Houston charged with defrauding investors in oil and gas deals

Arael Doolittle has been charged with taking $1.2 million from 21 investors through fake oil and gas deals. A federal grand jury returned a 12-count indictment.

Mr Doolittle operated Sariel Petroleum and Sariel Enterprises. He had an associate, a Houston realtor, pose as a distillates trader working for Chevron. The associate established a bank account in the name of Chevron USA Products, without permission from Chevron.



In 2017 Doolittle persuaded Dominion Resources Trading (‘DRT’), a small outfit in Las Vegas to work with him to find investors for oil and gas transactions he was working on. DRT ultimately forwarded on $1.25 million from 21 investors to Sariel Petroleum. Doolittle provided falsified records to DRT that appeared to show $1,209,600 of the funds has been used to buy product from Citgo.

Doolittle created letterhead and emails that appeared to come from Chevron. He also persuaded an attorney and a banker to provide attestation letters and assurances to potential customers and investors.

In a separate case in the Southern District of Texas, Chevron sued Sariel Petroleum in January 2018 for trademark infringement. After a jury trial, Chevron was awarded a $15.6 million judgement against Sariel in April 2020.

Doolittle is charged with eight counts of wire fraud and four counts of engaging in monetary transactions in criminally derived funds. Wire fraud carries a potential 20-year-maximum sentence and a possible $250,000 maximum fine. If convicted of any of the other four counts, he faces the same fines and up to 10 years imprisonment.

https://www.justice.gov/usao-sdtx/pr/houston-man-charged-defrauding-investors-oil-and-gas-deals

Doolittle indictment

Chinese national indicted for theft of coiled tubing trade secrets

Lei Gai, aka Jason Gao, has been indicted for stealing coiled tubing technology from a Houston-area manufacturing company. Also indicted were two corporations, Jason Energy Technologies in Yantai, China and Jason Oil & Gas Equipment LLC (JOG), based in Houston.

Also charged in relation to the case is Robert Erford, Jr of Dayton, Texas. He previously pleaded guilty to conspiracy to commit theft of trade secrets.



Erford was a production mill operator in the Dayton plant owned by a parent company, based in Houston. The plant and the company are not named in the indictment, but I believe them to be Global Tubing LLC, which is owned by Houston-based Forum Energy Technologies.

In April 2019, Erford first contacted JOG in Houston inquiring about managerial positions. It wasn’t until September that Gao responded and they agreed to meet up in Houston the following month.

During their second meeting, Gao suggested that Erford travel to China for a two-week consultancy assignment to assist the Chinese company with its manufacturing problems. Erford was asked to bring a small piece of sample material of advanced coil tubing.

One week assignment

Erford also took 120 photos of the Dayton facility, processes and data. This included unique chemical compositions for the raw material used in the plant. Erford eventually traveled to Beijng and visited the Chinese facility for 5 days over Thanksgiving 2019. In total, Erford was paid $8,500.

The sentencing for Erford is set for March 20121. At that time, he faces a prison term of up to five years and a fine of up to $250,000.

Gao previously resided in Houston but is now believed to be in China. A warrant remains outstanding for his arrest.

Not the first time

This is not the first time a Chinese company has stolen trade secrets from a Houston-area company by targeting production employees. Back in 2017, four employees from a Trelleborg plant in North Houston were indicted, along with a Chinese national.

https://www.justice.gov/usao-sdtx/pr/chinese-energy-company-us-oil-gas-affiliate-and-chinese-national-indicted-theft-trade

 

 

 

 

Houston company to move to Fort Worth after acquisition

Contango Oil & Gas, based in Houston, has agreed to acquire Mid-Con Energy Partners, based in Tulsa for $43 million. After the deal closes, the headquarters of the combined company will move to Fort Worth.

The biggest shareholder in both companies is Goff Capital, based in Fort Worth.



Contango’s operations are mostly in Central Oklahoma and the nearby Western Anadarko Basin. Mid-Con’s assets are also primarily in Central Oklahoma. In fact, in June, Contango signed a management services agreement with Mid-Con to provide operational services as the operator of record on Mid-Con’s properties.

