Two Dallas men were indicted for their participation in a $485 million oil and gas Ponzi scheme. Brendan Coughlin, 46, and Henry Harrison, 47, both of Dallas, were charged with one count of conspiracy and ten counts of mail fraud in connection with the collapse of Provident Royalties LLC ("Provident"), an alleged oil and gas Ponzi scheme that involved over $485 million and 7,700 investors throughout the United States. Each count of mail fraud carries a maximum prison sentence of twenty years, while the conspiracy charge carries a five-year maximum sentence.
Beginning in September 2006, Provident sold preferred stock in a number of private placement offerings, promising annual returns of up to 18% from the acquisition and development of oil and gas exploration and development activities. Each offering was limited to five hundred investors, and Provident also solicited retail broker-dealers to enter into placement agreements for each offering, who then sold the investments to retail investors. Each offering featured representations that approximately 86% of funds raised would be used to purchase oil and gas investments, and that dividends would be paid from revenues generated by the sale of assets.
However, investors were not told that proceeds from various offerings would be commingled together and used to pay dividends in other offerings. Additionally, less than 50% of investor funds were used to invest in oil and gas assets, in contrast to representation that at least 86% would be used. Investors were also not told that offering proceeds were used to make millions of dollars in unsecured loans to company founder Joseph Blimline, and that Blimline had previously been convicted of operating a different oil-and-gas Ponzi scheme in the early 2000s. Some of the offering proceeds were used to purchase the worthless assets of that previous Ponzi scheme. Blimline was sentenced to twenty years in federal prison in May 2012 for his role in the scheme.
The fallout from the scheme had serious consequences for many broker-dealers who participated in the private placements and sold the investments to their retail customers. Of the approximately 60 broker-dealers that participated, twenty-seven have since shuttered their doors due to the mounting liability from investor lawsuits. The Financial Industry Regulatory Authority ("FINRA") recently fined both Coughlin and Harrison $50,000 for their conduct and banned each from the securities industry for two years.