State securities regulators warn that oil and gas investment scams are particularly prevalent when oil prices are high. “Con artists always use the headlines as a way to get into investors’ wallets – and everyone knows oil prices are up because they can see it at the gas pump and in their heating bills,” former Texas Securities Commissioner Denise Voigt Crawford observed.
Oil and gas ventures can be structured as limited partnerships, ownership of fractional undivided interests in leases, and general partnerships. Investors’ financial commitments and liability vary with the type of business structure used.
Oil and gas investments usually call for a significant investment, often many thousands of dollars. Moreover, they typically include payments of high fees to program sponsors. Sales materials can be slick and misleading. They often depict “official-looking” surveyor maps and refer to purported “geologist” opinion letters touting the likelihood hitting pay dirt. Investors are offered a first-year tax write-off and quarterly cash distributions (which often include simply returning to investors some of the money they invested in the first place).
Drilling partnerships are especially risky, and recently they have proven to be even riskier than usual, according to regulators. In a drilling limited partnership, on average, 15% to 16% of investors’ purchase money is paid to the sponsor as a management fee (commonly called “tangible and intangible drilling costs”), according to the association of state securities regulators known as NASAA (the North American Securities Administrators Association). Remaining funds are used to lease property and drill wells. The sponsor also takes a percentage of any revenue generated.
Even legitimate oil and gas deals are high-risk investments that are difficult to cash out of and tend to have long holding periods. However, many oil and gas deals are simply fraudulent.
Regulators say that promoters with fraudulent intent often set up the business entity in one state, drilling operations in another state, and solicit investors from still other states in order to make it more difficult for regulators and investors to detect and prove fraud.
“Investors … need to be very careful,” Commissioner Crawford warned, “there are dozens of oil and gas boiler rooms currently operating in the State of Texas.”
Residents in other states need to be careful, too. Oil and gas investment scams are increasingly being promoted on the internet, via email, and in telemarketing boiler rooms to reach potential victims all over the country.
Regulators in many states have taken actions against investment promoters pushing oil and gas schemes. As of July 13, 2012, the two most recent enforcement actions posted on the Texas State Securities Board’s web site both involve oil and gas scams.
Regulators are concerned that still-high oil prices will make investors more vulnerable to crooks. NASAA advises anyone considering an oil and gas investment to be particularly skeptical of the following types of claims that, in words or substance, are commonly associated with high-pressure sales tactics and fraudulent activity:
- You will have an interest in a well that cannot miss.
- The risks are minimal.
- A geologist has given the salesperson a tip.
- The salesperson has personally invested in the venture.
- The promoter has “hit” on every well drilled so far.
- There has been a tremendous “discovery” in an adjacent field.
- A large, reputable oil company is operating or planning to operate in the area.
- Only a few interests remain to be sold and you should immediately send in your money in order to assure the purchase of an interest.
- This is a special private deal open only to a lucky chosen few investors.
If you have investment losses or problems involving oil and gas scams, call the lawyers at Page Perry for experienced representation at (404) 567-4400 or (877) 673-0047 (toll free).