TEXAS MAN AND COMPANIES CHARGED BY SEC WITH SELLING FRAUDULENT INVESTMENTS IN OIL AND GAS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Texas Resident and His Companies for Selling Fraudulent Oil and Gas Investments

On April 25, 2014, the Securities and Exchange Commission ("Commission") filed civil securities fraud charges against Guardian Oil & Gas, Inc. ("Guardian"), Guardian Oil & Natural Gas, Inc. ("GONG") and their principal, Rick D. Mullins. The charges stem from an alleged oil and gas offering fraud.

The Commission's complaint, filed in the U.S. District Court for the Northern District of Texas, alleges that between August 2010 and June 2013, Mullins, Guardian, and GONG raised approximately $6.5 million through the fraudulent offer and sale of securities to investors in the form of limited partnership interests in oil and gas programs.

According to the complaint, Mullins and Guardian failed to disclose to investors Guardian's deteriorating financial condition, including significant amounts owed on pre-existing bank loans. The Commission further alleges that defendants falsely represented to investors that their contributions would be used solely for the specific drilling project in which they had invested but instead, under Mullins's direction, Guardian and GONG redirected investor funds for other unrelated purposes. The complaint also alleges that defendants falsely represented to investors that they would directly receive revenue from the sale of any oil and gas production from the project in which they were invested when, in truth, operators were deducting from production revenue expenses due on other unrelated projects, a process known as "net checking." Moreover, according to the Complaint, Mullins made direct misrepresentations to investors. When, after collecting money from investors for one project and spending that money on unrelated expenses, Guardian was unable to obtain an interest in the oil and gas drilling project that it had purported to sell to investors, Mullins further lied to investors, telling them, among other things, that the well was unproductive and that Defendants had been approached by a possible purchaser of the partnership's interest. The Commission alleges that Defendants never disclosed that the investors' funds had been spent elsewhere and that Defendants had been unable to actually obtain an interest in the drilling project they sold.

The complaint alleges that Mullins, Guardian, and GONG violated Section 17(a) of the Securities Act of 1933 (Securities Act), and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The complaint seeks permanent injunctions and disgorgement of ill-gotten gains plus prejudgment interest against all Defendants, and civil penalties against Mullins.

The SEC's investigation was conducted by Akita Adkins, Ty Martinez, and Jim Etri of the SEC's Fort Worth Office. Matthew Gulde will conduct the Commission's litigation.

SEC HALTS ALLEGED OIL AND GAS PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Halts Texas-Based Oil and Gas Investment Scheme

The Securities and Exchange Commission today announced charges and an emergency asset freeze against the perpetrators of a Texas-based Ponzi scheme involving purported investments in oil and gas projects.

The SEC alleges that Robert A. Helms and Janniece S. Kaelin, who work out of an office in Austin, misled investors about their experience in the oil and gas industry while raising nearly $18 million for supposed purchases of oil and gas royalty interests. Despite representations that nearly all of the money they raised would be used to make oil and gas investments, Helms and Kaelin actually used only a fraction of the offering proceeds for that purpose. Instead, the vast majority of investor funds were used to make Ponzi payments and cover various personal and business expenses.

The SEC's complaint unsealed late yesterday in U.S. District Court for the Western District of Texas also charges Deven Sellers of Arvada, Colo., and Roland Barrera of Costa Mesa, Calif., with illegally selling investments for Helms and Kaelin without being registered with the SEC. They also allegedly misled investors about the sales commissions and referral fees they were receiving.

According to the SEC's complaint, Helms and Kaelin began offering investments in 2011 through Vendetta Royalty Partners, a limited partnership that they control. They have since attracted at least 80 investors in more than a dozen states while promising in offering documents that they would use more than 99 percent of the investment proceeds to acquire a lucrative portfolio of oil and gas royalty interests. The offering documents were fraudulent as Helms and Kaelin invested only 10 percent of the proceeds, and the oil and gas projects in which they actually did invest generated only minuscule returns.

