Sec. & Exch. Comm'n v. Arcturus Corp.
| Decision Date | 07 January 2019 |
| Docket Number | No. 17-10503,17-10503 |
| Citation | 912 F.3d 786 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee v. ARCTURUS CORPORATION; Aschere Energy, L.L.C.; Leon Ali Parvizian, also known as Alex Parvizian; Robert J. Balunas; R. Thomas & Co., L.L.C.; Alfredo Gonzalez; AMG Energy, L.L.C., Defendants - Appellants |
| Court | U.S. Court of Appeals — Fifth Circuit |
Benjamin M. Vetter, U.S. Securities & Exchange Commission, Washington, DC, for Plaintiff-Appellee.
Otto K. Hilbert, II, The Law Offices of Otto K. Hilbert, II, Denver, CO, Teresa L. Ashmore, Robinson Waters & O'Dorisio, P.C., Denver, CO, for Defendants-Appellants ARCTURUS CORPORATION, ASCHERE ENERGY, L.L.C., LEON ALI PARVIZIAN, ROBERT J. BALUNAS, R. THOMAS & CO., L.L.C.
Joseph Marion Cox, Cheyenne Rogers, Bracewell, L.L.P., Dallas, TX, for Defendant-Appellant ALFREDO GONZALEZ, AMG ENERGY, L.L.C.
Before STEWART, Chief Judge, and DENNIS and WILLETT, Circuit Judges.
The Defendants—Leon Ali Parvizian, Alfredo Gonzalez, Robert J. Balunas, Arcturus Corp., Aschere Energy, LLC, R. Thomas & Co., LLC, and AMG Energy, LLC—sold interests in several oil and gas drilling projects to investors. They never registered the interests as securities. The SEC called foul and filed this civil enforcement action. Because the Defendants failed to register interests in their drilling projects as securities, the SEC alleged that they violated Sections 10(b) and 15(a) of the Securities Exchange Act ("Exchange Act"), 15 U.S.C. §§ 78j(b), 78o(a), Rule 10b-5, 17 C.F.R. § 240.10b-5, and Sections 5(a), 5(c), and 17(a) of the Securities Act ("Securities Act"), 15 U.S.C. §§ 77e(a), 77e(c), 77q(a). After roughly a year and a half of discovery, both parties filed motions for summary judgment. The district court granted the SEC’s motion, holding that the oil and gas interests qualified as securities. The Defendants now appeal. Because the Defendants raised significant issues of material fact, we reverse the district court’s decision and remand for trial.
This case involves seven defendants, three individuals—Leon Ali Parvizian, Alfredo Gonzalez, and Robert J. Balunas—and four companies—Arcturus Corp., Aschere Energy, LLC, R. Thomas & Co., LLC, and AMG Energy, LLC. Parvizian started three of the companies—Arcturus, Aschere, and AMG. He was also primarily responsible for running Arcturus and Aschere. Parvizian also founded AMG, but passed management on to Gonzalez, who has served as president since 2010. Balunas started and managed R. Thomas.
The Defendants offered and sold interests in six oil and gas drilling projects. Each project had a managing venturer that supervised and managed the day-to-day operations. The managing venturer also earned management fees paid by the project. Together, Arcturus and Aschere were the managing venturers of all six projects—Arcturus managed four, and Aschere managed two. (We refer to Arcturus and Aschere, collectively, as the "Managers.")
While Arcturus and Aschere managed the drilling projects, R. Thomas and AMG were primarily responsible for marketing and selling interests in the projects. Neither company controlled or operated the drilling projects beyond marketing, and neither company registered as a broker.
R. Thomas entered into a consulting agreement with Aschere. Under the agreement, R. Thomas earned a 12% commission on each new investor it introduced to the drilling projects.1 AMG had a similar consulting agreement with Aschere, under which it offered and sold interests in all six joint ventures in exchange for $500 per week for each AMG employee and a 12% commission on each venture unit sold.
When the Defendants were selling interests in the drilling projects, they sought investors through a nationwide cold-calling campaign. Potential investors came from a lead list that Parvizian purchased. If a potential investor expressed interest, the Defendants distributed five primary signing documents: (1) a Confidential Information Memorandum ("CIM"), which gave a detailed overview of the drilling project; (2) a copy of the Joint Venture Agreement ("JVA"), which laid out the contractual rights and duties of each party; (3) a screening questionnaire, which asked various questions about the investor’s education, investing history, and experience; (4) a Private Placement Memorandum ("PPM"), which was an advertising brochure for each drilling project with geological information, pricing, and potential returns; and (5) a subscription agreement, which served as the investor’s application. After signing these various documents, investors could then join a drilling project.
