F.T.C. v. Atlantex Associates, 87-6106

• Decision Date: 15 May 1989
• Docket Number: No. 87-6106,87-6106
• Citation: 872 F.2d 966
• Parties: 1989-1 Trade Cases 68,585 FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. ATLANTEX ASSOCIATES, Dunn Petroleum, Inc., Petro Fund Corporation, Jaset Petroleum, Inc., Stephen Tashman, Michael Dundee, Archie Tashman, James Settembrino, Ernest Lockamy, Defendants- Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 966

872 F.2d 966

1989-1 Trade Cases 68,585

FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. ATLANTEX ASSOCIATES, Dunn Petroleum, Inc., Petro Fund

Corporation, Jaset Petroleum, Inc., Stephen

Tashman, Michael Dundee, Archie Tashman,

James Settembrino, Ernest

Lockamy,

Defendants-

Appellants.

No. 87-6106.

United States Court of Appeals,

Eleventh Circuit.

May 15, 1989.

Andrew C. Hall, Hall & O'Brien, Miami, Fla., for defendants-appellants.

Truett M. Honeycutt, Harold E. Kirtz, Atlanta, Ga., Ernest J. Isenstadt, F.T.C., Joanne Levine, Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before KRAVITCH and HATCHETT, Circuit Judges, and MARKEY ^*, Chief Circuit Judge.

KRAVITCH, Circuit Judge:

The Federal Trade Commission ("FTC") brought this action for consumer restitution under sections 5(a) & 13(b) of the Federal Trade Commission Act, 15 U.S.C. Secs. 45(a), 53(b), against defendants-appellants Atlantex Associates ("Atlantex"), Dunn Petroleum, Inc. ("Dunn"), Petrofund Corp. ("Petrofund"), Jaset Petroleum, Inc. ("Jaset"), Stephen Tashman, Michael Dundee, Archie Tashman, James Settembrino, and Ernest Lockamy for deceptive trade practices in conjunction with appellants' promotions and sales of partnership interests in oil and gas ventures and in a "Teen Disco." After a bench trial, the district court ordered restitution in the amount of $12,175,250.00 and enjoined appellants from carrying on similar activities in the future. We affirm.

I. FACTUAL BACKGROUND

Atlantex was an unincorporated association that sold investments in oil and gas drilling ventures and in a teen discotheque. Petrofund is Atlantex' corporate successor. Atlantex and Petrofund recruited investors and coordinated the formation of drilling partnerships that, in turn, contracted for drilling and development of oil and gas sites. Dunn is a Florida corporation that leased all the drilling sites and performed all drilling services for partnerships organized by Atlantex. Jaset is a Florida corporation that leased all drilling sites and provided all drilling services for partnerships organized by Petrofund. Defendants Stephen and Archie Tashman, Dundee, Settembrino and Lockamy acted as officers, and/or sales representatives for one or more of the aforementioned entities.

Atlantex and Petrofund recruited investors by purchasing address lists and conducting mass mailings. The "lead" mailings asked consumers to complete and return "lead" cards. Salesmen then made "front calls" to potential customers. During such calls, salesmen would screen potential customers for investment interest and financial capability. A sales brochure, a partnership agreement, a signature page, and a map of the lease area then would be sent to each potential investor. Later, a salesman would make "drive" calls, the principal oral sales presentations, which recited printed sales scripts in order to complete sales of partnership interests. When enough investors signed on to capitalize a particular program, a partnership would be formed, a managing partner would be elected, and a drilling contract would be concluded with Dunn or Jaset. Appellants employed similar methods to solicit investment in a "Teen Disco" partnership. Consumers invested $11,350,250 in Atlantex and Petrofund oil schemes and $825,000 in Teen Disco.

