Sethi Petroleum Inc. and its founder Sameer P. Sethi are asking a federal judge to send the U.S. Securities and Exchange Commission’s fraud case against it to trial. Sethi Petroleum is based in Dallas, Texas. The regulator had sought summary judgment in the Texas lawsuit, which accuses Sethi Petroleum and Sethi of fraudulently selling securities to investors for a drilling project in Montana and the Dakotas. However, the two of them claim that a jury needs to decide whether the interests that investors are holding are even securities.
The Commission claims that Sethi raised over $4M in a little over a year for the oil venture with the promise of 20 gas and oil wells. 90 investors in nearly 30 states were promised 62.5% net working interest on these wells. They were purportedly told that wells were already making 1 million barrels/month, when Sethi Petroleum actually only held interests in just eight wells—and not all of them were being drilled—in which investors held only .15 to 2.5% interest. These wells produced far less than the 1 million barrels/month touted, claims the regulator. The actual figure was closer to 9,000 to almost 14,000 barrels/month.
The SEC claims that Sethi invested just $950K of investor funds in the wells, while he used $577K to pay himself and his dad. $1.1M of investor funds purportedly went to employees at Sethi Financial Group, with sales employees getting $1.04M. Seth is accused of lying about his own record of regulatory and criminal violations and his company is accused of lying when it claimed that it was working with Hess Corp. and Mobil Corp.
Last year, a US district judge approved a preliminary injunction that stopped Sethi from fraudulently selling securities while letting him continue to sell and buy securities for his own accounts.
Now, Sethi is claiming that the joint venture agreements that are an issue in the case had set up a general partnership, called Sethi-North Dakota Drilling Fund-LVIII Joint Venture, and not security interests. He contends that this means that investors have had control and responsibility that lets them take the managing venture out. He notes in his brief that since general partners have the authority and right to take part in the partnerships’ management, there exists a strong presumption that a joint venture interest or general partnership is not a security.
Texas oil executive says SEC fraud case must go to trial, Law360, October 3, 2016