By Suzanne Cosgrove
A state appeals court has affirmed a decision by the Iowa Insurance Division that two salesmen from Texas company Carson Energy, Inc., violated the state’s blue-sky laws. The Division had previously charged the company, its president, Earl Carter Bills II, now deceased, and two of Carson’s salesmen, Anthony Weber and Jerrold Rothouse, with the soliciting of investment in Carson’s oil and gas wells in Texas and elsewhere as joint venture shares. The Division alleged what Weber and Rothouse sold to Iowans in “cold call” sales pitches were unregistered securities and constituted securities fraud (Weber v. Iowa Insurance Division, July 20, 2022, Ahlers, J.).
“Blue-sky laws” protect investors from fraudulent investment schemes by requiring the licensing of brokers, registration of securities and approval of investment offerings by appropriate governmental agencies. In Iowa, those statutes are enforced by the Iowa Insurance Division.
The Division initially filed a motion for partial summary judgment on the unregistered-securities count, seeking a declaration that the investments Weber and Rothouse sold qualified as securities under Iowa law. Weber and Rothouse filed a competing motion for summary judgment, contending the investments they sold were not securities.
An administrative law judge agreed Weber and Rothouse engaged in the sale of unregistered securities but determined that the Division failed to prove that Weber and Rothouse engaged in fraud. The judge imposed penalties against Weber and Rothouse, including fines of $6,000 against Weber and $9,000 against Rothouse, for the sale of unregistered securities. A district court affirmed that finding in a later judicial review, but Weber and Rothouse appealed.
Were the investments securities? According to court documents, the appeal’s “fighting issue” continued to be whether the agency properly determined as a matter of law that the joint venture shares that Weber and Rothouse sold to Iowans were securities that were required to be registered.
The court noted with certain exceptions, Iowa Code section 502.301(3) (2015) prohibits a person from selling a security in Iowa unless the security is registered in Iowa. There was no dispute that the agreements were not registered—the issue was whether the agreements qualified as “securities” under Iowa law. The Iowa Insurance Division argued the investments in this case were securities. Weber and Rothouse argued they were not.
Noting the term “security” can be broadly defined to include investment contracts, and leaning on federal law and guidance provided previously by the state supreme court, the court defined securities as contracts that require an investment of money in a common enterprise, on an expectation of profits to be derived “solely from the efforts of individuals other than the investor.”
Joint ventures come with responsibility. In contrast, joint venture participants are provided significant management powers which they are expected to exercise. They also are prohibited from relying on the “managing venturer” for its success or profitability.
More to the point of the Carson case, the court submitted affidavits obtained by the Division from 14 Iowans who signed the investment agreements. All 14 stated their sole involvement with Carson’s well projects was to send money to Carson. There was no evidence that the investors exercised their formal partnership powers, nor did they appear to have any experience with oil and gas wells.
In their appeal, Weber and Rothouse disputed the credibility of the affidavits but did not provide any evidence that contradicted the investors’ affidavits of statements.
“We find no genuine issue of material fact that the agreements Weber and Rothouse offered to Iowan investors were securities and they were not registered as required by Iowa law,” the court concluded.
The case is No. 21-1022.