SEC finds fracking sand company misled investors with claims of ‘game changing’ sand

The fracking industry’s over-the-top claims to investors have been the norm, but even when proven to be fraudulent, companies suffer almost no consequences.

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Fracking sand company Fairmount Santrol had a very clever corporate slogan for being in the business of selling products for oil and gas wells: “Do Good, Do Well.” 

The company sold its engineered sand to the fracking industry on the premise that oil and gas wells would “do good” when its “game changing” sand was used in the mixture to frack oil wells — hydraulic fracturing involves blasting a mixture of water, sand, and chemicals into wells to fracture shale and release the oil and gas trapped within. 

But according to the Securities and Exchange Commission (SEC), Fairmount knowingly misled investors for years about its products and results — a practice that appears to be common in the U.S. fracking industry. 

In December 2020, the SEC settled charges with Fairmount over misleading investors by “overstating the performance and commercial potential of high-margin products it was developing and selling to oil and gas exploration companies for use in fracking.” 

According to the SEC order, Fairmount made the “materially false and misleading statements in connection with securities offerings in 2014 and 2016, in periodic and current reports filed with the SEC, in presentations to investors and research analysts, and on the company’s website.”

The company agreed to pay a $17 million penalty. However, because Fairmount (and its successor company, Covia) declared bankruptcy last June, the SEC “will be deemed satisfied by a $1 million cash payment” which it will distribute to harmed investors.

Marketing campaigns touted remarkable results

The fracking industry uses massive amounts of sand; a single well can require 10,000 tons of sand. Fairmount Santrol — which merged with another company in late 2017 and was renamed Covia — was the second largest frac sand supplier in the U.S. 

Fairmount’s company motto “Do Good, Do Well” was incorporated into the company’s marketing literature for its fracking products that touted the huge improvements in oil and gas well production delivered by Fairmount’s sand products — known in the industry as proppants. “Do Good, Do Well” has appeared in Fairmount’s, and later Covia’s, annual corporate responsibility reports since 2006.  

Proppants are required for successful fracking. Hydraulic fracturing uses very high pressure liquids to shatter or fracture the shale that contains oil and gas. To keep those fractures open for the oil and gas to drain out, it is necessary to blast proppants into the fractures. 

Image: Propel SSP marketing materials Source: Oil and Gas 360 

The above image appeared in an industry publication in 2018, at the time the fracking industry was booming but in desperate need of products and techniques that could reduce costs so companies with huge debts could start making profits. The industry was very good at producing oil and gas and selling investors on huge payouts in the future while at the same time it was losing money. One way to continue attracting investors was to boast of technological advancements that would deliver big profits. 

DeSmog has reported on this trend and how, to date, these promises have never delivered the results or profits. 

Fairmount Santrol was claiming that its product Propel SSP had successfully increased the estimated ultimate recovery (EUR) of wells by up to 20 percent and by up to 92 percent per section when tested in trials in the field. Similar to the concept of recoverable reserves (which the industry consistently overestimates, as DeSmog has reported), EUR indicates the total oil a well was expected to produce.

Fairmount, however, continued to market its products — including Propel SSP — even after employees had informed management in May of 2017 that the products did not work as advertised. 

Fairmount’s claims that its product could increase EUR by 92 percent would mean companies could essentially double reserves estimates — if this claim were true. It was not.

Fairmount’s story highlights how the fracking industry’s business model is built on fraud. There were many opportunities when these claims could have been verified, but weren’t. Instead, journalists gave Fairmount glowing media coverage and major shale companies ran tests on Propel SSP and offered support for the fraudulent claims.  

Fairmount and the SEC

In 2018, Fairmount was a financial sponsor at the Hydraulic Fracturing Technology Conference held by the Society of Petroleum Engineers (SPE). Event bar napkins advertised that the conference was sponsored by “Fairmount Santrol — proppant solutions.” SPE events, a big deal in the industry, are where new technologies are discussed that may deliver better results at the wellhead, useful fodder for the stories told to investors.

However, Fairmount had already raised the eyebrows of regulators at the SEC two years earlier. 

In 2016, the SEC sent a letter to Fairmount questioning some of its accounting. In its response to the SEC, Fairmount stated that Propel SSP had demonstrated “a strong economic benefit in the form of increased production, reduced costs, or more drilling efficiency.”

The SEC responded to that letter and its claims with a brief letter reminding Fairmount’s management they were responsible for the “accuracy and adequacy of their disclosures.” 

As the SEC later found, Fairmount did not heed that advice. 

Fairmount’s helpers

How was Fairmount able to make such outrageous claims about increased oil production from its frac sand product Propel SSP? It needed help. And it found that help in some shale industry leaders. 

In 2014, Chesapeake Energy was still the second largest natural gas producer in the U.S., although its financial fortunes had taken a turn for the worse from the heady days of 2008 when its CEO Aubrey McClendon was the highest paid CEO in America. 

In 2014, Chesapeake was facing charges of fraud in Michigan and would pay a $25 million fine while denying any wrongdoing. The same year, the fracking pioneer was also accused of fraud in Pennsylvania. By 2016, McClendon was indicted on charges of bid rigging for land leases for oil and gas production. 

At the same time, in July 2014, Fairmount touted Chesapeake’s test results for Propel SSP, stating that it “excels in field trials.” According to the fracking sand company press release, a Chesapeake manager said the product “performs as advertised.” 

The press release said that “additional trials will be performed to verify results.” Chesapeake did not respond to a DeSmog inquiry about these trial results.

