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GREGORY C. GLYNN, Cal. Bar No. 039999
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges: JURISDICTION AND VENUE 1. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d)(1), and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d)(1) and 77v(a), and Sections 21(d)(1), 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(1), 78u(d)(3)(A), 78u(e) and 78aa. The Defendants have, directly or indirectly, made use of the means or instrumentalities of interstate commerce and/or of the mails in connection with the transactions, acts, practices, and courses of business alleged in this Complaint. 2. Venue is proper in the Central District of California, pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v(a) and Sections 21(d)(3)(A), 21(e) and 27 of the Exchange Act, 15 U.S.C. § 78u(d)(3)(A), 78u(e) and 78aa, because a substantial part of the events or omissions giving rise to the claim occurred in this District and because certain of the defendants reside therein. SUMMARY OF THE ACTION 3. This case involves the ongoing unregistered fraudulent offer and sale of securities in the form of fractional undivided interests in oil and gas rights. These securities are marketed by Shoreline Development Company ("Shoreline") using unregistered associated brokers. Shoreline and its brokers use cold-call telemarketing to contact potential investors. From at least 2000 to the present, Shoreline has raised at least $3.8 million from 120 investors nationwide. 4. Shoreline is operated by two principals, Todd J. Taylor ("Taylor") and Derek K. Gradwell ("Gradwell"). In 1999, Taylor was enjoined in a Commission action for selling securities while not being registered as a broker. Taylor and Gradwell offer and sell the oil and gas interests offered by Shoreline to investors. Using corporate shells controlled by them, Taylor and Gradwell have diverted and misused investor funds received by Shoreline for their own personal gain. These Defendants have misappropriated over $1.2 million of investor funds and have spent these funds on personal items, such as Taylor's wedding and honeymoon expenses, Gradwell's gambling debts, new motorcycles, a down payment on a vacation home for Gradwell, and for miscellaneous car and credit card payments. 5. Defendants Paul A. Barrios, III ("Barrios") and Dennis P. O'Connell, Jr., ("O'Connell") have sold the Shoreline oil and gas interests to members of the public. 6. Relief Defendants Epic Consulting Services, Inc. ("Epic") and Shoreline Holdings and Acquisitions, Inc. ("Shoreline H&A") are corporate shells controlled by Gradwell and are used to funnel Shoreline funds to him. Relief Defendant Coastal Resources, Inc. ("Coastal") is a corporate shell controlled by Taylor and is used to funnel Shoreline moneys to Taylor. Relief Defendant Northstar Acquisitions and Holdings, Inc. ("Northstar") is a corporate shell used to funnel Shoreline investor funds to O'Connell. Relief Defendant Spartan Consulting, Inc., ("Spartan") has received the sum of $76,000 from Shoreline. These relief defendants are sued because they have received proceeds of the fraudulent scheme to which they have no legitimate claim. 7. In its written offering materials and on its website, Shoreline misrepresents the performance of certain oil and gas wells and falsely claims to have a business relationship with a major natural gas pipeline company. Shoreline, Taylor, and Gradwell also misrepresent the use of investor funds. While the offering documents represent that either all of the investor funds will be used for well drilling costs, or that the purchase price of the securities includes the costs of drilling and competing the well, Defendants Taylor, Gradwell, and O'Connell have received investor funds directly, or through several shell companies controlled by them, and have used these investor funds for undisclosed personal purposes. In addition to payments to Taylor and Gradwell set forth in Paragraph 4 above, O'Connell has received from Shoreline approximately $233,000 of investor funds to pay his mortgage and automobile payments, golf country club expenses, property taxes, and credit card bills, among other things. 8. Defendants Shoreline, Taylor, Gradwell, O'Connell, and Barrios, by engaging in the above conduct, have violated the securities registration provisions,Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§77e(a) and (c). Defendants Shoreline, Taylor and Gradwell have also violated the antifraud provisions, Section 17(a) of the Securities Act, 15 U.S.C. §77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. Defendants O'Connell and Barrios in engaging in the conduct set forth herein, have violated the broker-dealer registration provisions, Section 15(a)(1) of the Exchange Act, 15 U.S.C. § 78o(a)(1). THE DEFENDANTS 9. Shoreline is a Delaware corporation which conducts business in Costa Mesa, California. Shoreline purportedly acquires and develops oil and gas properties in Texas. Shoreline is not registered with the Commission in any capacity, and no registration statement has been filed with respect to the offer and sale of Shoreline's securities. 