State ex rel. Day v. Petco Oil & Gas, Inc., s. 49054 and 49806

• Decision Date: 11 January 1977
• Docket Number: Nos. 49054 and 49806,s. 49054 and 49806
• Citation: 558 P.2d 1163
• Court: Oklahoma Supreme Court
• Parties: Blue Sky L. Rep. P 71,329 STATE of Oklahoma ex rel. Bruce W. DAY, Administrator of the Department of Securities and for the Oklahoma Securities Commission, Appellee, v. PETCO OIL & GAS, INC., a Texas Corporation, Appellant. PETCO OIL & GAS, INC., a Texas Corporation, Petitioners, v. David M. COOK, Judge of the District Court of Oklahoma County, Respondent.

Page 1163

558 P.2d 1163

Blue Sky L. Rep. P 71,329

STATE of Oklahoma ex rel. Bruce W. DAY, Administrator of the

Department of Securities and for the Oklahoma

Securities Commission, Appellee, v. PETCO OIL & GAS, INC., a Texas Corporation, Appellant.

PETCO OIL & GAS, INC., a Texas Corporation, Petitioners, v. David M. COOK, Judge of the District Court of Oklahoma

County, Respondent.

Nos. 49054 and 49806.

Supreme Court of Oklahoma.

Jan. 11, 1977.

Appeal from the District Court of Oklahoma County; David M. Cook, trial judge.

Original proceeding on application to assume original jurisdiction and petition for writ of prohibition.

This appeal involves an action brought by the State Securities Commission against Petco Oil and Gas, Inc., asserting that Petco, which sold undivided fractional interests in oil and gas leases coupled with a management agreement, was selling unregistered securities, had not registered as broker dealers with the Commission, were making misleading statements to potential investors, and failing to provide investors with all material information needed to make an informed investment decision. The Commission, among other things, asked that the trial court restrain and enjoin Petco from selling or offering to sell oil and gas lease interests coupled with an operation agreement. Additionally, the Commission asked that the trial court appoint a receiver or conservator to take into his immediate custody the assets and property and other possessions of Petco.

The trial court granted the relief sought by the Commission, and Petco made a direct appeal from the court's granting of a temporary injunction (Case No. 49,054). Additionally, Petco filed an Application for Writ of Prohibition (Case No. 49,806), asking that the trial court be prohibited from further enjoining their actions. For convenience, we will treat the cases as consolidated in this opinion.

Holding that the leasehold interests sold by Petco, when coupled with an operation or management agreement which deprives the investors of any control over the investment, constituted a security under the Oklahoma Securities Act, we uphold the action of the trial court.

ACTION IN CASE NO. 49,054 AFFIRMED and ORIGINAL JURISDICTION ASSUMED AND WRIT OF PROHIBITION DENIED IN CASE NO. 49,806.

Joseph C. Long, Norman, Michael R. Mallonee, Oklahoma Securities Commission, John E. Brewster, Jr., Oklahoma City, for appellees.

Gerald M. Birnberg, Bellaire, Tex., Michael A. Maness, Houston, Tex., for appellant.

Lewis Barber, Jr., Oklahoma City, for appellant and petitioner.

James O. Goodwin, Tulsa, for petitioner.

Bruce W. Day, Oklahoma Securities Commission, Oklahoma City, for respondent.

DAVISON, Justice:

Appellant corporation, Petco Oil and Gas Incorporated, promotes and sells undivided small fractional interests in oil and gas properties, coupled with an operating agreement.

In September, 1975, the Oklahoma Securities Commission initiated an investigation into the operations of Petco and other companies engaged in the sale of undivided fractional oil and gas interests in the State of Oklahoma.

Pursuant to its investigative powers, the Commission issued and served upon appellant corporation a subpoena duces tecum ordering that certain corporate records be produced.

In response to the subpoena issued, Petco's counsel appeared and denied the Securities Commission's authority to further proceed with its investigation on the grounds that the oil and gas interests sold by Petco were not 'securities' under Oklahoma law and therefore were not within the regulatory or investigative jurisdiction of the Commission.

