May 2 The top U.S. securities regulator on Thursday warned individual investors of possible frauds involving private securities offerings for oil and gas ventures, as energy-related fraud cases mount at the agency.
The Securities and Exchange Commission released an alert in which it said it is handling an average of more than 20 fraud cases per year related to private oil and gas ventures, an increase from 2005 and 2006, when there were "few" such cases.
The alert follows by almost two years a period in which the SEC filed a string of civil fraud cases related to oil and gas private placements. But an SEC spokesman said the issues they present are ongoing, adding: "The alert wasn't prompted by any particular case or series of cases."
Among the most recent cases was a civil complaint last year charging a south Florida promoter with fraudulently offering limited partnership units in two oil drilling projects. He allegedly misled investors by falsely claiming that his company acquired its wells from Exxon Mobil Corp., among other things, according to the SEC.
Private securities transactions can be extremely risky for investors, according to James Eccleston, a Chicago-based lawyer who represents investors in securities arbitration cases. Liquidity in such transactions is limited because it can be difficult or impossible to resell the securities, which do not trade on exchanges, Eccleston said.
Individual investors must meet certain net worth and income thresholds to buy private securities. Because of that, there is a regulatory presumption that they are more sophisticated investors needing less consumer protection than smaller investors.
Investors in private oil and gas deals are particularly vulnerable because they often do not understand the complexities of the industry, Eccleston said. They may not realize, for example, that investing in an "exploratory well," which is in an area that is not known to have produced oil or gas, is riskier than investing in other types of wells that are closer to areas where production was successful, Eccleston said.
The SEC's alert cautions investors about signs of possible scams, such as sales pitches that promise "guaranteed" returns or suggest that major oil and gas companies are drilling nearby. It also includes questions investors should ask, including what kind of track record the company has in the industry and how the investors' money will be used.
Promoters in one fraud case the SEC described used 58 percent of the money raised to pay sales fees, as well as a promoter's personal mortgage and child support.
The SEC filed many of the civil fraud cases it mentioned in the alert between 2009 and 2011. They included a 2009 case involving a $485 million Ponzi scheme by now-bankrupt Dallas-based Provident Royalties LLC.
Five former Provident executives have since plead guilty to federal criminal charges in connection with the scheme, according to the Federal Bureau of Investigation.