Securities and Exchange Commission v. Arcturus Corporation et al

Filing 76

MEMORANDUM OPINION AND ORDER: The Court finds Plaintiff Securities and Exchange Commission's 37 Motion for Summary Judgment must be granted. The Court also finds the Defendants' 32 Motion for Summary Judgment, the SEC's 43 Motion to Strike, and the Parvizian Defendants' 49 Motion to Strike should be denied. The Court will refrain from imposing remedies on each Defendant at this time. The Court orders the SEC to submit a brief to the Court on or before 4/22/2016 addressing appropriate and available remedies it seeks to be imposed against each Defendant resulting from their violations. (Ordered by Judge Ed Kinkeade on 3/21/2016) (twd)

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.
ARCTURUS CORPORATION,
ASCHERE ENERGY, LLC,
LEON ALI PARVIZIAN, ALFREDO
ALFREDO GONZALEZ,
AMG ENERGY, LLC,
ROBERT J. BALUNAS, and
R. THOMAS & CO., LLC,
Defendants.

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Civil Action No. 3:13-CV-4861-K

MEMORANDUM OPINION AND ORDER
Before the Court are: (1) Defendants Arcturus Corporation, Aschere Energy,
LLC, and Leon Ali Parvizian’s Motion for Summary Judgment (Doc. No. 32), in
which Defendants Robert J. Balunas and R. Thomas & Co., LLC, and Alfredo
Gonzalez and AMG Energy, LLC, joined (Doc. Nos. 35 & 36 respectively);
(2) Plaintiff Securities and Exchange Commission’s Motion for Summary Judgment
(Doc. No. 37); (3) Plaintiff Securities and Exchange Commission’s Objections to, and
Motion to Strike Defendants’ Summary Judgment Evidence (Doc. No. 43); and
(4) Defendants Arcturus Corporation, Aschere Energy, LLC, and Leon Ali Parvizian’s

ORDER – PAGE 1

Motion to Strike Declaration of Ty Martinez (Doc. No. 49). The Court has carefully
reviewed and considered the motions, the responses, the replies and supporting
appendices, the applicable law, and the relevant portions of the record. The Court
DENIES (1) Defendants’ motion for summary judgment, (2) GRANTS Plaintiff’s
motion for summary judgment, (3) DENIES Plaintiff’s motion to strike, and (4)
DENIES Defendants’ motion to strike.
I.

Factual Background

Defendant Leon Ali Parvizian (“Parvizian), a British citizen with permanent U.S.
residency, formed and controlled Defendants Arcturus Corporation (“Arcturus”) and
Aschere Energy, LLC (“Ashchere”), both Texas corporations based in Dallas. From
2007 through 2011, Parvizian, Arcturus and Aschere (collectively “Parvizian
Defendants”) offered and sold interests in six oil and gas well drilling projects which
became the subject of an investigation by Plaintiff Securities and Exchange
Commission (“SEC”)—Hillcock, Piwonka, Conlee, Frayley-Nelson, Chips Joint, and
Wied Field. Each project had a “Managing Venturer” which supervised and managed
the respective project, and which earned “Management Fees” paid by the project.
Arcturus was the Managing Venturer of the Hillcock and Piwonka drilling projects.
Aschere was the Managing Venturer of the Conlee, Fraley-Nelson, Chips Joint, and
Wied Field drilling projects.

ORDER – PAGE 2

The SEC contends that these drilling projects were in actuality securities, and the
Parvizian Defendants attempted to avoid the reach of securities laws by referring to
the oil and gas well drilling projects as “joint ventures” and the investors as “partners”
or “venturers”. The Parvizian Defendants argue these drilling projects were actually
Joint Ventures, not securities, and the partners funded, not invested in, these
ventures. The Parvizian Defendants further allege that these partners had powers
and rights, as well as liabilities and management obligations, under the Joint Venture
Agreements (“JVA”) for each respective drilling project. (The Court will refer to these
oil and gas well drilling projects as Joint Ventures and the investors as “venturers” or
“partners” only for purposes of simplicity in the Factual Background; this is not a
finding by the Court that these projects are indeed Joint Ventures thereby escaping
securities law.)
Parvizian sold these JVs through Defendant companies R. Thomas & Co., LLC
(“R. Thomas”), a Florida limited liability company, and AMG Energy, LLC (“AMG”),
a Texas limited liability company. Neither company was a registered broker.
R. Thomas was started and managed by Defendant Robert J. Balunas (“Balunas”), a
Florida resident. R. Thomas had a “consulting agreement” with Aschere which
provided that Balunas earned a 12% commission on each prospective venturer he
“introduced” to a Joint Venture. Balunas would call prospective venturers from a

ORDER – PAGE 3

“lead list” and give any interested persons information about the Joint Venture he
was “introducing”. Balunas would provide Parvizian with the interested person’s
contact information. Balunas used “lead lists” of prospective venturers which he
created and maintained from cold calls he had previously made; there was no prior
relationship between any potential venturer and the Parvizian Defendants. Parvizian
closed the sales of a venture interest, and any money received from a sale was
deposited into bank accounts controlled exclusively by Parvizian. In addition to the
12% commission, Parvizian also paid Balunas $4,000 monthly as a “retainer”.
AMG was set up by Parvizian for Defendant Alfredo Gonzalez (“Gonzalez”), a
Chilean citizen residing in Dallas. Gonzalez was president of the company. AMG
had a “consulting agreement” with Aschere under which AMG would offer and sell
the Joint Ventures. Parvizian paid AMG $500 each week per AMG employee for
their salaries. In addition, AMG employees were paid 10% commission for each
venture unit the employee sold, and AMG earned 2% commission for each venture
unit its employee sold. AMG employees made cold calls to potential venturers whose
information came from “lead lists” purchased by the Parvizian Defendants. Certain
AMG employees were in charge of giving potential venturers the venture offering’s
terms and then finalizing the sale. All money received from a sale was deposited into
bank accounts controlled exclusively by Parvizian.

ORDER – PAGE 4

Parvizian prepared the Joint Venture written materials that were given to
potential venturers. These included: (1) Confidential Information Memoranda
(“CIMs”) that generally described the operation of the venture; (2) Private Placement
Memoranda (“PPMs”) which were glossy brochures containing a summary of the
venture; (3) Joint Venture Agreements (“JVAs”) which contained detailed
information about the venture operations; (4) subscription agreements; and (5)
investor questionnaires (collectively “Offering Documents”).
The SEC filed this civil enforcement action on December 12, 2013, alleging
Defendants violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933
(“Securities Act”), and Sections 10(b) and 15(a) of the Securities Exchange Act of
1934 (“Exchange Act”), and Rule 10b-5 thereunder. The SEC seeks permanent
injunctions, disgorgement plus pre- and post-judgment interest, and civil penalties.
The Court previously denied the Defendants’ motions to dismiss. The Parvizian
Defendants filed a motion for summary judgment that is currently before the Court
and which Defendants Balunas, R. Thomas, Gonzalez and AMG joined. The SEC
then filed a competing motion for summary judgment which is also currently before
the Court. The SEC and the Parvizian Defendants each filed a motion to strike
specific summary judgment evidence submitted.

ORDER – PAGE 5

II.

