Denver-based St. Anselm Exploration had only $8,653 in cash by October, after raising $84 million from investors in the previous five years.
The story of the oil and gas exploration company’s financial ebbs and flows includes a look into a web of connected firms, a failed initial public offering and the relatively lavish lifestyles of the three company founders.
A confidential document provided to The Denver Post detailing the cash on hand in October also shows that by the end of the fourth quarter 2010, St. Anselm’s assets included $811,492 in cash available to make interest payments, $5.8 million from a successful oil-reserve sale in December, 46 productive oil wells in Kansas and Nebraska and permitted geothermal resources ready for test drilling.
On March 17, the Securities and Exchange Commission filed a lawsuit against St. Anselm and four of its officials, accusing them of a “Ponzi-like” scheme that may have left roughly 200 investors out more than $62 million since 2007.
The SEC accused the company, its principals — Michael Zakroff, Anna Wells and Mark Palmer — and an employee, Steven Etkind, of selling high-interest notes to pay off earlier notes that had been sold to other investors.
They have until late May to answer the SEC charges.
The three company officials say the investor funds went to cover expenses, salaries and ballooning interest payments due on older promissory notes.
A dealmaker and 2 geologists
Formed in 1989, St. Anselm Exploration has a well-appointed office in downtown Denver’s historic Equitable Building. It is the umbrella atop various companies, including St. Anselm KXP, SA04, Terra Caliente, Agua Caliente and Standard Steam Trust.
Each company has a different set of assets, mostly oil and gas fields but also geothermal projects. Zakroff is the dealmaker; Wells and Palmer are the geologists.
Zakroff and Wells have been married since 1984 but are getting divorced.
“Anna and I are good oil and gas finders,” Palmer said. “Historically, there have been a lot of people in this business that Anna and I like to say couldn’t find oil and gas at a filling station.”
Their association jelled in the mid-1980s as America’s petroleum giants began consolidating, leaving fewer big players in the Rocky Mountains. Oil was in decline, and Palmer and Wells smelled opportunity.
They made a key natural-gas discovery in east-central Utah — Zakroff called it an eight-figure discovery — and St. Anselm was on its way.
The company wasn’t interested in pumping the reserves, merely in finding and selling them.
As St. Anselm grew, it created limited liability companies and took on investors willing to put up millions of dollars to cover exploration and drilling costs. The team expanded its lease holdings into Kansas and Nebraska.
In the mid-2000s, the company began selling promissory notes to fund operations. “We started with family friends, friends of friends, all word of mouth,” Zakroff said.
Terms were simple: monthly interest payments of up to 36 percent on loans that didn’t mature for up to three years.
More than 260 investors
In all, the company would sell $84.5 million worth of notes to more than 260 investors over the course of 15 offerings between 2005 and 2010, records show.
The SEC complaint focuses on notes sold since 2007.
The money, however, didn’t stay within St. Anselm, which was also becoming a placeholder for the other corporate partnerships created beneath it.
Standard Steam Trust, a LLC whose primary objective was to identify, acquire and market geothermal resources, got some of the money — and, ultimately, became one way to generate cash and pay back investors.
Geothermal power comes from the super-hot water that flows underground, heated by the Earth’s core. When a power plant is built over a geothermal well, electricity can be produced from the steam.
St. Anselm created Terra Caliente as the controlling business of all its geothermal projects, one of which was Standard Steam Trust.
Standard Steam picked up investors, names whose presence were enough to legitimize a company: U.S. Energy Corp. in Wyoming; drilling giant Murfin Inc. in Wichita.; Lawrence Cohen of Boulder; Michael Stubbs of New York; and H. Kirk Brown III of Denver.
“We were interested in renewables, and my opinion is that geothermal was the most attractive,” said Keith Larsen, chief executive of U.S. Energy.
The idea with Standard Steam, much like the business model for their oil and gas assets, was to locate, identify and certify the resources, then sell them to a company to build a power plant.
“We do the sufficient science, then sell it to a major power developer who actually has the money and the timeline to build it,” Zakroff said.
Standard Steam often relied on capital calls to its partners to meet expenses. Publicly traded U.S. Energy would eventually pony up $4.3 million, according to its 2010 annual report. Murfin pumped in nearly $6 million. In all, the partners dropped $17 million cash into the deal in its first two years.
The payback, according to Zakroff, would come from taking a new company, Standard Steam Canada, public on the Toronto exchange. Then, Standard Steam Canada would acquire controlling interest of Standard Steam Trust.
The deal was prompted by two other geothermal companies, Magma Energy and Ram Power, going public, each generating about $90 million.
“When there is money out there at that kind of premium, it is economically justifiable to chase the money,” Zakroff said. But there were some financial issues.
IPO “expensive and horrible”
Terra Caliente, Standard Steam’s managing member, had missed a pair of critical capital calls.
The first missed call was covered through a $206,157 loan St. Anselm took from one of Standard Steam’s employees.
