Private securities offerings of oil and gas ventures pose a substantial danger for investor fraud. According to the Securities and Exchange Commission (SEC), there has been an increase in the number of civil fraud cases related to oil and gas private placements. Investing in private placement offerings carries unique risks and private oil and gas offerings have additional risks for investors to be aware of and to consider.
The SEC’s Investor Alert listed common red flag sales pitches that fraudulent oil and gas investments often make to investors including:
- Sales pitches referring to high oil and gas prices;
- “Can’t miss” wells and “guaranteed” returns;
- Promises of high rates of return;
- Sales pressure to purchase quickly due to a “limited” or “once-in-a-lifetime” opportunity; and
- Sales pitches touting new technology to get higher production out of low-producing wells (sometimes called “stripper” wells).
Before investing, investors should also make sure that the person promoting the oil and gas venture is a registered broker with SEC and the Financial Industry Regulatory Authority (FINRA).
Making sure to use a registered broker provides the investor with additional legal protections. In addition, investors thinking about investing in oil and gas ventures should ask and receive information concerning:
- The broker’s due diligence files and reports on the venture;
- How the investor’s proceeds will be used;
- If there are any parties related to the promoter involved in the work;
- The promoter’s prior experience in the industry;
- Any history of the area the well is going to be drilled in;
- Any reports on the land by third party engineers or geologists; and
- Any estimates on the reserves of the well.
Many recent enforcement actions highlight the potential dangers of fraudulent oil and and gas private placement offerings. Some recent actions include:
- SEC v. Hartmut Theodor Rose – SEC alleged that the promoters told investors that oil and gas production was about to start when their geologists said not to go ahead with the drilling. The defendants raised over $10 million from 300 investors.
- SEC v. Hilton – the SEC alleged that the defendants made false representations concerning the production of oil barrels from the fields acquired in order to sell interests to investors. The promoter raised $3.3 million from 176 investors.
- SEC v. Wellco Energy, LLC – the SEC alleged that 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.
- SEC v. Petroleum Unlimited, LLC – the SEC alleged that investors were told that they could expect returns of 14% to 141% a year. Meanwhile 81% of the money raised was being used to pay for expenses other than oil drilling, including huge sales fees. In sum, only $534,000 of the $2.9 million raised from investors was used for oil drilling.
- SEC v. Provident Royalties – SEC alleged that Provident raised $485 million 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 when a portion of investor funds were used to pay dividends and returns to earlier investors. A number of brokerage firms were also sanctioned by FINRA for selling the Provident offerings without having a reasonable basis for recommending the securities.
The law office of Gana Weinstein LLP is investigating fraudulent private oil and gas offerings. If you are a victim of securities misconduct, a securities fraud lawyer at Gana Weinstein LLP may be able to help recover your investment losses. We do not charge a legal fee unless we recover money for our clients.