The following are summaries of administrative actions the Texas State Securities Board took from July 1 through Sept. 30, 2019:
TMTE Inc. AKA Metals.com AKA Chase Metals LLC: Rescission Offer
Metals.com, a firm accused of convincing older Texans to liquidate securities held with registered investment firms and use the proceeds to buy precious metals, has agreed to offer a full refund to 84 Texas investors.
The amount of refunds will be made public once all investors have had the chance to get their money back. The State Securities Board expects the total of the rescission offer to exceed $10 million.
The rescission offer is part of an Order Securities Commissioner Travis J. Iles entered July 1.
Two months ago, Commissioner Iles entered an Emergency Cease and Desist Order against Metals.com, its vice president for sales, a senior portfolio manager, and a saleswoman.
According to the May 1 emergency action, Metals.com representatives cold-called potential investors and advised them that their money isn’t safe at registered brokers and investment advisers and they should move their funds into precious metals investments.
Grove Capital Management Inc.: Fine, Reprimand
Grove Capital Management Inc. paid a $5,000 fine and was been ordered to improve its compliance procedures after failing for eight years to use a form designed to provide disclosures to clients in plain language.
Texas Securities Commissioner Travis J. Iles on July 9 entered a Disciplinary Order against Grove Capital for failing to use the version of Form ADV Part 2 that has been required since 2011. James Grove is president of the firm.
The Form ADV is the primary disclosure document that investment advisers provide to their clients and file with both state securities authorities and the SEC. Prior to 2011, advisers made disclosures in a check-the-box format. The current Part 2 requires an adviser to prepare a plain English narrative brochure disclosing information business practices, fees and compensation, conflicts of interest, and other required disclosures.
Grove Capital had never updated its Part 2 brochure. From 2014 to August 2018, the firm added three new clients who received the disclosure form that should have been updated to the new format.
Besides the fine, the firm agreed to hire an outside consultant to help it comply with securities laws, including updating its ADV Part 2.
Michael E. Patman, Jeremy "JB" Yowell, Brett Kroh, Woodland Resources LLC: Emergency Cease and Desist Order
Texas Securities Commissioner Travis J. Iles on July 10 entered an Emergency Cease and Desist Order to stop the ongoing fundraising efforts of Michael E. Patman, the director of operations for Woodland Resources, and two other company principals, Jeremy “JB” Yowell and Brett Kroh.
According to the emergency action, Woodland is sending unsolicited emails to Texas residents offering investments in an offset well in producing oil wells in Seminole County, Okla. Woodland is selling working interests in direct drilling offsets of a nearby well called Oddfellows A-1.
An offset well is one close to an existing well that is producing and may provide clues to how much oil the offset well will produce. Woodland Resources is claiming the Oddfellows well produced between 38 and 40 barrels of oil per day as of October 2018. Production records, however, show that in the one-year period ended April 2019, Oddfellows produced an average of 19.7 barrels per day, or one-half of Woodland’s claimed total.
According to the order, Woodland Resources is promoting Patman as a successful manager of oil companies for nearly four decades. The company says Patman led one company, Sundance Resources Inc., from start up to revenue of more than $100 million in 2006.
Woodland and the three principals are not disclosing to investors that in 2010 the U.S. District Court for the Northern District in Dallas ordered Sundance and Patman to pay nearly $13 million in damages to investors who had sued them for fraud and breach of contract.
The investors, most of whom were retirees, collectively loaned Sundance more than $14 million to purchase drilling rigs. Sundance fell behind on loan repayments and eventually stopped making payments because its executives, including Patman, transferred Sundance assets to company insiders and their affiliated companies.
Potential investors are also not being told that Patman Drilling, one of Patman's former companies, filed for bankruptcy in 2007, listing more than $10 million in debt owed to at least 50 parties.
AWS Mining PTY: Rescission Offer
An Australian company that guaranteed returns of up to 200% on investments in cryptocurrency mining is refunding money to Texas investors and admitting it illegally sold unregistered securities.
