Here are several things to
note about SEC v. Arcturus et al :
Pay attention to this post if you sell oil deals in the way these
defendants did.
This is a civil enforcement suit, so nobody’s headed to jail.
Not all of the SEC’s many rules make sense. Think Leviticus
and the wrong way to sacrifice a goat, except nobody’s headed
for the unrelenting wrath of Yahweh.
Your “good intentions” won’t save you.
The SEC enforces when there are complaints. Break the rules
and you‘d better go “yard” for your investors.
Parvizian controlled Arcturus and Aschere, buying and selling
interests in drilling projects. Each project had a managing venturor
which supervised the project. Each venture included a confidential
information memorandum, PPM, joint venture agreement,
subscription agreement, and investor questionnaire.
The SEC alleged that the defendants violated the Securities Act of
1933 and the Securities Exchange Act of 1934, and sought
injunctions and money. The SEC contended that the projects were
securities. Defendants referred to them as “joint ventures” and the
investors as “partners” or “venturors”.
First, definitions
A “security” includes an “investment contract”, but that term is not
defined in either statute. The courts say an “investment contract”
is a transaction or scheme whereby a person:
invests his money
in a common enterprise
expecting profits derived solely from the efforts of others.
The agreements
Parvizian’s power was limited to day-to-day management and
was subject to the “affirmative vote” of the venturors.
The venture was to be “managed and controlled collectively by
all the venturors”, including the ability to call a meeting.
The venturors had voting rights and could remove the
managing venturor by a 60 percent vote.
The reality
But,
The court couldn’t find that the venturors had any real powers,
based on the way the ventures were actually constituted.
The venturors had no information about each other and thus no
way to actually have a vote. Parvizian refused to disclose the
identities of other venturors when requested.
In a process never disclosed to the venturors, Parvizian
combined the assets of the partnerships into pools of
accounts held by a third party.
Parvizian alone controlled and authorized every aspect of
drilling and producing operations.
The venturors had no personal or firsthand knowledge about
any activities or decisions related to the venturess and relied
completely on information from Parvizian.
The venturors were unknowledgeable in the oil and gas
business.
SEC wins
Courts focus on the “economic realities underlying the transaction
and not in the name appended thereto.” Here are factors (among
others) that made this investment a security:
Access to information does not necessarily protect an investor
from complete dependence from a third-party when that party
is the sole source of the information and advice regarding the
venture and the investor does not have the expertise necessary
to make the essential management decisions themselves.
Venturors are not similar to general partners when they have
no real power.
The partners were so dependent on a particular manager that
they could not replace him or otherwise exercise ultimate
control.
The venturors were so inexperienced and unknowledgeable in
business affairs as to be incapable of intelligently exercising
their venture powers.
Next
Did they commit securities fraud, … and what about the brokers?
