Tenth Circuit Looks Past 'General Partnership' Labels In Agreements To Determine Whether Certain Investments Constitute 'Securities'

In SEC v. Shields, No. 12-1438, 2014 U.S. App. LEXIS 3369 (10th Cir. Feb. 24, 2014), the United States Court of Appeals for the Tenth Circuit reversed the district court's order granting defendants' motion to dismiss, holding that the complaint alleged sufficient facts to (1) raise a plausible claim that the interests at issue involved are securities, and (2) rebut the presumption that an investment labeled as a "general partnership" is a "security." The Tenth Circuit's holding reaffirms that although an investment may be labeled as a "general partnership" interest, courts must look beyond the labels to determine whether the investment constitutes a "security."

The Securities & Exchange Commission ("SEC") filed a civil enforcement action against Jeffory Shields a/k/a Jeffrey D. Shields, Geodynamics, Inc. ("Geodynamics"), four joint ventures and others, alleging violations of Sections 5(a) and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a), 77e(c), 77q(a); Sections 10(b) and 16(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78o(a); and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. The SEC alleged that Shields, managing partner of Geodynamics, offered and sold over $5 million of interests in oil and gas exploration and drilling joint ventures to sixty investors across 28 states. The money collected was used to fund GeoDynamics. Shields allegedly marketed the oil and gas drilling ventures to individuals with little experience in the oil and gas exploration business by making cold calls to thousands of people and promising annual returns of between 256% and 548%. The SEC alleged that Shields denied investors access to information, lied to investors to keep them misinformed and comingled funds.

Shields provided potential investors with offering documents which stated explicitly that the investors had the rights of general partners, and that the joint venture interests were not securities. In addition, the documents provided the investors with the power to remove the managing venturer, GeoDynamics, the right to terminate the partnership, and the right to inspect records. However, unlike GeoDynamics, the investors did not have the power to bind the joint ventures by executing contracts, spending funds, or interpreting contracts. Additionally, the investors were required to sign drilling and completion contracts, thereby locking themselves into contracts with GeoDynamics, who unilaterally set the contract price.

Defendants moved...