3 Brothers to Be Arraigned in Ventura County Securities Fraud : Courts: More than 100 investors, many from the Valley, believed to have lost $2.3 million in oil and gas exploration ventures.
Three years ago, Charles E. Fuentes lived in a 4,200-square-foot house in Thousand Oaks, complete with a swimming pool and three fireplaces. Parked in his driveway were a red Rolls-Royce and a black Lamborghini.
Fuentes wore designer suits from Bijan, a Beverly Hills men’s store where he sometimes spent $15,000 in a single month. He maintained a $16,000-per-month suite in a Westlake Village complex to house his oil-exploration business.
Today, the 47-year-old Fuentes is in Ventura County Jail, where he is being held in lieu of $500,000 bail. His designer fashions have been replaced by jailhouse blues. He has lost the house and the business, Fountain Oil & Gas Co.
And more than 100 investors--primarily from the San Fernando Valley and Ventura County--have lost $2.3 million that they sank into oil and gas exploration ventures sponsored by Fuentes, according to Ventura County prosecutors.
Last week, the district attorney’s office charged Fuentes and his brothers, James A. Fuentes and Kenneth R. Fuentes, with 11 counts each of selling unregistered securities, 11 counts of securities fraud, and 11 counts of grand theft for allegedly misappropriating clients’ money, partly to fuel a high-flying lifestyle, investigators said. If convicted, each could face up to 10 years in prison.
Their arraignment was postponed last week to give their court-appointed attorneys time to study the complex case. But the brothers are expected to plead not guilty when they are arraigned today.
In addition to the criminal charges, Charles and James Fuentes and Fountain Oil & Gas also are named in several lawsuits that accuse them of bilking investors who bought shares in their natural-gas drilling ventures. Several investors lost more than $100,000, according to a court-appointed receiver who is trying to sort out Fountain’s affairs.
An Oxnard doctor, Michael C. Brinkenhoff, contends in a Ventura County Superior Court suit that he lost $240,000 invested with Fountain. Brinkenhoff was not available for comment on the case.
“The defendants have demonstrated an ability to talk people out of large sums of money,” district attorney’s investigator Thomas L. Kitchens said in court papers filed last week.
Indeed, nearly 250 investors put up about $12 million for Fountain’s oil and gas exploration ventures between 1986 and 1989, investigators said. Most of them first heard of the company from telephone solicitors working out of Fountain’s Westlake Village office, which closed in 1989, Kitchens said.
And some of the investors made handsome profits on their investments, according to Gerald T. Raydon, the receiver appointed by the U.S. District Court in Los Angeles. As receiver, Raydon has control over the company’s assets and is charged with trying to pay off creditors and investors.
“Their first well was a very good gas well,” Raydon said. “The investors got their money back and started making a profit.”
But of Fountain’s 26 Sacramento Valley drilling projects, only two wells returned the original investment, Raydon said. Thirteen turned out to be dry holes. The remainder produced gas, but not enough to repay the investors, let alone provide them with profits, Raydon said.
Among the reasons, he said, were the huge fees and royalties that the Fuentes brothers took off the top.
Each gas-well venture involved about 30 investors, Raydon said. They would put up a total of $400,000 to $550,000 for drilling. But Fountain would charge a set-up fee of 40% to 50% of that amount, contrasted with an industry standard of 15%, Raydon said. If the well came in, Fountain would take 30% to 50% of the gas produced, contrasted with the industry norm of 10% to 20%, he said.
“They had such a heavy load on the deals, it was going to be difficult for investors to make a profit regardless of how good the well was,” Raydon said.
By all accounts, Fountain President Charles Fuentes ran the company, while James Fuentes, 42, of Westlake Village and Kenneth Fuentes, 36, of Thousand Oaks had smaller management roles.
Though they were master fund-raisers, the Fuentes brothers were inexperienced in the oil business, Raydon said. After the first well paid off so handsomely, he said, “They started believing their own story. . . . They thought, ‘Gee, this is like shooting fish in a barrel.’ ”
Then, he said, Fountain drilled at least two more wells into the same underground gas pool that fed the initial well. “It gave them cash flow faster, but again, this is not in keeping with good industry practice,” said Raydon, a Los Angeles attorney who works with a number of oil companies. “People in the first well were getting their gas taken by people who drilled the second and third wells. The gas was just depleted.”
