Don Allen is avoiding SEC prohibitions that forbid him to act as a broker by seeking a single angel investor or a hedge fund group that is willing to enter into a limited liability corporation relationship with a single person.
Allen owns American Energy Resources Corp. and H&M Petroleum Corp., both headquartered in Colorado Springs. The private investor will receive 40 percent of American Resource Energy Corp. It is unclear whether a private investor will also own part of H&M Petroleum.
Allen started recruiting individual investors several years ago, but during August 2008, after a two-year investigation, the SEC filed a civil case against him for fraud.
He was accused by the SEC of “touting potentially astronomical returns to investors in his oil and gas companies, while spending $2.3 million of investor funds to pay for a lavish lifestyle, including the purchase of a custom speedboat, ski vacations, fitness equipment and jewelry.”
The SEC alleged that Allen defrauded investors between March 2002 and December 2006 by making misrepresentations or omissions, including offering materials that said investors’ money would be used only for drilling, testing and completing specific, identified well sites.
According to SEC records, Allen claimed the company had an “impressive record (of) several … highly successful programs, but had never generated profits for any investors.” The commission also said he included projections that touted annual returns of up to 354 percent, but failed to disclose the highly speculative nature of these projections.
“We took action for fraud, the highest kind of action that we do,” said Lauren Metcalfe, assistant regional director for the SEC’s Denver regional office. “He agreed to settle simultaneously as we filed, without admitting or denying the allegations.”
That move is fairly typical, she said, while noting that most of the SEC’s actions are against fraud.
“We sometimes charge people with incomplete records or bookkeeping,” she said. “But mostly we are here to prosecute fraud.”
Allen admits that the SEC “slammed” him with a $510,000 fine he had to repay investors. But he classified the allegations as a failure to have “my ducks in a row, all the paperwork lined up.”
Allen also denied using any investor money for his personal use, saying that all the money went back into the ground.
“The government can say whatever they want — they’re the government. That is a bald-faced lie and the SEC knows it now,” he said. “I settled out of court, and now I am thinking that wasn’t the right thing to do.”
Allen raised $9.9 million from more than 350 investors to get the company started. After the SEC filed the civil case against him, he repaid $510,000.
The money was raised by marketing oil and gas investments through cold call telephone solicitations and “seminars” advertised in newspapers.
One of the allegations made by the SEC was that the company never disclosed that it failed to earn profits for any investors during prior offerings.
“Allen convinced investors to finance his projects without telling them about his actual uses of their funds or his dismal track record in failing to generate investor returns,” said George B. Curtis, deputy director of the SEC’s division of enforcement.
But Allen’s problems with the SEC weren’t his first with a regulatory agency.
He experienced trouble at the state level in both Wisconsin and Pennsylvania during 2005 for selling unregistered securities by an unlicensed person.
The Wisconsin Department of Financial Institutions Division of Securities issued an order of prohibition and revocation that requires Allen to use only a licensed agent inside the state.
Pennsylvania’s securities commission also issued a summary order to cease and desist to stop the offer and sale of unregistered securities within the state.
Both state actions were related to an oil well, Highball No. 2, in Logan County, Colo.
Allen is trying to raise $100 million to expand his oil drilling operations in Kansas at the Bessie May development. He has three oil wells in another location that are pumping 500 barrels a day.
He said his Kansas mineral-rights holdings have the potential to perform for 20 or 30 years, based on 3D seismic technology, which Allen says, guarantees where the oil is — and how much there is.
But Paul Miller, professor of accounting at the University of Colorado at Colorado Springs, said that no matter what kind of technology is used, there are no guarantees.
“There’s so much risk and people can get away by just saying, ‘The oil isn’t here. We thought it was here, the geologist said it was here,’” Miller said. “It goes back to making sure you get sound investment advice from a trusted adviser.”
Still, Allen claims the annual “cash on cash” return is 67 percent.
However, Allan Roth, owner of Wealth Logic LLC and a financial adviser with 25 years experience in corporate finance and investment, said a rate of return that high is rare.
“If you were an angel investor in eBay or Amazon, you’d have a higher return on investment than that even,” Roth said. “And if your return is that high, raising $100 million would be a cinch — even during the October liquidity crisis, you’d have no trouble with that kind of track record.”
Problems with sales pitch
Roth said he heard Allen’s sales pitch in person during a 2006 seminar at Cheyenne Mountain Resort.
“He’s a salesman,” Roth said. “It was a very emotional pitch — this will be for your children, a legacy. These wells will produce for 20 years. You’ll never have to work again.”
Roth said Allen’s current efforts have a couple problems.
“First of all, anyone who has a successful track record is going to gain the attention of people with the kind of money to invest in the company,” he said. “They aren’t going to have to go after 350 small investors.”
Allen has had to change the way he seeks investment dollars because of the SEC settlement, Roth said. When Allen settled the SEC case, he agreed to an injunction that bars him from acting as a broker or dealer for five years.
“He can’t go out and solicit investors,” Roth said. “He has to go after one active partner, that’s within what’s allowed.”
The SEC received two filings for Allen’s business address during January.
The Form D notifies the SEC that the company is seeking a minimum investment of $90,884 from individual outside investors. The total offering amount is $3.6 million, with $1.9 million already received. Of that money, $50,000 is listed as going to the executive officer, while $545,000 is scheduled for sales commissions.
The second filing, issued by Bessie May Bonita Development, is a limited partnership. It is seeking equity securities in the amount of $7.4 million, with $1.9 million going to the chief executive officer. None of the equity shares have been sold.
Miller said the Form D was merely a notification of selling securities to less than 100 people. Any more than that, and the offering becomes public and is subject to SEC regulations
He also said that Allen’s past troubles with both state and federal securities regulators should serve as a warning for potential investors.
“It is unbelievable what people try to get away with,” Miller said. “These violations are by no means typical — but they aren’t uncommon either. There are con men out there — just like in the movies.”
While Allen classifies his SEC problems as an organizational failure, Miller, who worked at the SEC before moving to academics, said that the past SEC allegations set off alarm bells.
“People take advantage of naiveté of other people who won’t read what they are expected to read,” he said. “They see the pictures and listen to the story, but they don’t do their homework. He (Allen) violated his fiduciary duties.”
The oil industry in the Rocky Mountains has seen its share of problems — from unregistered securities to outright fraud, Miller said.
“It’s always been present here,” he said. “Just go back 100 years. One of the big scams in the oil business was to sell one-sixteenth of an interest in a well — and then sell 69 of those one-sixteenth interests — and hope you don’t hit any oil. The industry has always been laden with snake oil salesmen.”
People looking for safe investments should look outside the oil industry, which is rife with risk because the price of oil depends on the commodities market, Miller said.
“Always work to protect yourself,” he said. “If it sounds too good to be true, it probably isn’t true.”
Also, avoid investing in areas that you know little about, Miller said. That way you can avoid the emotional sales pitch.
“If you are going to invest in a farm, know about farming,” he said. “If you want to invest in a gold mine, find out something about gold mining — more than the average person.
For example, he said billionaire investor Warren Buffet never invested money in dotcom companies, because he said he didn’t understand them. When the dotcom bubble burst, he didn’t lose any money.
“Know your business,” Miller said. “But also know who you are doing business with. Do your homework. Check out their background, their successes.”
And finally — it comes down to trust, he said.
“Never trust anybody,” he said. “Especially when they are asking for your money.”