The SEC alleges that Helms and Kaelin directed Vendetta Royalty Partners to make approximately $5.9 million in so-called partnership income distributions to investors. They used money from newer investors to make the distributions to earlier investors. Helms and Kaelin created the illusion that Vendetta Royalty Partners was a profitable enterprise when, in fact, it was a fraudulent Ponzi scheme. Some offering documents touted Helms to have extensive oil-and-gas experience, misrepresenting that he had "worked with various mineral companies over the last 10 years advising management on issues involving the acquisition and management of royalty interests, mineral properties and related legal and financial issues." In fact, Helms's oil-and-gas experience came almost entirely from operating Vendetta Royalty Partners and its affiliated or predecessor companies.

The SEC alleges that Helms and Kaelin misled investors about other important matters besides their business background and industry reputation. They failed to disclose the existence of litigation against them and companies they control. They misrepresented the performance of the limited oil-and-gas royalty investments actually under their management. And they failed to inform investors that Vendetta Royalty Partners was behind on its line of credit. The company ultimately defaulted.

According to the SEC's complaint, Helms and Kaelin along with Sellers and Barrera told potential investors that any commissions or finder's fees would be small. However, Sellers and Barrera each received more than $200,000 in such fees on one investment alone. Sellers and Barrera regularly solicited investments without being registered as brokers.

At the SEC's request, the court entered an order temporarily restraining the defendants from further violations of the federal securities laws, freezing their assets, prohibiting the destruction of documents, requiring them to provide an accounting, and authorizing expedited discovery.

The SEC's complaint alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint further alleges that Sellers and Barrera acted as unregistered brokers in violation of Section 15(a) of the Exchange Act. The complaint requests permanent injunctions and the disgorgement of ill-gotten gains plus prejudgment interest and penalties.

The SEC's investigation was conducted by Chris Davis, Carol Hahn, and Joann Harris of the Fort Worth Regional Office. The SEC's litigation will be led by Timothy McCole. The SEC appreciates the assistance of the Federal Bureau of Investigation, U.S. Secret Service, and Texas State Securities Board.

SEC SUES TO HALT HOUSTON-AREA INVESTMENT SCHEME TARGETING LEBANESE AND DRUZE COMMUNITIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today charged a day trader in Sugar Land, Texas, with defrauding investors in his supposed high-frequency trading program and providing them falsified brokerage records that drastically overstated assets and hid his massive trading losses.

The SEC alleges that Firas Hamdan particularly targeted fellow members of the Houston-area Lebanese and Druze communities, raising more than $6 million over a five-year period from at least 33 investors. Hamdan told prospective investors that he would pool their investments with his own money and conduct high-frequency trading using a supposed proprietary trading algorithm. Hamdan promised annual returns of 30 percent and assured investors that his program was safe and proven when in reality it was a dismal failure, generating $1.5 million in losses. As he failed to deliver the promised profits, Hamdan told investors that his funds were tied up in the Greek debt crisis and the MF Global bankruptcy among other phony excuses.

According to the SEC's complaint filed in federal court in Houston, Hamdan is well-known in the Lebanese and Druze communities in the Houston area and is a former treasurer of the Houston branch of the American Druze Society. Hamdan found investors for his trading program by talking with his friends and family in these communities. As word spread about his purported trading success, he asked existing investors to solicit their friends for investments.

The SEC alleges that Hamdan misrepresented to investors that he generated positive returns in 59 of 60 months between 2007 and 2012. He showed them phony documentation to support his false claims. For instance, a purported brokerage statement he provided investors for the first quarter of 2010 showed an opening balance of more than $2.3 million with quarterly trading gains of $2.7 million for a closing balance above $5.1 million. An actual brokerage statement obtained by SEC investigators for Hamdan's account during that same period shows the opening balance at just $27,970.76 and the closing balance at $148,210.02, with quarterly trading losses of $7,452.80.

According to the SEC's complaint, Hamdan made several other false claims to potential investors. For instance, he lied about the existence of a cash reserve account that secured their investments. Hamdan falsely stated that investments were further secured by a $5 million "key-man" insurance policy. He also falsely claimed that a well-known hedge-fund manager in the Dallas area had made a million-dollar investment with him and promised to invest more based on Hamdan's continuing success.

The SEC's complaint charges Hamdan with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking various relief including a temporary restraining order, preliminary and permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.