Use a “finder” or “placement agent”? Think again.

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The SEC cracks down on boiler room fraud, gets $15.5 million judgment against oil and gas issuer.

The US District Court in Texas granted summary judgment in favor of the SEC against promoters Leon Ali Parvizian and his two Dallas-based companies, Arcturus Corporation and Aschere Energy, LLC, Alfredo Gonzalez and AMG Energy, LLC, and Robert Balunas and R. Thomas & Co. LLC.

The court found Parvizian and his companies liable for securities fraud under Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, concluding that they “acted with severe recklessness” in failing to disclose material information about the investments to investors. The court also found that all defendants violated the registration requirement of Sections 5(a) and 5(c) of the Securities Act, and that Parvizian, Gonzalez, AMG Energy, Balunas, and R. Thomas & Co. violated Section 15(a) of the Exchange Act by acting as unregistered broker-dealers.

Basically, the defendants got tangled in the web of the registration requirements of the Securities Act and Exchange Act. Indeed, they engaged in securities fraud by offering and selling interests in a oil and gas drilling project in which they had no rights to participate or share profits. Nor did they register the securities with the SEC.

The court rejected defense arguments that the investments were exempt from the federal securities laws because they were structured as “joint ventures.” The court instead found that the investors had little real power and were inexperienced in the oil and gas industry, leaving them dependent on Parvizian and his companies to control the ventures. This dependency made the joint venture interests “investment contracts,” which are subject to securities laws.

Capital raising and securities offering must comply with the Securities Act and, in certain circumstances, state’s blue sky laws. This ruling is a prototypical example of a misunderstanding of the registration requirements.

Also, this decision illustrates the dangers of using a “finder” or “placement agent,” which is not registered as a broker-dealer under the Exchange Act. Don’t do it without seeking the consultation of a securities attorney.

Most startups and companies try to cut costs by not filing Form D’s, and related notice filings with state regulators. This decision should raise caution to issuers trying to shortcut federal and state securities laws.

Richard Gora has advised issuers on private placements, including recently for a Hollywood producer seeking to raise $85 million and a Silicon Valley accelerator, and on the risks of using unregistered “finders” and “placement agents.” Gora LLC is a full-service firm with offices in Stamford, CT, Albany, NY and NY, NY, and provides counsel to clients all over the world ranging from startups to public companies on securities, business, litigation, IP, employment and energy.

 



Author: Rich Gora
Rich Gora is the founder of Gora LLC, and he has experience in billion dollar litigations and on corporate deals valued in the billions.