The US Securities and Exchange Commission has cautioned investors over potential frauds involving private securities offerings for oil and gas ventures, a threat that has been on the rise in recent years, according to the agency.
While the alert was not prompted by any single case, the SEC said it is handling an average of more than 20 fraud cases per year related to private oil and gas ventures. In 2006, there were "few" such cases, the alert said.
In the past two years, the SEC has investigated several fraud cases that involved misrepresentation of prospects or misallocation of funds raised. In a case against WellCo Energy, the SEC found that 58% of the money raised went to pay sales fees as well as the promoter’s personal mortgage and child support.
Another recent case charged a south Florida promoter with fraudulently offering limited partnership units in two drilling projects that he falsely claimed were acquired from ExxonMobil.
The SEC identifies several "red flags" in the alert, such as sales pitches referring to recent news events like high oil or gas prices, “can’t miss” wells and “guaranteed” returns, abnormally high rates of return and sales pitches touting new technology, especially if it relates to getting higher production out of low-producing wells.
Investors should look at the industry track record of a company and understand in detail how invested money will be used, the SEC said.
Another case investigated by the SEC involved a $485 million Ponzi scheme by now-bankrupt Dallas-based Provident Royalties.
Five former Provident executives have since plead guilty to federal criminal charges in connection with the scheme, Reuters reported, citing the Federal Bureau of Investigation.