Oil Fraud Case of Brian Polito : The Canary in the Coal Mine Warning of Future Texas Oil Fraud Arrests
Texas oil is the stuff of legend, and in a scandal worthy of television dramas like Dallas with J.R. Ewing, recently the Securities and Exchange Commission (”SEC”) filed a formal complaint in a Texas federal district court alleging that a local Texas man named Brian J. Polito had conned some folk out of millions of dollars by selling them parts, or interests, in Texas oil and gas wells and their “black gold” futures, when Mr. Polito didn’t own squat.
The official case is U.S. Securities and Exchange Commission v. GC Resources LLC et al., filed as case number 3:15-cv-01048 in the U.S. District Court for the Northern District of Texas, Dallas Division.
On the same day, in the same federal district court, the U.S. Attorney’s Office filed criminal charges against Brian Polito. He’s already made a deal with the prosecution (more on that below).
What Brian Polito Alleged Did: Texas Oil Fraud Scam Ready for Its TV Movie
Here’s what the feds (SEC, US Attorney) claimed they can prove in this federal criminal fraud case (based upon their filings): first, that Brian Polito set up a company called “GC Resources LLC,” which is another defendant in the case. He set up a nice office here in Dallas, on Preston Road.
Then, Mr. Polito went out in search of his marks and found 12 people who were willing to invest their money with him. Over a two year time span, Polito managed to manipulate these dozen deep pockets into handing over around $12,000,000 to him.
These people thought that they were investing in 12 oil wells owned by a company called EOG Resources, Inc. What they were really doing, per the feds, was investing in a Ponzi Scheme.
According to the federal investigators, Polito took that money and spent it. Polito was the sole signatory on the GC Resources’ account, and he bought lots of nice things. The investigation alleges that he bought 76 luxury cars, for instance. That’s right seventy-six: or enough swanky cars that he didn’t have to drive the same car twice for 10 days. (76/7 = 10.8)
In fact, the FBI took control of a 2014 Roll Royce Wraith, a 2015 McLaren 650S Coupe, a 2014 Lamborghini, a Aventador Anniversary Coupe, a 2015 BMW M4 Coupe, a 2014 Mercedes E63 Wagon, and a 2014 Ferrari 458 Speciale. The Rolls Royce Wraith alone has an estimated MSRP of $284,000.00.
He also is alleged to have used his investors’ money to buy over $1,000,000 in watches. Wow.
There were lots of nice vacations, too. Of course there were, right?
There Really Were Oil Wells, They Just Didn’t Produce Oil
Now, like any smart scheme, there was more than flash. In Polito’s world, there really were oil wells. Polito had over two dozen wells owned by his company, GC Resources LLC. The problem allegedly was that these wells weren’t producing oil and no one would want to buy shares in non-producing oil wells.
So, Polito is said to have gone out and found some producing wells online. He then created phony deals with faked contracts where investors thought they were buying interests in producing oil wells and then he would point them to the Texas Railroad Commission web site to confirm that these were producing wells.
Photoshop is said to have helped Polito create documents to show how his company had an interest in these producing wells, in case investors wanted to see comforting confirmation.
He’s even alleged to have driven some of his marks out to look at these oil wells that he didn’t own (can’t you see this as a TV movie?).
Polito’s world came crashing down around him when an unhappy investor had the temerity to circumvent Polito and go directly to the company listed by the TRC as owning the wells (EOG Resources, Inc.). Surprised, EOG published a notice on its web site that there was no connection between EOG and Polito, and then EOG allegedly called the authorities.
Polito Pled Guilty Last Week to Criminal Charges: He Made a Deal
Last week, Brian Polito’s plea deal was announced in federal court and according to the news release of the U.S. Attorney’s Office, Mr. Polito appeared before Judge Jorge Solis and pled guilty to one count of mail fraud — and that single count of mail fraud exposes Polito under the statutes to the possibility of 20 years in a federal prison as well as a $250,000 fine.
However, the prosecutors struck a deal with Brian Polito where under the plea agreement, he would only get a maximum of 96 months, or 8 years, behind bars.
Key here: for less time, Polito signs a restitution deal where the victims would recoup their losses in the oil fraud.
It’s up to Chief U.S. District Judge Jorge A. Solis whether or not this deal goes through: after the prosecution and the defense reach a plea agreement, the federal judge has the power to approve or nix the deal. However, the ability for these victims to get fast cash from Polito may be a big incentive in approving this plea deal.
[Read the Plea Agreement below; read the Factual Resume that supported the Plea Agreement submitted to Judge Solis here.]
Oil Fraud in Texas: Expect More Criminal Charges
As a Dallas criminal defense lawyer, I’m looking at this case not as an interesting blip in the federal fraud cases we see here, but as the canary in the coal mine where other oil and gas fraud cases are going to be filed here in North Texas as well as other parts of the State of Texas.
Federal oil fraud cases (usually based upon wire fraud or mail fraud), as well as joint efforts with Texas fraud investigators, are going to be popping up more and more in the press. The trick, from the perspective of the prosecutors, is getting sufficient factual support for these filings.
Fraud investigations take time in oil fraud cases because of the detail documentation involved in proving cases based upon federal securities law violations or violations wire fraud or mail fraud statutes. These oil fraud cases are also complicated because not only is more than one federal agency involved (say the SEC on the securities matters and the FBI on the federal criminal charges) but there may be state involvement too (e.g., the Texas Rangers and the Texas Attorney General).
Still, the reality here in Texas is that there are lots of scams and schemes being run right now involving oil and gas. See, for instance, the discussion of the situation in the January 2014 Dallas Morning News story, “Investment fraud is booming along with oil and gas drilling, SEC says.”
This isn’t new.
- Consider the big oil fraud case here in 2011 involving Jason Halek of Southlake and the Fort Worth oil company Halek Energy. Jason Halek had a luxury suite at the Dallas Cowboys Stadium, among other things, when he got nabbed by the feds.
- Or the Houston oil man, John Ehrman, indicted last Christmas on oil fraud charges alleged to exceed $2.3 Million.
Mr. Polito and his plea deal is an interesting case. It’s also an example for future criminal oil fraud prosecutions in the North Texas / Dallas area.
Here is the filed Plea Agreement entered into by Brian Polito, published in the Michael Lowe Digital Library:
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