Summary Judgment Motions
A. Legal Standard
Summary judgment is appropriate when the pleadings, affidavits and other

summary judgment evidence show that no genuine issue of material fact exists, and
the moving party is entitled to judgment as a matter of law. FED.R.CIV.P. 56(c);
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A dispute of a material fact is
“genuine” if the evidence is such that a reasonable jury could return a verdict in favor
of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
All evidence and reasonable inferences must be viewed in the light most favorable to
the nonmovant, and all disputed facts resolved in favor of the nonmovant. See
United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); Boudreaux v. Swift Transp. Co.,
Inc., 402 F.3d 536, 540 (5th Cir. 2005).
If the movant bears the burden of proof on an issue at trial, the movant “must
establish beyond peradventure all of the essential elements of the claim” in order to
obtain summary judgment on those issues. Fontenot v. Upjohn Co., 780 F.2d 1190,
1194 (5th Cir. 1986). If the movant does not bear the burden of proof at trial, then
the moving party must identify those portions of the record it believes demonstrate
the absence of a genuine issue of material fact. Celotex, 477 U.S. at 322-25. Once the
movant satisfies his burden, the nonmovant must show a genuine fact issue for trial

ORDER – PAGE 6

exists. Id. at 321-25; Anderson, 477 U.S. at 255-57. To meet this burden, the
nonmovant may not rest on the pleadings, but must designate specific facts in the
record establishing a genuine issue of material fact exists. Celotex, 477 U.S. at 325;
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994)(en banc). The
nonmovant may satisfy this burden by providing depositions, affidavits, and other
competent evidence; not with “conclusory allegations, speculation, and
unsubstantiated assertions.” Douglass v. United Servs. Auto. Ass’n, 79 F.3d 1415, 1429
(5th Cir. 1996) (en banc). Conclusory allegations, unsubstantiated assertions, or a
mere scintilla of evidence cannot defeat a motion for summary judgment. See
Anderson, 477 U.S. at 249-52; Boudreaux, 402 F.3d at 540. If the nonmovant fails to
meet his burden, summary judgment must be granted. Celotex, 477 U.S. at 322.
B. Applicable Law
The Securities Act and Exchange Act are remedial in nature and were enacted to
regulate investments in an attempt to protect against abuses of the securities market.
See Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990); SEC v. Koskot Interplanetary,
Inc., 497 F.2d 473, 479-80 (5th Cir. 1974). Section 2(1) of the Securities Act
broadly defines “security” so to intentionally “encompass virtually any instrument
that might be sold as an investment.” Reves, 494 U.S. at 61(quoting United Housing
Foundation, Inc. v. Forman, 421 U.S. 837, 847-48 (1975)). In SEC v. W.J. Howey Co.,

ORDER – PAGE 7

328 U.S. 293 (1946), the Supreme Court explained that a broad definition of
securities “embodies a flexible rather than a static principle, one that is capable of
adaptation to meet the countless and variable schemes devised by those who seek the
use of the money of others on the premise of profits.” Id. at 299.
This sweeping definition of “security” includes the term “investment contract”;
but, neither the Securities Act nor the Exchange Act defines this term. The test for
determining whether an investment scheme is an “investment contract” was set forth
by the Supreme Court in Howey:
In other words, an investment contract for purposes of the
Securities Act means a contract, transaction or scheme
whereby a person invests his money in a common
enterprise and is led to expect profits solely from the
efforts of a promoter or a third party.
328 U.S. at 298-99; see also Forman, 421 U.S. at 852 (“[t]he touchstone is the
presence of an investment in a common venture premised on a reasonable
expectation of profits to be derived from the entrepreneurial or managerial efforts of
others.”). In determining whether an investment scheme is an investment contract
under Section 2(1), the Supreme Court has repeatedly stated that courts should
disregard form for substance and focus on the “economic realities underlying a
transaction, and not the name appended thereto.” Forman, 421 U.S. at 848-49; see
Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers of Am. v. Daniel, 439 U.S.

ORDER – PAGE 8

551, 558-59 (1979)(substance of the transaction should control its classification
instead of “the names that may have been employed by the parties.”); see also
Williamson v. Tucker, 645 F.2d 404, 418 (5th Cir. 1981)(“[t]he Supreme Court has
repeatedly emphasized that economic reality is to govern over form and that the
definitions of the various types of securities should not hinge on exact and literal
tests,” when determining whether an interest is a security). The Fifth Circuit stated
that investment contracts include “financial instruments that may superficially
resemble private commercial transactions” and, although they may “not bear the
formal attributes of a security [ ] they are in actuality securities.” Youmans v. Simon,
791 F.2d 341, 345 (5th Cir. 1986).
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 (when
investors possessed, retained and had the ability to exercise real power in the joint
venture or general partnership, courts uniformly refused to find those joint ventures
or general partnerships were securities). But, simply identifying or labelling an
investment as a general partnership or joint venture does not preclude a court from
finding that the investment is actually within the “reach of federal securities laws.”
Id. at 422-23.

ORDER – PAGE 9

There are three prongs to the Howey test to determine whether a scheme is an
“investment contract”: “(1) an investment of money; (2) in a common enterprise;
and (3) on an expectation of profits to be derived solely from the efforts of
individuals other than the investor.” Williamson, 645 F.2d at 417. The Fifth Circuit
noted that a strict or literal interpretation of “solely” in the third factor would
prevent the remedial purposes of the Securities Acts, which includes protecting
investors. Koskot, 497 F.2d at 480. To determine whether profits are expected to
come “solely” from the efforts of others, the Fifth Circuit adopted the test out of the
Ninth Circuit 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.’” Id. at 483
(quoting SEC v. Glenn W. Turner, 474 F.2d 476, 482 (9th Cir. 1973)).
The third Howey factor can be established if the partnership or venture is one in
which the partners are “so dependent on a particular manager that they cannot
replace him or otherwise exercise ultimate control.” Williamson, 645 F.2d at 424.
The court can consider the following non-exclusive factors when determining whether
general partners or joint venturers are so dependent on another’s effort that the
investment is actually an investment contract:
(1)

ORDER – PAGE 10

An agreement among the parties leaves so little
power in the hands of the partner or venturer that

(2)

(3)

the arrangement in fact distributes power as would a
limited partnership; or
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
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.

Id.
C. Application of the Law to the Facts
The SEC moves for summary judgment on all of its claims against Defendants.
First, the SEC contends that the Parvizian Defendants’ oil and gas well offerings
satisfy all three Howey factors, so they are investment contracts for purposes of federal
securities law despite their general partnership/joint venture labels. Because these
offerings are securities, the SEC argues it has made a prima facie showing that all
Defendants committed a securities violation by offering and selling unregistered
securities, and that the individual Defendants committed a securities violation by
being unregistered brokers-dealers. Finally, the SEC contends that summary
judgment is appropriate on its two claims of securities fraud against the Parvizian
Defendants because its summary judgment evidence of two specific instances of fraud
establishes that there is no genuine issue of material fact on either claim.

ORDER – PAGE 11

In response, the Defendants first argue that the SEC cannot meet its “heavy
burden” to establish that the Joint Ventures are securities, and more specifically, that
the third Howey factor cannot be established. Because the SEC cannot establish these
Joint Ventures are securities, the Defendants argue all of the SEC’s claims necessarily
fail. As for the fraud claims, the Parvizian Defendants argue that even if the Court
found the Joint Ventures to be securities, summary judgment is not appropriate
because there are genuine issues of material fact related to the securities fraud
allegations, especially as to the required element of scienter.
1. Joint Ventures Were Investment Contracts
As a threshold matter, the Court must first determine whether the oil and gas well
offerings at issue here are actually investment contracts despite their “joint venture”
labels, making the Joint Ventures securities subject to federal securities laws. As
previously outlined, an “investment contract” is defined by the Supreme Court as (1)
individuals led to invest money, (2) in a common enterprise, and (3) having the
expectation that they would earn a profit solely through the efforts of others. Howey,
328 U.S. at 298-99. There is no dispute money was invested by individuals in these
oil and gas well offerings for testing, drilling and completing the wells, a common
enterprise. It is the third Howey factor that is in dispute—whether the investors
expected they would earn a profit solely through the efforts of others.

