Unregistered Securities & Sellers AKA Scams - just one story from NY Times

March 30, 2008
An Oilman Entices, and Investors Cry Foul
By JULIE CRESWELL

LIKE so many of the over-the-top birthday parties that typically appear on “My Super Sweet 16” on MTV, Ariel’s celebration took the fairy-tale-princess theme to new heights.
Horse-drawn carriages delivered teenage guests to a faux-castle tent where they were met with dancing jesters and disco lights. The birthday girl, wearing a white dress and tiara, flew in via helicopter. And the evening ended with fireworks and the arrival of Ariel’s gift from her father: a brand new BMW 325i.
As viewers learned, Ariel’s dad was a successful oilman. “I love oil. Oil means shoes and cars and purses,” Ariel exclaimed to the camera as she and her father stomped around oil drilling sites in the muddy hills near her home in Campbellsville, Ky. When her father pointed to one of the sites and told viewers that it produced 120 barrels a day, Ariel asked, “How many Louis Vuittons is that?” Her father’s answer was “a bunch.”
The show typically attracts younger viewers, but this particular episode, shown in February 2007, caught the attention of an entirely different demographic: government regulators.
Ariel’s father was Gary M. Milby, a man regulators now say was bilking hundreds of investors across the country out of millions of dollars by offering fraudulent investments in nearly 30 oil and gas limited partnerships with names like “Black Gold Oil No. 6” and “Fort Knox Oil No. 8.”
Last fall, the Securities and Exchange Commission filed a complaint accusing Mr. Milby of raising more than $19 million from 375 investors over about a year and a half, starting in February 2005. At least $12 million was diverted into offshore accounts and family trusts and millions of dollars was spent on Mr. Milby’s lavish lifestyle, the S.E.C. said in its complaint. Mr. Milby denied all of the accusations against him.
“That MTV show really put Milby on the road map,” said Frank Panepinto, a fraud investigator with the Louisiana Office of Financial Institutions. “That really got people aggravated with him.”
These days, with oil prices topping $100 a barrel, investors are scrambling for a piece of the latest gusher, and schemers and con artists seem to be eager to help them out. An association of state securities regulators said there were 260 open investigations into oil and gas scams across the country in early 2007. Updated figures are not available, but regulators say complaints continue to pour in.
“I bet you right now that I have over 20 oil and gas cases that I’m looking at involving unregistered securities and unlicensed people selling this stuff,” said the Colorado securities commissioner, Fred J. Joseph. “A year or two ago, I doubt that I had five cases.”
As suspect energy investments go, Mr. Milby’s offerings are pretty standard. Through private placement offerings, he sold units in limited liability partnerships managed by two companies he owned, Mid-America Energy and Mid-America Oil and Gas, that would use the money for shallow drilling mostly in Kentucky. Investors were told that they would receive monthly checks for as much as $4,800 for 30 to 50 years, according to the S.E.C., which said Mr. Milby bragged to some investors that “no one who has invested with me has ever lost money.”
What Mr. Milby didn’t tell investors also spoke volumes. He had filed for bankruptcy in 2003, and in 2005 and 2006 several states had banned him from selling securities, the S.E.C. said. The agency also said that Mr. Milby was barred from drilling in Texas and that the Kentucky counties where he was drilling had never produced enough oil to support his lofty claims. And, while some individuals received modest dividends from partnerships managed by Mr. Milby and the Mid-America companies, no investors ever recouped their entire investments, the S.E.C. said.
Mr. Milby’s story illustrates the limits of state securities regulators, who cannot keep a suspect operation from seeking investors in other states — and struggle to enforce bans even in their own states. For months, Mr. Milby continued to seek out investors across the country, even though several states had filed cease-and-desist orders against him.
Regulators in Tennessee, where Mid-America Energy was registered, did not issue any public warnings against the company despite numerous complaints from investors. Leslie A. Newman, the state’s commissioner of commerce and insurance, said that issuing a cease-and-desist order would have prevented the state from aiding in other investigations, such as the S.E.C.’s.
“There is still federal activity ongoing in this case,” Ms. Newman said. “Other agencies with criminal authority are still actively pursuing this case.” She declined to say which agencies were involved.
To date, Mr. Milby faces just one criminal charge, a count of felony fraud in a Louisiana parish.
Some federal prosecutors say they lack the resources to chase after every allegation of an oil and gas scheme.
“These are complex cases that take a lot of investigative time, and there’s just not a lot of investigative resources in this area right now,” said David L. Huber, the United States attorney for the Western District of Kentucky.
“The No. 1 federal priority right now, criminally speaking, is terrorism,” said Wynne James, a lawyer at Waller Lansden Dortch & Davis in Nashville, which is representing about 75 investors in multiple lawsuits filed against Mr. Milby. “You ought to feel somewhat comforted that the feds will drop everything to go after terrorism, but other things suffer for that.”
The group has so far won more than $5.1 million in its cases against Mr. Milby, who did not respond or defend himself in them. The investors, however, have not collected any money.
