether express or implied. The Author makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and the Author does not undertake to update or supplement this report or any information contained herein. This is not a recommendation to buy or sell any investment. We may transact in the securities of OMEX at any time subsequent to publication.