ORDER – PAGE 12

If the partnership or joint venture is one in which the general partners or
venturers are “so dependent on a particular manager that they cannot replace him or
otherwise exercise ultimate control,” the third factor is established. Williamson, 645
F.2d at 424. The Court can consider the following non-exclusive factors in
determining whether there is such dependence:
(1)

(2)

(3)

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
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
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.

Id. (emphasis added). The SEC need only establish one of the three factors. See
S.E.C. v. Merch. Capital, LLC, 483 F.3d 747, 756 (11th Cir. 2007)(“the presence
of one of the three Williamson factors renders even a general partnership interest
an investment contract.”).
a) Venturers had little or no actual power
The first Williamson factor the Court can consider is whether the agreement
between the parties gives the venturer little to no power, such as a limited partner
would have. Williamson, 645 F.2d at 424. A general partnership or joint venture

ORDER – PAGE 13

interest usually does not fall within the broad definition of “investment contract”.
Williamson, 645 F.2d at 419-421 (when investors possessed, retained and had the
ability to exercise real power in the joint venture or general partnership, courts
uniformly refused to find those joint ventures or general partnerships were securities).
But 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. (limited partners do
not possess same kind of power normally held by general partners). The SEC argues
these investors had “no real legal powers over their investment” and were not general
partners or venturers as the Defendants contend. Specifically, the SEC contends the
venturers delegated any powers they might have had, and all control was possessed by
the Parvizian Defendants. The Court finds the evidence submitted by the SEC
establishes the venturers had little power at best, but more realistically, no power at
all.
Each of the Parvizian Defendants’ six oil and gas well offerings had a Joint
Venture Agreement (“JVA”) which provided specific details of how the venture was
structured and would operate, including the assignment and delegation of powers and
duties. The Parvizian Defendants argue the venturers did not initially delegate

ORDER – PAGE 14

control to Arcturus or Aschere when they signed the JVA and that any power
delegated to the Managing Venturer is limited to day-to-day management and is
subject to the “affirmative vote” of the venturers. The summary judgment record
establishes the venturers did delegate control at the outset. Under the express
language of the JVA, the venturers delegated all powers related to the day-to-day
management as well as operations of the venture to either Arcturus or Aschere as the
respective Managing Venturer. The venturers also delegated “the power to act on
behalf of, sign or bind the Joint Venture” or other venturers with the Managing
Venturer under the express language of the JVA. The JVA vested the Managing
Venturer with “full and plenary power” over the drilling operations, and allowed the
Managing Venturer to either “retain or act as operator(s)” for the purposes of testing,
drilling and completing the well among other things.
In response, the Parvizian Defendants point the Court to the JVA language
that the venture “shall be managed and controlled collectively by all the Venturers.”
The Parvizian Defendants contend the venturers had broad actual managerial powers
under the JVA and they were expected to participate in the joint venture’s operations.
According to the Parvizian Defendants, these real powers included the ability to call a
meeting and certain voting rights, such as the ability to remove the Managing
Venturer and the ability to amend the JVA terms. The Parvizian Defendants also

ORDER – PAGE 15

maintain that the Managing Venturer’s powers were always “subject to the
affirmative Vote of the Venturers” under the JVA, and this was a “significant” and
“powerful” right related to management of the Joint Venture.
Despite the Parvizian Defendants’ argument to the contrary, the Court cannot
find that the venturers had any real, actual powers based on the summary judgment
record. The only specific powers the Parvizian Defendants reference, the ability to
call a meeting and voting powers to remove the Managing Venturer and to amend the
JVA terms, require a certain percentage of Joint Venture interest. For example, the
power to remove the Managing Venturer requires 60% interest vote. The SEC’s
summary judgment evidence establishes the venturers had no information about each
other and, therefore, no way to contact each other. The Parvizian Defendants held
this information and did not distribute it; Parvizian even characterized this
information as “confidential.” The summary judgment evidence establishes that
Parvizian refused to disclose the identities of or information about any venturer when
it was requested by a venturer multiple times. The summary judgment evidence also
reveals an instance where Parvizian attempted to control and deny use of this
information when it was accidentally disclosed. An Arcturus employee, Chris
Antonson, sent a group email to venturers which mistakenly revealed each venturer’s
email address rather than including those addresses in the blind copy line. Upon

ORDER – PAGE 16

receiving this email, venturer Rick Ullrey emailed the other venturers in an attempt
“to create an organized communication vehicle for the investors.” Mr. Ullrey
previously had not been allowed access to any contact information, and his requests
for this information had been ignored by Parvizian several times. When Parvizian
found out about Mr. Ullrey’s email, he called Mr. Ullrey. A very angry Parvizian told
Mr. Ullrey the venturers’ email addresses were “confidential” and his use of this
information was a breach of confidentiality. Parvizian ordered him not to contact the
other venturers again or Parvizian “would take legal action against” him. Mr. Ullrey
stated in his declaration that he felt Parvizian would sue him if he contacted the
other investors again.
If the venturers did not have any contact information for the other venturers,
or felt as if they could not use that information without threat of legal action as Mr.
Ullrey did, how could the venturers ever satisfy the minimum percentage interest to
exercise these powers cited by the Parvizian Defendants. These venturers were
located across the United States and had no connection to or prior relationship with
one another, except possibly for receiving “cold calls” as potential investors from a
“leads list”. Any 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. The Parvizian Defendants failed to address the SEC’s contention that

ORDER – PAGE 17

this information was withheld by them. The Parvizian Defendants do not attempt to
establish that the venturers did have access to this information and did not explain
how the venturers could effectively exercise their powers when a percentage interest
vote was required.
The Court finds a case out of the Eleventh Circuit instructive. In Merchant
Capital, the Eleventh Circuit applied the Williamson factors and determined that the
partnership agreement created many “barriers” to the investors being able to exercise
their powers. Id. 483 F.3d at 757-58. Citing the Supreme Court in Howey, the
Eleventh Circuit concluded that these barriers were compounded because the
investors “were geographically dispersed, with no pre-existing relationships” and there
was “a lack of face-to-face contact among the partners”. Id. at 758 (quoting Howey,
328 U.S. at 299 (Supreme Court found it significant that investments “were offered
‘to persons who reside in distant localities.’”)). Furthermore, the Eleventh Circuit
determined that powers or votes are illusory when the promoter 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”. Id. at 758. Just as in Merchant
Capital, these venturers had many barriers to exercise any alleged power under the
JVA. The venturers were geographically dispersed with no pre-existing relationship,

ORDER – PAGE 18

and were completely at the mercy of the Parvizian Defendants for any information
related to other investors as well as the venture accounts.
Furthermore, although the Parvizian Defendants refer to other “real” and
“significant” powers the venturers possessed, the Parvizian Defendants never offer
any detail or evidence in support of this. Citations to general language in the JVA
stating that the venturers were expected to participate in the management of the Joint
Venture, that the venturers would collectively control the Joint Venture, and that the
Managing Venturer’s powers were subject to the venturers’ “affirmative vote”, are
insufficient without more to rebut the SEC’s evidence. For example, the Parvizian
Defendants refer to the very “significant” power of the venturers that the Managing
Venturer’s powers were subject to the affirmative vote of the venturers. But the
Parvizian Defendants do not explain, among other things, how this vote would occur,
who would call for a vote, what could trigger such a vote of the venturers. The
summary judgment record established that the majority of the venturers’ powers and
duties were delegated to the Parvizian Defendants, and any arguable power the
venturers still possessed could not be exercised because the necessary information was
controlled by the Parvizian Defendants.
Despite the Parvizian Defendants argument to the contrary, the venturers are
not similar to general partners. The Fifth Circuit has stated that “a general

