Oil & Gas Investment Scams
With the drop in oil prices in 2014 and 2015, thousands of investors realized they had been taken advantage of in investments related to oil and gas. Dozens of oil and gas companies went bankrupt or wound-up operations leaving investors holding the bag. Even today oil and gas related investments are extremely popular with advisors because they pay out high commissions and offer investors pretty high yields in this perpetually low interest rate environment. There are two types of investment losses in oil and gas securities that are potentially recoverable through the FINRA arbitration process or via lawsuit.
Unsuitable Investment Recommendations in Oil and Gas Stocks, Private Placements, Master Limited Partnerships, and Mutual Funds: Negligence based unsuitable investment recommendations in oil, gas, and energy related companies make up a majority of the cases we’ve handled for investors. These can be overconcentration cases, meaning your advisor recommended you invest too much of your money in the energy sector. We analyze the energy sector concentration of your portfolio by first comparing it to the S&P 500, which at any given time about 11% of the index is comprised of energy companies. If you have more than that in your portfolio, there needs to be some justification for that. We have represented clients with anywhere from 50% to near 100% concentrations in oil and gas related investments. That sort of overconcentration should trigger compliance review automatically.
Brokers at full service brokerage firms recommended oil and gas stocks, master limited partnerships, and other related investments heavily to investors between 2012 and 2015. When oil prices collapsed in 2014 into 2015 due to oversupply, it resulted in devastating investment losses for many investors. The price shock moved fast and wiped out some pretty substantial companies like Breitburn Energy, Energy XXI, and Magnum Hunter amongst others. Unfortunately, many smaller oil and gas producers lost a majority of their value in 2014 and 2015, including many private issuers like the Coachman/Bakken Drilling Funds. Advisors sold the sizzle of “fracking” and the “energy renaissance” to justify their recommendations into these companies, many of which were highly leveraged and speculative.
Dozens of master limited partnerships declined in value substantially in 2014 and 2015. The $500 billion master-limited-partnership sector is the sausage maker of the oil/gas investment world. Brokers sell these investments as part of the income component of an investor’s portfolio, but never explain that with those high yields, come high risks. The bullish pitch by brokers in favor of the investments centered on the high-yielding way to participate in the booming U.S. energy infrastructure build-out. Unfortunately, the investments, while providing generous yields, masked the substantial high risks of these investments.
Many of these investments were pitched to elderly and conservative investors because of the relatively high dividends and yields that the investments paid out. These losses are potentially recoverable through either FINRA arbitration claims against the brokerage firms whose brokers recommended the investments or lawsuits against the promoters of the investments.
Fraud Based Claims: The second type of oil and gas actions deal with fraud based claims. Oil and gas investments take many forms, including limited partnership interests, master limited partnerships, ownership of fractional undivided interests in leases, and general partnerships. Risk level, tax consequences, and investor liability vary according to the type of program. Oil and gas deals are frequently structured with the limited partnership (or other legal entity) in one state, the operation and physical presence of the field in a second state, and the offerings made to prospective investors in states other than the initial two states. Thus, there is less chance of an investor dropping by a well site or nonexistent company headquarters. Such a structure also makes it difficult for law enforcement officials and victims to identify and expose the fraud. It also vests total authority in the General Partner to handle the day-to-day operations of the operation, which opens the door to fraud.
Brokerage firms that sell oil and gas limited partnerships through private placements received massive fees and commissions in excess of 8% for doing so. In exchange for this huge commission, the advisors are supposed to perform due diligence on the offering prior to allowing the interests to be sold to their retail client base. The level of due diligence required for an oil and gas offering is expensive and specialized. So what invariably happens is brokerage firms, especially the smaller regional firms that tend to sell these offerings, do nothing more than review a placement memorandum and check a few boxes on a list. That is not sufficient to pass the reasonable basis suitability test and the brokerage firm could be liable for losses in connection with investments where they fail to perform due diligence. Even if the offering turns out to be a fraudulent scam, the brokerage firm could still be responsible.