The FTC commenced this action on January 12, 1987 by filing a complaint, which alleged that appellants had sold partnership interests by employing deceptive trade practices, and a motion for an ex parte temporary restraining order, which sought to freeze the assets of all defendants in order to preserve a pool of funds for eventual consumer restitution. The district court granted the TRO, which provided, in part:

IT IS FURTHER ORDERED that, notwithstanding the [freezing of defendants' assets], that individual defendants Stephen Tashman, Michael Dundee, Archie Tashman, James Settembrino, and Ernest Lockamy may withdraw an amount no greater than $400.00 per week from their personal funds for their personal living expenses. Defendants may apply to the Court, after notice of three (3) business days to the Federal Trade Commission, for permission to make further withdrawals for reasonable personal or business expenses upon a proper showing of necessity.

After a hearing, which was held on January 21, 1987, the court extended the TRO and ordered consolidation of the hearing on the FTC's motion for a preliminary injunction and the trial on the merits. On November 25, 1987, the district court entered its final judgment, concluding that defendants-appellants used various misrepresentations to induce consumers to invest in their partnership ventures and that those misrepresentations constituted deceptive trade practices for which the defendants were jointly and severally liable.

Specifically, although Dunn and Atlantex were represented as separate, independently operating companies conducting business at arms length, the district court found: (1) that Stephen Tashman, who was the treasurer of Dunn, was a key decision maker of both Atlantex and Petrofund who hired and fired Atlantex salespeople, attended Atlantex sales meetings, wrote the Atlantex drive script, and helped to draft the Petrofund sales brochure; (2) that defendant Dundee, who was the president of Dunn, also participated in Atlantex activities, attended sales meetings, did "feeds" and made "in the mail calls," using the name Mike Sawyer to assure consumers that profit-distribution checks were "in the mail;" (3) that Settembrino, ostensibly of Atlantex, also performed duties for Dunn, such as representing Dunn in discussions and negotiations with geologists; (4) that Dunn and Atlantex occupied the same suite and shared a common reception room, common hallways and a common kitchen at an address used on the tax returns of each company.

The court also found that, although appellants represented that Atlantex would not receive any money from the partnership wells until investors had recovered their initial investments, Atlantex made considerable sums before the partners received any profits, as it retained from 35% to 40% of the partners' capital investment as "organizational fees and administrative costs." Further, the court found that actual production and resulting income were far less than promised, as income predictions presented to consumers were based upon obviously unrealistic production forecasts. Moreover, although the court found that Atlantex salesmen told prospective investors that Atlantex eliminated the risks of oil exploration by carefully selecting drilling locations, drilling a second or third well, studying reserve reports, and employing the most capable drillers with the best equipment, the court found also that oil drilling can never be risk free, as dry holes can occur, reserve reports are, at best, informed estimates, and mechanical problems, or other production-stopping or delaying events, may occur. Additionally, the court found that consumers were led to believe that wells drilled for partnerships in which they had invested were successful but that these representations frequently were made at the same time (or shortly before) consumers were urged to invest in new partnerships. The court found that, despite the failures of some wells, Settembrino informed investors that the wells were great successes.

The court found that Stephen Tashman and Settembrino solicited consumer investments in Teen Disco by representing that the project presented almost no risk to investors and that it would sell sixty franchises in eighteen months at a price of $50,000 per franchise, returning consumers' entire investments in less than one year. The court found that only one franchise actually was sold, and that, in December 1986, after eleven months of operation, Stephen Tashman, who owned no partnership interest in Teen Disco, terminated the business. The court found that the Teen Disco partners lost almost all of their investments.

In light of its findings, the district court enjoined appellants from engaging in similar enterprises in the future and ordered appellants to pay consumer restitution of $12,175,250, an amount equal to the total consumer investment in the oil and Teen Disco schemes. This appeal followed.

II. DISCUSSION

Appellants' primary contention is that the district court denied them due-process of law by failing to exempt from its pre-judgment, asset-freeze order sufficient funds to enable them to hire geological and accounting experts to aid in preparation of a defense and to testify at trial. They also assert that the court abused its discretion by failing to hold a separate trial to determine the proper amount of consumer restitution and by failing to set off certain sums against the amount of restitution ordered. Finally, appellants argue that the district court's...