StateImpact, in collaboration with NPR and KUT Austin

License To Drill: How Ex-Felons Can Operate Oil & Gas Wells In Texas

There's a lot of money being made in Texas with the surge in drilling for oil & gas. Maybe you've thought about how you could get a piece of the profits by investing in some of the wells. If so, StateImpact reporter Dave Fehling has a warning: The person running the company might be a felon — and that's just fine with the state of Texas.

How They Operate

A recent case of a multi-million dollar oil & gas scam shows that in Texas, being convicted of major financial fraud is no reason you shouldn’t be allowed to operate oil & gas wells. Actually, the State of Texas won’t even check.

Scams that use oil & gas ventures as a lure are on the rise in Texas and elsewhere according to the United State Securities and Exchange Commission (SEC). Earlier this year, it issued an “investor alert” after It noticed the number of such fraud cases it handled was growing from just a few each year to more than 20 a year.

“They are substantial cases involving hundreds of investors and millions of dollars. And that’s per each enforcement case,” said Lori Schock, director investor education at the SEC.

“I think the hopes and dreams of hitting that black gold is just really enticing to people,” Schock told StateImpact. “I think especially in this period of low interest rates we’ve been in for quite a while now, people are trying to look for some kind of return on their money. “

 

Real Wells, Real Scams

Schock said some of the oil & gas scams use totally fictitious tales of mineral leases and drilling operations. But not all of them according to Joe Rotunda, Enforcement Division Chief at the Texas State Securities Board.

“A lot of the scams we take a look at, a company may actually have a lease, they may actually be drilling in a well or re-entering a well. That becomes part of the scam. It lends legitimacy to the operation,” Rotunda told StateImpact.

One federal case prosecuted in Houston earlier this year involved a company that had actual oil & gas operations in South Texas. According to court documents, the company — Momentum Production Corp. located in Baytown — was founded by a man named Richard M. Plato.

Records from the Railroad Commission of Texas which regulates the oil & gas industry show that Momentum initially registered with the commission in September 2002. That date is important because of where Plato was earlier that year: federal prison.

In the 1990s, Plato “was convicted of wire fraud and money laundering in connection with the failure of a Florida insurance company” according to court documents filed by federal prosecutors.

 

From Prison to Petroleum

According to the U.S. Attorney’s Office in Houston, after Plato served time in prison, he was released in 2002 and “began acquiring various oil and gas interests in South Texas” and later “Plato formed Momentum” and began raising investment money from “vulnerable people”.

At the time, Plato “was on supervised release and owed almost $30 million in restitution” according to prosecutors. But as alleged in the 2011 indictment for the oil & gas scam, Plato didn’t share that news with those “vulnerable people.”  

Had they checked, they would have found that Plato’s Momentum Production Corp. was indeed a real company duly registered with the Railroad Commission of Texas to operate oil & gas wells and pipelines. The company’s application lists Richard M. Plato as the “resident agent” and “president”.

StateImpact asked the commission if it was aware of Plato’s past when Momentum registered as an operator.

In an emailed response, a Railroad Commission public relations person, Gaye Greever McElwain, wrote, “The Commission does not conduct criminal background checks on potential operators.”

But other state offices were keeping tabs on Plato. He’d once been licensed to practice law in Texas. The State Bar of Texas looked into complaints about Plato and in 1998, the Supreme Court of Texas revoked Plato’s law license.

Should state agencies do more to scrutinize who’s behind companies that want to drill to extract the state’s valuable natural resources? Lori Schock at the SEC deals with lots of state regulators.

“I think all the regulators are under some financial stress themselves and what they’re able to put their enforcement resources towards and the due diligence,” Schock told StateImpact. “That’s why an educated investor (is) our best defense against investment fraud. “

Earlier this year, a Houston jury convicted Richard M. Plato in the oil & gas scam case. A federal judge sentenced him to almost 20 years in prison and ordered him to pay just over $3 million in restitution.

Plato is 65 years old and housed at a low security prison in Beaumont according to the Federal Bureau of Prisons. His attorney, Jack Zimmermann, told StateImpact he plans to file an appeal early next year.

 

Bio photo of Dave Fehling

Dave Fehling

Energy & Environment Reporter for StateImpact

Dave Fehling is KUHF's Energy and Environment Reporter. His reporting is a part of StateImpact, a collaboration with KUT in Austin and NPR...