Securities Regulation Daily Oil & gas ‘Frack Master’ settles with SEC, pleads guilty to multiple criminal charges
Tuesday, October 23, 2018

Oil & gas ‘Frack Master’ settles with SEC, pleads guilty to multiple criminal charges

By Mark S. Nelson, J.D.

Christopher Faulkner, the self-styled oil and gas "Frack Master," agreed to pay $23.8 million to settle civil charges brought by the SEC while also pleading guilty to federal criminal charges that included securities fraud, engaging in illegal monetary transactions, and tax evasion. The parallel SEC and criminal cases arose from Faulkner’s scheme to mislead investors who sought to make money on oil and gas investments pitched to them by Faulkner and his associates. According to an SEC press release, in addition to paying the civil sanction, Faulkner will spend 12 years in federal prison.

"Decadence and debauchery." The SEC’s 2016 complaint alleged that Faulkner, through a publicly traded company and other entities he controlled, offered or sold fraudulent oil and gas working interest investments to prospective investors. The SEC detailed how Faulkner falsely bolstered his image and reputation by claiming to hold masters and doctorate degrees and by making television and radio appearances as part of his personal branding, which included referring to himself as the "Frack Master" to tout his supposed deep expertise in the oil and gas industry, including regarding the practice of hydraulic fracturing or fracking.

The SEC’s complaint asserted that a key part of Faulkner’s scheme involved his handling of estimates from drillers. Here, the SEC said Faulkner simply inflated the estimates (prosecutors said by 800 percent) in order to ensure that he would profit from the difference between the funds raised from investors and the actual drilling costs. These outsized estimates could be found in Faulkner’s offering documents. The SEC also detailed Faulkner’s reporting and books and records violations.

According to the SEC, Faulkner personally gained from the scheme by diverting investors’ funds to fuel his personal lifestyle. Among the many allegations, the SEC highlighted how Faulkner directed that company funds be used to pay his credit card (he referred to it as the "whore card") to cover charges at a gentlemen’s club and other items, including $1 million in personal travel. All told, the SEC claimed that Faulkner sold $80 million in investments for 20 oil and gas prospects to hundreds of investors in numerous states.

Multiple securities violations. The SEC’s eleven count complaint named Faulkner in all but two of the counts. Faulkner was charged with violating the antifraud provisions of the Securities Act and the Exchange Act, with offering or selling unregistered securities, and with multiple violations of the reporting and books and records provisions, including failing to implement internal controls. Faulkner alone was charged by the SEC with violating beneficial ownership reporting requirements. One of Faulkner’s companies and another individual were charged with violating the SEC’s proxy rules. The SEC charged a total of 11 entities and individuals other than Faulkner, many of which the agency said have agreed to settle the charges against them.

Under the settlement with the SEC, Faulkner would have to disgorge $23.8 million and he would be subject to permanent injunctions and director and officer and penny stock bars. The SEC settlement must still be approved by a judge. "Today’s serious civil and criminal sanctions serve as a warning to anyone who intends to target retail investors," said Shamoil Shipchandler, director of the SEC’s Fort Worth Regional Office.

Erin Nealy Cox, U.S. Attorney for the Northern District of Texas, emphasized the breadth of Faulkner’s scheme in announcing the criminal plea deal. "As Mr. Faulkner continued to deceive his investors about drilling expenses and potential oil well output, he spent their millions of investment dollars on his lavish lifestyle. Let this case send a message that this type of egregious investor fraud will [be] prosecuted to the fullest extent of the law."

The case is No. 16-cv-01735.

Companies: Breitling Oil & Gas Corporation; Crude Energy, LLC; Patriot Energy, Inc.

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