ORDER – PAGE 19

partnership in which some agreement among the partners places the controlling
power in the hands of certain managing partners may be an investment contract with
respect to the other partners.” Williamson, 645 F.2d at 423. Under the express
language of the JVA, the venturers delegated to the Managing Venturer: (1) all
powers related to the day-to-day management as well as operations of the venture;
and (2) “the power to act on behalf of, sign or bind the Joint Venture” or other
venturers. The JVA expressly vested the Managing Venturer with “full and plenary
power” regarding all drilling operations, among 13 other listed powers. The Court
finds that this summary judgment evidence supports a finding that the venturers had
no real powers; the actual controlling power was in the hands of the Parvizian
Defendants. See id.
The Parvizian Defendants respond that the Court must focus on the venturers’
understanding of their powers at the time the partnership was formed and what the
actual terms of the JVA were. The Court disagrees. To determine the reality of the
venturers’ powers, the Court must look, to some extent, at post-investment activities.
See Merch. Capital, 483 F.3d at 760. Otherwise, focusing on just the terms of the
partnership agreement would “be inconsistent with the substance over form principle
of Howey, and would be an invitation to artful manipulation of business forms to
avoid investment contract status.” Id. (citing Williamson, 645 F.2d at 418). “Post-

ORDER – PAGE 20

investment events can serve as evidence of how much power partners reserved at the
inception.” Id. These venturers were not given actual powers under the agreement
when the venture was formed, and then later delegated those duties or powers. These
venturers were given what are essentially sham or illusory powers; although listed on
paper, these powers never actually existed because the Parvizian Defendants did not
intend to allow the venturers to exercise them.
The Court finds that the first Williamson factor, that the venturers’ lacked actual
power, has been established by the SEC’s competent summary judgment evidence
and the Defendants failed to present sufficient, competent summary judgment
evidence to create a genuine issue of material fact on this issue. Because the first
Williamson factor proves the venturers’ dependence on the efforts of the Parvizian
Defendants, the Court finds the third Howey factor is established. See Williamson, 645
F.2d at 424. Accordingly, these Joint Ventures are “investment contracts” and,
therefore, are securities.
b) Venturers were inexperienced and unknowledgeable in oil and
gas well business
Even if the first Williamson factor had not been satisfied, the Court could look
to the second Williamson factor to establish complete dependence. 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

ORDER – PAGE 21

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 v. Shultz Cattle Co., Inc., 881 F.2d 129, 134-35 (5th Cir.
1989) (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.”).
The Parvizian Defendants contend that this Court must consider the investors’
general business experience and knowledge, not just their experience and knowledge
of oil and gas industry because that is too narrow. The Parvizian Defendants are
wrong. In the prior paragraph, the Court stated that binding Fifth Circuit case law
clearly requires this Court to examine the venturers’ experience and knowledge of the
oil and gas industry because the Joint Ventures involve oil and gas well drilling.
Using the correct standard, the SEC provided sufficient, competent summary
judgment evidence to establish that these venturers were inexperienced and

ORDER – PAGE 22

unknowledgeable about the oil and gas well drilling. The Parvizian Defendants,
however, did not meet their burden by submitting sufficient competent summary
judgment evidence that these venturers had experience or knowledge specifically in
the oil and gas industry.
The summary judgment evidence establishes that the Parvizian Defendants’
Joint Ventures were marketed through hundreds of daily unsolicited cold calls to
thousands of potential venturers whose information came from a “leads list”. The
uncontroverted summary judgment evidence also establishes that the Parvizian
Defendants’ Joint Venture offerings were not limited to potential venturers with
experience in or knowledge of the oil and gas industry. The Tenth Circuit has stated
that marketing “oil and gas interests nationwide to investors with little, if any,
experience in the oil and gas industry by means of over 400 cold calls a day” supports
a conclusion that the investors were so inexperienced or unknowledgeable in business
that they were not capable of “intelligently exercising their partnership or venture
powers.” SEC v. Shields, 744 F.3d 633, 647 (10th Cir. 2014). Although it is not
binding on this Court, the Tenth Circuit’s analysis is well-reasoned and the facts are
analogous to this case. The evidence establishes these Joint Ventures were marketed
to potential venturers across the nation, through cold calls using “leads lists”, and
without limiting the offering to potential venturers with experience in oil and gas well

ORDER – PAGE 23

drilling. This evidence supports a finding by the Court that these venturers were
inexperienced or unknowledgeable in the oil and gas industry making it more likely
that they were not capable of “intelligently exercising their partnership or venture
powers.” Shields, 744 F.3d at 647; see Long, 881 F.2d at 135 (evidence established
that plaintiffs, who were scattered geographically from each other and the cattle
which formed the basis of the investment, did not have “experience necessary to care
for, feed, and market their cattle.”).
The Parvizian Defendants argue that the Court must look to the investor
group as a whole in evaluating their experience and knowledge, and these venturers
are sophisticated and experienced business people who can collectively run the Joint
Venture. The Parvizian Defendants cite the Court to Nunez v. Robin, 415 Fed.Appx.
586 (5th Cir. 2011) as support for their proposition that “the partners’ sophistication
is evaluated collectively, not on a person-by-person basis.” The Parvizian
Defendants’ contention is simply wrong; Nunez does not hold that the investors’
generalized business knowledge may be considered collectively. The Court does not
consider what general business knowledge the venturers bring to the Joint Venture.
Again, Fifth Circuit case law is clear that the investors’ expertise and knowledge
“must be considered in relation to the nature of the underlying venture.” Long v.
Shultz Cattle Co. Inc., 896 F.2d 85, 135 (5th Cir. 1990)(citing Williamson, 645 F.2d at

ORDER – PAGE 24

423). The Fifth Circuit has emphasized that its discussion in Williamson “made clear
that the knowledge inquiry must be tied to the nature of the underlying venture.”
Long, 881 F.2d at 135 n. 3.
Regardless of whether the Court were to consider the venturers’ expertise
collectively or individually, the Parvizian Defendants failed to identify competent
summary judgment evidence that any of these investors had expertise and experience
in oil and gas well drilling, which was the nature of these Joint Ventures. In their
response, the Parvizian Defendants state, “[A] substantial number of the partners
have specific experience investing the in the oil and gas industry.” In support of this,
they cite the Court to two pages in their supporting appendix. The first citation is
Parvizian’s own declaration where he makes the following generalized statement:
“Many of the venturers have extensive experience investing in the oil-and-gas
industry, including partnering in multiple joint ventures with [Arcturus and
Aschere].” Nowhere does Parvizian identify any of these “many” venturers with
“extensive experience investing in the oil-and-gas industry”. Also, Parvizian does not
identify whether the other Arcturus or Aschere joint ventures he references are the
subject of this lawsuit. The second appendix citation is to a multi-page chart that
appears to identify venturers. There is no indication who created the chart, what
sources of information were used in creating the chart, or what information is

