Target Oil fraud case goes to jury

Smiths accused of defrauding investors in drilling proposals

ksaltz@herald-leader.comJuly 10, 2010 

After listening to testimony for about a month, a federal jury has heard closing arguments in the case against two Kentucky men accused of conspiring to defraud oil investors.

Closing arguments concluded and the jury was given instructions Friday afternoon in U.S. District Court in Lexington. Deliberations began shortly after 3 p.m.

On trial are Michael D. Smith of Lancaster and his brother Christopher C. Smith of Prestonsburg. Michael Smith is president of Target Oil and Gas in Albany and controlling interest holder of Kentucky Indiana Oil and Gas in Danville. Christopher Smith is the company's vice president. Both men are charged with conspiracy to commit fraud, wire fraud and mail fraud.

They face up to 20 years in prison if convicted, said U.S. attorney's office spokesman Kyle Edelen.

According to the federal indictment, Target Oil raised $3,192,793.50 from investors between 2003 and 2008, but only paid out about $37,000 in royalties. Prosecutors say the company asked investors to fund drilling projects in Kentucky, Texas, West Virginia and Tennessee but allegedly used fraudulent marketing materials and false geological surveys to persuade them.

Oil and gas companies use drilling programs to raise capital from investors. The investors buy shares into the project and receive royalties if the drilling strikes oil or gas.

The companies are required to publish "offering circulars" for prospective investors that disclose all facts relevant to the investment decision, including risks, proposed distribution of any profits and how drilling costs are to be reimbursed.

On Friday, prosecutors argued that the men misrepresented their intentions to potential investors.

Assistant U.S. Attorney Frances Catron said brochures Target Oil sent to investors contained images of oil pools and wells on maps that were inaccurate. She also said books sent to investors contained geological information that promised success in certain areas, but the investors never got their money back.

Catron told the jury that oil and gas companies can make money two ways: below the ground by drilling or above ground through investors. Catron said Michael Smith chose the latter.

"The intent was never to drill and make money selling oil and gas," she said. "The intent was to make money selling investors."

Michael Smith's attorney, Derek Gordon of Lexington, said Target Oil did not intentionally mislead investors. Gordon argued that geology is not an exact science and that it is impossible to guarantee that an oil or natural gas venture will be successful based on geological surveys.

Gordon said plenty of investors have gotten their money back from investments with Target Oil through drilling programs. Defense attorneys said the prosecutors "cherry-picked" investors and facts to present in their case.

Gordon compared the incidents of people not seeing a return on their investments to buying a "lemon" from a car salesman, saying it was not intentional but something beyond control.

"Could they have crossed T's a little better? Maybe they should have. But Target Oil worked hard and tried to do everything right," he said. "Mike Smith may not have been the most savvy businessman, may not have been the best businessman, but he tried."

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