Serve all at:
1001 N. Sam Rayburn Frwy.
Sherman, Texas 75090
On the 9th day of June 2006, the Enforcement Section of the Securities Division (the “Division” or the “Securities Division”), by and through Patrick T. Morgan, Chief Counsel, submitted a Petition for Cease and Desist Order, Civil Penalties, and Costs of Investigation under Section 409.6-604, RSMo Supp. 2005 (the “Petition”). After reviewing the Petition, the Commissioner of Securities issues the following findings of fact, conclusions of law and order:
At all times relevant to this Order, Petro-America Producing Oil and Gas Wells, Inc. (“Petro-America”) was a company operating in the State of Texas with an address of 1001 N. Sam Rayburn Frwy., Suite #111, Sherman, Texas 75090. Petro-America purportedly engages in the business of selling oil and gas interests.
At all times relevant to this Order, James Kosanke (“Kosanke”) was the President and Treasurer of Petro-America and had a business address of 1001 N. Sam Rayburn Frwy., Suite #111, Sherman, Texas 75090.
At all times relevant to this Order, Robert Harris (“Harris”) was the Vice President and Sales Manager of Petro-America and had a business address of 1001 N. Sam Rayburn Frwy., Suite #111, Sherman, Texas 75090.
As used in this Order, the term “Respondents” refers to Petro-America, Kosanke and Harris.
On Wednesday, October 12, 2005, Respondents ran an advertisement in The Wall Street Journal. The advertisement stated:
4 OIL / 5 GAS WELLS
Invest with $12,500.
Leased and Managed.
(Emphases in original.)
On October 13, 2005, a Missouri Resident (“MR”) telephoned Petro-America and left a telephone message in response to the October 12, 2005 advertisement of The Wall Street Journal.
On October 17, 2005, MR received a phone call from Harris in response to the message left with Petro-America on October 13, 2005. During this conversation, Harris questioned MR’s investment experience relating to the oil and gas industry. MR informed Harris that MR had some knowledge in the field and that MR had previously invested in an oil and gas program.
Harris told MR that MR could lose MR’s entire investment if MR invested in Petro-America. Further, Harris stated that MR could earn a return of “a couple of grand a month” and that the oil and gas wells in question are expected to “produce nine (9) barrels a day.” Among other things, MR agreed to have Harris send MR a package outlining the investment offering.
On or about October 18, 2005, MR received a package from Petro-America by priority mail from the United States Postal Service outlining Petro-America’s investment program as discussed with Harris in the October 17, 2005 telephone conversation.
Among other things, the packet included:
A three-page introduction letter (“Introduction Letter”);
A document outlining a projection of the monthly returns based on oil prices.1 Specifically, highlighted in yellow marker was a monthly return of $1,951.00 if oil prices were $60.00 per barrel;
Two (2) separate documents: one titled, “4 REFURBISHED OIL WELLS,” and the other, “5 REFURBISHED GAS WELLS,” located in Caddo Parish, Louisiana.
A four-page document titled, “Bill of Sale & Purchase Agreement” (the “Agreement”). The Agreement indicates that the “total offering is for 9 wells at a total price of $400,000.00 for 100% WI, being 60% NRI”; and
Numerous copies of color photos of the alleged oil wells and gas wells.
The Introduction Letter opened by thanking the reader for requesting the information “advertise[d] in the Wall Street Journal.” The Introduction Letter then continued:
Our main object is to make you 50% . . . return on your investment and much more. This is not a drilling program. Drilling for Oil is very risky. I will repeat this statement again. THIS IS NOT A DRILLING PROGRAM. Last year we were offering to the investors a 3 wells program for an investment of $10,000.00, which was a very good investment. This investment program is greater than that.
AT THIS POINT WE NEED TO MAKE A CORRECTION. IN OUR AD WE STATED THAT THESE WELLS WERE PRODUCING OIL AND GAS WELLS. AT ONE POINT THESE WELLS WERE PRODUCING BUT NOT NOW. THESE WELLS NOW ARE REFERRED TO AS REFURBISHED WELLS (REWORKED WELLS). WE WILL HAVE TO BRING THESE WELLS BACK UP TO PRODUCTION. FOR AN INVESTMENT OF 12,500 YOU WILL OWN A 3.12 % INTEREST IN NINE (9) REFURBISHED WELLS. FOUR (4) REFURBISHED OIL WELLS AND FIVE (5) REFURBISHED GAS WELLS.