Mr. Milby and one of his lawyers, Hunter Durham, said that all material information was disclosed to investors, that several wells that were drilled did hit oil and that participants received some returns on their investments. Both declined to make any individuals who had made money with Mr. Milby available for interviews.
As for the lavish MTV party, Mr. Milby says that one of his former wives (he has been married five times, twice to the same woman) picked up the bill and that he paid for only the fireworks. As for the BMW, he said he traded in another car and paid the price difference, $4,500, out of his own pocket. Efforts to contact the former wife were unsuccessful.
“If investors think I’m stealing their money, they’re wrong. I’m broker than a church mouse right now,” Mr. Milby said. “We spent and spent and spent, and borrowed and borrowed and borrowed, just to keep these wells going.” Nonetheless, he added, the wells have been shut down and are not currently operating.
WHEN oil is hot, Mr. Milby is an oilman. He said he became involved in the oil business in the late 1970s, drilling for himself or local Kentucky investors.
“When oil went on its tail in the 1980s, I sold cars, sold insurance, sold anything I could to make a living,” he said with a thick drawl.
While the S.E.C.’s complaint involves activities beginning in early 2005, Mr. Milby had returned to the oil patch a year earlier as oil prices started to rise.
In January 2004, he and Terry Goff, whom Mr. Milby describes as a former business partner and friend but whom several former investors and business associates said Mr. Milby often presented as a cousin, were drilling for oil in a remote spot about 25 miles south of Abilene, Tex.
Ronda Hyatt, a local geoscientist hired to monitor the drilling, said: “They had gotten a farmer to lease them a piece of land. But it was really strange. They picked the most difficult location you could on this place. You had to scrape off 20 feet of dirt before you could start drilling.”
Mr. Milby was eager to drill more sites. Eventually, Ms. Hyatt directed him toward a site called Crockett-Owens in Texas, which Ms. Hyatt said had high potential but would require a lot of capital and take years to develop.
Mr. Milby was hooked. He bought the option for the lease in April for $25,000 and immediately began raising money to drill the wells.
In August 2004, Pamela and David Hallin met with Mr. Milby for lunch at a hotel near their home in Memphis. Ms. Hallin had been impressed with a presentation Mr. Milby had made at an asset allocation seminar a month earlier, and the couple were interested in investing. Mr. Milby was hoping to raise $1.4 million for drilling, private placement documents stated.
Mr. Hallin, then a pilot for FedEx, said the couple thought that they had done their homework. “We called all of the references he listed, including his banker, and she said there were no problems with him. That he was in good standing,” Mr. Hallin said. By the time lunch was over, the couple had handed over a check for $84,000.
Soon after, though, investors like the Hallins had cause for concern. Mr. Milby and Mid-America hired Ms. Hyatt and her business partner to oversee the drilling and repair work on the wells at the Texas site. As she became concerned about vendors’ bills that were going unpaid, Ms. Hyatt also began to hear from investors complaining that they had not received their promised checks.
In October, Ms. Hyatt gathered the Crockett-Owens investors, including Mr. Hallin, in Memphis. There, she told them she thought the money was gone. Shocked and in disbelief, the investors decided to wait and see whether Mr. Milby would make good on his promises.
Instead, over the next few weeks, the situation soured further. By mid-November, all of the wells ceased operating. If production did not resume within 60 days, the lease would expire. Faced with losing the drill site itself, which Ms. Hyatt maintained could still be successful, she and the investors decided to try to buy out Mr. Milby and run the site themselves.
On an early December morning, the group, including Ms. Hyatt and Mr. Hallin, met Mr. Milby at the business center at Nashville International Airport. Although Mr. Milby had indicated that it would take $250,000 to buy him out, the group had a check for $50,000.
“We were betting on the fact that we believed he was totally desperate for money,” Ms. Hyatt said.
Mr. Milby reacted angrily to the size of the check and shouted that he had been misled, Ms. Hyatt and Mr. Hallin said, but after two hours of heated debate he signed the necessary documents, pocketed the check and walked out the door.
Now in control of the partnership, the investors had access to the bank records and could see where the money had gone.
What they discovered shocked them. The Crockett-Owens account not only was empty but also appeared to have been pillaged: Mr. Milby had written checks on the account for $68,339.74 to Mercedes-Benz of Memphis and for $800 to the Campbellsville Middle School cheerleading squad, of which his daughter was a member. There also had been wire transfers totaling $49,000 to unknown accounts over two days in September. Copies of the checks were provided by Mr. Hallin.
In a complaint to Nashville securities regulators, Mr. Hallin said Mr. Milby had raised about $868,000 from investors, of which about $408,000 appears to have been used for personal expenses.
Mr. Milby disputes the accusations. He says he was forced out of the venture by Ms. Hyatt and her partner, and he accuses them of running a shoddy operation. (A records search on Ms. Hyatt, her partner and their company, HighGround, turned up some small-claims lawsuits against them, which they say have been settled.)
