Six employees of two interlocking Kentucky oil and gas companies have been indicted on accusations they cheated investors out of $3.1 million.
According to a federal indictment that became public Tuesday, a West Virginia geologist and executives from Target Oil and Gas in Albany and Kentucky Indiana Oil and Gas in Danville fooled investors they contacted by cold calls into buying shares in drilling programs through fraudulent marketing materials and false geological surveys.
The companies asked investors to fund drilling projects in Kentucky, Texas, West Virginia and Tennessee.
From 2003 to 2008 they raised $3,192,793.50 from investors, but paid out only $37,882 in royalties, according to the indictment.
Marketing brochures claimed the company had struck oil and gas at several sites and was currently paying out royalties.
Each of the six men was charged with one count of conspiracy, 20 counts of mail fraud and two counts of wire fraud.
The defendants named in the indictment are:
■ Michael D. Smith, 53, of Lancaster. Smith is president of Target Oil and controlling interest holder of Kentucky Indiana.
■ Christopher C. Smith, 48, of Prestonsburg. Christopher Smith is Michael Smith's brother. He is the vice president of Target Oil.
■ Shaun Smith, 27, of Cookeville, Tenn. He is the son of Michael Smith and worked for both companies.
■ Ray Garton, 58, of Barrackville, W.Va. Garton claimed to have written geological surveys for both companies, according to the indictment. He runs a company called Mammoth Geophysical Inc.
Two other employees of both companies, Mark Irwin, 26, of Cookeville, Tenn., and Joshua Scott Harris, 23, of Hustonville, were also charged.
Michael Smith, Christopher Smith, Joshua Harris and Mark Irwin were charged with additional counts of selling securities without a license.
The six men were summoned to an arraignment Tuesday without arrest. They pleaded not guilty to all charges in U.S. District Court in Lexington. The defendants are free on their own recognizance.
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.
Oil and gas 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.
News of the charges was welcomed by at least one of their accusers. Vincent R, Guerrieri, of Kensington, Md., said he received several marketing calls in 2005 from Christopher Smith, whom Guerrieri said sounded like a southern "good-old-boy" who could be trusted.
Guerrieri, who has friends who have had varying degrees of success investing in drilling programs, said he invested about $11,000 in May 2005 in wells in West Virginia.
In December 2005, Christopher Smith told him that one of his wells had struck and he'd be receiving about $1,900 a month in royalties, Guerrieri said.
Garton, the geologist, met Guerrieri in January 2006 in West Virginia to show him the claimed well. Garton pointed to pipes "sticking out of the ground" and called it the best-producing well he'd ever seen, Guerrieri said.
Months later, Guerrieri had yet to see a dime in royalties. When he pressed officials for the royalties, he was talked into investing in another West Virginia well and a Kentucky well that the company claimed could produce 100 barrels of gas a day, he said.
Had it not been for those claims, Guerrieri says he would not have "thrown good money after bad."
In all, Guerrieri invested $42,000. He'd occasionally receive a royalty check for $30 or $50, and the biggest check he ever received was for $500, he said.
When Guerrieri pressed officials again in 2006, he was told that the company was running into regulatory problems and couldn't pipe the gas.
Officials eventually stopped returning phone calls.
"I am OK with investing $10,000 and losing it. But those bastards stole another thirty-something thousand from me and they need to fry for that," Guerrieri said. "They stole from me by lying to me. That's not fair. That's not business. They deserve whatever they get."
The indictment alleges that the companies were not licensed to sell securities. Seven states — Kentucky, Pennsylvania, Wisconsin, Oklahoma, Michigan, Texas and Missouri — had ordered the companies to stop selling the securities within their states, according to the indictment.
Geologists are hired by oil and gas companies to find sites that might be favorable to drilling. The indictment described a process in reverse, with Garton writing false geological surveys of sites selected by Michael Smith. Garton is not licensed in Kentucky.
The surveys claimed to contain geological information specific to the proposed well. But they actually only had information about the general area, according to the indictment.
The men face up to 20 years in prison for each count. Their next court appearance is scheduled for Feb. 10.