But the practice boosted Fountain’s success and made it easier to raise more money, Raydon and others said. According to Brinkenhoff’s suit, Fountain boasted that previous investors had received a 131% return on their money. Another suit, filed in Ventura County Superior Court by David and Norma Katz, contends that Fountain guaranteed they would own part of a successful gas well if they invested $15,800, which they did.
That suit accuses Charles Fuentes and Fountain of intentionally causing emotional distress when a company employee allegedly called and told the Katzes that their well had come in and they soon would be receiving income from it. In fact, the suit says, the well was a dry hole, and the call was made only to entice the couple to invest more money in Fountain.
Neither the Fuentes brothers nor family members responded to requests for comment. Charles Fuentes, who is acting as his own attorney in the Katz lawsuit, filed court papers denying every allegation.
A former Fountain employee, who asked not to be identified, said he believes the brothers had good intentions when they started the company. “Initially . . . they were really trying to make money for people, and obviously for themselves,” the ex-employee said. “But they painted themselves into a corner.”
Another former associate of the brothers said Charles Fuentes “was just spending too much, not just on himself, but on the corporation.” At the same time, the onetime associate said, Charles Fuentes became interested in other ventures for which he tried to raise capital, such as a chain of rehabilitation centers for people with back ailments.
“He had read the book, ‘The Art of the Deal,’ ” the ex-associate said. “He really thought he was another Donald Trump.”
Raydon said Fountain’s collapse came after it sunk a string of dry wells and “people quit buying their story.” Without new investors providing cash flow, the company quit paying contractors, who filed liens that eventually shut down the company, he said.
Raydon said he has managed to recoup some of the investors’ losses by getting a few good wells back into production. But as many as 150 investors will get nothing back, he said, and many of the others will get back far less than they put into Fountain.
Raydon said the brothers knew better than to guarantee that a drilling project would pay off. “They were inexperienced, but they weren’t that dumb,” he said.
And the investors should have been more wary, Raydon said. “They should have asked a lot more questions,” he said. “This is just not something you want to put $100,000 into without checking out . . . . Some people were too eager to listen to a salesman’s pitch.”
But Raydon said many of Fountain’s suppliers also were taken in, and they too lost money. And he said he sympathizes with the investors because, according to the criminal charges, many of them were not told the truth.
According to Kitchens’ statement filed in court, investors were told their money would be held in a separate account and would be devoted exclusively to drilling a specific gas well. In fact, the investigator said, funds for the various well projects were mingled, and some funds intended for a new well were used to complete an old one.
And an unknown amount of money was diverted to personal uses, according to the criminal complaint. For example, Charles Fuentes used $93,000 from one well-drilling account to supply himself with the Rolls-Royce, according to court records. Every cent of about $282,000 provided by investors for another drilling venture was converted to non-drilling purposes, according to Kitchens’ statement.
In Charles Fuentes’ closet, investigators found 20 Bijan-designed suits, which Deputy Dist. Atty. John L. Geb said cost about $2,500 each. Geb said he has obtained canceled checks drawn on Fountain gas-well accounts that were used to pay the clothing bills.
And investigators say they still have not accounted for nearly $1 million that flowed out of Fountain’s bank accounts, either as cash withdrawals or as transfers to bank accounts, including foreign accounts, that investigators have not been able to trace. Geb said he is also trying to determine what happened to the cars that Charles Fuentes allegedly purchased with investor funds.
Geb cited the missing money last week when he requested that the Fuentes brothers’ bail be kept at $500,000. If the money is squirreled away somewhere, the defendants could flee and “have the means to live their lives comfortably,” Geb said.
The brothers’ court-appointed attorneys argued that the three have known for a year that they were being investigated and still stayed in the area. One attorney said $500,000 is twice the normal bail for a murder suspect.
Municipal Judge Barry B. Klopfer said he will decide today whether to lower the bail.
Geb urged the judge to keep the bail high because the Fuentes brothers “currently are wreaking havoc on more investors.”
James Fuentes is trying to raise money for a glass-bottom-boat business in the Virgin Islands, according to Kitchens’ statement. And Charles Fuentes is still trying to interest investors in the chain of back-rehabilitation clinics, called Ergo-Med Centers, Kitchens said. Neither is informing potential investors that Fountain is in receivership, as required by law, the investigator said.
Recently, a Bay Area man called The Times, seeking more information about Charles Fuentes’ arrest. He said he had invested in Ergo-Med and had recently been approached about putting more money into the company.
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