the civil penalty thirteen times from what it originally found the six million it actually went to eighty one million dollars in that penalty were not appealing here today the finding of gross negligence that we've left behind but we are appealing on two grounds the finding of the economic benefit being ninety one million dollars we think there are two clear errors that the district court committed the first clear area the court committed was based on a flawed methodology that the government's expert employed and that the court adopted both parties agreed you cannot bet if it should be calculated on the basis of scicos cost of capital in other words economic benefit the government viewed in that we understand is appropriate is really sort of the delayed interest how much money it would have sicko to borrow or obtain the funds necessary to invest in the equipment that ultimately was put in there's no doubt cicle put that equipment in eventually but it saved interest or the cost to attaining those funds some for some period of years and the question is what interest rates should be used or what rate should be used to value that stream of money that sicko didn't pay while they didn't obtain those funds and what rate did you argue should be applied but we argue that it should have been borrowing right how much money it actually paid to borrow money during that period which is about four percent four point two one percent in one thousand nine hundred six when most of the equipment should have been installed according to the district court including the government the government use what its experts call the weighted average cost of capital measure which was far higher was two and a half times as high as ten point zero four percent the methodology to their expert mr harrison was precisely the methodology that he used in the allegheny case thirteen years before which went before the third circuit and the methodology was struck struck down by the third circuit as being legally flawed and flawed for basically three reasons that we're challenging the methodology here and saying that i could not have adopted it first the calculations that mr well first of all he had to scicos borrowing rate that was available to him we actually put it into the record so he use exxon to searle's of the literals he didn't even use their borrowing rate actually he made the same mistake even as to them that he did in what their borrowing rate was but what he did know is sickles borrowing rate that was put into the record bicycle and as i said to judge clematis it was four point two percent in the year that the tanks should have been installed according to the government as the rate that he ended up is in the right proposed by the government yes your honor he adopted entirely the rate proposed by the government and they also adopted entirely all the elements that needed to be added like the third turning the fourth tank tank where dozens for what what difference would not have made those who made no difference to the spill your honor and that's part of the reason they were contesting the second point which is there was equipment included in the ad that the government and the court said should have been installed to prevent the spill which had nothing to right you know that needs to be done that's fine but it had no effect on the spill and all the government government's evidence in the government's lawyers a new trial the twenty million gallons basically overflowed our wastewater treatment tanks and so the question to us of the question we put before this court is the simplest way the least expensive way of preventing the spill was to provide for twenty more million gallons of storage capacity and then everyone admits that there would have been no spill which is the issue here the is the violation is the spill into navigable waters in the debate really is how to provide that extra twenty million gallons of capacity at the time of the spill sicko is in the process of building a third tank that was approximately ten billion gallons of storage they also had created underneath the tanks what was called the dike for a containment area in case of a spill that was supposed to be all in concrete but because at the time of the rain event the third tank was being built that dike was actually partially demolished in order to provide for construction in earthen berms created where the demolition had occurred that berm partially partially gave way and the dike didn't fulfill its purpose because it was under construction plus your other two come or something it will question no question it had lots of gunk and didn't your people know that that their tanks were not sufficient the two tanks that were functioning or not functioning completely yes your honor they knew that at best the reason we were grossly negligent in the three tanks that given the time that would be needed for maintenance with regard to a single tank you then need a full tank so that you could have three operating at a time it was and that is testimony that was his testimony and that that's different than the expert reports that sicko had but even still even if that were the case they would only have meant we needed two more tanks to avoid the spill we think it while we needed it was the tank in the dike plan was to use that third tank and basically use shuttle three tanks around in dry weather periods in order to clean the other two tanks that was the plan that was in place at the time but you agree with me that the government's expert offered testimony that a full tank would be need yes or no question are but that still doesn't get us to the other equipment they just comment point out in the economic benefit calculation there was a lot of things that went beyond the fourth tank so we think all that was needed was the third tank in the dike because that would have given us twenty million