Securities and Exchange Commission v. Sethi Petroleum LLC et al
AMENDED MEMORANDUM OPINION AND ORDER re 195 MOTION for Summary Judgment Plaintiff's Motion for Summary Judgment As To Sameer Sethi and Brief In Support filed by Securities and Exchange Commission. Plaintiff Securities and Exchange Commissions Motion for Summary Judgment as to Sameer Sethi (Dkt. #195) is hereby GRANTED. The Court hereby withdraws its previous Memorandum Opinion and Order (Dkt. #232) and enters this order in its place. Signed by Judge Amos L. Mazzant, III on 1/17/17. (cm, )
United States District Court
EASTERN DISTRICT OF TEXAS
SECURITIES AND EXCHANGE
SETHI PETROLEUM, LLC and SAMEER
Civil Action No. 4:15-CV-00338
AMENDED MEMORANDUM OPINION AND ORDER
Pending before the Court is Plaintiff’s Motion for Summary Judgment as to Sameer Sethi
(Dkt. #195). After reviewing the relevant pleadings and motion, the Court finds that the motion
should be granted.
As early as January 2014, Defendant Sameer Sethi and his company, Sethi Petroleum,
LLC (“Sethi Petroleum”), began offering investors positions in the Sethi-North Dakota Drilling
Fund-LVIII Joint Venture (“NDDF”). This purported “joint venture” offered investors returns
from two sources: oil-and-gas revenues and tax benefits from oil-and-gas exploration and
production activities. The NDDF was promoted primarily through two documents: a Confidential
Private Placement Memorandum (“PPM”) and an Executive Summary (collectively, the
Sethi Petroleum marketed NDDF interests through a twenty-person sales staff using cold
calls, pitch scripts, and purchased lead lists. Defendant regularly visited Sethi Petroleum’s boiler
room to provide sales tips and directions on statements to make to potential investors. Once
salespeople determined that an investor was interested in NDDF and was “accredited,” Sethi
Petroleum would send Offering Documents to the potential investor through the United States
mails. An “accredited” investor is a person with a net worth over $1,000,000 independently or
combined with a spouse or with individual income over $200,000 or joint income over $300,000.
In the PPM, Sethi Petroleum stated its intention to raise $10 million to exploit its
exclusive rights to purchase mineral interests and to participate in oil and gas development on
200,000 acres in the Williston Basin of North Dakota, South Dakota, and Montana. Each of the
fifty units was offered at $200,000. Sethi Petroleum estimated that 70% of investor funds would
be used for the acquisition, drilling, and completion of the wells and that the remaining 30%
would be spent on legal, engineering, syndication, and management expenses.
The PPM further stated that the investors’ funds would be used to purchase
approximately 62.5% net working interest in at least twenty wells. The Offering Documents
further state that NDDF’s wells would be “operated by publicly traded and/or major oil and gas
companies” such as Continental Resources, ExxonMobil, Hess Corporation, and ConocoPhillips
(APP205).1 In August 2014, NDDF acquired a fractional working interest from Irish Oil & Gas
ranging from 0.15% to 2.5% in eight or nine wells. The operators of the acquired wells were
Crescent Point Energy U.S. Corp., Oxy USA Inc., and Slawson Exploration Co. Of those wells,
only six produced oil or gas. Two wells were voluntarily cancelled by their operators in
December 2014 and January 2015. The remaining wells produced a combined total of 9,147
barrels of oil in January 2015; 13,995 barrels of oil in February 2015; and 12,357 barrels of oil in
March 2015. Since the appointment of a receiver for all of Sethi Petroleum in May 2015, all of
the wells associated with Sethi Petroleum have produced total proceeds of $2,489.85.
The SEC incorporates the Appendix filed in support of the SEC’s Motion for Temporary Restraining Order (Dkt.
#4, Exhibit 2) as evidence for this motion. In addition, the SEC has attached additional materials to this motion
beginning with APP722, supplementing the TRO’s 721-page Appendix. The Court will refer to all of these materials
in reference to their Appendix citation.
The PPM alerted investors to various risk factors associated with the NDDF venture
including: “The venture is newly formed and has limited financial resources”; “There is no
minimum capitalization required before subscriptions will be utilized for venture operations”;
“Our prior performance is not an indication of how the venture will perform”; “The prospect
wells may not be productive”; “You may not recover your investment in the venture”; “We may
profit from the venture’s operations even if the venture is not profitable” (APP28–34).
The Executive Summary contained projections for the NDDF venture including a
projection for annual returns ranging from 32% to 254% on first year investments. These
projections were based on a $90/barrel price of oil. In March 2015, the price per barrel ranged
from $43.36 to $51.53.2
Attached to PPM was a Joint Venture Agreement (“JVA”). The JVA provided by Sethi
Petroleum established the NDDF venture and appointed Sethi Petroleum as Managing Venturer.
The JVA gave investors control of NDDF’s affairs and operations, but empowered Sethi
Petroleum to manage the venture’s day-to-day operations. Among the powers granted to Sethi
Petroleum were “sole and absolute discretion” to distribute NDDF profits to investors; authority
to execute oil and gas operating agreements; power to take and hold title to NDDF’s property;
and authority to hire all professionals on NDDF’s behalf, including engineers, geologists, and
appraisers. Certain significant actions—such as acquiring oil and gas interests or removing the
Managing Venturer—required the majority vote of investors. No evidence shows that a vote was
ever conducted or that a list of investors was ever provided to NDDF investors.
