Gerald Rome, Acting Securities Commissioner for the State of Colorado, Plaintiff-Appellant,
HEI Resources, Inc., f/k/a Heartland Energy, Inc.; Charles Reed Cagle; Brandon Davis; Heartland Energy Development Corporation; Bedrock Energy Development, Inc.; John Schiffner; and James Pollack, Defendants-Appellees.
City and County of Denver District Court No. 09CV7181 Honorable Michael A. Martinez, Judge
John W. Suthers, Attorney General, Sueanna P. Johnson, Assistant Attorney General, Charles J. Kooyman, Assistant Attorney General, Russell B. Klein, Assistant Attorney General, Denver, Colorado, for Plaintiff-Appellant
Shoemaker Ghiselli Schwartz LLC, Andrew R. Shoemaker, Alice Warren-Gregory, Paul H. Schwartz, Boulder, Colorado, for Defendants-Appellees HEI Resources, Inc. and Charles Reed Cagle
The Tenenbaum Law Firm, George D. Kreye, A. Thomas Tenenbaum, Greenwood Village, Colorado, for Defendants-Appellees Brandon Davis, Heartland Energy Development Corporation, and Bedrock Energy Development, Inc.
Robinson Waters & O'Dorisio PC, Otto K. Hilbert, II, Denver, Colorado, for Defendants-Appellees John Schiffner and James Pollack
King & Greisen, LLP, Paula D. Greisen, Denver, Colorado; Jay E. Sushelsky, Washington D.C., for Amicus Curiae AARP Foundation Litigation
Pendleton Wilson Hennessey & Crow, Paul L. Vorndran, Denver, Colorado; Christopher Staley, Washington D.C., for Amicus Curiae North American Securities Administrators Association, Inc. - NASAA
BERGER J. JUDGE
¶ 1 This case requires us to address the rules that determine when an interest in a general partnership or joint venture constitutes a security under the Colorado Securities Act (Act). The trial court applied a "strong presumption" that general partnership interests are not securities. We reject the strong presumption because it is inconsistent with the economic realities test — the controlling test in Colorado for identifying securities — and hold that the economic realities test, unencumbered by the strong presumption, determines when general partnership interests constitute securities.
¶ 2 The trial court also held that the measure of the venturers' business experience is their general business experience, not their experience in the specific business of the venture. We disagree and, like the United States Court of Appeals for the Tenth Circuit, hold that the proper measure of the venturers' experience is their collective experience in the business of the venture.
¶ 3 Accordingly, we vacate the trial court's judgment and remand for further proceedings.
I. Relevant Facts and Procedural History
¶ 4 Plaintiff, Gerald Rome, Acting Securities Commissioner for the State of Colorado (commissioner), appeals from a judgment dismissing his enforcement action against defendants, HEI Resources, Inc.; Charles Reed Cagle; Brandon Davis; Heartland Energy Development Corporation (HEDC); Bedrock Energy Development, Inc.; John Schiffner; and James Pollack.
¶ 5 HEI and HEDC have their principal places of business in Colorado. In 2009, the commissioner filed a complaint alleging that defendants violated the Act by using unlicensed sales representatives to offer and sell unregistered securities.
¶ 6 The allegations were based on defendants' formation and operation of several joint ventures in oil and gas exploration and drilling. To capitalize the ventures, defendants solicited individual investors by, in large part, cold-calling thousands of people across the country. Potential investors were solicited without regard to their experience or interest in oil and gas exploration.
¶ 7 If an individual contacted by telephone expressed interest in investing, defendants sent the prospect an information package that included a "Confidential Information Memorandum" (CIM) and a "Joint Venture Agreement" (JVA). The terms of the JVA provide for the formation of a joint venture, organized as a general partnership under the Texas Revised Partnership Act.
¶ 8 The JVA ostensibly gives the joint venturers various rights consistent with their status as general partners. The CIM designates either HEI or HEDC as the initial "managing venturer." The managing venturer manages the day-to-day operations of the joint venture and has the authority, subject to a vote of the venturers, to enter into contracts, acquire property, operate or retain operators to operate the venture's wells, and perform other functions on behalf of the venture.
¶ 9 Although the JVA gives the venturers authority to remove the managing venturer by majority vote and to vote on issues presented by the managing venturer, the commissioner alleged that any theoretical control the venturers collectively possess under the organizational documents is illusory. He alleged that the venturers instead are dependent upon the unique entrepreneurial or managerial abilities of HEI or HEDC and are unable to exercise meaningful partnership powers.
¶ 10 The commissioner thus contended that the substance of the transaction between the joint venturers and defendants is an investment contract under which the venturers invest money with the expectation that defendants' efforts will return a profit.
¶ 11 Both the commissioner and defendants filed various summary judgment and other dispositive motions. The trial court denied the commissioner's motions but granted defendants'. It held that the commissioner was collaterally estopped from arguing that, based upon the plain language of the JVAs, the joint venture interests are securities.
¶ 12 The court also ruled on defendants' claim that, as a matter of law, the commissioner could not establish that the interests are securities under any of the three factors articulated in Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981). Williamson provides a nonexhaustive three-factor test, adopted by Colorado courts, to aid courts in determining whether a general partnership or joint venture interest is a security. (But, as discussed extensively below, Colorado has not embraced the strong presumption, derived from Williamson, that general partnership interests are not securities.)
¶ 13 The first Williamson factor looks only at whether the partnership or joint venture agreements leave so little power in the hands of the partner or venturer that it renders the relationship between the parties tantamount to a limited partnership. Id. at 424. Accordingly, the trial court held that the collateral estoppel determination that precluded the commissioner from arguing that the interests are securities based only on the JVAs also prevented him from establishing that the interests are securities under the first Williamson factor. However, it also held that, independent from the collateral estoppel determination, as a matter of law, the interests are not securities under the first Williamson factor because it found that the joint ventures "are really general partnerships on their face."
¶ 14 The second Williamson factor looks at the knowledge and experience of the partners or venturers. Id. The court concluded that there were genuine issues of material fact regarding this exception, and thus it declined to determine whether, as a matter of law, the interests are securities under the second Williamson factor. The third Williamson factor looks at whether the managing partner or venturer has a "unique entrepreneurial or managerial ability" that would preclude the other partners or venturers from replacing it. Id. The court held that there were no genuine issues of material fact by which the commissioner could prove that the venturers were so dependent on some unique ability of the managing venturer that they could not replace it, and thus, as a matter of law, the commissioner could not establish that the interests are securities under the third Williamson factor.
¶ 15 Based upon the summary judgment orders, the court limited the commissioner at trial to attempting to prove that the interests are securities (1) solely under the second Williamson factor or (2) under other economic realities surrounding their offer and sale.
¶ 16 After a seven-day nonjury trial, the court ruled that the commissioner failed to establish that the joint venture interests are securities under the second Williamson factor or under ...