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Securities and Exchange Commission v. Blackburn

United States District Court, E.D. Louisiana

December 17, 2019

SECURITIES AND EXCHANGE COMMISSION
v.
RONALD L. BLACKBURN, ET AL. DESCRIPTION AMOUNT

         SECTION: “J” (1)

          ORDER & REASONS

          CARL J. BARBIER UNITED STATES DISTRICT JUDGE.

         Before the Court are cross-motions for summary judgment filed by the parties. The Securities and Exchange Commission (“SEC”) has filed a Motion for Summary Judgment (Rec. Doc. 182) against Defendants Ronald L. Blackburn, Andrew V. Reid, Bruce A. Gwyn, and Michael A. Mulshine (collectively, the “Officer Defendants”). The Officer Defendants oppose the SEC's motion (Rec. Doc. 194) and filed their own Motion for Summary Judgment (Rec. Doc. 197); the SEC filed a corresponding opposition (Rec. Doc. 200) and a Motion to Strike (Rec. Doc. 204). Having considered the motions and legal memoranda, the record, and the applicable law, the Court finds that the SEC's Motion to Strike should be GRANTED, the SEC's Motion for Summary Judgment should be GRANTED in part, and the Officer Defendants' Motion should be DENIED for the reasons set forth herein.

         FACTS AND PROCEDURAL BACKGROUND

         I. The Formation of Treaty Energy Corp.

         All of the Defendants are alleged to have violated securities laws through their involvement with Treaty Energy Corp. (“Treaty”), an oil and gas production company incorporated in Nevada and located in New Orleans, Louisiana.[1] During the relevant period, January 2009 to September 2013, Treaty was subject to the periodic and current reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (“Exchange Act”).[2] Treaty was a “penny stock” company traded over-the-counter on OTC Pink, an inter-dealer electronic quotation and trading system for registered and unregistered securities. OTC Pink does not have listing requirements for the stocks quoted on its system.[3] No registration statements for Treaty were ever filed with the SEC, except for a purported Form S-8 registration for an employee benefit plan. During the relevant four-year period, Treaty's stock traded daily at a volume of 1.4 million shares at an average price of $0.03 per share.[4] Treaty did not file a Form 10-K for the year ending 2013 and the SEC ordered a stop on trade of Treaty's shares on December 22, 2014.[5]

         Treaty was started by Ronald Blackburn in 2008, and Blackburn remained the driving force behind the company for the relevant period, although nominally he was never more than a mere consultant and shareholder.[6] Blackburn explained that he was never an officer or director at Treaty “[b]ecause No. 1, [he] was a felon, and [he] had been told you couldn't hold that position [as a felon].”[7] Blackburn had been convicted of felony counts of federal income tax evasion, filing a false tax return, and two counts of payroll tax violations in 1999.[8] Blackburn founded Treaty after the previous company he had been consulting for, Phoenix Associates Land Syndicate (“Phoenix”), bankrupted.[9]

         While he had been consulting at Phoenix, Blackburn met Michael Mulshine, who would become Treaty's Assistant Secretary (and sometimes Acting Corporate Secretary). Blackburn called Mulshine and asked for his help in forming a new publicly traded oil and gas company. In December 2008, Mulshine helped Blackburn find the corporate entity that was used to form Treaty through a reverse merger. At inception, Blackburn received an 86.4% interest in the public company (397, 440, 000 shares of Treaty common stock), Mulshine received a 3.6% interest in the company (16, 560, 000 shares), and the remaining 10% interest (46, 000, 000 shares) was distributed to the stockholders of the former company which was part of the reverse merger.[10] Blackburn did not pay any money for his stake in the company.[11]

         In 2009, Blackburn recruited Andrew Reid to be Treaty's president and to help secure a deal for drilling rights in Belize.[12] Later, Reid would become CEO, and he served as Chairman of the Board from April 2010 to July 2014.[13] Reid in turn hired Bruce Gwyn to raise capital for Treaty. Gwyn served as Treaty's co-CEO until January 2013, when Gwyn became Chief Operating Officer (“COO”).[14] From April 2011 until he resigned on March 14, 2014, Gwyn also served as a director on Treaty's board.[15]

         Reid is not an attorney-he was a former bond salesman who was working as a horse-drawn carriage driver in the French Quarter when Blackburn hired him as President.[16] So, with respect to his record keeping and filing obligations as CEO of a publicly traded corporation, Reid testified at his deposition that he depended on Treaty's “SEC attorney, ” Sam Whitley.[17] Reid did not hire Whitley; Whitley was “on board” with Treaty before Reid became President, although it is unclear if he was involved in the reverse merger that formed Treaty.[18]

         The SEC's allegations revolve around two of Treaty's oil and gas ventures and the stock distributions used to fund these undertakings. One was an exploratory drilling program that began in April 2010 in Belize, and the other was an offering for working interests in oil wells in west Texas beginning in February 2013.

