Inquest of Cash at Quest Resource

The Company: Quest Resource Corp, a producer of natural gas.
The Filing: Form 8-K filed with the SEC on August 25, 2008.
The Finding: The Chairman and CEO of Quest Resource Corp, Jerry Cash, resigned Monday after the Oklahoma Department of Securities launched an investigation into alleged fund transfers from the natural gas exploration company to an entity controlled by Cash. Initial indications are that the questionable transfers could involve about $10 million.

The Upshot: Quest Resource was nonspecific, but I suspect that the undisclosed entity is dedicated to exploration and production of coal bed methane gas in the Cherokee Basin area in southeast Kansas and northeast Oklahoma, an area where Cash first put roots down in the 1980s.

Quest Resources paid Cash about $2.6 million in salary, cash bonus, and stock grants in 2007, according to the 2008 proxy statement filed with the SEC on May 20, 2008. In addition, the company rewarded him an estimated $4.3 million in stock last year in connection with his new employment agreement.

Cash stands to lose almost $5.5 million in compensation due to him (salary, unvested equity, and cash bonus) if the Board determines he left-or was terminated-for reason(s) of theft or dishonest acts that materially enriched him at the expense of shareholders.

The company has wiped clean any fingerprint of Cash from its officers/biography homepage. The Question: Could the fallout -- and uncertainty -- from Cash's alleged activities delay pending exploration and development in the emerging Marcellus Shale play located in southwest Pennsylvania?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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