Two Western Kentucky Men Plead Guilty To Oil And Gas Fraud
BOWLING GREEN, KY. – Two western Kentucky men, Stacy Scott Phelps and James Michael Harper, pleaded guilty to conspiracy to commit wire fraud and wire fraud in connection with their operation of Phoenix Development Drilling Corporation, an oil and gas drilling business, announced Acting United States Attorney Michael A. Bennett.
According to plea agreements in the case, from approximately January 2015 to June 2016 Phelps and Harper operated Phoenix Development Drilling Corporation. Through their efforts, the company acquired drilling permits and leases for property in Hart County and Monroe County, Kentucky. Phelps and Harper put together two drilling programs for Phoenix known as Phoenix Three Select and Phoenix Three Preferred. They then, directly and through Phoenix’s unlicensed agents, solicited potential investors, to invest in the programs, which were unregistered securities. To induce investors into the programs, Phelps, Harper, and others prepared brochures describing the programs and their offerings. The brochures included a joint venture and a joint operating agreement representing that Phoenix would use invested funds to drill for oil. Phoenix also offered another investment opportunity, which allowed investors to purchase an Overriding Royalty Interest (“ORI”) in all of Phoenix drilling operations and guaranteed at least a 6% return on investment in the first year. The ORI agreement stated that the monies invested would be used to further the growth of Phoenix.
As part of their fraud conspiracy in the case, Phelps and Harper made numerous false statements to investors. For example, in the Phoenix Three Select offering materials, which defendants began distributing at least as of September 8, 2015, they described that the “main focus” of the program was “to develop out the proven Lee Miles lease in Hart Co. Kentucky.” However, no wells had been drilled on that lease before Phoenix drilled a single, non-producing well on September 17, 2015. The defendants also demanded payments from investors for “completion costs” for the Lee Miles well before they had drilled the well. In so doing, they falsely represented to at least one investor at least three months before they had actually drilled that well that they had drilled the well, let it sit overnight, and when they opened it up “[i]t blew nice quality oil for over 4 minutes.”
Phelps and Harper further made misrepresentations in connection with the ORI investment opportunity. The defendants made payments to three investors and represented that that they were “ORI” payments, leading the investors to believe that the payments were oil production revenue from Phoenix’s wells. In fact, they made these “ORI” payments before Phoenix had even drilled the first well and Phoenix never drilled a viable well or made any revenue from oil production.
Finally, Phelps and Harper also represented that monies invested in both the Phoenix Three Preferred and Phoenix Three Select programs would be used for Phoenix’s oil drilling operations, when in fact only approximately 10% of the money raised from investors was spent on legitimate business purposes. The remainder of the money raised was moved through Phoenix’s bank account and diverted for the use of the defendants and other co-conspirators, which were used by some for personal expenses, including for vacations, golf, jewelry, dating and adult websites, auto parts, gas, groceries, clothing, and online gambling, among other non-business expenditures.
During the course of their fraud conspiracy, Phelps and Harper and other co-conspirators sold shares of the two Phoenix programs to ten investors, most of whom resided outside of Kentucky, and sold the additional ORI investment to three of those investors, collecting $556,056.25 in investors’ money, while paying out only $15,574 in purported ORI payments to the three investors.
Phelps is scheduled for sentencing on July 7th at 9:00 am CDT in Bowling Green before Chief United States District Court Judge Stivers. Harper is scheduled for sentencing on July 7th at 9:30 am CDT in Bowling Green before Chief United States District Court Judge Stivers.
The case is being prosecuted by Assistant United States Attorneys Nicole Elver and Stephanie Zimdahl. The case is being investigated by the Federal Bureau of Investigation (FBI).
The U.S. Attorney’s Office also appreciates the assistance of the U.S. Securities and Exchange Commission.