DALLAS (CN) - Over $21 million in oil and gas drilling projects are indeed unregistered securities and not partnerships, a federal judge ruled in the Securities and Exchange Commission's securities fraud suit against two Dallas-based energy firms.
U.S. District Judge Ed Kinkeade granted the SEC's motion for summary judgment and motion to strike on Monday in its 2013 lawsuit against Arcturus Corp., Aschere Energy and owner Leon Parvizian, along with project buyers R. Thomas & Co. and AMG Energy.
The SEC said the Parvizian defendants tried to avoid falling under securities laws by referring to its six projects as "joint ventures" and investors as "partners" or "venturers" who funded - rather than invested - in the projects. Kinkeade agreed with the SEC's position that the venturers delegated any powers they might have had and that all control was possessed by the Parvizian defendants.
"The court finds the evidence submitted by the SEC establishes the venturers had little power at best, but more realistically, no power at all," Kinkeade wrote in the 50-page opinion. "The summary judgment record establishes the venturers did delegate control at the outset. Under the express language of the [joint venture agreement], the venturers delegated all powers related to the day-to-day management as well as operations of the venture to either Arcturus or Aschere as the respective managing venturer."
Kinkeade was not persuaded by the defendants' argument that the agreement also said the venture "shall be managed and controlled collectively by all the venturers" and that they had real powers such as calling meetings, the right to vote and the right to remove the managing venturer.
"Despite the Parvizian defendants' argument to the contrary, the court cannot find that the venturers had any real, actual powers based on the summary judgment record," Kinkeade wrote. "The only specific powers the Parvizian defendants reference, the ability to call a meeting and voting powers to remove the management venturer and to amend the [joint venture agreement] terms, require a certain percentage of joint venture interest. For example, the power to remove the managing venturer requires a 60 percent interest vote. The SEC's summary judgment evidence establishes the venturers had no information about each other and, therefore, no way to contact each other."
Kinkeade further pointed to the venturers being "inexperienced and unknowledgeable" in the oil- and gas-well business in establishing their "complete dependence" on the defendants.
Shamoil T. Shipchandler, director of the SEC's Fort Worth regional office, said the defendants used "illegitimate" joint venture structures to "conceal their fraud."
"The court confirmed what we maintained all along: that Parvizian and his colleagues misled investors about the nature of their investments, and that using a misleading characterization of investment vehicles will not escape SEC scrutiny," Shipchandler said in a statement Thursday.