ORDER – PAGE 25

contained in each column. But most problematic is that the Parvizian Defendants do
not cite the Court to any specific entries in this 10 page chart which might identify
the “many” venturers with “extensive experience in the oil-and-gas industry.” It is
the Parvizian Defendants’ burden to set forth “the precise manner in which that
evidence supports [their] claim.” Ragas v. Tenn. Gas Pipeline Co., 136 F.3d 455, 458
(5th Cir. 1998). “Rule 56 does not impose upon the district court a duty to sift
through the record in search of evidence to support a party’s opposition to summary
judgment.” Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 915-16 & n. 7 (5th Cir.
1992). The Court will not sift through this information and these numerous entries
in an attempt to determine which venturers might have experience in oil and gas
industry.
The summary judgment evidence establishes that these venturers, although
arguably professionals and people with business experience, had no expertise or
knowledge about the oil and gas well business, specifically drilling, and they would
have had to rely on information from the Parvizian Defendants to make any decision
if they had possessed any powers to exercise. See Long, 881 F.2d at 134-35(even
though investors may have “had theoretical control over the investment,” agreements
were investment contracts because investors lacked knowledge or experience in the
cattle business and investors received and relied on information from investment

ORDER – PAGE 26

promoter to make any decision). Likewise, there is no summary judgment evidence
showing they had the knowledge or desire to test, drill and complete these Joint
Venture oil and gas wells on an individual basis. See Long, 896 F.2d at 87 (5th Cir.
1990)(investors “were business and professional people” but they “possessed neither
the knowledge nor the desire to buy, raise, and market cattle on an individual
basis.”). The Parvizian Defendants’ focus on these venturers being “collectively
sophisticated” in general business is simply contrary to well-established Fifth Circuit
case law. See Long, 881 F.2d at 135 n.3.
The Court finds that the second Williamson factor, that the venturers lacked
experience in and knowledge about the oil and gas industry, has been established by
the competent summary judgment evidence. The Parvizian Defendants failed to
meet their burden to create a genuine issue of material fact on this issue with
citations to competent evidence in the summary judgment record. Because the
second Williamson factor proves the venturers’ dependence on the efforts of the
Parvizian Defendants, the Court finds the third Howey factor is established. See
Williamson, 645 F.2d at 424. Accordingly, these Joint Ventures are “investment
contracts” and, therefore, are securities.

ORDER – PAGE 27

c) Venturers were dependent on unique ability of the Parvizian
Defendants
Even if the first and second factors had not been satisfied, the third Williamson
factor could also establish the venturers were complete dependent on the Parvizian
Defendants’ efforts. Under this third factor, even if the venturers had possessed
actual powers, the Joint Venture is still an investment contract if the venturers have
no practical alternative to the manager or they are incapable of competently
exercising those powers. See Merch. Cap., 483 F.3d at 764; Long, 881 F.2d at 133.
The Court finds the SEC presented sufficient evidence to establish this third factor as
well.
Again, the Court finds the Eleventh Circuit’s analysis and conclusion in
Merchant Capital to be helpful and persuasive. 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.” Merch. Capital, 483 F.3d at 764. The manager had taken
the assets of the different partnerships he managed, combined them, then invested
them in “pools of accounts” held by a third-party. Id. The partnerships had no right,
contractual or otherwise, to require the return of their assets in these investment
pools; only the manager had a contractual right. Id. So even if the manager had been

ORDER – PAGE 28

replaced, the assets would not have been accessible to the partners or partnerships.
Id.
This is factually similar to the case at hand. The summary judgment evidence
shows that the Parvizian Defendants took the investments of each Joint Venture
account, placed them into one account Parvizian controlled exclusively, and
commingled the funds with money from other Joint Ventures controlled by the
Parvizian Defendants, as well as non-Joint Venture money. This process was never
disclosed to the venturers; in fact, the SEC’s summary judgment evidence establishes
that the venturers believed the Joint Venture’s fund were kept in that Joint Venture’s
account, and was not commingled with any other money. The venturers had no
access to their funds because the money was held in an account controlled exclusively
by Parvizian, not the Joint Venture. Therefore, even if the venturers were able to
exercise their power to remove Arcturus or Aschere as Managing Venturer, the Joint
Venture and any new Managing Venturer would not have had access to those
investment funds and the Joint Venture would have been at risk for failing without
access to its assets to fund the drilling. The Parvizian Defendants do not submit any
competent summary judgment evidence controverting that SEC’s evidence that the
venturers lacked any control over their money which created a complete dependency
on the Parvizian Defendants.

ORDER – PAGE 29

In addition, the SEC has presented sufficient evidence that the Parvizian
Defendants completely controlled and managed the ventures. Parvizian himself
either drafted, or directed to be drafted, the JVAs, and set the offering and
completion pricing which included profit amount. The JVA appointed Arcturus or
Aschere as the Managing Venturer and explicitly authorized the Managing Venturer
to control drilling operations, including the power to either retain or act as operator,
and to drill, complete, equip, test, rework, operate, recomplete and even plug the well
and abandon the prospect. The language of the JVA also permitted the Managing
Venturer to execute documents and hold interests in its own name. None of the JVA
terms were negotiable; venturers were required to consent to all the terms of the JVA
as written if they wished to participate in the venture. As previously discussed, the
venturers had no access to information about each other, and even if they had, the
Parvizian Defendants controlled what information was shared or disseminated to the
venturers. The Court finds this summary judgment evidence establishes that the
venturers completely depended on the Parvizian Defendants as managers.
The Parvizian Defendants respond that they routinely distributed information
to the venturers, such as financial information and testing and drilling progress. But
as the Fifth Circuit noted in Long, “access to information does not necessarily protect
an investor from complete dependence on a third party, where, as here, that same

ORDER – PAGE 30

third party is the sole source of the 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. These venturers received
all information related to the Joint Venture from the Parvizian Defendants, and these
venturers had no expertise in the oil and gas business which would have allowed them
to make informed decisions related to the Joint Venture, even if they had actually
possessed real power to make such decisions. The venturers had no personal or firsthand knowledge about any activities or decisions related to the Joint Venture; they
relied completely on information distributed by the Parvizian Defendants. The Court
finds this is further evidence that the venturers were completely dependent on the
Parvizian Defendants. See id. (“access to information does not necessarily protect an
investors 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.”).
The Court finds the third Williamson factor, the venturers were so dependent on
the Parvizian Defendants as managers, has been established by the competent
summary judgment evidence. The Court concludes that the Defendants failed to
meet their burden to identify competent summary judgment evidence showing there

ORDER – PAGE 31

is a genuine issue of material fact. Anderson, 477 U.S. at 249. Because the third
Williamson factor proves the venturers’ dependence on the efforts of the Parvizian
Defendants, the Court finds the third Howey factor is established. See Williamson, 645
F.2d at 424. Accordingly, these Joint Ventures are “investment contracts” and,
therefore, are securities.
The Court finds that the Joint Ventures at issue are investment contracts
because each of the three Williamson factors is established by the summary judgment
record. See Merch. Capital, 483 F.3d at 756 (“the presence of one of the three
Williamson factors renders even a general partnership interest an investment
contract.”). The Parvizian Defendants failed to demonstrate a genuine issue of
material fact as to whether these Joint Ventures are investment contracts and,
therefore, securities within the reach of the Securities Acts. The Court now turns to
the SEC’s four claims against the Defendants.
2. Violations of Sections 5(a) and 5(c) of the Securities Act
In its third claim against all Defendants, the SEC alleges each Defendant
violated Section 5 of the Securities Act by offering and selling unregistered securities.
In its motion, the SEC contends the summary judgment evidence conclusively
establishes that all Defendants used interstate commerce to offer and sell the Joint
Ventures, which are unregistered securities. The SEC also argues the Defendants

