LexisNexis® CLE On-Demand features premium content from partners like American Law Institute Continuing Legal Education and Pozner & Dodd. Choose from a broad listing of topics suited for law firms, corporate legal departments, and government entities. Individual courses and subscriptions available.
In recent months the SEC has brought dozens of Ponzi
scheme cases. Most are similar if not the same with promises of guaranteed
returns and safety tied to some proprietary scheme such as trading in
currencies or foreign securities or perhaps investing in TARP. The scheme ends
with the promoters hand in the till taking most of the money and leaving the
investors with little or nothing.
Now however, the SEC may have discovered a different kind
of Ponzi scheme although the end is the same for the investors. SEC v. Fox,
Case No. 11-CV-211 (Filed April 8, 2011) is a financial fraud action against
Brian Fox, Chairman, CEO and CFO of Power River Petroleum International, Inc.
The investment pitch was made to Asian investors over a four year period
beginning in 2004. Mr. Fox raised over $43 million by conveying working interests
in the oil and gas company to investors who were guaranteed an annual return of
Unlike many Ponzi schemes there actually were oil and gas
interests, or at least some. Mr. Fox apparently needed to enhance the holdings
of Power River by recording in the financial statements oil and gas reserves on
properties that the company did not own. He also was responsible for inflating
the net realizable value of those reserves.
The key to events at Power River however appears to be in
the nature of the interests Mr. Fox sold to investors. Since he promised not
just a specific return but also to buy back their interests in reality he sold
nothing. In investors purchased nothing. Rather, the transactions were loans.
This did not deter Mr. Fox from booking the investor funds as revenue in the
company's financial statements. A chart attached to the Commission's complaint
illustrates all of this, showing the reported assets, revenue and pre-tax
income for periods beginning in March 2005 through March 2008 and the restated
numbers as calculated by the SEC staff. During that period pre-tax income was
misstated on a quarterly basis by amounts which ranged from zero to 2,467%.
Assets were misstated by amounts which ranged from zero to as much as 48%.
All of this eventually turned oil and gas operator Power
River into a Ponzi scheme. Initially, Power River and Mr. Fox were apparently
able to pay investors the promised returns from the operations of the oil and
gas properties of the company. By mid-2007 however proceeds from operations
failed to match the success of the investor program and the obligations to the
stream of investors. There was not enough cash to pay investors. New investment
money was used to pay existing investor obligations. The oil and gas company
was now a Ponzi scheme. Nevertheless, Mr. Fox and the company continued to
represent in filings with the SEC that investor proceeds would be used to
purchase and develop oil and gas properties. Press releases and other
disclosures announced the revenues, assets and other financial information.
Eventually the company collapsed into Chapter 11 bankruptcy. That has been
converted to a Chapter 7 liquidation.
The Commission's complaint alleges violations of Exchange
Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
For more information about LexisNexis
products and solutions connect with us through our corporate site.