IN THE UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission alleges as follows:
1. This matter involves securities fraud and registration violations of the federal securities laws by Defendants C-Tech, L.L.P. ("C-Tech") and Robert Schlotterbeck ("Schlotterbeck"). From mid-2000 through at least November 2001, C-Tech raised approximately $3.9 million from more than 100 investors in at least 28 states through the sale of unregistered fractional working unit and overriding royalty interests ("interests") in two oil and gas wells located in Beeville, Texas. In the course of offering and selling these interests, C-Tech and its sales staff have engaged in misrepresentations and omissions concerning, among other things, the probability of drilling a successful well, the anticipated returns to investors, the compensation paid to the C-Tech sales staff, and the use of the funds collected from investors.
2. On November 13, 2001, Schlotterbeck made an apparent suicide attempt in a hotel room. Following this event, his activities as Managing Partner of C-Tech were closely examined by his colleagues. Within the last week, the staff of the United States Securities and Exchange Commission ("Commission"), conducting an expedited investigation, has learned that Schlotterbeck misappropriated large amounts of investor funds from C-Tech for the benefit of himself and his associates. Moreover, Schlotterbeck is currently attempting to transfer real property purchased with investor funds.
3. By engaging in the conduct detailed in this Complaint, Defendants C-Tech and Schlotterbeck, directly or indirectly, singly or in concert, have engaged in, and unless enjoined will again engage in, transactions, acts, practices and courses of business that constitute violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§77e(a), 77e(c) and 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78j(b)] and of Rule 10b-5 [17 C.F.R. §240.10b-5], promulgated thereunder.
JURISDICTION AND VENUE
4. The investments offered and sold by the Defendants are "securities" under Section 2(1) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §77b] and Section 3(a)(10) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78c].
5. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. §77t(b)], and Section 21(d) of the Exchange Act [15 U.S.C. §78u(d)], to preliminarily and permanently enjoin Defendants C-Tech and Schlotterbeck from future violations of the federal securities laws.
6. This Court has jurisdiction over this action, and venue is proper, pursuant to Section 22(a) of the Securities Act [15 U.S.C. §77v(a)], and Section 27 of the Exchange Act [15 U.S.C. §78aa].
7. Defendants, directly or indirectly, made use of the means or instruments of transportation and communication, and the means or instrumentalities of interstate commerce, or of the mails, in connection with the transactions, acts, practices and courses of business alleged herein. Certain of the transactions, acts, practices and courses of business alleged herein took place in the Northern District of Texas.
8. C-Tech is a limited liability partnership organized in Texas with its principal place of business in Comanche, Texas. C-Tech was founded in 1988 by Schlotterbeck and two other persons, David Collart ("Collart") and Giles Acker ("Acker"), for the purpose of obtaining production prospects and engaging in exploration, development and drilling activities. The company was reorganized as a limited liability partnership in 1999 or 2000 for the purpose of pursuing the development of medium depth wells in the Beeville, Texas area. Schlotterbeck, Collart and Acker are the general partners of C-Tech.
9. Robert Schlotterbeck is a co-founder and Managing Partner for C-Tech. As Managing Partner of C-Tech, Schlotterbeck controls the financial affairs of C-Tech and is a signatory on all bank accounts. In addition, Schlotterbeck established a sole proprietorship known as Millennium Lead Source ("Millennium") to market the oil and gas interests through cold calls to potential investors.
STATEMENT OF FACTS
The Offer And Sale Of C-Tech Securities
10. In mid-2000, C-Tech began to solicit investors to purchase working interests and overriding royalty interests in wells located in Beeville, Texas. To facilitate the offer and sale of these interests, Schlotterbeck established Millennium to place cold calls to potential investors whose names C-Tech obtained from commercial customer lists. While C-Tech was marketing the working interests, Schlotterbeck had Millennium purchase approximately 50,000 leads from another entity for use in soliciting C-Tech investors.
11. The Millennium sales staff, purportedly working as independent contractors, utilized both hourly workers and commission-based salespersons. The hourly workers cold-called potential investors from lead lists and attempted to promote interest in investing in C-Tech's wells. If the initial call provoked interest on the part of the prospect, the potential investor was provided with a copy of C-Tech's offering document. After the investor received the offering document, a commission-based "closer" contacted the potential investor to consummate the sale. Commissions totaling 15 percent were paid for each sale: the closers received a 12 percent commission for each sale, while the sales manager received a 3 percent commission.
