Breakingviews
By KEVIN ALLISON
A legal case against the self-described Frack Master is a sure sign that the so-called bezzle in the shale- is shrinking.
The says the entrepreneur Chris Faulkner inflated his shale companies’ prospects to attract cash, then blew $80 million of investors’ money on questionable expenses like escort services. The oil industry’s lax governance makes it an obvious place for enforcers to hunt for culprits.
John Kenneth Galbraith, the Depression-era economist, coined the idea of the bezzle — an inventory of undiscovered shenanigans that builds up during boom times as investors make gains and ask few questions. In downturns, the bezzle shrinks, as Galbraith explained, because the financial tide goes out and makes problems more obvious even as investors exert more scrutiny. Bad behavior, in other words, gets exposed.
The S.E.C.’s complaint paints Mr. Faulkner, 39, as a consummate snake-oil salesman, able to persuade investors to part with their money despite having no previous experience in the oil business before starting Breitling Oil and Gas in 2009. It accuses Mr. Faulkner of misleading backers about the estimated cost of drilling and completing wells and their likely returns.
As for where the money went, the S.E.C. says that at one point Mr. Faulkner racked up more than $1 million of charges for travel, escorts, strip clubs and exclusive night clubs on an American Express card. His costs were later reimbursed by the company in violation of its expenses policy, according to the complaint. His lawyer called the charges “inaccurate and untrue.”
If there were shenanigans, it is unlikely to come as a surprise to followers of the shale industry. A permissive governance environment allowed Chesapeake Energy’s former chief executive, Aubrey McClendon, to run a private hedge fund and take out personal loans from firms that his company did business with, among other instances of pushing the boundaries.
If that extended to actionable misdeeds, it would be no shock. It is also typical that such things should come to light after many shale players’ finances have been slammed by a fall in oil prices. Mr. Faulkner is an especially colorful test case, but the sector’s record suggests it may not be the last.