The PPM stated that “there will be no commingling of funds between the Venture and
Sethi Petroleum or any Affiliate thereof other than may temporarily occur during the payment of
Based on U.S. Energy Information Institute reports for daily spot prices of crude oil, Cushing, OK. U.S. Energy
Info. Admin. Petroleum & Other Liquids (Nov. 9, 2016), http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=
bills and/or distributions by Sethi Petroleum on behalf of the Venture.” From January 28, 2014,
through March 9, 2015, Sethi Petroleum raised over $4 million from ninety investors in twentyeight states across the country. From February 6, 2014 through March 21, 2015, Defendant and
Praveen Sethi moved $3.15 million of investor funds to the Sethi Petroleum general account in
more than eighty account transfers.3
On May 14, 2015, the Court granted the SEC’s emergency ex parte request and issued a
temporary restraining order, asset freeze, and other injunctive relief (the “TRO”) against Sethi
Petroleum and Defendant (Dkt. #11). The Court also appointed a receiver over Sethi Petroleum
(Dkt. #12). On May 26, 2015, the Court issued an Agreed Order Granting Preliminary
Injunction, Asset Freeze, and Other Relief (the “Preliminary Injunction”) (Dkt. #23).
On December 4, 2015, Defendant was noticed, and appeared, for a sworn deposition in
this case. Throughout the deposition, Defendant invoked his Fifth Amendment rights to nearly
every question (Dkt. #195, Exhibit 2-A). On April 7, 2016, Defendant executed a declaration
stating that he would assert his Fifth Amendment privilege to decline to testify, including
without limitation, testimony regarding his personal information, assets, conduct related to Sethi
Petroleum, receipt of funds in any way related to Sethi Petroleum, expenditures of funds,
relationships related to himself or Sethi Petroleum, any efforts to raise money from investors,
and communications with Sethi Petroleum (Dkt. #195, Exhibit 2-A).
On September 14, 2016, the SEC filed this Motion for Summary Judgment as to Sameer
Sethi (Dkt. #195). On October 11, 2016, Defendant filed a response (Dkt. #211). On October 18,
2016, the SEC filed a reply (Dkt. #218). On November 1, 2016, Defendant filed a sur-reply (Dkt.
It is disputed whether these transfers were legitimately used for expenses and distributions as stated in the PPM, or
whether they were fraudulent. The Court needs not decide because the fact that they occurred is not in dispute.
The purpose of summary judgment is to isolate and dispose of factually unsupported
claims or defenses. Celotex Corp. v. Catrett, 477 U.S. 317, 323–24 (1986). Summary judgment
is proper under Rule 56(a) of the Federal Rules of Civil Procedure “if the movant shows that
there is no genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” FED. R. CIV. P. 56(a). A dispute about a material fact is genuine when “the
evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson
v. Liberty Lobby Inc., 477 U.S. 242, 248 (1986). Substantive law identifies which facts are
material. Id. The trial court “must resolve all reasonable doubts in favor of the party opposing the
motion for summary judgment.” Casey Enters., Inc. v. Am. Hardware Mut. Ins. Co., 655 F.2d
598, 602 (5th Cir. 1981).
The party seeking summary judgment bears the initial burden of informing the court of its
motion and identifying “depositions, documents, electronically stored information, affidavits or
declarations, stipulations (including those made for purposes of the motion only), admissions,
interrogatory answers, or other materials” that demonstrate the absence of a genuine issue of
material fact. FED. R. CIV. P. 56(c)(1)(A); Celotex, 477 U.S. at 323. If the movant bears the
burden of proof on a claim or defense for which it is moving for summary judgment, it must
come forward with evidence that establishes “beyond peradventure all of the essential elements
of the claim or defense.” Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986). Where
the nonmovant bears the burden of proof, the movant may discharge the burden by showing that
there is an absence of evidence to support the nonmovant’s case. Celotex, 477 U.S. at 325; Byers
v. Dall. Morning News, Inc., 209 F.3d 419, 424 (5th Cir. 2000). Once the movant has carried its
burden, the nonmovant must “respond to the motion for summary judgment by setting forth
particular facts indicating there is a genuine issue for trial.” Byers, 209 F.3d at 424 (citing
Anderson, 477 U.S. at 248–49). A nonmovant must present affirmative evidence to defeat a
properly supported motion for summary judgment. Anderson, 477 U.S. at 257. Mere denials of
material facts, unsworn allegations, or arguments and assertions in briefs or legal memoranda
will not suffice to carry this burden. Rather, the Court requires ‘“significant probative evidence’”
from the nonmovant to dismiss a request for summary judgment. In re Mun. Bond Reporting
Antitrust Litig., 672 F.2d 436, 440 (5th Cir. 1982) (quoting Ferguson v. Nat’l Broad. Co., 584
F.2d 111, 114 (5th Cir. 1978)). The Court must consider all of the evidence but must “refrain
from making any credibility determinations or weighing the evidence.” Turner v. Baylor
Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007).
