SEC Charges Promoters of Notes Backed by Gold Mine, U.S.

When it is to good to be true, it almost always is. But returns of 53% to 120%, backed by millions of ounces of gold and bonds from the U.S. and Bank of America? Too hard to resist. Investors paid their cash; the promoters spent it, largely on themselves; the SEC claimed fraud. SEC v. Jenkins, Civil Action No. 4:16-cv-00402 (D. Idaho Filed Sept. 7, 2016).

The action centers on selling the promissory notes of Arco Hills Silica Company, a firm based in Idaho Falls, Idaho, supposedly searching for financing to develop its minerals. Defendant Gordon Jenkins was the firm’s only officer and director. He solicited investors, along with defendants Theodore Sweeten and Francis Kreais. They were assisted by Craig Parkinson of Parkinson Geologic Services, also a defendant.

In January 2012 Messrs. Jenkins and Sweeten approached Mr. Kreais about soliciting investors for Arco Hills. The proposal was to raise sufficient capital to secure long term financing. That financing, in turn, would be used to move the mine into production.

Production would be profitable. Arco Hills held 119 mining claims worth about $6.8 billion, according to a report of Geologist Parkinson. The report, prepared in 2010, was supposedly in accord with National Instrument 43-101, a set of standards governing the preparation of reports on mining properties. According to the report, the Arco Hills mining claims held 460 million ounces of gold that would be worth $805 billion. The property also held about 20 billion tons of high quality silica that could be sold for $20 to $30 per ton. Problem was, the report was not 43-101 compliant. To the contrary, it was a fraud.

Defendants offered investors promissory notes with high rates of return, guaranteed against loss and which were indemnified. The promissory notes were to repay the principle amount along with 53% to 120% interest within days of obtaining the necessary financing. The notes were guaranteed against loss by one of the Arco Hills claims which had significant value, according to Mr. Parkinson’s report.

The notes were also indemnified by bonds issued by the U.S. Department of the Treasury and Bank of America. Mr. Kreais obtained a $350 million bond purportedly backed by Treasury in 2012. When the bond was submitted for payment the Department declined, noting in an email that it was bogus. Treasury forwarded the bond to the IRS Criminal Investigation division. While Kreais, Jenkins and Sweeten were aware of these facts, they told investors that the notes were backed by the bond.

Over $500,000 was raised from 12 investors in several states through cold calls, marketing meetings in investor homes and emails. Claims about the potential interest to be paid, the collateral for the notes and its value, the bond and the overall value of the mineral claims were central to the sales pitch. In promoting the notes investors were not provided with a private placement memorandum, financial statements, accreditation documents or a copy of Parkinson’s report.

Defendants misappropriated most of the investor funds. The complaint alleges violations of Securities Act Sections 5(a) and 5(c), each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a).

Each defendant settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. In addition, Mr. Jenkins will pay disgorgement of $82,757.06, prejudgment interest and a penalty equal to the amount of the disgorgement; Mr. Sweeten will pay disgorgement of $227,702.32, prejudgment interest and a penalty equal to the amount of the disgorgement; Mr. Kreais will pay disgorgement of $112,077.20, prejudgment interest and a penalty equal to the amount of the disgorgement; and Mr. Parkinson will pay disgorgement of $10,000, prejudgment interest and a penalty of $40,000. See Lit. Rel. No. 23638 (Sept. 7, 2016).

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