         II. The Stock Distributions

         At inception, Treaty's only assets were some mineral leases in Texas with “sporadic production.”[19] Treaty needed funds to repair these wells, invest in new leases, and pay salaries, but Reid testified that Treaty had little institutional investment from the start.[20] To pay its expenses, Treaty needed to sell stock. “In the early days of Treaty, it was mostly - Treaty had no stock, and so all of the shares were Ron Blackburn's.”[21] Because Blackburn owned 86.4% of Treaty's shares, and Treaty itself “had no availability of stock in the treasury or anything to sell, ” Blackburn “would loan [his shares] to Treaty in order to facilitate a sale.”[22] “Investors would pay for the securities through Treaty and then - the majority of the time, and then . . . Blackburn would have those shares issued.”[23] Reid testified that either he or Blackburn would communicate with the investors to facilitate the sale.[24]

         Blackburn agreed that it was his expectation from the beginning that he would use his shares to pay back investors and grow Treaty.[25] Blackburn testified it was “questionable” that Treaty ever had sufficient revenues to cover its expenses.[26] Treaty was only able to pay its debts by raising money from investors.[27] After Blackburn had issued a significant number of his shares to investors, Treaty issued Blackburn millions of additional shares to replace the shares Blackburn had “loaned” to Treaty.[28]Blackburn sold those shares as well.[29] The SEC estimates Blackburn ultimately distributed at least 380 million of the shares issued to him to more than 200 individuals and entities spread across several states.[30]

         The SEC has submitted the sworn declarations of several of the investors who purchased Blackburn's shares of Treaty. One of these investors, Chris Ezzell, was recruited by Reid to invest his savings in Treaty. Ezzell attests that Reid told him that Koch Industries had already invested $300 million in Treaty and that Ezzell had the opportunity to get in on the ground floor. Ezzell agreed to invest most of a settlement he received for a catastrophic brain injury, $225, 000. Ezzell considered selling his stock in Treaty several times, but each time he says he was convinced not to by Reid.[31] When Ezzell finally learned from a friend that Treaty was being investigated by the SEC, Ezzell claims Reid told him not to sell because Treaty “was suing the SEC for $33 million for prohibiting [Treaty] from doing business, and that when they got the $33 million from the SEC, [Reid] would give me my money.”[32]

         While the common stock initially issued to Blackburn was never registered, Treaty later filed three Form S-8 registration statements with the SEC.[33] The first was filed on February 23, 2011, registering 100 million shares of common stock. The second was filed on August 24, 2012, registering 55 million shares of common stock. The third was filed on February 21, 2013, registering 30 million shares. Reid signed all three statements, and Gwyn signed the second and third.[34]

         “[A]n S-8 registration form can be used by a company only to issue stock as a means of compensating consultants for bona fide services not connected with raising capital.” S.E.C. v. Phan, 500 F.3d 895, 903 (9th Cir. 2007). Reid testified he was completely uneducated as to the limitations of an S-8 offering; he depended on Whitley.[35]

         The SEC's ledgers show that between February 2, 2011, and March 15, 2013, Treaty issued more than 180 million shares to more than thirty individuals residing in multiple states.[36] The SEC has provided evidence that at least a significant number of the S-8 shares were distributed to “consultants” who were being compensated for their capital raising roles with a discounted sales price for Treaty securities. Asked about one such “consultant, ” John Bushnell, Reid admitted Bushnell had no other duties than to “bring in capital for the company.”[37] Blackburn provided illuminating testimony as to Treaty's arrangement with Bushnell:

Q. So Mr. Bushnell writes [in his e-mail], ‘Good afternoon, Ron. I do have cash and I am looking for volume. My offer is as follow [sic]: 5 million shares of your S-8 free trading shares TECO, $90, 000, $45, 000 wired tomorrow mid-day, the remaining $45, 000 to be wired upon receipt of the 2 million shares I paid for last week.'
A. Yeah.
Q. You mentioned that Mr. Bushnell was one of Treaty's larger investors?
A. I think now he is the largest investor.
Q. And Mr. Bushnell was offering to pay $90, 000 for [five] million of S-8 free trading Treaty shares?
A. Yes, 5 million shares.
Q. You wrote back to Mr. Bushnell that "We will do the deal." Correct?
A. Uh-huh (affirmative response).
Q. Yes?
A. Yes.
Q. So if you sold him the 5 million shares for $90, 000, that would represent a significant discount to the market price?
A. Oh, yeah.
Q. Because the market price would have been, what, closer to $175, 000?
A. Yeah.
Q. But he was going to get them for $90, 000?
A. That is right.
Q. Did the deal go through?
A. I would think it did.
Q. So did Mr. Bushnell send the $90, 000?
A. Yes, he was a man of his word.[38]

         Bushnell received the five million free-trading S-8 shares on October 11, 2012, and he immediately sold most of them into the market at a profit.[39] The SEC has provided evidence that millions more S-8 shares were distributed in similar fashion.[40]

         The Officer Defendants participated in these distributions in a myriad of ways. Blackburn, Reid, and Gwyn each testified that they directly solicited investors to purchase either the unregistered shares or the S-8 shares. Moreover, as corporate officers at Treaty, Reid, Gwyn, and Mulshine also signed the transfer agent certifications and share agreements that were necessary to transfer Blackburn's shares and the S-8 shares to and between investors.[41]

         III. The Belize Venture

         On April 20, 2010, Treaty entered into a 50-50 joint venture with Princess Petroleum Limited (“Princess”) to explore for oil and gas in Belize (the “Belize Venture”).[42] Treaty stated in its 2010 Form 10-K that it paid $100, 000 for its stake in the Belize Venture through a debt Treaty incurred to a “major shareholder.”[43] Treaty did not disclose in the Form 10-K or elsewhere that the “major shareholder” was Ronald Blackburn or the extent of Blackburn's involvement in establishing the venture.

