Thanks Mitch for taking the time out of your busy schedule, would you mind telling our readers a little bit about your practice and background?
I am an associate with the law firm of Scheef & Stone, LLP in Dallas, Texas. I practice commercial litigation, and a large part of my practice is devoted to oil and gas and securities fraud. I graduated from Harvard University with Bachelor's degree in Government and received my law degree from the University of Texas. I have first-chair trial experience 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's more difficult sacking a quarterback or sacking an unscrupolous operator / promoter? Which one is more enjoyable?
Sacking a quarterback is more difficult. Taking down a promoter is more rewarding. Quarterbacks get up. If I'm doing my job right, sometimes a promoter will not get up.
3- With respect to oil / gas fraud, it appears people do not understand that many promoters do not structure their deals correctly. Please Explain.
There's really no "right" or "wrong" way to structure a deal as a promoter. "Fair" or "unfair" is probably a better comparison. As an investor in oil and gas, you have to know going in that there is a giant risk of losing your entire investment. Oil and gas is extremely risky, and you should not invest money you can not 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 you can think like a crook – you can tell the difference.
4- What is a Reg D offering?
That's a very big question that I'll try to condense into a small answer. "Reg D" refers to Regulation D to the Securities Act of 1933, an important piece of federal legislation. Regulation D covers private offerings. When Google has an "IPO," that's obviously a public offering for which registration is required under the '33 Act. Most oil and gas deals are offered privately under an exemption to registration – Regulation D. The issuer of the security can not use public solicitation and must take in only accredited investors. There are many other restrictions, but that's generally what a Reg D offering is.
5- What is a rescission and how does it work?
Good question. I'll make reference to the Texas Securities Act for ease of reference. An interest in an oil and gas lease (ie working interest) is a security. As a result, the types of investments we're discussing fall under the rubric of the Texas Securities Act and Federal securities law.
In basic terms, a rescission is getting your money back with interest and attorney's fees. Under Texas law, there are a couple of things that trigger a rescission:
(1) Offering an unregistered security publicly (telephone cold-calling, internet, etc.), and
Offering an unregistered security by means of a misstatement or omission of material fact.
Here's the key message: there's nothing wrong with selling unregistered securities as long as you have an exemption. If you do something to violate the exemption, like offering it publicly or just out-and-out fraud, the investors get their money back.
6- Are they difficult to get?
That depends on the financial wherewithal 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 I have had securities fraud litigation drag out for two and three years. The answer to your question is probably "Sometimes."
7- What are some tell tale signs an investor has been wronged?
Some of the hallmarks of oil and gas fraud include:
(1) Lack of communication with the investor;
(2) Significant action being taken on the project without the investor's consent or acknowledgement;
(3) Returns that fall far short of pro forma projections;
(4) Having your interest "rolled over" into another project;
Significant unexplained drilling delays; and
(6) Reduction in the investor's working interest.
8- What is a cease & desist order?
A cease and desist order ( "C & D") is an order that is typically issued by a governmental agency, like a state securities board or the SEC, that directs an issuer of securities to immediately "cease and desist" from selling securities in a certain state or selling securities altogether. I would encourage any investor to do some research online to determine whether the company trying to sell you has been C & D'ed and get a reasonable explanation from the company. You've got to make sure you're getting the whole story before you invest.
9-Can you speak to liability associated with owning working interest in a field? Any asset protection strategies to employ before purchasing such as buying them in an llc or other form?
The liability is virtually limitless; you have to understand going in that this is an investment in which you can lose your entire investment and then some. When you purchase working interest, you've got to understand that you're liable for your pro rata share of costs associated with the drilling and completion of an oil or gas well, which does not come cheaply these days.
The oil and gas promoter has many tools to hedge your bet, the most common of which is the "turnkey offering." The promoter promises to make you a hole to x feet at y dollars. If the hole is drilled for less than y dollars, he keeps the difference. If it costs more, he eats the difference.
What the investor does not know is that the well can be drilled for ½ y or even 1/10 y. It's the biggest scam going right now.
10- Have you seen a marked increase in investor fraud cases with the recent rise in oil?
Absolutely. It's rampant. Please, please be careful in Texas.
11- Any state or federal agencies we can contact for information on companies offering units?
Yes, absolutely. Before you make an investment in a Reg D, Rule 506 oil and gas offering, make sure that the issuer has filed a Form D with the Securities Exchange Commission and with the Secretary of State or Securities Commission of the state in which you reside.
Issuers of private offerings are required to make these filings when claiming an exemption. If there's no Form D already on file or on file within 15 days after your investment is made, that should be a major red flag.
12- Any independent forums or other resources you would recommend to our readers.
If you're curious about oil and gas investments, you should check out a site run by Bernie Bicoy called Venture Research Info and its message boards. You can the find You at Http://www.vcresearch.info .
13- How can we contact you and how do you work? Hourly rate or contingency?
You can contact me via e-mail at firstname.lastname@example.org or by telephone in the Dallas area at 214.472.2140. I work on both an hourly rate and contingent fee basis; I typically leave that up to the investor.