Energytec, Inc. v. Proctor

• Decision Date: 30 April 2007
• Docket Number: Civil Action No. 3:06-CV-871-L.,Civil Action No. 3:06-CV-933-L.
• Citation: 516 F.Supp.2d 660
• Parties: ENERGYTEC, INC., a Nevada Corporation, Plaintiff, v. Philip M. PROCTOR, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

516 F.Supp.2d 660

ENERGYTEC, INC., a Nevada Corporation, Plaintiff, v. Philip M. PROCTOR, et al., Defendants.

Civil Action No. 3:06-CV-871-L.

Civil Action No. 3:06-CV-933-L.

United States District Court, N.D. Texas, Dallas Division.

April 30, 2007.

COPYRIGHT MATERIAL OMITTED

Jeffrey M. Tillotson, Christopher J. Schwegmann, Richard A. Smith, Lynn Tillotson & Pinker, Dallas, TX, Erik A. Christiansen, Margaret Niver McGann, Parsons Behle & Latimer, Salt Lake City, UT, for Plaintiff.

Nicholas Even, Christopher E. Kirkpatrick, M. Elisabeth Rain, Haynes & Boone, Eric W. Buether, Christopher H. Rentzel, Kevin T. Schutte, Bracewell & Giuliani, Dallas, TX, Thomas L. Taylor, III, Winstead Sechrest & Minick, Kim Bernard Battaglini, Greenberg Traurig LLP, Houston, TX, for Defendants.

MEMORANDUM OPINION AND ORDER

SAM A. LINDSAY, District Judge.

Before the court are: (1) Defendant Philip M. Proctor's Motion to Dismiss Plaintiff's First Amended Consolidated Complaint, filed September 12, 2006; (2) Defendant Cole's Motion to Dismiss Plaintiff[']s First Amended Consolidated Complaint, filed September 21, 2007; (3) Motion to Dismiss Plaintiff's First Amended Consolidated Complaint by Defendants Raymond J. Vula and Alice G. Vula, filed September 24, 2006; and (4) Motion to Dismiss Plaintiff's First Amended Consolidated Complaint by Defendants John J. Petito, Melvin R. Seligsohn and Sam Miller, filed September 25, 2006. After careful consideration of the motions, responses, reply and applicable authority, the court grants in part and denies in part Defendant Philip M. Proctor's Motion to Dismiss Plaintiff's First Amended Consolidated Complaint; denies Defendant Cole's Motion to Dismiss Plaintiff[']s First Amended Consolidated Complaint; grants in part and denies in part Motion to Dismiss Plaintiff's First Amended Consolidated Complaint by Defendants Raymond J. Vula and Alice G. Vula; and grants in part and denies in part Motion to Dismiss Plaintiff's First Amended Consolidated Complaint by Defendants John J. Petito, Melvin R. Seligsohn, and Sam Miller

I. Procedural and Factual Background

This is a securities fraud action brought by Plaintiff Energytec, Inc. ("Plaintiff' or "Energytec") against Frank W. Cole ("Cole"), its former Chairman, Chief Executive Officer and Chief Financial Officer; Josephine Jackson ("Jackson"), Cole's executive assistant; Philip M. Proctor ("Proctor"), a licensed broker; and several unlicensed brokers, including Alice Vula ("Ms.Vula"), Raymond J. Vula ("Mr.Vula") Sam Miller ("Miller"), John J. Petito ("Petito"), and Melvin R. Seligsohn ("Seligsohn"), many of whom were Cole's friends and business associates.¹ Defendants Proctor, Ms. Vula, Mr. Vula, Miller, Petito, and Seligsohn are referred to herein as the "Broker Defendants." Energytec seeks to recover monetary damages incurred after the discovery of an allegedly fraudulent scheme perpetrated by Cole, Jackson and the Broker Defendants, whereby the Broker Defendants are alleged to have illegally sold Energytec securities to obtain unauthorized illegal commission payments from Energytec and/or to artificially inflate the price of Energytec's publicly traded securities.

A. Energytec's Claims against Cole

Energytec has asserted five causes of action against Cole: (1) violation of section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; (2) breach of fiduciary duty; (3) common law fraud; (4) misappropriation of corporate opportunities; and (5) interference with economic relations. Pursuant to Rules 12(b)(1), 12(b)(6), and 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Cole moves to dismiss all claims brought against him.

B. Energytec's Claims against the Broker Defendants

Energytec has asserted three claims against all of the Broker Defendants: (1) violation of section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; (2) violation of Texas securities laws; and (3) common law fraud-fraudulent concealment. Energytec has asserted a claim against all of the Broker Defendants except Proctor for violation of section 15(a) of the Securities and Exchange Act of 1934. Finally, Energytec has asserted a claim of interference with economic relations against Petito, Seligsohn, and Mr. Vula. Pursuant to Rule 12(b)(6), Proctor has moved to dismiss all claims brought against him. Mr. Vula and Ms. Vula have moved to dismiss all claims brought against them pursuant to Rules 12(b)(1), 12(b)(6), 9(b), and the PSLRA. Petito, Miller, and Seligsohn have moved to dismiss all claims brought against them pursuant to Rules 12(b)(6) and 9(b).

