in the united states district court for the northern ...breitlingreceivership.com/507...

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION ________________________________________________ § SECURITIES AND EXCHANGE COMMISSION, § § Plaintiff, § § v. § Case No.: 3:16-cv-01735-D § CHRISTOPHER A. FAULKNER, § BREITLING ENERGY CORPORATION, § JEREMY S. WAGERS, § JUDSON F. (“RICK”) HOOVER, § PARKER R. HALLAM, § JOSEPH SIMO, § DUSTIN MICHAEL MILLER RODRIGUEZ, § BETH C. HANDKINS, § GILBERT STEEDLEY, § BREITLING OIL & GAS CORPORATION, § CRUDE ENERGY, LLC, § PATRIOT ENERGY, INC., § § Defendants, § § and § § TAMRA M. FREEDMAN and § JETMIR AHMEDI, § § Relief Defendants. § ________________________________________________§

PLAINTIFF’S MOTION FOR REMEDIES AND MOTION FOR FINAL JUDGMENTS AS TO DEFENDANTS PARKER R. HALLAM, DUSTIN MICHAEL

MILLER RODRIGUEZ, AND BETH C. HANDKINS

Case 3:16-cv-01735-D Document 507 Filed 01/24/20 of 33 PageID 13425Case 3:16-cv-01735-D Document 507 Filed 01/24/20 Page 1 of 33 PageID 13425

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Dated: January 24, 2020 Respectfully submitted,

/s/ Jason P. Reinsch B. DAVID FRASER Texas Bar No. 24012654 Lead Attorney SCOTT F. MASCIANICA Texas Bar No. 24072222 TIMOTHY S. McCOLE Mississippi Bar No. 10628 JASON REINSCH Texas Bar No. 24040120 SECURITIES AND EXCHANGE COMMISSION Burnett Plaza, Suite 1900 801 Cherry St., Unit #18 Fort Worth, TX 76102-6882 (817) 900-2601 (JR phone) (817) 978-4927 (fax) [email protected] [email protected] [email protected] [email protected] ATTORNEYS FOR PLAINTIFF SECURITIES AND EXCHANGE COMMISSION


mailto:[email protected]



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TABLE OF CONTENTS

TABLE OF AUTHORITIES ................................................................................................... iv-viii

I. SUMMARY ...............................................................................................................................1

II. FACTUAL SUMMARY ...........................................................................................................3

A. Overview of The Faulkner Scheme .....................................................................................3

B. BOG: Phase One of the Faulkner Scheme ...........................................................................4

1. BOG:’s Offering Material Contained Numerous Misrepresentations and Omissions .4

a. Faulkner Had No Experience in the Oil and Gas Industry ................................6

b. BOG Paid Salespersons Transaction-based Compensation ...............................6

c. BOG’s Geologist Was Not Independent and His Projections Were Significantly Overstated.....................................................................................7

2. BOG Sold Working Interests It Did Not Own .............................................................7

3. Handkins Facilitated Faulkner’s Misappropriation of BOG’s Investor Funds ............3

C. BECC and Crude: Phase Two of the Faulkner Scheme .......................................................8

1. Crude’s Offering Materials Contained Numerous Misrepresentations and Omissions .....................................................................................................................8

a. Faulkner Surreptitiously Controlled Crude ........................................................9

b. Crude Paid Salespersons Transaction-based Compensation..............................9

c. Crude Did Not Segregate Investor Funds ........................................................10

2. Crude Sold Working Interests It Did Not Own ..........................................................10

3. Handkins Facilitated Faulkner’s Misappropriation of Crude’s Investor Funds .........11

D. Patriot – Phase Three of the Faulkner Scheme ..................................................................11

III. ARGUMENT AND AUTHORITES .......................................................................................13

A. The Court Should Order the Defendants to Disgorge the Total Amount of Their Ill-Gotten Gains and to Pay Prejudgment Interest ..................................................................13


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1. Defendants Agreed That They Shall Pay Disgorgement of Ill-gotten Gains and Prejudgment Interest, and the Court Shall Determine the Amounts ............................13

2. The Court Should Order Handkins, Miller, and Hallam to Disgorge the Total Amount of Investor Funds They Received ................................................................................14

