Striker Petroleum, LLC
The Securities and Exchange Commission (SEC) has filed a complaint against Striker Petroleum, LLC and its principal operators, Mark Roberts and Christopher Pippin. The complaint alleges that Striker's offering materials contained misrepresentations regarding the use of investor capital, the existence of an independent third party trustee for Striker's collateral, and the actual earnings and asset valuations of the company. Striker's business model involved the acquisition of oil and gas properties with the goal of increasing production.
Striker originally offered three, "Legacy offerings," in order to meet this goal, the first offerings beginning in July 2005. The first offering appears to have been successful, though problems soon arose as oil and gas production levels tapered off. Striker's dismal predicament was then exacerbated in December 2006 by the bankruptcy of Reichmann Petroleum Corporation, the chief operator of Legacy oil and gas properties. This had the effect of disrupting oil and gas production, which in turn caused Striker to make severely diminished returns to investors.
In February 2007, Striker began offering a fixed 12% annual return to investors in order to increase returns to disgruntled investors; an offer that the majority of investors elected to take. This, however, appears to have been a miscalculation by Striker, since they were not able to make a 12% promised return to the Legacy investors based on revenue alone. It also appears that Striker began using money from new investors to pay the 12% fixed return guaranteed to Legacy investors. Starting in September 2006 and continuing through September 2008, Striker offered five new series of debentures aimed at generating capital. The PPM offerings were as follows:
- Series A (September 18, 2006 — November 13, 2006)
- Series B (October 23, 2006 — January 26, 2007)
- Series B-2 (January 19, 2007 — August 24, 2007)
- Series B-3 (May 19, 2007 — November 9, 2007)
- Series B-4 (October 29, 2007 — September 8, 2008)
The total raised via these five offerings was approximately $57 million.
In each of the five offerings, Striker outlined how investor capital would be allocated and used. Though some of the offerings provided a more detailed outline of investor capital usage than others, Striker deviated from all in its actual allocation of investor funds. Case in point, 60% of Series A and B offerings were transferred to Reichmann Petroleum Corp. shortly before it entered bankruptcy. This appears to have been in contravention of stated investor capital allocation as put forth in the PPM.
Another alleged breach of state goals occurred in respect to offerings Series B-2, B-3, and B-4. It appears that $5 million of investor funds was used to pay Legacy investors their guaranteed 12% fixed return.
Independent Third Party Trustee
Each of the debenture offerings stated that an independent third party trustee would hold legal title to the collateral of the offerings. Such a party would hold the power to make decisions in the interest of the debenture holders in the event that the Striker encountered financial hardship. Striker, however, appointed its own general counsel to this position. This appears to be in direct contradiction to the stated aims of the Trustee as put forth in the PPMs and creates a clear conflict of interest.
Earning & Asset Valuations
There appear to have been multiple misrepresentations and omissions in the earnings and asset valuations of Striker as put forth in PPM offerings. A full $34 million of company assets reported in Series B-2 and B-3 offerings were based on Striker's right to drill wells on Legacy properties. It appears, however, that this was not an asset but merely a right to participate in drilling, and Striker would retain 85% of the working interests only in wells that were successful. In a move that appears even more anomalous, that $34 million "asset" was stated as being worth $95 million in the later Series B-4 offering. In the SEC complaint, the agency puts forth the following figures of inflation in Striker assets:
- Series A and B
- 413%, or $47.6 million
- Series B-2 and B-3
- 205%, or $34.7 million
- Series B-4
- 313%, or $95.8 million
Furthermore, Striker appears to have considered capital raised through the three Legacy offerings as income. As stated in the SEC complaint, Series A and B PPMs mention Striker's "total income" as being $40 million, however, $39 million of that figure was simply new investor capital. That fact never seems to have appeared in the PPMs. As with investor capital misuse, these are only two examples of many alleged Striker misrepresentations and omissions.
Regulators are concerned that recovering investor capital directly from Striker may prove difficult. This is because of a recent move by Striker transferring most of its assets to another company, Llano Consolidated Resources, LLC. If your investment in Striker was sold to you through an intermediary broker-dealer or other entity, you may have the ability to recoup your investment. Those who invested in Striker through one of its debt offerings could collectively stand to lose over $50 million.
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