Mr. Milby also said he had deposited money back into the account for the Mercedes, the cheerleading contribution and any other personal expenses. He said the wire transfers to unknown accounts paid for drilling equipment and expenses. Mr. Hallin said money was deposited into the account for the Mercedes but disputes Mr. Milby’s other contentions.
Lastly, Mr. Milby says investors were paid. “They’re lying. They got the checks, everything we promised to them. But nobody ever gets enough money. Do you? I sent one guy a check for $18,000, and he called up to complain it wasn’t $22,000. That’s just the way people are,” Mr. Milby said.
MR. MILBY may have been out of the Texas partnership, but he was busy selling deals all over the country throughout 2005.
A group of eight wealthy Ohio investors — largely family trusts — invested $504,000 into a number of the private investments in late summer and early fall that year.
Instead of sending the checks that the investors expected, Mr. Milby diverted the money for his personal uses, including child-support payments, the group alleged in an arbitration case it later won.
The investors say Mr. Milby’s lawyer, Bryan S. Coffman, in Lexington, Ky., created an irrevocable trust called Arimor Trust and named himself the trustee, according to a lawsuit the investors later filed against Mr. Coffman and Mr. Milby’s brother Paul. Their investments and other money totaling nearly $6 million were put into this and other trusts, and some of that money was diverted to Paul Milby to buy 17 cars and trucks, five boats, and real estate, the lawsuit said.
Mr. Coffman, who has not been accused by regulators or authorities of any wrongdoing, said in an interview that he did some tax and estate planning for Mr. Milby and Mid-America. As part of the estate planning, Mr. Coffman said, he did set up some trusts, but he declined to speak about any specific trusts, citing client confidentiality.
Mr. Milby said Mr. Coffman did much more. “He’s the one who set up everything with us and the S.E.C.” Mr. Milby said. “He put together the books and did all of the filings that we needed to do to keep us legal. He made sure whenever people invested with us that they were worth so much money and could invest in us. That they were sophisticated investors.”
Mr. Coffman denied writing any of the private-placement offerings. “That is an area of securities law that I don’t have any expertise in,” Mr. Coffman said. “I don’t know who did that service for them, but some attorney was paid for it.”
Mr. Coffman later reached a confidential settlement with the Ohio investors. In court filings, Paul Milby denied all of the accusations against him. A call to his lawyer, Daniel Butler, was not returned.
Undaunted by angry investors, Gary Milby continued to raise money. After hearing ads for Mid-America on XM Satellite Radio in the fall of 2005, Eric Taylor called the company.
“They sounded too good to be true, but you never know,” said Mr. Taylor, who lives in Haymarket, Va., about 45 miles west of Washington. “Oil was trading at $75 a barrel, and I had read about people making decent money from legitimate oil and gas companies, so I called.” At the time, he was a branch manager for a national mortgage company.
After speaking with a Mid-America sales manager and looking at a prospectus he received in the mail, Mr. Taylor spoke with an individual Mr. Milby said was a “satisfied investor.”
And on a rainy day in December 2005, Mr. Taylor visited the Kentucky drilling sites where Mr. Milby told him he had just “uncorked” a well that would be producing in January.
“First there was this noxious smell, like a very, very strong sulfur,” Mr. Taylor recalled. “That smell came out for about 10 minutes and then you hear the sound and oil shot right out of the ground a good 25 to 30 feet in the air.” Excited, he gave Mr. Milby a check for $111,000.
Like the others, instead of getting checks, Mr. Taylor said he was soon getting only excuses. Worse, in the few months since he had looked into Mr. Milby’s background, new information had become available. Mr. Milby’s personal bankruptcy popped onto the radar, and several states, including Pennsylvania, Arizona and California, had filed cease-and-desist orders against Mr. Milby and Mid-America.
Mr. Taylor demanded his money back. He said Mr. Milby refused, maintaining that other investors were making money — lots of it. Mr. Taylor said he doubted that this was true, but he had no way of contacting other investors.
ALL that changed in April 2006 with an e-mail message accidentally sent out by Mid-America to about 20 investors, including Mr. Taylor; it revealed all the recipients’ e-mail addresses.
“Everyone started contacting everyone else,” Mr. Taylor said. “I started to cross-reference the partnerships these people said they were in against the partnerships Milby and his staff were telling me were paying out good money.” It turned out that no one said they were making money, Mr. Taylor said. In addition, he said, he found out that the “satisfied investor” was actually a Mid-America employee.
Now it is Mr. Milby who says he has been swindled; he says Mr. Goff, who was his friend, had “fictitious” liens on the well sites and took them over. Mr. Milby says he has sued Mr. Goff, although no suit could be found on record. Calls to Mr. Goff, Mr. Goff’s lawyer and Mr. Milby’s lawyer were not returned.
“If I could get control of them again, investors could get their money back in six months to a year,” Mr. Milby said, adding that Mr. Goff “robbed me of this whole thing.”
“I would have never thought this could have happened,” Mr. Milby added. “ You know, have you ever gotten to where you just trusted people too much?”