ORDER – PAGE 32

cannot prove any available exemption from the registration of the Joint Ventures
applies here, and why none of the available exemptions would apply. In response, the
Defendants argue just that the Joint Ventures are not securities, so there can be no
violation of any securities law, including Section 5. Defendants put forth no other
responsive argument.
Section 5 violations are strict liability offenses and the defendant’s state of
mind is not a consideration. See Aaron v. SEC, 446 U.S. 680, 714 n. 5 (1980);
Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir. 1980). To establish a prima facie
case for Section 5(a) and 5(c) violations, the plaintiff must prove: (1) defendants
offered or sold securities; (2) the securities were not registered as required by Section
5; and (3) defendants used the United States mail or interstate commerce to offer or
sell the securities. Dennis v. Gen. Imaging, Inc., 918 F.2d 496, 503-504 (5th Cir.
1990). Once the SEC satisfies its burden, the defendant then bears the burden of
proving he qualifies for an exemption from the registration requirement. SEC v.
Cont’l Tobacco Co., 463 F.2d 137, 155-56 (5th Cir. 1972).
The Court has already determined the Joint Ventures are “investment
contracts” thereby making them securities. The SEC argues that each Defendant
offered and sold interests in these investment contracts relating to oil and gas well
drilling, totaling approximately $21.9 million. The summary judgment evidence

ORDER – PAGE 33

establishes there was no registration on file or in effect for these securities, and the
Defendants used interstate commerce to make offers and sales of the Joint Venture
interests to the venturers. The SEC met its burden of establishing a prima facie case of
Section 5 violations as to each Defendant. The burden shifted to the Defendants to
establish an applicable exemption, but they merely argued that the Joint Ventures are
not securities. They failed to meet their burden.
The Court finds there is no genuine dispute of material fact as to whether each
Defendant violated Section 5 of the Securities Act. Summary judgment in favor of
the SEC is appropriate on its third claim for violations of Section 5 of the Securities
Act against each Defendant.
3. Violations of Sections 15(a) of the Exchange Act
In its fourth claim against Defendants Parvizian, Gonzalez, AMG, Balunas and
R. Thomas, the SEC alleges these Defendants violated Section 15 of the Exchange
Act as unregistered brokers offering and selling securities. In its motion, the SEC
contends the summary judgment evidence establishes that Defendants Parvizian,
Gonzalez, AMG, Balunas and R. Thomas acted as brokers for purposes of Section 15,
and because they are unregistered brokers and used interstate commerce to offer and
sell interests in the Joint Ventures, which are securities, they violated Section 15.
Just as with the SEC’s argument related to Section 5 violation, Defendants respond

ORDER – PAGE 34

that the Joint Ventures are not securities, so there can be no violation of any
securities law, including Section 15. Defendants put forth no other responsive
argument.
Section 15(a) provides that it is unlawful for a broker or dealer who is not
registered “to make use of the mails or any means or instrumentality of interstate
commerce to effect any transaction in, or to induce or attempt to induce the purchase
or sale of, any security.” 15 U.S.C. § 78o(a)(1). Scienter is not a required element.
SEC v. Offill, Civ. Action No. 3:07-CV-1643-D, 2012 WL 246061, at *6 (N.D. Tex.
Jan. 26, 2012)(Fitzwater, CJ)(citing SEC v. Rabinovich & Assoc., LP, NO.
07Civ.10547, 2008 WL 4937360, at *5 (S.D.N.Y. Nov. 18, 2008)). Broker is
defined as “any person engaged in the business of effecting transactions in securities
for the account of others.” 15 U.S.C. § 78c(a)(4). Section 15 does not define the
terms “engaged in business”, but courts have defined it as “being ‘engaged in the
business’ of ‘effecting transactions in,’ or ‘buying and selling,’ securities. Offill, 2012
WL 246061, at *7. The regularity of a defendant’s participation in securities
transactions is a strong indicator of “being engaged in the business.” Id. Factors
tending to show regularity of participation include “’the dollar amount of securities
sold . . . and the extent to which advertisement and investor solicitation were used.’”
Id. (quoting SEC v. Kenton Capital, Ltd., 69 F.Supp.2d 1, 12 -13 (D.D.C. 1998)).

ORDER – PAGE 35

Section 15 also does not define the term “effecting transactions”. Courts can
consider various factors in deciding whether someone “effected transactions,” such as:
(1) did he solicit investors to buy securities; (2) was he involved in negotiations
between the issuer and the investor; and (3) did he receive transaction-related
compensation rather than a salary. Offill, 2012 WL 246061, at *7 (citing SEC v.
Earthly Mineral Solutions, Inc., No. 2:07-CV-1057, 2011 WL 1103349, at *3 (D.Nev.
Mar. 23, 2011)).
The Fifth Circuit addressed the definition of “broker” in Eastside Church of
Christ v. Nat’l Plan, Inc., 391 F.2d 357 (5th Cir. 1968). The Fifth Circuit determined
that the defendant’s actions “conclusively” proved that he was a “broker” for
purposes of Section 15 violation; these activities included helping churches with all
legal work related to a bond plan, acting as a trustee and financial agent of the
property, and managing the bond sales program including making sales across the
country. Id. at 361.
The Court has already found each of the six Joint Ventures are securities. The
summary judgment record establishes that Defendants Parvizian, Gonzalez, AMG,
Balunas, and R. Thomas were not registered with the SEC as brokers and they used
interstate commerce when they made telephone calls to offer and sell interests in the
Joint Ventures. The SEC also presented summary judgment evidence showing: (1)

ORDER – PAGE 36

Gonzalez, AMG, Balunas, and R. Thomas received transaction-based compensation
for the sale of an interest or an “introduction” to a potential venture; (2) Parvizian
paid the salaries of AMG employees; (3) Parvizian paid Balunas a monthly “retainer”
which was used for business expenses; (4) Gonzalez, AMG, Balunas, and R.Thomas
called potential investors, advised them about the Joint Ventures, including terms,
provided written materials, and essentially acted as the “link” between potential
investors and Parvizian; (5) Parvizian, Gonzalez, and AMG finalized the sale of
interests in the Joint Ventures; (6) Parvizian prepared each of the Joint Venture
offerings, including written materials, and controlled each Joint Venture Offering; (7)
Parvizian received all proceeds related to the sale of any Joint Venture interest, and
he exclusively controlled the accounts in which proceeds were deposited; and (8)
none of these Defendants were employees of the Joint Ventures themselves. The
Court finds the SEC has presented sufficient summary judgment evidence to establish
that Defendants Parvizian, Gonzalez, AMG, Balunas, and R. Thomas were acting as
“brokers”. See SEC v. StratoComm Corp., 2 F.Supp.3d 240, 262 (N.D.N.Y.
2014)(soliciting potential investors to buy securities and being involved in
negotiations between issuer and investor are evidence someone is acting as a broker);
Cornhusker Energy Lexington, LLC v. Prospect St. Ventures, No. 8:04CV586, 2006 WL

ORDER – PAGE 37

2620985, at *6 (D. Neb. Sept. 12, 2006)(“[t]ransaction-based compensation, or
commissions are one of the hallmarks of being a broker-dealer.”).
Defendants Parvizian, Gonzalez, AMG, Balunas, and R. Thomas do not offer
any response or summary judgment evidence to controvert the SEC’s extensive
summary judgment argument that these Defendants were acting as brokers. Instead,
they continue to claim the Joint Ventures are not securities so there can be no
Section 15 violation. These Defendants failed to raise a genuine issue of material fact
on this issue. Summary judgment in favor of the SEC is appropriate on its fourth
claim for violations of Section 15 of the Securities Act against all Defendants.
4. Securities Fraud
In its first and second claims, the SEC alleges the Parvizian Defendants
committed securities fraud in violation of Sections 10(b) of the Exchange Act, Rule
10b-5 thereunder, and 17(a) of the Securities Act. In its motion, the SEC argues the
Parvizian Defendants made material misrepresentations and/or omissions about the
costs associated with the wells, the use of the investors’ money, and the right to
participate in drilling of a well associate with a specific Joint Venture. The SEC rests
its summary judgment argument on two examples of the Parvizian Defendants’
alleged fraud: (1) approximately 65% of the investors’ money was spent on things
other than the primary purpose of the investment, which was drilling, testing, and

