Oil and Gas Scams: Common Red Flags and Steps You Can Take to Protect Yourself
Henry . . . was a successful business man, married for 30 years, raised a family and had a good life . . .
after his wife’s death, he received an [overnight] package of materials with all kinds of reports, and it was
offering an oil and gas investment . . . And it was unsolicited. . . he ignored it . . . But the next day, a
salesman called him and used high-pressure sales tactics . . . to persuade him to invest $40,000. And here are
some examples of what was said to him on the phone: “These gas wells are guaranteed to produce $6,800 a
month in income;” “Some of the most successful investors in the country are interested in these
wells;” “There are only two units left in this project;” “We drilled a well in Texas that
had these same early gas readings, and the investors all made millions.” . . . Over a three year-period, Henry was
recontacted 12 times and invested, essentially, his life savings in 4 different gas wells, each time thinking that he had
to invest or lose his original investment . . . He ultimately lost over $500,000 to this oil and gas scam investing in
wells that always seemed promising at first . . .
- Description of an oil and gas scam victim at the SEC’s first-ever
Seniors Summit (July 2006)
If you think you’ve found the right oil or gas investment to “strike it rich,” consider this:
it may be a scam. While some oil and gas investment opportunities are legitimate, many oil and gas ventures are
frauds. Many of these schemes start in so-called “boiler rooms,”
where skilled telemarketers use high pressure sales tactics to convince you to hand over your hard-earned money.
Once they have your money, scam artists pay themselves first, often using funds to pay personal expenses. In the
end, only some of your money may be invested in an actual oil or natural gas well, or none at all.
Red Flag Warnings
If you are considering an oil and gas investment, look for these “red flag” warnings of fraud:
- Sales Pitches Focused on Highly Publicized News. Scam artists read the headlines, too. Often,
they’ll use a highly publicized news item, like volatile gas prices, to lure potential investors and make
their “opportunity” sound more legitimate.
- “Can’t Miss” Wells. Every investment carries some degree of risk so you should be
skeptical of any oil and gas investment opportunity pitched as completely safe. Fraudsters often spend a lot of
time trying to convince you that extremely high returns are "guaranteed" or "can't miss." Don't
- Unsolicited Materials. Be especially careful if you receive unsolicited materials about an investment.
Simply ignoring investment-related “junk” faxes,
emails, voice mail messages, and regular mail may be
your best strategy. And don’t let a package full of colorful marketing materials impress you, even if
it’s sent by certified or overnight mail. If you’re not going to research an opportunity fully, do
yourself a favor and put any unsolicited materials in the recycle bin immediately. If someone calls to follow
up regarding the materials, tell him or her “thanks, but no thanks” and hang up. [Hanging up is
critical because scam artists often use scripted sale pitches to keep you on the phone.]
- Limited Opportunities. Scam artists often try to give you the impression that the “
opportunity” they are promoting is scarce, hoping you will hand over your money hastily before doing any due
diligence. Resist the pressure to invest quickly, and take the time you need to investigate before sending
- High Rates of Return. Compare promised yields with current returns on well-known stock indexes.
Any investment opportunity that claims you'll get substantially more could be highly risky. And that means you might
- Tips or Secrets. A promoter may discourage you from talking about the opportunity with someone you
trust, like a loved one, attorney or financial professional. If that happens, stop listening, and leave or
hang up. Then, be sure to contact us.
Steps You Can Take to Protect Yourself
Here are some steps you can take to avoid being scammed:
- Ask questions and check out the answers. Fraudsters rely on the sad truth that many people simply don't bother to
investigate before they invest. It's not enough to ask a promoter for more information or for references - fraudsters have no
incentive to set you straight. Savvy investors take the time to do their own independent research.
- Contact state oil and gas regulatory agencies. You may be able to verify information provided in offering
materials by contacting the oil and gas regulatory agency in which the wells are allegedly being drilled. For example,
these agencies generally have information about a company’s drilling history that could confirm claims of prior
You might be surprised to learn that the Railroad
Commission of Texas oversees the Texas oil and gas industry.
Unfortunately, state oil and gas regulatory agencies don’t have uniform names. If you’re having trouble finding
the agency that regulates oil and gas in a particular state, enter the State’s name - followed by “oil and
gas” - into your favorite Internet search engine. The appropriate agency should be listed near the top of your
search results. If you are still having trouble, call us at (800) 732-0330.
- Research the company before you invest. You
can contact the secretary of state where the company is incorporated
to find out whether the company is a corporation in good standing. You also will want to understand the company's business
and its products or services before investing. Before buying any stock, check out the company's
financial statements on the SEC's website, or
contact your state securities regulator. All but the smallest public companies have to file financial statements with
us. If the company doesn't file with us, you'll have to do a great deal of work on your own to make sure the company is legitimate
and the investment appropriate for you. That's because the lack of reliable, readily available information about company finances
can open the door to fraud. Remember that unsolicited materials should never be used as the sole basis for an investment
- Know the salesperson. Spend some time checking out the person touting the investment before you invest - even if you
already know the person socially. Always find out whether the securities salespeople who contact you are licensed to sell securities
in your state and whether they or their firms have had run-ins with regulators or other investors. You can check out the disciplinary
history of brokers and advisers quickly - and for free - using the SEC's and FINRA's online databases.
Your state securities regulator may have additional information.
If you encounter a problem with an oil and gas investment, you can send us your complaint
using our online complaint form at www.sec.gov/complaint.shtml. You can also
reach us by regular mail at:
Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, N.E.
Washington, D.C. 20549-0213
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Remember - an educated investor is our best defense against fraud! For more information on
how to invest wisely and avoid fraud, please visit the Investor Information section of our website.