3. Defendants Cannot Overcome the Evidence Approximating Their Ill-gotten Gains ..16

B. The Court Shall Determine the Amounts of Civil Penalties ..............................................17

1. The Court Should Impose a Third-Tier Penalties ........................................................17

2. Hallam’s Miller’s, and Handkins’s Conduct Warrants Third-Tier Penalties ..............19

a. Defendants’ conduct was particularly egregious and a high degree of scienter .............................................................................................................20

b. Defendants’ conduct created substantial losses to investors ............................21

c. Defendants’ conduct recurred over several years ............................................22

d. There is no record evidence about Defendants’ financial condition................22

e. Defendants have provided some cooperation to the SEC ................................22

C. The Court Should Be Permanently Enjoin Hallam ............................................................23

IV. REQUEST FOR RELIEF .......................................................................................................25


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TABLE OF AUTHORITIES

Allstate Ins. Co. v. Receivable Fin. Co., 501 F.3d 398 (5th Cir. 2007) ...................................................................................................14

Kokesh v. SEC, 137 S. Ct. 1635 (2017) ............................................................................................................ 16

SEC v. AmeriFirst Funding, Inc., No. 3:07-cv-1188-D, 2008 WL 1959843 (N.D. Tex. May 5, 2008) ..............................................................14, 17, 19

SEC v. AMX Int’l, Inc., 7 F.3d 71 (5th Cir. 1993) ........................................................................................................ 13

SEC v. Blatt, 583 F.2d 1325 (5th Cir. 1978) .................................................................................... 13-14, 24

SEC v. Blavin, 760 F.2d 706 (6th Cir. 1985) ...................................................................................................13

SEC v. Caterinicchia, 613 F.2d 102 (5th Cir. 1980) .................................................................................................. 24

SEC v. Cavanagh, 2004 WL 1594818 (S.D.N.Y. July 16, 2004) ..........................................................................19

SEC v. Coates, 137 F. Supp. 2d 413 (S.D.N.Y. 2001) .....................................................................................19

SEC v. Evolution Capital Advisors, LLC, 2013 WL 5670835 (S.D. Tex. Oct. 16, 2013) ........................................................................ 14

SEC v. First City Fin. Corp., 890 F.2d 1215 (D.C. Cir. 1989) .................................................................................. 14-15, 17

SEC v. Gann, 565 F.3d 932 (5th Cir. 2009) .................................................................................................... 4

SEC v. Halek, 537 F. App’x 576 (5th Cir. 2013) ...........................................................................................14

SEC v. Helms, 2015 WL 5010298 (W.D. Tex. Aug. 21, 2015) .................................................................13, 17

SEC v. Huffman, 996 F.2d 800 (5th Cir. 1993) ............................................................................................. 13-14

SEC v. Kenton Capital, 69 F. Supp. 2d 1 (D.D.C. 1998) ...............................................................................................17


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SEC v. Kern, 425 F.3d 143 (2nd Cir. 2005) ..................................................................................................19

SEC v. Life Partners Holdings, Inc., 71 F. Supp. 3d 615 (W.D. Tex. Dec. 2, 2014) .........................................................................17

SEC v. MacDonald, 699 F.2d 47 (1st Cir. 1983) ......................................................................................................17

SEC v. Milan Capital Group, Inc., 2001 WL 921169 (S.D.N.Y. Aug. 14, 2001) .......................................................................... 20

SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) .................................................................................................. 23

SEC v. Offill, No. 3:07-cv-1643-D, 2012 WL 1138622 (N.D. Tex. Apr. 5, 2012) ..............................................................14, 17, 19

SEC v. Patel, 61 F.3d 137 (2d Cir. 1995) ......................................................................................................17

SEC v. Platform Wireless Int’l Corp., 617 F.3d 1072 (9th Cir. 2010) .................................................................................................14

SEC v. Reynolds, No. 3:08-cv-0438-B, 2013 WL 3479825 (N.D. Tex. July 11, 2013) .........................................................................16

SEC v. Robinson, 2002 WL 1552049 (S.D.N.Y. 2002) .......................................................................................20

SEC v. Team Res. Inc., 942 F.3d 272 (5th Cir. Nov. 5, 2019) ......................................................................................13

SEC v. Universal Express, Inc., 646 F. Supp. 2d 552 (S.D.N.Y. 2009) .....................................................................................19

