The firm, Bixler and Gordon were named respondents in a FINRA complaint alleging that they participated in a fraudulent scheme and defrauded investors by selling investments in saltwater disposal wells at excessive, undisclosed markups through a middleman “development” company owned and controlled by the firm Bixler, a firm principal and Gordon, the firm’s CEO. The complaint alleges that the fraudulent markups totaled over $8 million. Investors were not informed, in the PPM or otherwise, that the fund would pay or had paid excessive markups for its purchases of interests in saltwater disposal wells from the development company. As a result, the firm, Bixler and Gordon willfully violated Section 10(b) of the Exchange Act and Rule 10b-5(a) – (c) thereunder, and FINRA Rules 2010 and 2020. The complaint also alleges that as managers of the fund, Bixler and Gordon owed fiduciary duties to the fund. Bixler and Gordon violated their fiduciary duties by causing the development company to usurp the fund’s investment opportunities and resell those investments to the fund at excessive prices, and by failing to take steps to ensure fair pricing to the fund, Bixler and Gordon used the development company to extract ill-gotten profits from retail investors who purchased interests in individual saltwater disposal wells outside the fund.
The development company purchased these interests and resold them to retail investors, sometimes through the firm, at undisclosed, excessive markups. The complaint further alleges that the development company was largely engaged in buying and reselling well interests, which were securities. Although this rendered it a dealer of securities, Bixler and Gordon failed to register the development company with FINRA or the SEC. By virtue of their ownership and control of the development company, Bixler and Gordon had the ability to cause the development company to register as a dealer but failed to do so. As a result, Bixler and Gordon willfully 38 Disciplinary and Other FINRA Actions November 2017 violated Section 15(a) of the Exchange Act and FINRA Rule 2010. In addition, the complaint alleges that despite deriving a substantial portion of its revenue from private offerings by affiliates, the firm failed to adopt or implement reasonable procedures to address conflicts of interest in transactions involving affiliates. In overseeing all the firm’s sales activities, including sales of fund interests and interests in individual saltwater disposal wells, Gordon labored under numerous and obvious conflicts of interest. Nonetheless, the firm failed to adopt or implement an alternate supervisory structure for offerings where Gordon was conflicted. Moreover, because Gordon and the firm were aware of the frauds being perpetrated in connection with sales of fund and well interests, and permitted registered representatives of the firm to sell the interests, Gordon and the firm failed to reasonably supervise the firm’s sales activities.
Gordon and the firm did not even acknowledge that individual well interests were securities and allowed them to be sold away from the firm for compensation without any supervision, other than requiring registered representatives to submit “outside business activity” disclosures. Gordon and the firm knowingly permitted, and expressly or tacitly approved, the firm’s registered representatives to sell interests in direct working interests marketed as “real estate” to retail investors, and to receive selling compensation for those transactions. In addition to allowing representatives to engage in private securities transactions in violation of the firm’s WSPs, Gordon and the firm failed to record the sales on the firm’s books and records, failed to supervise the sales as if the transactions were executed on behalf of the firm and failed to otherwise reasonably supervise the transactions. (FINRA Case #2014041860801)