         Blackburn testified as to how Treaty entered the deal. Blackburn was approached by a friend associated with Princess, Richard Lion, who asked Blackburn to go in with him on a venture using exploratory wells to search for oil in Belize:

[Lion] said, you think that you could come up with the money to buy into this thing with Princess? And I asked him how much, and he said $100, 000. He explained what he thought the potential was over there, there had only been one oil strike [in Belize] of substance, one company, and they were doing really well. . . . So anyways, I came up with the money, I sold a guy named Dan Bass 50 million shares of my stock for $100, 000. He wired the money to me, and then I wired it to -- actually to Panama because that's where their main office in Central America was.[44]

         Over the course of the next year, the Belize Venture became a crucial means by which Treaty's officers assured investors and potential investors of Treaty's future profitability. In a July 2011 press release prepared by Mulshine, Reid enthused:

Ongoing developments and significant preparation in Belize are proving advantageous to a successful drilling program. Upon arrival of the drilling rig and support equipment by sea on or about July 24/25 our company will move ahead with an oil program that holds the potential to be a magnificent life changer for all Treaty stakeholders and the people of Belize.[45]

         The Belize Venture was also used by a stock promoter, Platon Petratos, Treaty hired to drive investment in Treaty. Petratos contacted Mulshine in April 2011 and told Mulshine “he could bring a lot of buying in the stock” because Petratos “had promotional mechanisms that he used by setting up his own chat rooms on, like, Yahoo, chat boards, and such, where he would talk about [the stock], in his own [chat] sessions.”[46] Mulshine recommended Treaty meet with Petratos, and Reid did so.[47] Mulshine testified that Reid and Petratos reached some sort of arrangement[48] and Petratos began posting about the Belize Venture on the message boards of sites such as investorshub.advfn.com and investorshangout.com in the fall of 2011.[49] Petratos made statements which indicated that the Belize Venture was about to strike oil, such as “I'll be there when she blows.”[50] Between April 2011 and January 2012, Treaty's stock price increased 450% and the volume of trade increased 930%.[51]

         On January 13, 2012, Reid e-mailed Petratos to say, “Platon, it would be nice if we could push through .04” cents per share.[52] Petratos replied, “I need some real support to go to Belize . . . plenty of expense, tickets alone 3, 000, Make it happen.”[53] Two weeks later, on January 26, 2012, Treaty posted pictures and a video of Treaty's drilling site in Belize.[54] Mulshine sent an e-mail to a distribution list with a link to Facebook and a message:

Treaty posted a message to its Facebook page yesterday that on Tuesday they hit a Natural Gas zone between 400 and 500 feet on the 1st Well that is being drilled!!!! This is very good!!!! Remember gas drives oil and we do have a strong use for gas at this time in Belize!!! Drilling “to depth” started on Tuesday morning and is expected to be completed to about 2, 000 ft this week. Keep tuned in for further developments. Please feel free to call or email me regarding any of this. We are all clearly very excited with the great progress being made in Belize and Texas![55]

         In the weeks leading up to Mulshine's message and the Facebook post, some investors had grown concerned. One investor asked Mulshine in a January 5, 2012 e-mail whether “the first well in Belize [was] dry.”[56] Mulshine responded he could not report on the drilling, but nevertheless, he stated, “I assure you that Treaty will be successful in its efforts to produce oil from Belize. Lots happening in Belize that cannot be made public yet.”[57] About the same time Mulshine sent his e-mail touting Treaty's progress in Belize, Petratos was leading a group of investors to the nation. Reid arranged for the “four VIPS” to stay at “the Princess, ” a hotel associated with Treaty's co-venturer.[58]

         Meanwhile, Treaty had hired Max Mohamed-a geologist who did business under the moniker Advanced Geological Services-as its mudlogger on the ground.[59]When Mohamed was brought in, he was told testing indicated a possibility of hydrocarbons at one of Treaty and Princess's Belize wells-called the San Juan #2 well-at 800 feet and 1200 feet below the surface.[60] Mohamed found no indications of oil at 800 feet, but at 1200 feet the drilling team hit limestone and the sample they pulled “smelled strong of oil.”[61] The next step after getting this smell of oil was to take samples, dry them, add a solvent to release any oil, and see what floated up, using a blacklight to look for fluorescence.[62] Upon performing this test, “[o]il stains appeared from the black light.”[63] A “bluish yellow” hue made it “look like a trace of oil was in the sample.”[64] These results amounted to what Mohamed called an “oil show.” Mohamed explained the significance of this:

[An oil] show doesn't mean that you see visible oil. It means you see some indication of some sort of hydrocarbon present. It's a term that the people in the oil industry will probably see it one way and outside others will think differently. I don't know. But a show, in my opinion, is not an oil find.[65]

         Things moved very quickly at Treaty after the blacklight test. On January 28, 2012, Steve York, then the COO of Treaty, sent an update on developments at the San Juan #2 well to Reid, Blackburn, and Gwyn.[66] He stated, “Our independent logger made a visual analysis with microscope and blacklight and confirmed the presence of hydrocarbons.”[67] York also wrote that a six-million-barrel reservoir size had been determined from mudlogging analysis and satellite imaging.[68] York's letter, however, did not say that Treaty had “struck oil” or that there was an estimate as to “recoverable” oil quantities. Blackburn sent an e-mail to Reid and others at Treaty the next morning, January 29, responding to York's letter:

