U.S. Attorney For Western District Of Pennsylvania Maintains Close Eye On Gas Drilling Industry As Three Sentenced In Mineral Rights Scheme

Posted On Monday, February 3, 2014
By: James W. Kraus

While the gas drilling boom brought on by the Marcellus and Utica gas plays in Pennsylvania has attracted much attention for the positive economic development it has spurred, the U.S. Attorney for the Western District of Pennsylvania continues to eye the business practices of those involved in this industry.  As a result, those whose businesses are now impacted by this industry should be aware of potential pitfalls as the boom in related land and mineral rights acquisition continues to settle in. 

The recent sentencing of three local men convicted in a fraudulent drilling rights scheme should serve as a cautionary tale, both with respect to the presence of opportunists taking advantage of this boom to defraud others in the industry, and as notice that federal prosecutors see themselves playing a prominent role in policing this industry. 

On January 31, two western Pennsylvania men were sentenced to prison sentences of 40 months and a third to 20 months, and were ordered to make restitution in the amount of $2.4 million, after pleading guilty to a conspiracy to commit mail fraud.  Two of the men, Derek A. Candelore and William J. Ray, were employed as landmen for Penn-Star Energy, LLC, and negotiated with mineral rights owners for gas production companies, including Range Resources.  Outside of their work for Penn-Star, however, they developed a scheme to fraudulently convey mineral rights to themselves and then sell the rights to unsuspecting purchasers. 

To carry out their scheme, Candelore and Ray forged documents and filed them with the Washington County, PA, Recorder of Deeds, to make it appear that they or companies they operated owned the mineral rights to four parcels of land in Washington County.  According to the criminal information filed by the government, Ray and Candelore set up fake companies, along with several post office boxes and bank accounts in names of companies they created.  After they filed documents to make it appear that they had acquired ownership of the mineral rights, the fake companies leased and/or sold the mineral rights to unsuspecting purchasers, including local investors, out-of-state investment groups and Range Resources. The total loss to investors was $2,400,144.77.

According to the government, the scheme began to unravel when one of the mineral rights owners hired an attorney to sell the mineral rights. The attorney discovered that one of the fake companies, Clark Lumber Company, owned the mineral rights by reason of a deed that bore the forged signature of the true owner.