The second, just as Standard Steam Canada was about to launch its IPO, was covered through a $1 million management compensation deal paid to Terra, according to a prospectus filed for the IPO.
“All I will say is, the capital call was paid,” Zakroff said. “The compensation agreement was not made in order to meet that capital call. Not at all.”
Standard Steam Canada never went public. Company officials pulled back in March 2010 after what Zakroff termed “an expensive” road show to cities such as Zurich, London and New York that yielded one investor interested in only 10 percent of the offering.
The market for any geothermal offering was seemingly sated by Magma and Ram.
In retrospect, Zakroff said he should have listened to the bankers.
“It was the worst decision that I’ll take responsibility for ever making,” he said of the IPO effort. “It was an expensive and horrible process.”
Standard Steam eventually sold some of its assets — it had eight promising geothermal prospects — for $8.72 million, according to U.S. Energy’s annual report. The deal also could generate more payments, depending on the size of the power plant built over the geothermal sites.
By late 2010, St. Anselm was sitting on $49 million in notes it had sold since 2007, requiring nearly $6 million to cover the annual interest payments.
At one point, St. Anselm’s bank accounts were overdrawn by $155,000, the SEC says.
But Zakroff, Wells and Palmer told investors in February 2010 that company “economics remain very robust,” the SEC complaint shows. They say it’s from the vast reserves the companies hold but have remained unsellable until recently because of the economy.
“The SEC failed to mention our 15 years of successful and profitable operations and chose to focus strictly on the time period of the Great Recession, the credit crisis and an unprecedented volatility in the price of oil,” the company wrote investors just after the SEC filing in March.
The three partners had drawn large distributions from St. Anselm and its affiliates over the past 10 years. Zakroff’s estimates range up to $21 million, but the SEC said Wells and Palmer alone pocketed more than $19 million in just three years.
Trappings of trio’s millions
The trio has also acquired some of the trappings that come with money.
The bookish Zakroff is a lover of fine clothes, favoring the ultra-expensive handmade Italian suits of Battaglia, the oldest shop along North Rodeo Drive in Beverly Hills. The suits, according to manager Dow Thanombhand, on average cost $4,000 each, and Zakroff has been a longtime customer.
Wells is a horse lover who’s transformed that interest into a sprawling 40-acre spread in Longmont, known as The Quartermaster Farm. It has a 21,000-square-foot riding arena and was bought in 1993 for $750,000, county property records show.
Zakroff and Wells drove high-end leased vehicles — a pair of Mercedeses for her and a Lexus SUV for him. But their largest extravagance was a $4 million penthouse condominium at the Four Seasons in tony Teton Village at Jackson Hole, Wyo.
“It was a nice place, yes,” Zakroff said.
Purchased in 2008 and mortgaged for $2 million, it wasn’t long before the couple drew two more mortgages on the penthouse — for $800,000 and $900,000 — by the time foreclosure proceedings began.
Overlooking the ski slopes, the three-bedroom, 2,680-square-foot spread was listed recently for $3.95 million, according to real estate records.
Palmer has a $910,000 home in Denver, along with a three-story townhouse along the Atlantic at about the same value. Located in Key Largo Yacht Club, it faces east along the Florida Keys. Palmer’s wife lives there most of the year, he said, though he gets back to enjoy time on his boat.
The 30-foot powerboat is aptly named Lucky Dog.
David Migoya: 303-954-1506 or dmigoya@denverpost.com
Debt Restructuring to Repay $60 millions
A debt-restructuring plan devised by St. Anselm Exploration to repay more than $60 million to about 200 investors centers around a profit-sharing deal tied to the company’s oil, gas and geothermal reserves.
Accused by the Securities and Exchange Commission of running a Ponzi-like scheme that started to unravel in early 2010, company executives asked investors to pool their notes into a newly formed company that would reap profits meant for St. Anselm.
The company, SA Terra Net, was created in November after investors overwhelmingly approved the move.
St. Anselm executives, led by businessman Michael Zakroff, say the vote was one of confidence in the company’s ability to turn things around.
“We didn’t hide but stood up to do what needed to be done,” he said.
Many investors had promissory notes that matured in three years and paid monthly interest of up to 36 percent. Those were rewritten into five-year notes with 5 percent yields and bonuses.
SA Terra will hold all the new notes issued to the investors, most of whom live in New Mexico, and will share the profits of another company, Terra Caliente.
St. Anselm holds a majority interest in Terra Caliente, which in turn holds different levels of interest in several geothermal projects.
The deal calls for SA Terra to receive any profits due St. Anselm from Terra Caliente until the investors are made whole.
St. Anselm also has signed away 17 percent in limited profit interest in Terra Caliente to a variety of individuals employed by the company, including Steven Etkind, the company’s chief salesman of the promissory notes that drew the SEC’s interest.
Etkind is named a defendant in the government’s case.
David Migoya: 303-954-1506 or dmigoya@denverpost.com
