The SEC has charged two stock promoters with conducting a fraudulent oil and gas investment scheme that netted $2.2 million.

The Commission claims that Ivan Dearaujo of Brazil and Wesley A. Harbison, Jr. of La Pine, Oregon, sold at least 70 investors participation interests in various gas and oil wells through PetroSite Assets, Inc., a Nevada-based corporation controlled by Dearaujo. The Commission also alleges that the pair made false statements to investors and pocketed a still-unknown amount of investor assets.

The regulator is also charging both men with the fraudulent sale of stock in Masset, Inc., a bogus jewelry business also owned by Dearaujo.

“Rising Fuel prices make investors particularly susceptible to oil and gas scams,” said Katherine Addleman, the Commission’s Associate District Administrator for Enforcement in the Fort Worth Office, in a statement. “Investors are led to believe that it will be easy to profit from an oil and gas venture. However, oil and gas ventures are extremely speculative and complex and many unscrupulous individuals use that complexity to enrich themselves with the investor’ funds.”

Between August 2002 and April 2005, Harbison and Dearaujo sold participation interests in the future production revenue of six oil and gas projects to investors across the country. Dearaujo sent investors materials that contained PetroSite’s supposed ownership interest rates in the wells. The materials also included estimated production information in terms of barrels of oil, million cubic feet of gas or dollars, said the regulator. The defendants also promised several investors annual returns of 25% to 40%. One investor was told that the production revenue would return 100% of his principal within the year, according to the complaint.

But the offering materials failed to mention that PetroSite owned no interests in any of the wells at the time of each initial offering. The defendants were counting on investor funds to purchase the interests, according to the Commission. But once secured, the funds were usually used to purchase less than half of the interests that PetroSite had claimed to own. For example, out of the $886,000 the company had raised from investors for an investment called the “Blanca Project,” only $371,400 was used to buy a pro rata share of the production revenue of the site. As a result, investors received substantially smaller returns than had been initially promised.

Starting in June 2005, Dearaujo and Harbison began soliciting PetroSite investors to purchase shares of Masset preferred stock, raising roughly $250,000. Dearaujo touted the Masset shares as better deal than PetroSite. But the duo failed to disclose that Masset’s charter was revoked by the California Franchise Tax Board in early September 2004. The state regulator’s actions prohibited the company from conducting any business, including the sale of its stock.

The defendants allegedly used investor funds to finance myriad PetroSite expenses including salaries, rent, insurance, and utilities, charged the complaint. All told, roughly $500,000 out of the $2.2 million in investor funds was spent on PetroSite operating expenses.

Dearaujo also allegedly transferred $200,000 to Masset and spent $150,000 on bail bond costs and payments to his estranged wife, the SEC charges. Dearjauo also misappropriated $70,000 of Masset investor funds for his own personal use. Over $50,000 in “referral fees” was paid to Harbison, who acted as director for both companies. The misappropriation had the effect of further reducing investors’ monthly returns until August 2005, when the defendants stopped paying investors outright.

Neither defendant is a stranger to the long arm of the law.

From January 11 through May 10, 2006, Dearajuo was incarcerated in a California prison. While in prison, Dearajuo continued to direct both PetroSite and Massest’s operations, the regulator claims. A day after his release, Dearajuo was picked-up on immigration violations and is currently being held without bond. Harbison has two felony convictions on his rap sheet.

For their part in the alleged scam, the Commission is seeking a permanent injunction, disgorgement plus prejudgment interest and civil money penalty against both Dearaujo and Harbison. It is also seeking a penny stock bar against each defendant, and has ordered the prohibition of the destruction of records and the appointment of a marshal to conserve both companies’ assets for investors.

The Commission also responded to the alleged scam with an investor alert. The regulator warned investors to be wary of gas investment opportunities that seem too good to be true. The alert also provides several tell tale signs of a fraudulent offering. These red flags include sales pitches that reference recent news reports, the guarantee of extremely high returns, unsolicited materials via mail or faxes, and a promoter’s attempt to discourage discussing the offer with a family member or investment professional.

Have a comment? Let us know what you think of this or another CCH Wall Street story by clicking here.