Securities Fraud in Oklahoma, Not OK
June 19, 2009 by Lela Davidson
Filed under Finance
The Securities and Exchange Commission this week charged two Oklahoma City residents with securities fraud and other violations related to misappropriating millions of dollars from Quest Resource Corporation, Quest Energy Partners, L.P. and their affiliates while they were executives at the company.
The SEC alleges that Jerry D. Cash and David E. Grose caused Quest to make a series of transfers to a separate company that Cash controlled. Cash tried to conceal the transfers by, among other things, ostensibly transferring the funds back to Quest at the end of each quarter. The progressively greater amounts taken from Quest over time are alleged to have been used to support Cash’s lavish lifestyle, including spending more than $5 million on his Oklahoma City mansion. Grose was complicit in Cash’s wrongdoing by, among other things, initiating wire transfers to Cash’s company and creating a false cover story to explain the transfers to Quest’s employees and auditors.
“Cash and Grose treated Quest like a personal piggy bank and then lied about their wrongdoing to the company’s investors and auditor,” said Rose Romero, Director of the SEC’s Fort Worth Regional Office.
The SEC alleges that the scheme, which began in June 2004, collapsed in August 2008 after other Quest executives discovered and began questioning the legitimacy of the transfers. By that time, Cash had misappropriated a total of $10 million from Quest. Cash subsequently resigned from Quest and Grose was terminated.
It took four years for anyone to start asking questions?
According to the SEC’s complaint, Grose took advantage of Quest’s lax internal controls to siphon more than $1.8 million from the company. From December 2005 through August 2008, one of Quest’s equipment vendors kicked back approximately $850,000 to Grose from equipment purchases that Quest had made. The SEC also contends that Grose used $1 million of Quest’s money to fund his personal investment in a small Oklahoma start-up company.
The SEC’s complaint states that none of these transactions were disclosed, despite Cash and Grose signing numerous filings and representation letters in which such related party transactions were required to be disclosed. The two also attested that there had been no fraud involving management.