10. Taylor resides in Aliso Viejo, California. He is the President of Shoreline and Coastal. Taylor was previously enjoined by this Court for violating Section 15(a) of the Exchange Act in SEC v. Michael A. Todd, et al., CV 98-6509 (DT) (C.D. Cal. Feb. 9, 1999). The Pennsylvania Securities Commission issued a cease-and-desist order against Taylor on October 27, 2000, for the unregistered sale of securities in an unrelated offering. Taylor does not presently hold any securities licenses. 11. Gradwell resides in the Las Flores area of Orange County, California. Gradwell incorporated Shoreline and is its chairman and CEO. He also incorporated and controls Epic and Shoreline H&A. Gradwell formerly held a Series 7 license which expired in 1994. He is not currently associated with a registered broker-dealer. 12. O'Connell resides in the Las Flores area of Orange County, California. Since March 2001, he has worked as a sales representative for Shoreline. He controls Northstar and is the treasurer of Coastal. ThePennsylvania Securities Commission issued a cease-and-desist order against O'Connell on December 14, 2000, for the unregistered sale of securities in an oil and gas offering similar to that of Shoreline. O'Connell has never held any securities licenses. 13. Barrios resides in Rancho Santa Margarita, California. From at least November 2001 to February 2002, he was a Shoreline sales representative. On March 15, 2000, the Commission issued a cease-and-desist order against Barrios for violating Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder. In the Matter of Paul A. Barrios, Admin. Proc. File No. 3-10157, Exchange Act Rel. No. 42531 (March 15, 2000). Barrios is not currently associated with a registered broker-dealer and does not hold any securities licenses. THE RELIEF DEFENDANTS 14. Coastal is a Delaware corporation doing business in California as Delaware Coastal Resources. Coastal was incorporated by Taylor on April 27, 2001 and its principal place of business is Taylor's home. Taylor, Gradwell, and O'Connell are or were signatories on Coastal's bank account. 15. Epic is a Delaware corporation which was incorporated by Gradwell on March 30, 2001. Epic's place of business is Gradwell's home and Gradwell is the authorized signatory on its bank account. 16. Northstar was incorporated in California by O'Connell on April 24, 2001. Its address of record is the same as that of Shoreline. O'Connell is a signatory on Northstar's bank account. 17. Shoreline H&A was incorporated in Delaware by Gradwell on March 30, 2001. Its principal place of business is Gradwell's residence. Taylor is President and Treasurer of Shoreline H&A; Gradwell is CEO and Secretary. Both Gradwell and Taylor are signatories on Shoreline H&A's bank account. 18. Spartan was incorporated in California on June 12, 1995 andcontrolled by the CEO of Millennium Petroleum Management, Inc. ("Millennium"). Millennium sold undivided fractional interests in oil and gas rights prior to the creation of Shoreline. Taylor and O'Connell sold Millennium securities prior to their association with Shoreline. GENERAL ALLEGATIONS The Offer and Sale of Shoreline Securities 19. Shoreline sells fractional undivided interests in oil and gas rights to investors. Commencing in 2000, Shoreline has raised at least $3.8 million in approximately six unregistered offerings from 120 investors in 32 states. Taylor, Gradwell, Barrios and O'Connell have solicited investors to purchase the Shoreline securities, using cold-call telemarketing, and using overnight mail to provide and return offering materials. Defendants purchased lead lists to obtain names of potential investors. 20. Shoreline uses the Internet to promote its business and makes representations on its website as to its success in drilling wells. Gradwell is both the webmaster and administrative contact for the Shoreline website: www.shorelinedevelopmentco.com. 21. Investors who purchase oil and gas interests receive a purchase agreement and prospectus from Shoreline. The Shoreline sales representatives tell investors that they will recoup their initial investment from production from the well and make profits thereafter, if the well "hits." A Shoreline offering document stated that a $27,000 investment could return between $1,536 and $3,092 per month, or between $18,433 and $37,106 per year (i.e., an annual rate of return of between 68% and 137%). 22. The offer and sale of securities by Shoreline is ongoing and continuing. In June 2002, an investor received correspondence from Gradwell thanking the investor for her purchase and Taylor again solicited the investor in early August to invest in a new Shoreline drilling venture in Texas. Shoreline Misrepresents the Performance of Certain Wells 23. The Shoreline website contains a "project status" page for each well, including the name of the well, type of well, status, and date of first production. The website describes two wells in Texas (Clark Trustee #3 and Greenwood #1) as producing oil or gas. However, Clark Trustee #3 has reported no oil or gas production to the Railroad Commission of Texas ("RRC"), which maintains and keeps records of entities which are registered to operate oil and gas wells in Texas, and Greenwood #1 has not reported any production to the RRC since January 2002. Shoreline Misrepresents a Key Business Relationship 24. On its website and in