(Emphasis in original.) The Introduction letter then proceeded to describe the “four oil well & five gas well lease[s].” The Introduction Letter predicted that “[i]f each of these wells produce a minimum of 9 barrels per day at the Fredricksburg Formation . . . [then the participant’s] monthly check will be $1,748.00 per month.” The Introduction Letter also suggested that this could be one of the “wisest” and “profitable investment[s]” that the participant could make. The Introduction Letter continued:
FOR AN INVESTMENT OF $12,500.00 YOU WILL OWN A 3.12% INTEREST IN 4 REFURBISHED OIL WELLS AND 5 REFURBISHED GAS WELLS. We highly recommend that you purchase 2 units at 6.24% for an Investment of $25,000.00 your [sic] rate of return will double. It’s required that you speak to me personally before you invest Mr. James E. Kosanke . . . .
THERE ARE WELLS IN THIS FIELD THAT HAVE BEEN PRODUCING FOR OVER FIFTY (50) YEARS. THIS LITERATURE WILL NOT IMPRESS YOU BUT THE RESULTS WILL.
Your Business Partner,
J. E. Kosanke /s/
J.E. Kosanke, President
A/B/A No. 111000614
Account Name – Petro America Producing Oil & Gas Wells
(Emphasis in original.)
The Agreement also contained a section requiring that the “purchaser” attest that he or she is:
an “Oil and Gas industry, or related industry, company or individual”, and or Petroleum Professional, and as such, being a knowledgeable buyer of oil and gas properties, Is exempt from qualifying as an investor, and as such is exempt from any filing requirements of the “S.E.C.” as show in the “Securities act of 1933, sect. 4, sub. Sec. 2, rule 146, sched. “D”.
Since MR’s initial phone conversation with Harris on October 17, 2005, MR received at least 8 additional follow-up phone messages from Harris. During these messages, Harris, among other things, encouraged MR to invest in the 4 oil well and 5 gas well programs.
On or about January 22, 2006, MR received a phone message from Kosanke. Among other things, Kosanke identified himself as the President of Petro-America. He also stated that:
He was following up on the literature that Petro-America sent MR concerning the 4 oil wells and 5 gas wells;
“[O]nly a few positions were left available for investing”;
MR could see returns of $2,000 per month on MR’s $12,500 investment subject to the prices of oil and the performance of the wells’ production;
Kosanke highly recommended that MR acquire “a position as it’s the best oil investment he [Kosanke] has seen”; and
If MR were interested, MR should invest and that Kosanke would send MR additional literature on the investment program.
MR did not invest with Petro-America, nor is MR currently in communication with Petro-America, Kosanke, or Harris.
On or about December 20, 2005, the Missouri Securities Division received information which indicated that Respondents had allegedly offered or sold securities in the State of Missouri.
On March 15, 2006, the Division sent a letter (the “March 15th letter”) via certified mail, to Respondents requesting a claim of exemption from registration; exception from definition of a security upon which Respondents relied in offering or selling any unregistered securities in or from the State of Missouri; or whether Respondents were offering and selling a federal covered security. The letter also requested information about any offers to Missouri residents and advised Respondents that failure to provide a written statement on or before March 29, 2006, could result in further proceedings to prohibit Respondents from offering or selling securities in Missouri.
On March 27, 2006, the Division received a letter from Kosanke dated March 22, 2006. The letter responded to the Division’s March 15th letter. In his letter, Kosanke, among other things, stated:
That Petro-America “has not sold nor contacted Missouri residents for sale [sic] oil and gas well securities in Missouri.”
That “I became associated with Petro-America on 9/1/02 and purchased Mineral Leases of the Southwest on 8/1/05. Rest assured that if sales in the STATE of Missouri are contemplated Petro-America will submit the appropriate documents prior to contacting residents of MISSOURI.” (Emphasis in original.)
On March 28, 2006, a representative of the Division received a telephone call from Kosanke. Kosanke stated he had received the Division’s March 15th letter. Among other things, Kosanke stated that:
To the best of his knowledge, he or his business manager, Robert Harris, had not conducted any business in or from the state of Missouri;
He did place an advertisement in The Wall Street Journal, but that no one from the State of Missouri ever invested with Petro-America as a result of the advertisement.
He filed a “Reg D 504” with the United States Securities and Exchange Commission and that the offerings should be exempt under the federal rule. Additionally, he stated he filed the form in early or mid-2005.
A check of the records maintained by the Missouri Commissioner of Securities revealed no registration, granted exemption, or notice filing indicating status as a “federal covered security” for any securities allegedly offered by Respondents in Missouri.
Respondents were not registered to offer or sell securities in the State of Missouri.