In an all-stock transaction, Contango is issuing shares worth $42.8 million to the unit holders of Mid-Con, a 5% premium. After the deal closes in late 2020 or early 2021, Contango shareholders will own 87% of the combined company.

John Goff and affiliated parties own 28% of Contango. The CEO of Contango, Wilkie Colyer, is also based in Fort Worth. Mr Goff acquired his stake in 2018 and installed Mr Colyer as the CEO shortly thereafter. Mr Wilkie was a non-executive director of Mid-Con until he resigned in June 2020.

That resignation was part of a recapitalization of Mid-Con. Mr Goff ended up owning 56% of it. He also appointed his son, Travis, to the Board.

The deal follows a recent spate of all-stock transactions in the E&P sector

  • ConocoPhillips, based in Houston, agrees to acquire Concho Resources (Midland) for $9.7 billion.
  • Pioneer Natural Resources (Dallas) buys Parsley Energy (Austin) for $7.6 billion. (Dad Scott Sheffield is the CEO of Pioneer, son Bryan is the founder and chairman of Parsley).
  • Devin Energy (Oklahoma City) agrees to buy WPX Energy (Tulsa) for $2.6 billion.

SEC filing – Contango – Mid-Con

Seven Houston companies have gone public in recent weeks

Seven Houston-area companies have completed their Initial Public Offerings (IPO) since the beginning of September.

Academy Sports & Outdoors, raised $203 million by selling 15.6 million shares at $13, well below the range of $15 to $17.  The shares (ACO) are currently trading at $14.76, giving the company a market capitalization of $1.3 billion.  It has its head office in Katy.



Kiromic Biopharma completed its IPO on October 15. The company initially filed back in May. It is based in the Medical center district and is developing immunotherapies for blood cancers and solid tumors. Kiromic raised $15 million by offering 1.3 million shares at $12. This was at the low end of the range $12 to $14. It is trading on the Nasdaq under the symbol KRBP.

Greenwich Life Sciences is another biotech company developing immunotherapies for breast cancer. The company, based in Stafford, raised $7 million by offering 1.3 million shares at $5.75 each. That was much lower than the original plan of raising $21.6 million at $7.50 to $8.50 each.

The remaining companies that went public are blank check companies.

Good Works Acquisition Corp raised $150 million. The company has its head office in the Galleria. It will trade on the Nasdaq under the symbol GWACU.

It is focused on finding a business in financial distress with an enterprise value of between $400 million and $600 million. Fred Zeidmann is the Chairman and CEO. He has served as Chairman of Gordian Group LLC, a U.S. investment bank specializing in board level advice in complex financial matters since December 2014.

Landcadia Holdings III completed its IPO on October 8. It raised $500 million and is listed on the Nasdaq under the symbol LCYAU. This is the third blank check company launched by Tilman Fertitta, CEO of Landry’s and Richard Handler, the CEO of Jefferies. As before, the company plans to acquire a business in the consumer, dining, hospitality or entertainment sectors.

Peridot Acquisition Corp has its head office in the River Oaks area. It raised $300 million and is listed on the NYSE under the symbol PDAC.U

The company is looking to buy a business that focuses on environmentally sound infrastructure, industrial applications and disruptive technologies that eliminate or mitigate greenhouse gas emissions. The target should have an enterprise value of between $800 million and $2 billion. Carnelian, a PE firm based in Houston, is backing the company. It has $1.8 billion in cumulative equity commitments in traditional E&P companies.

Industrial Tech Acquisitions raised $75 million. The company has its head office in the Galleria area. It is seeking to buy a technology business operating in the industrial or energy area. This includes software, mobile and IoT (Internet of Things) applications, cloud communications and ultra-high bandwidth services. Targets would have an enterprise value of between $250 million and $500 million.

The complete list of Houston-area public companies can be found here.

 

 

 

Restaurant chain moves corporate office to Houston area

Muscle Maker has moved its corporate office from the Dallas-Fort Worth area to League City. The company has a market capitalization of $18 million and went public in February 2020. It was founded in New Jersey in 1995 and had its head office in the League City area until 2018.



