Checklist to Prevent Oil and Gas Securities Fraud

Posted November 29, 2016 by jeremy

American consumers are getting duped into making bad investments in highly speculative oil and gas drilling projects. Not only are these investments risky, but many are examples of oil and gas securities fraud.

Unscrupulous salespeople are skilled at fraudulently misrepresenting oil and gas investments to make them appear safe and secure when in fact, they are not. The more inexperienced an investor is, the more likely he or she will fall prey to one of these scams.

How Oil and Gas Investment Fraud Happens

Oil and gas speculators want investors to pay for risky drilling and exploration projects that may not bear fruit. If the operation is successful, there will be a big payoff. If it’s not, a lot of money will be lost by investors.

Here’s the problem: Dishonest stockbrokers are marketing risky oil and gas projects to investors as if they were safe. This is an insidious type of investment fraud. If you have fallen prey to an oil and gas misrepresentation scam like this, contact the Consumer Investor Resource Center and try to get your money back.

For investors who are considering an oil and gas drilling investment right now, keep reading. The following advice could help you avoid becoming the victim of oil and gas securities fraud.

6 Steps to Prevent Oil and Gas Securities Fraud

The best advice for novice investors is to avoid oil and gas exploration investments completely. If you still wish to proceed, be sure to hire an experienced and reputable oil and gas investment consultant to help you evaluate the project and avoid oil and gas securities fraud. Even highly experience oil and gas investors work with consultants before moving forward with an investment like this.

The following checklist was produced by state securities regulators to help investors stay savvy and avoid fraudulent investments when it comes to oil and gas industry securities. These steps are essential when evaluating any oil and gas drilling project:

1. Resist pressured sales and don’t make hurried decisions:

If a broker or salesman is telling you to “buy now” or “get it while the getting is good,” be careful. Any kind of pressure means it’s time to slow down and consider every piece of information available.

2. Research the company:

Is it well-established? Is it New York Stock Exchange-listed? Less-established and newer oil and gas companies are more vulnerable to going belly up. Make sure the company is well-established and preferably New York Stock Exchange-listed. Go over the company’s prospectus with a fine-toothed comb. Do not stop digging until you have answers to the following questions:

Who are the principals and/or general partners of the company that is offering the security? What are their oil and gas industry experience and background? How long have they worked for the company and in the industry?
What is the history of the company, and its failures and successes?
What are the company’s assets, retained earnings, and capitalization?
Does the company have contingent liabilities related to other business dealings?
What is the company’s available capital to pay for unexpected expenditures?
Does the Internal Revenue Service support the tax strategy being used on the investments?
What is the company’s history/background in drilling operations? How long has it been in this business, how many wells has it drilled, how many became producing wells, and has the company kept its interest these wells?
What conflicts of interests may exist between the promoter of the investment and the company offering the investment? Is the promoter of the security also an owner of the company?

3. Check the salesperson’s background:

A legitimate salesperson and/or investment advisor will never try to hide information from you. An honest salesperson will be happy to provide written explanations for any questions you have.

Be sure to collect the following information in this regard:

The name and background of the salesperson.
The salesperson’s background in the field of selling oil and gas securities.
The compensation or commission the salesperson will receive.
If the salesperson is FINRA-registered, look up the salesperson’s FINRA broker check disclosure report. Look for previous sanctions and securities law infractions
Confirm the salesperson’s background and disclosure information with the appropriate state securities agency. Check for previous sanctions and/or securities law violations.

4. Look up the registration requirements for the oil and gas securities offering:

Ask the salesman if the investment is registered with the appropriate state securities commission. If it’s a registered investment, get in touch with the securities commission to collect all available information.

If the security is exempt from registration, find out what exemptions have been claimed and their terms. Contact the state securities commission to confirm the exemption. Be wary of registration-exempt investments. Contact an oil and gas securities consultant and attorney if you still want to proceed.

5. Gather information about the investment project:

Research the following information about the oil and gas speculation project:

Confirm that the company will hold invested funds in an escrow account and not mix them other monies.
Confirm that the invested money is for specified purposes only.
Determine the amount of money the company will through the offering and the cost per fractional interest.
Find out the “cost per fractional interest,” i.e., how much each unit of investment is going to cost and the total amount of money that will be raised.
Will investors need to invest more money in the future? Will there be completion costs for this project, and will additional commissions need to be pay? What are the purposes and amounts of these?
Are there tax incentives if the drilling exploration reveals a “dry hole?”
Was the drilling area proven to be productive in the past, or is it a wildcat operation in unknown territory?

6. Learn about the property lease for the drill location:

Gather the following information about the leased property:

Obtain a legal description of the drilling property.
When and how did the company acquire the property lease?
Is the original leaseholder selling the lease at a profit?
Obtain a geologist’s report for the property and surrounding areas.
Learn about other oil well completions on the property and surrounding areas and whether they produced oil.
Is the lease in default? Or, is the current leaseholder current on payments.
Obtain a disclosure about the seller of the lease.
Is there a relationship between the operator of this drilling project and the property owner?
Obtain a statement about when the drilling will start and the depth of the well.
Get a copy of the contract that exists between the project operator and the promoter.

Always Seek Professional Help

Part of the reason why the Consumer Investor Resource Center is publishing this checklist to prevent oil and gas securities fraud is not only to help investors to stay out of trouble but also to illuminate how much work, research, and expertise go into the evaluation of an oil and gas drilling investment.

If the following steps seem foreign to you, or in any way over your head, it’s a good sign that this kind of investment is not for you.

IMPORTANT: Even experienced investors should contract that the services of an oil and gas investment consultant to evaluate the details of any project they are considering.

Did You Lose Money Due on an Oil and Gas Investment?

If you have lost money due to oil and gas securities fraud, the Consumer Investor Resource Center is available to help. We will listen to your story and answer any questions you might have about the nature of your investment, and advise you of your legal rights and options. You may be able to seek financial compensation for your economic damages.