The SEC Warns Investors of Oil and Gas Frauds
On May 2, 2013, the Securities and Exchange Commission (“SEC”) issued an investor alert warning of the increasing number of frauds involving private securities offerings for oil and gas ventures, as energy-related fraud cases mount at the agency. The SEC reports that the number of enforcement cases has averaged more than 20 per year since 2006. The SEC stated, while all investing involves varying degrees of risk, “Investing in private offerings, however, carries unique risks, and private oil and gas offerings have additional risks to consider.”
Red Flags in Oil and Gas Scams
The SEC’s Division of Enforcement identified several common red flags in oil and gas investments that include:
♦ Sales pitches referring to recent news events like high oil or gas prices. “Can’t miss” wells and “guaranteed” returns, including claims that major oil and gas companies are drilling nearby.
♦ Abnormally high rates of return.
♦ Unsolicited materials.
♦ Sales tactics that pressure you to decide, like “limited” or “once-in-a-lifetime” opportunity.
♦ Sales pitches touting new technology, especially if it relates to getting higher production out of low-producing wells (sometimes called “stripper” wells).
♦ Salesperson claims to be an investor.
♦ Being asked to sign documents acknowledging that the securities laws do not apply to the investment.
The SEC discussed several recent enforcement cases in the Investor Alert which highlight the types of fraudulent activities involving oil and gas offerings. These fraudulent activities include misrepresenting experience & the use of offering proceeds as well as enlisting unregistered sales persons who receive undisclosed commissions. The SEC’s recent enforcement cases are summarized below.
In Hartmut Theodor Rose, the SEC’s Division of Enforcement alleged that the promoters told investors that oil and gas production was about to start when many of the wells were actually marginal or even dry. they misrepresented the “success” of prior wells to raise funds for new wells and touted the “low-risk” opportunity as “once-in-a-lifetime.”
In SEC v. Hilton, the SEC alleged that the promoter raised $3.3 million from about 176 investors nationwide in several offerings by falsely portraying the success or prospects of various wells and the expected returns for investors.
In SEC v. Sunray Oil Co., the SEC alleged that the promoter touted sunray’s “50 years of experience,” but he left out the fact that the company was formed much more recently and his previous company went bankrupt.
In SEC v. Wellco Energy, LLC, the SEC alleged the promoters misrepresented that investors’ funds would be used for oil and gas wells when, in fact, 58% of money raised went to pay sales fees as well as the promoter’s personal mortgage and child support.
In Petroleum Unlimited, the SEC alleged that investors were told without any reasonable basis that they could expect returns of 14% to 141% a year rather, 81% of the money raised was used to pay for expenses other than oil drilling, including huge sales fees. The SEC also alleged misrepresentations were made about the use of investor funds, since only $534,000 of the $2.9 million raised from investors was used for oil drilling. In addition to failing to mention that sales fees equaling 49% and 74% of the investments would be paid, the SEC alleged investor funds also were used to pay the promoter directly and through related companies, like the drilling company. The individuals selling the offerings in both these cases were not registered with the SEC.
In another case, SEC v. Provident Royalties, Provident raised $485 million through various offerings from at least 7,700 investors nationwide promising high returns and misrepresenting how investor funds would be used. Investors were told that 86% of their funds would be for oil and gas investments. The SEC alleged that, instead and undisclosed to investors, a portion of the investor funds was used to pay dividends and returns of capital to earlier Provident investors retail brokers sold the Provident offerings to retail investors nationwide. A number of these brokers have since been sanctioned by FINRA for selling the offerings without having a reasonable basis for recommending the securities.
The complete release can be viewed at:http://www.sec.gov/investor/alerts/ia_oilgas.pdf
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected]. Please note that the prior results discussed herein do not guarantee similar outcomes.
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