gallons capacity to provide to spill the fourth tank might have been nice to of dollars and cost it was added on to the economic benefit none of that was intended to be or is needed for the cleanup of this spill and that's a that's really the heart of our dispute as well as this interest rate calculation so i thought if i could return to that for a minute the third circuit said there were three things wrong with the interest rate calculation it wasn't specific to their allegheny love them or here sicko it was based on an average over the then eight year period here a ten year period  rather than the time in which the actual purchases had to be made that that didn't happen here and it didn't calculate the actual cost of the cheapest way of doing it the marginal cost of capital all of those problems happened here on the weighted average cost of capital calculation i know it's more esoteric than just tanks but it actually amounts to a huge amount of money the best estimate of how much money this difference makes was given during the trial by our expert dr finch he said if you just change the interest calculation between what dr harris used and what sickle actually paid for debt during that period the economic benefit calculation went from the eighty three million dollars that the government was asking for at that point down to fourteen million dollars just on that changing of the interest rate calculation it has almost seventy million dollars change in that value so that it's critical as to what interest rate because mainly this economic benefit is interest that's mainly what we're talking about here  allegheny love that ludlum made it clear that this methodology is absolutely unacceptable because it's not based on this defendant's cos it's not based on anything and mr harris didn't give i admit that he didn't give  cost of equity for a public private company but that's because he said he didn't know how to do it he'd never done it no one ever asked him to do it he didn't know about how to go about doing it but that's not an excuse to use a method that's invalid and that's exactly what he did and he was the government was told thirteen years ago in the allegheny case that he couldn't use this methodology not only didn't he used his debt measure but the weighted average casting cost of capital methodology is supposed to use a ratio of how much equity and how much debt a corporation has he didn't use it goes ratio he used the ratios for these three other companies so he could have you sickos but he did so in every way where he could have use it goes data he did he use third party data without being able to relate that to sicko at all there was no excuse for his doing and we also believe that actually not only was the methodology flawed but under this court's the view of having necessary expenditures or the least cost expenditure the least cost way of doing this was to borrow the  money and so that that is really the issue here is wide why couldn't he have you simply sickles cost of debt which was known that was in the record which was four point two percent for one nine hundred ninety six and other your other years it was different amounts of water but that table is in the record and so he could have selected he mr harris could have selected that cost of debt and use that now the government says well no i didn't finance its projects with debt if you finance it with income and income is the same as equity but first of all they didn't find our cost of equity they could have calculated it but they didn't and second that's a mischaracterization of the testimony that they had and i'd like to refer the court to mr  kent's testimony which the government i'm sure will emphasize bob kent was the vice president of refining at the time he testified at trial and if i may i usually don't read things to the court but i'd like to read this exchange if i may so i think it's really very interesting you wish and end it might be in the form of cash or something else and then he goes on and he says so when we do a project after that we look at our income and generate income to do the capital projects we need to do and it was unclear what he meant by after that so the judge followed up and the government only cut quotes that last piece a piece about using our income implying that equity was important to sicko and that these projects would be financed out of equity but the court actually was unclear as to what that meant so i asked another question that the government doesn't quote and the judge judge heike asked so you say that you do not go and borrow money to buy a refinery i think you meant to take so to increase assets you take for either the income you have coming in the profit you have coming in or the revolver or the revolving loan and mr kent went came back right back in now he was very clear he said to do a project it would be from the fixed debt the bonds of the bank loans  so that was his answer when he finally made it clear that investments are from the fixed debt the bonds in the bank loan that's what he said the government also quotes miss of in ski who was an employee at the lake charles refinery who was given a capital budget was talked and talked about how the capital budget was allocated and they'd like to cite her for another person who says that sicko would finance this out of equity again a number of the government doesn't know and they have two quotes from her that they refer to one is she asked herself she said when she's putting the capital budget together are there any constraints on capital based on her and the government implies from this that the budget is all based on earnings but no that's not right you know if you lose money obviously you have less money to invest in capital projects because you have a pool of money that you borrowed from the bank if you lost money theoretically you consume some of those