The company owns and operates Muscle Maker Grill and Healthy Joe restaurants. Muscle Maker concentrates on fresh, made-to-order protein-based meals while Healthy Joe’s has a wider menu selection. As of 30 June, it operated 31 restaurants, located in 15 states and Kuwait. 20 of them are franchise restaurants.

Because of the pandemic, the company is moving to a delivery-only ‘ghost kitchen’  concept. The company intends to expand into non-traditional locations such as universities, military bases and office buildings.

The CEO is Mike Roper. He became the CEO in May 2018. Before that, he was the CEO of Taco Bueno, a Tex-Mex restaurant chain with its head office in the Dallas-Fort Worth area. Ferdinand Groenewald serves as the CFO. He joined the company in October 2017 and became the CFO in September 2019.

I’ve added Muscle Maker to the list of Houston Public Companies, along with Murphy Oil, an E&P company with a market cap of $1.3 billion. The company formally moved its head office from Arkansas to west Houston earlier this summer.

SEC filing – Muscle Maker

 

 

Houston software CEO charged with evading tax on $2 billion of income

Bob Brockman, 79, has been charged with tax evasion, wire fraud, money laundering and other offenses. The scheme ran for 20 years. Prosecutors say it is the largest tax fraud case against an individual in the US.



Mr Brockman has his primary residence in the Memorial Villages area of Houston. He founded Universal Computer Systems in 1970. The business supplies software to assist car dealerships in managing their inventory. In 2006, it took over a publicly-traded rival called Reynolds & Reynolds for $2.8 billion. Mr Brockman remains the CEO of the combined business, still privately-owned and based in Ohio.

Mr Brockman is a former trustee of both Rice University and Baylor College of Medicine.

Robert Smith – Co-operating with the government

At the same time that prosecutors were announcing the charges, they also issued a press release stating that Robert Smith, an Austin-based billionaire had entered into a non-prosecution agreement. Mr Smith agreed to pay $139 million in taxes and penalties . He also agreed to abandon a refund claim of $182 million that he had filed against the IRS, related to charitable contribution deductions. Most damaging, Smith agreed to co-operate with the government investigation against Brockman. The investigation of Mr Smith took four years.

Mr Smith made headlines last year when he pledged to pay off the $34 million of student loan debt for the Morehouse College graduating class.

The Scheme

Smith and Brockman met in 1997 when Mr Smith was a Goldman Sachs. At Brockman’s urging Smith founded Vista Equity Partners, a PE firm, in 2000.  Brockman invested $1 billion in the first fund. When the portfolio companies in that and subsuquent funds were later sold at a profit, Brockman used a series of offshore companies and trusts, that he secretly controlled,  to allegedly avoid paying capital gains tax.

Brockman used a proprietary, encrypted email system to communicate with the trustees and nominees that he controlled.  Each person had a codename. At one point, Brockman emailed the trustee and reminded him that

‘all copy machine/laser printer paper has encoded into it the manufacturer of that paper as well as the year and month of manufacture. For that reason I always set aside some packets of copy paper with dates on them – for potential future use.’

The trustee is also co-operating with the government.

In all, Mr Brockman faces 39 counts. If convicted, he faces a substantial prison term and restitution and criminal forfeiture.

https://www.justice.gov/opa/pr/ceo-multibillion-dollar-software-company-indicted-decades-long-tax-evasion-and-wire-fraud

Brockman indictment

Katy man pleads guilty to stealing $2 million from employer

Andy Bishop, 45, of Katy, has pleaded guilty to stealing more than $2 million from his employer, Independent Professional Management (IPM), a staffing and asset management company, based in west Houston.



The company started in 1992 and Bishop joined in 1998. According to the company’s website ‘Andy Bishop joined the team, not knowing he would eventually become the Super Star operations guru that everyone relies on to keep things running on a daily basis.’ His title was VP of Resource Management.

As stated in the criminal charges, Bishop was in charge of preparing the ‘Borrowing Base Report’ to Gulf Coast Bank. This was used to fund the operations of the company. In the example in the charge sheet, Bishop stated that IBM had $3,888,237 in accounts receivables, when in fact the company only had $2,822,065 in receivables. That allowed IPM to borrow more money than the company was truly entitled to.