This is Steve's draft at saying we have found oil in Belize and a fucking lot of it. We will use certain areas of it and keep other areas for future use. I will draft a news release to send to Andrew. He will then add calculations to estimate the potential production of the current area we have found oil in and any comments he might want to add. It will then be sent to all of us plus Mike Mulshine to produce a draft news release . . . to release at 6:30 am on Monday morning.[69]

         Even before Monday, though, Mulshine began to e-mail investors, implying Treaty had struck oil. He messaged an investor affiliated with Benzinga, a stock information website, “Hey . . . Is it time for Benzinga to talk about [Treaty]? Oil in Belize Monday is going to blow it sky high!”[70] To another investor, Mulshine responded that Treaty “hit oil of commercial quality and amount . . . on their 1st Well in Belize.”[71] As planned, on Monday, January 30, Treaty issued its press release, titled “Treaty Energy Corporation Strikes Oil in Belize” (the “Belize Announcement”). The by-line states in bolded lettering:

Treaty's Drilling Team Struck Oil on its First Well on the Princess Concession in Belize Friday, January 27th at 4:30 PM-CT - This 1st Well, SAN JUAN #2, will be Put into Production Following Review by Belizean Regulatory Officials - The Stann Creek Field is Estimated to Contain 6 Million Barrels of Recoverable Oil.[72]

         The body of the release states in part:

Treaty Energy Corporation (OTCQB: TECO) (www.treatyenergy.com), a growth-oriented international energy company, today reported drilling success on its first oil well, SAN JUAN #2, in Belize, Central America. . . .
At 1235 ft hydrocarbons were detected in the form of a gas register. This presence of C1-C4 gas readings indicated a geo-pressurized oil bearing zone/gas driven. As drilling continued the indicator steadily increased from the depth of 1235 ft with readings being taken at 1 ft intervals.
On site analysis of the cuttings by Advanced Geological Services, Treaty's “Mud Logging” equipment supplier and consultant revealed that hydrocarbons (Oil) were present in the cuttings samples. Continued drilling showed a constant increase in hydrocarbon presence in the formation through 1290 ft, after which there was a steady decline. This defined the producing presence in the formation through 1290 ft, after which there was a steady decline. This defined the producing zone to be 1235 ft - 1290 ft.[73]

         The release goes on to quote Reid as saying, “Based on our initial findings, we estimate there are about 5, 000, 000-6, 000, 000 Barrels of recoverable oil in place in this first finding.”[74]

         Mulshine testified that he had “no documentation, no reports” supporting the content of the press release when he published it.[75] Mulshine stated the basis for claiming Treaty had stuck oil was the York letter, a conversation with the driller Bill Harden, and a conversation with a non-expert shareholder, Sean Hickey.[76] Mulshine explained, “Andrew Reid, the Chairman and CEO, asked me and demanded that I get this filed as fast as possible.”[77] Mulshine stated that he wanted the release to have a “major impact” because “I was a shareholder, too, and the shares were at one-tenth the price of what I got in at.”[78]

         Mohamed testified that the release “was stretching, stretching way beyond, ”[79]and that the release misstated his conclusion-which was merely that there was an “oil show.” When read the release's statement that the mud log “defined the producing zone to be 1235 feet through 1290 feet, ” Mohamed replied, “Wow. No.”[80] Mohamed gave the following answers at his deposition:

Q: I guess at this point did you even know if there was a producing zone?
A: No. We couldn't have. We couldn't have.
Q: Even if there was a producing zone, would it have been 1235 to 1290 feet?
A: Not according to this because I didn't see anything there according to the mudlog. The wireline log would have been the way to - they should have waited for the wireline log is the bottom line.[81]

         On January 31, Mulshine signed and filed a Form 8-K with the Belize Announcement attached as an exhibit.[82] The Belize drilling program was subject to the oversight and regulation of the Government of Belize. The same day the Form 8-K was filed, the Belize Government issued its own release:

THE MINISTRY OF NATURAL RESOURCES AND THE ENVIRONMENT INFORMS THE GENERAL PUBLIC THAT THE INFORMATION BEING CIRCULATED TO THE MEDIA HOUSES BY TREATY ENERGY CORPORATION RELATING TO OIL DISCOVERY IN THE SAN JUAN #2 WELL IN SOUTHERN BELIZE IS FALSE AND MISLEADING.
THE MINISTRY CATEGORICALLY REFUTES THE IRRESPONSIBLE ACTIONS OF TREATY ENERGY CORPORATION IN ITS MISINFORMATION ON DRILLING SUCCESS AND THEREFORE RESPONSIBLY ADVISE THAT AN INSPECTION CONDUCTED ON THE MUDLOG AND ROCK CUTTINGS FROM THE WELL, BY THE GEOLOGY AND PETROLEUM DEPARTMENT, CONFIRMED ONLY MINUTE TRACES OF TAR WHICH IS COMMONLY OBSERVED IN ROCK FORMATIONS IN MANY WELLS PREVIOUSLY DRILLED IN BELIZE THAT WERE NOT COMMERCIAL.
IT MUST BE EMPHASIZED THAT NO LIVE OIL, IN LARGE AMOUNTS, WAS OBSERVED IN THE ROCK CUTTING WHICH NORMALLY INDICATES SOME LEVEL OF POTENTIAL AND WOULD REQUIRE FURTHER ANALYSIS AND TESTING TO DETERMINE WHETHER IT IS COMMERCIALLY VIABLE.[83]

