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Kentucky Drilling Scam Convictions Upheld

Wed, 04/16/2014 - 10:17am
BRETT BARROUQUERE, Associated Press

LOUISVILLE, Ky. (AP) — Two brothers who defrauded millions of dollars from thousands of investors in an oil and gas drilling scheme lost a bid Tuesday to have their convictions and sentences overturned.

The U.S. 6th Circuit Court of Appeals concluded that prosecutors presented enough evidence to back their contention that 53-year-old Christopher Cello Smith of Prestonsburg, Ky., and 58-year-old Michael D. Smith of Cookeville, Tenn., defrauded thousands of investors.

The Smiths ran a company called Target Oil and Gas. Prosecutors said the company asked investors to fund drilling projects in Kentucky, Texas, West Virginia and Tennessee but used fraudulent marketing materials and false geological surveys to persuade them.

Christopher Smith is serving a five-year sentence in federal prison and has been ordered to pay $1.6 million in restitution. Michael Smith is serving a 10-year sentence and has been ordered to pay $5.5 million in restitution.

The case centered on how the men raised money for Target Oil. Prosecutors contend the company raised $15 million from investors between 2003 and 2008, but only paid out about $1.19 million in royalties.

Michael Smith was president of Target Oil and Gas in Albany, Ky., and controlling interest holder of Kentucky Indiana Oil and Gas in Danville, Ky. His brother, Christopher Smith, was the company's vice president.

Oil and gas companies use drilling programs to raise capital from investors. The investors buy shares into the project and receive royalties if the drilling strikes oil or gas. Prosecutors said brochures Target Oil sent to investors contained images of oil pools and wells on maps that were inaccurate.

"These packets contained false or misleading information that increased the likelihood of an investor sending money to Target Oil," Judge Ronald Lee Gilman wrote for the unanimous three-member panel.

Gilman noted that employees of Target Oil had little or no training and learned most of the trade by watching other employees, such as Christopher Smith. Gilman also noted that the Smiths used as training materials the movie "The Boiler Room," which is about a fictional New York brokerage firm that used high-pressure tactics to commit investment fraud.

"Another salesman said that Michael Smith made copies of 'The Boiler Room' and distributed the movie to various employees," Gilman wrote.

The two men contested the amount of restitution ordered. They argued that investors knew oil and gas was a high-risk field and therefore forfeited the right to complain about losing money. Gilman rejected that argument, saying the trial judge accurately assessed the number of victims and money each brother was responsible for.

"Because Michael Smith directed Target Oil's operations for the full duration of the conspiracy, he was properly held accountable for all investors who were adversely affected by any part of the company's fraudulent activity," Gilman wrote.

In all, the Smiths and four other men were convicted in the scheme and sentenced to prison, although Tuesday's ruling only impacted the brothers. A judge previously ordered the six to repay $13 million to investors.

Also sentenced to prison were Shaun Michael Smith of Cookeville, Tenn., and Mark Irwin of Cookeville, Tenn., each for 30 months, Joshua Scott Harris received a year in prison and Ray Garton of Barrackville, W.Va., was placed on five years of probation. Each was ordered to pay $1.6 million in restitution — about 12 percent each of the total.

Several states, including Kentucky, issued a cease-and-desist order against Target Oil and Gas that prohibited the company from practicing business in those states. Prosecutors said the Smith brothers concealed this information from potential investors.

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