ORDER – PAGE 38

completing the wells, and this directly conflicted with representations in the Offering
Documents; and (2) the Parvizian Defendants offered and sold investments in a Joint
Venture of a well in which they had no ownership interest, so there was no right to
participate in the drilling and no claim to any possible revenues generated. The
Parvizian Defendants respond that: (1) the allegedly false statements cited by the
SEC do not support a fraud claim; (2) the SEC’s allegations about lack of any
ownership interest in one of the wells is factually inaccurate; and (3) the SEC did not
establish the Parvizian Defendants acted with the requisite scienter. Because they
did not make material misrepresentations or omissions, the Parvizian Defendants
contend the SEC is not entitled to summary judgment on these fraud claims.
Section 10(b) of the Exchange Act makes it unlawful “[t]o use or employ, in
connection with the purchase or sale of any security . . ., any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the
[SEC] may prescribe as necessary or appropriate in the public interest or for the
protection of investors.” 15 U.S.C. § 78j(b). Rule 10b-5 makes it unlawful for any
person, directly or indirectly, to:
(1)

Employ any device, scheme, or artifice to defraud;

(2)

Make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the

ORDER – PAGE 39

light of the circumstance under which they were made, not misleading,
or
(3)

Engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person in connection with
the purchase or sale of any security.

17 C.F.R. § 240.10b-5. To establish a prima facie case under Section 10 and Rule
10b-5, the SEC must prove the Defendants: (1) made a material misrepresentation or
omission, or used some other fraudulent device; (2) in connection with the offer, sale,
or purchase of a security; and (3) acted with scienter. SEC v. Hopper, No. Civ. A. H04-1054, 2006 WL 778640, at * 9 (S.D. Tex. Mar. 24, 2006).
Section 17(a) of the Securities Act makes it unlawful for any person in offering
or selling any securities to, directly or indirectly:
(1)

Employ any device, scheme, or artifice to defraud, or

(2)

Obtain money or property by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order
to make the statements made, in light of the circumstances under which
they were made, not misleading, or

(3)

Engage in any transaction, practice, or course of business which operates
or would operate as a fraud or deceit upon the purchaser.

ORDER – PAGE 40

15 U.S.C. § 77q(a). To establish a prima facie case under Section 17(a), the SEC
must essentially prove the same elements as for Section 10 and Rule 10b-5 violations,
except scienter is not an element under Section 17(a)(2) or 17(a)(3). Hopper, 2006
WL 778640, at * 9. Those subsections require a showing of just negligence. Id.
(citing Meadows v. SEC, 119 F.3d 1219, 1226 n. 15 (5th Cir. 1997)).
Initially, the Parvizian Defendants again contend these ventures are “outside
the [SEC’s] jurisdiction as there are no ‘securities’ at issue.” This argument fails as
the Court has already found that the Joint Ventures at issue are investment contracts
and, therefore, securities. Because the Court has already made this determination,
the second factor of a prima facie case of liability under Section 10(b), Rule 10b-5 and
Section 17(a) is established—the statements were made in connection with the offer,
sale or purchase of securities. The Court now turns to the first and third factors:
whether the Parvizian Defendants made a material misrepresentation or omission, or
used some other fraudulent device, and whether they acted with the requisite mental
state.
a) Material Misrepresentation or Omission or Other Fraudulent
Device
The Fifth Circuit has stated that “the standard for misrepresentation is
whether the information disclosed, understood as a whole, would mislead a
reasonable potential investor.” Trust Co. of La. v. N.N.P. Inc., 104 F.3d 1478, 1490

ORDER – PAGE 41

(5th Cir. 1997). Stated another way, the statement or omission is “‘material’ if there
is a substantial likelihood that a reasonable investor would consider the information
important in making a decision to invest.” ABC Arbitrage Plaintiffs Group v. Tchuruk,
291 F.3d 336, 359 (5th Cir. 2002).
The SEC argues there are two examples of securities fraud the Parvizian
Defendants committed. The Court first addresses the SEC’s contention that the
Parvizian Defendants committed securities fraud related to the Fraley-Nelson Joint
Venture. Specifically, the SEC argues the Parvizian Defendants omitted material
facts when they failed to disclose to potential investors in the Fraley-Nelson Joint
Venture that the Parvizian Defendants had no ownership interest in that well, so
there was no right to participate in the drilling and no claim to any possible revenues
generated. The summary judgment evidence establishes that the Parvizian
Defendants had no working interest in the Fraley-Nelson well when the Joint Venture
offering began. In April 2010, the seller of the Frayley-Nelson well prospect notified
Parvizian that Arcturus failed to pay the $594,504.50 balance due on its working
interest and no election had been made, so Arcturus had forfeited its rights to
participate in the well prospect. Parvizian admitted he knew this relationship had
been terminated. Yet beginning in June 2010 through September 2010, after
Arcturus’s working interest had been terminated, the Parvizian Defendants offered

ORDER – PAGE 42

and sold units to venturers in the Frayley-Nelson Joint Venture for testing, drilling
and completion of a well to which they had no right to participate. Parvizian
admitted he did not disclose to any of these investors that Arcturus’s working interest
had been terminated, which precluded any right to participate in the drilling and to
share in any profits. The Court concludes there is a substantial likelihood that a
potential investor in the Frayley-Nelson Joint Venture would find it important in
making their investment decision to know that the Parvizian Defendants had
forfeited their working interest in the well, giving them no right to participate in any
testing and drilling—the exact business purpose of their potential investment. See
SEC v. Whitworth Energy Res. Ltd., 243 F.3d 549, *2 (9th Cir. 2000)(“[A]n
overstatement of ownership interest in 400 wells [of joint venture offerings]
constituted additional material misrepresentations.”). The Court finds the omission
of this information to be highly material. See Tchuruk, 291 F.3d at 359.
The Parvizian Defendants respond that the SEC’s allegations are factually
inaccurate. Specifically, the Parvizian Defendants contend that their working interest
in the Frayley-Nelson well is in dispute and Parvizian fully expects this dispute will be
resolved in their favor. They further argue that none of the venturers suffered any
losses. Neither of these arguments has any merit and does not create a genuine issue
of material fact. First, the fact that the venturers did not suffer any losses has no

ORDER – PAGE 43

bearing on this issue or its analysis. The Court looks to whether “a reasonable
investor would consider the information important in making a decision to invest.”
Id. No consideration is given to any financial injuries resulting from an investment
being made. As for the Parvizian Defendants’ contention that a more factually
accurate statement is that Arcturus’s working interest was in dispute, the result would
not change even if the Court were to agree. Parvizian admitted he did not disclose
any information to potential investors about their working interest—even that it was
allegedly “in dispute”. The Court concludes any potential investor would find it
important in making their investment decision to learn that the Parvizian
Defendants’ working interest in the Frayley-Nelson well was, at the very least, “in
dispute”, because this would call into question any right to participate in testing and
drilling of the well—the exact business purpose of their potential investment. See id.
The Court finds this would also be a material omission. See Whitworth Energy, 243
F.3d at *2 (“[A]n overstatement of ownership interest in 400 wells [of joint venture
offerings] constituted additional material misrepresentations.”). Whichever way the
factual allegations are cast, both of the aforementioned omissions satisfy the first
factor of a prima facie case of fraud. The Parvizian Defendants failed to meet their
burden to produce evidence establishing a genuine issue of material fact. Because the
Court finds this omission related to the Frayley-Nelson Joint Venture to be material,

