Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 1 of 11 PageID #: 526
`
`United States District Court
`EASTERN DISTRICT OF TEXAS
`SHERMAN DIVISION
`
`
`MEMORANDUM OPINION AND ORDER
`
`Pending before the Court is Plaintiff Securities and Exchange Commission’s Motion for
`
`
`
`Partial Summary Judgment as to Defendants Robert William Myers, Jr. and Stephen Romo
`
`(Dkt. #32). The Court, having considered the motion, finds it should be granted.
`
`BACKGROUND
`
`
`
`Between September 2010 and October 2011, Daro Blankenship (“Blankenship”), though
`
`his company, Mieka Energy Corporation (“Mieka”), and with assistance from Stephen Romo
`
`(“Romo”) and Robert Myers, Jr. (“Myers”), raised almost $4.4 million from approximately 60
`
`investors by selling interests in the “2010 Mieka PA/WestM/Marcellus Project II” (the “2010-
`
`JV”). According to the confidential information memorandum Blankenship prepared, Mieka’s
`
`management would use these offering proceeds to drill and complete two gas wells—one
`
`horizontal, the other vertical—and the investors would receive, in return, production revenue from
`
`the wells. However, Blankenship depleted the offering proceeds by immediately applying them to
`
`expenses and projects unrelated to the 2010-JV, leaving insufficient funds to drill the horizontal
`
`well or complete the vertical well.
`
`
`
`CIVIL ACTION NO. 4:15-CV-00300-ALM
`JUDGE MAZZANT
`
`§
`§
`§
`§
`§
`§
`§
`§
`§
`
`SECURITIES AND EXCHANGE
`COMMISSION
`
`v.
`
`MIEKA ENERGY CORPORATION,
`VADDA ENERGY CORPORATION,
`DARO RAY BLANKENSHIP, ROBERT
`WILLIAM MYERS, JR. and STEPHEN
`ROMO
`
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 2 of 11 PageID #: 527
`
`
`
`From 1981 to 1984, Robert Myers was CEO, president and owner of the Securities and
`
`Exchange Commission (“Commission”)-registered broker-dealer Janus Securities, Inc. Myers
`
`joined Mieka in 2004 as a salesman. But Myers has not been registered with the Commission in
`
`any capacity, or associated with any Commission-registered entity, including any broker-dealer,
`
`since 1984. In May 2005, Stephen Romo joined Mieka as a salesman. Both Myers and Romo admit
`
`that, during the relevant period, they were not registered as brokers with the Commission or
`
`affiliated with a broker-dealer registered with the Commission. (Dkt. #14 ¶ 50); (Dkt. #13 ¶ 50).
`
`Blankenship provided Myers and Romo with lead lists to recruit investors. Blankenship
`
`also required a particular approach to their sales efforts—brokers would begin by cold-calling
`
`potential investors from the lead lists, making introductions, and notifying the potential investor
`
`that they would be sending an introductory letter about Mieka to the investor. After sending the
`
`letter, the brokers would continue to call the potential investors to develop a relationship, generally
`
`discussing Mieka, its business, and the potential investor’s investing history. During this time,
`
`Blankenship did not allow the brokers to discuss specific projects with the potential investors.
`
`After forty-five days had passed, the brokers would then send a pre-completed confidential
`
`information memorandum to the investor, using the information they had learned over the course
`
`of the previous phone calls. The memorandum would include the potential investor’s contact
`
`information, investment history, qualification as an accredited investor, and other information.
`
`Using these methods, for the 2010-JV and other projects, Myers received $165,453.47 in
`
`total commissions from Mieka in 2010 and $102,484 in 2011. Of these total commissions, Myer
`
`received $121,466 for selling the 2010-JV. Romo received $69,962 of commissions for his sales
`
`of the 2010-JV.
`
`
`
`2
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 3 of 11 PageID #: 528
`
`Blankenship prepared, or directed the preparation of, the written materials for each offering
`
`that were provided to investors (“Offering Documents”). Those documents included: (1) a
`
`confidential information memorandum that purported to describe generally how the venture would
`
`operate; (2) brochures summarizing the offering and used to pitch prospective investors; (3) a Joint
`
`Venture Agreement (“JVA”) that designated Mieka as the managing joint venturer, with sole
`
`authority to bind the venture; (4) a subscription or application agreement that investors signed; and
`
`(5) an investor questionnaire. At all times, Blankenship had ultimate control and authority over the
`
`content of the Offering Documents and how the disclosures contained therein were communicated
`
`to investors.
