REFILE-COLUMN - Citgo on the brink: Conflicts, creditors and control of Venezuela’s crown jewel

By Jenna Greene

Jan 9 (Reuters) - As the U.S. moves to reshape Venezuela’s future, a new uncertainty hangs over long-running litigation involving the court-ordered sale of Citgo Petroleum, the South American country’s most valuable overseas asset.

The case, a multibillion-dollar quest by companies seeking compensation for assets seized years ago by Venezuela’s socialist government, is now in its final stretch at the Philadelphia-based 3rd U.S. Circuit Court of Appeals.

But there's a new wild card. What impact, if any, might the capture of Venezuelan leader Nicolás Maduro by U.S. forces on January 3 have on the litigation? President Donald Trump has said his administration will "run" Venezuela for now, and that the country will be "turning over" 30 to 50 million barrels of sanctioned oil to the U.S.

The appeals court on Monday invited the federal government to submit comments of up to 1,300 words by January 8 “to address whether the recent developments in Venezuela” affect the litigation. As of press time on January 9, the U.S. government had not submitted a filing. A Justice Department spokesperson did not respond to a request for comment.

U.S. District Judge Leonard Stark in Delaware paved the way for the sale of Houston-based Citgo in a 2018 decision. The seventh-largest petroleum-refining company in the U.S., Citgo is ultimately owned by Venezuela’s state-run oil company Petroleos de Venezuela, or PDVSA. The sale proceeds will be used to pay some of Venezuela's creditors.

The transaction needs approval from the U.S. Treasury's Office of Foreign Assets Control to close.

Should the feds refrain from involvement, Citgo’s fate will be in the 3rd Circuit’s hands.

Among the key issues on appeal is whether U.S. law firm Weil, Gotshal & Manges or investment bank Evercore had conflicts of interest in advising a court-appointed special master who recommended the $5.9 billion winning bid for Citgo by an affiliate of Elliott Investment Management.

For more than four years, Weil has served as counsel to Special Master Robert Pincus, a retired M&A partner at Skadden, Arps, Slate, Meagher & Flom. Evercore is acting as Pincus’s financial advisor on the auction.

The problem, according to court filings by Venezuela as well as losing bidder Gold Reserve, is that Elliott is a Weil client. Both Weil and Evercore have also allegedly represented bondholders who will receive proceeds from Elliott affiliate Amber Energy’s purchase of Citgo.

Weil, Evercore and Pincus declined comment, and an Elliott spokesperson referred me to the company’s court filings, which assert the disqualification motions are a meritless attempt to scuttle the sale.

The combined engagements have yielded $170 million in fees for Weil and Evercore over the last four years, according to Bermuda-based miner Gold Reserve, which did not respond to a request for comment.

"An objective observer would conclude that the Advisors had an incentive to favor the interests of their clients," Gold Reserve lawyers wrote in an appellate brief filed Thursday, arguing that the appearance of bias requires voiding the Citgo sale and reassigning the case to another judge.

Citgo did not respond to a request for comment, nor did lawyers from Munger, Tolles & OIson representing Venezuela.

The conflict allegations came after Pincus in August switched his recommendation for the winning bid from Gold Reserve's subsidiary Dalinar Energy to Elliott’s Amber Energy.

As my Reuters colleague Marianna Parraga previously reported, Elliott's bid — though significantly lower than Gold Reserve’s — offers a $2.1 billion payment to the holders of a defaulted Venezuelan bond collateralized with Citgo equity. That payout is expected to remove a key obstacle to closing the deal.

The underlying dispute dates back to 2011, when Venezuela nationalized its gold mines and seized a project being developed by Canadian mining company Crystallex without compensation.

Crystallex sued and, in April 2016, won a $1.2 billion arbitration award (plus interest) from a World Bank panel.

That left one question: how to collect on a judgment Venezuela refused to pay?

In 2018, Crystallex lawyers from Gibson, Dunn & Crutcher hit on a winning strategy. They convinced Stark to find Citgo parent PDVSA is Venezuela’s alter ego, and that its Citgo shares could be used to pay Venezuela’s debts. Over a dozen other judgment creditors including ConocoPhillips followed with similar claims.

Gibson Dunn partner Miguel Estrada in an email said the disqualification motions “lack any merit.”

In November, Stark in a 51-page opinion said the recusal requests came too late, and that the parties knew of Weil’s and Evercore’s relationships with Elliott and the bondholders almost six months before they raised any concerns.

Nor was he persuaded by Venezuela’s and Gold Reserve’s arguments that they only learned the extent of the representations more recently, when Elliott’s assistant general counsel testified in the case in September.

Stark noted that Weil earned about $4.65 million in fees for its work on behalf of Elliott or its affiliates since 2021. The total represents less than .05% of Weil’s $4.5 billion in revenue during that time period, “hardly a material amount,” Stark wrote.

Weil has also allegedly earned about $62 million in fees since 2021 for unrelated legal work representing individual bondholders, as well as $31 million in fees from groups that included an Elliott affiliate or bondholder.

As for Evercore, it’s allegedly collected about $65 million in fees from other Citgo bidders, bondholders or groups — numbers that Stark wrote are "dwarfed" by its annual revenue of nearly $3 billion in 2024.

Gold Reserve argues Pincus was swayed by his advisors to recommend Elliott’s bid over its own offer because it would benefit their clients.

Not so, Stark said.

“Elliott’s bid won out because it “offered the best combination of price and the certainty of closing,” he wrote.

(The opinions expressed here are those of the author, a columnist for Reuters.)