Investor Funds Raised By C-Tech
12. In March 2000, C-Tech began to solicit investors to purchase working interests and overriding royalty interests in a well to be drilled in Beeville, Texas, known as the Schlotterbeck-Adams #1 (hereafter, "Well #1"). C-Tech sold 50 working interest units in Well #1 at approximately $58,000 per unit. C-Tech raised approximately $2.8 million from the sale of working interests sold to investors in Well #1. In addition, C-Tech sold $200,000 of "overriding royalty" interests in Well #1. All of those investors were either paid back or their investments were converted into working interests.
13. Under the terms of the Well #1 offering, investors paid approximately half the investment amount upfront for drilling and testing; the remainder was paid when C-Tech determined that the well should be completed. C-Tech required the payment of completion funds in or about July 2001. Although sufficient completion funds were collected, Well #1 has never been completed.
14. From May 2001 through at least October 2001, C-Tech raised funds for a second well to be drilled in Beeville, Texas, known as the Pouliot-Heirs #2 (hereafter "Well #2"). C-Tech offered as many as 50 working interest units in Well #2 at a price of about $72,000 per unit; however, C-Tech apparently succeeded in selling only about 14 working interests. Some investors who purchased working interest in Well #2 received refunds. In addition, C-Tech raise about $600,000 from the sale of overriding royalty interests in Well #2. After refunds to purchasers of working interests, the net amount of investment in Well #2 is approximately $1.1 million.
15. Under the terms of the Well #2 offering, approximately 60 percent of investment funds were due upfront to pay for drilling and testing, while the remaining funds were to be paid when C-Tech made a completion call. No completion call has been made concerning Well #2. Indeed, C-Tech never commenced the drilling and testing process for Well #2. Rather, as set forth below, funds collected for drilling and testing Well #2 have been misappropriated for unauthorized uses. Schlotterbeck, in fact, on or about November 13, 2001, failed to make a $150,000 option payment to renew the oil and gas lease for the property on which Well #2 was to be located. Schlotterbeck allowed the lease to expire even though C-Tech has at least $375,000 in one bank account on which Schlotterbeck is a signatory.
Fraudulent Conduct In The Offer And Sale Of C-Tech Securities
16. In written materials and sales calls to investors and prospective investors, C-Tech misrepresented the probability of completing a successful and commercially viable well that would produce a substantial return for investors. C-Tech made unqualified and unsupported predictions concerning the expected production from wells and sales persons referred to the investments with such terms as a "laydown" and a "no-brainer." Orally and in writing, investors were told that they could expect a return of eight to 10 times their investment within 18 months, with little or no risk to their investment capital. These statements had no reasonable basis.
17. In offering documents provided to investors and potential investors, C-Tech misrepresented the percentage of investor funds that would be paid in commissions. For example, the offering document relating to Well #1 represents that "overhead and commissions" will be less than 10 percent of the funds raised to drill and complete the well. In fact, the commissions paid to the C-Tech sales force equaled 15 percent of the funds raised.
18. Investors were told that the funds they supplied would be used to drill and complete C-Tech wells. In fact, as described below, Schlotterbeck misappropriated a substantial portion of investor funds and used them for unauthorized and undisclosed purposes for his own benefit and the benefit of others.
Misuse Of Investor Funds By C-Tech And Schlotterbeck
19. At least $500,000 in investor funds collected for drilling and completing Well #1 were diverted to unauthorized uses. Records reflect that Schlotterbeck transferred at least $500,000 to a money market account for his own use. The misappropriation of these funds left insufficient money to complete Well #1.
20. Investor funds collected for Well #2 were also misused. For example, Schlotterbeck used $311,000 of investor funds to purchase a lot in the Cimarron Hills development adjacent to a Jack Nicklaus-designed golf course in Williamson County, Texas ("Cimarron Hills property"). In addition, Schlotterbeck participated in the diversion of $155,500 to pay for a home for Acker in home in Conroe, Texas.
21. Moreover, Schlotterbeck used at least $25,000 to open a brokerage account and trade in commodities. Finally, investor funds have been used as collateral for loans for the personal benefit of Schlotterbeck and his wife.
Danger Of Further Dissipation Of Assets
22. Within the last week, Schlotterbeck has attempted to transfer title to the Cimarron Hills property for $450,000. There is a substantial likelihood that the liquidation of this asset will cause irreparable harm to investors. The Commission is informed and believes that Schlotterbeck still intends to consummate this transfer.
23, As of November 28, 2001, one C-Tech bank account on which Schlotterbeck is a signatory had a balance of approximately $375,000. Although the bank has placed an administrative hold on these funds, there is a substantial risk that Schlotterbeck may attempt to withdraw these funds to the detriment of investors.
