Petition for Writ of Certiorari — Sameer P. Sethi, Petitioner v. Securities and Exchange Commission

APPENDIX A

l

Opinion of the Court of Appeals

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

United States Court of Appeals

Fifth Circuit

No. 17-41022

SECURITIES AND EXCHANGE COMMISSION,

FILED

December 4, 2018

Lyle W. Cayce

Clerk

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.

No. 17-41022

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.” j

The jJVA laid out the rights, duties, and obligations for the investors and

i|

the managing venturer—Sethi Petroleum. While the JVA purported to give

the investors control over the venture’s affairs, it delegated power over the dayto-day operations to Sethi Petroleum. The JVA also gave Sethi Petroleum the

sole powejr 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.

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No. 17-41022

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 erred

in granting summary judgment on the SEC’s securities fraud claims.

A.

Under Section 5 of the Securities Act, it is “unlawful for any person,

directly or indirectly” to use interstate commerce to offer to sell “any security”

unless the person has filed a “registration statement” for the security. 15

U.S.C. § 77e(c). The Securities Act broadly defines the term security to include

a long list of financial instruments, including “investment contracts,” the type

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No. 17-41022

of security at issue here. See 15 U.S.C. § 77b. While Congress defined the term

security, it left it to the courts to define the term “investment contract.” In

Howey, the Supreme Court developed a “flexible” test for determining whether

an arrangement qualifies as an investment contract:

[A]n 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 the promoter or a third party.

SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). Distilled to its elements,

an investment contract qualifies as a security if it meets three requirements:

“(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 v. Tucker, 645 F.2d 404, 417-18 (5th Cir. 1981)

(citing SEC v. Koskot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974)). Here,

the parties dispute the third factor.

When determining whether investors expect to rely “solely on the efforts

of others,” courts construe the term “solely” “in a flexible manner, not in a

literal sense.” Youmans u. Simon, 791 F.2d 341, 345 (5th Cir. 1986). Courts

read this requirement flexibly “to ensure that the securities laws are not easily

circumvented by agreements requiring a ‘modicum of effort’ on the part of

investors.” Long v. Shultz Cattle Co., 881 F.2d 129, 133 (5th Cir. 1989). The

critical inquiry is 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.” Williamson, 645 F.2d at 418

(internal citation omitted). Even though an investor might retain “substantial

theoretical control,” courts look beyond formalities and examine whether

investors, in fact, can and do utilize their powers. Affco Invs. 2001, LLC v.

Proskauer Rose, LLP, 625 F.3d 185, 190 (5th Cir. 2010).

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No. 17-41022

Here, the court must apply these general principles to a partnership.1

While we employ a “strong presumption” that “a general partnership ... is not

a security,” Nunez v. Robin, 415 F. App’x 586, 589 (5th Cir. 2011) (per curiam)

(unpublished) (quoting Youmans, 791 F.2d at 344), this court in Williamson

articulated three factors that, if proven, overcome this presumption. These

factors flesh out situations where investors depend on a third-party manager

for their investment’s success, and each factor is sufficient to satisfy the third

Howey factor. Under the Williamson factors, a partner is dependent solely on

the efforts of a third-party manager when:

(1) an agreement among the parties leaves so little power in the

hands of the partner or venturer that the arrangement in fact

distributes power as would a limited partnership; or (2) the

partner or venturer is so inexperienced and unknowledgeable in

business affairs that he is incapable of intelligently exercising his

partnership or venture powers; or (3) the partner or venturer is so

dependent on some unique entrepreneurial or managerial ability

of the promoter or manager that he cannot replace the manager of

the enterprise or otherwise exercise meaningful partnership or

venture powers.

Williamson, 645 F.2d at 422.2 Courts, however, are not limited to these three

factors—other factors could “also give rise to such a dependence on the

promoter or manager that the exercise of partnership powers would be

1 This court applies the same analysis to partnerships and joint ventures. Youm,ans,

791 F.2d at 346 n.2 (“Our discussion of partnerships applies with equal force to joint ventures

since this kind of business investment device is the same for purposes of the federal securities

laws.”).

2 A number of other circuits have adopted the Williamson factors as a way to analyze

the third Howey factor. See, e.g., SEC v. Shields, 744F.3d 633, 644 (10th Cir. 2014) (adopting

the Williamson factors); United States u. Leonard, 529 F.3d 83, 90-91 (2d Cir. 2008) (same);

SEC u. Merck. Capital, LLC, 483 F.3d 747, 755-66 (11th Cir. 2007) (same); Stone v. Kirk, 8

F.3d 1079, 1086 (6th Cir. 1993) (same); Koch v. Hankins, 928 F.2d 1471, 1477-81 (9th Cir.

1991) (same); Riuanna Trawlers Unlimited v. Thompson Trawlers, Inc., 840 F.2d 236, 241

(4th Cir. 1988) (same).

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No. 17-41022

effectively precluded.” Id. But regardless of which factor is at issue, a party

can only prove one of the Williamson factors by looking to the unique facts of

the arrangement at issue. Differently put, a party faces a “factual burden”

when proving one of the Williamson factors. Id. at 425.

The first Williamson factor is whether the drilling projects left the

investors so little power “that the arrangement in fact distribute[d] power as

would a limited partnership.”

Id. at 422.

In determining whether an

arrangement deprives investors of power, courts look to two sources of

evidence. First, courts look to the legal documents setting up the arrangement

to see if investors were given formal powers. See, e.g., id. at 424 (looking to the

“partnership agreement” to see if partners were given power). Second, courts

examine how the arrangement functioned in practice. How the arrangement

functioned is typically the most important indication of whether investors had

power.3

See, e.g., Nunez, 415 F. App’x at 590 (looking to the fact that an

investor exercised power over the partnership’s finances); Long, 881 F.2d at

134 (crediting the jury’s conclusion that investors, in practice, followed the

manager’s recommendations).

Here, the governing venture documents gave investors some theoretical

power to control the drilling projects.

Importantly, they had the power to

remove Sethi as manager. See Youmans, 791 F.2d at 347 (holding that the

3 Post-investment conduct is relevant for determining the expectations of the parties

at the time they entered the drilling investment contracts, as other circuits have held.

Shields, 744 F.3d at 646; see also Merck. Capital, LLC, 483 F.3d at 760; Koch, 928 F.2d at

1478 (looking to the “practical possibility of the investors exercising the powers they

possessed pursuant to the partnership agreements.”). Although the Fifth Circuit has not

explicitly held that courts may look to post-investment activity, nearly every case has in fact

analyzed such activity. See, e.g., Nunez, 415 F. App’x at 590 (looking to the fact that the

investor exercised power over the partnership’s finances); Long, 881 F.2d at 134 (crediting

the jury’s conclusion that investors followed the manager’s recommendations); Youmans, 791

F.2d at 347 (directing the trial court on remand to further develop the “practical application”

of the relevant contract provisions).

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No. 17-41022

removal power is “an essential attribute of a general partner’s . . . authority.”).

They also could call meetings and propose amendments with a 20% vote,

develop rules for meetings with a 50% vote, and veto Sethi’s decisions.

These powers, however, were illusory in practice,

Sethi blocked

investors from using their powers on numerous occasions. First, and most

tellingly, Sethi was responsible for calling meetings and soliciting votes. He

never did. The investors never held a meeting and did not vote on any matter.

