The Internal Revenue Service dug through garbage of an oil and gas investment company in Basalt multiple times prior to raiding its offices and launching a fraud investigation in July 2013, according to an affidavit filed to obtain the search warrant.
The IRS also employed an undercover agent posing as a potential investor to get principal players in Crystal River Oil and Gas, LLC to outline their business practices, according to the search warrant affidavit.
Federal investigators also collected extensive information from two former employees who were fired from Crystal River. The information from the employees triggered the investigation, the affidavit said. One of the ex-workers provided information while he was incarcerated in Eagle County Jail awaiting sentencing after being convicted of embezzling from the oil and gas firm, according to the affidavit.
Agents with the IRS Criminal Investigation Division, FBI and Bureau of Land Management raided Crystal River’s second floor office on July 29, 2013, and hauled off scores of boxes of records and computers. The operation attracted a lot of attention in Basalt because the business is in a highly visible spot across from Town Hall at 110 Midland Ave., the town’s main street. The search warrant information was sealed for several months after the raid and only recently became available to the public.
No charges have been filed against Reiner Klawiter, the managing principal of Crystal River Oil and Gas, according to Jeff Dorschner, public affairs officer for the U.S. Department of Justice in the District of Colorado. He declined to confirm or deny if an active investigation is ongoing.
Raid was surprise to company
The IRS presented its allegations against Crystal River Oil and Gas in an affidavit to try to convince a judge to approve the July 2013 search. The affidavit, filed by IRS Special Agent Melinda Wilgus, said Klawiter and company executive Gary Schelling are suspected of four possible violations: fraudulent interstate transactions, wire fraud, mail fraud and bank fraud.
In a response to questions emailed to Klawiter by The Aspen Times, Crystal River Oil and Gas representative Jack Wheeler said no one from the company had any notice prior to the raid that federal agencies were looking into the company’s business dealings. Federal authorities have not notified company officials of any pending charges, Wheeler wrote.
When asked how the raid affected Crystal River Oil and Gas’ business, the company statement said, “It has been a very difficult year, to say the least. The company has experienced a high degree of staff turnover. The company has not engaged in any efforts to attract investors since this matter arose.”
Business practices under scrutiny
Crystal River Oil and Gas operates wells in Colorado, California, Kansas, New Mexico, Oklahoma and Texas, according to the document. It attracts investors to acquire interests in oil and gas wells that it drills or “recompletes” in the case of older wells that get a second look with advanced technology.
The search-warrant affidavit alleges that Klawiter and other company employees represented that the funds collected would go directly into programs used for drilling wells. Investors would receive revenues from the production of oil or gas.
The IRS alleges that investment funds were really needed by Crystal River Oil and Gas for general operating expenses because it was facing poor cash flow. Some of the money coming from new investors also was being used to pay earlier generations of investors, the government agency alleges.
The IRS agent also claimed in the affidavit that expenses connected to drilling the wells were understated to potential investors while the outlooks for production were overstated.
The company also is accused by authorities of representing that the firm was collecting significant amounts of “outside” investor funds in order to reassure prospective investors about the safety of their investment. In fact, the IRS alleges, Crystal River was using money provided by Klawiter and his family to make it appear the company was attracting more investment funding than was the case.
The search-warrant affidavit also contends that Crystal River counted oil and gas wells in the inventory of affiliates more than once — essentially double-dipping — to make its assets appear greater so it could get a $3 million loan from a bank.
The IRS, FBI and BLM seized volumes of Crystal River’s records to try to prove its allegations.
Fired employee provided info
The IRS started looking into Crystal River Oil and Gas after an employee of the firm was fired and filed a claim with the Equal Employment Opportunity Commission in September 2012, according to the search-warrant affidavit.
Information provided by that employee was independently corroborated by a second employee of Crystal River who was fired, according to the IRS. The second employee “submitted a letter to the State of Colorado Division of Securities, outlining many of the allegations discussed and expanded on herein,” the search-warrant affidavit said.
The person identified in the affidavit as “Employee 2” later pleaded guilty to charges related to embezzling from Crystal River Oil and Gas.
“Employee 2 acknowledged the above charges will impact his credibility; although, he commented the charges do not mean (Crystal River Oil and Gas) can ignore the fundamentals of accounting, regulatory agency requirements, labor laws, severance and other taxes, and obligations to investors, royalty owners and vendors,” the affidavit said. “Employee 2 received no benefit or cooperation in exchange for his interview.”
Feds conducted ‘trash runs’
Once the federal agencies were alerted to the alleged fraudulent business practices of Crystal River Oil and Gas, they used what the affidavit called “trash runs” and an undercover operation to gain more information.
IRS agents checked the trash of Crystal River Oil and Gas an undisclosed number of times to obtain information such as a “map” of the business office that showed where different types of records were kept, draft letters from company officials to prospective investors, bank statements, utility bills and production expectations for various wells.
“Information provided by Employees 1 and 2 is consistent with information received from other sources including documents obtained during trash runs on the (Crystal River Oil and Gas) Basalt, CO office, undercover operations conducted on December 12 and 13, 2012, bank records and information provided by (an investor),” the affidavit said.
Information obtained in another “trash pull” was cited in the affidavit as evidence that Crystal River was having trouble paying utility bills and its operations allegedly needed to be propped up by collecting additional investment funds.
A male undercover agent working for the federal agencies attended a seminar that Crystal River Oil and Gas hosted at the St. Regis Hotel in Aspen for prospective investors in December 2012. The undercover agent later met with Klawiter and other officials with the gas firm at the Basalt office. He allegedly collected information that the government alleges shows fraudulent business practices.
Crystal River’s response to questions by The Aspen Times said it couldn’t comment at this time on the allegations made by the IRS agent in the search-warrant affidavit. The company “would like a chance to counter these allegations at the appropriate time and to present its side of these matters,” it said in the statement.