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Bakken connection to a $22M fraud

A little-known company called Halek Operating ND LLC is facing the largest fine North Dakota has ever levied against an oil and gas producer -- $1.5 million -- for jeopardizing drinking water near Dickinson.

But even before the company drilled its first well in North Dakota, federal officials say the man behind it had swindled $22 million out of 300 investors in a Texas oil and gas project.

The odd facts of the case show that the state officials overseeing the nation's oil and gas boom might need to look beyond promoting development and monitoring groundwater and keep their eyes open for plain old fraud.

Both of the cases revolve around Jason Halek, 39, of Southlake, Texas, an affluent suburb of Fort Worth.

Halek was CEO of Halek Operating ND until April 2012. He signed over the company as state officials stepped up their investigation of a defective disposal well for oil field waste.

He was also CEO of Halek Energy LLC, the company at the center of the Texas oil fraud allegations, until it collapsed into bankruptcy in 2011. He settled the Texas fraud charges with the Securities and Exchange Commission by agreeing to a $50,000 fine and to repay "ill-gotten gains."

At its peak, Halek Energy put down at least $15,000 on a luxury suite in Cowboys Stadium in Dallas, had a 2006 Hummer for a company car and hired a "personal assistant" for Halek to handle his email and drive him out to the oil field.

But there was something a little different about the company. For one thing, the phone number the company gave state officials rang in the hair salon of the woman listed as Halek's corporate relations director.

As things fell apart, the Hummer was sold to CarMax, the Cowboys were suing for the unpaid balance on the luxury suite, and the personal assistant was demanding back pay and overtime.

Left behind are frustrated investors, a substandard injection well threatening groundwater west of Dickinson and a tangle of litigation. That legal tangle even includes felony criminal charges against a former Halek associate named Nathan Garber.

But Halek says there was no fraud and no ill-gotten gains. In a phone interview Sunday with EnergyWire, Halek said he's a legitimate oil driller, not the fraudster depicted by the SEC. He said he agreed to settle with the SEC under duress and that problems in North Dakota happened on someone else's watch.

"I feel like I've been majorly wronged by several organizations," Halek said in the interview. "I'm trying to drill for oil as cheaply as possible and as environmentally friendly as possible. That's my deal."

He added, "I hope to get through this red tape and drill some really awesome wells."

Cold calls and wildcat wells

Halek is originally from Minnesota. He said he came to Texas in 1998 and got into the oil business with "older guys" in the industry mentoring him.

The paper trail in the case goes back to 2007, when Halek Energy registered with state oil and gas officials at the oddly named Texas Railroad Commission. The SEC said Halek and an associate raised the $22 million between 2007 and 2009 to drill oil and gas wells west of Fort Worth.

They made cold calls and advertised on websites, according to court records, and told some prospective investors they could "double or triple their initial investment."

The SEC alleged the pair told investors they would probably get their investment back within two-and-a-half years with returns of up to 32 percent.

"These projections were wholly speculative," the SEC wrote in its complaint. They were "formulated by a Halek energy employee who had no oil and gas experience."

The wells were extremely risky "wildcat" ventures with little proven potential and no pipelines nearby to take gas to market, the SEC said, adding that the projections were "flatly contrary to actual results" from nearby wells.

Among those who lost their entire investment was a 24-year-old blind man from Southern California named Anthony Michael Ramsey. He'd handed over $140,000 of the $400,000 trust set up to support him after the motorcycle accident that blinded him.

Halek settled Ramsey's lawsuit and says that between that and his settlement with the brokerage involved in the deal, Ramsey has gotten his money back.

Texas oil and gas records show that from the beginning of 2007 to April 2011, Halek Energy produced about 194,000 barrels of crude oil from 34 leases spread among Jack, Coryell, Lampasas and Palo Pinto counties, west of Fort Worth. State records show several of the wells have been shut off for some period of time by inspectors for various violations.

A spokeswoman for the Railroad Commission said the company, now under the control of a bankruptcy trustee, currently has 11 wells, nine of which are considered "active" and has shown production within the past year.

The project unraveled in 2010. Halek said he hit some dry wells at first but eventually struck oil and started making money for investors. He said the SEC got involved and a group of investors sued before he could turn things around.

"I had drilled every well I said I was going to drill," Halek said.

By June of that year, Halek and his attorneys were negotiating a settlement with the SEC, agreeing to the $50,000 fine.

The California broker who sold stock to the blind man was permanently barred from the industry. Halek kept going in the oil and gas exploration business, turning his sights on the booming Bakken Shale in North Dakota.

North to the booming Bakken

Halek Operating ND sought its first well permit from North Dakota officials on July 21, 2010. That was after Halek and his attorneys negotiated the settlement with the SEC in the Texas case but before they finalized it in court.

"I thought that was resolved by the time I went to North Dakota," Halek said, "and we were just waiting for the paperwork."

The permit was for a well near Dickinson, in the western part of the state, on the southwest edge of the Bakken Shale. Halek was also seeking investors for the North Dakota wells. Records filed with the SEC show that a few days after applying for the permit, Halek garnered his first investment in Halek Energy North Dakota LLC. Overall, Halek said, investors put in about $3 million.