A receiver appointed by the district court also found no evidence that Sethi

ever “organized a vote or solicited input of any kind from investors.” While

Sethi contends that the project was in its early stages, the SEC provided

evidence that Sethi took several actions without informing investors. When he

purchased well interests for the venture, he did not inform the investors or

solicit any investor approval, even though this approval was required by the

JVA. He did not notify investors when he sued to rescind this interest. Nor

did Sethi ask for any investor input when he drilled eight of twenty wells

promised in the PPM.

Second, Sethi gave the investors little to no information. The investors

did not have access to the project’s books. One investor, Michael Martin,

declared that Sethi’s employees stymied his efforts to gather information on

numerous occasions, denying him promised “up-to-date” reports and

repeatedly failing to return his calls and emails. Other investors corroborated

Martin’s story, declaring that Sethi “never consulted” them on “business

matters” and failed to provide “promised quarterly updates.” The district

court’s receiver further supported this evidence, concluding that Sethi “actively

sought to minimize transparency with investors and limit the information to

be made available to, and the involvement of, the investors.”

Without

“sufficient information,” investors could not “make meaningful decisions”

about their investments. Merck. Capital, 483 F.3d at 759.

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No. 17-41022

Sethi does not provide any evidence to the contrary. He correctly states

the law in arguing that a voluntarily passive investor cannot transform an

investment into a security. See Rivanna Trawlers Unlimited, 840 F.2d at 24041.

Sethi did not, however, support this argument with any evidence.

Meanwhile, the SEC provided summary judgment evidence that investors did

seek to use their powers but could not. Sethi also argues—again without

evidence—that investors might have been actively monitoring their

investments. But overcoming a motion for summary judgment requires Sethi

to do more than provide “unsubstantiated assertions.” Turner, 476 F.3d at 343.

In sum, the SEC provided unrebutted evidence showing that the

investors could not use their legal powers. As a result, the district court

correctly concluded that Sethi’s drilling projects distributed power as if they

were limited partnerships. Because we agree that the first Williamson factor

was met, we do not address the second and third factors.

B.

Sethi also argues that the district court erred when it granted the SEC’s

motion for summary judgment on its securities fraud claims under Section

10(b) of the Exchange Act, Rule 10b-5, and Section 17(a) of the Securities Act.

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 Commission may prescribe as necessary or appropriate in

the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). Under

the power granted by this statute, the SEC created Rule 10b-5, which makes

it unlawful for any person, directly or indirectly:

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to

state a material fact necessary in order to make the statements

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No. 17-41022

made, in the light of the circumstances under which they were

made, not misleading, or

(c) To engage in any act, practice, or course of business which

operates or would operate as a fraud or deceit upon any person

17 C.F.R. § 240.10b-5.

To prove a violation of Rule 10b-54 for material representations or

misleading omissions, the SEC must prove three elements: “(1) material

misrepresentations or materially misleading omissions, (2) in connection with

the purchase or sale of securities, (3) made with scienter.” SEC v. Seghers, 298

F. App’x 319, 327 (5th Cir. 2008) (unpublished) (per curiam) (citing Aaron v.

SEC, 446 U.S. 680, 695 (1980)).

To show that a defendant has violated

§ 17(a)(2) or (a)(3), the SEC must show the same elements as for Rule 10b-5,

except that it need only prove “the defendant acted with negligence.” Id.

Here, the parties dispute the first and third elements of this test,

material misrepresentation and scienter.

Under Rule 10b-5, a defendant

makes a misrepresentation when “the information disclosed, understood as a

whole, would mislead a reasonable potential investor.” Laird v. Integrated

Rees., Inc., 897 F.2d 826, 832 (5th Cir. 1990). The scope of this standard is

determined by the relative status and sophistication of the parties. Id. The

defendant’s misrepresentation 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 Grp. v. Tchuruk, 291

F.3d 336, 359 (5th Cir. 2002). To prove scienter, the SEC need only prove that

the defendant acted with severe recklessness. Broad v. Rockwell Int’l Corp.,

642 F.2d 929, 961 (5th Cir. 1981) (en banc). Severe recklessness is defined as

“those highly unreasonable omissions or misrepresentations that involve not

4 The scope of liability under Section 10(b) and Rule 10b-5 is the same. See SEC v.

Zandford, 535 U.S. 813, 816 n. 1 (2002).

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No. 17-41022

merely simple or even inexcusable negligence, but an extreme departure from

the standards of ordinary care, and that present a danger of misleading buyers

or sellers which is either known to the defendant or is so obvious that the

defendant must have been aware of it.” Id. at 961-62.

Sethi primarily argues that he did not make any misrepresentations at

all. He also suggests that he did not act with scienter. We are not persuaded

7N

Sethi’s brief cites no summary judgment evidence to support his conclusory

arguments. Meanwhile, the district court, relying on unrebutted evidence,

held that Sethi misstated his relationships with major oil companies when .

offering interests m his drilling venture and, as a result, misled investors. The

record supports the district court’s findings.

In communications with prospective investors, Sethi and his employees

made several statements concerning his relationships with major oil

companies. His cold-call script emphasized the venture’s current relationship

with “HUGE, PUBLICLY traded companies, like Conoco Phillips, Continental,

GMXR just to name a few.” The script also claimed that the venture

was

“working DIRECTLY with these major companies.” Affidavits confirm this

evidence. One investor declared that Sethi told him that “Sethi Petroleum was

partnering with Exxon Mobil and other major oil companies to drill and

operate.”

A former cold-caller also declared that Sethi instructed him to

emphasize Sethi Petroleum’s relationships with “major oil and gas companies.”

Sethi did not stop these representations after the initial call_the

offering documents also portrayed Sethi Petroleum as having current

partnerships with several major oil and gas companies. The Executive

Summary represented that “all” of the venture’s wells would be drilled by

Exxon Mobil (XOM), Conoco Phillips (COP), Continental Resources (CLR),

Hess Corp. (HES), and several others, all of whom have extensive drilling

experience in the Williston Basin.” The PPM told investors that “publicly

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No. 17-41022

traded and/or major oil and gas companies” would drill the venture’s wells.

The PPM also specifically mentioned the four

companies listed above as

examples_ofthe type of company that would drill the venture’s wells.

Taken together, Sethi’s statements suggest that Sethi Petroleum had

preexisting relationships with some of the largest oil companies in the worldrelationships that Sethi would leverage in the venture’s favor. In reality, these

relationships did not exist. No evidence in the record indicates that Sethi

Petroleum had any preexisting relationship with any of the listed

companies

or ones that are similar. Nor does the record show that the venture ever

partnered with Exxon Mobil, Conoco Phillips, or a similar company. In fact,

Sethi acquired the venture’s only well interests from Irish Oil & Gas, Inc.—a

small, private oil company. Three other companies—Crescent Point Energy

U.S. Corp., Slawson Exploration Co., and Oxy USA Inc.-operated the wells.

us to any contrary evidence. Sethi also offers no evidence

that either Crescent Point Energy or Slawson Exploration are of the same scale

and notoriety as the major oil companies touted in the offering documents . And

while Oxy USA is a subsidiary of Occidental Petroleum, a major oil company,

Sethi offers no evidence about whether and to what extent Occidental

Petroleum was involved in the well operation.

