Sec. & Exch. Comm'n v. Shields

• Decision Date: 24 February 2014
• Docket Number: No. 12–1438.,12–1438.
• Citation: 744 F.3d 633
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellant, v. Jeffory D. SHIELDS, a/k/a Jeffrey D. Shields; GeoDynamics, Inc., f/k/a or d/b/a GeoDynamics Exploration, Inc., Defendants–Appellees, and GeoDynamics, Inc. Johnston's Corner # 1 and # 2 Joint Venture; GeoDynamics, Inc. Huskies # 1 Joint Venture; GeoDynamics Exploration, Inc. Trumpeter # 1 and # 2 Joint Venture; GeoDynamics, Inc. EVDA # 1 Joint Venture; Floribama Oil Corporation; Carbotec, Inc.; Triton Energy Asset Management, Inc., d/b/a Triton Energy Asset Management, LLC; GeoDynamics Property Management, LLC; T.E.A.M. Property Management, LLC, d/b/a T.E.A.M. Property Management; S & P Energy, LLC; Aurum Energy Associates, LLC; Unum, LLC, Relief Defendants–Appellees. The American Energy Joint Venture Association, Amicus Curiae.

744 F.3d 633

SECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellant,

v. Jeffory D. SHIELDS, a/k/a Jeffrey D. Shields; GeoDynamics, Inc., f/k/a or d/b/a GeoDynamics Exploration, Inc., Defendants–Appellees,andGeoDynamics, Inc. Johnston's Corner # 1 and # 2 Joint Venture; GeoDynamics, Inc. Huskies # 1 Joint Venture; GeoDynamics Exploration, Inc. Trumpeter # 1 and # 2 Joint Venture; GeoDynamics, Inc. EVDA # 1 Joint Venture; Floribama Oil Corporation; Carbotec, Inc.; Triton Energy Asset Management, Inc., d/b/a Triton Energy Asset Management, LLC; GeoDynamics Property Management, LLC; T.E.A.M. Property Management, LLC, d/b/a T.E.A.M. Property Management; S & P Energy, LLC; Aurum Energy Associates, LLC; Unum, LLC, Relief Defendants–Appellees.The American Energy Joint Venture Association, Amicus Curiae.

No. 12–1438.

United States Court of Appeals, Tenth Circuit.

Feb. 24, 2014.

Susan S. McDonald, Senior Litigation Counsel (Anne K. Small, General Counsel; Michael A. Conley, Deputy General Counsel; Jacob H. Stillman, Solicitor; and Benjamin Vetter, Attorney, with her on the briefs), of the Securities and Exchange Commission, Washington, D.C., for Plaintiff–Appellant.

Paul H. Schwartz (Andrew R. Shoemaker and Alice Warren–Gregory, with him on the brief) of Shoemaker Ghiselli & Schwartrz LLC, Boulder, CO, for Amicus Curiae in support of Appellees.

Before BRISCOE, Chief Judge, SEYMOUR, and LUCERO, Circuit Judges.

SEYMOUR, Circuit Judge.

The Securities and Exchange Commission (“SEC”) brought this civil enforcement action against Defendant–Appellees Jeffory D. Shields, GeoDynamics, Inc. (“GeoDynamics”), and several other business entities affiliated with Mr. Shields, alleging securities fraud in connection with four oil and gas exploration and drilling ventures Mr. Shields, as managing partner of GeoDynamics, marketed to thousands of investors nationwide as Joint Venture Agreements (“JVAs”). The district court granted defendants' Fed.R.Civ.P. 12(b)(6) motion to dismiss. The SEC appeals, contending that despite their labels as JVAs, the investment agreements are actually “investment contracts” and thus “securities” subject to federal securities regulations as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934 (collectively, the “Securities Acts”). Because it cannot be said as a matter of law that the investments at issue are not “investment contracts,” we reverse.

I

“In a securities case, we may consider, in addition to the complaint, documents incorporated by reference into the complaint, public documents filed with the SEC, and documents the plaintiffs relied upon in bringing suit.” Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190, 1196 (10th Cir.2013); see also Prager v. LaFaver, 180 F.3d 1185, 1189 (10th Cir.1999) (on review from grant of 12(b)(6) motion, court may consider documents referred to in complaint that are “central to [the plaintiff's] claim”). The following facts are taken from the factual allegations in the SEC's complaint together with the offering documents central to this case.

Mr. Shields is a resident of Larkspur, Colorado.¹ In September 2009, he formed GeoDynamics, a Colorado corporation with its principal place of business in Centennial, Colorado. According to the SEC, in order to fund GeoDynamics, Mr. Shields initially obtained money by offering and selling more than five million dollars worth of interests in four purported oil and gas exploration and drilling joint ventures to sixty investors across twenty-eight states. Four of these joint ventures are at issue in this case, including: Johnston's Corner, created in January 2010 and sold by GeoDynamics as Johnston Corner # 1 and # 2 Joint Venture; Huskies, created in April 2010 and sold by GeoDynamics as Huskies # 1 Joint Venture; Trumpeter, created in August 2010 and sold by GeoDynamics as Trumpeter # 1 and # 2 Joint Venture; and EVDA, created in May 2011 and sold as EVDA # 1 Joint Venture.²

Mr. Shields' sales strategy included marketing these oil and gas exploration and drilling ventures by making nationwide cold calls to thousands of members of the general public and promising investors annual returns between 256% and 548%. According to the SEC's investigation, Mr. Shields initially solicited investors by making cold calls himself. By 2010, however, he had hired and was supervising more than a dozen salespersons, each making over 400 boiler room cold calls a day to potential investors. As a result of this sales strategy, investors were spread out across the entire country and had no prior relationship or contact with each other.

