936 F. Supp. 2d 1281
D. Colo.2013Background
- SEC sued SAE and principals for misrepresentation and scheme liability under the Securities Act and Exchange Act, tried by the court in 2012.
- SAE conducted oil/gas and geothermal ventures via entities CKU, KXP, Agua, SST, Terra, and others; principals Wells, Palmer, Zakroff, and Etkind ran SAE.
- SAE funded operations with promissory notes, asset sales, shareholder infusions, and loans; note holders were accredited investors.
- SEC alleged two main misrepresentations (funds used for operations; debt/expense funding) and two omissions (use of funds to pay debt and ongoing cash deficits).
- Court found SAE had genuine assets and profits; evidence did not prove a Ponzi scheme; business restructured debt in 2010 after cash-flow pressures.
- Rule 52(c) judgment granted for defendants on fraud (17(a)(2)/10b-5(b)) and scheme liability claims; final judgment dismissing those claims with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was there a misrepresentation under 10b-5 and 17(a)(2)? | SEC claimed false use/omission of funds and deception of investors. | No affirmative misrepresentation; funds disclosures and debt servicing were legitimate. | No liability for fraud; grant 52(c) on fraud claims. |
| Did defendants engage in scheme liability under 10b-5(a)/(c) and 17(a)(1)/(3)? | Defendants' acts formed an inherently deceptive scheme. | No deceptive scheme; actions not inherently deceptive beyond misrepresentations. | No scheme liability; grant 52(c) on scheme claims. |
Key Cases Cited
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (Supreme Court 1976) (scienter required for Rule 10b-5 claims)
- City of Philadelphia v. Fleming Companies, Inc., 264 F.3d 1245 (10th Cir. 2001) (recklessness defined as extreme departure from ordinary care)
- SEC v. Wolfson, 539 F.3d 1249 (10th Cir. 2008) (elements of a Rule 10b-5 claim and scienter standard)
- In re Citigroup, Inc. Securities Litigation, 330 F.Supp.2d 367 (S.D.N.Y. 2004) (duty to disclose not infinite; disclosure decisions control disclosures)
- KV Pharmaceutical Co., 679 F.3d 972 (8th Cir. 2012) (scheme liability requires inherently deceptive conduct beyond misrepresentation)