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This Huge Texas Oil Fraud Scandal Could Happen Again – Here’s How

by | published September 20th, 2017

As you know, everything is bigger in Texas – ranches, oil fortunes, trucks, you name it.

But there’s a certain court case that’s getting to be a really big thing… even by Texan standards.

Last week in San Antonio, Texas State Senator Carlos Uresti testified in a bankruptcy hearing. The process follows from the 2015 insolvency of FourWinds Logistics.

The company’s former CEO, a consultant to management, and Uresti himself have been charged in a separate criminal case alleging investor fraud.

For his part, the senator has been indicted by a federal grand jury in San Antonio on no less than 11 counts, including wire fraud, money laundering, securities fraud, and engagement in monetary transactions with property from specified unlawful activity.

If found guilty on all 11 counts, he could get some 200 years in prison. Unlike most of the company folks, he has entered a “not guilty” plea.

Uresti worked as an advisor to FourWinds. According to the charges, his function was to attract investors in exchange for a share of the resulting proceeds.

That case is going to trial next month.

But in his testimony in the bankruptcy proceedings last Tuesday, Uresti acknowledged that FourWinds “might have been a Ponzi scheme.”

Right, and Irma might have been a hurricane…

The thing is, this alleged Ponzi scheme operated right in the middle of the American “shale revolution.”

And it could be happening again, right now…

FourWinds Owes Investors $14 Million

The bankruptcy hearing involves an attempt by a Chapter 7 trustee to recover investment funds from a third-party recipient of FourWinds revenue.

If successful, about half of the original funds at issue could be returned to about a dozen investors claiming they were defrauded.

When it went belly up, FourWinds owed investors at least $14 million. For his part, in exchange for his services, Uresti received company shares, commissions, and a $40,000 loan, according to the indictment.

Four senior managers of the company were also indicted. Three of those have already pleaded guilty. The charges lodged against the four mirror those against Uresti, with the addition of what appears to be a classic example of cooking the books.

For example, one investor testified that he was shown a bank account with a balance of more than $18.8 million, while in fact bank records revealed that over the period under scrutiny, the bank account never had more than $1.4 million in it – most, if not all, of that total represented in funds provided by individuals claiming they were victims of fraud.

But there is something else that makes the criminal case interesting. In a state famous for “Texas-sized” oil swindles and drilling land graft, this one is all about sand.

Frack sand, that is.

In the unconventional “shale” revolution, oil and natural gas has been extracted from shale rock formations. Actually, this is a smaller category of broader tight oil and gas (where sandstone and other non-shale rock are involved).

This revolution has dramatically increased U.S. production.

The process has made “fracking” central in the national energy debate. “Fracking” describes using water under high pressure to break the rock and release the oil and gas trapped within.

But to actually harvest that oil and gas, the cracks in the rock have to be kept open.

That’s where frack sand comes in. It sticks in those cracks and keeps them from closing, allowing the oil and gas to flow.

When the frack movement took off in earnest, frack sand was in very high demand and companies selling it made some very nice profits.

Unfortunately, the collapse in oil and natural gas prices that began in late 2014 put pressure not only on oil and gas producers. As new drilling for oil and gas fell, the decline also hit frack sand providers hard.

This is where FourWinds comes in…

FourWinds Was Trading the Frack Sand Boom

Now, FourWinds didn’t manufacture frack sand. It traded it.

The company established a market in a high-demand product and then served as a middleman between manufacturer and end user.

This is what makes this Texas court case new. These are the first criminal charges to arise from the trading in a necessary component of a drilling process.

Now the company could have gone under due to the rapid decline in demand for sand that followed from falling oil and gas prices.

But what put FourWinds in the crosshairs of the legal system was the allegedly deceitful and misleading way in which it attempted to raise money.

The alleged “Ponzi scheme” might have continued to run undetected if the floor hadn’t fallen out in the demand for fracking – and the sand that’s essential for it.

But I’m not telling you about this because of the lurid details – or at least not only because of them.

You see, my interest in all of this, and the reason for discussing it today, arises from two elements in the current fracking situation…

Frack Sand Fraudsters Will Have an Even Easier Time Now

First, with prices stabilizing, frack sand producers are seeing a rapid rise in demand. As of last month, there are reports of shortages in available frack sand as oil and gas companies drill more and more sideways from the initial drill site, and frack more locations within the same well string.

All to get more oil and gas out.

Together with the trend to drill more wells from a single drilling pad, all these improvements have caused sand demand to spike.

In some drilling basins, demand for frack sand is now ten times higher than at the start of the “shale revolution.”

The frack sand industry has been expanding as fast as possible in response.

All of which has prompted suspicion that the FourWinds episode of attempting to realize profits from a rapidly expanding situation may be copied by others.

Second, it brings up an even more troubling matter…

I’ve been hearing anecdotal comments from industry contacts that the provision of frack sand has resulted in a new generation of derivatives.

According to this information, this new paper (as derivatives are often called) amounts to traded “futures” in frack sand (and other “proppants” that do the same, including synthetic alternatives).

It also provides another dimension involving the ability to play the spread between actual and anticipated demand, as well as the cost of proppant against the resulting wellhead price of extracted oil and gas.

To the extent that such paper trading is emerging, the problem of frack sand control and finance extends beyond the sand itself to the price of the oil and natural gas produced.

Controlling the manipulation of market prices may just have become more difficult…

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  1. Debberiel Mckinnie
    September 25th, 2017 at 22:02 | #1

    What is a small stock that I can invest in now and will exposed later. I am a beginner and I would like to try it so what would you recommend.

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