Mr. Shields, as managing partner of GeoDynamics, specifically marketed these investments to members of the general public with little or no experience in the oil and gas exploration business. During these sales pitches, the SEC contends, Mr. Shields and his staff would specifically emphasize “the capabilities and unique qualifications of GeoDynamics as an experienced oil and gas driller and operator.” Aplt.App. at 34–35 ¶ 83. If an investor seemed interested after the pitch, Mr. Shields would send the investor a packet of offering documents which included: Confidential Information Memoranda (“CIMs”), which explained how the venture would operate; one or more of the JVAs; and a Monthly Income Conversion Table that outlined the expected annualized profits for each purported joint venture.³

The offering documents state “the Venturers will have all of the rights and will be subject to all of the liabilities of a General Partner under” Texas law, id. at 104, and also note that GeoDynamics, as managing venturer, “takes the position that the joint venture interest are not securities,” id. at 19 ¶ 26. Under the agreements, investors “expressly delegate[d] management of the day-to-day Operations of the Joint Venture[s]” to GeoDynamics as managing venturer. Id. at 73 ¶ 4.1. GeoDynamics had broad powers to bind the joint ventures by executing agreements and contracts on their behalf and spending funds raised, and had exclusive power to interpret ambiguous provisions of the JVAs. Notably, no investor had any power to bind the joint ventures.

Investors did have the right to vote on certain matters, including the right to remove the managing venturer by a vote of 51% “in interest” of the venturers, id. at 77 ¶ 5.7, and the right to terminate the partnership. They also had the right to develop procedures for partnership meetings, amend the partnership agreements, and call partnership meetings. In addition, investors maintained the right to inspect the accounting records and reports which, under the JVAs, the managing venturer was required to provide to them, including annual reports concerning the status of each venture. But the SEC alleges that Mr. Shields denied investors access to information, including financial statements and reports for each joint venture, even when investors specifically requested the information. Moreover, the SEC alleges Mr. Shields consistently lied to investors on conference calls in an attempt to keep them misinformed, raise more money, and prevent them from challenging his actions.

When an investor purchased an interest in one of the four purported joint ventures, he or she would wire the funds or send a check to the GeoDynamics account associated with the joint venture interest purchased. The offering documents stated that funds raised for a specific venture would be deposited in a separate account for each respective venture, and also explained that investors' funds would be used to pay for the cost of drilling and completing the wells under the provisions of the “turnkey” contracts executed solely with GeoDynamics. Indeed, investors were required to enter into “turnkey” drilling and completion contracts with GeoDynamics in order to invest in any one of the ventures.⁴These provisions of the offering documents essentially locked investors into drilling and completion contracts exclusively with GeoDynamics, who unilaterally set the contract prices before an investor purchased an interest in the venture.

Notwithstanding the terms of the agreements, the SEC alleges that Mr. Shields and GeoDynamics commingled all funds raised through investors and deposited the money directly into accounts controlled by Mr. Shields. GeoDynamics' Chief Financial Officer “admitted in testimony during the SEC's investigation that there were no internal controls in place, and that she made no effort to segregate funds of the respective joint ventures. Instead, at Shields' direction, GeoDynamics' CFO used funds from any available source to pay Shields' personal expenses, GeoDynamics' administrative expenses, and various operational expenses as they came due,” Aplt.App. at 30 ¶ 73, regardless of whether they were related to the joint ventures. In fact, of the roughly five million dollars raised from investors, over two million went directly to Mr. Shields to pay for extravagant personal expenses, luxury items, and cash withdrawals.⁵

Mr. Shields used an additional two million dollars of commingled investor funds for general business expenses, which vastly exceeded the amount the managing venturer was allowed to receive as monthly reimbursement under the offering documents. In all, of the roughly five million dollars raised by Mr. Shields and GeoDynamics, only $613,494 went to oil and gas development as of April 2011. In fact, GeoDynamics never finished the drilling work planned for in the offering materials, failed to produce any commercial quantities of oil or gas, and made no payments to investors involved in any of the four purported joint ventures. The SEC alleges Mr. Shields and GeoDynamics' fraud “is ongoing,” and that they continued to raise funds for EVDA and “solicited investors for purported ‘completion funds' for Trumpeter” and Huskies as recently as June 2011. Aplt.App. at 14 ¶ 6.

In September 2011, the SEC filed suit against Mr. Shields, GeoDynamics, the four joint...