Nor does he present any

evidence of a preexisting relationship with Oxy USA or Occidental Petroleum.

The district court correctly concluded that these facts constitute

misstatement.

These facts also establish scienter. Sethi knew that he did not have

relationships with the listed companies, and Sethi does not dispute that the

venture never partnered with

major oil company.5

Nevertheless, he

f 5 Sethi contends

^ that

, .he relied on consultants when he made these statements and,

refore did not act with scienter. Again, however, he provides no evidence to support his

argument. Nowhere in the record do we find any sign that Sethi relied on statements by his

11

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No. 17-41022

repeatedly represented that he had relationships with several major oil

companies, and he used these representations as a tool to entice investors. By

touting his relationships with major oil companies, Sethi created

a “danger of

misleading buyers” into believing that his venture would be well-managed and

their investments would be in the hands of the most successful drillers in the

world. Broad, 642 F.2d at 961.

In sum, the district court correctly found that Sethi made material

misstatements

to

investors

when he knowingly

misrepresented

his

relationships with major oil companies.

IV.

For the foregoing reasons, the judgment of the district court is

AFFIRMED.

consultants, or that consultants ever made statements about Sethi Petroleum’s relationships

with major oil companies.

12

APPENDIX B

Memorandum Opinion of the

District Court

Case 4:15-cv-00338-ALM

Document 238 Filed 01/17/17 Page 1 of 24 PagelD #: 4282

United States District Court

EASTERN DISTRICT OF TEXAS

SHERMAN DIVISION

SECURITIES AND EXCHANGE

COMMISSION

§ .

§

v.

§

§

SETHI PETROLEUM, LLC and SAMEER

P. SETHI

§

§

§

Civil Action No. 4:15-CV-00338

Judge Mazzant

AMENDED MEMORANDUM OPINION AND ORDER

Pending before the Court is Plaintiffs Motion for Summary Judgment as to Sameer Sethi

(Dkt. #195). After reviewing the relevant pleadings and motion, the Court finds that the motion

should be granted.

BACKGROUND

As early as January 2014, Defendant Sameer Sethi and his company, Sethi Petroleum,

LLC (“Sethi Petroleum”), began offering investors positions in the Sethi-North Dakota Drilling

Fund-LVIII Joint Venture (“NDDF”). This purported “joint venture” offered investors returns

from two sources: oil-and-gas revenues and tax benefits from oil-and-gas exploration and

production activities. The NDDF was promoted primarily through two documents: a Confidential

Private Placement Memorandum (“PPM”) and an Executive Summary (collectively, the

“Offering Documents”).

Sethi Petroleum marketed NDDF interests through a twenty-person sales staff using cold

calls, pitch scripts, and purchased lead lists. Defendant regularly visited Sethi Petroleum’s boiler

room to provide sales tips and directions on statements to make to potential investors. Once

salespeople determined that an investor was interested in NDDF and was “accredited,” Sethi

Petroleum would send Offering Documents to the potential investor through the United States

Case 4:15-cv-00338-ALM Document 238 Filed 01/17/17 Page 2 of 24 PagelD #: 4283

mails. An “accredited” investor is a person with a net worth over $1,000,000 independently or

combined with a spouse or with individual income over $200,000 or joint income over $300,000.

In the PPM, Sethi Petroleum stated its intention to raise $10 million to exploit its

exclusive rights to purchase mineral interests and to participate in oil and gas development on

200,000 acres in the Williston Basin of North Dakota, South Dakota, and Montana. Each of the

fifty units was offered at $200,000. Sethi Petroleum estimated that 70% of investor funds would

be used for the acquisition, drilling, and completion of the wells and that the remaining 30%

would be spent on legal, engineering, syndication, and management expenses.

The PPM further stated that the investors’ funds would be used to purchase

approximately 62.5% net working interest in at least twenty wells. The Offering Documents

further state that NDDF’s wells would be “operated by publicly traded and/or major oil and gas

companies” such as Continental Resources, ExxonMobil, Hess Corporation, and ConocoPhillips

(APP205).1 In August 2014, NDDF acquired a fractional working interest from Irish Oil & Gas

ranging from 0.15% to 2.5% in eight or nine wells. The operators of the acquired wells were

Crescent Point Energy U.S. Corp., Oxy USA Inc., and Slawson Exploration Co. Of those wells,

only six produced oil or gas. Two wells were voluntarily cancelled by their operators in

December 2014 and January 2015. The remaining wells produced a combined total of 9,147

barrels of oil in January 2015; 13,995 barrels of oil in February 2015; and 12,357 barrels of oil in

March 2015. Since the appointment of a receiver for all of Sethi Petroleum in May 2015, all of

the wells associated with Sethi Petroleum have produced total proceeds of $2,489.85.

1 The SEC incorporates the Appendix filed in support of the SEC’s Motion for Temporary Restraining Order (Dkt.

#4, Exhibit 2) as evidence for this motion. In addition, the SEC has attached additional materials to this motion

beginning with APP722, supplementing the TRO’s 721-page Appendix. The Court will refer to all of these materials

in reference to their Appendix citation.

2

Case 4:15-cv-00338-ALM

Document 238 Filed 01/17/17 Page 3 of 24 PagelD #: 4284

The PPM alerted investors to various risk factors associated with the NDDF venture

including: “The venture is newly formed and has limited financial resources”; “There is no

minimum capitalization required before subscriptions will be utilized for venture operations”;

“Our prior performance is not an indication of how the venture will perform”; “The prospect

wells may not be productive”; “You may not recover your investment in the venture”; “We may

profit from the venture’s operations even if the venture is not profitable” (APP28-34).

The Executive Summary contained projections for the NDDF venture including a

projection for annual returns ranging from 32% to 254% on first year investments. These

projections were based on a $90/barrel price of oil. In March 2015, the price per barrel ranged

from $43.36 to $51.53.2

Attached to PPM was a Joint Venture Agreement (“JVA”). The JVA provided by Sethi

Petroleum established the NDDF venture and appointed Sethi Petroleum as Managing Venturer.

The JVA gave investors control of NDDF’s affairs and operations, but empowered Sethi

Petroleum to manage the venture’s day-to-day operations. Among the powers granted to Sethi

Petroleum were “sole and absolute discretion” to distribute NDDF profits to investors; authority

to execute oil and gas operating agreements; power to take and hold title to NDDF’s property;

and authority to hire all professionals on NDDF’s behalf, including engineers, geologists, and

appraisers. Certain significant actions—such as acquiring oil and gas interests or removing the

Managing Venturer—required the majority vote of investors. No evidence shows that a vote was

ever conducted or that a list of investors was ever provided to NDDF investors.

The PPM stated that “there will be no commingling of funds between the Venture and

Sethi Petroleum or any Affiliate thereof other than may temporarily occur during the payment of

2 Based on U.S. Energy Information Institute reports for daily spot prices of crude oil, Cushing, OK. U.S. Energy

Info. Admin. Petroleum & Other Liquids (Nov. 9, 2016), http:/Avww.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=

pet&s=rwtc&f=d.