ORDER – PAGE 44

the Court need not address the SEC’s other example of alleged securities fraud
committed by the Parvizian Defendants.
b) Scienter
Scienter is a mental state involving an “intent to deceive, manipulate or defraud.”
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). The Fifth Circuit has stated
that scienter can also be established with severe recklessness. Broad v. Rockwell Int’l
Corp., 642 F.2d 929, 961-62 (5th Cir. 1981)(en banc); see also Plotkin v. IP Axess Inc.,
407 F.3d 690, 697 (5th Cir. 2005) (citing id.). The Fifth Circuit defined severe
recklessness as “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.” Broad, 642 F.2d at 961-62.
The SEC argues Parvizian knew Arcturus’s interest in the Frayley-Nelson well
had been terminated before the Frayley-Nelson Joint Venture was offered and
interest units sold to venturers. According to the SEC, his knowledge of this
information “evidences a high degree of scienter. In response, the Parvizian
Defendants argue only that scienter is fact-specific, and the SEC failed to meet its
burden and simply restated its fraud theories.

ORDER – PAGE 45

Parvizian admitted that: (1) he knew Arcturus’s working interest in the
Frayley-Nelson prospect well was terminated in April 2010; and (2) he did not
disclose this fact, or even his characterization that the working interest was in
dispute, to potential investors when he offered and sold units between June and
September 2010. The Court finds Parvizian intended to “deceive, manipulate or
defraud” the potential investors with this material omission. See Ernst, 425 U.S. at
193. Parvizian admitted he knew that Arcturus’s working interest in the FrayleyNelson well had been terminated; yet, two months after learning this, Parvizian began
offering and selling investment units in this well for the express business purpose of
testing, drilling and completing the well. Failing to disclose this information, which
Parvizian admitted knowing, to potential venturers in the Frayley-Nelson Joint
Venture most certainly created a risk that they would be misled. See SEC v. Profit
Enter., Inc., Civ. A. No. 90-2020, 1992 WL 420904, at *5 (D.D.C. Nov. 16,
1992)(misrepresentations which included ownership interest in well was evidence of
scienter, either that promoter knew of their falsehood or at least demonstrating
recklessness). The Court finds Parvizian acted with severe recklessness in omitting
this information that he knew would be “an extreme departure from standards of
ordinary care” which created “a danger of misleading buyers” of units in the FrayleyNelson prospective well. See Broad, 642 F.2d at 961-62.

ORDER – PAGE 46

Parvizian’s scienter can be imputed to Aschere and Arcturus. “[T]he scienter
of executives can be imputed to corporate entities” for purposes of claims arising
under federal securities laws. SEC v. Treadway, 430 F.Supp.2d 293, 337 (S.D.N.Y.
2006). Parvizian is the sole managing member and president of Aschere, and 100%
shareholder and president of Arcturus. The record establishes that Parvizian was
solely in control of both Aschere and Arcturus, and he was solely responsible for all
information related to the Frayley-Nelson well prospect that was disseminated and
likewise all material information that was withheld or omitted. Aschere and Arcturus
both participated in the Frayley-Nelson well—Aschere was the Managing Venturer
and Arcturus allegedly held the working interest in the well. The Court finds the
summary judgment record clearly supports a finding that Parvizian’s scienter can be
imputed to Aschere and Arcturus. See SEC v. Wolfson, No. 2:03CV914, 2005 WL
6796532, at *2 (D. Utah Nov. 29, 2005)(court granted summary judgment for SEC
on its claims of Section 17(a), Section 10(b), and Rule 10b-5 violations, finding
individual defendant’s scienter could be imputed to defendant entity he solely
controlled); see also SEC v. Thibeault, 80 F.Supp.3d 288, 292 (D. Mass.
2015)(“[D]efendant’s] scienter is imputed to the other defendants because he
controlled each of those entities.”).

ORDER – PAGE 47

The Court concludes the SEC met its burden and the summary judgment
record shows Parvizian had the requisite scienter which can be imputed to both
Aschere and Arcturus. The third factor of a prima facie case of securities fraud has
been established. The Court finds the Parvizian Defendants failed to meet their
burden to present evidence to create a genuine issue of material fact as to this
element.
c) Negligence
To establish a prima facie case under Section 17(a), the SEC is required to
prove basically the same elements as for Section 10 and Rule 10b-5 except scienter is
not an element under Section 17(a)(2) or 17(a)(3). Hopper, 2006 WL 778640, at *
9. The SEC need only make a showing of just negligence for these subsections. Id.
The Court has already determined the evidence conclusively establishes the Parvizian
Defendants acted with the requisite scienter for Section 10 and Rule 10b-5
violations. Therefore, the Court finds the summary judgment record most certainly
supports a finding the Parvizian Defendants acted negligently in relation to securities
fraud violations under Section 17(a)(2) and/or 17(a)(3).
d) Conclusion
The Court finds the SEC established a prima facie case of securities fraud
violations under Section 10 of the Exchange Act and Rule 10b-5 thereunder against

ORDER – PAGE 48

the Parvizian Defendants related to the Frayley-Nelson Joint Venture. The Court
also finds the SEC established a prima facie case of securities fraud violations under
Section 17(a) of the Securities Act against the Parvizian Defendants as to the
Frayley-Nelson Joint Venture. The Parvizian Defendants failed to meet their burden
to present summary judgment evidence to establish a genuine issue of material fact
on the SEC’s fraud claims. Accordingly, summary judgment is appropriate on the
SEC’s first and second claims of securities fraud violations.
D. Conclusion
The Court finds the SEC has sufficiently established a prima facie case for each
of its claims: (1) securities fraud violations of Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder against the Parvizian Defendants; (2) securities fraud
violations of Section 17(a) of the Securities Act against the Parvizian Defendants; (3)
violations of Sections 5(a) and 5(c) against all Defendants for the offer and sale of
unregistered securities; and (4) violations of Section 15(a) of the Exchange Act for
the offer and sale of securities by unregistered broker-dealer. The Court also finds the
Defendants failed to meet their burden to present competent and sufficient summary
judgment evidence to create a genuine issue of material fact as to any of the claims
asserted against them by the SEC. Accordingly, the Court grants summary judgment
on each of the SEC’s claims against the Defendants.

ORDER – PAGE 49

III.

Motions to Strike

The SEC filed a motion to strike uncited paragraphs of Parvizian’s declaration as
well as certain exhibits submitted in support of the Defendants’ motion for summary
judgment. The Parvizian Defendants also filed a motion to strike the declaration of
Ty Martinez submitted in support of the SEC’s summary judgment motion. The
Court denies both motions, and notes that the Court’s ruling on the summary
judgment motions would not change were the Court to grant either motion to strike.
IV.

Conclusion

The Court finds Plaintiff SEC’ motion for summary judgment must be granted.
The Court also finds the Defendants’ motion for summary judgment, the SEC’s
motion to strike, and the Parvizian Defendants’ motion to strike should be denied.
The Court will refrain from imposing remedies on each Defendant at this time. The
Court orders the SEC to submit a brief to the Court on or before April 22, 2016
addressing appropriate and available remedies it seeks to be imposed against each
Defendant resulting from their violations.
SO ORDERED.
Signed March 21st, 2016.
______________________________________
ED KINKEADE
UNITED STATES DISTRICT JUDGE

ORDER – PAGE 50