Last Updated Dec 28, 2009 1:35 PM EST
A little background
Now this article isn't about frauds, such as the Nigerian Prince Scam which tries to get you to turn over your bank account number, or the pump and dump emails telling you the price of a thinly traded stock is about to go up a thousand percent from $0.03 to $0.30 in the next two weeks. These are calls offering legitimate or semi-legitimate investment opportunities.
An oil and gas investment opportunity of a lifetime
Let's examine a pretty typical investment opportunity that came my way a few weeks ago, with a call from a very nice but persistent man representing Energy Investment Partners, LLC. For about $5,400, plus an additional $2,000 completion cost, I could own an interest in an oil well that would yield a monthly income of $1,232.40 (yes -they stated their expected return to the penny) with a twenty year life. According to the company, this was a low risk investment for a shallow well.
So, according to the caller, my $7,400 investment has a likelihood of yielding $14,788 for the next 20 years. Imagine, if I buy 20 shares, I'll have $295,000 a year! Hello easy street.
Now I wasn't born yesterday, so I dug a little deeper. Everything seemed to check out. They sent me a nice "3-D seismic survey outline" and told me the principal of the partnership had been in the oil business since the 1980's. The company stated they had been drilling wells for investors since 2002. What more could I ask for? Maybe they will let me in on the whole thing, rather than just a small interest.
I can't read a "3-D seismic survey," and I don't have the time to check out the company's history, but I can apply some common sense. If the company had been successfully drilling since 2002, it would seem reasonable that current investors would use some of that great cash flow to make more investments. Wouldn't they be pushing and shoving their way in for a bigger slice of the pie, not to mention being upset that the company was making cold calls to give this great deal to others?
And just how good is that seismic survey? Even if Energy Investment Partners didn't have such a great track record, wouldn't someone buy up the whole partnership if the data was as conclusive as they claimed?
How legitimate is Energy Investment Partners, LLC? It's likely that they are actually going to drill a well but I spoke with the Securities Commissioner of the Colorado Division of Securities, Fred Joseph, about this investment opportunity. He noted that this offering appeared to be a security and that there was no registration for this company. Thus, they likely violated securities law by even cold calling me, much less if they had taken my money.
Why does this keep happening to me?
My instinctual feeling of greed and my common sense always seem to be engaged in a steel cage match when it comes to these emotional sales pitches. I desperately want to believe them. So far, however, common sense has always won out. The most brilliant presentation I ever attended was an oilman who left out a few facts, such as his run-ins with the SEC. He did snare a couple of my friends, despite my pleas to look at the facts. Not too long ago, one friend even asked, "Why does this keep happening to me?" I didn't have the heart to answer him truthfully.
Most of us are savvy enough to avoid the Nigerian Prince scams but, to some degree, we all turn off our logical brain to occasionally fall for something we want to believe. The reason my friend so often falls for these is that he too often puts the human instinct of greed above common sense.
I do believe in the decency of human kind. I just don't believe strangers are going to call me to make me rich. And if you think you are too smart to fall for these, you are probably most at risk. Keep this cheat sheet by your phone to remind you of these warning signs.
- It sounds too good to be true.
- A sense of urgency and expectation that you act right away.
- No way to check out the information conveyed.
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