Texas Shale Oil Fraud Felony Cases: Illegal Investment Ponzi Schemes?

Recently, a Dallas investment scheme orchestrated by Brian Polito and his company EOG Resources got snagged by the federal authorities, with the Securities and Exchange Commission (”SEC”) filing suit here in a Texas federal district court alleging Polito had conned millions of dollars from his investors through the sale of interests in Texas oil and gas wells and oil futures. The US Attorney also filed criminal charges against Polito, and a plea deal was soon made on the felony charges.

Prediction: Texas Fracking Industry Will End Up in Felony Arrests

For details, check out our post on the case. Here’s the thing: the Polito Ponzi Scheme isn’t the only Ponzi Scheme that we’ve seen here in Texas recently — or that we’re going to be seeing in the near future.

I’m predicting many more felony arrests based upon fraud in the oil and gas industry will be coming — big felony arrests by both state and federal authorities. Here’s why.

What is a Ponzi Scheme? It’s a Huge Money Maker (Until It’s Not)

First, let’s consider the infamous Ponzi Scheme. Named after Charles Ponzi, these are considered devious and complicated plans to make lots of money from people with money by luring them into investing in a project, say some oil and gas wells, but instead of their returns on investment (ROI) coming from the project itself, they’re getting paid by money that’s coming in from newer investors in the deal.

Things work great as long as the sales keep enticing new people to invest — and for well-run Ponzi Schemes, they can look legit for years, even decades. But once that supply of new people with money to put their funds into the pot plays out, the whole thing falls apart.

What’s going on here? Bottom line, Ponzi Schemes are really good at generating lots of cash flow, and they’ve been extremely popular over the years. If you interested, there’s a long list of successful Ponzi Schemes that have been operated all over the world on Wikipedia.

Among them:

1.  A $500M Ponzi Scheme that lasted over 20 years, run by the former manager of the Backstreet Boys and N’Sync, Lou Pearlman. Pearlman used his fame in the pop music industry to get people to invest in an airline and an air service company — thing is, they never existed. Pearlman ended up taking a plea deal on felony charges of fraud and money laundering and was sentenced to 25 years.

2.  And of course, there’s Bernie Madoff. In what is considered the biggest fraud in American history, Madoff (who did have a seat on the National Association of Securities Dealers among other comforting items on his resume) ran a Ponzi Scheme of investment funds that generated over $65B over the course of many years. Everything went great until things fell apart as too many investors wanted their money at once. Madoff was arrested and charged with fraud, money laundering, perjury, etc.

He’s currently serving a 150 year prison sentence, and they’re making a movie about his scheme. Robert DeNiro is playing him in the movie; Richard Dreyfuss in the TV Miniseries.

Texas Shale Oil and Gas Industry: Ponzi Scheme in Progress and Felonies in Our Future

Meanwhile, here in the Lone Star State, we hear a lot about the fracking, or shale oil and gas, industry. It’s a big deal and fracking has implications besides making Texas lots of revenue — fracking here and in other parts of the United States is touted as a political means to lessen the country’s dependence on foreign oil reserves. Some have estimates that underneath that Texas soil is 100 years worth of Texas gold.

However, there’s a problem here: scientists and geologists are warning that all this hype about fracking being such a long-term godsend for the oil and gas industry as well as national security and economic independence is not based upon fact.

They’re estimating that we’ve got maybe five years of shale oil and gas here in Texas before that the peak is reached.

Five. Not 100.

CEOs of Texas oil and gas companies are already being faulted for over-estimating things to investors, if not the SEC. Last September, Bloomberg ran an article discussing how these fracking companies were touting all these oil reserves to investors — but the science isn’t supporting those claims.

Their article begins with an example of Marathon Oil CEO Lee Tillman telling investors last fall that Marathon has control over around 4.3B barrels of oil accessible via fracking (shale oil). Their article then points out that this estimate is FIVE TIMES HIGHER than the reserves that Marathon reported to the SEC.

Read the full article here, “CEOs Tout Reserves of Oil, Gas Revealed to Be Less to SEC.”

Then, lets go back to the story of Dallas’ own Brian Polito and his company EOG Resources … Polito’s made a plea deal in an acknowledged Ponzi Scheme where he was selling interests in oil and gas wells and oil futures that didn’t exist. (The story that we started with today.)

Am I the only one thinking we’re going to be seeing a lot more Ponzi Scheme felony charges for fraud, money laundering, etc., in the near future?

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For more information, check out our web resources page and Michael Lowe’s Case Results .