Treaty Energy, a New Orleans-based oil-and-gas company, is in big trouble in the US after the Securities and Exchange Commission charged that company and five of its executives with running a stock trading scheme through which they garnered US$3.5 million in illicit gains after they falsely announced a commercial oil find in Belize—only to scam people into buying stock in the company.
According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Texas, Treaty Energy Company issued “deceptive press releases,” in which it touted drilling successes in Belize and Texas to induce investor demand for its unregistered stock, which was then illegally distributed to the public.
Back in January 2012, Treaty announced that it had struck oil at the San Juan #2 site near Independence, adjacent to the Port of Big Creek in Stann Creek, claiming, according to then CEO Andrew V. Reid, that it could drill up to 90 wells in the field, where the production potential was said to be 6 million barrels of oil.
Treaty Energy operated in Belize under a joint venture agreement with Princess Petroleum, to explore 1.8 million acres of offshore territory of Belize, just east of the Belize Barrier Reef, and 200,000 acres onshore in the Toledo and Stann Creek Districts, under a production sharing agreement issued in 2007.
In April 2011, Treaty formed a local company, Treaty Belize Energy Ltd., through the Barrow & Williams law firm, its legal representative in Belize, and it began importing drilling equipment for exploration works in Belize. However, last month, Treaty announced that it had ceased drilling operations in Belize.
“In January 2014, Treaty management performed, without reporting to shareholders, the abandonment of Belize and its opportunity platform when it assigned all of its assets to the Hackmeyer Real Estate Group in a ‘blanket security agreement’ as collateral against funds which the Hackmeyer Group had loaned to Treaty for ironically, development in Belize, as well as some of the company’s endeavors in Texas,” the SEC said.
“We believe this was misguided. Clearly at that time, Treaty was not able to execute on extensive opportunities available to the company to provide shareholders the ultimate return on investment that was and is indeed possible,” the SEC complaint added.
Now, the SEC alleges that Treaty Energy’s founder Ronald Blackburn and four company officers – Andrew V. Reid, Bruce A. Gwyn, Lee C. Schlesinger, and Michael A. Mulshine – obtained at least $3.5 million in illicit profits from the scheme.
The SEC also charged a Houston-based attorney with facilitating the scheme by issuing false legal opinion letters that allowed free trading of the restricted company stock.
“Treaty Energy professed to be in the oil-and-gas business, but its real business seems to have been misleading investors,” said David Peavler, Associate Director for Enforcement in the SEC’s Fort Worth Regional Office. “These company officers were behind press releases and SEC filings announcing drilling successes that were simply falsehoods designed to deceive the market and put investor money into their own pockets,” Peavler commented.
The SEC’s complaint further alleges that Treaty Energy’s outside counsel Samuel Whitley abused his gatekeeper role and enabled the scheme by authoring improper legal opinion letters that allowed the company and its officers to illegally distribute unregistered stock to the public.
“Whitley was aware that Blackburn was running the company and Treaty Energy was abusing registration rules under the federal securities laws. Yet these facts did not deter him from issuing the opinion letters that allowed the scheme to proceed,” the SEC said.
According to the SEC’s complaint, the scheme had three basic components.
(1) In January 2012, Blackburn directed Treaty Energy to issue a press release claiming that its purported oil strike in Belize contained an estimated five to six million barrels of recoverable oil.
“Treaty’s stock price shot up nearly 80 percent that day,” the SEC said.
It noted, though, that the Belize government publicly refuted Treaty Energy’s purported oil strike the very next day, calling the company’s statement “false and misleading” and “irresponsible.” Despite Belize’s official position, Blackburn and the company’s officers continued to mislead investors by claiming that Belize was merely downplaying an actual oil strike for strategic reasons, the SEC statement said.
(2) Treaty Energy failed to disclose in public filings from 2009 to 2013 that Blackburn – previously convicted of federal income tax evasion – actually controlled the company and was a de facto officer.
According to the SEC, Reid, Gwyn, Schlesinger, and Mulshine all knew Blackburn’s true role at the company, but intentionally kept this fact out of its disclosures to conceal from the public that a convicted felon was in charge.
(3) In November 2013, Treaty Energy began offering investors working interests in a well in West Texas. Investors were enticed with claims that the working interests were low-risk and expected to yield a return of 111.42 percent over a 10-year period.
The SEC alleges that Treaty Energy and its officers knew these claims were baseless, because the well was producing only marginal amounts of oil; that is, 235 total barrels from October 2013 to October 2014.
As a result of these findings, the SEC’s complaint charges the company (Treaty Energy), its founder — Blackburn, as well as the officers of the company: Reid, Gwyn, Mulshine, and Schlesinger, with securities fraud, as well as violations of the registration and reporting violations of the federal securities laws.
“The SEC seeks disgorgement of ill-gotten gains with prejudgment interest plus financial penalties as well as penny stock bars, officer-and-director bars, and permanent injunctions against them,” said the SEC statement.
It said that Reid and Gwyn are additionally charged with signing false certifications in Treaty Energy’s SEC filings, and Whitley is accused of securities registration violations.