WICHITA (CN) – Five securities recidivists ran a “nationwide securities offering fraud” that took $156 million from more than 1,300 investors, the SEC claims in Federal Court. The SEC claims the men – four Kansans and a man from Corona, Calif. – ran the scheme involving “22 purported oil-and-gas equipment-leasing and pipeline joint ventures structured to evade the securities laws.”
The SEC says defendant Michael J. McNaul II, 54, of Hutchinson, Kan., is a securities recidivist; as are Russell W. Kilgariff, 59, of Preston, Kan.; Dale C. Lucas, 57, of Wichita; Freddie J. Hembrie, 53, of Hutchinson; and Mark DuBoise, 47, of Corona, Calif.
Midwestern Natural Gas is the first of many corporate defendants named in the complaint, which states, “the investments offered were not joint ventures, but investment contracts, which meet the statutory definition of securities.”
“Defendants sold these securities by making numerous misrepresentations, omissions, half-truths and outright falsehoods, concerning, among other things, the purported success and profitability of the ventures, the background and experience of management, and the safety and risks of the investment. Defendants lured potential investors with the promise of annual returns of 25-40% and an even more lucrative initial public offering resulting in returns as high as 3-8 times their investments.
“Contrary to the purported lavish returns, Defendants have returned only $7 million to investors over the four-year period of the scheme. And of that $7 million, approximately $1 million consisted of funds diverted from later investors to pay earlier ones, i.e., Ponzi payments. Moreover, almost half of the funds fraudulently raised went to pay sales commissions to agents who promoted the investments.
“The remaining $80 million was supposed to be used to acquire and refurbish approximately 59 oil-and-gas rigs and related equipment for the ventures, as well as to acquire, refurbish and outfit an oil-and-gas pipeline system. Currently, however, only eight of the 59 promised rigs are operating. Further, little work has been done on the pipeline, and the pipeline venture has insufficient cash to do any meaningful work.
Moreover, recent operating results are bleak. For the fourth quarter ending Dec. 31, 2007, seven of the 22 purported ventures reported losses ranging from $3,537 to $97,109. Another four of the ventures were not even operational. The remaining 11 ventures reported a profit, but the profit was de minimis for nine of those, ranging from .05% to .7%. The other two ventures for the fourth quarter reported quarterly profits to investors of 4.8% and 6.2%.
“Even so, none of the fourth quarter profits from any of these ventures, which collectively total over $700,000, has been distributed to investors as required. Instead, Defendants McNaul, Nunns, Krause and Lucas, each of whom invoked the Fifth Amendment privilege in response to the SEC’s investigations, appear to have misapplied the investors’ profits to pay operating and other expenses of at least one of the entities named herein as a Relief Defendant.”
Here are the defendants: Consumer Information Network Inc.; Gregg Krause; T&D Oil Service LLC; Mid Kan Operating LLC; Pawnee Iron Works LLC; Warrick Drilling LLC; Warren Drilling LLC; Forrest Energy LLC; Garner Management LLC; Golden Belt Transportation LLC; Consolidated Management Group LLC; Alliance Leasing LLC; Mark DuBoise; Mid Western Natural Gas Inc.; Raymond Leonard; Freddie Hembree; Steven Tallman; Russell Kilgariff; Lloyd Nunns; Dale Lucas; and Michael McNaul.