C. Factual Background

As set forth in the next section, for purposes of a motion to dismiss, the court assumes all well-pleaded facts in the First Amended Complaint ("Complaint") to be true. The Complaint alleges that Cole formed Energytec in July 1999 for the purpose of engaging in oil and gas producing activities. Compl. ¶ 24. As part of these activities, Energytec and its investors hold "working interests in certain oil and gas properties located in Texas and Wyoming." Id. ¶ 24. From July 1999 through March 2006, Cole served as Chairman, Chief Executive Officer and Chief Financial Officer for Energytec. Id. ¶ 25. During that time, Jackson served as his executive assistant. Id. Cole and Jackson controlled Energytec's bank accounts and financial records. Id. ¶ 70. Energytec alleges that at some point in time it discovered unlawful acts in violation of state and federal securities laws by Cole, Jackson and the Broker Defendants. Id. ¶ 26. On March 18, 2006, Energytec's Board of Directors removed Cole as Chairman, CEO and CFO of Energytec, and removed Jackson from her position. Id. ¶ 27.

With regard to the details of the alleged scheme, Plaintiff alleges:

This case involves a rogue CEO, CFO and Chairman of a publicly traded company — Mr. Cole — who, with the direct participation of a group of unregistered and thus unregulated brokers and others, developed a scheme to raise millions of dollars very quickly from numerous investors, including small and unsophisticated investors, in numerous states. The scheme could not have succeeded without Mr. Cole's concealment of the scheme and related actions from[:] the Board of Directors, the SEC, and the Company's auditors, and could not have succeeded without the active participation and knowledge of the other Defendants.

The heart of the scheme was that although individual investors were making an investment in oil wells, and properly should have been paid profits or losses based on the actual performance of the individual wells in which they invested (i.e., whether it was a producing or non-producing well), Mr. Cole instead arranged for each investor to be paid a "profit" that exactly matched preinvestment projections given to investors, regardless of the performance of the individual wells in which each person invested. Mr. Cole arranged for the payments to the investor in this way so the investor would believe the investment was an easy and risk-free return on the oil well investment. The investor would then be more likely to purchase more working interests and tell his or her friends, family and colleagues about the opportunity, and the easy money to be had.

The other Defendants knew about this guaranteed "profit" scheme and, in fact, working with Mr. Cole developed the scheme and the manner in which it was sold. The Broker Defendants were the marketing department for the scheme, and directly solicited the investors to put their money into this Ponzi-like scheme, where new investor money was used to pay early investors phony "profits." [...]

The motive for this scheme was simple greed. Mr. Cole and other defendants held substantial shares of stock in the Company, and the Broker Defendants were paid millions of dollars in illegal commissions to act as the sales team for this Ponzi-like scheme. As the volume and dollars invested in the Company grew, the value of Mr. Cole's holdings in the Company and the holdings of other defendants grew.

Id. ¶¶ 15-18. Having set forth Energytec's allegations regarding the nature of the alleged scheme to defraud, the court now looks more specifically at the allegations against the moving defendants.

1. Allegations against Cole

In addition to the allegations regarding the scheme as outlined above, the Complaint also includes various other allegations against Defendant Cole. Specifically, Energytec has alleged that Cole, with Proctor and Jackson, established a scheme whereby Proctor sold working interests to investors located by Proctor, who was paid commissions. Compl. ¶ 29. Energytec alleges that the scheme expanded in January 2002 with the addition of Mr. Vula, and ultimately included all of the Broker Defendants. Id. ¶¶ 29-30. Energytec has alleged that Cole knew or had reason to know that many of the individuals purchasing working interests and/or stock were unaccredited investors. Id. ¶ 31. The Complaint maintains that Cole kept the sales, the nature of the investors, and the commissions paid to the Broker Defendants secret from Energytec and that he represented that the sales were legal, and the Complaint identifies eleven specific instances of omissions by Cole to the Energytec board of directors. Id. ¶ 32. The secret commission agreements ultimately resulted in the payment of more than $7 million to the Broker Defendants, payments that were usually not described as commissions to brokers, but rather as "consulting services," "legal fees," or "acquisition fees." Id. ¶ 34. On at least two occasions, as alleged by Energytec, Cole was informed by an Energytec employee that these commission payments were unlawful. Id. ¶¶ 53, 60. Nevertheless, Cole, with Jackson, allegedly issued the checks to the Broker Defendants. Id.

Energytec has made multiple allegations of public misrepresentations by Cole....