Section 409.6-601(a), RSMo, provides that the Missouri Securities Act of 2003 “shall be administered by the commissioner of securities . . . .”
Section 409.1-102(1), RSMo, defines an “agent” as “an individual, other than a broker dealer, who . . . represents an issuer in effecting or attempting to effect purchases or sales of the issuer’s securities.”
Section 409.1-102(17), RSMo, defines an “issuer” as “a person that issues or proposes to issue a security . . . .”
Section 409.1-102(26), RSMo, reads as follows.
“Sale” includes every contract of sale, contract to sell, or disposition of, a security or interest in a security for value, and “offer to sell” includes every attempt or offer to dispose of, or solicitation of an offer to purchase, a security or interest in a security for value.
(Emphasis in original.)
Section 409.1-102(28), RSMo, defines a “security” to include a “fractional undivided interest in oil, gas, or other mineral rights.”
Section 409.3-301, RSMo, states as follows.
It is unlawful for a person to offer or sell a security in this state unless:
The security is a federal covered security;
The security, transaction, or offer is exempted from registration under sections 409.2-201 to 409.2-203; or
The security is registered under this act.
Section 409.4-402(a), RSMo, makes it “unlawful for an individual to transact business in this state as an agent unless the individual is registered under this act as an agent or is exempt from registration as an agent under” Section 409.4-402(b), RSMo.
Section 409.4-402(d), RSMo, states that it is “unlawful for . . . an issuer engaged in offering, selling, or purchasing securities in this state, to employ or associate with an agent who transacts business in this state on behalf of . . . issuers unless the agent is registered under [Section 409.4-402(a), RSMo] or exempt from registration under” Section 409.4-402(b), RSMo.
Section 409.5-503(a), RSMo, reads as follows: “In a[n] . . . administrative proceeding under this act, a person claiming an exemption, exception, preemption, or exclusion has the burden to prove the applicability of the claim.”
Section 409.6-604(a), RSMo, reads as follows.
If the commissioner determines that a person has engaged, is engaging, or is about to engage in an act, practice, or course of business constituting a violation of this act or a rule adopted or order issued under this act . . . the commissioner may:
(1) Issue an order directing the person to cease and desist from engaging in the act, practice, or course of business or to take other action necessary or appropriate to comply with this act . . . .
Section 409.6-604(b), RSMo, reads as follows.
An order under subsection (a) is effective on the date of issuance. . . . If a person subject to the order does not request a hearing and none is ordered by the commissioner within thirty days after the date of service of the order, the order becomes final as to that person by operation of law.
Section 409.6-604(c), RSMo, reads in part: “The final order may make final, vacate, or modify the order issued under subsection (a).”
Section 409.6-604(d), RSMo, reads: “In a final order under subsection (c), the commissioner may impose a civil penalty up to one thousand dollars for a single violation or up to ten thousand dollars for more than one violation.”
Section 409.6-604(e), RSMo, reads in part: “In a final order, the commissioner may charge the actual cost of an investigation or proceeding for a violation of this act . . . . These funds may be paid into the investor education and protection fund.”
Section 409.6-610, RSMo, reads in part as follows.
(a) Sections 409.3-301 . . . [and] 409.4-402(a) . . . do not apply to a person that . . . offers to sell a security unless the offer to sell . . . is made in this state . . . .
(c) For the purpose of this section, an offer to sell . . . a security is made in this state, whether or not either party is then present in this state, if the offer: . . .
(2) Is directed by the offeror to a place in this state and received at the place to which it is directed.
Neither the Missouri Securities Act of 2003 nor the Missouri Code of State Regulations pursuant to Section 409.2-203, RSMo,2 recognize an offering under SEC Rule 504 in Missouri as either (1) a federal covered security or (2) a security, transaction, or offer exempted from registration under Sections 409.2-201 to 409.2-203, RSMo.
The Commissioner has jurisdiction in this proceeding and over these Respondents under Section 409.6-601(a), RSMo.
The transaction described in paragraphs 5, 10, 11, and 13 was a “fractional undivided interest in oil, gas, or other mineral rights” and thus a “security” under Section 409.1-102(28), RSMo.
The facts described in paragraphs 5 and 8-14 are “attempt[s] or offer[s] to dispose of, or solicitation[s] of an offer to purchase” the securities described above and are thus “offers to sell” a security under Section 409.1-102(26), RSMo, in the State of Missouri.
Based upon the facts in paragraphs 1, 2, 11, 14, and 19, Kosanke acted as an “agent” as defined under Section 409.1-102(1), RSMo, for Petro-America in the State of Missouri.