Defendant moves to strike portions of Plaintiff’s Appendix that do not comport with the
requirements of Federal Rule of Civil Procedure 56. First, Defendant moves to strike statements
by Marcus Helt that are conclusory or without foundation. Statements setting forth conclusory
facts or conclusions of law are insufficient evidence on a motion for summary judgment. See
Clark v. America’s Favorite Chicken Co., 110 F.3d 295, 297 (5th Cir. 1997). An affidavit in
support of a motion must be made on “personal knowledge, set out facts that would be
admissible in evidence, and show that the affiant or declarant is competent to testify on the
matters stated.” FED. R. CIV. P. 56(c)(4).
The Court finds that several statements in Marcus Helt’s affidavit are conclusions of law.
Thus, the Court sustains Defendant’s objection and excludes Helt’s statements that, “the entire
Sethi Enterprise was a sham”; “the Sethi Enterprise was insolvent; “The Sethi Enterprise
received approximately $13 million of cash under false representations”; and “the enterprise
never had a possibility, let alone probability, of being a viable business.”
Next, Defendant seeks to strike hearsay portions of the declarations of Michael Martin
and Joseph Barbaria. The Court overrules this objection. Martin’s and Barbaria’s statements are
supported by the record before the Court. Additionally, Defendant has not specified which
statements he perceives to constitute hearsay. The Court finds that the statements by Sethi
Petroleum employees are not hearsay because they are not offered for the truth of the matter
asserted, but rather to prove their falsity. See FED. R. EVID. 801(c)(2). Further, Barbaria’s
statements regarding what Defendant told him would be admissible as statements by a party
opponent. FED. R. EVID. 801(2). Therefore, the Court overrules this objection.
The SEC argues that the Court should draw an adverse inference from Defendant’s
refusal to testify to establish that (1) Defendant did in fact control Sethi Petroleum and all of its
employees and related entities and (2) that he conducted the fraudulent offer, issuance, and sale
of Sethi Petroleum venture shares (Dkt. #195 at pp. 21–22). Defendant responds that a negative
inference is inappropriate at the summary judgment stage because the Court is required to make
all reasonable inferences in favor of the nonmovant (Dkt. #211 at p. 32).
In the Fifth Circuit, courts may draw an adverse inference from a defendant’s refusal to
testify in a civil case. See Hinojosa v. Butler, 547 F.3d 285, 295 (5th Cir. 2008). This inference is
available to the court on summary judgment. See State Farm Life Ins. Co. v. Gutterman,
896 F.2d 116, 119 (5th Cir. 1990). However, a court cannot decide an issue on summary
judgment against a party solely on the basis of the party’s invocation of the Fifth Amendment.
Id. at 119, n.2 (citing United States v. White, 589 F.2d 1283, 1287 (5th Cir. 1979)). A court may
only decide an issue if there is any independent evidence in addition to the invocation. Gulf
Coast Bank & Trust Co. v. Stinson, No. 2:11-CV-88-KS-MTP, 2013 WL 30136, at *4, n.2 (S.D.
Miss. Jan 2, 2013). Therefore, while the Court declines to base its decisions solely on
Defendant’s assertion of Fifth Amendment rights, it may consider such silence as a failure to
dispute other evidence.
Joint Venture Units Were Investment Contract Securities
The SEC argues that the joint venture units are securities as investment contracts because
they meet each of the three factors from Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981)
(Dkt. #195 at p. 15). Defendant argues that the SEC’s arguments for each factor are insufficient
to meet their heavy burden to prove an investment contract on summary judgment (Dkt. #211 at
p. 17). Specifically, Defendant argues that no factor is met because the JVA gives investors
actual power over the NDDF venture and each venturer represented that he or she possessed the
requisite knowledge and experience to exercise those powers (Dkt. #211 at pp. 19–22).
A security is broadly defined under the Securities Act and the Exchange Act. 15 U.S.C.
§§ 77b(a)(1) & 78c(a)(10). An investment contract exists where: (1) individuals are led to invest
money; (2) in a common enterprise; (3) with the expectation that they would earn a profit solely
through the efforts of the promoter or of someone other than themselves. SEC v. W.J. Howey
Co., 328 U.S. 293, 298–99 (1946). The first two elements are clearly established and are not
seriously disputed. Therefore, the issue for the Court is whether the investors had an expectation
that they would earn a profit solely through the efforts of someone other than themselves.
The leading Fifth Circuit case interpreting Howey’s third element is Williamson v.
Tucker. In Williamson, the Fifth Circuit held that the term “solely” is interpreted in a flexible
manner, not in a literal sense. Id. at 418. In evaluating whether an interest is a security, “form
should be disregarded for substance,” and courts should analyze the “economic reality
underlying a transaction, and not [focus] on the name appended thereto.” United Hous. Found.,
Inc. v. Forman, 421 U.S. 837, 848–49 (1975). Therefore, to determine whether profits are
expected to come “solely” from the efforts of others, the Fifth Circuit adopted the Ninth Circuit’s
test, which defined the critical question as “whether the efforts made by those other than the
investor are the undeniably significant ones, those essential managerial efforts which affect the
failure or success of the enterprise.” SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483
(5th Cir. 1974) (citing SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir. 1973)).