Then in August 2016, an article in Drilling Contractor magazine, an oil and gas trade industry publication, announced more amazing test results for Propel SSP. According to Fairmount, the oil company Enerplus used Propel SSP in test wells and produced eye-popping results. Drilling Contractor reported that Enerplus used the product in six wells in the Bakken formation in North Dakota and compared those results to other wells in the Bakken using the industry standard approach. According to Fairmount, the “initial 90-day oil production of the trial wells increased by an average of 39% compared with the offset wells.”

Enerplus did not respond to an inquiry about these trial results. The SEC did not respond to an inquiry about the involvement of Chesapeake and Enerplus in these test results. 

Not surprisingly, the stunning results were reported uncritically by industry media, but no one publicly questioned if these results were too good to be true. In November 2015, leading gas industry publication Natural Gas Intelligence ran an article featuring the Enerplus results in the Bakken and noted that Fairmount had presented its results at SPE’s annual conference. 

In July 2015, PB Oil & Gas, a publication covering the Permian shale region in Texas and New Mexico, published a cover story about proppants with the title, “The Greatest Oilfield Innovation.” 

The first article in that issue, however, was about the fracking industry’s serious financial troubles. 

So, stirring hope for the greatest innovation yet — what the cover of the magazine touted as being the very basis for the “fracking miracle” — was just what investors needed to hear to stay committed to the fracking industry. The proppant cover article highlighted SSP Propel along with a Fairmount product director claiming that using Propel SSP would decrease costs for producers while increasing the reservoir volume and fracking efficiency. 

In November 2020, Bloomberg reported on a whistleblower complaint made by a Fairmount employee in 2017 alleging fraudulent behavior for misrepresenting the company’s product. “This fraud is particularly brazen because the company aggressively markets scientific testing to create the illusion of proven performance and reliability,” the whistleblower was reported to have said in the 2017 SEC complaint according to Bloomberg, which saw a copy of the complaint.  

The article also noted how four employees had expressed concerns to management about the fact that, as Bloomberg reported: “Some of the proprietary sand it was selling, they said, wasn’t so special.”

What the SEC found

This past December, the SEC published a cease and desist order for Fairmount-now-Covia, finding that the company misled investors about Propel SSP and other products. 

“The order found Fairmount repeatedly told investors that its development of these products would provide long term and sustainable value for investors,” the SEC wrote.  

For Propel SSP, the SEC found that “the statement that most wells increased production by more than 30% was false and misleading because only a small subset of all test wells had those increases and the company did not have data for many of the test wells.”

This practice of cherry-picking data from higher performing wells to make sweeping claims about all wells is at the heart of much of the ongoing claims made within the fracking industry, as the Wall Street Journal highlighted in January 2019. Fairmount certainly was not alone in this approach. 

The SEC also found that Fairmount received negative feedback “from certain customers that its data did not support its claims about effectiveness.” 

This simple misrepresentation somehow appears to have fooled Chesapeake, one of the largest and most experienced shale companies, and Enerplus. Additionally, presentations by Fairmount about its products to the Society of Petroleum Engineers apparently didn’t raise any red flags. 

However, even if petroleum engineers in attendance did question the validity of the claims, there is reason to believe they wouldn’t say anything. In the same Wall Street Journal article about the shale industry’s constant use of highly optimistic estimates, one attendee at such a conference did raise questions about why the industry continued to use models that knowingly over-predict oil well production. 

When repeatedly asked by an audience member why the industry wouldn’t use accurate models, an engineer in the audience said “Because we own stock.” 

Openly admitting to fraudulent behavior at an industry conference was a cause for laughter from the audience, however, not concern. As the engineer admitted in front of an audience, this behavior is simply accepted because it is critical to increasing stock prices and enriching executives and stockholding engineers.

Sand is just sand

DeSmog has reported on many of the technological innovations that fracking firms promised would deliver big profits for shale investors. While the profits never materialized, the promises continued. 

In 2015, Hart Energy, a media, research, and data company for the energy industry, published an article touting the potential of proppants and included more impressive results for Propel SSP.  

This March, Hart published its current take on the value of proppants compared to just plain old sand: “Shale Frac Designs Move to Just-Good-Enough Proppant Economics.”

The article detailed new research by Liberty Oilfield Services which found “no clear evidence that higher conductivity proppants (either white sand versus regional sand or ceramic proppants versus white sand) result in better well performance and economics.”

The oilfield services company found that  the economics of using the type of engineered sand product Fairmount-turned-Covia had been hawking as well as high end white sand didn’t pan out compared to regionally produced sand (white sand is 3.5 times more expensive than regional sand and is one of the products Covia produces from sand mines). 

Today, the fracking industry and its trade media have come a long way from calling products like Propel SSP the “greatest oilfield innovation.” Apparently, in many cases sand is just sand, when it comes to fracking. And the cheaper the better. 

For the shale industry, fraud works 

Covia CEO Jenniffer Deckard resigned in May 2019, shortly after the SEC subpoenaed the company. While Deckard technically resigned, Covia told the SEC that the company “expects to treat her resignation as a termination” and that “Ms. Deckard will receive the enhanced severance benefits provided for a termination.” 

Despite resigning from the company while being investigated, and later charged, by the SEC for fraud, Deckard received $7.9 million in compensation in 2019.

Much of that compensation came as a severance package that Covia said Deckard qualified for if she “experiences a separation from service as a result of an involuntary termination of employment without cause or resignation for good reason.” Covia did not respond to an inquiry about Deckard’s payout for leaving the company while being investigated for actions taken while she was CEO.

In July 2020, Covia filed for bankruptcy. 

The CEO who oversaw the fraud walked away with $7.9 million for working part of 2019. The investors who were defrauded by her company will be splitting $1 million. 

The message to the rest of the industry is pretty clear: Do Fraud, Pays Well. 

FALL FUNDRAISER

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