borrowings you have but then she went on in made it very clear the government uses  to characterize as income she says the pool of money is pretty much determined on cash flow and cash flows right cash flow is the pool of money that comes in from all sources not just income so the bank  in the bonds that mr kent talked about is all part of the cash flow that comes in and that's why to us really this is the cheapest way the least expensive which is the test and allegheny uses the least expensive way of for the court john are bad for the united states i'd like to start my intention had been to start with the government's cross appeal but because mr i'm a talk about a number of parts of his appeal i'd like to just briefly address them and if i out and in the prior appeal citing alleghany of ludlum that case said that there were two possibilities one is to look at the actual cost of debt but the second possibility is to look at the actual return on investment of the funds that were not used to invest in pollution control equipment and that latter actual return on money not not spent on pollution control equipment was the government's approach in this case and it was after hearing all of the evidence between the battling experts the district court credited the government's approach which resulted in a in the ten percent rate not the much lower rate applied by mr finch also with respect to mr katz testimony that mr imus referred to he didn't refer to what we think is the most stuck crucial part of ken's testimony which was he said that it was in his entire tenure at sicko which went back to  hundred nine i e only three years from one thousand nine hundred six which was the start date of the economic benefit period the company had never borrowed the money to do projects like this and the district court heard that testimony was intitled to credit so the idea that the company would have gone to the bank to borrow money to build the pollution control equipment that it should have had place prior to the spill that's just not supported by the record or at least there's enough there's a conflict the court district court decided to credit the testimony of count because he was an excellent that position to know about the company's bar and practice  pollution control equipment now effective term to say that they really didn't have a barring right or that is that your argument they didn't the testimony showed that they didn't borrow money to do these kinds of compliance projects to their bar right come from they used they used money that they earned internally through through cash flow that was the testimony that they would whatever money  sick o made through its operations in the used to finance projects and it had a very high actually a very high hurdle rate according to scicos own documents mr harris checked his ten percent rate against that goes on documents and found out that i mean he was comforted that ten percent was conservative because the company's own documents showed that sometimes they insisted on a fifteen percent return rate in some of the relevant years and in one of the relevant years it was d talk about cost of debt but the judge found that that was not a reliable way of determining if the interest rate here for mainly for the reason i just pointed out the company the company did not borrow money to build things like large storage tanks or a necessary treatment quitman and there are other problems restate to make to make to make sure that i understand there's a methodology which would focus on what it would have them to borrow the money to make the improvements that would avoid the violation and then that the other reads a different approach is to look at what the return aid was on what was saved by not making the improvements exactly iran and the government took the latter approach that district court heard the former approach from mr finch and decided that given all of the testimony and evidence that the government's approach through its witness was therefore economic benefit should have been based only on the cost of the thirteenth i think the court can look at two or maybe three pages in the record to see what that argument is just not not  approximation of the least cost means of preventing this bill comes to seven two point two million dollars now the critical thing here is not the number but what sick o was including when it came up with the seven point two million dollar number and for that i   under the least cost options is the third the third of the three options on that chart and it includes lots of other things besides just a third tank this is sicko itself making  presentation to the district court on agreement if you look at the chart and also footnote three you have a third tank you have one caustic neutralization unit two a p i separators dissolve gas flotation unit and upgrade tanks fine bubbler diffusers this is all much more than a third tank only or even a third tank plus the pave dike proposal so and as it turned out the district court  negating position below it's contrary to what citgo is saying is supported by the record and is what we would accept and the third page which is behind tab two of the government's record urbs sort of summarizes and chart a chart prepared by citgo it lists all of these items delayed capital cost there are multiple things under that column including third storm water tank but many others there's also delayed expenses a list of them there's also avoided operation and the expense all of these things go far beyond a third cannick only concept take out of service one of the tanks for mains so if you only had three tanks you'd be back down to a two tank scenario which is exactly what led to the spill you also have the government's expert mr a men on this point i think the probably the fifty as part of his testimony can be found at record one four seven one four two