By the time Norman businessman Robert Arrowood used $10,000 of investors' money from his oil and gas lease investment company to fund a swank trip to Las Vegas that included a stay at the Bellagio resort and casino and rides in a rented limousine, the company had devolved into a Ponzi scheme, state security regulators claim.
The Department of Securities claims Arrowood cheated investors in the 2001 Trinity Fund from Utah, Missouri, Texas and Florida out of as much as $4 million, spending most of the funds on an ostentatious lifestyle for he and his wife, Cathy Arrowood, that included luxury vacations, tickets to Oklahoma City Thunder games and thousands of dollars spent on jewelry and clothing purchases.
Arrowood specialized in buying oil and gas leases on the cheap and then flipping them to large exploration and production companies at a premium when natural gas prices reached their peak in 2008. His funders included former University of Oklahoma football players Dusty Dvoracek and Tommie Harris, according to court documents.
Arrowood maintains he has done nothing illegal and that he never sold securities to the people who gave him money, which would be subject to certain disclosures and other regulations. Instead, he claims his financial backers gave him money in the form of loans secured by promissory notes.
“This was back when natural gas prices were extremely high,” Arrowood said in a deposition, taken in the 2001 Trinity Fund's bankruptcy case. “Everybody and their brother wanted to do something in oil and natural gas. And I had people approach me on a daily basis wanting to make some kind of return on their money.”
Although some Trinity funders — like Dvoracek and Harris — were repaid with interest, many were not, according to court documents. The scheme collapsed in 2009 when the 2001 Trinity Fund filed for bankruptcy.
Securities regulators say the number of oil and gas investment scams are on the rise.
With its reputation for oil and gas activity, Oklahoma is a location ripe for such scams to take root, said Irving Faught, administrator of the Oklahoma Department of Securities.
“We are concerned about mainly somebody operating from Oklahoma using the prestige of an Oklahoma address that would imply some type of expertise to people on the East and West coast,” Faught said.
In May, the U.S. Securities and Exchange Commission issued a bulletin to investors warning of the dangers of private oil and gas offering scams, which have become increasingly common over the past several years. In 2005, the SEC investigated only a handful of such scams each year, but that number had jumped to as many as 20 a year in recent years, according to the bulletin.
The Arrowood case is just one of several of enforcement actions or investigations into suspicious oil and gas-related investment opportunities in the state the past year.
The Oklahoma Department of Securities has opened investigations or filed enforcement actions against four oil and gas related investment businesses in the past 12 months ending in July, and three such schemes in the previous 12 months.
Many enforcement actions have to do with an oil and gas operator who has not made the proper disclosures to investors about where their money was going, Faught said.
The agency launched an investigation earlier this year into Duncan-based Gates Oil & Gas Ltd. Gates' senior drilling consultant Jimmy W.Gray once ran a company called Jasmine Inc that has been cited in at least two states for selling unlicensed securities. Although Gates claims on its website to be a third-generation oil and gas operator, the company was incorporated only in Oklahoma in 2012, according to state records.
Records show Jasmine has been banned from soliciting investors in at least two states, Pennsylvania and Wisconsin, for selling unregistered securities.
Lance Bowman, chief financial officer for Gates Oil & Gas, declined to comment on the state investigation. Faught declined to comment on any of the open investigations or enforcement actions the department is involved in.
While many schemes involve a promoter getting a larger-than-average cut of the profits or giving sweetheart deals to related parties to provide drilling and other oil-field services, others are outright Ponzi schemes, said attorney H. Wayne Cooper, who specializes in oil and gas and securities law with the firm Doerner, Saunders, Daniel & Anderson.
In one of Oklahoma's most infamous cases, the Tulsa-based Home-State Production Co. defrauded more than 1,500 investors out of nearly $100 million through annual securities offerings in the 1970s in what was later discovered to be a Ponzi scheme.
In some instances, Home-State investors were shown “oil fields” where irrigation pipes had been painted to look like oil equipment, said Cooper, whose firm was involved with some of the litigation stemming from the Home-State swindle.
In many cases, a business will begin as a legitimate venture, but will become a Ponzi scheme once a promoter realizes it's easier and more lucrative to run a scam.
Case still unfolding
Arrowood maintains that he has done nothing to run afoul of state securities law. His attorney, Billy Bock, claims that people in several states gave him money not as investments but as business loans with fixed interest rates.
Bock has submitted promissory notes signed by Arrowood as proof of the loans in the lawsuit that the Department of Securities has filed against the 2001 Trinity Fund, as well as a signed affidavit of one Trinity backer backing up Arrowood's loan claim.
“Each one of these things is a business deal and they are loans,” Bock said. “They didn't say ‘you are investing in this oil well.' These were business loans for Mr. Arrowood to do with what he wanted and then repay.”
Attempts to contact any of the people who gave money to Arrowood or the 2001 Trinity Fund were unsuccessful.