r / /1″. d iffel 7, 4 ca , le MI /AM. a. a-…. Big D Scam … Dallas their favorite city. At their height last summer, more than 30 firms were based in Dallas selling millions of dollars in junk oil and gas well interests each year. A record 625 offerings for investors were approved by the SEC in 1974 for $35 million. Anyone can get in on the act. The main prerequisite is not knowledge of the oil and gas industry, but a polished sales no more about oil and gas than the average man on the street does,” says Roy Mouer, Texas securities commissioner. On the other hand, people in the midwestern and northeastern states who invest in Schedule D offerings “think just because you are in Texas you must know something about oil and gas,” Mouer said. All a promoter has to do is buy a “sucker list” of potential investors, lease an office with a prestigious address, set up a boiler room of salesmen manning long distance telephone lines, and contract with a drilling firm for respectability. “There is no way for the seller \(proinsider in what had been one of Dallas’ larger Schedule D operations. If a dry hole is drilled, the Schedule D promoter usually still makes a good profit from what is left over in investors’ money. It requires only about $50,000 to drill the typical Schedule D well, but the promoter is permitted to raise up to $250,000 from investors for each drilling venture. The leftover goes into the promoter’s pockets as inflated and padded costs to the investors. The promoter uses none of his own money for actual drillirig costs. Yet he usually rakes off 25 to 40 percent of the production money, if oil is found. Investors foot up to. 188 percent of the drilling cost but get only about 60 percent of the production revenue. Investors are told it’s a gamble, but if they strike oil it’s their share of record industry profits during the energy crisis. If they take a loss, they are told, they can write it off on their income taxes. What’s more, they love the glamour of having a Texas oil well to talk about over martinis with friends at the City Club of Chicago or the Manhattan Club in New York. The brochure of a prominent Schedule D firm in Dallas urges potential investors to climb aboard the bandwagon now because “it is estimated that 80 percent of the known 1990.” “Almost without exception major periodicals in this country have carried recent stories of the serious energy shortage and the imminent disappearance of our existing reserves,” the brochure states. It cites a recent report by New York’s big Chase Manhattan Bank, no less, on “Outlook for Energy in the U.S.” The report states the consumption of oil will increase in this country by two-thirds, and gas consumption will double during the 15year period ending in 1980, as compared to the previous 15-year period. “And so, not only .do these facts reveal a great need for the development of new sources of oil and gas, but coupled with the tax benefits available, they point up a significant opportunity,” the potential investor/sucker is told. THESE same quotes the Chase report and all are found in the brochures of other Schedule D firms in the Dallas area. They are used word for word, but none of the firms is seemingly connected with another. But investing in a “fractional undivided working interest” of Schedule D oil and gas leases isn’t as glamorous as is advertised. Wisconsin dairy farmer Richard R. Renk assesses his $10,000 investment in two wells drilled by Dallas Oil and Gas Inc.: “I was foolish. Too greedy, I guess, is the word.” The first was a gas well in Pennsylvania which Renk was told “had a problem with salt water.” The second was an oil well in Texas which resulted in a dry hole. Renk became suspicious and went to the Wisconsin Securities Commission, which ruled that Dallas Oil and Gas was selling unregistered securities and ordered the firm to stop doing business in Wisconsin. But this didn’t get Renk his $10,000 back. He finally hired an attorney to file suit against the firm in a Dallas federal court. Renk subsequently reached an outof-court settlement and recovered $7,600 4/11/4V/Xe_ir,, vio Pr .dy Att.*. 14P4W414.Vd1 94;:.Zer OttM from the Dallas company. “I was fortunate to get back what I did,” he said. “What I experience, the hard way.” The investors sucker list is usually purchased by Schedule D promoters from firms with good reputations in the business world. In Texas, Dun & Bradstreet is a frequent source of names for certain categories, such as doctors and funeral home directors. A favorite target in Michigan recently for Dallas operators has been ministers and auto assembly line workers. The operators hope they will lead to a whole “nest” of investor/suckers. Country clubs and fraternal orders also are good nest hits. “If you get somebody on the Detroit assembly line, he may be able to sell 200 interests a day, at $1,000 each, for you,” says Hugh Makens, Michigan Securities Bureau director. “And he might not get anything at all for it. He thinks he’s doing his friends a favor. A minister can be convinced to tell his congregation this is a good deal.” Ironically, several thousand oil geologists and petroleum engineers in Dallas who are legitimate can’t help investors from falling prey to Schedule D con men. They can give advice if asked, but they are forbidden by professional ethics from volunteering advice on who is good or bad. “Unfortunately, in many instances we are consulted only after an investor has been promQted into a venture which he later finds is misrepresented or fraudulent,” says James A. Gibbs, president of the Dallas Geological Society. The geologists and engineers, who serve a 12-year apprenticeship to earn a professional reputation, fume when they see con men at work under the federal protection of the SEC’s Schedule D umbrella. These professionals would like to use Schedule D as a legitimate vehicle for public investment, but they don’t want to associate with the Schedule D reputation. So they are left with’ private offerings to a small circle of friends to raise drilling capital. THERE ARE some, but few, legitimate Schedule D firms operating in Texas. And the problem of separating the legitimate operator from the con man has caused a major controversy within government securities ranks in recent years. A faction within the SEC’s Washington offices, led by oil and gas division chief J. Lawrence Muir, strongly endorses Schedule D in practice as well as in principal. The SEC enforcement staff in the field, however, sharply disagree with Muir’s view that Schedule D is generally an exemption used by honest operators. His critics include the SEC regional office in Fort Worth and state securities agents in Texas and most other states where investors have been conned. The disagreement, has reached the SEC’s chief of enforcement, Stanley Sporkin, in Washington. Sporkin reportedly has told Muir he is out in left field. Muir said “some offerers who violated the rule have been loose promoters, but not all offerers are this type. . . . We believe we are getting adequate disclosure if the investor will read it \(Schedule D offering too, because it hasn’t changed the law. . . . Our people in Fort Worth \(SEC regional Hewitt, the SEC regional administrator in Fort Worth, says he thinks the SEC is “approaching it wrong” by relying mainly on enforcement through court suits against Schedule D promoters. “There is another December 12, 19 75 3 .rowavimertse47 , .
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