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Securities and Exchange Commission v. Sethi

United States Court of Appeals, Fifth Circuit

December 4, 2018

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee
v.
SAMEER P. SETHI, Defendant-Appellant

          Appeal from the United States District Court for the Eastern District of Texas

          Before STEWART, Chief Judge, and KING and OWEN, Circuit Judges.

          CARL E. STEWART, CHIEF JUDGE.

         Sameer P. Sethi sold interests in an oil and gas joint venture. He promised investors partnerships with world-famous oil companies and large returns. The SEC wasn't buying it-not only did Sethi fail to register his interests as securities, he materially misrepresented his relationships with large oil companies. The SEC filed claims against Sethi under Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5, and Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a). Then the SEC filed a motion for summary judgment. The district court granted the motion, holding that Sethi offered securities and committed securities fraud. Sethi appeals. We affirm.

         I.

         Sethi sold interests in an oil and gas drilling joint venture. He sold these interests through his company, Sethi Petroleum, which he founded in 2003 and manages alone. Sethi sought out investors using a broad cold-calling campaign. With the help of twenty salespersons, he purchased lead lists and offered positions in his joint venture to potential investors. When a potential investor expressed interest, Sethi would determine whether the investor was "accredited." If so, he would further promote the venture using two main documents: a private placement memorandum ("PPM") and a copy of the joint venture agreement ("JVA").

         The PPM told investors that Sethi intended to raise $10 million by selling fifty units at $200, 000 apiece. Sethi would then use the investor funds to purchase mineral interests in an oil and gas development in the Williston Basin in North Dakota, South Dakota, and Montana. The PPM further specified that Sethi would use the funds to purchase a 62.5% net working interest in at least twenty wells, all of which would be operated "by publicly traded and/or major oil and gas companies," such as ExxonMobil, Hess Corporation, and ConocoPhillips. The PPM also made clear that Sethi would not commingle venture funds with funds from "Sethi Petroleum or any Affiliate."

         The JVA laid out the rights, duties, and obligations for the investors and the managing venturer-Sethi Petroleum. While the JVA purported to give the investors control over the venture's affairs, it delegated power over the day-to-day operations to Sethi Petroleum. The JVA also gave Sethi Petroleum the sole power to distribute profits, execute oil and gas agreements, hire professionals, and take and hold property. The JVA required a majority vote of the investors for larger actions, such as acquiring oil and gas interests.

         As a result of his sales efforts, Sethi ended up raising over $4 million from ninety investors, which he used to purchase a fractional working interest in eight wells from Irish Oil & Gas, with the interests ranging from 0.15% to 2.5%. Three different operators worked on the wells-Crescent Point Energy U.S. Corp., Oxy USA Inc., and Slawson Exploration Co. Six of the wells produced oil, and the operators voluntarily cancelled two other wells.

         Over the course of the investments, no evidence shows that a vote or investor meeting ever occurred.

         II.

         We review a district court's grant of summary judgment de novo, using the same legal standard as the district court. Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007). Summary judgment is appropriate where there is no genuine issue of material fact and the parties are entitled to judgment as a matter of law. Id. All reasonable inferences must be drawn in favor of the nonmovant, but "a party cannot defeat summary judgment with conclusory allegations, unsubstantiated assertions, or only a scintilla of evidence." Id. (internal quotation marks omitted).

         III.

         On appeal, Sethi challenges two of the district court's decisions. First, he argues that the district court erred when it held that interests in his drilling projects qualified as securities. Second, he argues that the district court ...


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