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Sept. 2012

September 2012
From the Colorado Bar Association Business Law Section
Ed Naylor, Editor
To view a pdf of this newsletter, click here.
In this issue...
Articles Welcome!

Our monthly Newsletter needs your articles. We seek contributions that are of practical interest to Colorado business lawyers, including new attorneys, well-seasoned practitioners, members of corporate legal departments, and government attorneys. Article length is very flexible. If you have an article you would like to provide, or an idea for one, let us know.

Contact the Editor, Ed Naylor at

More Joint Venture Interests, but NOT Securities!
By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

Our May 2012 Newsletter included an article about a Colorado case in which the Court of Appeals confirmed the joint venture/general partner interests in that case were securities. Earlier this month, the US District Court for the District of Colorado reached a different conclusion, and focused on the rights of the JV participants contained in the agreements at the time of the investment. SEC v. Shields, 2012WL3886883 (D. Colo. 9/6/2012).

In 2011, the SEC brought an enforcement action against Jeffory Shields and his company, Geodynamics, Inc., for what the SEC alleged were the fraudulent and unregistered offer and sale of securities styled as joint venture interests in oil and gas drilling programs. It appears that the joint ventures in question were formed under Texas law and were governed by written joint venture agreements and the Texas Business Organizations Code. The SEC alleged that Jeffory D. Shields and Geodynamics

“defrauded at least 64 investors in 28 states of over $5 million since January 2010 through fraudulent and unregistered securities offerings of interests in four oil and gas investments, attracting investors through boiler-room cold-calls [promising returns of up to 548%]. They continue to seek new investors in their fraudulent scheme based in Colorado.”

The SEC further alleged that instead of using the funds for the intended purposes, “Shields has used investor deposits as a personal slush fund, taking over $2 million to pay for personal expenses, including a Learjet, luxury vehicles, travel, designer clothing, sporting events, rent for homes in Colorado and Florida, home furnishings, electronics, jewelry, and cash withdrawals and transfers to personal accounts.” The SEC alleged that the defendants spent just $613,494 on oil and gas drilling operations—according to the SEC an amount less than was spent on the Learjet.

In an earlier (August 2011) decision in this case, the United States District Court for the District of Colorado (Hon. Robert E. Blackburn) denied the SEC’s motion for a temporary restraining order (“TRO”) and ruled that the SEC had not proven that the interests that the defendants offered were in fact securities. Shortly after the denial of the TRO, the defendants filed a Rule 12(b)(6) motion to dismiss. In September 2012, the Court granted the defendants’ motion.

As required by Bell Atlantic Corp. v. Twombley, 550 U.S. 544 (2007), the Court reviewed the SEC’s complaint to determine whether, after accepting “all well-pleaded factual allegations of the complaint as true,” the complaint “contains enough facts to state a claim to relief that is plausible on its face.” The Court reviewed the factual allegations and noted that, to determine the existence of an investment contract (and therefore a “security” subject to SEC jurisdiction), the core question was “whether investors were led to expect profits ’solely from the efforts of others.’” The Court noted that since the 1946 Howey case, the standard has been relaxed. The Court defined the current standard as “whether an investor, as a result of the investment agreement itself or the factual circumstances that surround it, is left unable to exercise meaningful control over his investment.”

The Court went on to describe the Williamson test, noting that the joint ventures in question were general partnerships, and “[a] general partnership interest is presumed not to be an investment contract because a general partner typically takes an active part in managing the business and therefore does not rely solely on the efforts of others.” (The Colorado Securities Commissioner objects to the application of the Williamson test for state law purposes. See the May 2012 Business Law Section Newsletter discussion of the In re Mieka decision.)

In order to determine whether the joint venture/general partnership interests were “investments contracts,” the Court focused on the rights of the joint venture participants (referred to by the SEC as the “investors”) as established in the agreements. Whether the investors exercised those rights was not a material consideration for the Court; the important determination was whether the investors had appropriate rights they could exercise should they choose to do so.
(Perhaps if the SEC would have alleged that the joint venture participants were not sufficiently sophisticated in oil and gas matters to be able to exercise his or her rights, the Court would have allowed the case to proceed further. Of course, the actual “sophistication” of each investor would then have to be measured against the representations the investor made in the joint venture documentation.)

As noted by the Court, the thrust of the SEC’s arguments in the Shields case was that the defendants’ subsequent (but alleged) post-investment fraud rendered the investors’ contractual rights to participate in the venture meaningless. In granting the motion to dismiss, the Court noted that “the SEC has flipped the relevant inquiry on its head, reasoning backwards from the alleged fraud itself to prove that the investors lacked control.” The Court noted that the investment needs to be judged as of the facts existing at the time of the investment—and not based on subsequent acts no matter how egregious. Since the agreements gave the investors appropriate rights and further, since none of the investors were “so dependent on a particular manager,” a security was not involved.
Motion to dismiss GRANTED.