`
`The JVA appoints Mieka as the managing venturer and explicitly delegates management
`
`of the day-to-day JV operations to Mieka. As a result, Blankenship controlled nearly every aspect
`
`of the venture. Blankenship identifies the prospect, drafts the organizational documents and
`
`agreements, sets the offering and completion price, controls who is admitted to the venture, and
`
`extends the offering period at its sole discretion. The JVA specifically authorized the managing
`
`venturer to retain or act as operator, drill, complete, equip, test, rework, operate, recomplete and,
`
`if necessary, plug the well and abandon the prospect. Blankenship also had the authority to enter
`
`into operating and other agreements relating to the JV property. The JVA required the joint venture
`
`to pay “Management Fees” to the managing venturer “[i]n consideration of the supervision and
`
`management of the affairs of the Joint Venture . . . .” (Dkt. #32, Appendix Part 5 at 12). Thus,
`
`Blankenship had the power to make all of the significant decisions regarding the oil and gas
`
`activities that are the purpose of the 2010-JV.
`
`
`
`3
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 4 of 11 PageID #: 529
`
`Under the terms of the offerings, all decisions made by Mieka as the managing venture
`
`were binding on the joint venture, but investors could not bind the joint venture or act on its behalf.
`
`Blankenship could enforce this prohibition by filing suit.
`
`From the outset of the investment, investors had no control over the price, terms, and
`
`counterparty of the factor most important to the success of the investment—the turnkey drilling
`
`and completion contract. Blankenship set these out in the confidential information memorandum
`
`before the offering commenced. It determined the form of the joint-venture agreement.
`
`Blankenship had the final authority to approve the information and disclosures in the confidential
`
`information memorandum; determined who the managing venturer would be; identified the
`
`prospective wells; and required the joint venture to enter a turnkey drilling contract at a fixed price
`
`with itself as the managing venturer. Also, the terms of the JVA were presented as non-negotiable.
`
`Other than removal of the managing venturer, which requires a vote of 60% of the interests,
`
`the JVA specifies few matters that required a vote. Acts such as assignment of the JV property for
`
`the benefit of a creditor, confession of judgment, and submission of claims to arbitration or
`
`litigation require unanimous approval. The managing venturer controls access to information
`
`regarding the JV, who can condition disclosure of the books, records, and reports upon a showing
`
`of a “proper purpose” by the partner. Investors had no insight into how the votes would be
`
`calculated, or what any other investor voted.
`
`Several barriers inhibited the investors’ ability to exercise their power of removal.
`
`Blankenship could restrict access to the JV’s books and records, thus preventing partners from
`
`communicating with one another to marshal the required 60% votes. Further, the investors are
`
`numerous, geographically dispersed, and have no prior relationship to one another, which also
`
`impedes their ability to organize and exercise their removal power. Investors had no access to
`
`
`
`4
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 5 of 11 PageID #: 530
`
`information except through Blankenship, and no way of initiating a vote. It was, therefore,
`
`practically impossible for investors to confer with each other and organize to vote to replace Mieka.
`
`Blankenship took the funds raised from the 2010-JV and commingled them into his own
`
`account at the outset of the investment. Thus, had the JV partners attempted to remove the
`
`managing venturer, the venture would have been left without sufficient funds to conduct their
`
`intended business. Further, Mieka’s management was entitled under the JVA to execute documents
`
`and hold interests in their own names. Thus, if the JV partners tried to remove Mieka, they would
`
`have not possessed the working interest. As a result, from the outset of the investment, the investors
`
`had no realistic alternative to Mieka as managing venturer.
`
`As a condition to acceptance as an investor in these ventures, the JVA required the
`
`purchaser to agree to the JVA as written, including the appointment of Mieka as managing
`
`venturer. Prospective investors had no ability to negotiate the terms, which were presented on a
`
`take-it-or-leave-it basis. Mieka’s salesmen, including Myers and Romo, did not seek out investors
`
`with managerial experience in oil and gas drilling operations and instead marketed the investments to
`
`the general public using generic lead lists and other general solicitation efforts, ultimately raising over
`
`$4 million from around 60 investors in 21 states. Those who purchased the investments were scattered
`
`throughout the United States, had no prior relationships with or contact information for each other, and
`
`lacked experience in and knowledge about oil and gas exploration. Thus, investors were dependent on
`
`Mieka’s efforts for profits, as they understood from the outset of the investment.