         Treaty set about containing the Belize Government's release and never disclosed that the government agency overseeing its drilling program had stated it was “false” that Treaty had struck oil.[84] On February 1, 2012, Treaty issued a second release (the “Second Belize Announcement”). The Second Belize Announcement restates the contents of the York letter verbatim but begins by stating the company “hereby details its review of the first successful oil well strike by the Company.”[85] The Second Belize Announcement made no reference to the Government of Belize's disclaimer. Mulshine transmitted the Second Belize Announcement to an e-mail distribution group.[86]

         In the ensuing confusion an investor e-mailed Mulshine to ask, “Are we in the middle of a political squeeze play? When do you think it will blow over? This is enough to make the uninformed a bit nervous. Thanks for whatever you can tell me.”[87] Mulshine replied:

The “pot hole” has been filled! The TECO team had major mtg in Belize this morning and gave them an education on oil wells…and they now understand that our Monday release claiming an Oil Strike…is totally true. All is now fine. The stock will recover and we go forward…an unexpected buying opportunity. Life is tough![88]

         Mulshine admits he assured the investor the stock would rally with “no idea whether it would actually go up.”[89] “What's an investor relations guy going to say? You're trying to survive.”[90] Mulshine made similar assurances that Treaty had struck oil to other investors who were worried Treaty's oil claims were bogus.[91]

         Treaty was never able to produce oil from San Juan #2 well or from anywhere in Belize.[92] In July 2014, the Belize Government ordered Treaty to plug and abandon its three dry-hole wells. None of the Defendants nor Treaty ever disclosed this information.[93]

         IV. The West Texas Offering

         While the Belize Venture was still ongoing, in November 2013, Treaty began an unregistered offering of purported working interests in west Texas oil wells on a mineral lease controlled by Treaty (the “West Texas Offering”).[94] A Confidential Private Placement Memorandum (“PPM”)[95] was drafted offering thirty-two “Units of Working Interest” in the Stockton #2 well in Taylor County, Texas.[96] Each unit represented a 3.125% working interest and a 2.3125% net revenue interest in the Stockton #2 well. The minimum purchase was for one unit at a price of $30, 000. The PPM states under its “Use of Proceeds” section:

Funds received from this purchase will be used to reimburse the company for the drilling and completion expense of the Stockton #2 well in addition to fund future and current oil and gas field developments in areas that the Company is already engaged in or have plans to move operations to. These areas may include Texas and Louisiana or any other unannounced areas. Funds may also be used to pay expenses and further fund Company operations on a day-to-day basis.
Funds from this particular well sale will be used to complete the Stockton #3 Lease project and begin a 25-well oil and gas development on the Lubacak lease near Ovalo, Texas.[97]

         Treaty was able to attract $565, 000 in investment funds for the West Texas Offering from 19 investors from Texas, Louisiana, Georgia and Utah from October 29, 2013, to February 27, 2014.[98] The SEC has filed into the record Treaty's bank records, summaries of Treaty's bank records, and a sworn declaration by Keith Hunter, a Senior Accountant with the Division of Enforcement of the SEC, demonstrating that very little of the proceeds of the sales of these units was reinvested into Treaty.[99] In his declaration, Hunter gives examples of how particular investor funds from the offering were distributed as indicated by Treaty's bank records.

         For example, on October 29, 2013, Treaty opened an account at Iberia Bank to deposit investor funds from the West Texas Offering; two investor checks totaling $25, 000 were deposited that same day.[100] Still the same day, $2, 000 of these investor funds was disbursed to Blackburn.[101] Subsequently, another $1, 500 of these funds was disbursed to Blackburn, $3, 000 to Reid, $3, 100 to Rampant Leon Financial Corporation (another entity controlled by Reid and Blackburn), and $1, 300 to Gwyn. Of this $25, 000 investment, $2, 500, or 10%, was spent on oil and gas expenses. A chart provided by the SEC demonstrates how the money was distributed.

DESCRIPTION
AMOUNT

BEGMNKG BALANCE ©10/29/2013

$0.00

INVESTOR FUNDS

$15, 000.00

INVESTOR FUNDS

$10, 000.00

BLACKBURN. RONALD

($3, 500.00

REID. ANDREW

($3, 500.00

RAMPANT LEON FINANCIAL CORPORATION

($3, 100.00

GWYN, BRUCE

($1, 300.00

REAL ESTATE

($3, 675.00

OIL & GAS EXPENSE

($2, 500.00

CONSULTING

($2, 000.00

UTILITIES

($1, 000.00

UNKNOWN

($674.00

PAYROLL

($576.92

CASH

($500.00

BANK FEES

($80.00

ENDING BALANCE @ 11/1/2013

$2, 594.08

         This example is illustrative of how Treaty spent the investor funds for the West Texas Offering.

