by Collin Eaton
Federal regulators on Friday charged a Houston energy firm and four individuals with securities fraud, alleging they pumped up the company’s stock price with tall tales of a splashy – but fictional – water-free fracturing technology.
The Securities and Exchange Commission alleged Andrew I. Farmer, 36, of Houston, secretly took control of Chimera Energy, a shell company he created, and hawked $4.58 million in shares as the firm unleashed a flurry of news releases about its made-up technology and phony business deals.
The alleged scheme, called a “pump-and-dump,” ran for a three-month stretch in 2012 as Chimera issued more than 30 news releases and Farmer paid for an Internet advertising campaign touting a newfangled technology that used helium instead of water to fracture shale rock. It was touted as an environmentally friendly alternative to hydraulic fracturing.
In reality, the SEC said, Chimera never had any significant assets. Farmer sold off Chimera shares from three investment vehicles that controlled the company, including one called Infinite Funding Inc. Farmer’s name and his control over the firm was never disclosed in Chimera’s regulatory filings.
A phone number listed for Chimera was out of service Friday.
The alleged scheme involved three other individuals, including two figurehead chief executives and a person the SEC said helped sell the stock, and ended when regulators suspended Chimera from trading on penny stock exchanges in October of 2012. The SEC filed a complaint in Houston court on Thursday.
“Farmer and his accomplices secretly rigged the market for Chimera Energy stock and illegally profited by exaggerating the company’s capabilities and technology,” David Woodcock, director of the SEC’s regional office in Fort Worth, said in a written statement. “They seized on fracking as a topic of public discourse and aggressively touted an entirely fictitious business to attract unwitting investors.”
Chimera had said it licensed its “non-hydraulic extraction” technology from a firm called China Inland, which didn’t exist, the SEC said.
In various press releases, the technology was described as a process that used an inert element, helium, which, “beginning in its liquid state, is used to create the pressures needed to open up existing fractures and form new ones.”
“Helium,” according to one Chimera press release, “is the second-most most abundant element in the universe and it is less water soluble than any other gas known. Chimera Energy Corp. is in the process of reengineering this new method of shale oil extraction for mass production, relicensing and sales.”
The company claimed the process was originally developed to fracture shale in regions too cold for water, and claimed that a drought in the Midwest could be a boon for its water-free fracturing technology business. In one press release, it even promised a 2013 showing at a well-known industry event, the North American Prospect Expo.
An SEC investigation found “the purported acquisition of a license to develop such technology and the license agreement itself are entirely fictitious.”
The SEC said Chimera, Farmer and three others involved in the alleged scheme are being charged with securities fraud, registration violations and reporting violations.
The agency is seeking financial penalties, disgorgement of profits and bars against securities activities by the four named in the complaint.
It’s the second Houston-based energy company to get hit with SEC charges this month.