SEC v. Zale Corp., 650 F.2d 718 (5th Cir. 1981) ............................................................................................. 23-24


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Securities Act of 1933 Section 17(a)

[15 U.S.C. § 77q(a)] .......................................................................................................... 18 Section 20(b)

[15 U.S.C. § 77t(b)] .......................................................................................................... 23 Section 20(d)

[15 U.S.C. § 77t(d)] .................................................................................................... 17, 25 Section 20(d)(2)(A)

[15 U.S.C. § 77t(d)(2)(A)] ................................................................................................ 18 Section 20(d)(2)(B)

[15 U.S.C. § 77t(d)(2)(B)] ................................................................................................ 18 Section 20(d)(2)(C)

[15 U.S.C. § 77t(d)(2)(C)] ................................................................................................ 18

Securities Exchange Act of 1934 Section 10(b)

[15 U.S.C. § 78j(b)] .................................................................................................... 18, 23 Section 21(d) [15 U.S.C. §78u(d)] ...............................................................................................17, 23, 25 Section 21(d)(1) [15 U.S.C. §78u(d)(1)] .......................................................................................................23 Section 21(d)(3) [15 U.S.C. §78u(d)(3)] .......................................................................................................17 Section 21(d)(3)(B)(i) [15 U.S.C. §78u(d)(3)(B)(i) ...............................................................................................18 Section 21(d)(3)(B)(iii) [15 U.S.C. §78u(d)(3)(B)(iii) .............................................................................................18

Securities Exchange Act Rules Rule 10b-5

[17 C.F.R. § 240.10b-5] .................................................................................................... 18


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Plaintiff Securities and Exchange Commission (“SEC” or “Commission”) respectfully files its motion for remedies and entry of final judgments against Defendants Parker R. Hallam (“Hallam”), Dustin Michael Miller Rodriguez (“Miller”), and Beth C. Handkins (“Handkins”) (collectively, the “Defendants”), and would respectfully show the Court as follows:

I.

SUMMARY1

As alleged in detail in the First Amended Complaint (“Complaint”), Defendant Christopher

A. Faulkner (“Faulkner”) orchestrated a scheme that defrauded hundreds of investors across the

country out of approximately $80 million2 over the course of at least five years through the offer

and sale of oil-and-gas working interest investments (the “Faulkner Scheme”). (First Am. Compl.

[Dkt. No. 22] at 2.) In perpetrating the Faulkner Scheme, Faulkner enlisted Hallam, Miller,

Handkins, and others to actively defraud, or otherwise participate in schemes to defraud, investors.

(Id. at ¶¶ 1-2.) Once in receipt of investor funds, Faulkner, assisted by his co-Defendants,

misappropriated approximately $30 million3 of investor funds for extravagant personal expenses.

(Id. at 2.)

The Commission now moves for remedies against three of these co-Defendants—

Handkins, Miller, and Hallam, all of whom previously consented to the entry of bifurcated

judgments in this litigation. (See Dkt. Nos. 7, 8, and 94.) In those bifurcated judgments, the Court

ordered each Defendant to pay disgorgement of ill-gotten gains, prejudgment interest thereon, and

1 “APP” citations refer to both the appendix filed with this Motion and the Appendix in Support of Plaintiff’s Ex Parte Emergency Motion for Temporary Restraining Order, Asset Freeze, Appointment of Receiver, and Other Ancillary Relief. [Dkt. No. 105]. 2 Investors in the of oil-and-gas working interest investments from Breitling Oil & Gas Corporation, Crude Energy, LLC, and Patriot Energy, Inc. offerings collectively invested $78.1 million. (Decl. of Sowards [Dkt. No. 105-11] Ex. 1 at 9, Aug. 8, 2017 [APP 0013].) 3 Faulkner and his related entities received approximately $23.8 million in cash distributions and other benefits. (Decl. of Sowards [Dkt. No. 105-11] Ex. 1 at 9, Aug. 8, 2017 [APP 0013].) In addition, Faulkner received approximately $6.1 million in payments for personal expenses directly out of Breitling Oil & Gas Corporation’s, Breitling Energy Corporation’s, Crude Energy, LLC’s, and Patriot Energy, Inc.’s bank accounts. Id.


