SEC v. 7S Oil and Gas, LLC, et al.
Case No. 17-cv-22914-UU (S.D. Fla.)
On August 1, 2017, the Commission filed a complaint against 7S Oil and Gas, LLC ("7S"), a Texas-based oil and gas company, and its CEO, William Alexander Sewell ("Sewell") (collectively, the "Defendants"), alleging, among other things, that Defendants mislead investors about amounts spent on commission payments to sales agents and administrative expenses, and misappropriated investor funds for personal expenses. From approximately November 2014 through July 2016, Defendants raised almost $7 million from at least 70 investors nationwide through a series of unregistered offerings in oil and gas projects. Defendants lured investors primarily through a network of sales agents and also a series of YouTube videos including one in which Sewell claimed that "for sure you will get some type of return because there's no such thing as a dry hole," as well as another video depicting oil gushing out of a well with Sewell commenting that "you got back gold coming out of that well." The complaint also alleged that some of 7S's offering documents told investors that no more than 10% would be spent on marketing costs, commissions to sales agents, and salaries and that 85% of investor funds would be spent on oil and gas operations. In reality, as alleged in the complaint, in some instances 7S paid commissions as high as 35% to its sales agents out of investor proceeds and applied only at most 57% of investor funds toward operating the wells. Defendants also allegedly used more than $90,000 in investor funds to pay tuition for Sewell’s children, entertainment expenses, and other personal expenses. In addition, the complaint alleges that 7S paid out sham "royalty payments" to some investors, which led investors to believe 7S was making a return on their investment based on oil sold to an independent third party.
The Commission’s complaint charged 7S and Sewell with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. See Complaint.
Without admitting or denying the Commission's allegations, 7S and Sewell each consented to the entry of a final judgment permanently enjoining each of them from violating the charged provisions of the federal securities laws. On August 3, 2017, the Court entered Final Judgments against each of the Defendants, in which it ordered the Defendants to pay a total of $750,000 in disgorgement, prejudgment interest, and penalties. In the Defendants' final judgments, the Commission was ordered to hold all funds, (collectively, the "Fund"), and may propose a plan to distribute the Fund subject to the Court’s approval. See 7S’s Final Judgment and Sewell’s Final Judgment.
The Defendants have paid a total of $750,000 into the Fund. The Fund has been deposited in an interest-bearing account at the U.S. Treasury.
On April 17, 2020, the Commission filed a motion for an order establishing a Fair Fund for the monies in the Fund and appointing Michael S. Lim, a Commission employee, as the Distribution Agent and Miller Kaplan Arase LLP as the Tax Administrator of the Fair Fund. The Commission further requested that the Court approve its proposed Distribution Plan (the “Plan”) and approve the disbursement of the Fair Fund in accordance with the Plan. See the Commission’s Motion. On April 29, 2020, the Court granted the Commission’s motion. See the Court’s Order.
The Plan provides for the distribution of the Fair Fund, plus interest (approximately $786,708.74), less any taxes and administration costs to the approximately 73 harmed investors that were not compensated for their economic harm as a result of the Defendants’ conduct described in the Complaint.
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