The Securities and Exchange Commission (SEC) charged Houston American Energy Corp. (NYSE MKT: HUSA) and its CEO, John F. Terwilliger, for “making fraudulent claims about the company’s oil reserves,” the SEC said in a press release Aug. 4. The company and Terwilliger were charged with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 20(b) of the Exchange Act and Section 17(a) of the Securities Act of 1933, the SEC added.
An enforcement investigation revealed that the Houston-based exploration and production company and Terwilliger claimed that an exploration concession in Colombia, of which it owned “a fractional interest,” held between 1 billion barrels (Bbbl) and 4 Bbbl of oil reserves, the SEC said. It was also claimed that those reserves were worth more than $100 per share to Houston American Energy’s investors, the SEC said.
The actual estimates of oil reserves “were much lower,” the SEC said, noting that it also ordered administrative proceedings against stock promoter Kevin T. McKnight and his firm, Undiscovered Equities Inc. Houston American Energy paid him and the firm to “disseminate its fraudulent claims” about the Colombian project, the SEC added.
“Terwilliger and Houston American misled investors by wildly exaggerating the extent and nature of their oil and gas holdings,” said Gerald H. Hodgkins, associate director of the SEC’s Enforcement Division.“They used a cadre of third parties to publicize and bolster their misleading claims.”
McKnight and Undiscovered Equities were charged with violations of Section 17(b) of the Securities Act, the SEC said.
The SEC’s Enforcement Division alleged that the misconduct occurred over several months in late 2009 and early 2010; during that time, Houston American Energy raised about $13 million in a public offering, and its stock rose from less than $5 a share to more than $20 a share, the SEC added.
After it drilled several unsuccessful wells from 2010 to 2012, the company withdrew from the project in “early 2013” without any oil recovered, and “the company’s stock price eventually cratered under the weight of the fraud,” the SEC said. Currently, it trades at about 40 cents a share, the SEC noted. This represents a $600 million market capitalization loss since its peak in April 2010, the SEC added.
D. Mark Cave conducted the enforcement investigation, which was supervised by Jeffrey P. Weiss, the SEC said, noting that Melissa Armstrong and Cave will lead the Enforcement Division’s litigation.
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