668 Securities and Exchange Commission v. Mieka Energy Corp. Sec. & Exch. Comm’n v. Mieka Energy Corp., No. 4:15-CV-00300-ALM, 2017 WL 1739767

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Securities and Exchange Commission v. Mieka Energy Corp. Sec. & Exch. Comm’n v. Mieka Energy Corp., No. 4:15-CV-00300-ALM, 2017 WL 1739767 (E.D. Tex. May 4, 2017) (mem. op.) (Joint venture interests as securities), held that joint venture interests were securities sold by unregistered brokers. Mieka Energy Corporation (“Mieka”), through its salesmen Robert Myers, Jr. and Stephen Romo, raised almost $4.4 million from sixty investors by selling joint venture interests in the “2010 Mieka PA/WestM/Marcellus Project II,” a two-well drilling program. Mieka supplied lead lists to Myers and Romo, who would then cold-call the potential investors, send an introductory letter, and later send a confidential information memorandum personalized and already completed to each potential investor. Mieka paid Myers and Romo together approximately $200,000.00 in total commissions on the project. The Investors’ funds were diverted, and no wells were drilled.

Each investor was required to enter into a Joint Venture Agreement (“JVA”) with Mieka that specifically authorized the managing venturer (Mieka) “to retain or act as operator, drill, complete, equip, test, rework, operate, recomplete, and if necessary, plug the well and abandon the prospect.” The JVA also specified that removal of the managing venturer would require a vote of 60% of the interests, which was impossible to obtain, because the JVA limited access to the contact information of the venturers unless there was a showing of a “proper purpose”. In summary, Mieka had the power to make all of the significant decisions, title was in Mieka’s name, and most of the funds were used for Mieka’s other projects.

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 admitted that they were offering and selling interests in the Mieka project while they were unregistered with the Commission. The Commission sought summary judgment as to Myers and Romo. The only issue in the case was whether they were selling joint venture interests or securities.

“Securities” include “investment contracts.” “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.” The court found that the first two elements were obviously met, and then focused on the question of whether the investors had relied on someone other than themselves to create a financial return. To answer this question, the court relied upon the more detailed analysis in the Williamson v. Tucker case. Williamson stated that the reliance factor from Howey was satisfied 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 venturer powers.

The court concluded that the reliance test was met as Mieka clearly dominated the terms of the investment and could not be removed from its managerial position. The court appeared to hold that all three of the Williamson factors were present. Myers and Romo acted as brokers selling securities while they were unregistered.

The case is an example of how the sale of interests in oil and gas ventures may easily qualify as a sale of securities subject to regulation by the Securities and Exchange Commission.