3

Case 4:15-cv-00338-ALM Document 238 Filed 01/17/17 Page 4 of 24 PagelD #: 4285

bills and/or distributions by Sethi Petroleum on behalf of the Venture.” From January 28, 2014,

through March 9, 2015, Sethi Petroleum raised over $4 million from ninety investors in twentyeight states across the country. From February 6, 2014 through March 21, 2015, Defendant and

Praveen Sethi moved $3.15 million of investor funds to the Sethi Petroleum general account in

more than eighty account transfers.3

On May 14, 2015, the Court granted the SEC’s emergency ex parte request and issued a

temporary restraining order, asset freeze, and other injunctive relief (the “TRO”) against Sethi

Petroleum and Defendant (Dkt. #11). The Court also appointed a receiver over Sethi Petroleum

(Dkt. #12). On May 26,. 2015, the Court issued an Agreed Order Granting Preliminary

Injunction, Asset Freeze, and Other Relief (the “Preliminary Injunction”) (Dkt. #23).

On December 4, 2015, Defendant was noticed, and appeared, for a sworn deposition in

this case. Throughout the deposition, Defendant invoked his Fifth Amendment rights to nearly

every question (Dkt. #195, Exhibit 2-A). On April 7, 2016, Defendant executed a declaration

stating that he would assert his Fifth Amendment privilege to decline to testily, including

without limitation, testimony regarding his personal information, assets, conduct related to Sethi

Petroleum, receipt of funds in any way related to Sethi Petroleum, expenditures of funds,

relationships related to himself or Sethi Petroleum, any efforts to raise money from investors,

and communications with Sethi Petroleum (Dkt. #195, Exhibit 2-A).

On September 14, 2016, the SEC filed this Motion for Summary Judgment as to Sameer

Sethi (Dkt. #195). On October 11, 2016, Defendant filed a response (Dkt. #211). On October 18,

2016, the SEC filed a reply (Dkt. #218). On November 1, 2016, Defendant filed a sur-reply (Dkt.

#220).

3 It is disputed whether these transfers were legitimately used for expenses and distributions as stated in the PPM, or

whether they were fraudulent. The Court needs not decide because the fact that they occurred is not in dispute.

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LEGAL STANDARD

The purpose of summary judgment is to isolate and dispose of factually unsupported

claims or defenses. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). Summary judgment

is proper under Rule 56(a) of the Federal Rules of Civil Procedure “if the movant shows that

there is no genuine dispute as to any material fact and the movant is entitled to judgment as a

matter of law.” Fed. R. Civ. P. 56(a). A dispute about a material fact is genuine when “the

evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson

v. Liberty Lobby Inc., All U.S. 242, 248 (1986). Substantive law identifies which facts are

material. Id. The trial court “must resolve all reasonable doubts in favor of the party opposing the

motion for summary judgment.” Casey Enters., Inc. v. Am. Hardware Mut. Ins. Co., 655 F.2d

598, 602 (5th Cir. 1981).

The party seeking summary judgment bears the initial burden of informing the court of its

motion and identifying “depositions, documents, electronically stored information, affidavits or

declarations, stipulations (including those made for purposes of the motion only), admissions,

interrogatory answers, or other materials” that demonstrate the absence of a genuine issue of

material fact. Fed. R. Civ. P. 56(c)(1)(A); Celotex, All U.S. at 323. If the movant bears the

burden of proof on a claim or defense for which it is moving for summary judgment, it must

come forward with evidence that establishes “beyond peradventure all of the essential elements

of the claim or defense.” Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986). Where

the nonmovant bears the burden of proof, the movant may discharge the burden by showing that

there is an absence of evidence to support the nonmovant’s case. Celotex, All U.S. at 325; Byers

v. Dali. Morning News, Inc., 209 F.3d 419, 424 (5th Cir. 2000). Once the movant has carried its

burden, the nonmovant must “respond to the motion for summary judgment by setting forth

particular facts indicating there is a genuine issue for trial.” Byers, 209 F.3d at 424 (citing

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Anderson, All U.S. at 248-49). A nonmovant must present affirmative evidence to defeat a

properly supported motion for summary judgment. Anderson, All U.S. at 257. Mere denials of

material facts, unsworn allegations, or arguments and assertions in briefs or legal memoranda

will not suffice to carry this burden. Rather, the Court requires ‘“significant probative evidence’”

from the nonmovant to dismiss a request for summary judgment. In re Mun. Bond Reporting

Antitrust Litig., 672 F.2d 436, 440 (5th Cir. 1982) (quoting Ferguson v. Nat’l Broad. Co., 584

F.2d 111, 114 (5th Cir. 1978)). The Court must consider all of the evidence but must “refrain

from making any credibility determinations or weighing the evidence.” Turner v. Baylor

Richardson Med. Ctr., A16 F.3d 337, 343 (5th Cir. 2007).

ANALYSIS

Evidentiary Objections

Defendant moves to strike portions of Plaintiff s Appendix that do not comport with the

requirements of Federal Rule of Civil Procedure 56. First, Defendant moves to strike statements

by Marcus Helt that are conclusory or without foundation. Statements setting forth conclusory

facts or conclusions of law are insufficient evidence on a motion for summary judgment. See

Clark v. America’s Favorite Chicken Co., 110 F.3d 295, 297 (5th Cir. 1997). An affidavit in

support of a motion must be made on “personal knowledge, set out facts that would be

admissible in evidence, and show that the affiant or declarant is competent to testify on the

matters stated.” Fed. R. Civ. P. 56(c)(4).

The Court finds that several statements in Marcus Helt’s affidavit are conclusions of law.

Thus, the Court sustains Defendant’s objection and excludes Helt’s statements that, “the entire

Sethi Enterprise was a sham”; “the Sethi Enterprise was insolvent; “The Sethi Enterprise

received approximately $13 million of cash under false representations”; and “the enterprise

never had a possibility, let alone probability, of being a viable business.”

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Next, Defendant seeks to strike hearsay portions of the declarations of Michael Martin

and Joseph Barbaria. The Court overrules this objection. Martin’s and Barbaria’s statements are

supported by the record before the Court. Additionally, Defendant has not specified which

statements he perceives to constitute hearsay. The Court finds that the statements by Sethi

Petroleum employees are not hearsay because they are not offered for the truth of the matter

asserted, but rather to prove their falsity. See Fed. R. Evid. 801(c)(2). Further, Barbaria’s

statements regarding what Defendant told him would be admissible as statements by a party

opponent. Fed. R. Evid. 801(2). Therefore, the Court overrules this objection.

Negative Inference

The SEC argues that the Court should draw an adverse inference from Defendant’s

refusal to testify to establish that (1) Defendant did in fact control Sethi Petroleum and all of its

employees and related entities and (2) that he conducted the fraudulent offer, issuance, and sale

of Sethi Petroleum venture shares (Dkt. #195 at pp. 21-22). Defendant responds that a negative

inference is inappropriate at the summary judgment stage because the Court is required to make

all reasonable inferences in favor of the nonmovant (Dkt. #211 at p. 32).

In the Fifth Circuit, courts may draw an adverse inference from a defendant’s refusal to

testify in a civil case. See Hinojosa v. Butler, 547 F.3d 285, 295 (5th Cir. 2008). This inference is

available to the court on summary judgment. See State Farm Life Ins. Co. v. Gutterman,

896 F.2d 116, 119 (5th Cir. 1990). However, a court cannot decide an issue on summary

judgment against a party solely on the basis of the party’s invocation of the Fifth Amendment.