`
`The confidential information memorandum for the 2010-JV misled investors about the
`
`expected use of offering proceeds. It said that the funds raised would be paid to Mieka to be used
`
`to cover “all costs associated with the Venture’s acquisition of interests in the Prospect Wells and
`
`the Working Interests in connection with the drilling, testing and Completion of the undrilled
`
`Prospect Wells and pay all Organization Costs . . . .” (Dkt. #32, Appendix Part 4 at 17). In reality,
`
`
`
`5
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 6 of 11 PageID #: 531
`
`of the $4.4 million raised, Blankenship used only approximately $850,875, or 19%, for 2010-JV
`
`business purposes (drilling, testing, and completing the wells). Blankenship spent the remainder
`
`of the funds on other expenses, including on Mieka projects other than the 2010-JV.
`
`On September 2, 2016, the Securities and Exchange Commission filed this Motion for
`
`Partial Summary Judgment as to Defendants Robert William Myers, Jr. and Stephen Romo
`
`(Dkt. #32). Myers and Romo never responded to the motion.
`
`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.,
`
`477 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, 477 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
`
`
`
`6
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 7 of 11 PageID #: 532
`
`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, 477 U.S. at 325; Byers v. Dall. 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 Anderson, 477 U.S. at
`
`248–49). A nonmovant must present affirmative evidence to defeat a properly supported motion
`
`for summary judgment. Anderson, 477 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., 476 F.3d 337,
`
`343 (5th Cir. 2007).
`
`ANALYSIS
`
`
`
`Two issues are before the Court: (1) whether investments sold by Defendants Myers and
`
`Romo were joint-venture interests or securities; and (2) if the investments were securities, whether
`
`Myers and Romo acted as brokers without being registered with the Commission?
`
`Section 15(a) of the Securities Exchange Act of 1934 prohibits someone from acting as a
`
`broker without registering with the Commission. Myers and Romo admit that they were offering
`
`and selling interests in an investment with Mieka while unregistered with the Commission as
`
`brokers. (Dkt. #13, ¶ 50); (Dkt. #14, ¶ 50). Section 3(a)(4) of the Exchange Act defines “broker”
`
`
`
`7
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 8 of 11 PageID #: 533
`
`to include “any person engaged in the business of effecting transactions in securities for the
`
`accounts of others.” 15 U.S.C. § 78c(a)(4). “Section 15 does not define the term ‘engaged in the
`
`business,’ but courts have defined it as ‘being engaged in the business’ of ‘effecting transactions
`
`in,’ or ‘buying and selling,’ securities.” SEC v. Arcturus Corp., 171 F. Supp. 3d 512, 524 (N.D.
`
`Tex. 2016). The Exchange Act does not define the term “effecting transactions,” but courts
`
`consider various factors, including whether the person: (1) solicited investors to buy securities; (2)
`
`was involved in negotiations between the issuer and the investor, and (3) received transaction-
`
`based compensation. SEC v. Helms, 2015 WL 5010298, at *16–17 (W.D. Tex. Aug. 21, 2015).
`
`Indeed, courts perceive “transaction-based compensation” to be a hallmark that a person is a
`
`broker. See SEC v. Gagnon, 2012 WL 994892, at *11 (E.D. Mich. Mar. 22, 2012) (finding
`
`unregistered broker where defendant solicited the purchase of securities as “the link between the
`
`issuer and the investor,” and received transaction-based compensation).
`
`The Commission argues that Myers and Romo were conducting themselves as brokers
`
`when offering and selling the interests: they were cold-calling potential investors from lead sheets
`
`purchased by Blankenship; developing relationships by discussing the potential investor’s
`
`investment history over a period of weeks; recommending investment with Mieka; sending
`
`Mieka’s Offering Documents to potential investors; taking orders after successfully closing a sale;
`
`helping investors with corresponding paperwork; and, most telling, receiving transaction-based
`
`compensation for their efforts. The Court finds that under the Helms analysis, Myers and Romo
`
`were acting as unregistered brokers. 2015 WL 5010298 at *16–17. The only truly contested issue
`
`here is what they were selling—joint-venture interests or securities.
`
`Under the federal securities laws, a broker is only a broker if they are selling securities.