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a civil penalty pursuant to Section 20(d) of the Securities Act [of 1933] [15 U.S.C. § 77t(d)] and

Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]”4 and that “[t]he Court shall

determine the amounts of disgorgement and civil penalty upon motion of the Commission.” (J. as

to Handkins [Dkt. No. 7] at 3-4; J. as to Miller [Dkt. No. 8] at 5; and J. as to Hallam [Dkt. No. 94]

at 5-6.) In the bifurcated judgments, the Court also ordered that, in connection with this motion

for remedies, the Defendants shall “be precluded from arguing that [they] did not violate the federal

securities laws as alleged in the Complaint” and that “solely for purposes of such motion, the

allegations of the Complaint shall be accepted as and deemed true by the Court.” (J. as to Handkins

[Dkt. No. 7] at 4; J. as to Miller [Dkt. No. 8] at 5; and J. as to Hallam [Dkt. No. 94] at 5-6.)

As a result of Defendants’ various securities-law violations, the Commission requests that

the Court order:

• Hallam, Miller, and Handkins to disgorge all of the ill-gotten gains they received as a result of their participation in, and actions undertaken in furtherance of, the Faulkner Scheme, plus prejudgment interest thereon, as set out in Section III.A., below;

• Hallam, Miller, and Handkins to pay civil penalties, pursuant to Section 20(d) of the

Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)], as set out in Section III.B., below;

• Hallam to be permanently restrained and enjoined from participating, directly or

indirectly, including but not limited to through any other entity owned or controlled by him, in the issuance, purchase, offer, or sale of any security, provided however that such injunction shall not prevent him from purchasing or selling securities for his own account, as set out in Section III.C., below; and

• such additional relief to which the Commission is entitled.

4 Hallam’s bifurcated judgment also provided that “[t]he Court shall determine, upon motion of the Commission, whether Defendant should be permanently restrained and enjoined from participating, directly or indirectly, including but not limited to through any other entity owned or controlled by him, in the issuance, purchase, offer, or sale of any security, provided however, that such permanent injunction shall not prevent Defendant from purchasing or selling securities for his account (collectively the “conduct-based injunction” or “CBI”).” (J. as to Hallam [Dkt. No. 94] at 5.)


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II. FACTUAL SUMMARY5

A. OVERVIEW OF THE FAULKNER SCHEME

The Faulkner Scheme was a massive, multi-pronged, and fraudulent scheme orchestrated

by Faulkner—with assistance from Hallam, Miller, and Handkins—that defrauded hundreds of

investors across the country out of approximately $80 million6 invested in oil-and-gas investments

sold by companies he owned and controlled. (First Am. Compl. [Dkt. No. 22] at ¶¶ 1, 18.) It

involved the unregistered and fraudulent offer and sale of working-interest investments

(“investments”) in more than 20 oil-and-gas prospects in several states by salesmen of Faulkner-

controlled entities. (Id. at ¶ 3.) The Faulkner Scheme deceived myriad investors across the country

about key aspects of the investments, including the relationships between and among all

defendants named in this matter, the nature and operation of the investments, the estimated costs

to drill and complete the prospects, and the use of investor proceeds. (Id. at 2.) Once in receipt of

investor funds, Faulkner brazenly misappropriated at least $30 million7 of investor funds for

extravagant personal expenses, including lavish meals and entertainment, international travel, cars,

jewelry, gentlemen’s clubs, and personal escorts. (Id. at ¶ 1.)

But Faulkner did not perpetrate this massive fraud alone. As detailed below, Hallam,

Miller, and Handkins were essential and active participants in the scheme. Hallam and Miller

spearheaded the sales efforts of Defendants Breitling Oil & Gas Corporation (“BOG”) and Crude

Energy, LLC (“Crude”) and, in these roles, served as the primary conduits to disseminate

5 Because the allegations in the Complaint are admitted for the purposes of this motion, the Commission incorporates those allegations by reference. In particular, the Commission refers the Court to Paragraphs 1-20 of the Complaint [Dkt. No. 22], which provide a brief summary of the Commission’s case. 6 See fn. 1, supra. 7 See fn. 2, supra.


