SEC v. Helms: Ponzi Schemes Still Not Legit

In SEC v. Helms, 2015 BL 270501 (W.D. Tex. Aug. 21, 2015), the United States District Court for the District of Texas granted the Securities and Exchange Commission’s (“SEC”) motion for summary judgment and sanctions against Robert Helms, Janniece Kaelin, Deven Sellers, and Roland Barrera (collectively, “Defendants”) for alleged involvement in a Ponzi scheme and securities fraud. 

According to the allegations, Defendants Helms and Kaelin operated and controlled several entities including Vendetta Royalty Partners (“Vendetta”) and Iron Rock Royalty Partners (“Iron Rock”), organized as limited partnerships that held and distributed royalties from oil and gas investments. Vendetta began soliciting investors in July 2011 with the goal of raising $300 million in less than a year. Sellers and Barrera worked for Helms and Kaelin soliciting and negotiating investments in Vendetta, Iron Rock, and other entities. Helms and Kaelin raised roughly $31,422,861 selling limited partnership interests in Vendetta and Iron Rock to 129 investors, indicating 99% of funds would be used to buy royalty interests. 

On October 3, 2013, the SEC alleged Helms and Kaelin violated Section 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5 promulgated thereunder. Specifically, the SEC alleged Helms and Kaelin misappropriated at least $8,442,116 of the funds for personal use and at least $12,851,455 for business expenses. The SEC further contended the royalty revenues from Vendetta and Iron Rock were inadequate to pay the royalty distributions, which were eventually paid using subsequent investors’ money.  

In addition, the SEC alleged both Helms and Kaelin: (1) greatly overstated their professional backgrounds as well as the performance of prior investment portfolios to induce investments; (2) fabricated an audit letter regarding the holdings of Vendetta to present to potential investors; (3) falsely indicated they were not involved in litigation; and (4) orchestrated “round-trip transactions” to create fictitious income.

Finally, the SEC alleged Sellers and Barrera violated Section 17(a) of the Securities Act, Sections 15(a) and 10(b) of the Exchange Act, and Rule 10b-5. Specifically, the SEC contended the Private Placement Memorandum provided to potential investors misrepresented commissions earned by Sellers and Barrerra for each transaction as small. 

The SEC filed motions for summary judgment requesting permanent injunction, joint and several liability for disgorgement, and a civil money penalty. Because the Defendants did not respond or provide rebuttal evidence, the court accepted the SEC’s evidence as true. 

Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5, function similarly, prohibiting the offer or sale of securities through interstate commerce to: (1) make any attempt to defraud; (2) obtain money or property by means an untrue statement or omission of a material fact; or (3) engage course of business which operates as deceit upon the purchaser. All three require scienter—established by showing a defendant intended to deceive, defraud, or manipulate or acted with severe recklessness. 

The court first granted the SEC’s motion for sanctions against Kaelin for her refusal to comply with discovery obligations  In asserting that Kaelin had not done so, the Commission asked the court to strike her pleadings and draw adverse inferences from the behavior.  The court reviewed the allegations and agreed that the disclosure violations were “willful.”  The court agreed to strike her pleadings and enter a default judgment.  The court likewise agreed to draw adverse inferences.

Due to Kaelin's repeated refusal to participate in the discovery process, the Court finds it necessary to "issue further just orders" to remedy the prejudice to the SEC. This is especially true considering the fact that Kaelin's co-defendant Helms frequently stated in his deposition that Kaelin could explain questions that Helms could not answer. The Court therefore infers, based on Kaelin's bad faith refusal to testify, that her answers to the SEC's deposition questions would have been unfavorable to her.

The court found sufficient evidence that Helms and Kaelin were running a Ponzi scheme. The court also found Helms and Kaelin misrepresented material facts regarding: (1) the intended use of funds invested in Vendetta and other entities; (2) their professional backgrounds; (3) their involvement in litigation; and (4) the value of Vendetta’s Portfolio.  It made no difference that some of the funds were used for legitimate purposes.  Id. (“Although the evidence shows Helms and Kaelin used some of the investments to purchase royalty interests, the existence of a Ponzi scheme is not negated. Engaging in some legitimate business operations does not counteract the existence of a Ponzi scheme because the distributions made to investors were nevertheless funded by other investors' money.”). 

The court therefore held Helms and Kaelin violated 17(a), 10(b), and Rule 10b-5. Here, the court enjoined Helms and Kaelin from future securities violations, imposed joint and several liability for disgorgement of in ill-gotten gains of $31,422,861 with prejudgment interest of $3,873,043, and ordered Helms and Kaelin to each pay $4,221,058 in third-tier civil penalties.

With regard to Sellers and Barrera, the court found sufficient evidence that they materially misrepresented their commissions.  The court also found Sellers and Barrera, because they were not registered with the SEC as broker dealers, violated Section 15(a) of the Exchange Act. Here, the court reasoned that Sellers and Barrera were at least severely reckless in their misrepresentations and the conduct warranted permanent injunctive relief, joint and several liability for disgorgement in the amount of $423,500, subject to prejudgment interest of $36,243.87, and third-tier civil penalties of $150,000 each. 

Accordingly, the court granted the SEC’s motion for sanctions against Kaelin and motion for summary judgment against the Defendants, ordering the SEC to file a proposed final judgment detailing the injunctive relief, disgorgement amounts, and civil penalties.

The primary materials for this post can be found on the DU Corporate Governance Website.