According to the press release from the US Attorney’s Office, Bishop created fake vendor accounts and diverted the ‘excess’ cash to pay these vendors.  Over a span of six years, Bishop stole approximately $2.1 million. These details are not included in the criminal charges filed.

The owners of the company discovered the fraud in August 2019.

Bishop will face sentencing on Jan 5, 2021. At that time, he faces up to 20 years in federal prison and a possible $250,000 maximum fine.

Last week, in another case involving a trusted, long-standing employee, James Camp was sentenced to four years for stealing $10 million over a 19-year period from Lubrizol in Deer Park.

https://www.justice.gov/usao-sdtx/pr/ex-oil-exec-admits-stealing-more-2-million

Robert Andrew Bishop – charges

[Note that the press release issued by the US Attorney’s Office incorrectly refers to the employer as International Professional Management].

SEC charges four execs from seismic company with $100 million fraud

The Securities and Exchange Commission (SEC) has charged four former executives from SAExploration with falsely inflating revenues by $100 million and stealing millions of dollars.

SAEX is a seismic company that had significant operations in Alaska. It is based in west Houston and recently filed for Chapter 11 bankruptcy



The four executives charged are

  • Jeff Hastings. Chairman from 2013 to 2016. CEO from 2016 to August 2019.
  • Brent Whiteley. CFO from 2011 to August 2019.
  • Brian Beatty. Founder and CEO from 2011 to 2016. COO from 2016 to December 2019.
  • Michael Scott. VP of Operations from 2011 to September 2020.

The spouses of Hastings and Whiteley have been charged as relief defendants. In other words, they have not been charged with any wrongdoing, but the SEC will seek to recover ill-gotten gains passed to them.

Hastings lives in Anchorage, Whiteley in Houston, Beatty and Scott reside in Canada.

Last month, Hastings was arrested in Alaska and will face securities fraud charges in a federal court in New York. The other three were unnamed co-conspirators but were not charged at the time.

Company secretly controlled by the Executives

The SEC complaint goes into more detail than the complaint filed in the New York federal court. To recap, the scheme began in February 2015 when the executives discussed ways for SAEX to take advantage of tax credits offered to seismic companies by the State of Alaska to help offset the costs of exploring for oil and gas in the state. The problem for them was that the Board of SAEX was against the idea of the company operating its own data library.

Hastings proposed setting up a special purpose vehicle. In April 2015 he enlisted a business acquaintance to be the straw man owner of Alaskan Seismic Ventures. ASV was set up to be a seismic data library company that would buy seismic data from SAEX and lease it to E&P operators.

However, they hid their involvement and control over ASV from the Board and investors.  Whiteley provided administrative and operational support to the owner of ASV. Hastings, Whiteley and Scott located customers to license data from ASV.

SAEX started recognizing revenue from ‘sales’ to ASV, and the sales it recognized began to far exceed the licensing sales made by ASV to E&P operators. By the end of 2015, SAEX had recognized revenue of $83 million but ASV had only made $32 million in licensing sales.

In early 2015, the executives had begun to seek bank financing for ASV. However, in June 2015, Bill Walker, the Governor of Alaska, threatened to enact a line-item veto that would significantly reduce the pool of money available to pay out Alaska Tax Credit claims. That meant that banks were less likely to lend money to ASV.

Round-tripping

According to the SEC, that’s when the executives came up with a plan to round-trip funds to ASV and back to SAEX. They created a sham company that purported to rent seismic survey equipment from SAEX. $12 million was transferred from SAEX in this way. Two more sham companies were set up, one ‘owned’ by a close friend of Hastings, the other by a neighbor of Whiteley’s. After a series of transactions funneled through these companies, $5.8 million was returned to SAEX as payment of outstanding receivables.

Of the remaining $6 million, $1.8 million was transferred to a TD Ameritrade brokerage account owned by Hastings and his wife. Whiteley transferred $2.6 million to himself. A later transaction resulted in Hastings and Whiteley getting a further $313,082 each. Beatty and Scott got $219,940 each.

CFO creates fake vendor

The SEC also alleges that CFO Whiteley misappropriated an additional $4 million between 2011 and 2019. He created fake invoices for legal and consulting services performed by fictitious entities that he created. Whiteley approved the payments of these invoices to a bank account in the name of his spouse. He also directed payments owed to legitimate vendors to himself.

