SEC, USAO Settle With Frack Master

Christopher Faulkner, the self-styled “Frack Master,” at one time was a media star with frequent appearances on CNBC, CNN International, Fox Business news, the BBC and a weekly radio talk show in Dallas, all discussing oil-and-gas topics. Investors flocked to his offerings of turnkey interests in oil and gas properties. Over $80 million was raised – far more than necessary to conduct the drilling investors were told about. Yet by 2016 the operation teetered on the verge of collapse for lack of cash. The next year the SEC obtained a freeze order and the appointment of a receiver.

Now the Frack Master faces years in prison and crippling debt. He settled with the Commission, agreeing to the entry of permanent injunctions based on various sections of the federal securities laws while agreeing to pay disgorgement of $23.8 million. He will also be barred from serving as an officer or director of any public company and from participating in any penny stock offering. SEC v. Faulkner, Civil Action No. 3;16-cv-01735 (N.D. Tx. Filed June 24, 2016). At the same time Frack Master Faulkner settled with the U.S. Attorney’s Office, entering into a plea agreement based on securities fraud, money laundering and tax evasion charges. He has agreed to serve 12 years in prison. U.S. v. Faulkner, No. 3:18-cr-00500 (N.D. Tx.).

The SEC’s complaint named as defendants: Christopher Faulkner, President and CEO of defendant Breitling Energy Corporation, registered under Section 12(b) with the SEC; Breitling Oil & Gas Corporation; Crude Energy, LLC and Patriot Energy, Inc., both controlled by Mr. Faulkner; Jeremy Wagers, a Texas Attorney; Judson Hoover, a CPA and Breitling Energy Corp. CFO; Parker Hallam; co-founded of Breitling and president of defendant Crude Energy; Joseph Simo, the owner of Simo Energy, LLC, a Dallas petroleum geology consulting firm that services Breitling Oil, Breitling Energy, Crude Energy and Patriot Energy; Dustin Miller Rodreguez, co-founder of Breitling Oil and its CIO; Beth Handkins, Crude Energy’s COO; and Gilbert Steedly, Breitling Energy’s v.p. of capital markets.

Mr. Faulkner created a fraudulent offering scheme using Breitling Oil which was later essentially replicated with other firms, including publically traded Breitling Energy. He began in 2011 telling investors they could acquire an interest in “turnkey” oil and gas working interests. Mr. Faulkner ran the operations in large measure while Messrs. Hallam and Miller directed the sale process.

The sales process was built on a series of misrepresentations. Those began with the background of Mr. Faulkner who falsely claimed to hold masters and doctorate degrees and have extensive oil and gas experience – the media appearances were arranged by Mr. Faulkner’s public relations firm to promote his book.

Interests in oil-and-gas properties were sold. Many of the agreements had a continuous drilling provision which if not complied with would result in the interest reverting to its original holder. The provisions were not disclosed. Investors were furnished with an estimated cost to drill and complete the wells as well as the amount the investment would earn. Mr. Faulkner received estimates for drilling and completion costs from operators that actually drilled and completed the wells in which Breitling Oil and the other firms held interests. Investors were not told that he took those estimates and inflated them before they were presented in connection with selling the shares.

The offering materials also included reports by geologist Joseph Simo. Those reports recommended drilling wells on the prospects. The reports frequently included production projections. Those projections were built on historical performance numbers from property in the vicinity and an assumption that a new drilling would perform as well as the best properties. No basis was offered for this assumption. Mr. Simo was held out to the public as an independent expert – his affiliation with Breitling Oil was not disclosed.

Over time Breitling Energy, a public company, essentially became Breitling Oil’s success along with Crude Energy and later Patriot Energy. Crude Energy became the covert marketing arm of Breitling Energy. Interests were marketed using essential the same approach as that used for Breitling Oil.

Beginning in late 2013, and continuing through April 2015, Mr. Faulkner directed that about $36 million be transferred from Crude Energy to Breitling Energy. He also had Breitling Energy make payments of over $18 million on his American Express cards in addition to other claimed reimbursements he received that had no support. Reports were filed with the Commission for the firm at the direction of Mr. Faulkner. Those reports did not disclose the firm’s relationship with Crude Energy or the results of operations.

In late 2014 the share price of Breitling Energy tumbled along with those of other oil firm stocks as the price of oil plummeted. In an effort to prop up the price, Mr. Faulkner diverted hundreds of thousands of dollars from Breitling Energy to two stock trading accounts he controlled. He engaged in heavy trading through the two nominee accounts and at some points marked the close in an effort to manipulate the share price.

In December 2015 the oil and gas sales operation for Breitling Energy was moved from Crude Energy to Patriot Energy following a dispute involving Mr. Faulkner and one of his confederates. Mr. Faulkner directed the transfer of millions of dollars from Patriot Energy to Breitling Energy. Portions of the money went to pay his personal expenses.

By April 2016 the scheme began to collapse. Despite raising significantly more money than was required to drill, test and complete prospects, Mr. Faulkner had drained so much cash from the operation that business could not continue. Operations were shuttered. This triggered certain provisions in many of the agreements under which the interests were re-acquired by the original holder. The investors were left with nothing. Overall Defendants had raised about $80 million in more than 20 oil and gas offerings from hundreds of investors. Mr. Faulkner had misappropriated at least $30 million. The Commission’s complaint alleged violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a) and 16(a).