The drilling projects were split into multiple stages. First, in the capitalization stage, the Defendants sought investors for each individual drilling project. According to the signing documents, investors collectively would pay a fixed price for a "Turnkey Drilling Contract." The Manager of the drilling project would then use those funds to purchase a working interest in a prospect well, which would entitle it to drill, test, and complete the well. The working interest also entitled the project to a share of the well’s net revenue.
After capitalization, the drilling project would begin initial operations. Initial operations included the drilling and testing of the prospect well. The Manager of each drilling project was responsible for the initial operations. Aschere, for example, was responsible for managing the initial operations of the Conlee well. To complete the initial operations, the Manager would take the investors’ funds and subcontract with a drilling operator who would drill and test the well. The operator for each project was identified in the corresponding CIM.
After drilling and testing the well, the Managers would recommend whether or not to complete the well.2 The investors would then vote on the recommendation. If the investors voted in favor, then they would all be required to pay a completion assessment, which covered the cost of entering into a "Turnkey Completion Contract." If an investor did not pay the completion assessment, he abandoned his interest in the well, did not pay any further assessments, and had no right to any revenue.
After completion, the investors could elect, at the Manager’s recommendation, to engage in special operations. Special operations could include drilling deeper, fracking, or completing additional zones in the well. These operations were subject to special assessments. The investors could also choose to engage in additional operations, which were subject to additional assessments.
In December 2013, the SEC filed this civil enforcement action, alleging that the Defendants violated Section 5(a) and (c) of the Securities Act and Section 17(a) of the Exchange Act. The SEC argued that interests in these drilling projects qualified as securities, and the Defendants tried to avoid federal securities laws by calling the projects joint ventures and labeling the investors as partners. The Defendants argued that the projects were joint ventures because the investors had powers, rights, and management obligations. Both parties filed motions for summary judgment, and the district court granted the SEC’s motion.
The district court held that interests in the drilling projects were sold as securities pursuant to SEC v. W.J. Howey Co. , 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). The parties agreed that only one factor from Howey was in dispute—whether the investors expected to profit "solely from the efforts of" the Defendants. This factor is governed by Williamson v. Tucker , 645 F.2d 404 (5th Cir. 1981), which sets out three factors for determining whether investors expect to profit solely from third-party efforts. The drilling interests qualified as securities for three main reasons, which correspond to the three factors in Williamson . First, the district court held that the investors had no real power to control the venture. Despite having some powers in the JVAs, the court held that these powers were illusory because the investors had no way of contacting each other, and the Defendants would not provide contact information. Without the ability to communicate, they could not amass the votes they needed to control the drilling projects.
Second, the court held that the investors were inexperienced and lacked expertise in the oil and gas field. The investors lacked experience, according to the district court, because the Defendants marketed their drilling interests through a broad cold-calling campaign. The investors were also forced to rely on the Defendants to acquire all of their information.
Third, the court held that the investors were reliant on the Defendants. The Defendants controlled all of the investors’ assets, and a replacement manager could not access those assets—only the Defendants could. The investors also relied on the Defendants for all of their information.
This court reviews a district court’s grant of summary judgment de novo, using the same legal standard as the district court. Turner v. Baylor Richardson Med. Ctr. , 476 F.3d 337, 343 (5th Cir. 2007). Summary judgment is appropriate where there is no genuine issue of material fact and the parties are entitled to judgment as a matter of law. Id. All reasonable inferences must be drawn in favor of the nonmovant, but "a party cannot defeat summary judgment with conclusory allegations, unsubstantiated assertions, or only a scintilla of evidence." Id. (internal quotation marks omitted).
Under Section 5 of the Securities Act, it is "unlawful for any person, directly or indirectly" to use interstate commerce to offer to sell "any security" unless the person has filed a "registration statement" for the security.3 15 U.S.C. § 77e(c). The Securities Act broadly defines the term security to include a long list of financial instruments, including "investment contracts," the type of security at issue here. See 15 U.S.C. § 77b(a)(1). Whil...
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