The Financial Industry Regulatory Authority’s Office of Hearing Officers has determined that Sandlapper Securities, through its chief executive officer Trevor Gordon and president Jack Bixler, willfully committed securities fraud by charging unreasonable and undisclosed markups on sales of fractional interests in saltwater disposal wells. The recommended bars and expulsion shall become effective immediately if this decision becomes FINRA’s final disciplinary action.
It all began with Randy B. Jones, who constructs and operates saltwater disposal wells to serve the oil industry, as the owner of business Randy B. Jones & Associates in the Permian Basin of Texas.
When an oil well brings oil to the surface, saltwater rises with it. Jones charges oil well operators a fee for each barrel of saltwater that his saltwater disposal wells pump back into the ground in an environmentally responsible manner. He also sells any “skim” oil for a profit.
FINRA noted that while Jones had a wealth of experience in developing and operating saltwater disposal wells, raising money for his company was one aspect of his job that he was content to delegate.
When Trevor Gordon, founder and chief executive officer of Sandlapper Securities, and Jack Bixler, principal and president of Sandlapper Securities, offered their services to raise money for Jones by selling fractional interests in his company’s saltwater disposal wells, he accepted it.
FINRA claims that what transpired next was a pattern of deceit by Gordon and Bixler that spanned nearly four years and involved approximately 170 investors who parted with approximately $12.4 million.
“Respondents engaged in a massive fraudulent scheme. They repeatedly gouged customers, including a vulnerable retired couple who entrusted respondents with their life savings,” stated FINRA.
Rather than Sandlapper Securities offering the fractional interests directly to investors at a fair market value, FINRA says that Gordon and Bixler established TSWR Development to purchase the saltwater disposal wells from Randy B. Jones & Associates. Yet they failed to register it as a dealer of securities.
FINRA stated they “willfully defrauded the fund by fraudulently interposing another entity between an investment fund and the market by charging undisclosed, excessive markups.”
In the Spring of 2011, Gordon and Bixler, along with two Sandlapper Securities associates, formed Tiburon Saltwater Reclamation Fund I LLC. Sandlapper served as the managing broker-dealer for the distribution of the fund’s shares, selling the interests through its 60 representatives in 16 offices as well as brokers at other firms.
Between August 2011 and November 2015, TSWR Development sold 49 fractional interests in nine saltwater disposal wells at a markup of more than $8 million and charged investors commissions and fees totaling approximately 10 percent per transaction.
Randy B. Jones & Associates charged $45,000-$70,000 per 1 percent interest in each well. Despite TSWR Development’s markup practice, there were several instances when it did not have the funds to pay for the well interests in full, so Gordon and Bixler relied on bridge loans that incurred up to 25 percent interest per year to buy the saltwater disposal wells.
Once investors paid for their fractional interests in the saltwater disposal wells at a markup of between 67 and 376 percent of the acquisition costs, Gordon and Bixler were able to repay Randy B. Jones & Associates the balances and interest due for them several months later.
FINRA’s evidence showed that Gordon and Bixler had no reasonable basis for their markups as there was no distinction between the wells’ developmental and operating interests. They failed to conduct any appraisals or research of contemporaneous resales to substantiate the basis and assess a market price for the wells.
FINRA 92-16 NASD Policies and Procedures for Markups/Markdowns on Equity Securities makes clear that markups exceeding 5 percent are presumed excessive and a firm that charges more, must be fully prepared to justify its reasons. FINRA noted that higher mark-ups are suspect and potentially fraudulent. In the hearing, FINRA referred to the SEC’s view that markups of more than 10 percent are fraudulent, even in the sale of low-priced securities.
In the face of conflicts of interest created by Gordon’s personal financial stake in the transactions, Sandlapper failed to adopt or implement a supervisory system to address them. Sandlapper’s investment committee, which included Gordon and Bixler, uncritically reviewed and accepted the firm’s participation in these private placements.
Because it lacked written procedures to resolve conflicts by its members, Gordon and Bixler were able to approve their own company to sell shares of the wells through its broker-dealer network, a violation of NASD Rule 3010 and FINRA Rules 3110 and 2010.
FINRA claims that Gordon and Sandlapper also knowingly permitted the firm’s registered representatives to sell well interests marketed as “real estate” to retail investors and then receive selling compensation for those transactions without supervision. The firm exercised no oversight beyond requiring registered representatives to submit an “outside business activity” form with any well interests’ sales activities.
Subsequently, Gordon and Sandlapper did not believe any disclosure about the markups was necessary since the saltwater disposal well interests were incorrectly defined as real estate transactions.
“Because of the predominance of aggravating factors here, and the respondents lack of remorse or appreciation of the wrongfulness of their conduct, we find that only adequately remedial sanction for their fraudulent conduct is a bar for Gordon and Bixler, and expulsion for Sandlapper in connection with excessive markup charged to the fund.”
The disciplinary actions were taken for causing TSWR Development to act as an unregistered dealer. As a result of this proceeding, they were collectively ordered to pay a restitution of $901,418 plus interest for interposing TSWR Development into well purchase transactions at an excessive markup.
In addition, Sandlapper and Gordon were also ordered to pay restitution of $2.4 million plus interest for defrauding retail customers by selling well interest as securities through TSWR Development while charging excessive markups.
Furthermore, Gordon was ordered to pay a restitution of nearly $4.7 million plus interest for marketing these investments as “real estate” through a network of representatives and charging excessive markups.
Finally, the respondents were ordered to pay nearly $27,500 for the cost of the FINRA hearing. Altogether, the respondents were ordered to pay in excess of $8 million for their actions.