Under the Order entered Aug. 2 by Texas Securities Commissioner Travis J. Iles, AWS Mining PTY, based in Sydney, Australia, is paying 19 Texas residents the full amount of their investment minus any profits they received. AWS Mining is the Australian business name holder for AWS Mining and MyCoinDeal. The latter provides digital wallet services for cryptocurrency investments issued by AWS Mining.
The Securities Commissioner took emergency action against the AWS companies in November 2018, finding that they were illegally recruiting sales agents through LinkedIn, Facebook, and other online marketing channels.
AWS Mining claimed it was mining cryptocurrency in computing facilities in China, Russia, and Paraguay. According to the initial order, AWS claimed the contracts are “guaranteed to 200% return on purchase price."
Although investors were told they would receive a 200% return on the purchase of the contacts, AWS Mining also disclaimed the guarantee. The company said investors would bear the risks of mining cryptocurrency, which include volatility in the price of cryptocurrencies, system or technical failures, and changes in the cost of electricity used to power and cool hardware.
According to the emergency action, AWS Mining used a multilevel marketing network of sales agents to sell the mining power contracts and paid as many as six different types of bonuses and commissions to these sales agents.
Lowell & Company: Fine, Reprimand
Lubbock investment adviser Lowell & Company Inc. paid a $40,000 fine to the State of Texas for failing to supervise a representative who nearly wiped out the assets in two client accounts by holding onto an exchange-traded fund designed for short-term trading.
Besides the fine, the Aug. 2 Disciplinary Order entered by Texas Securities Commissioner Travis J. Iles reprimanded the firm. William H. "Bill" Lowell is president of the firm.
Lowell & Co. violated its supervisory procedures by not reviewing the monthly account statements for the discretionary accounts managed by Jody Bowers, an investment adviser representative for the firm. Bowers has not been registered with the Securities Commissioner in any capacity since June 2018.
In two discretionary accounts for clients, Bowers was buying and selling shares of the Proshares Ultra VIX Short-Term Futures ETF, a leveraged fund (symbol: UVXY).
Leveraged ETFs use financial derivatives and debt to magnify the returns of an underlying index.
The UVXY fund seeks to profit by capitalizing on volatility in the S&P 500 Index, which tracks the performance of 500 widely held large U.S. companies across the major sectors of the economy. The UVXY benefits when the S&P 500 index declines.
Although the prospectus for the UVXY states it is “intended for short-term use” and it requires almost daily monitoring, Bowers held the fund in one client’s account for 987 days and sold the shares for a 93% loss.
In a second client’s account, Bowers held the UXVY for 356 days and lost 98% of the account’s value.
The firm failed to enforce its written supervisory procedures because neither Bill Lowell nor other supervisory personnel reviewed the monthly statements for discretionary accounts like the two accounts Bowers managed.
Forex and Bitcoin Trader: Emergency Cease and Desist Order
Texas Securities Commissioner Travis J. Iles on Aug. 6 took emergency action against a cryptocurrency investment promoter touting a 900% return in 14 days by dealing in cryptocurrency investments and foreign currency trading.
According to the Emergency Cease and Desist Order, New York-based Forex and Bitcoin Trader is advertising on Craigslist Dallas. The company is claiming to be a licensed broker that is authorized to trade in derivatives, securities, and foreign currency, but according to the order the company is not registered with the Securities Commissioner as a dealer or agent.
The company is soliciting Texas investors with the promise that a principal investment of $2,000 will return $20,000 after 14 days, minus commissions and fees equal to 10% of returns.
According to the order, Forex and Bitcoin Trader is misleading investors by stating it has an insurance policy that backs client funds and a balance sheet with sufficient net capital to guarantee returns.
The company, however, is not disclosing any information about its capital or insurance policy, and it is failing to inform investors of the risks in trading cryptocurrency and foreign currency.
Jeremy "JB" Yowell: Agreement to Cooperate
Jeremy “JB” Yowell, an unregistered investment promoter for Fort Worth-based Woodland Resources LLC, is cooperating with the Enforcement Division of the State Securities Board in its investigation of the company and its director of operations, longtime oilman Michael E. Patman.
