HOUSTON (CN) - A Texan who made $4.1 million from a pump-and-dump scam fueled by his shell company's "science fiction" oil drilling technology is liable for securities violations, a federal judge ruled.
Andrew Farmer of Houston told financial regulators he never had a business relationship with Chimera Energy, a Nevada company incorporated in 2011. He claimed that as a favor to his longtime friend, the company's CEO Charles Grob, he advised Grob how to file Chimera's registration statement with the SEC and that was the extent of his involvement.
In fact, Farmer was Chimera's de facto CEO who installed Grob as a puppet executive and called all the shots, according to the SEC's August 2014 lawsuit against Farmer.
Farmer negotiated Chimera's startup funding, a $100,000 loan, he worked closely with the attorney who prepared the company's Initial Public Offering, he solicited his friends, associates, parents and wife to buy Chimera's penny stock and financed their purchase of 2 million of the 5 million offered in the IPO, which raised $75,000, the SEC's investigation revealed.
Farmer also orchestrated an aggressive marketing campaign in which Chimera issued 33 press releases, claiming it had licensed China Inland Oil Exploration Company's "environmentally friendly oil & gas extraction procedure" called "nonhydraulic extraction," and had partnered with Mexico's state-owned oil company Pemex, according to the SEC.
Farmer spent $346,000 on online advertising to raise Chimera's profile with investors, the SEC said.
Before the marketing blitz, the SEC said, the typical daily trading volume of Chimera's stock was 15,577 shares; afterward, the trades soared to an average of 948,066 shares a day.
Farmer sold at least 6.1 million shares of Chimera stock to the public in unregistered transactions that netted him $4.58 million, according to the SEC's lawsuit.
None of Chimera's marketing claims were true, the SEC established in court hearings and filings.
"The summary judgment evidence establishes that Chimera's purported agreement with China Inland and the nonhydraulic extraction technology itself are both entirely fictitious. In fact, China Inland appears to be a wholly fabricated entity, a company that never existed," U.S. District Keith Ellison wrote on Wednesday.
"Furthermore, an expert in oil drilling technology, Dr. Fernando Sebastian Flores Avila, has testified that nonhydraulic extraction technology is 'science fiction.'"
Ellison granted the SEC's summary judgment motion and found Farmer liable for violations of federal securities laws, unswayed by Farmer's argument that he did not have "ultimate authority" over Chimera's misleading statements.
The name Farmer chose for his company is revealing. A chimera is "something that exists only in the imagination and is not possible in reality," according to Merriam-Webster's Dictionary.
The SEC also sued Chimera Energy, Grob, Grob's successor Baldemar P. Rios of Mexico City and Carolyn Austin of Houston and Lake Charles, La., who sold Chimera stock.
The agency reached settlements with Grob, Rios and Austin in which they agreed to injunctions. Ellison will decide the amount of civil penalties or disgorgement they must pay, if any. Chimera, in keeping with its name, did not file an answer, so Ellison granted the SEC a default judgment against it on Wednesday.
Farmer was the only defendant who challenged the SEC with cross-summary judgment motions, which Ellison denied in the 35-page order.
The SEC seeks disgorgement, penalties and wants Farmer permanently barred from serving as officer of any business that files reports with the SEC and from involvement in any penny stock offering.
Farmer's attorney Kevin Edmundson of Austin didn't return a phone message seeking comment.