Halek and the SEC sealed their deal in court on Aug. 31, 2010. Shortly thereafter, Halek Operating ND applied for a second well permit, also near Dickinson.

The permit requests for the wells were filed by a woman named Heather Barnes as the company's "director of corporate relations." The phone number on the permits traces back to the Facebook page of a hair salon in Dallas called "Heather Barnes Studio."

On April 1, 2011, Halek Energy filed for Chapter 11 bankruptcy in Texas. And that's about when the trouble started in North Dakota. On April 6, 2011, the pit at one of the company's two wells overflowed from snowmelt. The liquid, with a sheen of oil on top, flowed into a drainage.

Halek Operating ND faced more than $588,000 in potential fines, but the company caught a break from state officials. All but about 10 percent of the fine was suspended. However, the company had to pay a $20,000 cash bond against potential future contamination.

Amid the haggling, Halek wrote to assure state officials in October 2011 that after unsatisfactory dealings with a local contractor, "we sent our own group from Texas, led by Nathan Garber, to make some final adjustments." He added, "Nathan is now in charge of the North Dakota projects."

Garber and his relationship to Halek Operating ND are the subject of a key dispute in the case.

Halek said he handed the reins to Garber because he was mired in his Texas troubles -- the bankruptcy and SEC charges. He said Garber had assured him he was working "hand in hand" with the state.

"I got bogged down," Halek explained. "I didn't have time to deal with it. It was basically all I could do to basically stay alive."

The well that suffered the spill was a dry hole, so Halek Operating ND applied to convert it to a wastewater disposal well. The hydraulic fracturing operations needed to pry oil from the Bakken Shale produce millions of gallons of briny, toxic wastewater. Companies can make money by taking it and disposing of it in deep injection wells. But the process is regulated by state officials under the federal Safe Drinking Water Act because of the danger of contaminating groundwater.

The rules require disposal wells to have three layers of steel to protect drinking water. Halek said in the interview that the well had all three layers. But state officials say Halek Operating ND, with Garber acting as its representative, started accepting wastewater even though it had only one layer.

That "tripled the risk" of contaminating an underground zone with drinking-quality water, Lynn Helms, director of the North Dakota Department of Mineral Resources and the state's top drilling regulator, said last year. If drilling wastewater had contaminated the groundwater, he said, it would take years to clean up, if it even could be cleaned up.

"The violations admitted by Halek are among the most egregious violations ever pursued by the commission," Administrative Law Judge Allen Hoberg wrote in findings earlier this year.

The groundwater in the area hasn't been contaminated, but after evaluating evidence in the case, Hoberg found there is a "real future risk of contamination."

State officials also say Halek Operating ND injected wastewater before passing a mandatory, state-supervised test for "mechanical integrity" and after inspectors ordered the well shut down.

The mechanical integrity test was done on Feb. 16, 2012. But state officials said it wouldn't have passed had it been done properly.

Instead, Garber called the oil field service company Baker Hughes Inc. and asked it to change the configuration of the well, according to a criminal complaint filed by an agent of the state Bureau of Criminal Investigation (BCI). The change sealed the pipe in a way that would conceal its weaknesses, akin to kinking a hose so water can't reach a leak.

Garber had some instructions that a Baker Hughes manager found "unusual." According to the BCI agent's affidavit, Garber demanded that the old joints and piping from the job had to be moved behind a building, and the crew "needed to be off-site by morning."

In another unusual step, Halek had transferred ownership of the disposal well on Jan. 23, 2012, to Executive Drilling LLC, whose owner was listed as Garber. Halek Operating ND has argued in filings that it's not liable for what happened after Jan. 23, because the well had been transferred to Garber and Executive Drilling.

But the company can't simply transfer responsibility for a well whenever it wants, state officials say. The switch must be approved by the state to make sure it's working properly.

State oil and gas officials approved the transfer from Halek Operating ND to Executive Drilling on Feb. 27, 2012. The approval came even though state inspectors had found that the company had continued to inject wastewater, despite orders not to do so.

State officials declined to comment on the case, beyond providing public records.

In April 2012, Halek signed over control of Halek Operating ND to someone named Corey Hunt. Halek said Hunt is a small investor in the North Dakota project, as are some of Hunt's family members. Hunt said in written comments to the state that he got involved to "protect the investors."

On July 27, BCI filed criminal charges against Garber. Two weeks before that, Helms filed an action in state court in Bismarck seeking more than $1.5 million in fines, plus costs, from Halek. The North Dakota Industrial Commission, chaired by Gov. Jack Dalrymple (R), upheld the fine last month, though Halek Operating ND can appeal to a state judge.

But a $1.5 million fine might not be Halek's biggest worry. Halek said he's in the process of trying to seek a rehearing of a 5th U.S. Circuit Court of Appeals ruling last week that he's on the hook for the "ill-gotten gains" in the Texas case.

With interest, that now adds up to more than $26 million.

Copyright 2013 Environment and Energy Publishing LLC. Reprinted with permission.