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knowingly false and misleading statements to investors. (Id. at ¶¶ 3, 27, and 29.) Then, at Crude

(Hallam and Miller) and Patriot Energy, Inc. (“Patriot”) (Miller alone), they enabled Faulkner to

clandestinely control the entities behind the scenes and to misappropriate investor funds. (Id. at

¶¶ 23, 27, and 29.) Meanwhile, Handkins controlled all relevant bank accounts of BOG, Crude,

Patriot, and Defendant Breitling Energy Corporation (“BECC”) commingled tens of millions of

investor dollars from separate offerings in a single account, and facilitated and assisted Faulkner

in misusing, diverting, and misappropriating approximately $30 million in investor funds. (Id. at

¶¶ 8, 30.) Not surprisingly, Hallam, Miller, and Handkins were each well-compensated for their

vital roles in the Faulkner Scheme. (Id. at ¶ 18.)

B. BOG: PHASE ONE OF THE FAULKNER SCHEME

In or around 2009, Faulkner met with Hallam and Miller, two individuals with experience

selling oil-and-gas investments, to discuss starting an oil-and-gas company. (Id. at ¶ 39.) Shortly

thereafter, in or around 2010, Faulkner, Hallam, and Miller co-founded BOG; Faulkner was BOG’s

President, Hallam was BOG’s Chief Operating Officer (“COO”), and Miller was BOG’s Chief

Investment Officer (“CIO”). (Id. at ¶ 39.) Hallam and Miller had singular roles at BOG: managing

the sale of unregistered securities—in the form of working interests in oil and gas prospects in

Texas, Oklahoma, and North Dakota—to investors across the country. (Id. at ¶¶ 39, 64.) In 2011,

BOG started offering and selling these unregistered investments. (Id. at ¶ 40.) From January

2011 through December 2013, BOG sold more than $43 million in investments in oil-and-gas

working interests. (Id. at ¶ 41.)

1. BOG’s Offering Materials Contained Numerous Misrepresentations and Omissions.

In offering and selling oil-and-gas working interests, BOG used written offering materials

drafted by Faulkner that Hallam, Miller, and BOG’s sales staff provided to prospective investors,


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including a Confidential Information Memorandum (“CIM”), a marketing brochure, and a

subscription agreement. (Id. at ¶¶ 42, 64.) The CIMs contained numerous misrepresentations,

inter alia, regarding:

• Faulkner’s education and experience in the oil and gas industry (id. at ¶¶ 43-45);

• BOG’s use of investor funds (id. at ¶ 45);

• BOG’s segregation of investor funds (id. at ¶ 57);

• a purported independent, third-party geologist prepared accurate geological reports and production projections (id. at ¶ 61); and

• the payment of transaction-based compensation to salespersons (id. a ¶ 64);

Hallam and Miller knew and/or were severely reckless in not knowing that particular

representations were false or misleading. (Id. at ¶¶ 148, 153, and 155.)

a. Faulkner Had No Experience in the Oil and Gas Industry.

As to Faulkner’s alleged background and experience in the oil and gas industry, Hallam

and Miller knew Faulkner had no such experience. (Decl. of Miller [Dkt. No. 105-3] at ¶ 10 [APP

1123-1124]; Decl. of Hallam [Dkt. No. 105-1] at ¶ 12 [APP 321].)

b. BOG Paid Salespersons Transaction-based Compensation.

According to BOG’s CIMs, only company officers (specifically Hallam and Miller) would

offer and sell working interests to investors, and no one would receive transaction-based

compensation. (First Am. Compl. [Dkt. No. 22] at ¶ 64.) This was a lie. Id. Although Hallam

and Miller offered and sold these investments and obtained investor funds as a result of material

misrepresentations in the offering documents, they also knew that the sales staff received millions

of dollars in transaction-based compensation. (Id. at ¶ 65; Decl. of Hallam [Dkt. No. 105-1] at ¶

11 [APP 321]; Decl. of Miller [Dkt. No. 105-3] at ¶ 9 [APP 1123].)


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c. BOG’s Geologist Was Not Independent and His Projections Were Significantly Overstated.

In another example, Hallam and Miller used a purportedly independent geologist’s reports

and projections to entice investors to invest in BOG’s offerings. (First Am. Compl. [Dkt. No. 22]

at ¶ 61.) However, Hallam, Miller, and the salespeople they supervised failed to disclose that the

geologist’s projections were consistently and vastly overstated; actual production on the wells was

often less than 10% of the geologist’s projections. Id. Hallam and Miller, who knew about the

poor performance of prior prospects but continued to offer and sell newer prospects did not

disclose the prior poor results to investors. (Id. at ¶ 63.)

