The Securities and Exchange Commission has obtained an emergency asset freeze in a $485 million offering fraud and Ponzi scheme orchestrated by three Dallas businessmen through a company they owned and controlled, Provident Royalties LLC.
The SEC alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent securities offerings involving oil and gas assets through 21 affiliated entities to more than 7,700 investors throughout the United States. Provident's entities made some direct retail sales of securities, but primarily solicited retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.
According to the SEC's complaint filed in U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. In fact, the SEC alleges that less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.
"Provident sold ostensibly safe securities such as preferred stock to thousands of investors", said Ken Israel, Director of the SEC's Salt Lake Regional Office. "But it was actually operating a Ponzi-like shell game in which assets were shuttled from one entity to another and investors were paid 'returns' from whatever money was available - usually that of the most recent investors."
The SEC's complaint charges Paul R. Melbye, Brendan Coughlin, and Henry Harrison for orchestrating the scheme, as well as Provident, broker-dealer Provident Asset Management LLC, and the 21 entities that offered and sold securities. Although each offering was made by a separate entity through a separate private placement, the Commission alleges that the offerings actually involved a single plan of financing.
In addition to the asset freeze, the court has appointed a receiver to preserve and marshal assets for the benefit of investors.
The SEC's complaint charges the defendants with violations of the antifraud provisions of the federal securities laws. The complaint seeks a temporary restraining order and preliminary and permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and financial penalties. Officer and director bars are sought against Melbye, Harrison and Coughlin. Five affiliated entities that did not sell securities are named as relief defendants for purposes of disgorgement.