Violations Of Sections 5(a) And 5(c) Of The Securities Act
24. Paragraphs 1 through 23 are hereby realleged and incorporated herein by reference.
25. C-Tech and Schlotterbeck, directly or indirectly, singly or in concert with others, have been offering to sell, selling and delivering after sale, certain securities and have been, directly and indirectly: (a) making use of the means and instruments of transportation and communication in interstate commerce and of the mails to sell securities, through the use of written contracts, offering documents and otherwise, (b) carrying and causing to be carried through the mails and in interstate commerce by the means and instruments of transportation such securities for the purpose of sale and for delivery after sale, and (c) making use of the means or instruments of transportation and communication in interstate commerce and of the mails to offer to sell such securities.
26. The working interests and overriding royalty interests were offered and sold to the public by C-Tech through a general solicitation of investors.
27. No registration statements were on file with the Commission or were otherwise in effect with respect to these securities.
28. By reason of the foregoing, C-Tech and Schlotterbeck violated and, unless enjoined, will continue to violate Sections 5 (a) and 5(c) of the Securities Act [15 U.S.C. §§77e(a) and (c)].
Violations Of Section 17(a) Of The Securities Act
29. Paragraphs 1 through 23 are hereby realleged and incorporated by reference herein.
30. C-Tech and Schlotterbeck, in connection with the offer and sale of securities, by use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, directly and indirectly, have employed schemes and artifices to defraud; made untrue statements of material fact and have omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and engaged in acts, practices, courses of business which have operated as a fraud and deceit upon purchasers and sellers.
31. As a part of and in furtherance of their scheme to defraud, C-Tech and Schlotterbeck, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence and oral presentations which contained untrue statements of material facts and misrepresentations of material facts and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including, but not limited to, those set forth above.
32. C-Tech and Schlotterbeck made these misrepresentations and omissions knowingly or with reckless disregard for the truth.
33. By reason of the foregoing, C-Tech and Schlotterbeck have violated and, unless enjoined, will continue to violate the provisions of Section 17(a) of the Securities Act [15 U.S.C. 77q(a)].
Violations Of Section 10(b) Of The Exchange Act And Rule 10-5 Thereunder
34. Paragraphs 1 through 23 are hereby realleged and incorporated by reference herein.
35. C-Tech and Schlotterbeck, directly or indirectly, in connection with the offer and sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails have: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in acts, practices and courses of business which operate as a fraud and deceit upon purchasers, prospective purchasers and other persons.
36. As a part of and in furtherance of their scheme, C-Tech and Schlotterbeck, directly and indirectly, prepared, disseminated or used written offering documents and made oral presentations which contained untrue statements of material facts, and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including, but not limited to, those set forth above.
37. C-Tech and Schlotterbeck made the above-referenced misrepresentations and omissions knowingly or recklessly disregarding the truth.
38. By reason of the foregoing, C-Tech and Schlotterbeck violated and, unless enjoined, will continue to violate the provisions of 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].
PRAYER FOR RELIEF
WHEREFORE, Plaintiff respectfully requests that this Court:
Preliminarily and permanently enjoin Defendants, their agents, servants, employees, attorneys, 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 future violations of Sections 5(a) and 5(c) of the Securities Act.
Preliminarily and permanently enjoin Defendants, their agents, servants, employees, attorneys, 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 future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, 17 C.F.R. 240.10b-5, thereunder.
Enter an order instanter freezing the assets of Defendants C-Tech and Schlotterbeck and directing that all financial or depository institutions comply with the Court's Order.
Order instanter that Defendants shall file with the Court and serve on the Commission an interim accounting, under oath, within ten days of the issuance of this order or three days prior to any hearing on the Commission's Motion for Preliminary Injunction, whichever is sooner, detailing all of their assets and all funds or other assets received from investors and from one another.
Order instanter that Defendants be restrained and enjoined from destroying, removing, mutilating, altering, concealing or disposing of, in any manner, any of their books and records or documents relating to the matters set forth in the Complaint, or the books and records and such documents of any entities under their control, until further order of the Court.
Order instanter the appointment of a receiver pendente lite for Defendants for the benefit of C-Tech investors, to marshal, conserve, protect and hold funds and assets obtained by the Defendants and their agents, co-conspirators and others involved in this scheme, wherever such assets may be found, or, with the approval of the Court, dispose of any wasting asset in accordance with the application and proposed order provided herewith.
Order that the parties may commence discovery immediately, and that notice periods be shortened to permit the parties to require production of documents, or the deposition of any party or party-representative, on 72 hours notice.
Order the Defendants to disgorge an amount equal to the funds and benefits they obtained illegally as a result of the violations alleged herein, plus prejudgment interest on that amount.
Order civil penalties against the Defendants pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), for the violations alleged herein.
Order such other and further relief as the Court shall deem just and proper.
DATED: December 3, 2001