In Williamson, the Fifth Circuit concluded that a general partnership or joint venture
interest may satisfy the third Howey element if the investor can establish any one of the
following factors: (1) an agreement among the parties leaves so little power in the hands of the
partner or venturer that the arrangement in fact distributes power as would a limited partnership;
or (2) the partner or venturer is so inexperienced and unknowledgeable in business affairs that he
is incapable of intelligently exercising his partnership or venture powers; or (3) the partner or
venturer is so dependent on some unique entrepreneurial or managerial ability of the promoter or
manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful
partnership or venture powers. 645 F.2d at 424. These factors are not exhaustive. Id. at 424, n.15.
Although “[t]he test stated in Williamson . . . refers to the investor’s experience in “business
affairs,” without referring to specialized knowledge, the Fifth Circuit has “made clear that the
knowledge inquiry must be tied to the nature of the underlying venture.” Long v. Shultz Cattle
Co., 881 F.2d 129, 134 n.3 (5th Cir. 1989) (noting that “any holding to the contrary would be
inconsistent with Howey itself”).
Furthermore, the Fifth Circuit has stated that “a strong presumption remains that a
general partnership or joint venture interest is not a security.” Youmans v. Simon, 791 F.2d 341,
346 (5th Cir. 1986). The Youmans court made it clear that “[a] party seeking to prove the
contrary must bear a heavy burden of proof.” Id. (citing Williamson, 645 F.2d at 424). Therefore,
the Court will examine each of the Williamson factors to determine if the SEC has met its heavy
burden in establishing that the type of interest that Defendant sold was actually a security.
The First Williamson Factor: Venturers’ Actual Power
The first Williamson factor the Court considers is whether the agreement between the
parties gives the venturer little to no power, such as a limited partner would have. 645 F.2d at
424. A general partnership or joint venture interest usually does not fall within the broad
definition of “investment contract.” Williamson, 645 F.2d at 419–421. However, agreements that
are more akin to limited partnerships may be considered a security under the statutory definition.
Youmans, 791 F.2d at 346. Limited partners have limited liability, are typically unable to
dissolve the partnership or bind other partners, and have virtually no power to take an active role
in the management of the partnership. Id.
The SEC argues that investors did not have any real power over their investment because
Sethi Petroleum had “sole and absolute discretion” to distribute NDDF profits to investors;
authority to execute oil and gas operating agreements; power to take and hold title to NDDF’s
property; authority to hire all professionals on NDDF’s behalf; and to choose operators for
drilling on NDDF’s wells (Dkt. #195 at pp. 16–17). The SEC supports its arguments with
unrebutted declarations from an accountant, an investor, a salesman, and the Receiver.
Defendant points to several of the venturer’s alleged powers in support of his argument
that the venturers had real power, making the NDDF shares not a security. According to
Defendant, Venturers could remove the managing venturer, could propose and pass amendments
to the [JVA], calling meetings, develop rules and procedures for holding meetings, and vote on
“any matter that may be submitted for decision by the Venturers in accordance with the express
terms of [the JVA] or under the provisions of the TBOC” (Dkt. #211 at p. 20). Defendant then
argues that it is reasonable to infer that a venturer with these types of rights would actually check
up on the performance of the NDDF venture (Dkt. #211 at p. 20). Defendant further argues that it
requires an unfavorable inference to assume that just because one investor had no power then all
investors did not have power (Dkt. #211 at p. 21).
This case is similar to Arcturus, where the joint venturers also had the ability to call
meetings and the voting power to remove the managing venturer. SEC v. Arcturus, 171 F. Supp.
3d 512, 525 (N.D. Tex. 2016). The Arturus court pointed out that “[i]f the venturers did not have
any contact information for the other venturers . . . how could the venturers ever satisfy the
minimum percentage interest to exercise these powers[?]” Id. The court went on to state that
“[a]ny right to vote or call a meeting that required a percentage of the venture interest was
absolutely hindered by the inability of the venturers to contact each other.” Id.
Here, Sethi Petroleum solicited investors from across the country with no prior
relationships to Sethi Petroleum or to each other. Further, Sethi Petroleum did not provide access
to its books or records. Therefore, the summary judgment evidence establishes that the investors
could not exercise any powers they had because they did not know the names or addresses of
other investors. Arcturus, 171 F. Supp. at 525; see also SEC v. Merchant Capital, LLC, 483 F.3d
747, 758 (11th Cir. 2007) (finding barriers to exercise of powers were compounded because the
investors “were geographically dispersed, with no pre-existing relationships”).
Furthermore, even if the investors could contact each other or otherwise force a vote,
Sethi Petroleum’s misrepresentations frustrated any meaningful management powers of the
investors. Michael Martin (“Martin”), an NDDF investor, asked multiple people for a status
update of his investment and was repeatedly stymied. First, Martin was given a letter by Sethi
Petroleum’s Vice President, Michael Davis (“Davis”) who told Martin that Sethi Petroleum had
engaged independent contractors to provide such updates. Further, Davis told Martin that he
would provide an up-to-date report on the status of Martin’s investment. Martin has never
received either the name of the independent contractor or the report. Davis further directed
Martin to call Diane Cimoperlik (“Cimoperlik”) if he had any further questions. When Martin
reached Cimoperlik, she told him that only eight of the twenty promised NDDF wells had been
drilled. However, when Martin asked for additional detail during that call and in a follow up
email, he did not receive any response.