Business Law Section Activities
Financial Institutions Subsection

Lender/Creditor Issues–Tuesday, Nov. 13

On Nov. 13, the Financial Institutions Subsection and CBA-CLE is co-sponsoring a full-day CLE related to lending and creditor issues, including loan documentation, default issues, workouts and receiverships, UCC issues, and the latest on Article 9, to name a few. Please check the CBA-CLE website in coming weeks for additional topics and complete information on the class. The live program will be held at the CBA-CLE Classroom, 1900 Grant Street, Suite 300, Denver, CO, or via webcast.

CBA-CLE Information

Anatomy of a Law Firm Merger – Bryan Cave and HRO—Tuesday, Oct. 2
Co-sponsored by the CBA Business Law Section M&A Subcommittee

Lawyers who worked on the combination of Holme Roberts & Owen LLP and Bryan Cave will discuss their experiences in combining two firms, each of which had well over 100 years of history. Topics include the process of deciding to combine and with whom, dealing with different capital structures, syncing salaries and compensation, sorting out liabilities (retirement plans, leases, professional claims), meshing the cultures, and communicating with partners and staff. Nine months after the combination, lawyers will assess what worked well and what might be done differently.

The program will be from 8 to 9 a.m. on Oct. 2 at the CBA-CLE offices. Submitted for one general CLE credit. Click here for more information and to register.

Ethics and Professionalism in the Practice of Law—Friday, Oct. 5

This is the annual Ethics Program that brings you interactive legal theater for your CLE experience, providing one of the more stimulating, thought-provoking, and enjoyable ethics program around. The distinguished panel will entertain and engage with a carefully crafted series of interactive vignettes that encompass the ethical and professional dilemmas that you can face in your day-to-day practice. The most common and difficult problem areas are covered, including the interaction between lawyers, clients, and opposing counsel; bias issues; mentoring; client and counsel communication; and, of course, courtroom decorum.

The program is on Oct. 5 from 8:30 a.m. to noon. For more information and to register, click here.

2012 Business Law Institute—Oct. 18–19
Live only! Co-Sponsored by the CBA Business Law Section

Whether you’re new to business law or have many years of experience, in private practice or an in-house counsel, the eclectic blend of interesting topics and talented professionals will give you key take-away points that directly affect your business practice.

Click here for detailed agenda and faculty information.

Choose topics from the Basics and Advanced Tracks:

Basics Track

  • Business Judgment Rule
  • Contract Drafting and Interpretation
  • Drafting and Negotiating the Acquisition Agreement
  • Hot Tax Topics and Developments
  • Franchise Basics
  • Choice of Entity
  • Piercing the Corporate Veil/Alter Ego
  • Securities Basics
  • Intellectual Property
  • Ethics of Social Media

Advanced Track

  • Current Issues in Corporate Governance for Public Companies
  • Fiduciary Duties and Structuring Deal Protections Throughout the M&A Process
  • Advising the Entrepreneur on the New JOBS Act
  • Ethics of Multijurisdictional Practice
  • The Use of Partnerships and LLCs for Tax Planning
  • Contract Tips for Sourcing Information Technology
  • Foreclosure of Secured Assets from a Creditor's Perspective
  • Establishing and Fostering Relationships with In-House Counsel: A Panel Presentation

Featuring Plenary Session Speakers Tom Clark, CEO of Metro Denver Economic Development Corporation, on Denver’s Economic Climate and Business Outlook, and Nat Stoddard, Chairman, Crenshaw Associates, New York, NY, on M&A Risk Reduction, Post-Deal Integration Success and Long-Term Value Recognition for You and Your Clients

The Institute is at the Four Seasons Hotel, Denver. Submitted for 12 general CLE credits, including two ethics credits.

Best Case Bankruptcy Workshop: The Fundamentals—Tuesday, Oct. 16

Join Wolters Kluwer Law & Business and CBA-CLE from 9:30 to 11:30 a.m. for a free, in-person CLE workshop that offers an introduction to Best Case Bankruptcy, the industry-leading bankruptcy software. See firsthand how Best Case can boost your productivity and reduce case preparation and filing time by utilizing wizards, calculators, and data-entry shortcuts. All attendees receive a special discount offer and one lucky attendee will win a free single-user license valued at $995!

Submitted for three general CLE credits. For more information and to register, click here.

Best Case Bankruptcy: Advanced Topics—Tuesday, Oct. 16

Join Wolters Kluwer Law & Business and CBA-CLE from 1:30 to 4 p.m. for a free, in-person CLE workshop that offers an introduction to Best Case Bankruptcy. Gain time-saving strategies for managing cases, preparing forms, and completing the means test. Plus, get an in-depth look at recent Best Case enhancements, local forms, and provisions for your jurisdiction and workflow efficiency tools.

Submitted for three general CLE credits. For more information and to register, click here.

CBA-CLE Featured Publications

CBA-CLE Books: Did you know CBA Members get ABA books at a 15% discount?

CBA-CLE carries a great selection of ABA Business law books. Check out our titles including: Advising the Small Business: Forms and Advice for the Legal Practitioner; Directors and Officers Liability Insurance Deskbook; and Financial Statement Analysis and Business Valuation for the Practical Lawyer. See the entire list!

Contributions for future newsletters are welcome –
Contact Ed Naylor at or 303-292-2900

This newsletter is for information only and does not provide legal advice.

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