         In January 2014, Treaty assigned all of its assets to another company.[102]Treaty's management changed later that year. Treaty had sold one of its mineral leases to a neighboring lease holder in Texas, Chris Tesarki, for $150, 000, but Treaty could not transfer the lease because Treaty's interests were under sanction by the Texas Railroad Commission.[103] Tesarski took over as CEO and chairman of the board in a compromise over the debt that resulted from Treaty when it was discovered the interests could not be transferred.[104]

         V. Procedural History

         The SEC filed its complaint against Treaty, the Officer Defendants, Lee Schlesinger, and Whitley on December 15, 2014 in the Eastern District of Texas. The case was subsequently transferred to the undersigned in July 2015. In February 2017, the Court issued an Agreed Partial Judgment as to Defendant Treaty.[105] That judgment enjoined Treaty and its officers and employees from violating securities laws. The Court also ordered disgorgement, with any civil penalty amount to be determined upon motion by the SEC.[106] In March 2017, the Court issued another Agreed Final Judgment as to Schlesinger, requiring disgorgement of $92, 498.00.[107]The SEC and the remaining Defendants filed their cross-motions for summary judgment thereafter.

         PARTIES ARGUMENTS

         The SEC contends that the Officer Defendants violated Section 17(a), and its subsections, of the Securities Act, 15 U.S.C. § 77q(a), which prohibits fraud in the offer or sale of securities, and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, which prohibits fraud in connection with the purchase or sale of any security, by making material misrepresentations or omitting material facts concerning Blackburn's involvement in Treaty, the Belize Venture, and the West Texas Offering. The SEC further contends that the Officer Defendants violated Section 5(a) and (c) of the Securities Act, which prohibits the offer or sale of unregistered securities in interstate commerce unless an exemption is established. Additionally, the SEC asserts that the Officer Defendants violated Section 13(a) and Rules 13a-1, 13a-11, 13a-13, and Rule 12b-20 of the Exchange Act, which require issuers of registered securities to file accurate reports, current reports, and quarterly reports, and to disclose additional information as may be necessary to make the required statements not misleading, by aiding and abetting Treaty's alleged reporting violations.

         Similarly, the SEC contends that Defendants Reid and Gwyn signed false certifications in Treaty's annual and quarterly reports in violation of Rule 13a-14 of the Exchange Act. Finally, the SEC claims that Defendants Blackburn, Reid, and Gwyn violated Section 16(a) and Rule 16a-3 of the Exchange Act, which require certain directors and officers, and persons who own more than 10% of a registered class of a company's equity securities, to file ownership and changes of ownership reports with the SEC.

         The Officer Defendants' motion for summary judgment merely incorporates[108]a letter that their counsel sent to several individuals in February 2015.[109] In this letter, the Officer Defendants first contend that Treaty's announcement that it struck oil in Belize was “absolutely proper.”[110] Second, the Officer Defendants argue that Blackburn did not invest $100, 000 in the Belize oil project, Blackburn did not control Treaty, and Blackburn did disclose that he had a criminal history to investors.[111]Blackburn contends that Richard Daniel Bass Jr. was the investor in the Belize oil project. The Officer Defendants go on to suggest that the online blogger tdbowieknife wrote the SEC's complaint in this case.[112] In fact, counsel goes as far as to allege that he does “not believe that the penmanship of the Complaint was that of Senior Trial Counsel Magee. The inference that it was tdbowieknife ghost-writing for [Ms. Magee] is irresistible, based on the obsessive conduct by the bloggers.”[113] Defendant Mulshine then contends that he did not play a managing role in Treaty and did not act with the requisite scienter necessary to prove that he violated the Securities Act. Finally, the Officer Defendants attempt to address some of the SEC's claims, but merely state that no violations of the Section 5, Section 17, or Section 10 of the Securities Act occurred.[114] The common response by the Officer Defendants is “that did not happen.”

         LEGAL STANDARD

         Summary judgment is appropriate when “the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (citing Fed.R.Civ.P. 56); accord Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994). When assessing whether a dispute as to any material fact exists, a court considers “all of the evidence in the record but refrains from making credibility determinations or weighing the evidence.” Delta & Pine Land Co. v. Nationwide Agribusiness Ins. Co., 530 F.3d 395, 398 (5th Cir. 2008). All reasonable inferences are drawn in favor of the nonmoving party, but a party cannot defeat summary judgment with conclusory allegations or unsubstantiated assertions. Little, 37 F.3d at 1075. A court ultimately must be satisfied that “a reasonable jury could not return a verdict for the nonmoving party.” Delta, 530 F.3d at 399.

         If the dispositive issue is one on which the moving party will bear the burden of proof at trial, the moving party “must come forward with evidence which would ‘entitle it to a directed verdict if the evidence went uncontroverted at trial.'” Int'l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th Cir. 1991). The nonmoving party can then defeat the motion by either countering with sufficient evidence of its own, or “showing that the moving party's evidence is so sheer that it may not persuade the reasonable fact-finder to return a verdict in favor of the moving party.” Id. at 1265.

         If the dispositive issue is one for which the nonmoving party will bear the burden of proof at trial, the moving party may satisfy its burden by merely pointing out that the evidence in the record is insufficient with respect to an essential element of the nonmoving party's claim. See Celotex, 477 U.S. at 325. The burden then shifts to the nonmoving party, who must, by submitting or referring to evidence, set out specific facts showing that a genuine issue exists. See Id. at 324. The nonmovant may not rest upon the pleadings but must identify specific facts that establish a genuine issue at trial. See Id. at 325; Little, 37 F.3d at 1075.

         DISCUSSION

         I. The SEC's Motion to Strike & The Officer Defendants' Motion for Summary Judgment

         Before addressing the merits of the summary judgment motions, the Court will first address the SEC's Motion to Strike, which the Officer Defendants failed to oppose. The SEC moves to strike: (1) the first eight pages of the Officer Defendants' brief in support of their Motion for Summary Judgment because they are irrelevant;[115] and (2) Appendices A through H[116] attached to the Officer Defendants' Motion for Summary Judgment because they are inadmissible and not competent summary judgment evidence. The Court finds that the motion is well-taken and therefore should be GRANTED.