One of Sethi Petroleum’s salesmen, Joseph Barbaria (“Barbaria”), stated in his
declaration that the “closers” for Sethi Petroleum were instructed to reassure investors that they
would eventually receive revenue checks, and that Sethi Petroleum had interests in more wells
than it actually did. Barbaria was personally contacted by one investor who had concerns about
receiving status updates on his investments. On December 23, 2014, Davis sent an email to the
closers stating that NDDF only had interest in five wells, not twelve. However, William Shavers,
Sethi Petroleum’s Sales Director, immediately told the closers that the email was sent in error
and they should continue telling prospective investors that NDDF had interest in twelve wells.
Defendant argues that it is reasonable to infer that at least some investors took steps
privately to track the performance of the NDDF venture to not be reliant on the managing
venture (Dkt. #211 at p. 20). However, as the foregoing facts demonstrate, investors did take
steps to learn of the NDDF venture, but were stymied at every step along the way and when they
were given information, it was inconsistent at best. The Fifth Circuit has stated that “access to
information does not necessarily protect an investor from complete dependence on a third party
where, as here, that same third party is the sole source of information and advice regarding the
underlying venture and the investor does not have the expertise necessary to make the essential
management decisions himself.” Long, 881 F.2d at 135–36; see also Arcturus, 171 F. Supp. 3d at
530–31; Merch. Capital, 483 F.3d at 761. The Eleventh Circuit has determined that powers are
illusory when the promotor controls how much information is given to investors, and he does
“not submit sufficient information for the partners to be able to make meaningful decisions.”
Merch. Capital, 483 F.3d at 758. Even though Martin eventually obtained information about the
NDDF venture, his convoluted path to that discovery demonstrates that he was reliant upon Sethi
Petroleum to provide that information.
Therefore, the summary judgment record establishes that the majority of the venturers’
powers were delegated to Sethi Petroleum, and any power the venturers still possessed could not
be exercised because the necessary information was controlled by Sethi Petroleum. Because the
first Williamson factor proves the venturers’ dependence on the efforts of Sethi Petroleum, the
Court finds the third Howey element is established. See Williamson, 645 F.2d at 424.
Accordingly, Sethi Petroleum’s joint venture is an investment contract and, therefore, a security.
See Arcturus, 171 F. Supp. 3d at 527.
The Second Williamson Factor: Venturers’ Experience and Knowledge
Even if the first Williamson factor had not been satisfied, the Court could look to the
second Williamson factor to establish complete dependence. Id. Under this factor, the Court
considers whether the venturers were inexperienced and lacked expertise in the oil and gas well
business. The Court finds the SEC presented sufficient evidence to establish this second factor.
Courts look to the investor’s experience and knowledge in the particular business of the
venture at issue, not the investor’s general business experience. Long, 881 F.2d at 135 n.3
(noting that Williamson “made clear that the knowledge inquiry must be tied to the nature of the
underlying ventures.”); see Howey, 328 U.S. at 296. The critical inquiry is whether the investors
are inexperienced and unknowledgeable in this particular business, making it more likely they
would “be relying solely on the efforts of the promoters to obtain their profits.” Merch. Capital,
483 F.3d at 762; see also Long, 881 F.2d at 134 (“[A] plaintiff may establish reliance on others
within the meaning of Howey if he can demonstrate not simply that he did not exercise the
powers he possessed, but that he was incapable of doing so.”).
Courts have consistently held that when offerings are made by hundreds of cold calls per
day, via a nationwide network of investors with little, if any, experience in the oil and gas
industry, then one can conclude that the investors were so inexperienced or unknowledgeable in
business that they were not capable of “intelligently exercising their partnership powers.” See,
e.g., Arcturus, 171 F. Supp. 3d at 528.
Defendant argues that the SEC has not produced enough evidence to meet its burden on
summary judgment and even if it has, the statements in the JVA that each venturer has “the
requisite business knowledge and experience” is sufficient to satisfy the requisite knowledge
requirement (Dkt. #211 at p. 22). The SEC has provided unrebutted declarations from its
investigating accountant, a former NDDF employee, and an investor, to prove that NDDF sought
out and obtained investors who had no experience in the oil and gas industry. The Court finds
that these uncontroverted statements from multiple sources are sufficient to establish that no
genuine issue of material fact exists as to the venturers’ experience and knowledge.
The sheer breadth of indiscriminate solicitation of investors shows that the second
Williamson factor is present. There are approximately ninety investors from at least twenty-five
different states. Sethi Petroleum employed between ten and twenty “fronters” who initiated calls
through automatic dialing and purchased leads list. Once a “fronter” determined that the caller
was accredited and interested in purchasing a joint venture interest, the call would be sent to a
“closer” to make the sale. Fronters and closers were told that they could sell to investors that had
no prior experience making oil and gas investments as long as they were “accredited investors.”
An “accredited investor” was simply a rating on how much money a person had. Sethi Petroleum
employed eight closers. All employees in the call center, with the exception of two successful
closers, worked from 8 a.m. to 5 p.m.. The fronters and closers were told to continually make
calls to potential investors.
