The U.S. Securities and Exchange Commission (SEC) has charged a Houston-based penny stock company and four individuals behind a pump-and-dump scheme that misled investors to believe the company was on the brink of developing revolutionary technology to enable "environmentally friendly" oil and gas production.
The SEC said backers of Chimera Energy hyped the company's stock to investors during 2012, issuing about three-dozen press releases during a two-month period. The company claimed it had licensed the technology and it was in development. Andrew I. Farmer orchestrated the scheme by creating a shell company called Chimera Energy, secretly obtaining control of all shares issued in an initial public offering (IPO) in late 2011, the SEC said.
"However, Chimera Energy did not actually license or even possess the technology it touted and had not achieved the claimed results in commercially developing it," the regulator said. "While the stock was being pumped by the false claims, entities controlled by Farmer dumped more than six million shares on the public markets for illicit proceeds of more than $4.5 million."
Trading in the shares was suspended in 2012, and the SEC prevented Farmer and associates from dumping additional shares or misleading new investors.
Back in 2012, the system was described by Chimera as able to replace hydraulic fracturing without using water, natural gas "or the pumping of anything hot into the well" (see Shale Daily,Nov. 12, 2012). However, prospective investors might have been tipped off by the company's name. One dictionary definition of "chimera" is "something that exists only in the imagination and is not possible in reality."
In addition to Chimera Energy and Farmer, the SEC complaint charges a pair of figurehead CEOs installed by Farmer. The SEC alleges that Charles E. Grob Jr. and Baldemar Rios approved the misleading press releases and operated Chimera "at the minimum level necessary to lend the company a veneer of legitimacy while concealing Farmer's involvement altogether." Additionally, Carolyn Austin was charged with helping Farmer profit from his scheme by dumping shares of Chimera stock in the midst of the promotional efforts.
"Farmer and his accomplices secretly rigged the market for Chimera Energy stock and illegally profited by exaggerating the company's capabilities and technology," said David Woodcock, director of the SEC's Fort Worth regional office. "They seized on fracking as a topic of public discourse and aggressively touted an entirely fictitious business to attract unwitting investors."
According to the SEC, Farmer obtained control of all five million shares of Chimera stock issued in the IPO by disguising his ownership through the use of nominee shareholders. Farmer's name and the nature of his control over the company were not disclosed to investors in any of Chimera's public filings. Following the IPO, Farmer directed the press release distribution along with an Internet advertising campaign designed to increase investor awareness of Chimera's claims.
The SEC alleges that Chimera Energy disclosed in public filings that an entity named China Inland had granted the company an "exclusive license to develop and commercialize cutting edge technologies related to Non-Hydraulic Extraction." The technology that China Inland purportedly licensed to Chimera Energy was described as an "environmentally friendly oil & gas extraction procedure for shale to replace hydraulic fracturing." The SEC said its investigation found that the purported acquisition of a license to develop such technology and the license agreement itself are entirely fictitious. "No legitimate entity known as China Inland even exists," the agency said.
The SEC complaint charges Chimera Energy, Farmer, Grob, Rios, and Austin with securities fraud, registration violations, and reporting violations. The SEC is seeking permanent injunctions, disgorgement with prejudgment interest and financial penalties, penny stock bars, and officer and director bars. The investigation is continuing, it said.