Only Real Men Need Apply

Over the years I saw quite a range of private placement memoranda, prepared to coax money out of investors to drill oil and/or gas wells. They ran the gamut from thick slick magazine quality presentations with full color photos, graphs, diagrams and reports by petroleum engineers and geologists (that only petroleum engineers and geologists could understand) to things that looked like school reports written by 6th graders using a typewriter for the first time. It never ceased to amaze me that presumably well educated men wrote checks for thousands of dollars payable to somebody they’d never met in order to get in on oil well drilling programs that were grossly inflated as to cost and unlikely to yield a return on investment regardless of how good the wells turned out if they ever were, in fact, drilled. Even the 6th grade quality memorandum could attract enough money to fund the proposed program whose unstated goal, I sometimes suspected, was really a two-week spree in Vegas for the promoter and a few good buddies followed by a “sorry, dry hole” letter to investors.

I had a theory that it didn’t really matter to many investors if they ever saw a return; they just wanted to be able to tell their golfing buddies about their oil wells in Montana (or wherever). Regardless of whatever else they contained, most private placement memoranda had at least a couple of pages in capital letters “warning” about the high risk of putting money into drilling wells. Rather than serving to emphasize the need to think carefully and think twice before investing, it seemed that the warnings served to emphasize that “Only Real Men Need Apply”. There never seemed to be a shortage of potential investors who, in their own minds, were “real men” or, perhaps, who were easily persuaded that “real men have oil wells”. Over the years, I received several calls from women whose story began, “My husband invested in this oil well venture…”

It also never ceased to amaze me how such promoters avoided jail. Many of them probably gave little, if any, thought to federal and state securities (“blue sky”) laws. The ones who did probably assumed their “private” drilling programs were exempt from securities laws and regulations. Many programs probably were exempt from registration by reason of the Uniform Limited Offering Exemption (ULOE), though not from the “notice filing” required under ULOE. Exemption from registration did not mean exemption from the general fraud (“bad boy”) provisions of blue sky laws. Those provisions make it unlawful to misrepresent the facts (i.e., dozens of highly successful wells have been drilled all around our lease), as well as unlawful to not disclose important facts (i.e., nothing but dry holes have been drilled all around our lease). State securities regulators would periodically crack down on “oil well scams” and find a particularly egregious case to prosecute and “make an example”. And, yet, well educated men still write checks for thousands of dollars to somebody they’ve never met to get in on oil well drilling programs.

Speaking of petroleum engineer and geologist’s reports, after reading quite a few, one begins to wonder if they all use the same template and just fill in different names for the state, county and target formation. A humorous take on such reports can be seen here.