Further, the testimony of an NDDF investor, Martin, shows that he was solicited despite
lacking relevant knowledge or experience. When Martin was first contacted by a Sethi Petroleum
Vice President, Jerry Impini (“Impini”), Martin said that he had no experience in oil and gas.
Nevertheless, Sethi Petroleum continued to ensure that Martin was an “accredited investor” and
followed through with the sale. Whether or not an individual is an accredited investor is
unrelated to whether or not they are knowledgeable about oil and gas. Further, Defendant has
failed to produce any evidence supporting his argument that a majority, if not all, of the investors
possessed the requisite knowledge. Considering the circumstances under which Sethi Petroleum
solicited potential investors, and the investors’ lack of knowledge at the time of the investment, it
is clear that investors did not have the necessary experience in oil and gas to manage their own
The Court finds that the second Williamson factor has been established. Because the
second Williamson factor proves the venturers’ dependence of the efforts of Sethi Petroleum, the
Court finds the third Howey element is established. See Williamson, 645 F.2d at 424.
Accordingly, NDDF’s venture is an investment contract and, therefore a security.
The Third Williamson Factor: Venturers’ Dependence on the Unique Capabilities of Sethi
Even if the first and second factors had not been satisfied, the third Williamson factor
establishes that the venturers were completely dependent on Sethi Petroleum’s efforts. Under this
third factor a dependent relationship exists when the investors rely “on the managing partner’s
unusual experience and ability in running that particular business.” Williamson, 645 F.2d at 423.
As noted in Williamson, even a partner knowledgeable in the particular investment “may be left
with no meaningful option when there is no reasonable replacement for the investment’s
manager.” Id. In such a situation, “a legal right of control would have little value if partners were
forced to rely on the manager’s unique abilities.” Id.; see also Merch. Capital, 483 F.3d at 763
(“[E]ven if the arrangement gives the partners some practical control, the instrument is an
investment contract if the investors have no realistic alternative to the manager.”). In assessing
the third Williamson factor, a court may consider “the representations and promises made by
promotors or others to induce reliance upon their entrepreneurial abilities.” Gordon v. Terry,
684 F.2d 736, 742 (11th Cir. 1982); see also Koch, 928 F.2d at 1478.
The SEC argues that “Sameer and his company structured and operated the NDDF
investment leaving investors completely dependent on the company’s supposed entrepreneurial
and managerial abilities, without any reasonable alternative management option” (Dkt. #195 at p.
The summary judgment evidence establishes that Sethi Petroleum’s cold call regime was
built around touting the company’s established relationships in the oil and gas industry and
promising that the wells would produce one million barrels of oil per month from a major oil and
gas company, that new investors would immediately begin receiving revenue checks, and that
investments would return 30%–60% per year. Martin explicitly stated that he did not have
experience in the oil and gas industry except for a one-well project that never produced oil. After
Martin spoke on the phone with Impini, he received an NDDF PPM and other documents. In the
PPM, Sethi Petroleum touts its experience and ability to produce profit in the oil and gas
industry, specifically in the Bakken Shale. The Executive Summary further states that the
Bakken Shale area has been monopolized such that only major oil companies can participate in
drilling. Due to Sethi Petroleum’s purported experience and access to an exclusive market, the
Court agrees that investors were “without any reasonable alternative management option.”
Additionally, the SEC argues that “if NDDF investors somehow wrestled power away
from Sethi Petroleum, they would have found . . . funds hopelessly commingled with [Sethi
Petroleum’s] own funds and those of other joint ventures” (Dkt. #195 at p. 21). Defendant argues
in response that “a majority-in-interest of the investors could have voted down all actions taken
by Sethi Petroleum and could have replaced Sethi Petroleum without cause” (Dkt. #211 at p. 23).
Other courts have held that investors were granted only illusory control over an
investment where the enterprise was run by pooling investors’ interests so that an individual
investor had no control over the operation as a whole, even if he had some control over a
subsidiary portion. See, e.g., Koch, 928 F.2d at 1478, 1480; Bailey v. J.W.K. Props., Inc., 904
F.2d 918, 924–25 (4th Cir. 1990). In Merchant Capital, the Eleventh Circuit concluded that the
partners had no realistic alternative to the current manager, as well as no actual power to remove
him, because the manager “effectively had permanent control over each partnership’s assets.”
483 F.3d at 763; see also Arcturus, 171 F. Supp. 3d at 530 (Stating that “[t]he venturers had no
access to their funds because the money was held in an account controlled exclusively by [the
manager], not the Joint Venture.”).
This is similar to the case at hand. The summary judgment evidence establishes that Sethi
Petroleum took the investments, placed them in an account Sethi Petroleum exclusively
controlled, and used the funds to pay for the costs associated with running Sethi Petroleum’s
office. Although the entire Sethi Enterprise was represented to include several different joint
ventures, it was in reality a single enterprise with significant commingling of funds. Until
January 2015, only Defendant had signatory power over the NDDF account. Defendant did not
observe corporate formalities or otherwise keep the NDDF account separate from other Sethi
Enterprise accounts. Furthermore, while the entire Sethi Enterprise raised approximately thirteen
million dollars, less than $100,000 remained on the date of the receiver’s appointment. Despite
the receiver’s efforts to sell the mineral interests actually owned by the Sethi Enterprise, no one
has offered to buy the interest for cash. Additionally, when Martin asked for a refund of his
investment, Cimoperlik refused to provide one, clearly indicating that NDDF venturers had no
access to their funds.