         Having granted the SEC's Motion to Strike, little remains of the Officer Defendants' Motion for Summary Judgment: of the four remaining pages, two merely recite the legal standard for summary judgment. In the final two pages, the Officer Defendants argue that 17 C.F.R. § 229.401, requiring, inter alia, disclosure of criminal convictions, did not apply to Blackburn and that the SEC has “no facts regarding violations.”[117] Regardless of the applicability of that specific regulation, the SEC argues that the failure to disclose Blackburn's involvement with Treaty, not merely his criminal convictions, violated the antifraud provisions of federal securities law and points to numerous instances of the Officer Defendants failing to disclose his involvement.[118] See, e.g., SEC v. Enters. Sols., Inc., 142 F.Supp.2d 561, 573 (S.D.N.Y. 2001) (“To prove a violation of § 10(b) and Rule 10b-5, the [SEC] must prove . . . that, in connection with the purchase or sale of any security, defendants, acting with scienter . . . made an untrue statement of a material fact or [failed] to state a material fact in order to make the statements made, in light of the circumstances under which they were made, not misleading.”). The Officer Defendants have failed to establish that they are entitled to judgment as a matter of law and, accordingly, their Motion for Summary Judgment is DENIED.

         II. Section 5(a) and (c) of the Securities Act

         The SEC's first claim is that each of the Defendants violated Sections 5(a) and (c) of the Securities Act. Section 5(a) and (c) of the Securities Act make it unlawful to offer or sell a security in interstate commerce unless a registration statement has been filed or the transaction qualifies for an exemption from registration. 15 U.S.C. § 77e(a), (c); SEC v. CMKM Diamonds, Inc., 729 F.3d 1248, 1255 (9th Cir. 2013). To establish a prima facie case against each Defendant for violating Section 5, the SEC must produce competent summary judgment evidence establishing that (1) no registration statement was in effect as to the securities; (2) the Defendant sold or offered to sell these securities; and (3) interstate transportation or communication and the mails were used in connection with the sale or offer of sale. SEC v. Cont'l Tobacco Co. of S.C., 463 F.2d 137, 155 (5th Cir. 1972). Section 5 is a strict liability statute; there is no need to prove scienter. Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir. 1980) (“The Securities Act of 1933 imposes strict liability on offerors and sellers of unregistered securities . . . regardless of any . . . degree of fault, negligent or intentional, on the seller's part.”).

         Moreover, the prohibition on the sale or attempted sale of securities has broad reach. CMKM Diamonds, Inc., 729 F.3d at 1255 (“[L]iability under Section 5 is not limited to the person or entity who ultimately passes title to the security.”). It extends to significant “participants” in the sale, those who were both necessary for a transaction and a “significant factor” in bringing it about. Id. (citing SEC v. Murphy, 626 F.2d 633, 650 (9th Cir. 1980)). If the SEC establishes a prima facie case, then the burden shifts to the Defendants to prove that they are entitled to an exemption. SEC v. Ralston Purina, 346 U.S. 119 (1953); Cont'l Tobacco, 463 F.2d at 156. The Court will address the merits of the SEC's claims against each of the Defendants in turn.

         A. Blackburn Violated Section 5

         Blackburn violated Section 5(a) and (c) by offering and selling his initial, unregistered shares and by offering and selling S-8 shares on Treaty's behalf. Regarding the first element, the SEC's Records Officer attested that “no registration statements were filed with [the SEC] between 2009 to [March 10, 2017], under the name of Treaty Energy Corporation . . . other than the Form S-8 registrations filed on February 23, 2011, August 24, 2012 and February 21, 2013.”[119] Therefore, the SEC may satisfy the first element by showing that these S-8 form filings did not serve as valid registrations of the securities. See SEC v. E. Delta Res. Corp., No. 10-CV-310 SJF WDW, 2012 WL 3903478, at *4 (E.D.N.Y. Aug. 31, 2012), aff'd, 550 Fed.Appx. 52 (2d Cir. 2014). “[A]n S-8 registration form can be used by a company only to issue stock as a means of compensating consultants for bona fide services not connected with raising capital.” Phan, 500 F.3d at 903. If the SEC can show that Blackburn did not perform bona fide services in exchange for any Treaty shares, or that Blackburn was issued shares primarily in order to raise capital on behalf of Treaty, then there was no effective registration statement applicable to any of Treaty's shares, including those purportedly registered under S-8. See E. Delta Res., 2012 WL 3903478, at *4.

         At formation, Blackburn possessed 397, 440, 000 of Treaty's shares, an 86.4% interest, and the evidence in the record confirms Blackburn offered and sold most of those shares to investors. Blackburn freely admitted at deposition that he sold his shares on behalf of Treaty in order to raise capital for the company.[120] He testified that he would call investors in an attempt to receive money to develop oil and gas wells.[121] After he spoke with these investors on the phone, Blackburn would sell them his shares and they would wire the money directly to Treaty.[122] In fact, this arrangement was the means by which Treaty entered into the Belize Venture. Therefore, the SEC has easily proven the first element: Blackburn's initial shares were unregistered and to the extent the S-8 shares were intended to compensate Blackburn as a “consultant, ” it was primarily for his capital-raising and promotional role. See E. Delta Res., 2012 WL 3903478, at *5; see also Registration of Securities on Form S-8, Release No. 7646 (S.E.C. Release No. Feb. 25, 1999). The same evidence also satisfies the second element: Blackburn sold and offered the unregistered securities.

