Sethi’s Alleged Securities Law Violations
The specific false and misleading statements, omissions, and acts that the SEC alleges to form the basis of the enforcement action against Sethi and his company are numerous. For example:
- The offering documents represented that 70% of the investment funds would be used to acquire, drill, and complete 20 oil and gas wells, when in fact, the defendants used only 23.5% of the money raised for that purpose;
- The offering documents represented that Sethi Petroleum, LLC would take 25% of the funds for administration and management of the joint venture, when in reality, it spent more than 76.4%, the majority of which were undisclosed or unapproved expenditures, including $577,000 paid directly to Sethi; and
- The offering documents also falsely stated that the program would be a “10 million dollar fund that will . . . result in the fund owning approximately 62.5% net [working interest] in oil producing well,” when in truth, the investors owned between 0.15% and 2.5% interests in only 8 wells, as opposed to 20, two of which were never drilled.[1]
Sethi’s alleged false and misleading representations did not end with the offering documents. It is alleged that in late 2014, Sethi directed the sales staff to tell potential investors that the joint venture already owned an interest in 12 wells, with more to come, which was untrue.[2] It is also alleged that defendants’ cold call script read that they “partnered directly with a couple of HUGE, PUBLICLY traded companies like Conoco Phillips, Continental, GMXR just to name a few” and the company’s website featured logos for those companies as affiliates, which was false.[3] Additionally, the SEC says that the defendants falsely claimed that Sethi, age 33, had managed Sethi Petroleum, LLC since 2003, when in reality, Sethi was convicted of aggravated assault and incarcerated from June 2006 to January 2009; the defendants’ private placement memorandum (“PPM”) only mentioned a “control person’s” prior indictment, nothing more.[4] Moreover, the SEC says that the defendants represented in the same PPM that Sethi was a registered representative of FINRA, which was blatantly false, and failed to adequately disclose their prior censure under Pennsylvania and Colorado securities laws.[5]
In summary, the SEC alleged that the defendants not only made untrue statements and omissions of material facts concerning the investment, but also “misus[ed] investor proceeds for their own purposes and benefits including paying commissions, covering non-venture expenses, and personally siphoning funds from [the investment].”[6] The SEC argued that the defendants would continue to engage in those acts, unless enjoined, and requested that they be temporarily and permanently enjoined.
Did the court agree? We will find out in our next post.
This post is a part of a multi-post blog series on the SEC’s recent enforcement action against Sethi Petroleum LLC and how to avoid investment scams. You can find the other post by searching our blogs.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
So-Eun Lee – So-Eun Lee is an associate attorney in the New York office of The R. Shawn McBride Law Office, P.L.L.C. She concentrates her practice on business law. So-Eun can be contacted at: (347) 921-0173 or [email protected]. Her profile is available on www.mcbrideattorneys.com.
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] Id. ¶¶ 18–22.
[2] Id. ¶ 23.
[3] Id. ¶ 24 (emphasis in original).
[4] Id. ¶ 29.
[5] Id. ¶¶ 30–31.
[6] Id. ¶ 35.