HOUSTON (CN) - Admitted perpetrators of an oil-and-gas Ponzi scheme must disgorge $5.5 million, a federal judge ruled, but the Securities and Exchange Commission cannot tack on prejudgment interest and penalties.
From March 2008 to February 2009, Rockwell Energy of Texas, Rockwell Energy Management and their owners raised about $5.5 million from investors in their two oil-and-gas investment funds, Rockwell Energy Production and Acquisition Fund LP and Rockwell Energy Acquisition Fund.
Both funds claimed the entities would invest in gas wells and enhance production with green technology. But one of the funds made minimal investments in gas wells, and the other made no such investments.
Despite promises of 18 percent annual returns, the funds did not generate enough revenue to pay the returns.
As new investments came in, fund managers distributed that money to older investors through sham transactions designed to simulate the promised returns.
Of the $5.5 million the funds raised from investors, Rockwell salespeople pocketed about $2.3 million in commissions, and other sales fees, according to the SEC.
The commission sued the Rockwell companies and their owners, alleging they defrauded investors through the sale of unregistered securities.
Individual defendants included Gregory Shindler, who owned and controlled the two funds at issue; Bradley James, who co-owned the second fund with Shindler until his December 2008 resignation; and Stuart Rawitt, who allegedly made about $275,000 by selling interest in the second fund.
Rockwell, its subsidiary and the three individuals consented to the entry of a judgment permanently enjoining them from further securities violations.
Court-appointed special master Kelly Crawford currently controls the companies and is liquidating the fund assets to satisfy investors' claims.
Last week, U.S. District Judge Keith Ellison refused to reduce James and Shindler's disgorgement liability by the amount they spent on valid business expenses for the funds, or based on their inability to pay.
"Neither James' and Shindler's legitimate business expenses nor their inability to
pay persuades the court to decline to award disgorgement, or to adjust downward the figure developed by the special master," Ellison wrote. "Thus, the court finds that RET and Shindler are jointly and severally liable for $3,245,886, the amount fraudulently raised for Fund I. REM and Shindler are jointly and severally liable for $1,852,249, the amount fraudulently raised for Fund II. Finally, James is jointly and severally liable for $880,780, the proportionate amount of his responsibility for Fund II."
Rawitt argued that his "less 'inappropriate' conduct should warrant a reduction in disgorgement." He also pointed to business expenses, and his alleged net worth of $7,800 as of June 30, 2011, as a basis for reduced liability.
Ellison nevertheless ordered him to disgorge the $275,000 demanded by the SEC.
Financial insolvency and cooperation with the SEC did persuade Ellison to reject claims for prejudgment interest and civil penalties.
"James' and Shindler's financial conditions are bleak, and the court cannot see what purpose the imposition of penalties would serve as against these defendants," he wrote. "In light of these factors and the court's award of full disgorgement, the court declines to impose additional civil penalties, and expresses its sincerest hope that defendants have learned from this experience."
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