U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19737 / June 23, 2006
Securities and Exchange Commission v. Sunray Oil Company, Inc., Abilene Oil & Gas, LP, Larry Stiles, Defendants, and J&L Drilling, LLC, Relief Defendant, Civil Action No. 3:06CV-1097R, United States District Court for the Northern District of Texas (Dallas Division).
On June 21, 2006, the United States Securities and Exchange Commission filed an emergency civil action in United States District Court in Dallas, Texas, to preserve and recover funds and assets that were derived from an alleged fraudulent offering of oil and gas interests. The Commission's complaint alleges that Sunray Oil Company, Inc. and its principal, Larry Stiles, conducted a fraudulent offering of limited partnership interests in the Abilene Oil & Gas, LP, which raised $1.14 million from 52 investors residing in ten states and Canada. In connection with the Abilene partnership offering, it is alleged that the defendants made material misrepresentations and omissions concerning, among other things, Sunray's and Stiles' prior history in the oil and gas business, the profitability of the partnership, and the use of investor funds. U.S. District Judge Jerry Buchmeyer granted the Commission's Motion for Emergency Relief and issued an Order: 1) freezing the defendants' assets; 2) requiring an accounting; 3) preserving documents; 4) authorizing expedited discovery, and 5) appointing a receiver for all defendants.
The Commission's complaint names the following entities and individual as defendants:
The Commission's complaint alleges that the defendants engaged in an unregistered and fraudulent securities offering during which they touted Sunray's "50 years of experience" in the oil business, without disclosing that Sunray was only formed in 2000 and that Stiles' previous oil and gas company was dissolved in bankruptcy after being assessed over $700,000 in penalties for failing to plug abandoned wells it operated in Texas. The defendants further represented that their drilling program was "so successful" that Sunray, the general partner, agreed to repurchase the partnership interest after five years at a 50% profit. Moreover, the repurchase agreement was to be funded by an "Insurance Guarantee Bond" or other financial instrument purchased "from one of the top twenty European Banks." In reality, according to the complaint, the company never purchased any bonds or financial instruments to fund the repurchase agreement.
The complaint further alleges that Stiles, contrary to representations made to Abilene LP investors, commingled partnership funds in Sunray's operating bank account and diverted at least $247,000 for personal expenses. Sunray also used investor funds for another undisclosed purpose - to purchase a drilling rig in the name of J&L Drilling, LLC, a Texas limited liability company that is named as a defendant solely for purposes of relief. In addition to the funds raised in the Abilene partnership offering, the complaint alleges that Sunray and Stiles received approximately $800,000 of investor funds raised in an unlawful "prime bank" scheme recently halted by the Commission in SEC v. EFS, LLC, et. al. (USDC N.D. Tex. No. 3-06CV0793-M (Lit. Rel. 19689 May 5, 2006). In return for the EFS funds, Sunray purportedly agreed in January 2005, to assign to EFS 50% of all oil and gas interests that Sunray acquired over at least a four-year period. Further, the complaint alleges that the defendants used Abilene partnership and EFS investor funds to acquire oil and gas leases in Taylor County, Texas, but never assigned an interest in those leases to the Abilene partnership or EFS.
The Commission's complaint charges that the defendants have violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 [15 U.S.C. §§ 77e(a), 77e(c) and 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. In addition to seeking preliminary and permanent injunctive relief against all defendants, the Commission seeks orders requiring defendants Sunray and Stiles to pay civil monetary penalties and to disgorge all ill-gotten gains, plus prejudgment interest thereon. The complaint further seeks disgorgement against relief defendant J&L Drilling.
The Commission acknowledges the assistance and cooperation of the Pennsylvania Securities Commission and The Railroad Commission of Texas.