What does an $80 million scam look like from the inside? The federal Securities and Exchange Commission laid out its version last week in its complaint against Dallas-based Breitling Energy Corporation, its CEO, Christopher Faulkner, and seven others associated with the company.
As the SEC recounts it, the plot is intricate and includes interlocking companies, bad science, fake financials and an massively effective public relations campaign that turned a tech entrepreneur with a shaky record into the “Frack Master” whose “expertise” was on display on radio and cable TV news shows from coast to coast.
Faulkner’s lawyer denies his client did anything wrong and tags the SEC complaint as a vendetta.
But the complaint has the kinds of details that seem to indicate a scheme that took years of planning and execution.
The SEC account starts in 2009 when Faulkner ran a website data hosting company. At that point, “he had never managed, run, operated, or even worked in an oil-and-gas business.”
He met Parker Hallam and Dustin Michael Miller Rodriguez, who had sold oil and gas investments. They decided to create a company; Breitling Oil and Gas was born. By 2011 Miller and Hallam were selling unregistered investments – working interests in oil and gas prospects in Texas, Oklahoma and North Dakota.
Investors paid their money and Breitling promised to use the cash to drill, test and complete the projects. In fact, the company promised to pay the difference if the cost of development was higher than the estimate sold to the investors.
From January 2011 through December 2013, Bretling sold $43 million in investments.
Why did people buy? One reason was Faulkner, who billed himself in the sales materials as having a“diverse background in the oil and gas industry” with “extensive past experience in all aspects of oil and gas operations. . .”
Why did the buyers believe those claims? He further promoted himself, the SEC says, through high-profile appearances on business-themed radio programs and television shows,”as an expert in ‘fracking’ – hydraulic fracturing, the process of drilling and injecting fluid into the ground at a high pressure to fracture shale rocks to release natural gas.”
Faulkner also touted his education: A master’s degree in information science from the University of North Texas and a doctorate degree from Concordia College. Never happened, the SEC said.
In the investment pitches, the company told potential customers exactly what the estimated costs of drilling and completion would be for each project and charged accordingly. For a $5 million project, Breitling would sell one percent for $50,000.
But wait, there was more. No management fees.
So the only way the company could make money is if the wells made more money than the original investment or the costs were less than the original estimate.
Faulkner, the SEC says, decided to rig the process: “There was no possibility that the actual costs would ever approach the grossly inflated estimated costs.”
Faulkner took estimates from prior offerings and different kinds of wells to craft his new estimates. And then he marked those up even higher. A lot higher.
In one case, the land costs were $80,000 and Breitling puffed that up to $8.2 million.
The bottom line, the SEC says: The company “raised exponentially more money than it needed to drill and complete the prospects.”
Which might have been OK if the wells produced what Breitling had claimed. But those claims, the SEC said, were based on bogus geology produced by “Simo Energy, LLC and its principal, Mr. Joe Simo.”
Investors were told they were getting independent assessments. But Simo, as it turns out, was Brietling’s vice president for exploration. The SEC says he puffed up the production estimates by basing his numbers on the best producing wells in the area and assuming the new wells would do as well. (Even that wasn’t good enough for Faulkner, who doubled some of the production estimates on his own, the SEC says.)
The claims did not deliver, the SEC says: “Simo’s projections were consistently, and abysmally, overstated; actual production on the wells was often less than 10 percent of Simo’s projections.”
So now the money flowed in. What did Faulkner and associates do with it? A fraction went for drilling wells. Some went for high-on-the-hog, face-to-face wooing of investors. But millions were used for “lavish personal expenditures,” the SEC says:
“In 2013 alone, Faulkner and…Tamra Freedman, Faulkner’s wife at the time, charged approximately $7 million on Amex cards Faulkner used. Faulkner claimed that all of these charges were legitimate business expenses without providing documents identifying the nature of the expenditures,” the SEC said. “Many of the charges were personal, including tens of thousands of dollars in charges to his personal concierge, gentlemen’s clubs, and assorted high-end fashion stores.”
The better to shuffle money around, the SEC says that Falkner and his associates created another company: Crude Energy operated just like Brietling, selling shares in oil and gas wells based on the same kinds of bad information produced by the same people.
Between December 2013 and April $2015, Crude raised more than $38 million from hundreds of investors. Most of that money got pooled with Bretiling. And millions of those dollars, the SEC says, paid for personal expenses on various American Express cards.
Faulkner tossed in a final bit of chicanery as oil prices tumbled in 2014, the SEC says. He created two shell accounts to buy up Breitling stock to make it look like there was actual investor interest.
According to the SEC: “Faulkner’s trading artificially sustained and increased [Breitling’s] stock price.
Finally, in 2015, Breitling started to come clean in SEC filings, saying the financial reports going back to 2012 had problems. And even before the SEC shut the stock down last Friday, it’s price per share had hit 2 cents.