Court Finds Jeffry and Paul Downey and John Leonard Guilty of Oil and Gas Fraud
On July 25, the Honorable Sam R. Cummings of the United States District Court for the Northern District of Texas granted summary judgment for the SEC on all claims against the father-and-son duo of Paul and Jeffry Downey, and John Leonard, all involved in oil-and-gas fraud, finding them liable on all charges.
The SEC’s action, filed in November 2014, alleges that the defendants raised nearly $5 million from 17 investors in a securities offering in the Permian Advanced Oil Recovery Investment Fund I, LP (PAOR), in which the Downeys’ company, Quest Energy Management Group, Inc. (Quest), served as PAOR’s operating general partner. The SEC’s complaint alleges that the Downeys violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and alleges that Leonard violated Section 15(a) of the Exchange Act, and seeks permanent injunctions, money penalties, and disgorgement of illicit earnings from the illegal offerings.
According to the court’s order, the Downeys committed fraud by misrepresenting and concealing material facts while offering and selling securities to raise money for their oil-and-gas investment program, and that Leonard violated the law by acting as a broker in these securities transactions even though he was not registered with the SEC. The court found that the Downeys – acting with scienter – made “misrepresentations relating to the usage of funds raised from the investors,” and that they failed to inform investors about a receivership involving entities with which the Downeys and Quest were involved, and “how [the receivership] could impact the investors by recovering over five million dollars from the operating general partner.” The court also found that Leonard acted as an unregistered broker because he received commissions totaling $405,698 for selling more than $4 million in PAOR limited-partnership units to 13 investors and “[t]he indisputable evidence shows that Leonard (1) solicited prospective PAOR investors in person, by phone, and by email; (2) recommended the PAOR investment to investors; (3) negotiated transactions in PAOR LP units and closed the sales; (4) distributed, directly and indirectly, the private placement memorandum and other offering material; and (5) received a 10 percent commission from Quest on each sale.” Rejecting Leonard’s argument that he was merely a “liaison” or “finder,” the court concluded that “the evidence clearly shows that Leonard was much more involved with the investment transactions and sales than merely ‘bringing the parties together’ while acting as a ‘finder.'”
The court directed the SEC to submit briefs by August 15, 2016 on the proper remedies to impose on the defendants as a result of their violations.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.