These facts clearly indicate that even if Sethi Petroleum was replaced, the assets would
not be accessible to the NDDF venturers. The SEC has submitted evidence that, just as in
Arcturus, the venturers in the current case lacked any control over their money, which created a
complete dependency on Sethi Petroleum.
The Court finds the third Williamson factor has been established. Because the third
Williamson factor proves the venturers’ dependence on the efforts of Sethi Petroleum, the Court
finds the third Howey element is established. See Williamson, 645 F.2d at 424. Accordingly, the
NDDF joint venture is an investment contract and, therefore, a security.
The SEC claims that Defendant made material misrepresentations including: (1) falsely
describing Defendant’s criminal history; (2) falsely describing Defendant’s and Sethi
Petroleum’s regulatory history; (3) falsely claiming partnerships with major oil companies;
(4) misrepresenting the scope of the NDDF venture; (5) misrepresenting expected returns; and
(6) stating that investors funds would be used in accordance with the Operating Documents
when, in reality, those funds were diverted for purposes not disclosed to investors. The Court
finds that summary judgment should be granted only as to the misrepresentations of partnerships
with major oil companies. Summary judgment is therefore denied for all other alleged
To establish a prima facie case under Section 17(a)(1) of the Securities Act, Section 10(b)
of the Exchange Act, and Rule 10b-5, the SEC must prove by a preponderance of the evidence:
(1) a misstatement or omission (2) of material fact (3) in connection with the purchase of a sale
or security (4) made with scienter. SEC v. Gann, 565 F.3d 932, 936 (5th Cir. 2009). Information
is material if there is a substantial likelihood that disclosure of the misstated or omitted fact
would have significantly altered the “total mix” of information to be considered by a reasonable
investor. Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988) (quoting TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)). The scope of this standard is determined by the
relative status and sophistication of the parties. Laird v. Integrated Res., Inc., 897 F.2d 826, 832
(5th Cir. 1990). Scienter is defined as “a mental state embracing intent to deceive, manipulate, or
defraud.” Gann, 565 F.3d at 936. Section 17(a)(2) and (3) require essentially the same elements,
but do not require scienter. See SEC v. Evolution Capital, 866 F. Supp. 2d 661, 667 (S.D. Tex.
2011). Since the SEC must essentially prove the same elements for each violation, the Court will
consider these allegations together. See Arcturus, 171 F. Supp. 3d at 535.
The SEC argues Defendant intentionally made a material misstatement when he told
investors that Sethi Petroleum had partnerships with major oil companies (Dkt. #195 at pp. 25–
28). Defendant argues that any misstatements were not material because the “total mix of
information” included cautionary language, the statements were predictive, insufficient time had
elapsed, and unfavorable market conditions intervened (Dkt. #211 at pp. 12, 24). Based on these
facts, Defendant argues that a reasonable inference in his favor would lead to the conclusion that
these were not actionable misrepresentations. The Court finds that despite hedging and
cautionary statements in parts of the offering documents, the “total mix” of information based on
the relative sophistication between Sethi Petroleum and its investors was that these relationships
were currently existing, and that larger relationships may develop as the investors pour in.
Defendant, individually and through Sethi Petroleum, unequivocally advertised to the
world that Sethi Petroleum presently “works with companies such as ExxonMobil and Hess in
big oil and gas plays in the Bakken [Shale]” (APP476). The very first interaction that investors
have with Sethi Petroleum is through a cold call. The Sethi Petroleum script for its salespeople
states: “We’re partnered directly with a couple of HUGE, PUBLICLY traded companies like
Conoco Phillips, Continental, GMXR just to name a few” (APP480). Salespeople pursue
investors solely on the basis of the investor being “accredited,” which has nothing to do with
actual experience in the oil and gas industry or even investing in general. Once an investor
expresses interest, the salesperson sends offering documents including the PPM and Executive
Summary. The Executive Summary states:
[T]his area has become monopolized, allowing only major oil companies to
participate in the Bakken Shale developments . . . Sethi Petroleum is working
directly with major oil companies, operators, landmen, service crews, landowners,
mineral rights owners, and royalty owners thus gaining ground floor access to
developmental opportunities in both the Bakken Shale and the Three Forks
(APP204). The Executive Summary goes on to describe the extent of Sethi Petroleum’s
operations as “rights and options to drill in more than 200,000 available net acres of land in
North Dakota” (APP204). Later, it ambiguously states “all of our wells will be drilled by
publicly traded and/or major oil and gas companies” (APP204). Given the unequivocal preceding
statements, it would not be reasonable to infer that the final statement about major oil and gas
companies is simply a predictive statement of “hoped-for major operators” (Dkt. #211 at p. 12).
Rather, Sethi Petroleum, by using the word “directly” in the present tense, led NDDF investors to
believe that it was currently working with major companies to establish a direct link to profit.