one five now let's look at let's look at the a couple of the earth medical assumptions that are wrong there's an assumption that the third tank would have had ten point seven million gallons of capacity but that's that's overstated but testimony from mr mend showed that the standard operating procedure for citgo was to empty the tanks into the dike before the overflow level was reached in other words they wouldn't let the early waste water get all the way to the top of the tank  and for three tanks that standard operating procedure removed about one point five million gallons of capacity that's at record page fourteen six five  two another problem here is that a third tank would not have had the full ten point seven million gallons capacity because we know that citgo allowed sludge and gunk is judge clement said to build up in the tanks and we should i think we should give sicko the benefit of the doubt that if it had had the third tank on mine it would not have made the thirty million gallons of destroyed it was that it made to the unpermitted surge pond so those thirty million gallons would have had to go somewhere i think it's fair to say that a lot of the thirty million gallons would have ended up in a third tank had been built at the time and the company would not have been checking the amount of sludge in the third tank either just like it didn't with the first tip another problem with the third tank only scenario is that it assumes that the concrete dike would have had eleven point eight million gallons of capacity but we know that's not right because the testimony of mr mendel of record fourteen six five three to five four established that the dike had one point six million gallons of rainfall in it during the storm event because it was it was raining and you have to take into account the one point six million gallons that were not available to hold waste because they were already taken up by rainfall now let me let me turn to the government's cross appeal our our main point here is quite straightforward your honour's and that is if you look at the prior appeal the court said that the purpose of the economic benefit benefit penalty factor is quote to recoup any benefit gained by the polluter in failing to comply with the law unquote and the court in the prior people also explained what economic benefit means in this context when the court said  generally courts consider the economic benefit to the offender of the lane capital expenditures and maintenance cost on pollution control equipment that that is the test that the district court applied when it reasonably  determined that the company gained ninety one point seven million dollars in economic benefit but contrary to the recouping principle that i just mentioned the course without explanation set the penalty considerably below the economic benefit level the penalty was eighty one million dollars but that's almost eleven million dollars below the amount that the court found was suppose economic benefit it does not recruit eighty one million dollars obviously does not recoup ninety one point seven million dollars another problem is that in the prior appeal the court described economic benefit as a floor that can be adjusted in other ways but clearly eighty one million dollars does not treat economic benefit as a floor the floor would be ninety one point seven and you were just upward from there but in know in the event is eighty one million a floor when the economic benefit is almost eleven million dollars higher have to be the same your honor the case law is quite clear that in civil penalty cases the amount of the penalty generally needs to be greater than the amount of economic benefit to to promote the deterrence and punishment and leveling the playing field objectives of a civil penalty and the problem here is compounded because as m mention the district court on remand found that sicko had been grossly negligent in allowing this catastrophic oil spill so the idea that in a gross negligence case you would have a penalty that's the economic benefit without any explanation just does not make sense here taking the uncontested aggravating factors under my own penalty statute the penalty should have been considerably more than the amount of economic benefit you have uncontested finding this catastrophic event you have the judge's findings on dream and about the also uncontested about the very negative the very bad history of compliance oh you also found that they were extremely and it would in our view it would be within the judge's discretion to not impose the maximum penalty based on that mitigating factor but mitigation can only take you so far in a gross negligence case there that there's no except for one outlier case that we talk we discuss the late lucky's there's no precedent for a below economic benefit penalty cases all uniformly recognize that economic benefit that a penalty needs to be greater than the amount cannot benefit and even this court made the cedar point boil recognize that there could be a limited situation where an equal and only equal to economic benefit  penalty what would be to the court's discretion but that was based on the fact that the district court found the defendant in that case could not afford to pay anything more than economic benefit but it certainly doesn't doesn't justify going to low economic benefit particularly as i said as i said are you conceding that there are some circumstances which you justify going below that it meant i think i think it would be an extraordinary situation here on earth as i said in cedar point the court barrel penalty amount of fifteen hundred dollars times fifty four thousand barrels and i thought he got it was eighty one million dollars yes they're right that's right you're right what's wrong with that we don't know there's several things wrong with it first we don't know the the