The sales pitch sounded alluring. It claimed: get a piece of the latest oil rush in Texas by investing with Sedona Oil & Gas. Expect annual returns ranging from 37 to 276 percent from wells “guaranteed” to make money, where oil is seeping out of the ground like in “The Beverly Hillbillies!”
But this wasn’t true. According to a complaint filed by the Securities and Exchange Commission last year against the Dallas-based firm and its founder, Kenneth W. Crumbley, Sedona knew its wells in Concho County were surrounded by dry holes while high-pressure sales calls were being made between June 2013 and October 2015.
Sedona raised $3.3 million from at least 55 investors before the SEC shut down the operation. Instead of pumping the bulk of investor funds into oil production, the SEC alleged nearly 63 percent was misappropriated, including spending for vacations and trips to Neiman Marcus by Crumbley and his family. Sedona is now in the hands of a court-appointed receiver.
This case is a reminder that while the oil industry creates great wealth in Texas, it also spawns a steady stream of fraudsters.
The SEC typically brings about 10 oil and gas cases to court a year, most handled by attorneys and investigators in its Fort Worth regional office, says David Peavler, at the time the associate regional director for enforcement in a four-state region (he left the agency in May). While the basic scam stays pretty much the same–promising sky-high returns then pocketing a lot of money–the methods used to snag investors evolve with the times.
Promoters now use social media networks like Twitter, Facebook, and YouTube to attract money, Peavler says, in addition to traditional cold calls to wealthy prospects. And skilled salesmen make the investments appear timely whether oil prices are high or low. “When prices were high earlier in the decade, the pitch was you want to get in because they’re only going higher,” Peavler says. “Now the pitch is oil and gas prices are very low, but they’re only going to be temporarily low. So this is a buying opportunity.”
Breitling Energy Corp. CEO Chris Faulkner used a mix of modern media to create a persona of expertise to attract about $80 million from investors through three entities: Breitling Oil & Gas, Crude Energy, and Patriot Energy, according to a 2016 SEC complaint filed against him. Faulkner portrayed himself as “The Frack Master” on CNBC and Fox Business Network appearances, speeches at industry gatherings, and a weekly radio talk show in Dallas. He posed as an expert on the fracking revolution driving domestic energy production. But, according to the SEC, Faulkner misrepresented his education, experience, and background. In fact, his only oil-and-gas experience was derived from web hosting work he did for energy companies at his old technology firm, CI Host.
To win over investors, the SEC says, Faulkner inflated estimated costs of drilling and expected production to pocket illicit profits, leaving investors with little chance of getting exaggerated returns as promised. Then he used at least $30 million to maintain “a lifestyle of decadence and debauchery,” spending money on lavish meals and entertainment, cars, jewelry, gentleman’s clubs, and personal escorts, the complaint states. Faulkner has denied the allegations; a trial isn’t expected until next year.
But arguably the most famous Texas energy fraud was perpetrated by Enron, the Houston pipeline company-turned-online energy trader that used accounting tricks to hide billions of debt from investors and enrich executives until its sudden collapse in 2001. Former CFO Andy Fastow, who served six years in prison, shared his experience with business students at Texas Christian University earlier this year, cautioning that there’s a fine line between loopholes and breaking the law. Holding up the trophy he received for being named “CFO of the Year,” Fastow says the same deals that won him praise landed him in prison, and that while he now knows that what he did at Enron was illegal, he never thought at the time he was committing fraud.
“The intent was to technically follow the rules, but the intent was to also be materially misleading,” Fastow says. “When is that a good thing and when is that a problem?”
It’s hard to believe Fastow didn’t know the difference. But for all those who live in a world of moral ambiguity, the SEC is here to set them straight.
Steve Kaskovich is the deputy managing editor of business for the Fort Worth Star-Telegram.