Judge orders $13 million restitution in oil scam

LOUISVILLE, Ky. (AP) - Six men convicted in an oil and gas drilling scheme must pay a total of $13 million in restitution to victims in a case where a federal judge found that all aspects of the business were intertwined with acts of fraud.

Senior U.S. District Judge Joseph M. Hood on Friday found that the men deliberately misled investors about the risks and possible rewards of investing in a company called Target Oil & Gas.

Hood determined that the company "operated in such a way as to obscure the true nature of the risk on which investors were placing their bets.

"Fraud is fraud, regardless of the risk involved," Hood wrote in a 22-page opinion.

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. Prosecutors say 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.

Hood divided up the restitution proportionally. The judge ordered 56-year-old Michael D. Smith of Lancaster to pay $5.4 million, about 30 percent of the loss to investors. He ordered Christopher Cello Smith of Prestonsburg, Shaun Michael Smith of Cookeville, Tenn., Joshua Scott Harris, Ray Garton of Barrackville, W.Va., and Mark Irwin of Cookeville, Tenn., each to pay $1.6 million in restitution - about 12 percent each of the total.

The men were sentenced to federal prison in 2011, with Irwin and Shaun Michael Smith each ordered to serve 30 months, Michael D. Smith sentenced to 10 years, Garton to five years of probation, Christopher Cello Smith to five years in prison, and Harris to a year in prison.

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

Michael and Christopher Smith contested the amount of restitution sought by prosecutors. The men argued that investors knew oil and gas was a high-risk field and therefore forfeited the right to complain about losing money.

The judge noted that some oil and gas drilling did take place with investor funds and wells produced some natural gas, but the sales to investors were tainted by misrepresentations.

"The Target Oil & Gas scheme was operated in such a way as to obscure the true nature of the risk which investors were placing their bets," he wrote.

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.

The companies are required to publish "offering circulars" for prospective investors that disclose all facts relevant to the investment decision, including risks, proposed distribution of any profits and how drilling costs are to be reimbursed.

Prosecutors said brochures Target Oil sent to investors contained images of oil pools and wells on maps that were inaccurate. She also said books sent to investors contained geological information that promised success in certain areas, but the investors never got their money back.

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.