written offering materials, Shoreline represents that it has a business relationship with an affiliate of a prominent and widely recognized energy company, El Paso Corporation. A page of the Shoreline website contains a letter on Shoreline's letterhead dated May 17, 2002, which states that Shoreline is "working with El Paso Field Services, the pipeline company, to tap into their existing pipeline." This statement is untrue. Neither El Paso itself, nor any affiliate, including El Paso Field Services, has ever done business with Shoreline. Shoreline and its Principals Misuse Investor Funds 25. Shoreline's offering materials state that all of the investor funds will be used for well drilling and completion costs, including production equipment and expenses. Other written materials indicate that the purchase price of the securities includes the costs of drilling and completing the well, production equipment, and management fees. 26. In fact, of $3.8 million raised from investors, approximately $2.5 million, or 65% of funds raised from investors, has been paid to well operators for the alleged purchase of fractional interests in the oil and gas wells and for drillingand completion costs. The remaining $1.3 million, or approximately 35% of investor funds, has been diverted by Defendants. 27. Since February 2001, Taylor and Gradwell have diverted in excess of $1.2 million of investor funds from the Shoreline bank account. Taylor and Gradwell have withdrawn at least $150,000 in cash or checks payable to themselves. Using the corporations which they control, Taylor and Gradwell have also written checks from Shoreline to these shell corporations and then from the shells to themselves or for their own personal expenses. Thus, Taylor and Gradwell caused Shoreline to transfer $477,000 to Coastal, $579,000 to Epic, and $41,000 to Shoreline H&A. Shoreline transferred an additional $175,000 to Northstar. 28. Taylor has caused Coastal, the shell corporation he controls, to make the payments for his personal use and benefit, including the following: (a) wedding and honeymoon expenses of $18,500, (b) a motorcycle purchase of at least $13,000, (c) Mercedes automobile lease payments of $18,000, (d) payments on credit card bills of $29,000, (e) stock purchases of $13,200, (f) payment of Orange County property taxes of $4,300, and (g) cash or check payments to his mother and wife of at least $10,000. Taylor has also written checks from Coastal payable to himself totaling at least $74,000 as well as checks to cash totaling at least $55,000. 29. Gradwell wrote checks to himself from Epic, Gradwell's shell corporation, totaling at least $185,835 and checks to cash totaling at least $56,500. Gradwell also paid personal expenses from the Epic bank account using investor funds transferred from Shoreline, including the following: (a) payments of credit card debt of $76,500, (b) payments on a BMW monthly auto lease of $19,465, (c) a motorcycle purchase of $25,890, (d) stock purchases of $23,200, (e) payment of a $5,000 gambling debt to Bally's/Paris Casino in Las Vegas, (f) payment for a $5,000 purchase of art, and (g) payment on a $2,300 vacation in the Florida Keys. In addition to the foregoing, Gradwell also used at least $26,000 from Epic as a down payment to purchase a second home located in Big Bear Lake, California. Gradwell also directly transferred the sum of $15,000 from Shoreline's bank account to the Bellagio Hotel and Casino in Las Vegas, Nevada as payment on a gambling debt owed by Gradwell at that casino. 30. O'Connell and his corporation, Northstar, received approximately $233,000 from the Shoreline account. O'Connell used these moneys to pay house and car payments, property tax payments, credit card bills and expenses relating to a country club membership. Barrios received over $15,000 from the Shoreline account and Spartan received $66,000. FIRST CLAIM FOR RELIEF UNREGISTERED OFFER AND SALE OF SECURITIES Violations of Sections 5(a) and 5(c) of the Securities Act
31. Paragraphs 1 though 30 are hereby realleged and incorporated herein by this reference. 32. Defendants Shoreline, Taylor, Gradwell, O'Connell and Barrios by engaging in the conduct described above, directly or indirectly:
33. No registration statement has been filed with the Commission or has been in effect with respect to the above securities. 34. By reason of the foregoing, Defendants Shoreline, Taylor, Gradwell, O'Connell and Barrios, and each of them, violated, and unless restrained and enjoined will continue to violate, Sections 5(a) and 5(c) of the Securities Act. SECOND CLAIM FOR RELIEF FRAUD IN THE OFFER OR SALE OF SECURITIES Violations of Section 17(a) of the Securities Act
35. Paragraphs 1 though 30 are hereby realleged and incorporated herein by this reference. 36. Defendants Shoreline, Gradwell and Taylor, by engaging in the conduct described above, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce or by the use of the mails:
37. By reason of the foregoing, Defendants Shoreline, Gradwell and Taylor, and each of them, violated, and unless restrained and enjoined willcontinue to violate, Section 17(a) of the Securities Act. THIRD CLAIM FOR RELIEF FRAUD IN CONNECTION WITH THE
Violations of Section 10(b) of the Exchange Act
