Courts have narrowed the power of the US Securities and Exchange Commission to regulate oil and gas deals and punish those who commit fraud.

“Unlike shareholders in a company like Apple, the investors in such deals have been found by state and federal judges to be partners who essentially stake money at their own risk,” the Dallas News said.

David Peavler, associate director of the SEC’s Fort Worth office, said the legal precedent gave some firms incentive to take advantage.

“It’s an illusion. They set them up like joint ventures, but the investors don’t have any real power,” he told the Dallas News.

In 1993, the SEC filed a suit claiming that Texas-based Kinlaw Oil Corp. defrauded investors of more than $125 million. The vice president of the firm, Charles Cagle, challenged the SEC’s authority to regulate its business, arguing that Kinlaw Securities sold partnerships in a business venture, not securities, the Dallas News said.

“In 1999, a Dallas federal judge dismissed the SEC’s case. The judge ruled that Kinlaw’s investors had enough power and information to be deemed partners.
The distinction between partner and shareholder is a meaningful one for companies seeking outside investment, said Henry Hu, a law professor at the University of Texas at Austin. Not only is registering a security with the SEC a rigorous and costly process, but anti-fraud laws are far more stringent for investments deemed securities,” the story said.

In 2009, the Colorado Securities Commission sued to shut down another company founded by two of Kinlaw’s principals. Colorado regulators alleged the company  it had fraudulently raised more than $300 million from investors on hyped drilling projects.

“But again, a judge found in October that the investments were partnerships and dismissed the regulators’ case,” the Dallas News said.


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