The allegations in the lawsuit include, among other things, claims that Company's management has been grossly negligent and/or has acted in a fraudulent manner in conducting the Company's business. Specifically, the Company's President and Chief Executive Officer, Brian Fox, is alleged to have acted in a grossly negligent or fraudulent manner in his dealings with working interest investors (the "investors") in a number of respects, including but not limited to: (a) failing to drill or perform promised re-completion work on leases, (b) hiring an operator with a criminal and regulatory history of investor fraud, (c) failing to take steps to preserve company assets, (d) taking actions which caused the unreasonable loss of company assets, (e) withholding funds due to the Company from affiliated entities he controlled, (f) transferring company assets without an exchange of reasonably equivalent value, (g) filing misleading reports with regulators, and (h) paying himself an exorbitant salary and bonuses that were not justified under the circumstances.
The Receiver has been engaged in an ongoing investigation of these allegations. Based upon the review of an accounting schedule prepared by the Company's Chief Financial Officer, the Receiver has preliminarily determined that the Company engaged in a fraudulent "Ponzi" scheme with regard to its working interest investors during 2007. In this regard, the Company's President, Brian Fox, committed the Company to pay a minimum 9% return to numerous working interest investors. During 2007, a total of $4,413,406 in interest payments were made to those working interest investors, of which $3,263,004 came from funds received from subsequent working interest investors, not profits generated by the Company from oil and gas production. The scheme began to reveal itself when there were insufficient oil and gas production and funds from later investors to pay the promised returns to the earlier investors. Additionally, the Company has failed to pay various expenses for the past 3 to 6 months, which has resulted in the Company being in default on various obligations and some of the producing oil and gas properties of the Company being shut down. One of the most recent notices of default involves a purported Company obligation in excess of $1 million in connection with a lease of certain oil and gas equipment.
Since being appointed, the Receiver has attempted to assert control over the various oil and gas producing properties of the Company. The Receiver has retained the services of an independent accountant who, with the assistance of the Company's CFO, is attempting to indentify the Company's oil and gas properties as well as its current and past due liabilities. Mr. Fox's lack of cooperation with the Receiver has caused additional disruptions in the Company's operations.
The Receiver has also retained an independent oil and gas engineering consulting firm to evaluate the known oil and gas properties of the Company and its working interest investors. The report, which is expected to be issued before the end of August, will provide the estimated oil and gas reserves for the known oil and gas properties of the Company, as well as a geological (prospective) evaluation of those properties. In this regard, one of the principal properties of the Company, the Weesatche lease in Goliad County, Texas, is the subject of pending litigation with the operator of the property.
The operator is a company controlled by John Ehrman. Mr. Ehrman has been a subject of two prior SEC enforcement proceedings and has previously pled guilty to a federal criminal fraud charge. Mr. Ehrman is currently the subject of additional criminal fraud charges. Mr. Fox has been the subject of regulatory proceedings in an unrelated matter filed by the Calgary Securities Commission.
None of the foregoing regulatory and criminal proceedings were disclosed by the Company in its prior SEC filings or its working interest investors.
The Company will be in a better position to evaluate its properties, its prospects, and the value of investors' potential future revenues when the engineering report is received and an accounting is completed. The Receiver believes, based upon his initial investigation, that the Company's financial statements will be materially restated.