38. Paragraphs 1 through 30 are hereby realleged and incorporated herein by this reference. 39. Defendants Shoreline, Taylor, and Gradwell, by engaging in the conduct described above, directly or indirectly, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, or of the mails, or of a facility of a national securities exchange, with scienter:
40. By reason of the foregoing, Defendants Shoreline, Taylor, Gradwell, and each of them, violated and, unless restrained and enjoined, will continue to violate, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. FOURTH CLAIM FAILURE TO REGISTER AS A BROKER-DEALER Section 15(a)(1) of the Exchange Act
41. Paragraphs 1 through 30 are hereby realleged and incorporated herein by this reference. 42. Defendants O'Connell and Barrios, by engaging in the conduct described above, acted and conducted business as broker-dealers in securities and as such made use of the mails or means or instrumentalities of interstate commerce to effect transactions in, or induce or attempt to induce the purchase or sale of securities in the nature of fractional undivided oil and gas interests. 43. Defendants O'Connell and Barrios have neither been registered with the Commission as broker-dealers in accordance with Section 15(b) of the Exchange Act, 15 U.S.C. § 78o(b), nor associated with a registered broker-dealer in connection with the sale of securities in the nature of fractional undivided oil and gas interests. 44. By reason of the foregoing, Defendants O'Connell and Barrios, and each of them, violated, and unless restrained and enjoined will continued to violate, Section 15(a) of the Exchange Act. FIFTH CLAIM VIOLATION OF CEASE AND DESIST ORDER (Against Barrios) 45. Paragraphs 1 through 30 are hereby realleged and incorporated herein by this reference. 46. On March 15, 2000, the Commission issued a cease-and-desist order against Barrios for violating Sections 5(a), 5(c) and 17(a) of the Securities Act andSections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder. In the Matter of Paul A. Barrios, Admin. File Proc. No. 3-10157, Exchange Act Rel. No. 42531 (March 15, 2000). This order was issued pursuant to Section 8A of the Securities Act, 15 U.S.C. § 77h-1 and Section 21C of the Exchange Act, 15 U.S.C. § 78u-3. 47. By engaging in the conduct described herein, Defendant Barrios violated the terms and conditions of the cease-and-desist order. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that this Court: I. Issue findings of fact and conclusions of law that Defendants Shoreline, Taylor, Gradwell, O'Connell and Barrios engaged in the alleged violations. II. Issue orders temporarily, preliminarily and permanently enjoining Defendants Shoreline, Taylor, Gradwell, and O'Connell and permanently enjoining Barrios and their officers, agents, servants, employees, and attorneys-in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating, directly or indirectly, Sections 5(a) and 5(c) of the Securities Act. III. Issue orders temporarily, preliminarily and permanently enjoining Defendants Shoreline, Taylor, and Gradwell and their officers, agents, servants, employees, and attorneys-in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating, directly or indirectly, Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. IV. Issue orders temporarily, preliminarily and permanently enjoining Defendant O'Connell and preliminarily and permanently enjoining Defendant Barrios and their officers, agents, servants, employees, and attorneys-in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating, directly or indirectly, Section 15(a)(1) of the Exchange Act. V. Issue a temporary restraining order and a preliminary injunction freezing the assets of Defendants Shoreline, Taylor, Gradwell, O'Connell and Barrios, and those assets of the Relief Defendants Coastal, Epic, Northstar, Shoreline H&A and Spartan, derived from the defendants' violations of the registration and antifraud provisions of the securities laws, prohibiting all Defendants and all Relief Defendants from destroying documents, allowing expedited discovery, appointing a receiver over Defendant Shoreline only and for accountings from all Defendants and Relief Defendants. VI. Enter an order that Defendants Shoreline, Taylor, Gradwell, O'Connell, and Barrios disgorge all profits gained directly or indirectly from the illegal conduct, together with prejudgment interest thereon. VII. Enter an order that Relief Defendants Coastal, Epic, Northstar, Shoreline H&A and Spartan disgorge all profits gained directly or indirectly from the Defendants' illegal conduct, together with prejudgment interest thereon. VIII. Enter an order that Defendants Taylor, Gradwell, O'Connell, and Barrios pay civil penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act. IX. Enter an order requiring Defendant Barrios to comply with the Cease and Desist Order issued by the Commission in In the Matter of Paul A. Barrios, Admin. File Proc. No. 3-10157, Exchange Act Rel. No. 42531 (March 15, 2000). X. Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court. XI. Grant such other and further relief as this Court may determine to be just and necessary. DATED: August 26, 2002
http://www.sec.gov/litigation/complaints/comp17702.htm
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