Thanks Mitch for taking time out of your busy schedule, would you mind telling our readers a bit about your practice and background?
I am an associate at the law firm Scheef & Stone, LLP in Dallas, Texas. I practice commercial litigation and a large portion of my practice is dedicated to oil and gas and securities fraud. I graduated from Harvard University with a degree in Government and received my law degree from the University of Texas. I have experience in first-class lawsuits and have a good track record of obtaining rescission for oil and gas investors.
2- I heard you played Defensive End on the Harvard football team, what is more difficult to fire a quarterback or fire an unscrupulous operator / promoter? Which is nicer?
Firing a quarterback is more difficult. Taking down a promoter is more rewarding. The quarterbacks get up. If I do my job well, sometimes a promoter doesn’t get up.
3- Regarding oil / gas fraud, it seems that people do not understand that many developers do not structure their deals correctly. Please explain.
There really is no “right” or “wrong” way to structure a promoter deal. “Fair” or “unfair” is probably a better comparison. As an oil and gas investor, you should know that there is a huge risk of losing your entire investment. Oil and gas are extremely risky and you should not invest money that you cannot afford to lose. Most investors want a fighting chance to make money; Unfortunately, many promoted oil and gas investments do not provide the investor with that fighting chance. If you understand the industry, and can think like a criminal, you can tell the difference.
4- What is a Reg D offer?
That is a very important question that I will try to condense into a short answer. “Reg D” refers to Regulation D of the Securities Act of 1933, an important piece of federal law. Regulation D covers private offerings. When Google has an “initial public offering,” it is obviously a public offering for which registration is required under the Law of 33. Most oil and gas offerings are offered privately under a registration exemption: the Regulation D. The issuer of the security cannot use the public request and must accept only accredited investors. There are many other restrictions, but that is generally what a Reg D offer is.
5- What is a termination and how does it work?
Good question. I will refer to the Texas Securities Law for ease of reference. An interest in an oil and gas lease (that is, working interest) is a security. As a result, the types of investments we are discussing fall under the rubric of the Texas Securities Law and the Federal Securities Law.
In basic terms, a termination is getting your money back with interest and attorney’s fees. Under Texas law, there are a couple of things that trigger a termination:
(1) Publicly offer unrecorded security (phone calls, Internet, etc.), and
Offering an unrecorded value through a material fact misstatement or omission.
Here’s the key message: There is nothing wrong with selling unregistered securities as long as you have an exemption. If you do something to violate the exemption, such as offering it publicly or just outright fraud, investors get their money back.
6- Are they difficult to get?
That depends on the financial resources of the issuer of the security and, in my experience, the depth of the fraud. I have obtained rescissions for clients with demand letters and have had securities fraud litigation that has dragged on for two and three years. The answer to your question is probably “Sometimes”.
7- What are some telltale signs that an investor has been wronged?
Some of the distinguishing characteristics of oil and gas fraud include:
(1) Lack of communication with the investor;
(2) Significant steps are being taken on the project without the consent or recognition of the investor;
(3) Returns well below pro forma projections;
(4) Have your interest “transferred” to another project;
Significant and unexplained delays in drilling; Y
(6) Reduction of investor participation.
8- What is a cease and desist order?
A cease and desist (“C&D”) order is an order typically issued by a government agency, such as a state securities board or the SEC, that directs a securities issuer to immediately “cease and desist” from selling securities in a determined status or sale of securities together. I would encourage any investor to do some research online to determine if the company you are trying to sell you has received C&D and get a reasonable explanation from the company. You need to make sure you get the whole story before investing.
9-Can you talk about the responsibility associated with owning an active participation in a field? Any asset protection strategies to employ before you buy, like buying them from an LLC or otherwise?
The liability is practically unlimited; You have to understand that it is an investment in which you can lose all your investment and something else. When you buy an active stake, you need to understand that you are responsible for your prorated share of the costs associated with drilling and completing an oil or gas well, which is not cheap these days.
The oil and gas developer has many tools to cover his bet, the most common of which is the “turnkey offer.” The promoter promises to put a hole in it ax feet and dollars. If the hole is drilled for less than y dollars, you keep the difference. If it costs more, you eat the difference.
What the investor does not know is that the well can be drilled for ½ year or even 1/10 year. It is the biggest scam out there right now.
10- Have you seen a marked increase in investor fraud cases with the recent rise in oil?
Absolutely. It is creepy. Please be careful in Texas.
11- Any state or federal agency that we can contact to obtain information about companies that offer units?
Yes absolutely. Before making an investment in a Reg D, Rule 506 oil and gas offering, make sure the issuer has filed a Form D with the Securities and Exchange Commission and with the Secretary of State or the state Securities Commission in the residing.
Issuers of private offerings must make these submissions when claiming an exemption. If there is no Form D on file or on file within 15 days of your investment being made, that should be a major red flag.
12- Any independent forum or other resources that I would recommend to our readers.
If you are curious about oil and gas investments, you should visit a site run by Bernie Bicoy called Venture Research Info and their message boards. You can find it at http://www.vcresearch.info.
13- How can we contact you and how do you work? Hourly rate or contingency?
You can reach me by email at [email protected] or by phone in the Dallas area at 214.472.2140. I work both hourly and contingent fees; I usually leave that up to the investor.