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Tips for Avoiding Oil and Gas Investment Fraud

Introduction to Oil and Gas Investment Fraud

The oil fields of Texas conjure up an image of “striking it rich” by investing in oil and gas. Investors should be aware, however, that the oil and gas sector is rife with investment fraud. Read on to learn how to protect yourself from oil and gas investment fraud and learn when it’s time to call a securities attorney well-versed in oil and gas investment fraud.

You may think that investing in oil and gas is a smart way to make a quick buck. In reality, nothing could be further from the truth, as unscrupulous brokers prey on investors with big dreams. Brokers who engage in nefarious schemes regarding oil and gas often do so by offering private placements in oil and gas ventures. Private placements are typically only suitable for so-called “accredited investors,” those who meet specific federal standards (such as an annual income of $200,000 or more or a net worth of $1 million or more). These investments typically involve large upfront fees, which are then used to drill wells or lease land where drilling occurs. While there are some legitimate oil and gas investments out there, many investments are fraudulent, and you should take care to avoid investment fraud.

Questions to ask to Avoid Oil and Gas Investment Fraud

Let’s look at some questions to ask before investing in oil and gas.

  • Is the person offering the investment registered with their state securities board? With the SEC? With the FINRA?
  • Is the broker experienced in selling oil and gas investments? Has the broker done their due diligence and properly vetted the investments?
  • Is the broker free from conflicts of interests or do they have a personal relationship with the promoter of the investment?
  • Has anyone else drilled the area you are considering drilling? If so, how do you know that there is any oil left over?
  • If the area has not been drilled, what proof do you have that there is oil there?
  • Did the broker independently evaluate the oil and gas offering? What information does their “due diligence” report contain?
  • If there is a tax benefit, do I need it?
  • What will your investment be used for? How much of your funds will go towards drilling expenses and how much will go to sales fees? How will those sales fees be calculated?
  • If the well comes up dry, how much money will your promoter still make?
  • Are your interests align with the promoter’s interests?
  • If the oil and gas investment turns out not to be profitable, are you willing to lose your entire investment?
Oil and Gas Investment Fraud: Know the Red Flags

Before taking the leap into the world of oil and gas investments, it is important to educate yourself to avoid oil and gas investment fraud. What are the signs of oil and gas investment fraud? Message boards like the Texas Investment Network feature ads touting generous, or even guaranteed, returns: “You will get up to 15% in return! Guaranteed!” Promises of “guaranteed” returns should raise a red flag because no one can ever guarantee that an investment will be profitable. Steady returns (with no fluctuation based on market ups and downs) can be one sign of a Ponzi scheme. To this end, the Securities and Exchange Commission cautions investors to do their own due diligence in its Investor Alert entitled Private Oil and Gas Offerings.

Other signs include:

  • “This investment is a sure thing!” Every investment carries risk. Any time you invest your money in something, whether it is a security or a friend’s restaurant, you are taking a risk that you may lose money. Brokers who guarantee “no risk” or describes an investment as “completely safe” are lying. Do not fall for this trap.
  • “It’s a once in a lifetime opportunity!” This trick is as old as time itself. If you offer a toy to a child, she may not want it until another child reaches for it. Brokers know this and they often try to capitalize on it. Be wary of brokers who tell you “this investment opportunity won’t last long” and “act now”. Another tactic is, “XYZ has already invested and made millions!” They are trying to entice you into wanting something just because someone else has it, or someone may have it soon. Do not fall for this “scarcity” tactic.
  • “Get rich, quick!” Investments are not the lottery. There is no legitimate investment that will make you a millionaire overnight. Any investment that promises to make you rich fast will involve an incredibly high degree of risk. Remember, as a general rule, you can have a high return but with it comes a high risk of loss. These two are generally not separable in the investment world. Safer investments with low risks often produce a low return over a long span of time.
  • “Keep it just between us.” Any time an investor discourages you from sharing what he’s told you with an attorney or another financial advisor, head for the hills. Any legitimate broker will have your best interest at heart and encourage you to realize the full weight of your decision before entering into it. If a broker suggests you decide quickly and not talk to anyone about it, they are likely scamming you.

Unsolicited literature is another red flag. If you have received unsolicited literature or phone calls asking you to invest in oil and gas, this should be a huge red flag. Corrupt brokers will operate boiler rooms and use banks and insurance companies to get contact information for potential investors. Brochures that show a happy couple retired on the beach, enjoying the profits from their high-yielding low risk investment, are simply another deception mechanism to entice you into handing over your hard-earned money.

In general, you can think of it this way: if it sounds too good to be true, it probably is. If a broker approaches you with a “get rich quick” scheme, especially relating to oil and gas investment, stay far away, look them up on FINRA’s BrokerCheck database or the SEC’s EDGAR program (use this for companies you are researching), or contact the securities attorneys at Fitapelli Kurta immediately.

Next Steps

If you are concerned about oil and gas investment fraud, don’t hesitate to contact a securities attorney that is well-versed in oil and gas investments. The securities attorneys of Fitapelli Kurta fit the bill. Contact the securities attorneys of Fitapelli Kurta at (877) 238-4175 or info@fkesq.com for your free case consultation.