Shortly thereafter, the Commission instituted a suit against Petco in the District Court of Oklahoma County alleging, among other things, that Petco was engaged in the sale and the offering for sale of unregistered securities, that Petco through its agents and officers was employing 'devices, schemes, or artifice to defraud, or making untrue statements of material facts and omitting statements of material facts necessary to keep from misleading prospective purchasers.' In its petition, the Commission prayed that Petco be enjoined and restrained from: (1) Issuing, offering or selling any undivided interests or participation in oil and gas leases which are coupled with operating agreements, (2) acting as unregistered securities agents and/or broker dealers, (3) making false and misleading statements or failing to disclose material facts, and (4) violating the advertising, filing and approving provisions of the Oklahoma Securities Act. Additionally, the Commission prayed that the court appoint an equity receiver or conservator to take into his immediate custody, control and possession the assets and property belonging to or in the possession of Petco.

On October 8, 1975, the trial court entered a restraining order prohibiting Petco, its officers, agents and employees from continuing to sell or offer for sale the interests above described without first having registered them for sale with the Oklahoma Securities Commission. On October 16, 1975, the Oklahoma Securities Commission's motion for temporary injunction came on for hearing before the trial judge, who after receiving into evidence certain stipulations, testimony and exhibits, granted the temporary injunction. In the order granting the temporary injunction, the court set forth the basis for its decision:

'The Court bases its decision on the finding that the interests being offered and sold to investors by the Defendant, PETCO, are securities within the meaning of that term as it appears in the Oklahoma Securities Act. The Court's finding that the transactions in question are securities is based on the reasoning that the overall intent and purpose of the Oklahoma Securities Act, as expressed by the Oklahoma Legislature, requires that such transactions be regulated as securities.

It is the opinion of the Court that it was the intent of the Oklahoma Legislature to exclude from the definition of a security the lease broker and the interests in oil and gas leses which he sells. (Section 2(21)). But when these interests are coupled with other terms, such as management contracts and operating agreements, they become securities and are subject to the intended purview of the Oklahoma Securities Act.'

Petco duly perfected an appeal (Case No. 49,054) from the order granting the temporary injunction.

In January, 1976, the trial court ordered the appointment of a receiver for Petco.

In June, 1976, the petitioner applied to this Court, requesting that it assume original jurisdiction and issue an Alternative Writ of Prohibition restraining the respondent, the trial court, from exercising further jurisdiction. The action brought in this Court seeking the Alternative Writ of Prohibition is Case No. 49,806. For the convenience of disposing of these matters, we will treat these cases as if consolidated.

The primary issue raised by the appellate procedures is: Whether the interests offered and sold by appellant are excluded from coverage under the Oklahoma Securities Act by virtue of the exclusionary language of 71 O.S. § 2(l), (Laws 1961, p. 580). ¹

The applicable exclusion provided:

"Security' does not include * * * any oil, gas, or mining title or lease or any certificate of interest or participation, or conveyance in any form, of an interest therein, or in payments out of production under such a title or lease.'

Petco, in characterizing the interests it offers and sells to the general public, asserts in its brief that all elements of the interests offered and the entire package as a whole comes within the exclusionary language quoted above. In its description of the interests involved, Petco states:

'It is the assignment of a fractional interest in an oil and gas lease--a 'certificate of interest' in such a lease--with an agreement governing the development of the fractional interest so assigned--a 'certificate of participation' in such lease. Neither the leasehold assignment, nor the accompanying development agreement, nor the two considered together, are outside the statutory exclusion.'

The position of the Oklahoma Securities Commission is that had the appellant been marketing only bare leasehold interests without combining them with operating agreements, the interests sold would clearly be excluded under the provisions quoted above. However, the Commission asserts that the operating agreement coupled with the lease interests constitutes an entire package which is not included within the exclusion.

The interests sold by Petco are undivided 1/126th interests in a particular lease. In addition to the purchase price, each 1/126th interest is charged a fixed proportionate share of the drilling costs, $980.00, and if completion is warranted, is charged an additional $980.00 for completion costs.

The operating agreement which accompanied each lease provided that the operator had unrestricted control of locating, drilling, reworking, testing, completing, equipping, operating, and abandoning each well or each leasehold property.

The agreement further provided that the operator had authority to contract with other companies for drilling, maintenance and operation of any lease. The agreement also provided that the operator was entitled to charge $252.00 per month to pay for his overhead expenses, that the leaseholders were to bear their proportionate share of the expenses of operation. Additionally, the offering sheet, (the receipt of which was acknowledged by each leaseholder in the operating agreement), informed the investors that they were subject to further liability in the event an unexpected accident occurs, but stated that the company had sufficient insurance to minimize this exposure.

I

The first issue raised is: Does the inclusion of a nonsecurity in an investment package preclude the investment package as a whole from constituting a security? We hold that it does not. Our holding is...