Thanks, Mitch, for taking the time off your busy schedule, could you tell our readers a little bit about your practice and experience?
I am an associate at the law firm of Scheef & Stone, LLP in Dallas, Texas. I deal in commercial matters, and much of my practice is dedicated to oil and gas and securities fraud. I graduated from Harvard University with a bachelor’s degree in public administration and a law degree from the University of Texas. I have experience in the tests of the first chairman and I have good experience in obtaining refusals for oil and gas investors.
2- I heard you played Defensive End on the Harvard football team, what’s harder to fire a quarterback or fire an unscrupulous cameraman / promoter? Which is more enjoyable?
Dismissing a quarterback is harder. Removing a promoter is more rewarding. Quarterbacks are getting up. If I do my job properly, sometimes the promoter won’t.
3- With regard to oil / gas fraud, people do not seem to understand that many promoters do not structure their deals properly. Please explain.
There really is no “right” or “wrong” way to structure a deal as a promoter. “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 chance to make money; Unfortunately, many encouraged investments in oil and gas do not give the investor this chance to fight. If you understand the industry – and you can think like a scammer – you can see the difference.
4- What is a Reg D proposal?
This is a very big question, which I will try to summarize in a small answer. “Reg D” refers to Regulation D of the Securities Act of 1933, an important piece of federal law. Rule D covers private proposals. When Google has an IPO, it is clearly a public offering that requires registration under the ’33 Act. Most oil and gas transactions are offered privately with the exception of registration – Regulation D. The issuer of the security cannot use a public offering and must only accept accredited investors. There are many other restrictions, but in principle this is the proposal of Reg D.
5- What is cancellation and how does it work?
Good question. I will refer to the Texas Securities Act to make it easier to deal with. Interest in oil and gas leasing (ie working interest) is a security. As a result, the types of investments we are discussing fall under the Texas Securities Act and the Federal Securities Act.
Generally speaking, a cancellation is a refund of your money with interest and attorney’s fees. There are several things under Texas law that cause repeal:
(1) Public offering of unregistered security (cold calling, internet, etc.), and
Offering an unregistered security by making an incorrect statement or omitting a material fact.
Here is the main message: there is nothing wrong with selling unregistered securities, as long as you have an exception. If you do something to violate the release, such as offering it publicly or simply blatant fraud, investors get their money back.
6- Are they difficult to obtain?
This depends on the financial resources of the issuer of the security and, in my experience, on the depth of the fraud. I received rejections for clients with letters of request and I had lawsuits for securities fraud that lasted for two and three years. The answer to your question is probably “Sometimes.”
7- What are some indicative signs that the investor has been wronged?
Some of the hallmarks of oil and gas fraud include:
(1) Lack of communication with the investor;
(2) Significant actions taken under the project without the consent or recognition of the investor;
(3) Return that is far less than pro forma forecasts;
(4) Your interest to be “transferred” to another project;
Significant unexplained delays in drilling; and
(6) Reduction of the working interest of the investor.
8- What is a termination and waiver order?
A C&D is an order usually issued by a government agency, such as the State Securities Board or the SEC, that instructs the issuer of securities to immediately “stop and give up” the sale of securities in certain condition or sale of securities in general. I would encourage any investor to do an online survey to determine if the company they are trying to sell to you was C&D’ed and get a reasonable explanation from the company. You need to make sure you get the whole story before you invest.
9-Can you talk about the responsibility associated with having a working interest in a field? Any asset protection strategies to use before purchasing, such as purchasing them in llc or other form?
The liability is practically unlimited; you need to understand that this is an investment in which you can lose all your investment and then part. When buying interest, you need to understand that you are responsible for your proportionate share of the cost of drilling and finishing an oil or gas well, which is not cheap these days.
The oil and gas promoter has many tools for hedging your bet, the most common of which is turnkey. The promoter promises to make you a hole up to x feet per y dollar. If the hole is drilled for less than y dollars, he keeps the difference. If it costs more, it eats up the difference.
What the investor does not know is that the well can be drilled in ½ d or even 1/10 d. This is the biggest scam at the moment.
10- Have you seen a significant increase in investor fraud with the recent rise in oil prices?
Absolutely. He’s excited. Please be careful in Texas.
11- Any government or federal agencies we can contact for information about companies offering units?
Yes, absolutely. Before investing in Reg D, Rule 506 for Oil and Gas, make sure that the issuer has submitted Form D to the Securities and Exchange Commission and to the Secretary of State or the Securities and Exchange Commission of the country in which you reside.
Publishers of private proposals are required to submit these documents when requesting exemption. If there is no Form D already recorded or recorded within 15 days of making your investment, this should be the main red flag.
12- Any independent forums or other resources you would recommend to our readers.
If you’re curious about investing in oil and gas, you should check out a website run by Bernie Bicoy called Venture Research Info and its bulletin boards. You can find it at http://www.vcresearch.info.
13- How can we contact you and how do you work? Hourly rate or unforeseen circumstances?
You can contact me by email at mitch.little@solidcounsel.com or by phone in the Dallas area at 214.472.2140. I work both on an hourly rate and on a contingent fee; I usually leave that to the investor.