         Finally, the third element is met. The SEC has provided a detailed accounting of the distributions of shares by Blackburn to individuals across the United States.[123]This accounting was produced by reference to the internal transfer ledgers created by Mulshine to track the millions of shares transferred from Treaty, through Blackburn, to investors from February 2009 to June 2013.[124] Blackburn has provided absolutely no evidence to suggest that the hundreds of thousands of shares he admits he sold to raise capital for Treaty were limited to intrastate commerce. Moreover, evidence that Blackburn actually sold unregistered stock in interstate commerce is sufficient but not necessary: the jurisdictional nexus can be met simply by showing that the means of interstate commerce-telephones, e-mail, and the mail-were used to communicate with investors, potential investors, transfer agents, or broker-dealers. See SEC v. Softpoint, Inc., 958 F.Supp. 846, 861 (S.D.N.Y. 1997) (“The third element of a Section 5 violation, requiring the use of interstate means in connection with the sale or offering of a security, ‘is broadly construed to include . . . intrastate telephone calls.'”). It is clear from the record that Blackburn used these devices; therefore, this element is met.

         Accordingly, the SEC has presented a prima facie case that Blackburn sold and offered unregistered shares by means of interstate commerce. Blackburn has not argued that a specific exemption to registration applies in this case and, upon examining the record, it is clear that no exemption applies.[125]

         B. Reid Violated Section 5

         Reid also violated Section 5(a) and (c) by directly offering and selling Blackburn's shares to investors. As noted above, the first element is met because none of Treaty's shares were registered for a general capital raising purpose. Proceeding to the second and third elements, the Court finds that these are easily confirmed by Reid's deposition testimony.

         Reid testified that in the early days of Treaty-from 2009 to 2010-Treaty did not have any registered stock that it could sell, so the only way it could raise money through stock sales was by selling Blackburn's stock.[126] The “bulk” of the money coming into Treaty at this time was from investors.[127] According to Reid, Blackburn would “loan” his shares to Treaty to facilitate a sale.[128] Investors would pay for the securities through Treaty, and Blackburn would then have the shares issued to the investors.[129] In order to procure investors, either Reid or Blackburn would contact and solicit sales to investors.[130] Reid agreed that soliciting or attracting new investors to Treaty was one of his duties as CEO and president of Treaty.[131] He further admitted part of his work at Treaty was “reaching out to investors, current investors, talking with them and trying to raise capital.[132] Moreover, there is unrefuted evidence that Reid solicited Chris Ezzell to purchase Blackburn's unregistered Treaty shares, and that Ezzell purchased shares.[133]

         Thus, the SEC has demonstrated a prima facie case that Reid directly solicited and sold Treaty's unregistered securities through means of interstate commerce.[134]Reid has failed to allege, let alone demonstrate, that an exemption applies to his sale of these securities, that the securities were registered, or that the sale of these unregistered securities was not made through interstate commerce. The SEC is entitled to summary judgment on its Section 5 claim against Reid.

         C. Gwyn Violated Section 5

         Gwyn, like Blackburn and Reid, admitted in his deposition that he sold Treaty shares on behalf of the company in order to raise capital for Treaty. When asked, “Did you sell shares of Treaty Energy to [an investor]?” Gwyn replied, “Yes, I did.”[135] As Gwyn explained, “The only way the operations would continue to go is if we brought money in because we didn't have enough revenue.”[136]

         Further, it is undisputed that these shares were unregistered and that checks would arrive in the mail for the purchase of such stock. Thus, the SEC has established a prima facie case against Gwyn, and the burden shifts to Gwyn to demonstrate that an exemption applies in this case or to disprove any of the SEC's arguments. He has not done so. Accordingly, the SEC is entitled to summary judgment on its Section 5 claim against Gwyn.

         D. Mulshine Violated Section 5

         Mulshine violated Section 5 of the Securities Act by soliciting investors to purchase unregistered Blackburn shares. The SEC filed the sworn declaration of Jefferey Morgan, a Contract Specialist for the U.S. Army who invested in Phoenix and later in Treaty.[137] Morgan had been an investor in Phoenix and he knew Mulshine and Blackburn from their time there. Mulshine contacted Morgan in 2008 by telephone to solicit his investment in Treaty, which he said was raising $200, 000 for oil well repairs that would quadruple the wells' output.[138] Morgan voiced concern that Blackburn might be involved-Morgan had learned Blackburn was a felon-but Mulshine assured Morgan that Blackburn was not associated with Treaty.[139] Morgan agreed to invest in the well and wired $30, 000 to a Regions account according to Mulshine's instructions.[140] Morgan was issued a convertible promissory note, which converted to 780, 320 shares of Treaty common stock.[141] Morgan later learned of Blackburn's involvement and sold his shares for a loss of approximately $18, 800.[142]

         Accordingly, this evidence indicates that Mulshine was involved in the sale of unregistered Treaty stock and that the sale and offer were made through interstate commerce. Further, Mulshine has not argued, nor produced any evidence, that an exemption to registration applies in this case. Therefore, the ...


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