The Securities and Exchange Commission recently charged four companies and eight individuals in an oil and gas fraud orchestrated by a man calling himself the “frack master.”
In addition, the Department of Labor filed a suit requiring fiduciaries of an employee stock ownership plan to restore losses of $5.9 million, and the Nebraska Department of Banking and Finance went after an Omaha investment advisor for misusing client funds.
SEC Charges ‘Frack Master’ in Oil and Gas Scheme
The SEC has charged four companies and eight individuals in an $80 million oil and gas fraud orchestrated by a Dallas man who calls himself the “Frack Master” for his purported expertise in hydraulic fracturing.
Chris Faulkner, the CEO of Breitling Energy Corp. (BECC), has been a recurring guest on CNBC, CNN International, Fox Business News and the BBC, where he discussed oil and gas. Now he has been charged by the SEC with disseminating false and misleading offering materials, misappropriating millions of dollars of investor funds and attempting to manipulate BECC’s stock. The SEC also charged BECC and suspended trading in BECC’s securities for 10 business days.
According to the agency, the scheme dated back to at least 2011 through privately held Breitling Oil and Gas Corp. (BOG), which offered and sold “turnkey” oil and gas working interests. Faulkner ran most of BOG’s operations, while co-owners Parker Hallam and Michael Miller oversaw the sales process.
Not only did BOG’s offering materials contain false statements and omissions about Faulkner’s experience, estimates for drilling costs, and how investor funds would be used, they included reports by licensed geologist Joseph Simo that included phony production projections but did not disclose Simo’s affiliation with BOG.
The scheme evolved to include BOG’s successor, BECC, a reporting company with shares traded on OTC Link, and two affiliated entities, Crude Energy LLC and later Patriot Energy Inc. Crude and Patriot were created to deceive investors through offerings similar to those conducted by BOG. And even though investors thought Hallam and Miller ran Crude and Patriot, it was Faulkner who directed much of their operations. BOG, Crude and Patriot raised more than $80 million from investors as part of these deceptive offerings.
Of that, Faulkner misappropriated at least $30 million in investor funds for personal expenses, including lavish meals and entertainment, international travel, cars, jewelry, gentlemen’s clubs, and personal escorts. The SEC said that Beth Handkins, a former employee of Crude and Patriot, Rick Hoover, the former CFO of BECC, and Jeremy Wagers, BECC’s general counsel and COO, all played essential roles in assisting Faulkner in the fraud.
Faulkner, Wagers and Hoover misrepresented various aspects of BECC’s operations in BECC’s public reports, including statements about the company’s financial performance, and its relationship to Crude and Patriot. At the same time, Faulkner manipulated BECC’s stock price, with the help of former BECC employee Gilbert Steedley, by placing trades at the end of the day to “mark the close” of the stock.
The SEC has charged Faulkner, Hallam, Miller, Simo, Handkins, BOG, Crude and Patriot with violations of antifraud provisions, and charged BECC, Faulkner, Wagers, and Hoover with violations of the antifraud, reporting, recordkeeping and internal controls provisions of the federal securities laws. In addition, the agency charged Faulkner, Wagers and Hoover with lying to auditors, and Faulkner and Hoover with violating certification provisions of the Sarbanes-Oxley Act. Faulkner faces additional fraud charges based on his manipulation of Breitling Energy’s stock, and Steedley was charged with aiding and abetting Faulkner’s manipulative conduct.
Miller, Handkins and Steedley have offered to settle on a bifurcated basis. Each will agree to full injunctive relief, including a conduct-based injunction for Miller; the court will determine appropriate disgorgement and civil penalties at a later date.
The investigation is continuing.
Nebaraska Regulator Suspends Omaha Advisor in Annuity Scam
The Nebraska Department of Banking and Finance issued an emergency order against Jerome Bonnett Jr., aka Joe Bonnett, and two of his companies, Bonnett Financial Services Inc., and BWM Advisors LLC of Omaha, revoking Bonnett’s registration as an investment advisor representative and suspending the registration of BWM Advisors LLC for multiple violations of the Securities Act of Nebraska.
In addition, the Nebraska Attorney General’s office, on behalf of NDBF, filed a civil action in Douglas County District Court against Bonnett and his companies alleging violations of the act and misappropriation of client funds. The lawsuit seeks injunctive relief, freezing of assets and the appointment of a receiver.
According to the emergency order, Bonnett had arranged for an annuity for one client, but when the client had attempted to receive payment for the annuity, it developed that there was no such policy and instead Bonnett made a payment to the client from funds he had received from another client. In addition, Bonnett borrowed money from other clients to satisfy his own tax obligations and received numerous checks from other clients for purported sales of various investment products, but had been depositing client checks only to have checks drawn in his own name for withdrawal of funds that were then deposited in his personal accounts and apparently diverted for personal use.
“Based upon the evidence reviewed to date, it appears that Bonnett has borrowed $550,000 from his clients since October 2015, and $500,000 of that debt remains outstanding,” the department said in a statement. “While Bonnett has made $187,602.74 in payments to clients, there remains over $1,350,000 that is unaccounted for.”
DOL Files Suit Against Fiduciaries for Return of $5.9 Million to ESOP
The Department of Labor has filed suit requiring the fiduciaries of the Triple T Transport Inc. Employee Stock Ownership Plan over losses exceeding $5.9 million that resulted from the fiduciaries’ actions.
Triple T Transport Inc. is the plan administrator and plan sponsor of the ESOP. Triple T Transport hired Thomas Potts Jr., the owner of Fiduciary Trust Services Inc., and Fiduciary Trust Services to act as the independent fiduciary for an ESOP transaction involving the purchase of 80% of the stock of Triple T. Transport.
According to the DOL, an investigation by the Employee Benefits Security Administration’s Cincinnati regional office found that Potts authorized the plan to purchase that stock for $17.46 million in January 2011, an amount at least $5.9 million higher than the stock’s fair market value.
DOL said that Fiduciary Trust Services and Potts caused the plan to overpay by, among other things, failing to properly review and recognize the errors in a valuation analysis and fairness opinion provided to the company by ComStock Valuation Advisors Inc.
EBSA investigators found the ComStock report not only used an unreasonably high long-term growth rate for the company, it added an improper control premium, erred in its calculation of the weighted average cost of capital, selected comparable companies that were drastically different from the company and failed to value warrants for the selling shareholders correctly.
Based on the errors in ComStock’s report, Potts failed to accurately determine the fair market value of the company and arrived at a value $5.9 million more than the actual value.
The suit seeks to require Fiduciary Trust Services Inc. and Potts to restore all losses suffered by the ESOP, plus interest.
— Check out FINRA Posts Loss for 2015 as Costs Rise, Fines Drop 30% on ThinkAdvisor.