Id. at 119, n.2 (citing United States v. White, 589 F.2d 1283, 1287 (5th Cir. 1979)). A court may

only decide an issue if there is any independent evidence in addition to the invocation. Gulf

Coast Bank & Trust Co. v. Stinson, No. 2:11-CV-88-KS-MTP, 2013 WL 30136, at *4, n.2 (S.D.

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Miss. Jan 2, 2013). Therefore, while the Court declines to base its decisions solely on

Defendant’s assertion of Fifth Amendment rights, it may consider such silence as a failure to

dispute other evidence.

Joint Venture Units Were Investment Contract Securities

The SEC argues that the joint venture units are securities as investment contracts because

they meet each of the three factors from Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981)

(Dkt. #195 at p. 15). Defendant argues that the SEC’s arguments for each factor are insufficient

to meet their heavy burden to prove an investment contract on summary judgment (Dkt. #211 at

p. 17). Specifically, Defendant argues that no factor is met because the JVA gives investors

actual power over the NDDF venture and each venturer represented that he or she possessed the

requisite knowledge and experience to exercise those powers (Dkt. #211 at pp. 19-22).

A security is broadly defined under the Securities Act and the Exchange Act. 15 U.S.C.

§§ 77b(a)(l) & 78c(a)(10). An investment contract exists where: (1) individuals are led to invest

money; (2) in a common enterprise; (3) with the expectation that they would earn a profit solely

through the efforts of the promoter or of someone other than themselves. SEC v. W.J. Howey

Co., 328 U.S. 293, 298-99 (1946). The first two elements are clearly established and are not

seriously disputed. Therefore, the issue for the Court is whether the investors had an expectation

that they would earn a profit solely through the efforts of someone other than themselves.

The leading Fifth Circuit case interpreting Howey’s third element is Williamson v.

Tucker. In Williamson, the Fifth Circuit held that the term “solely” is interpreted in a flexible

manner, not in a literal sense. Id. at 418. In evaluating whether an interest is a security, “form

should be disregarded for substance,” and courts should analyze the “economic reality

underlying a transaction, and not [focus] on the name appended thereto.” United Hous. Found.,

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Inc. v. Forman, 421 U.S. 837, 848—49 (1975). Therefore, to determine whether profits are

expected to come “solely” from the efforts of others, the Fifth Circuit adopted the Ninth Circuit’s

test, which defined the critical question as “whether the efforts made by those other than the

investor are the undeniably significant ones, those essential managerial efforts which affect the

failure or success of the enterprise.” SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483

(5th Cir. 1974) (citing SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir. 1973)).

In Williamson, the Fifth Circuit concluded that a general partnership or joint venture

interest may satisfy the third Howey element if the investor can establish any one of the

following factors: (1) an agreement among the parties leaves so little power in the hands of the

partner or venturer that the arrangement in fact distributes power as would a limited partnership;

or (2) the partner or venturer is so inexperienced and unknowledgeable in business affairs that he

is incapable of intelligently exercising his partnership or venture powers; or (3) the partner or

venturer is so dependent on some unique entrepreneurial or managerial ability of the promoter or

manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful

partnership or venture powers. 645 F.2d at 424. These factors are not exhaustive. Id. at 424, n.15.

Although “[t]he test stated in Williamson... refers to the investor’s experience in “business

affairs,” without referring to specialized knowledge, the Fifth Circuit has “made clear that the

knowledge inquiry must be tied to the nature of the underlying venture.” Long v. Shultz Cattle

Co., 881 F.2d 129, 134 n.3 (5th Cir. 1989) (noting that “any holding to the contrary would be

inconsistent with Howey itself’).

Furthermore, the Fifth Circuit has stated that “a strong presumption remains that a

general partnership or joint venture interest is not a security.” Youmans v. Simon, 791 F.2d 341,

346 (5th Cir. 1986). The Youmans court made it clear that “[a] party seeking to prove the

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contrary must bear a heavy burden of proof.” Id. (citing Williamson, 645 F.2d at 424). Therefore,

the Court will examine each of the Williamson factors to determine if the SEC has met its heavy

burden in establishing that the type of interest that Defendant sold was actually a security.

The First Williamson Factor: Venturers’ Actual Power

The first Williamson factor the Court considers is whether the agreement between the

parties gives the venturer little to no power, such as a limited partner would have. 645 F.2d at

424. A general partnership or joint venture interest usually does not fall within the broad

definition of “investment contract.” Williamson, 645 F.2d at 419-421. However, agreements that

are more akin to limited partnerships may be considered a security under the statutory definition.

Youmans, 791 F.2d at 346. Limited partners have limited liability, are typically unable to

dissolve the partnership or bind other partners, and have virtually no power to take an active role

in the management of the partnership. Id.

The SEC argues that investors did not have any real power over their investment because

Sethi Petroleum had “sole and absolute discretion” to distribute NDDF profits to investors;

authority to execute oil and gas operating agreements; power to take and hold title to NDDF’s

property; authority to hire all professionals on NDDF’s behalf; and to choose operators for

drilling on NDDF’s wells (Dkt. #195 at pp. 16-17). The SEC supports its arguments with

unrebutted declarations from an accountant, an investor, a salesman, and the Receiver.

Defendant points to several of the venturer’s alleged powers in support of his argument

that the venturers had real power, making the NDDF shares not a security. According to

Defendant, Venturers could remove the managing venturer, could propose and pass amendments

to the [JVA], calling meetings, develop rules and procedures for holding meetings, and vote on

“any matter that may be submitted for decision by the Venturers in accordance with the express

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terms of [the JVA] or under the provisions of the TBOC” (Dkt. #211 at p. 20). Defendant then

argues that it is reasonable to infer that a venturer with these types of rights would actually check

up on the performance of the NDDF venture (Dkt. #211 at p. 20). Defendant further argues that it

requires an unfavorable inference to assume that just because one investor had no power then all

investors did not have power (Dkt. #211 at p. 21).

This case is similar to Arcturus, where the joint venturers also had the ability to call

meetings and the voting power to remove the managing venturer. SEC v. Arcturus, 171 F. Supp.

3d 512, 525 (N.D. Tex. 2016). The Arturus court pointed out that “[i]f the venturers did not have

any contact information for the other venturers... how could the venturers ever satisfy the

minimum percentage interest to exercise these powers[?]” Id. The court went on to state that

“[a]ny right to vote or call a meeting that required a percentage of the venture interest was

absolutely hindered by the inability of the venturers to contact each other.” Id.

Here, Sethi Petroleum solicited investors from across the country with no prior

relationships to Sethi Petroleum or to each other. Further, Sethi Petroleum did not provide access

to its books or records. Therefore, the summary judgment evidence establishes that the investors

could not exercise any powers they had because they did not know the names or addresses of

other investors. Arcturus, 171 F. Supp. at 525; see also SEC v. Merchant Capital, LLC, 483 F.3d

747, 758 (11th Cir. 2007) (finding barriers to exercise of powers were compounded because the

investors “were geographically dispersed, with no pre-existing relationships”).