Further removing doubt as to the misstatement regarding major oil and gas relationships
are the unofficial statements made in the press and on social media about Sethi Petroleum’s
business. A “D Magazine” article about Defendant stated that “the company works with
companies such as ExxonMobil” (APP476). A Craigslist listing seeking investors states among
the documents that it will send a list of “Partnerships with the major Oil and Gas companies”
(APP482). Finally, Defendant’s own LinkedIn page describes his company as having “groundfloor investment opportunities managed and operated by major oil or publically traded energy
companies” (APP486). Each of these statements would lead a reasonable investor to believe that
Sethi Petroleum had present relationships with major oil and gas companies at the time that the
statements were made. In fact, Sethi Petroleum only had interests with Irish Oil & Gas, Inc., a
small, private oil company. The unrebutted evidence regarding Sethi Petroleum’s
mischaracterization of its relationships with major oil and gas companies proves that there is a
substantial likelihood that disclosure would have significantly altered the “total mix” of
information to be considered by a reasonable investor. Thus, the first and second elements of a
violation of the anti-fraud provisions are established.
To establish the third element, the SEC must prove that the misstatement was made in
connection with the sale or purchase of a security. This element is met if the misstatement
‘somehow touches upon’ or has ‘some nexus’ with ‘any securities transaction.’ SEC v. Rana
Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993) (quoting SEC v. Clark, 915 F.2d 439, 449
(9th Cir. 1990)). The purpose of Sethi Petroleum misstating its relationship with major oil and
gas was to sell its securities. This is sufficient to satisfy the “in connection with” requirement.
See Clark, 915 F.2d at 449. Therefore, the SEC has established the third element of securities
To establish the fourth element, the SEC must prove that Defendant acted with scienter.
In the Fifth Circuit, scienter may be established by showing that the defendant acted intentionally
or with severe recklessness. See Broad v. Rockwell Int’l Corp., 642 F.2d 929, 961–62 (5th Cir.
1981) (en banc). Severe recklessness is limited to those highly unreasonable omissions or
misrepresentations that involve not merely simple or even inexcusable negligence, but an
extreme departure from the standards of ordinary care, and that present a danger of misleading
buyers or sellers which is either known to the defendant or is so obvious that the defendant must
have been aware of it. Id. The Executive Summary stated that the Bakken Shale area “has
become monopolized, allowing only major oil companies to participate” (APP204). The
following statement that “Sethi Petroleum is working directly with major oil companies” would
obviously create a danger of misleading investors into thinking that the NDDF venture is a viable
investment. Defendant has not produced any argument or evidence disputing this point or that
such relationships in fact existed. Therefore, the SEC has proved that Defendant acted with at
least severe recklessness. Having found that Defendant acted with scienter with regard to the
statements about relationships with oil companies, Defendant has violated Section 17(a)(1) of the
Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.
To establish a violation of Section 17(a)(2) or 17(a)(3), the SEC need only make a
showing of negligence in connection with Defendant’s sale of securities. Meadows v. SEC,
119 F.3d 1219, 1226 n.15 (5th Cir. 1997). The Court has already determined the evidence
conclusively establishes Defendant acted with scienter. Therefore, the Court finds the summary
judgment evidence supports a finding that Defendant violated Sections 17(a)(2) and 17(a)(3).
To establish joint and several liability, the SEC must prove that Defendant is a control
person or acted through or by means of another person. To establish that Defendant is a control
person under Section 20(a) of the Exchange Act, the SEC must show an underlying violation and
that person’s control of the violating entity. 15 U.S.C. § 78t(a). The SEC argues that Defendant
is a control person of Sethi Petroleum because Defendant was Sethi Petroleum’s President and
sole Managing Member (Dkt. #195 at p. 28). Defendant created, owned, managed, and
controlled the company’s operations from at least November 7, 2011, until May 2015. This
unrebutted evidence is sufficient to show that Defendant had control of Sethi Petroleum when the
misstatements were made. Therefore, Defendant is jointly and severally liable with and to the
same extent as Sethi Petroleum for the fraudulent sale of securities.
Further, Defendant is jointly and severally liable for violating the antifraud provisions
through or by means of another person. 15 U.S.C. § 78t(b). Defendant directed his salespeople to
tell potential investors that Sethi Petroleum is “partnered directly” with major oil companies such
as Conoco Phillips and Continental. Further, he directed the author of the Executive Summary to
state similar misstatements about direct relationships with major oil and gas companies.
Defendant is therefore jointly and severally liable for directing others to make misstatements in
violation of the federal securities laws.
It is therefore ORDERED that Plaintiff Securities and Exchange Commission’s Motion
for Summary Judgment as to Sameer Sethi (Dkt. #195) is hereby GRANTED.
The Court finds that Sameer Sethi is liable for violations of Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder. The Court further finds that Sameer Sethi is jointly
and severally liable with and to the same extent as Sethi Petroleum under Section 20(a) of the
. Exchange Act for Sethi Petroleum’s Exchange Act violation. The Court further finds that Sameer
Sethi is liable for violations of Section 17(a) of the Securities Act.
The Court hereby withdraws its previous Memorandum Opinion and Order (Dkt. #232)
and enters this order in its place.
SIGNED this 17th day of January, 2017.
AMOS L. MAZZANT
UNITED STATES DISTRICT JUDGE
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