The SEC is seeking civil penalties and disgorgement of allegedly ill-gotten gains. It is also seeking reimbursement of incentive-based compensation paid to the executives pursuant to section 304(a) of the Sarbanes-Oxley Act.

https://www.sec.gov/news/press-release/2020-251

Former Deer Park chemist sentenced for $10 million fraud

James Camp, 66, of New Braunfels has been sentenced to four years in prison after admitting to stealing nearly $10 million from his former employer, Lubrizol. The fraud occurred over an 19-year period.

Lubrizol was a public company until its takeover by Berkshire Hathaway in 2011 for $9 billion.



Camp began working for Lubrizol in Deer Park in 1976. Part of his job involved managing the testing of samples of the wastewater treatment unit at the facility. Camp was also responsible for managing various laboratory tests requested by Lubrizol production or waste management personnel. In addition, he was responsible for selecting the labs and approving the payments to those labs.

Beginning in April 1998, Camp set up two sham companies as vendors in the Lubrizol ERP system. He then fabricated invoices and set up the electronic payment requests, which were sent to the corporate office in Ohio.

The scheme continued until Camp retired from the company in November 2017.  In total, the company paid almost $9.3 million to the sham companies. In addition, Camp used a company credit card to make $385,000 in purchases from one of the sham companies.

Camp was arrested in September 2019 and pleaded guilty in June. His sentence will be followed by three years of supervised release. Camp was also ordered to pay restitution in the amount of $11,256,712.54.

https://www.justice.gov/usao-sdtx/pr/chemist-sent-prison-embezzling-millions

Noble Energy delisted after acquisition by Chevron

Chevron has completed its all-stock acquisition of Noble Energy, whose shares have now been delisted from the NYSE. The stock was acquired for $5 billion. Including debt, the enterprise value of the transaction was $13 billion.



Noble’s primary assets are in the Eastern Mediterranean sea (Israel and Cyprus).  These will fit well with Chevron’s assets in Egypt. Noble also has 92,000 contiguous net acres in the Permian which are next to Chevron’s acreage. Noble also has 336,000 of net acres in the DJ Basin in Colorado. This would be a new onshore basin for Chevron.

Board sought to reduce debt in 2019

The deal was first announced in July 2020. Chevron also acquired Noble’s 63% stake in publicly-traded Noble Midstream Partners.

In July 2019. the Board of Noble decided to explore a sale of its interest in Noble Midstream in order to reduce leverage and explore potential transactions to reduce the company’s concentration risk in the Eastern Mediterranean.

In the fall of 2019, the company received offers from a strategic midstream operator and a private-equity-backed entity to purchase Noble Midstream. However, both offers were not acceptable.

At an industry event in October 2019, Kevin Haggard, Noble’s Treasurer met Frank Mount, General Manager of M&A for Chevron. Mr Mount requested a meeting with Noble regarding the Mediterranean assets. Discussions moved slowly over the next few months.

Pandemic spurred sale of company

After the pandemic hit, the Noble Board hired J.P Morgan to review strategic alternatives and the discussions with Chevron morphed into an outright purchase. Noble contacted 9 other E&P operators to see if they were interested in acquiring the company. Nobody was interested in getting into a bidding war, either for strategic reasons or because of Noble’s high debt levels.

Golden Parachutes

Under the terms of the merger agreement, David Stover, the CEO of Noble is in line to receive $25.2 million in severance and vested equity. COO Brent Smolik will get $14.1 million, while CFO Ken Fisher will get $8.6 million. These payments will be triggered if their employment is terminated within two years following a change in control.

In connection with the merger, Mr Smolil has resigned as CEO of Noble Midstream, He will be replaced by COO Robin Fielder. She joined the company in January 2020, having previously worked at Anadarko.

I’ve deleted Noble Energy from the list of Houston-area public companies, but added Academy Sports + Outdoors, following its IPO launch last week. Oasis Petroleum, which filed for bankruptcy last week, is scheduled to be delisted next week. You can see the complete list here

 

SEC filing – Chevron completes Noble acquisition