Furthermore, even if the investors could contact each other or otherwise force a vote,

Sethi Petroleum’s misrepresentations frustrated any meaningful management powers of the

investors. Michael Martin (“Martin”), an NDDF investor, asked multiple people for a status

update of his investment and was repeatedly stymied. First, Martin was given a letter by Sethi

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Petroleum’s Vice President, Michael Davis (“Davis”) who told Martin that Sethi Petroleum had

engaged independent contractors to provide such updates. Further, Davis told Martin that he

would provide an up-to-date report on the status of Martin’s investment. Martin has never

received either the name of the independent contractor or the report. Davis further directed

Martin to call Diane Cimoperlik (“Cimoperlik”) if he had any further questions. When Martin

reached Cimoperlik, she told him that only eight of the twenty promised NDDF wells had been

drilled. However, when Martin asked for additional detail during that call and in a follow up

email, he did not receive any response.

One of Sethi Petroleum’s salesmen, Joseph Barbaria (“Barbaria”), stated in his

declaration that the “closers” for Sethi Petroleum were instructed to reassure investors that they

would eventually receive revenue checks, and that Sethi Petroleum had interests in more wells

than it actually did. Barbaria was personally contacted by one investor who had concerns about

receiving status updates on his investments. On December 23, 2014, Davis sent an email to the

closers stating that NDDF only had interest in five wells, not twelve. However, William Shavers,

Sethi Petroleum’s Sales Director, immediately told the closers that the email was sent in error

and they should continue telling prospective investors that NDDF had interest in twelve wells.

Defendant argues that it is reasonable to infer that at least some investors took steps

privately to track the performance of the NDDF venture to not be reliant on the managing

venture (Dkt. #211 at p. 20). However, as the foregoing facts demonstrate, investors did take

steps to learn of the NDDF venture, but were stymied at every step along the way and when they

were given information, it was inconsistent at best. The Fifth Circuit has stated that “access to

information does not necessarily protect an investor from complete dependence on a third party

where, as here, that same third party is the sole source of information and advice regarding the

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underlying venture and the investor does not have the expertise necessary to make the essential

management decisions himself.” Long, 881 F.2d at 135-36; see also Arcturus, 171 F. Supp. 3d at

530-31; Merck. Capital, 483 F.3d at 761. The Eleventh Circuit has determined that powers are

illusory when the promotor controls how much information is given to investors, and he does

“not submit sufficient information for the partners to be able to make meaningful decisions.”

Merck. Capital, 483 F.3d at 758. Even though Martin eventually obtained information about the

NDDF venture, his convoluted path to that discovery demonstrates that he was reliant upon Sethi

Petroleum to provide that information.

Therefore, the summary judgment record establishes that the majority of the venturers’

powers were delegated to Sethi Petroleum, and any power the venturers still possessed could not

be exercised because the necessary information was controlled by Sethi Petroleum. Because the

first Williamson factor proves the venturers’ dependence on the efforts of Sethi Petroleum, the

Court finds the third Howey element is established. See Williamson, 645 F.2d at 424.

Accordingly, Sethi Petroleum’s joint venture is an investment contract and, therefore, a security.

See Arcturus, 171 F. Supp. 3d at 527.

The Second Williamson Factor: Venturers’ Experience and Knowledge

Even if the first Williamson factor had not been satisfied, the Court could look to the

second Williamson factor to establish complete dependence. Id. Under this factor, the Court

considers whether the venturers were inexperienced and lacked expertise in the oil and gas well

business. The Court finds the SEC presented sufficient evidence to establish this second factor.

Courts look to the investor’s experience and knowledge in the particular business of the

venture at issue, not the investor’s general business experience. Long, 881 F.2d at 135 n.3

(noting that Williamson “made clear that the knowledge inquiry must be tied to the nature of the

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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.” Merck. Capital,

483 F.3d at 762; see also Long, 881 F.2d at 134 (“[A] plaintiff may establish reliance on others

within the meaning of Howey if he can demonstrate not simply that he did not exercise the

powers he possessed, but that he was incapable of doing so.”).

Courts have consistently held that when offerings are made by hundreds of cold calls per

day, via a nationwide network of investors with little, if any, experience in the oil and gas

industry, then one can conclude that the investors were so inexperienced or unknowledgeable in

business that they were not capable of “intelligently exercising their partnership powers.” See,

e.g., Arcturus, 171 F. Supp. 3d at 528.

Defendant argues that the SEC has not produced enough evidence to meet its burden on

summary judgment and even if it has, the statements in the JVA that each venturer has “the

requisite business knowledge and experience” is sufficient to satisfy the requisite knowledge

requirement (Dkt. #211 at p. 22). The SEC has provided unrebutted declarations from its

investigating accountant, a former NDDF employee, and an investor, to prove that NDDF sought

out and obtained investors who had no experience in the oil and gas industry. The Court finds

that these uncontroverted statements from multiple sources are sufficient to establish that no

genuine issue of material fact exists as to the venturers’ experience and knowledge.

The sheer breadth of indiscriminate solicitation of investors shows that the second

Williamson factor is present. There are approximately ninety investors from at least twenty-five

different states. Sethi Petroleum employed between ten and twenty “fronters” who initiated calls

through automatic dialing and purchased leads list. Once a “fronter” determined that the caller

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was accredited and interested in purchasing a joint venture interest, the call would be sent to a

“closer” to make the sale. Fronters and closers were told that they could sell to investors that had

no prior experience making oil and gas investments as long as they were “accredited investors.”

An “accredited investor” was simply a rating on how much money a person had. Sethi Petroleum

employed eight closers. All employees in the call center, with the exception of two successful

closers, worked from 8 a.m. to 5 p.m.. The fronters and closers were told to continually make

calls to potential investors.

Further, the testimony of an NDDF investor, Martin, shows that he was solicited despite

lacking relevant knowledge or experience. When Martin was first contacted by a Sethi Petroleum

Vice President, Jerry Impini (“Impini”), Martin said that he had no experience in oil and gas.

Nevertheless, Sethi Petroleum continued to ensure that Martin was an “accredited investor” and

followed through with the sale. Whether or not an individual is an accredited investor is

unrelated to whether or not they are knowledgeable about oil and gas. Further, Defendant has

failed to produce any evidence supporting his argument that a majority, if not all, of the investors

possessed the requisite knowledge. Considering the circumstances under which Sethi Petroleum

solicited potential investors, and the investors’ lack of knowledge at the time of the investment, it

is clear that investors did not have the necessary experience in oil and gas to manage their own

investment.

The Court finds that the second Williamson factor has been established. Because the

second Williamson factor proves the venturers’ dependence of the efforts of Sethi Petroleum, the

Court finds the third Howey element is established. See Williamson, 645 F.2d at 424.

Accordingly, NDDF’s venture is an investment contract and, therefore a security.

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The Third Williamson Factor: Venturers’ Dependence on the Unique Capabilities of Sethi

Petroleum

Even if the first and second factors had not been satisfied, the third Williamson factor

establishes that the venturers were completely dependent on Sethi Petroleum’s efforts. Under this

third factor a dependent relationship exists when the investors rely “on the managing partner’s

unusual experience and ability in running that particular business.” Williamson, 645 F.2d at 423.

