The Securities and Exchange Commission today announced charges against 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 alleges that 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, and launching an aggressive promotional campaign midway through 2012 to hype the stock to investors. Chimera Energy issued around three dozen press releases in a two-month period about its supposed licensing and development of technology to extract shale oil without the perceived environmental impact of hydraulic fracturing known as fracking. 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. While the stock was being pumped by the false claims, entities controlled by Farmer dumped more than 6 million shares on the public markets for illicit proceeds of more than $4.5 million.
In addition to Chimera Energy and Farmer, the SEC’s 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 Energy at the minimum level necessary to lend the company a veneer of legitimacy while concealing Farmer’s involvement altogether. The SEC’s complaint also charges Carolyn Austin with helping Farmer profit from his scheme by dumping shares of Chimera Energy 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’s complaint filed yesterday in federal court in Houston, Farmer obtained control of all 5 million shares of Chimera Energy 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 Energy’s public filings. Following the IPO, Farmer directed the press release barrage along with an Internet advertising campaign designed to increase investor awareness of Chimera Energy’s claims. The initial press release issued by the company on July 30, 2012, sported the headline: CHMR Unveils Breakthrough Shale Oil Extraction Method to Safely and Effectively Replace Hydraulic Fracturing.
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’s 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 SEC’s complaint charges Chimera Energy, Farmer, Grob, Rios, and Austin with securities fraud, registration violations, and reporting violations. The SEC seeks permanent injunctions, disgorgement with prejudgment interest and financial penalties, penny stock bars, and officer-and-director bars.
The SEC’s investigation, which is continuing, has been conducted by Nikolay Vydashenko and Eric Werner in the Fort Worth Regional Office. The SEC’s litigation will be led by Matthew Gulde and Mr. Vydashenko. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.