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Former oilfield exec indicted on wire fraud charges

Joseph Kostelecky, shown here in May 2012, is accused of falsely inflating company revenues by tens of millions of dollars and has been indicted on felony fraud charges. LAUREN DONOVAN/BISMARCK TRIBUNE

BISMARCK — A former oilfield executive is accused of falsely inflating company revenues by tens of millions of dollars and has been indicted on felony fraud charges.

A federal indictment filed Thursday alleges that Joseph Kostelecky, from November 2011 to December 2012, ordered his staff at Poseidon Concepts Corp., a fracking fluid storage tank provider, to recognize nonexistent revenue related to fake long-term rental contracts and bill customers for services never ordered.

It also alleges the Dickinson man tried to cover up the scheme by telling his staff not to call customers about outstanding invoices or making himself their sole contact at the company. He is also accused of making false assurances to other company executives.

During this time period, the company's revenues grew substantially, but allegedly under false pretenses.

"Such growth was caused by Kostelecky's fraudulent directives to book revenue for customers that had not agreed to long-term tank rentals and his false representations and assurances that the large and aged accounts-receivable balance remained collectible," according to the indictment.

When investors in the publicly traded company learned in February 2013 that as much as $106 million of the company's reported $148 million in revenue should not have been recorded, the company's stock collapsed, according to the indictment. The stock price lost 98.6 percent of its value, falling from $13.10 per share to $0.18 per share. The Calgary-based company was delisted from the Toronto Stock Exchange and later filed for bankruptcy.

From November 2011 to December 2012, Kostelecky was the sole executive officer for the company in the United States, where as much as 94 percent of the company's purported revenue originated at the time, according to the indictment.

The company rented above-ground fluid reservoirs to fracking companies needing a place to store the liquid used to break apart the rock and extract oil and natural gas. Usually, companies only rent such tanks for a period of weeks, according to the indictment, not the year-long contracts that Kostelecky said he obtained.

Kostelecky is charged in the U.S. District of North Dakota with five counts of wire fraud and one count of securities fraud. He faces a maximum penalty of 20 years in prison on each count and maximum total fines of $6.25 million.

He entered not guilty pleas to all the charges at a hearing before Magistrate Judge Miller at the federal courthouse in Bismarck on Friday morning. He was released under the conditions that he surrender his passport and stay within North Dakota and Montana. A trial has been scheduled for March 7 with U.S. District Judge Daniel Hovland.

Kostelecky's Dickinson, N.D.-based attorney Markus Powell declined to comment on the case after court.

The defendant was previously the subject of a related 2015 investigation by the U.S. Securities and Exchange Commission. Without admitting guilt, he settled the civil case in February 2015 for $75,000 and an agreement to never again work as an officer or director at a publicly traded company.

The criminal case is being prosecuted by the Fraud Section of the Criminal Division of the U.S. Department of Justice in Washington, D.C.

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