SEC Prevails in Offering Fraud Action
The SEC prevailed in an offering fraud case against the promoters of an oil and gas investment scheme. The court granted summary judgment in favor of the Commission. SEC v. Downey, Civil Action No. 1:14-cv-00185 (N.D. Tex. Nov. 20, 2014).
The action was brought against Paul Downey, Jeffry Downey (father and son) and the principals of Quest Energy Management Group, Inc., and John Leonard who acted as a salesman. From January 2010 through May 2011 the father and son sold the preferred stock of Quest and limited partnership units in Permaian Advanced Oil Recovery Investment Fund I, LP, according to the complaint. Investors were told that the LP would acquire working interests in oil and gas leases from Quest and receive revenue from those leases. About $4.8 million was raised from 17 investors. In fact the representations were false. The PPM did not provide accurate financial information or fully describe the use of the proceeds. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a).
The court granted the Commission’s motion for summary judgment as to all defendants but in separate orders. In the order as to the Downey defendants, the court first concluded that the limited partnership interests were securities. The Commission’s claim was supported by voluminous evidence, according to the court. At the same time the “Downey Defendants have failed to come forward with any evidence or argument that creates a genuine issue of material fact that would thereby preclude the granting of summary judgment . . .” according to the order.
The Court went on to find in favor of the SEC on its fraud claims, centered on the sale of the interests. At the time of the sales “there was a receivership involving other entities with which the Downeys were involved (including the operating general partner of the limited partnership), and the Downeys failed to inform investors of the receivership and how it could impact the investors by recovering over five million dollars from the operating general partner.” There were, in addition, other misrepresentations including about the use of proceeds, the court concluded. The court thus found violations of Securities Act Section 17(a) and Exchange Act Section 10(b).
Finally, the court found in a separate order that defendant Leonard acted as an unregistered broker in selling the securities. This is reflected by the over $400,000 in commissions he was paid for selling over $4 million in limited partnership units to 13 investors. He solicited those investors in person, by phone and through emails, recommending the investment. Accordingly, the Court found violations of Exchange Act Section 15(a).
The court had established a briefing schedule regarding remedies. See Lit. Rel. No. 23608 (July 29, 2016).