Oil and Gas Firm Over-Valued Reserves

The SEC has commenced enforcement proceedings against an oil and gas producer and its CEO for over-stating and over-valuing oil reserves.  The SEC alleges that the respondents quadrupled the estimates received from the operator and used a price per barrel based on commercially viable wells.  Using these inflated numbers, which translated into a higher stock valuation, the respondents raised money from outside investors as the firm’s stock price increased.  The SEC charges several violations of the anti-fraud rules.  The SEC also brought charges against the respondent’s marketing consultant for publishing information about a security without fully disclosing the compensation received.

OUR TAKE: The SEC has increased focus on valuation claims for non-traded assets such as oil and gas reserves and private companies.  This scrutiny will likely work its way into exams of private equity firms now registered as investment advisers.