As noted in Williamson, even a partner knowledgeable in the particular investment “may be left

with no meaningful option when there is no reasonable replacement for the investment’s

manager.” Id. In such a situation, “a legal right of control would have little value if partners were

forced to rely on the manager’s unique abilities. ” Id.\ see also Merck. Capital, 483 F.3d at 763

(“[E]ven if the arrangement gives the partners some practical control, the instrument is an

investment contract if the investors have no realistic alternative to the manager.”). In assessing

the third Williamson factor, a court may consider “the representations and promises made by

promotors or others to induce reliance upon their entrepreneurial abilities.” Gordon v. Terry,

684 F.2d 736, 742 (11th Cir. 1982); see also Koch, 928 F.2d at 1478.

The SEC argues that “Sameer and his company structured and operated the NDDF

investment leaving investors completely dependent on the company’s supposed entrepreneurial

and managerial abilities, without any reasonable alternative management option” (Dkt. #195 at p.

21).

The summary judgment evidence establishes that Sethi Petroleum’s cold call regime was

built around touting the company’s established relationships in the oil and gas industry and

promising that the wells would produce one million barrels of oil per month from a major oil and

gas company, that new investors would immediately begin receiving revenue checks, and that

investments would return 30%-60% per year. Martin explicitly stated that he did not have

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experience in the oil and gas industry except for a one-well project that never produced oil. After

Martin spoke on the phone with Impini, he received an NDDF PPM and other documents. In the

PPM, Sethi Petroleum touts its experience and ability to produce profit in the oil and gas

industry, specifically in the Bakken Shale. The Executive Summary further states that the

Bakken Shale area has been monopolized such that only major oil companies can participate in

drilling. Due to Sethi Petroleum’s purported experience and access to an exclusive market, the

Court agrees that investors were “without any reasonable alternative management option.”

Additionally, the SEC argues that “if NDDF investors somehow wrestled power away

from Sethi Petroleum, they would have found .. . funds hopelessly commingled with [Sethi

Petroleum’s] own funds and those of other joint ventures” (Dkt. #195 at p. 21). Defendant argues

in response that “a majority-in-interest of the investors could have voted down all actions taken

by Sethi Petroleum and could have replaced Sethi Petroleum without cause” (Dkt. #211 at p. 23).

Other courts have held that investors were granted only illusory control over an

investment where the enterprise was run by pooling investors’ interests so that an individual

investor had no control over the operation as a whole, even if he had some control over a

subsidiary portion. See, e.g., Koch, 928 F.2d at 1478, 1480; Bailey v. J.W.K. Props., Inc., 904

F.2d 918, 924-25 (4th Cir. 1990). In Merchant Capital, the Eleventh Circuit concluded that the

partners had no realistic alternative to the current manager, as well as no actual power to remove

him, because the manager “effectively had permanent control over each partnership’s assets.”

483 F.3d at 763; see also Arcturus, 171 F. Supp. 3d at 530 (Stating that “[t]he venturers had no

access to their funds because the money was held in an account controlled exclusively by [the

manager], not the Joint Venture.”).

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This is similar to the case at hand. The summary judgment evidence establishes that Sethi

Petroleum took the investments, placed them in an account Sethi Petroleum exclusively

controlled, and used the funds to pay for the costs associated with running Sethi Petroleum’s

office. Although the entire Sethi Enterprise was represented to include several different joint

ventures, it was in reality a single enterprise with significant commingling of funds. Until

January 2015, only Defendant had signatory power over the NDDF account. Defendant did not

observe corporate formalities or otherwise keep the NDDF account separate from other Sethi

Enterprise accounts. Furthermore, while the entire Sethi Enterprise raised approximately thirteen

million dollars, less than $100,000 remained on the date of the receiver’s appointment. Despite

the receiver’s efforts to sell the mineral interests actually owned by the Sethi Enterprise, no one

has offered to buy the interest for cash. Additionally, when Martin asked for a refund of his

investment, Cimoperlik refused to provide one, clearly indicating that NDDF venturers had no

access to their funds.

These facts clearly indicate that even if Sethi Petroleum was replaced, the assets would

not be accessible to the NDDF venturers. The SEC has submitted evidence that, just as in

Arcturus, the venturers in the current case lacked any control over their money, which created a

complete dependency on Sethi Petroleum.

The Court finds the third Williamson factor has been established. Because the third

Williamson factor proves the venturers’ dependence on the efforts of Sethi Petroleum, the Court

finds the third Howey element is established. See Williamson, 645 F.2d at 424. Accordingly, the

NDDF joint venture is an investment contract and, therefore, a security.

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Securities Fraud

The SEC claims that Defendant made material misrepresentations including: (1) falsely

describing Defendant’s criminal history; (2) falsely describing Defendant’s and Sethi

Petroleum’s regulatory history; (3) falsely claiming partnerships with major oil companies;

(4) misrepresenting the scope of the NDDF venture; (5) misrepresenting expected returns; and

(6) stating that investors funds would be used in accordance with the Operating Documents

when, in reality, those funds were diverted for purposes not disclosed to investors. The Court

finds that summary judgment should be granted only as to the misrepresentations of partnerships

with major oil companies. Summary judgment is therefore denied for all other alleged

misrepresentations.

To establish a prima facie case under Section 17(a)(1) of the Securities Act, Section 10(b)

of the Exchange Act, and Rule 1 Ob-5, the SEC must prove by a preponderance of the evidence:

(1) a misstatement or omission (2) of material fact (3) in connection with the purchase of a sale

or security (4) made with scienter. SEC v. Gann, 565 F.3d 932, 936 (5th Cir. 2009). Information

is material if there is a substantial likelihood that disclosure of the misstated or omitted fact

would have significantly altered the “total mix” of information to be considered by a reasonable

investor. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Indus., Inc. v.

Northway, Inc., 426 U.S. 438, 449 (1976)). The scope of this standard is determined by the

relative status and sophistication of the parties. Laird v. Integrated Res., Inc., 897 F.2d 826, 832

(5th Cir. 1990). Scienter is defined as “a mental state embracing intent to deceive, manipulate, or

defraud.” Gann, 565 F.3d at 936. Section 17(a)(2) and (3) require essentially the same elements,

but do not require scienter. See SEC v. Evolution Capital, 866 F. Supp. 2d 661, 667 (S.D. Tex.

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2011). Since the SEC must essentially prove the same elements for each violation, the Court will

consider these allegations together. See Arcturus, 171 F. Supp. 3d at 535.

The SEC argues Defendant intentionally made a material misstatement when he told

investors that Sethi Petroleum had partnerships with major oil companies (Dkt. #195 at pp. 2528). Defendant argues that any misstatements were not material because the “total mix of

information” included cautionary language, the statements were predictive, insufficient time had

elapsed, and unfavorable market conditions intervened (Dkt. #211 at pp. 12, 24). Based on these

facts, Defendant argues that a reasonable inference in his favor would lead to the conclusion that

these were not actionable misrepresentations. The Court finds that despite hedging and

cautionary statements in parts of the offering documents, the “total mix” of information based on

the relative sophistication between Sethi Petroleum and its investors was that these relationships

were currently existing, and that larger relationships may develop as the investors pour in.

