North Texas Company Ordered to Stop Fraudulent Offering of Oil Royalty Rights

Mar 26

Securities Commissioner John Morgan entered an Emergency Cease and Desist Order March 25 prohibiting Lonestar Mineral Assets LLC and Kenneth Wayne McKay from illegally offering for sale unregistered investments in mineral royalty rights and not disclosing information about McKay's background, which included a criminal conviction for securities fraud.

According to the order, Dallas-based Lonestar Minerals and McKay, who is an owner of the company, are offering to sell investors mineral royalty rights through the company's website. The tracts of land are in Meade County, Kansas. Lonestar and McKay are telling investors that once they pay $8,200 per acre for royalty rights, their interests will be pooled with those of other investors.

The company and McKay are telling investors they will start receiving revenue in 90 to 120 days after drilling starts, according to the order. Investors will supposedly receive returns based on the percentage of the tract they own.

Lonestar and McKay are claiming that investors aren't responsible for any costs or risks associated with exploration or development, according to the order. Instead, the company is representing to investors that they will simply receive returns from producing wells, which "may provide a monthly cash flow for 40 years. . . "

McKay was found guilty of securities fraud in 1998 in U.S. District Court in Dallas. McKay and a business partner fraudulently raised $8 million from investors in 28 states for oil and gas drilling investment programs. He was sentenced to a prison term and ordered to pay $7.6 million in restitution. As of 2012, the outstanding balance of the restitution had grown to $12.9 million.

The year before his criminal conviction, McKay was the subject of a permanent injunction in a civil action by the U.S. Securities and Exchange Commission.