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Texas Oil Firm Cooked the Books, SEC Says

DALLAS (CN) - A North Texas oil and gas outfit raised $6.5 million through fraudulent offerings of partnership interests in Texas and Louisiana wells, the SEC claims in court.

The SEC sued Guardian Oil & Gas, Guardian Oil & Natural Gas, and Rick D. Mullins, 50, all of Southlake, in Federal Court. It claims the defendants falsely promised investors that their money would be used solely for the specific drilling project they invested in.

"Defendants also did not disclose growing cash-flow problems and deteriorating financial condition to investors, nor did they disclose the fact that defendants intermingled investor funds and used those funds to pay unrelated expenses," the 12-page complaint states. "Defendant Mullins also made direct misrepresentations to investors.

"For example, in 2012 and 2013, after collecting money from investors for one project and spending that money on unrelated expenses, Guardian was unable to retain an interest in the oil and gas drilling project that it had purported to sell to investors. Mullins then personally lied to investors, telling them, among other things, that the well was unproductive and that defendants had been approached by a possible purchaser of the partnership's interest."

The SEC says the defendants have formed and sold interests in approximately 50 partnerships and that Mullins, a licensed attorney and CPA in Texas, has been involved in the oil and gas industry since 1996.

The SEC claims that "almost immediately" after Guardian got $36 million in loans in 2009 from Western National Bank, it had trouble making payments.

Assets worth $10.5 million were sold in 2010 to pay outstanding principal, and in 2011 most of the workforce was laid off and operations were significantly limited, the complaint states.

The SEC claims the defendants failed to disclose any of Guardian's financial difficulties between August 2010 and June 2012, that Mullins drafted private placement memorandums saying that "it is possible" that a "significant financial reversal" for the managing partner could be a problem for their interests.

"At the times the defendants made these statements, they were aware that Guardian and GONG were experiencing significant cash flow issues and that the negative impact on investors' interests was no mere possibility, but rather a known and occurring fact," the complaint states.

"Similarly, defendants never informed investors that they were not timely receiving production revenue payments from wells in which they were invested because of the continued practice of net checking - the process by which production revenue from one Guardian investor project was offset against expenses due on another, unrelated Guardian investor project with the same operator.

"Defendants never informed investors of GONG's June 2012 proposal which would divert investor proceeds to cover expenses from other unrelated investor projects."

A phone number listed under Guardian Oil & Gas in Southlake was disconnected Monday.

The SEC seeks disgorgement, an injunction and civil penalties for securities fraud.

It is represented by Matthew Gulde with the agency's Fort Worth Regional Office.

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