Defendant, individually and through Sethi Petroleum, unequivocally advertised to the

world that Sethi Petroleum presently “works with companies such as ExxonMobil and Hess in

big oil and gas plays in the Bakken [Shale]” (APP476). The very first interaction that investors

have with Sethi Petroleum is through a cold call. The Sethi Petroleum script for its salespeople

states: “We’re partnered directly with a couple of HUGE, PUBLICLY traded companies like

Conoco Phillips, Continental, GMXR just to name a few” (APP480). Salespeople pursue

investors solely on the basis of the investor being “accredited,” which has nothing to do with

actual experience in the oil and gas industry or even investing in general. Once an investor

expresses interest, the salesperson sends offering documents including the PPM and Executive

Summary. The Executive Summary states:

[T]his area has become monopolized, allowing only major oil companies to

participate in the Bakken Shale developments ... Sethi Petroleum is working

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Case 4:15-cv-00338-ALM Document 238 Filed 01/17/17 Page 21 of 24 PagelD #: 4302

directly with major oil companies, operators, landmen, service crews, landowners,

mineral rights owners, and royalty owners thus gaining ground floor access to

developmental opportunities in both the Bakken Shale and the Three Forks

formations.

(APP204). The Executive Summary goes on to describe the extent of Sethi Petroleum’s

operations as “rights and options to drill in more than 200,000 available net acres of land in

North Dakota” (APP204). Later, it ambiguously states “all of our wells will be drilled by

publicly traded and/or major oil and gas companies” (APP204). Given the unequivocal preceding

statements, it. would not be reasonable to infer that the final statement about major oil and gas

companies is simply a predictive statement of “hoped-for major operators” (Dkt. #211 at p. 12).

Rather, Sethi Petroleum, by using the word “directly” in the present tense, led NDDF investors to

believe that it was currently working with major companies to establish a direct link to profit.

Further removing doubt as to the misstatement regarding major oil and gas relationships

are the unofficial statements made in the press and on social media about Sethi Petroleum’s

business. A “D Magazine” article about Defendant stated that “the company works with

companies such as ExxonMobil” (APP476). A Craigslist listing seeking investors states among

the documents that it will send a list of “Partnerships with the major Oil and Gas companies”

(APP482). Finally, Defendant’s own Linkedln page describes his company as having “groundfloor investment opportunities managed and operated by major oil or publically traded energy

companies” (APP486). Each of these statements would lead a reasonable investor to believe that

Sethi Petroleum had present relationships with major oil and gas companies at the time that the

statements were made. In fact, Sethi Petroleum only had interests with Irish Oil & Gas, Inc., a

small,

private

oil

company.

The

unrebutted

evidence

regarding

Sethi

Petroleum’s

mischaracterization of its relationships with major oil and gas companies proves that there is a

substantial likelihood that disclosure would have significantly altered the “total mix” of

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Case 4:15-cv-00338-ALM Document 238 Filed 01/17/17 Page 22 of 24 PagelD #: 4303

information to be considered by a reasonable investor. Thus, the first and second elements of a

violation of the anti-fraud provisions are established.

To establish the third element, the SEC must prove that the misstatement was made in

connection with the sale or purchase of a security. This element is met if the misstatement

‘somehow touches upon’ or has ‘some nexus’ with ‘any securities transaction.’ SEC v. Rana

Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993) (quoting SEC v. Clark, 915 F.2d 439, 449

(9th Cir. 1990)). The purpose of Sethi Petroleum misstating its relationship with major oil and

gas was to sell its securities. This is sufficient to satisfy the “in connection with” requirement.

See Clark, 915 F.2d at 449. Therefore, the SEC has established the third element of securities

fraud.

To establish the fourth element, the SEC must prove that Defendant acted with scienter.

In the Fifth Circuit, scienter may be established by showing that the defendant acted intentionally

or with severe recklessness. See Broad v. Rockwell Int’l Corp., 642 F.2d 929, 961-62 (5th Cir.

1981) (en banc). Severe recklessness is limited to those highly unreasonable omissions or

misrepresentations that involve not merely simple or even inexcusable negligence, but an

extreme departure from the standards of ordinary care, and that present a danger of misleading

buyers or sellers which is either known to the defendant or is so obvious that the defendant must

have been aware of it. Id. The Executive Summary stated that the Bakken Shale area “has

become monopolized, allowing only major oil companies to participate” (APP204). The

following statement that “Sethi Petroleum is working directly with major oil companies” would

obviously create a danger of misleading investors into thinking that the NDDF venture is a viable

investment. Defendant has not produced any argument or evidence disputing this point or that

such relationships in fact existed. Therefore, the SEC has proved that Defendant acted with at

22

Case 4:15-cv-00338-ALM Document 238 Filed 01/17/17 Page 23 of 24 PagelD #: 4304

least severe recklessness. Having found that Defendant acted with scienter with regard to the

statements about relationships with oil companies, Defendant has violated Section 17(a)(1) of the

Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.

To establish a violation of Section 17(a)(2) or 17(a)(3), the SEC need only make a

showing of negligence in connection with Defendant’s sale of securities. Meadows v. SEC,

119F.3d 1219, 1226 n.15 (5th Cir. 1997). The Court has already determined the evidence

conclusively establishes Defendant acted with scienter. Therefore, the Court finds the summary

judgment evidence supports a finding that Defendant violated Sections 17(a)(2) and 17(a)(3).

To establish joint and several liability, the SEC must prove that Defendant is a control

person or acted through or by means of another person. To establish that Defendant is a control

person under Section 20(a) of the Exchange Act, the SEC must show an underlying violation and

that person’s control of the violating entity. 15 U.S.C. § 78t(a). The SEC argues that Defendant

is a control person of Sethi Petroleum because Defendant was Sethi Petroleum’s President and

sole Managing Member (Dkt. #195 at p. 28). Defendant created, owned, managed, and

controlled the company’s operations from at least November 7, 2011, until May 2015. This

unrebutted evidence is sufficient to show that Defendant had control of Sethi Petroleum when the

misstatements were made. Therefore, Defendant is jointly and severally liable with and to the

same extent as Sethi Petroleum for the fraudulent sale of securities.

Further, Defendant is jointly and severally liable for violating the antifraud provisions

through or by means of another person. 15 U.S.C. § 78t(b). Defendant directed his salespeople to

tell potential investors that Sethi Petroleum is “partnered directly” with major oil companies such

as Conoco Phillips and Continental. Further, he directed the author of the Executive Summary to

state similar misstatements about direct relationships with major oil and gas companies.

23

Case 4:15-cv-00338-ALM Document 238 Filed 01/17/17 Page 24 of 24 PagelD #: 4305

Defendant is therefore jointly and severally liable for directing others to make misstatements in

violation of the federal securities laws.

CONCLUSION

It is therefore ORDERED that Plaintiff Securities and Exchange Commission’s Motion

for Summary Judgment as to Sameer Sethi (Dkt. #195) is hereby GRANTED.

The Court finds that Sameer Sethi is liable for violations of Section 10(b) of the

Exchange Act and Rule 10b-5 thereunder. The Court further finds that Sameer Sethi is jointly

and severally liable with and to the same extent as Sethi Petroleum under Section 20(a) of the

Exchange Act for Sethi Petroleum’s Exchange Act violation. The Court further finds that Sameer

Sethi is liable for violations of Section 17(a) of the Securities Act.

The Court hereby withdraws its previous Memorandum Opinion and Order (Dkt. #232)

and enters this order in its place.

SIGNED this 17th day of January, 2017.

AMOS L. MAZZANT

& V

UNITED STATES DISTRICT JUDGE

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