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Attorney General Lockyer Files $200 Million Taxpayer Lawsuit Against Bay Area 'Sand Pirates'
Complaint Alleges Mining Firms Stole State's Marine Sand And Underpaid Royalties
(SAN FRANCISCO) – Attorney General Bill Lockyer today filed a $200 million lawsuit against three Bay Area mining companies, alleging they stole state-owned sand and defrauded the state of tens of millions of dollars in royalty payments for sand harvested from the San Francisco and Suisun Bays.
"These sand pirates have enriched themselves by stealing from the state and ripping off taxpayers," said Lockyer. "We're taking them to court to get every dime of taxpayers' money they took by lying and cheating. This is not ordinary dirt we're talking about. Most construction projects could not be completed without sand. The government needs it to build highways and public buildings. And with dry sand becoming harder to find, marine sand has become more valuable."
Lockyer filed the complaint in San Francisco County Superior Court under the state's False Claims Act. The law prohibits individuals and businesses from knowingly creating or making false statements or records to avoid paying money owed to the state or local governments. The action alleges the defendants violated the Act and engaged in conspiracies to violate the Act, for which the state can collect treble (triple) damages.
The defendants include: Hanson Building Materials America of San Ramon, a subsidiary of Hanson PLC of Great Britain, the world's largest producer of sand and other construction aggregates; Moe Sand Company of Oakland; and Olin Jones Sand Company of Martinez. Hanson bought the Moe and Olin Jones companies in 1999 for $88 million.
The defendants also violated Public Resources Code provisions that prohibit trespassing, and appropriating or converting state-owned sand, according to the complaint. Additionally, the complaint alleges, the defendants' actions constituted unfair business practices.
The complaint seeks a total of about $200 million in damages and civil penalties. That figure includes damages under the False Claims Act and Public Resources Code, and civil penalties for violations of the False Claims Act and laws prohibiting unfair business practices.
If the state wins the case, some of the recovery will go to the whistleblower who originally filed the case in 2001. The Attorney General's Office conducted its own investigation and obtained substantial evidence of serious misconduct. By filing today's complaint, the Attorney General's Office took over the case.
The State Lands Commission (SLC) leases submerged state-owned land in the San Francisco and Suisun Bays to mining firms. The companies dredge and harvest sand from these sites and sell it to construction businesses and other customers. Under the leases, the companies must pay the state royalties based on the actual sales prices the companies receive for the sand. Dredging and harvesting of sand cannot be conducted in areas where a company holds no lease.
Since 1993, Lockyer's complaint alleges, the defendants have perpetrated three basic schemes to defraud and steal from the state. First, they manipulated the sales prices they reported to the SLC to make them artificially low and evade full royalty payments. Second, they under-reported the amount of sand they harvested from the lease sites, which also allowed them to avoid paying what they owed the state. Third, they mined sand outside their lease areas.
"By methods as sophisticated as fictitious pricing schemes to as simple as outright (theft), defendants have knowingly and systematically cheated California taxpayers out of tens of millions of dollars in royalties on state-owned sand over the past 10 years," the complaint alleges. "By failing to pay state royalties and (stealing) state sand, defendants reaped huge economic benefits at the expense of state taxpayers."
The price manipulation took two forms. Under one method, the firms sold sand to affiliates for a small, "token" price. The affiliates then received full retail price when they sold the sand on the open market. But the companies reported to the SLC the token price, which the companies used to calculate their royalty payments. Under the second method, the companies added fees for transportation, unloading and other services to the price they charged their wholesale customers. But the price they reported to the SLC was stripped of the fees, leaving only the net wholesale price and allowing the companies to pay artificially low royalties.
In some cases, the difference between the actual market price and the price reported to the SLC was striking. For example, from 1999 through 2002, the average sales prices received by Hanson ranged from just over $11 per cubic yard to almost $12.50 per cubic yard. During those same years, the average price Hanson reported to the SLC was about $3.30.
In 2002, Hanson's British parent company (Hanson PLC) reported trading profits of $837.4 million. The San Ramon-based subsidiary, meanwhile, ranks near the top of the North American aggregates market.
As the defendants defrauded taxpayers and stole the state's sand, they and the investment community bragged about their profitability. An investment banking group said of one of the Moe companies, "The tremendous hikes in profitability during 1998 underscores that Tidewater has entered a new era of performance with gross margins in excess of 50 percent of revenues." And the complaint quotes Olin Jones as telling one environmental agency staffer that sand mining was so lucrative the agency could not fine firms enough to keep them from over-dredging. "It's like mining gold," said Jones.
Lockyer established the False Claims Section after he become Attorney General in 1999. In enforcement actions it has settled since its formation, the section has recovered $229.6 million for taxpayers.