In recent months the SEC has brought dozens of Ponzi scheme cases. Most are similar if not the same with promises of guaranteed returns and safety tied to some proprietary scheme such as trading in currencies or foreign securities or perhaps investing in TARP. The scheme ends with the promoters hand in the till taking most of the money and leaving the investors with little or nothing.

Now however, the SEC may have discovered a different kind of Ponzi scheme although the end is the same for the investors. SEC v. Fox, Case No. 11-CV-211 (Filed April 8, 2011) is a financial fraud action against Brian Fox, Chairman, CEO and CFO of Power River Petroleum International, Inc. The investment pitch was made to Asian investors over a four year period beginning in 2004. Mr. Fox raised over $43 million by conveying working interests in the oil and gas company to investors who were guaranteed an annual return of 9%.

Unlike many Ponzi schemes there actually were oil and gas interests, or at least some. Mr. Fox apparently needed to enhance the holdings of Power River by recording in the financial statements oil and gas reserves on properties that the company did not own. He also was responsible for inflating the net realizable value of those reserves.

The key to events at Power River however appears to be in the nature of the interests Mr. Fox sold to investors. Since he promised not just a specific return but also to buy back their interests in reality he sold nothing. In investors purchased nothing. Rather, the transactions were loans. This did not deter Mr. Fox from booking the investor funds as revenue in the company’s financial statements. A chart attached to the Commission’s complaint illustrates all of this, showing the reported assets, revenue and pre-tax income for periods beginning in March 2005 through March 2008 and the restated numbers as calculated by the SEC staff. During that period pre-tax income was misstated on a quarterly basis by amounts which ranged from zero to 2,467%. Assets were misstated by amounts which ranged from zero to as much as 48%.

All of this eventually turned oil and gas operator Power River into a Ponzi scheme. Initially, Power River and Mr. Fox were apparently able to pay investors the promised returns from the operations of the oil and gas properties of the company. By mid-2007 however proceeds from operations failed to match the success of the investor program and the obligations to the stream of investors. There was not enough cash to pay investors. New investment money was used to pay existing investor obligations. The oil and gas company was now a Ponzi scheme. Nevertheless, Mr. Fox and the company continued to represent in filings with the SEC that investor proceeds would be used to purchase and develop oil and gas properties. Press releases and other disclosures announced the revenues, assets and other financial information. Eventually the company collapsed into Chapter 11 bankruptcy. That has been converted to a Chapter 7 liquidation.

The Commission’s complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is in litigation.