Yowell’s cooperation was part of an Order entered Aug. 9 by Texas Securities Commissioner Travis J. Iles. The order sets aside a July 10 Emergency Cease and Desist Order – only as it pertains to Yowell – against Woodland, Patman, and another company principal, Brett Kroh.
From March through June, Yowell promoted an investment offering by Woodland Resources, which was soliciting Texas residents for working interests in oil wells in Seminole County, Okla.
Yowell has never been registered with the Securities Commissioner as a dealer or agent.
Yowell was previously sanctioned by a securities regulator. In 2016 the State of Michigan filed a Cease and Desist Order against Yowell for acting as an unregistered agent for contracting with an energy company to sell investments for a commission of up to 20% of the value of the securities sold.
Kelcas Corp., Kelcas Ohio River Oil LLC, HOK Global Consulting PTE Ltd, Wilhelm B. Lilliehook, Hok-Lam Chan: Emergency Cease and Desist Order
Texas entered an emergency order on Sept. 16 to stop the offering of unregistered investments in an oil-drilling program in Southern Illinois that promises to produce oil wells with a minimum return of 100% within two years and monthly income for 20 years.
According to the Texas order, Kelcas Corp. of Owensboro, Ky., and CEO Wilhelm Lilliehöök are using sales agents to solicit Texas investors for an oil drilling project in the Illinois Basin, a geological formation underlying much of Illinois and parts of Kentucky and Indiana.
The order alleges widespread registration and disclosure violations of the Texas Securities Act, including Kelcas and its salespeople telling potential investors that the drilling will be handled by a separate company. Kelcas is representing that this energy company is a top producer in the Illinois Basin and has won numerous industry awards.
In fact, the order alleges, the company is not the operator of the drilling program. Kelcas Well Services Ltd., owned by Lilliehöök, is the operator, a connection not being disclosed to investors.
The Texas order alleges that Kelcas and Lilliehöök are paying a sales agent named Hok-Lam Chan to sell the oil-drilling investment. Hok-Lam Chan, a director of HOK Global Consulting, is soliciting Texas investors through LinkedIn, a global online networking platform.
According to the order, Kelcas is soliciting $975,0000 to complete one in a series of wells in the Illinois Basin. The minimum investment is $25,000.
Hok-Lam Chan and HOK Global are telling potential investors that an investment of $100,000 should generate a return of $72,200 after one year, $113,266 after two years, and continuing toward a cumulative return of $166,841 after five years.
Neither Kelcas nor HOK Global are providing any financial information or operating history about Kelcas Well Services that would allow investors to evaluate the investment.
None of the parties named in the order are registered to sell securities in Texas or Kentucky and the working interests have not been registered for sale or qualify for an exemption.
Jason A. Gilbert, SourceRock Energy Partners LP, SourceRock Energy GP LLC: Rescission Offer
Jason A. Gilbert, the CEO of a New York-based energy company who last year was ordered to stop an offering of unregistered investments in a multi-million-dollar oil and gas project, has made a full rescission offer to investors.
Texas Securities Commissioner Travis J. Iles on Sept. 19 entered an Agreed Cease and Desist Order with Gilbert, the CEO of SourceRock Energy and affiliated companies. As part of the order Gilbert offered repayment to all investors, including Texas residents, who invested in the Phoenix Prospect, an oil and gas project in Sumner County, Kansas.
The agreed order settled a previous administrative case in which the Securities Commissioner alleged that Gilbert and SourceRock said they planned to raise $4.4 million for the Phoenix Prospect. That total was to include $1 million to be paid to one of Gilbert's companies, SourceRock Energy Partners LP, as a management fee.
Gilbert and the SourceRock companies also agreed to permanently cease offering or selling any securities in Texas. Gilbert is also known as J.A. Gilbert.
Neither Gilbert nor the SourceRock companies have ever been registered to sell securities in Texas and their securities have never been registered for sale in Texas.