Insurance and financial advisors should advise clients to be wary of oil-patch scams – and should promote these deals only after doing careful due diligence themselves. According to the North American Securities Administrators Association (NASAA), state regulators have opened more than 260 investigations in the last two years and have issued 122 cease and desist orders against oil and gas promoters.

“Securities investments offering profit participation in oil and gas ventures can be legitimate for those who understand and can afford the risk,” says Joseph P. Borg, NASAA’s president and director of the Alabama Securities Commission. “But too often we are seeing doubtful and even outright fraudulent energy deals aggressively promoted to the public.”

Escalating energy prices in recent years have made energy investment opportunities attractive to the public. Problem is many such deals are not appropriate for smaller investors. And even when the underlying project is sound, high sales commissions and dubious expenses can offset evenues, says NASAA.

So before you “green light” a client’s oil or gas investment – or get involved promoting one – make sure to scope out all of the risks involved. Key things to check out: the backgrounds and integrity of the principals; the chance something technical will go wrong with the well; the possibility the well won’t produce enough oil or be sold at a high enough price; and the structure and terms of the deal itself.

What “red flags” are affecting your business? Send your comments to the National Ethics Bureau at redflags@ethicscheck.com.