maximum for a gross negligence case was forty three hundred dollars per barrel we don't know the judge doesn't tell us why fifteen hundred was selected that's way below forty three hundred he says he looked at the totality of the circumstance but  say he's required to tell you what betty at that part of part of our problem with the eighty one million dollars penalty is that it's not explained but the that's not the only thing wrong with with the penalty in the government's view that the principle thing that's wrong with it is given all of the judge's aggravating findings including gross negligence and the finding of ninety one point seven million dollars in economic benefit this is a case the cries out for a penalty that's in excess above economic getting a feel for it is that the eighty one million dollars penalty in a gross negligence case with all of the additional aggravating statutory factors that the judge himself found this penalty is only thirty five percent of the statute statutory maximum now we're not saying that the judge had to give the statutory maximum of which would have been two hundred thirty two million dollars actually the government suggested that some mitigation of the maximum would be if the court so was so inclined but there's just nothing here that that justifies given the court's own factual findings a below economic benefit penalty eighty one million is far below is almost thirty two million maximum penalty in a gross negligence case and the government gave give an explanation for why i thought a moderate amount of mitigation would be warranted but the court didn't didn't offer an explanation for why this drastic below economic benefit mitigation was done and as i've been indicating the case laws is uniform that that economic benefit needs to exceed the i'm sorry the penalty needs to exceed the amount of economic benefit otherwise there's no deterrence in polluters are going to fact here sicko is in effect saying it's going to benefit to the tune of eleven million dollars from violating the clean water act and that's not the kind of message that that we should be sending i see that my time is is almost up if there are no further questions oh to summarize by saying that as two signals appeal the government requests that the ninety one point seven million dollars economic benefit finding be affirmed and us to the governments across appeal the government requests that the eighty one billion dollars penalty be vacated and remounted with instructions that the court case you know that should be remanded to your honor the district court should enter a new penalty in excess of ninety one point seven million dollars and and the district court she explained with some precision as the court said in the prior feel how the district court's facts  led to that the new penalty a just a few points in answer to your question judge graves i heard the government is saying that their methodology was basically to calculate the amount on the money that sickle say that that was not their methodology least i guess not the way i understand it in their brief and remained page thirteen that was a record eight zero three zero they describe their methodology is calculating the cost of the capital m so that's essentially the borrowing rate or the cost of the equity that's what the weighted average capital take out a specific loan for a specific project but he talked about having a massive borrowing tens if not hundreds of millions of dollars that was borrowed and that's why in the testimony i read he was talking about the pool of cash that was available from these bond issues that were already issued and they would use those for projects like this that's why he testified that they take it out of the borrowings also that citgo typically didn't borrow money for projects like that just  testified that they didn't do a loan for a project so you know i go out and buy a house i go get a mortgage for my house what does it had bought bond issues in long term debt that we just created a general in mortgage it's basically its assets  excited by having a mortgage on my house it's as though it took out a long term loan for five hundred thousand dollars separately on a personal note and then i drew into that five hundred thousand dollars to buy my house that's the way sicko finance its budget where you hike that you could take a whole different mix of equipment and still come out with numbers much lower than the government did in so that's the reason it used these different variations in fact sick o expressly said that to the much lower number than the government's coming up with and it's not created this idea of the third tank in the berm out of whole cloth is actually what the government insisted citgo do in the environmental compliance plan that the government made cicle sign when you plead guilty to the criminal charges so in in that in that it environmental compliance plan the government required sicko to complete the third tank and the government needs finish the dike and put a diversion valve in the dike so that it would not have the same spill again in the environmental compliance plan would plead guilty the government didn't ask for a fourth tank the government didn't say a fourth tank was needed to avoid the this he found a thirteen million dollar criminal penalty was paid it was sixteen billion dollars in reimburse cleanup costs and seven billion dollars in implementing the environmental compliance plan thirty to forty million dollars and injunctive relief he ordered three million dollars penalty to the state seventy million dollars so that alone take half of the government's penalty now or almost it if you take the penalty entirely that's one hundred fifty million dollars you take half the penalty because of its negligence or gross negligence sicko is far far in the hole as a result of this episode thank you thank you