The Texas Securities Act , when applicable, is an extremely powerful tool for any investor seeking to recover an investment and other damages when they have been a victim of fraud or when the Texas Securities Act (TSA) has been technically violated, and this is particularly true when an investor invests in a private oil and gas deal that may not be compliant with the TSA or when the deal is misrepresented, or perhaps an outright scam. Oil and gas scams are, in fact, a staple of the enforcement actions brought by the Texas State Securities Board, and even though the Texas State Securities Board often shuts down the scams and the scammers, investors don’t always get compensated for their losses.
With the stock market reaching recent all time highs in late 2017 and going into 2018, private investment will predictably increase, and in Texas, a lot of investment dollars find their way into oil and gas drilling programs and other investments tied to our so-called “black gold.” One recent Houston Chronicle article made a good case of why we will see more and more money flowing into the oil and gas and drilling sectors in Texas. In short, with the price per barrel up from lows of last year, and with the Texas economy booming, it is reasonable to predict that there will be much more drilling activity, and investment into drilling activity. This usually translates to more private investment opportunities for individual investors in the Texas oil and gas sector, and this predictably will attract promoters and other scam artists hoping to exploit gullible and unsophisticated investors hoping to take part in the energized energy sector. And, surprisingly, it is still common for promoters of oil and gas deals to abscond with investors’ dollars.
Investments in oil and gas can come in many shapes and sizes. Investors can, of course, invest in a variety of publicly traded securities, including mutual funds, ETFs, Master Limited Partnerships, and specific companies (e.g. Exxon Mobile, Royal Dutch, and many others who are headquartered in Texas) whose share value is tied to the oil and gas industry. Investing in a public traded vehicle generally eliminates the opportunity for most registration fraud, IF you are investing through a registered broker that makes a suitable recommendation in light of your investment objectives, risk tolerances, sophistication, and financial condition, but when you are investing in a private investment, the potential of securities fraud may be increased.
Included among these many types of investments are private placements, where individual investors are solicited to invest in, for example, a specific drilling program for one to several wells. The vehicle for such an oil and gas investment may be a limited partnership, a corporation, a Limited Liability Company, working interests, and more common recently, a Joint Venture. For the Texas Securities Act to be applicable, the investment needs to meet the TSA’s definition of a “security.” Fortunately, Section 4 of the TSA provides an expansive definition of a covered security (or investment contract), and virtually every type of vehicle used to receive an investor’s dollar into an oil and gas deal will be a covered security under the TSA. There are certain vehicles that may escape inclusion into the definition of a security, but such determination is not dependent on the name (i.e. “Joint Venture”), but on the rights and responsibilities of everyone involved. Simply stated, if investment return is based on the conduct of others, and the investor has little or no actual control over operational decisions (like drilling decisions and operations) then the investment is a security or investment contract covered under the TSA, regardless of any title attached to the deal.
Fundamentally, under the TSA the security being offered, the transaction, and the person making the offer must be registered, or exempt from registration. If any of these requirements are not met then the TSA has been technically violated, and the investor should be entitled to rescind the investment. While complying with the technical requirements of the TSA is straightforward, many private investments don’t comply, and all of the investors would be entitled to rescind their investment. The only salvation for the promoters and the issuer of the securities in this situation is success, and/or ignorance and complacency on the part of the investors. When the deal goes sour, these technical violations of the TSA may result in a direct path for the investors to recover their investments, plus interest, and often attorneys’ fees.
In addition to technical compliance with the TSA, each offer and sale of securities must be offered and sold only to those investors that fall within the scope of any exempt offering (think “accredited investor”) and there can be no misrepresentations or omissions of material facts in connection with the sale of the securities. Section 33 of the TSA provides, in pertinent part, as follows:
“Untruth or Omission. A person who offers or sells a security (whether or not the security or transaction is exempt under Section 5 or 6 of this Act) by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, is liable to the person buying the security from him, who may sue either at law or in equity for rescission, or for damages if the buyer no longer owns the security. “
In other words, if the person recommending your investment does not tell you the whole truth and the complete truth (no omissions) about facts that you would consider important in making an investment decision, then they have violated Section 33 and you are entitled to rescission or damages under the TSA. Rescission, simply stated, means you get your investment back, plus interest, less any income received.
Another aspect of the TSA that is a powerful tool for aggrieved investors, is the ability to hold “control persons” and those persons who aide the wrongdoer liable just as if they were the culprit making the misrepresentations or omissions about the deal. The TSA provides:
F. Liability of Control Persons and Aiders.
(1) A person who directly or indirectly controls a seller, buyer, or issuer of a security is liable under Section 33A, 33B, or 33C jointly and severally with the seller, buyer, or issuer, and to the same extent as if he were the seller, buyer, or issuer, unless the controlling person sustains the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.
(2) A person who directly or indirectly with intent to deceive or defraud or with reckless disregard for the truth or the law materially aids a seller, buyer, or issuer of a security is liable under Section 33A, 33B, or 33C jointly and severally with the seller, buyer, or issuer, and to the same extent as if he were the seller, buyer, or issuer.
When you think “control person”, think owners, directors, officers, attorneys, accountants and even banks. If any such person is in a position to know of and control the transaction, or otherwise provides substantial assistance to the deal or wrongdoers, those persons can be held liable just as if they were the wrongdoer. This is a particularly powerful tool when oil and gas entities are represented to have gone bankrupt, etc, and investors can (and should) go after those persons that controlled the deal and assisted the deal. An overused analogy would be the get-away driver in a bank robbery—maybe they didn’t point the gun and grab the money, but by driving the get away car they provided substantial assistance and should be held liable just as if they pointed the gun and grabbed the money.
So what are some of the warning signs? Bad deals, non-compliant deals, scams, and ponzi schemes often share common characteristics. You should be concerned if:
- If you don’t personally know or have not done business with the people in the deal
- If you are cold-called
- If there was any push or urgency for you to invest in a hurry
- If the one selling the deal to you makes any grandiose promises whatsoever
- If they tell you their deal is NOT subject to the securities regulations
- If they won’t provide you with the documents filed with the Texas State Securities Board
- If the people selling the deal to you are not registered brokers or dealers (or if they are not with a well known brokerage firm)
- If you have a hard time getting information about the financial condition of the company, or about the deal (i.e., drilling program)
Successfully drilling for oil and gas is a difficult endeavor, and even the pros can’t guarantee success. If the person selling you the deal makes it sound like you will get rich in a hurry, that the deal is exclusive or you must invest in a hurry, and if you don’t have significant experience and sophistication in oil and gas deals, you should proceed with caution. Of course, if anything sounds too good to be true, it probably is. Sometimes proceeding with caution means getting a lawyer before you invest, and it may be money well spent to engage an attorney to conduct even simple due diligence. Often a call from your attorney will quickly flush out whether it is a scam or a legitimate deal. If, unfortunately, you discover that you got into a deal that has a little odor to it, or you think your money was not invested as you were promised, you should definitely contact an attorney.
In summary, the TSA is a very investor friendly statute, and is a very powerful tool for investors seeking to recover an investment in a securities offering that didn’t comply with the TSA technical requirements, or an offering that was full of lies, deceit, misrepresentations and omissions. Don’t be fooled, and if you were, get qualified help, and use the Texas Securities Act if you can.