`
`Sections 2(a)(1) of the Securities Act of 1933 and 3(a)(10) of the Securities Exchange Act of 1934
`
`
`
`8
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 9 of 11 PageID #: 534
`
`define “securities” to include “investment contracts.” 15 U.S.C. §§ 77b(a)(1) & 78c(a)(10). An
`
`investment contract exists where: (1) individuals are led to invest money; (2) in a common
`
`enterprise; and (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 only aspect of the Howey test at issue here is whether the investors were dependent on
`
`the efforts of others for their expected financial return. In Williamson v. Tucker, the Fifth Circuit
`
`established a test to indicate whether investors in a purported general partnership or joint venture
`
`expected to depend on the efforts of others, thus satisfying the third Howey element. 645 F. 2d 404
`
`(5th Cir. 1981). Under Williamson, an investment contract exists if one of the following three
`
`factors is present: (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. Id. at 424. The Commission need only establish one of the three
`
`Williamson factors. Arcturus Corp., 171 F. Supp. 3d at 524 (citing S.E.C. v. Merch. Capital, LLC,
`
`483 F.3d 747, 756 (11th Cir.2007) (“the presence of one of the three Williamson factors renders
`
`even a general partnership interest an investment contract.”)).
`
`On its face, the investment Myers and Romo were selling was a joint venture. But even a
`
`cursory review of the Offering Documents and the relationship between Mieka and the investors
`
`reveals the truth—Blankenship wholly dominated the investment, while the investors, some of
`
`whom had no experience with oil and gas, had no real power, were prevented from exercising any
`
`
`
`9
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 10 of 11 PageID #: 535
`
`of the scant authority afforded to them under the Joint Venture Agreement, and depended entirely
`
`on Mieka’s managing of the business. At the outset of the investment, the investors expressly
`
`delegated the management of the operations of the JV to Mieka, the managing venturer (Dkt. #32,
`
`Appendix 1 at 130). Investors relied entirely on Mieka for the success of the JV because
`
`Blankenship controlled the drilling of the wells and all aspects of the contracts including the price
`
`and terms. The investors were unable to exercise any illusory managerial powers they may have
`
`had because Blankenship did not provide any information about the identity of other investors or
`
`provide meaningful access to the operative books and records of the JV (Dkt. #32, Appendix 5 at
`
`192). The JVA permitted investors to call a meeting upon written request of 10% of the shares of
`
`the JV, yet Blankenship did not provide the investors with the means to determine ownership
`
`identity and share percentages. This case is strikingly similar to Arcturus, where the joint venturers
`
`also had the hollow and illusory 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 concluded 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.
`
`Even if the investors had access to the requisite information to exercise management rights,
`
`which they did not, the third Howey element would be satisfied because the investors did not have
`
`the knowledge to intelligently exercise their rights. The Fifth Circuit has held, “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
`
`
`
`10
`
`

`

`Case 4:15-cv-00300-ALM Document 63 Filed 05/04/17 Page 11 of 11 PageID #: 536
`
`underlying venture and the investor does not have the expertise necessary to make the essential
`
`management decisions himself.” Long v. Shultz Cattle Co., 881 F.2d 129, 135-36 (5th Cir. 1989).
`
`The investors—who were targeted by purchased lead lists and unsolicited calls—had little to no
`
`expertise in the oil and gas industry (Dkt. #32, Appendix 1 at 3). Therefore, the summary judgment
`
`record establishes that the majority of the investors’ powers were delegated to Mieka, and any
`
`power the investors still possessed could not be exercised because Blankenship controlled the
`
`necessary information. Because the first Williamson factor proves the investors' dependence on
`
`Mieka, the Court finds the third Howey element is established. See Williamson, 645 F.2d at 424.
`
`Accordingly, Mieka’s joint venture is an investment contract and, therefore, a security. See
`
`Arcturus, 171 F.Supp.3d at 527.
`
`Because the 2010-JV interests were securities, and because Myers and Romo were acting
`
`as brokers, they should have registered with the SEC. And because they admit that they were not
`
`registered, they violated Section 15(a). The SEC’s motion should therefore be granted.
`
`CONCLUSION
`
`
`
`It is therefore ORDERED that Plaintiff Securities and Exchange Commission’s Motion
`
`for Partial Summary Judgment as to Defendants Robert William Myers, Jr. and Stephen Romo
`
`(Dkt. #32) is hereby GRANTED.
`
`
`
`
`
`11
`
`