Oil and Gas Scams

As long as the oil and gas industry is booming, so too will oil and gas fraud. With big discoveries in Texas and North Dakota, the Securities and Exchange Commission (SEC) has warned about increasing oil and gas securities fraud cases. Eight years ago, the SEC was dealing with only a few cases a year. But that number has jumped to more than 20 SEC lawsuits a year involving oil and gas fraud. Oil and gas scams are most common in states like Texas and Oklahoma, where high oil prices create heightened interest in investing in energy-related business ventures. Whenever a highly-publicized economic situation creates an opportunity for legitimate money to be made, fraudsters follow in the shadows to take advantage. So, it is not surprising that oil and gas promoters often engage in fraudulent practices and take advantage of investors.

How do oil and gas scams typically work?

Oil and gas investments generally involve an oil or gas company selling partnership units to investors and using the money it raises to lease property and drill wells. The company takes an upfront fee and shares in a percentage of the generated revenue. In return, the investors get a substantial first-year tax write-off and cash distributions from the sale of any oil and gas the company finds until the well runs dry. This type of oil and gas investment is very speculative and highly illiquid. Fraudulent deals are frequently structured with the company’s legal entity in one state, the operation and physical presence of the “oil field” in a second state, and the offerings made to investors in yet another state or states. This creates a lower risk of the investor dropping by the well site or non-existent headquarters.

Recently, a North Texas man, David Kevin Lewis, was sentenced to 30 years in federal prison for his role in a multimillion-dollar oil and gas securities fraud. Lewis was a chairman of Always Consulting, an oil and gas well promoter. Along with co-defendants, Bruce Kyle Griffith and Thomas Alden Markham Jr., Lewis defrauded investors in fractional well units in the Rattlesnake Springs Drilling Program in Oklahoma. According to the indictment, the group of fraudsters lied to 23 investors from at least 14 states about using their money to drill, test, and complete oil wells. Investors were told that, for about $3.5 million, Always Consulting would perform all services to complete the Rattlesnake Springs Drilling Program and get multiple wells into production. The group claimed to have influence in the Osage Nation in Oklahoma, which could provide favorable lease terms. But Lewis and the other fraudsters converted investors’ money for themselves through shell entities Davmom, Inc. and Diversified Group International, among others. They also failed to disclose past felony convictions for securities and mail fraud – along with one bank robbery and counterfeiting conviction.

How can investors avoid being swindled in oil and gas investment scams?

First, investors should be wary of unsolicited phone calls hyping the profitability of any deal. Unprincipled promoters frequently use “boiler room” offices with phones manned by salespeople with little or no background in energy exploration. If a promoter claims that an offering is exempt from securities registration in a particular state, an investor should confirm by contacting the state securities agency and finding out which exemption is claimed and its terms. A legitimate salesperson will also be willing to answer questions about themselves. An investor should ask the salesperson’s name, background, and even the commission they are receiving. They should also make sure the salesperson has no history of felony or securities law violations. An investor should also know the names and backgrounds of the principals of the company, along with the company’s own history and financial situation. Funds raised by these offerings should be kept in a separate escrow account, and investors should know how much is being raised and how it is going to be used. Lastly, investors should secure legal descriptions of the property on which the program is to be drilled and all information related to the exploration. Don’t be afraid to insist on seeing legal documents and making physical observations of the oil and gas venture you decide to invest in. Fraudsters rely upon investors’ unwillingness or inability to make these types of inquiries. The diligent investor is a fraudster’s biggest fear.

If you suspect you’ve been a victim of oil and gas investment fraud, contact us for a free consultation.