Black Gold Scandal in Bluegrass State

June 13, 2008— -- A teen party featured last year on MTV's "My Super Sweet Sixteen" may have been the icing on the cake. "I wanna have the biggest Sweet Sixteen that anyone has ever seen," exclaims smiling birthday girl Ariel Milby on the video.

The program is known for showing off the lavish, over-the-top lifestyles of rich American girls and their families, but in the case of Ariel's birthday, her party captured the attention of some unintended viewers: federal agents.

The birthday girl arrived by helicopter, decked out like a princess. Her big day was capped off by fireworks and a big gift from her father — a BMW 325i.

On the video, Ariel proudly explains her fabulous lifestyle is made possible by her father's oil business.

"My dad owns his own oil company and he has oil wells all over the world," she tells the audience. "I love oil. Oil means shoes and cars and purses," she continued, adding that her new car "kind of sets me apart from everyone else in this town."

"Daddy" is Gary Milby, the target of a federal case for allegedly swindling hundreds of people, including many senior citizens, who invested in his oil business.

"I can't believe this," a shocked David Peters — one of Milby's alleged victims — says as he watches a video of the TV program. "I feel like I've been hit in the solar plexus. Below the belt. Is that where our money went? For her 16th birthday, whatever. He knew how to flaunt it I guess."

False Promise of Black Gold?

Peters is among nearly 400 investors who claim Milby cheated them out of up to $19 million, according to a complaint by the U.S. Securities and Exchange Commission, as well as lawsuits filed in federal court. Other investors in Milby's companies in several states say they've been interviewed by federal agents about the promises they say he made, and a warrant for Milby's arrest on a charge of felony fraud was issued by a judge in Louisiana.

"I was swindled. I was scammed. It was a con job," Peters says.

In the summer of 2005, Peters heard ads on XM Satellite Radio about a potentially lucrative oil investment. "With investments of $24,000 to $49,000, you can make up to $4,800 in monthly income," the ad promised.

Intrigued, Peters flew to Kentucky, where he was picked up in a limousine and taken to meet Gary Milby in person.

"He was the guy that was gonna make things happen," Peters says. "He was the go-to guy. He was the guy that was behind the program. We ended up spending the day out in the field in Kentucky looking at supposed oil-producing wells."

After hearing the pitch and reading marketing materials from Milby's Mid-America Energy, Inc., Peters invested $37,000, believing Milby's promise that the oil wells would produce 22 barrels per day.

"I thought I was buying somewhere between $2,100 and $3,600 a month in free cash flow," Peters complains.

The SEC charges that such investments were based on "false and misleading information" and "exaggerated the returns that investors would receive." Milby denies all the allegations.

"In this business, you never get a big enough check," Milby told ABC in a telephone interview. "If you get $1,800, you want $2,200. We were in the business of drilling holes. Every one of them [the investors] was given an opportunity to see, touch and feel."

Milby claimed he had "two wells producing 250 barrels a day apiece. More than enough money, along with all the other wells we have producing, to give the investors their money back. I drilled six wells and three of them were producing and I was writing checks [to investors] until all this happened."

In the rolling hills of central Kentucky, a top state regulator took "Nightline" to the "Picke'ts Chapel" tract in Adair County. In these fields Milby's company owned at least 17 rigs. The pumps are called "jacks" and the cylindrical holding tanks are known as "batteries," which they resemble.

According to Marvin Combs, assistant director of the Kentucky Division of Oil and Gas, state inspectors were called in after investors began to complain about "the fact that they hadn't received any checks from, for their investment."

Combs said he and his fellow inspectors found non-producing wells, abandoned rigs and other violations, and Mid-America Energy had to forfeit a $25,000 bond it had posted to operate in the state.

For all intents and purposes, Milby's company is now shut down in Kentucky. But not before hundreds of people signed on to Milby's promise of black gold in the Kentucky hills.

On that MTV video, he boasts of producing enough oil to fulfill his daughter's designer fantasies.

"This well will produce 120 barrels a day," Milby says as he and Ariel walk past a bobbing pump jack.

"How many Louis Vuittons is that?" Ariel asks.

"A bunch," Milby says drily.

False Oil Gusher Demonstration?

Some investors say they were fooled by a demonstration that supposedly shows a gusher of oil captured on a cell phone camera by one of the 60-plus people suing Milby. In all likelihood, according to Combs, the "gusher" represents nothing more than nitrogen gas forced into a shallow pool of oil just below ground.

"It's a combination of acid," said Combs, the Kentucky regulator. "There is probably some crude oil associated with it and … nitrogen gas that's being brought back to the surface."

David Peters also toured Milby's Kentucky operation.

"He could have told me most anything, because his position was that he was a knowledgeable oil man and I was an investor asking questions and I took what he said as Gospel," he said.

Since the lawsuit was initiated, Milby hasn't been easy to track down.

Larry Wozencraft, a professional process server, was hired to deliver legal papers to Milby as part of a federal court lawsuit. Process servers sometimes have to go to great lengths to serve individuals, and Wozencraft went in search of Milby at a Kentucky farm before dawn, dressed in camouflage and packing his gun.

"I picked up the box of summons," Wozencraft recalls. "It was a pretty heavy box, it was 37 summons and complaints, and walked up to about six to 10 feet from him and as I was walking to him I kept calling, 'Mr. Milby, Mr. Milby.' I didn't want to startle him. He turned around. He was very cordial at first."

But then, according to Wozencraft, Milby reached for a gun. Wozencraft called 911, which recorded the exchange:

Wozencraft: Wait, he's coming out with something. He's got to have a gun.

Milby: You get out of here!

Wozencraft: Mr. Milby, put the gun down please!

911 Operator: Subject being held at gunpoint at this time.

Conflicting Reports

"Nightline" reached Milby by phone, and he disputed that version of events. "I don't have any property in Kentucky," he said.

Milby said he was visiting his brother's farm on Father's Day two years ago when Wozencraft "snuck up behind me and stuck a gun to my head."

Milby claimed Wozencraft "told me to back away from the truck and stick my hands in the air."

Larry Wozencraft tells a different story. "He started telling me repeatedly, 'You'll never make it off my property alive,' so I drew my weapon. In fact, I didn't even have my finger inside the trigger guard. I had it alongside and I started retreating."

Wozencraft insists he never pointed the weapon at Milby.

Once the sheriff's deputies arrived, things calmed down, though Wozencraft was arrested, spent the night in jail and eventually agreed to a plea deal on trespassing charges.

Milby, meanwhile, is the target of several civil lawsuits, and the SEC complaint alleges he diverted more than $7 million of investors' money — partly to support his lavish lifestyle.

Like many of Milby's investors, David Peters says he never saw a dime. The only financial statement he ever received after buying a $37,000 share in Mid-America Energy "Fort Knox # 12" showed he owed Gary Milby $34.11.

"I'd like to get some of my money back," said Peters.

For that to happen, the wells in old Kentucky will have to pump black gold like they never have before.