State securities regulators around the country warn that high oil prices that prevailed until recently created a heightened interest in investments in energy-related business ventures- ventures that may lead to losses now that oil prices have plummeted to the $45 a barrel range (from around $100 a barrel in recent months)

Oil and gas investments come in various forms, including limited partnerships (“LPs”), fractional ownership interests in leases, and general partnerships. In a drilling limited partnership, an oil or gas company sells partnership units to investors and uses the money it raises to lease property and drill wells. These limited partnerships often charge high upfront fees of about 15-16% of the initial investment and the sponsor may also take a share of any profits. Such limited partnerships are highly risky, are illiquid (meaning they can’t easily be resold by the initial investor) and can have a long holding period.

Unfortunately the field of oil and gas investments has a history of attracting dishonest promoters. Common sales techniques associated with dishonest promoters may include repeated unsolicited phone calls to members of the public featuring false representations such as purported successful track records of the promoter, or secret information concerning oil finds. Some of these investments sold over the phone through high pressure sales tactics may be out and out frauds.

Even legitimate brokerage firms may also recommend private placement investments to investors for whom they are not suitable, motivated by the high sales commissions offered by promoters. Suitability claims arise when stockbrokers or investment advisors recommend investments that are not appropriate for an investor’s financial circumstances, risk tolerance, or investment goals. If advisors make unsuitable recommendations, the investor may be able to recover damages through arbitration proceedings administered by the regulatory agency Financial Industry Regulatory Authority, or “FINRA.”
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If you have suffered significant losses as a result of your investment in oil and gas funds, you may have a valid securities arbitration claim. To find out more about your legal rights and options, contact a securities fraud attorney at The Law Office of Christopher J. Gray at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

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A recent Reuters article analyzed the success of funds structured and offered by Reef Oil & Gas Partners, Black Diamond, and Discovery Resources & Development LLC . These firms have marketed their funds to investors as a way to profit from the U.S. shale oil and fracking boom. These companies issue limited partnerships and other private, non-traded investments that promise to drill for oil and gas and pay investors the profits that will result. Even in the best of times, such investments have substantial drawbacks including illiquidity (the fact that they can’t be easily re-sold after an investor purchases them), very high commissions, sales costs, and management fees, and risk that they investor may lose his initial investment. Due to these risks investors often lose money while issuers make handsome profits.

According to Reuters, of 34 deals Reef has issued since 1996, only 12 have paid out more cash to investors than they initially contributed. In addition, Reuters found that Reef sold an additional 31 smaller deals between 1996 and 2010 collecting $146 million for itself while paying out investors a paltry $55 million. The recent collapse in oil prices from around $100 a barrel to only about $45 a barrel will likely render Reef funds even less profitable for investors.

Under the terms of one Reef deal, of $50 million in initially invested, Reef immediately collected $7.5 million for fees and broker commissions. After that, Reef received a monthly management fee of $41,667 from the fund. Reef also charged for drilling, operating, legal, and other expenses to the fund- including money that was payable to its own affiliates.

Ultimately, no more than half of the money raised from investors would be used to buy oil and gas land where there were reserves. Two funds singled out by Reuters for their high profitability for Reef and poor returns for investors (largely due to Reef’s high offering expenses and other charges) included Reef Income and Development Fund II and Reef Income and Development Fund III.

The high costs associated with oil and gas private placements, often 30-35% of the investors original investment, almost guarantee that investors will lose money, even in good times. How the investments will fare in today’s low oil price climate is open to question, but the likelihood appears to be that investor losses will only increase.
If you have suffered significant losses as a result of your investment in oil and gas funds offered by Reef or another firm, you may have a valid securities arbitration claim. To find out more about your legal rights and options, contact a securities fraud attorney at The Law Office of Christopher J. Gray at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

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Unsuitable Recommendations Of Oil And Gas Royalty Trusts May Give Rise To Arbitration Claims S

January 13, 2015

With crude oil trading in the range of $45 a barrel, down from over $100 a barrel in the past year, investments linked to the value of crude oil extraction such as royalty trusts have also seen their share prices plummet. The ten largest royalty trusts traded on the U.S. exchanges are: BP Prudhoe Bay […]

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Ameriprise Broker Thomas Sharp Charged By FINRA With Misleading Communications Concerning Non-Traded REITs

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The Financial Industry Regulatory Authority has charged broker Thomas Sharp with making misleading communications to customers concerning non-traded REITs.    FINRA alleges that Sharp violated NASD Rule 2210(d)  by sending customers e-mails recommending the REITs that were not fair and balanced and failed to provide a sound basis for evaluating the facts. Sharp was associated with […]

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LPL Financial To Pay $541,000 To Settle Variable Annuity Switching Claim

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During October 2014, LPL Financial agreed to reimburse nearly $550,000 to investors to resolve a Massachusetts claim that LPL had allowed its brokers to engage in “annuity switching” in the accounts of senior investors. “Annuity switching” means that a broker advises an investor to sell one annuity in order to purchase another for no  legitimate […]

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Former First Allied Broker Herbert Leonard Kaye Suspended By FINRA

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FINRA suspended Herbert Leonard Kaye, formerly a First Allied Broker, for four months beginning September 2015 and fined him $25,000, including a $11,000 in disgorgement of commissions charged to a customer.  According to FINRA, Kaye carried out 2,000 discretionary trades in the account of a sole customer between June 2010 and April 2013. Kaye’s customer […]

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Kansas Broker Darrell W. Mikulencak Charged With Forgery

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FINRA has filed a complaint against registered reprensentative Darrell W. Mikulencak alleging forgery and failing to appear to testify in Kansas City. FINRA alleges that Mikulencak forged a bank employee’s signature as well as that of a notary public in order to transfer the registration of stock certificates. Mikulencak allegedly  did not have authority or […]

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Gambling Broker Donald Overbey, Jr. Sentenced for Defrauding Investors

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The U.S. District Court for the Northern District of Illinois sentenced Oscar Donald Overbey, Jr. to 3.5 years in federal prison for defrauding more than 30 people out of $4 million.  The court found that he had defrauded his clients to pay for personal expenses and fund a gambling habit. Overbey allegedly convinced his victims […]

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FINRA Disciplines Former VSR Financial Broker Steven L. Stahler Over Sales of REITs and Private Placements

October 8, 2014

During August 2014, Financial Industry Regulatory Authority (FINRA) filed a complaint against Steven L. Stahler, formerly a broker with VSR Financial Services, for making unsuitable recommendations to his customers. Allegedly, Stahler recommended high concentrations of private placements and real estate investment trusts (REITs) that exceeded his clients’ stated risk tolerance and investment objectives. His recommendations […]

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Former Raymond James Broker Jo Ellen Fisher Allegedly Set Up Client’s Account To Embezzle In Her Daughter’s Name

October 8, 2014

FINRA has barred Jo Ellen Fisher, a former Raymond James broker who allegedly set up a scheme to steal nearly $1 million from her 95 year old client. By forging a godparent certificate, Fisher’s daughter was set to receive the money upon turning 21. Raymond James has sought to recoup the money but it is […]

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