Even after the highly-publicized fall of Bernard L Madoff and the largest Ponzi scheme in US History, the schemes continue to proliferate. Today we see more Oil and Gas Ponzi schemes because of low interest rates and low returns on investments. People looking for safe harbors for their money are prey for Ponzi scheme promoters who fill the gap with promises of “big money.” These investors are not necessarily greedy, but concerned enough about the future to be willing to risk some of his/her investable funds (1) with an investment of money, (2) due to an expectation of profits, (3) arising from a common enterprise, which (4) depends on the efforts of others. This is the definition of an “investment contract” as defined by the Supreme Courts W.J. Howey case, 328 US 293. Investors should consider this four-pronged test before making an investment and should consider the old adage, “if it is too good to be true, then it generally is!”
The Ponzi scheme received its name from Charles Ponzi who, in the 1920’s, hoodwinked thousands of New Englander’s into investing their money into an arbitrage with international postal reply coupons used to purchase postage stamps. He promised a 50% return on investment (ROI) in 90 days. When he could not produce the 50% return he used incoming funds from new investors to pay other investors until the scheme failed. (http://www.sec.gov/answers/ponzi.htm)
How do we protect friends and clients from being lulled into a false sense of security? We can teach them to recognize the difference between a legitimate investment and something pimped by a promoter. Promoters are “Pied Pipers” who attract individual investors who honestly are trying to better their financial position and provide for their family. Promoters are generally well spoken, give the appearance of wealth, may try to appear “godly” by quoting scripture, and usually offer to pay for the lunch or dinner over which the deal is discussed. The promoter today is selling limited partnership interests in an oil and gas lease, which can be a very complicated investment. A promoter will pay commissions to individuals that bring in investors. The promoter usually owns or controls the entire operation from sales to drilling to production, and brag about never drilling a dry hole. The promoter will pay “profits” to the first few victims to cause them to be their spokes-person for other investors to lure them into the scheme through success stories. If actual drilling does occur the promoter will often inflate the cost of drilling to reduce the revenue for the limited partners.
What the promoter will not do:
- Own the asset (oil & gas lease) – in a true Ponzi scheme they just use other people’s money (OPM) to carry on the charade
- Record their working interest in the county records
- If they sell investments in limited partnerships they will not transfer the ownership interest into the name of the nominee entity owned by the limited partners
- Notify investors of orders from state regulatory agencies concerning the sale of unregister securities or unregistered salespersons
- When the investment starts to break down and cash flow is limited the promoter will not allow investors access to the investor list and to the books and records of the company, even though their Private Placement Memorandum (PPM) contains provisions for that access
In one case of a royalty interest Ponzi investigated by Sage Investigations, LLC, money paid to investors as distributions was traced back to a production company that had received a transfer of funds from the promoter’s bank account in which the promoter had recently deposited new investors funds. The recipient investors paid income tax on the funds received, but the funds were really a return of capital because there were never enough royalty payments received to pay investors.
Oil and gas limited partnerships investments are not for inexperienced investors, yet radio, telephone, and internet promotions encourage investors to “get involved in oil.” Your friends and clients should beware of the dangers that lurk behind the pages of a PPM and the silver tongue of the promoter.
Before making major investment decisions hire an expert to thoroughly look into the individuals and the entities involved. The minor cost of the research could enable you or your client to save your money for a better, more secure investment. It could also save you years of headaches and the cost of lawyers to sue for your money to be returned. Also, in my opinion, individual investors must protect themselves; law enforcement in most states are overwhelmed by the amount of fraud in their jurisdiction and are very selective in their pursuit of fraudsters.
To learn more about helping your client, contact retired IRS Special Agent Edmond J. Martin, Chief Investigator at Sage Investigations, LLC, e-mail firstname.lastname@example.org website: www.sageinvestigations.com or call 512-659-3179 for a free 20-minute consult, and visit our website at www.Sageinvestigations.Com and review our team and their CV’s.