Based upon the facts in paragraphs 1, 3 and 7-13, Harris acted as an “agent” as defined under Section 409.1-102(1), RSMo, for Petro-America in the State of Missouri.
Based upon the facts in paragraphs 1, 5, 7-14, and 19, Petro-America acted as an “issuer” as defined under Section 409.1-102(17), RSMo, in the State of Missouri.
Respondents violated Section 409.3-301, RSMo, when they offered a security to MR when that security was not (1) a federal-covered security, (2) exempt from registration under Sections 409.2-201 or 409.2-202, RSMo, or (3) registered under the Missouri Securities Act of 2003 when they offered unregistered, nonexempt fractional undivided interests in oil or gas wells to MR as described above in paragraphs 5 and 8-14.
Kosanke violated Section 409.4-402(a), RSMo, when he acted as an agent in the State of Missouri when he was neither registered under the Missouri Securities Act of 2003 nor exempt from registration under Section 409.4-402(b), RSMo.
Harris violated Section 409.4-402(a), RSMo, when he acted as an agent in the State of Missouri when he was neither registered under the Missouri Securities Act of 2003 nor exempt from registration under Section 409.4-402(b), RSMo.
Petro-America violated Section 409.4-402(d), RSMo, when Petro-America engaged in offering the above-described securities in Missouri while associating with Kosanke and Harris who, while acting as unregistered, nonexempt agents under section 409.4-402(a), RSMo, transacted business in Missouri on Petro-America’s behalf.
This Order is in the public interest.
NOW, THEREFORE, it is hereby ordered that Respondents, their agents, employees and servants, and all other persons participating in or about to participate in the above-described violations with knowledge of this order are prohibited from:
Offering or selling the above-described securities in the State of Missouri unless those securities are registered under the Missouri Securities Act of 2003 in accordance with the provisions of Section 409.3-304, RSMo; and
Violating or materially aiding in the violation of Section 409.4-402(a), RSMo, by transacting business as an agent for Petro-America without being registered as an agent under the Missouri Securities Act of 2003.
IT IS FURTHER ORDERED that, pursuant to Section 409.6-604(d), RSMo, the Commissioner will determine whether to grant in a final order the Enforcement Division’s petition for an imposition of a civil penalty of $10,000, whole or in part, against each Respondent for the above violations unless Respondents request a hearing and show cause why such penalties should not be imposed.
IT IS FURTHER ORDERED that the Enforcement Section has petitioned for an award for costs of the investigation against Respondents in this proceeding. Pursuant to Section 409.6-604(e), RSMo, the Commissioner will issue a final order awarding an amount to be determined after review of evidence submitted by the Enforcement Section, unless Respondents request a hearing and show cause why an award should not be made to the agency.
WITNESS MY HAND AND OFFICIAL SEAL OF MY OFFICE AT JEFFERSON CITY, MISSOURI THIS 6 TH DAY OF JULY, 2006.
SECRETARY OF STATE
MATTHEW D. KITZI
COMMISSIONER OF SECURITIES
Serve all at:
1001 N. Sam Rayburn Frwy.
Sherman, Texas 75090
TO: Respondents and any unnamed representatives aggrieved by this Order:
You may request a hearing in this matter. Any request for a hearing should be sent, in writing to:
Commissioner of Securities
Office of the Secretary of State
Missouri State Information Center, Room 229
600 West Main Street
Jefferson City, Missouri, 65102
Said request must be made within thirty (30) days of the receipt of this Order pursuant to Section 409.412(a), RSMo Supp. 2005, and 15 CSR 30-55.020.
If you wish to challenge the factual basis for this Order, you must file an answer to the allegations made by the Securities Division in its Petition. Your answer must be filed within thirty (30) days of receipt of the hearing order, unless the Commissioner orders additional time. Your answer must be in writing and should admit those portions of the Petition which you believe are true and deny those portions of the Petition which you believe are not true. Your answer must contain a short and concise statement of those facts which you believe are true and relevant to the issues raised in the complaint. You or your legal counsel must sign the answer.
I hereby certify that on this 6 th day of July, 2006, a copy of the foregoing notice, order and petition was mailed by certified U.S. Mail, postage prepaid, to the Respondents in this matter.
1 This document bore the words “YOUR MONTHLY CHECK BASE [sic] ON OIL PRICES” in bold at the top of the document.
2 Section 409.2-203, RSMo, reads in pertinent part as follows: “A . . . rule adopted or order issued under this act may exempt a security, transaction, or offer; a rule under this act may exempt a class of securities, transactions, or offers from any or all of the requirements of sections 409.3-301 to 4093-306 and 409.5-504 . . . .”