2. BOG Oversold Working Interests and Sold Working Interests It Did Not Own.

Hallam, Miller, and the salespeople they managed offered and sold a larger percentage of

working interests in prospects than BOG actually owned. (Id. at ¶ 55.) Hallam, Miller, and

Handkins were well aware of this practice. (Decl. of Handkins [Dkt. No. 105-1] at ¶ 4 [APP 312];

Decl. of Hallam [Dkt. No. 105-1] at ¶ 15 [APP 322]; and Decl. of Miller [Dkt. No. 105-3] at ¶¶

13-15 [APP 1124-1125].) Instead of disclosing this fact to investors, BOG and Faulkner

surreptitiously papered over the overselling by moving investors out of the oversold prospect and

into different prospects. (First Am. Compl. [Dkt. No. 22] at ¶ 55.) BOG often placed investors in

substitute prospects in different states with different operators, providing materially different

ownership interests than what investors had bargained for. Id. Occasionally, BOG also sold

interests in prospects it did not own. (Id. at ¶ 56.)

3. Handkins Facilitated Faulkner’s Misappropriation of BOG’s Investor Funds.

Additionally, BOG represented in its CIMs that investor funds would be deposited into

segregated bank accounts, and that payments for prospect costs would be paid from these

segregated accounts. (Id. at ¶ 57.) Keeping the funds segregated provided a level of assurance to


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investors that their funds would be available to drill, test, and complete their prospect, and not for

something else. (Decl. of Handkins [Dkt. No. 105-1] at ¶¶ 2-3 [APP 311-312].) However, BOG’s

representations were false. Id. Handkins commingled investor funds in the BOG operating

account shortly after receipt. (First Am. Compl. [Dkt. No. 22] at ¶ 57; Decl. of Handkins [Dkt.

No. 105-1] at ¶ 3 [APP 312].) Because Handkins paid costs associated with multiple prospects

using the commingled funds, BOG often had difficulty paying bills on its prospects, and later lost

investors’ interests in prospects when it failed to pay bills. (First Am. Compl. [Dkt. No. 22] at ¶

57; Decl. of Handkins [Dkt. No. 105-1] at ¶ 3 [APP 312].) This mismanagement is all the more

egregious and shocking in light of the fact that BOG raised exponentially more money than it

needed to drill and complete the prospects. (First Am. Compl. [Dkt. No. 22] at ¶ 57.)

Also, Handkins transferred millions of dollars of investor funds to pay off Amex cards that

Faulkner used and to reimburse Faulkner for business expenses. (Id. at ¶¶ 68-70; Decl. of

Handkins [Dkt. No. 105-1] at ¶¶ 7-8 [APP 313].) She paid more than $8.6 million in BOG funds

directly to Amex for charges incurred on Amex cards Faulkner used, and she did so without

questioning Faulkner about the requests or asking for documentation supporting the supposed

business expenses. (First Am. Compl. [Dkt. No. 22] at ¶¶ 68, 69.) In addition to these direct

payments to Amex, Handkins paid Faulkner approximately $7.8 million in reimbursements for

purported business expenses even though Faulkner often failed to provide any supporting

documentation for these claimed business expenses or services. (Id. at ¶ 70.)

As detailed above, Hallam, Miller, and Handkins played critical roles in defrauding BOG

investors out of $43 million. Because BOG obtained funds from investors as a result of its

fraudulent offerings, a significant portion of the compensation that Hallam, Miller, and Handkins

received from BOG was derived from ill-gotten gains. (Id. at ¶ 71.)


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C. BECC AND CRUDE: PHASE TWO OF THE FAULKNER SCHEME

Faulkner then took the Faulkner Scheme public, using BOG and Breitling Royalties

Corporation (“BRC”), another company controlled by Faulkner, Hallam, and Miller, to acquire a

public company and form BECC. (Id. at ¶¶ 9, 72.) Faulkner and others portrayed BECC as a

traditional exploration-and-production (“E&P”) company, but neither BECC nor its officers

possessed experience in traditional E&P operations. (Id. at ¶ 9.) But this was not the plan for

BECC. Id. At the same time that he created BECC, Faulkner established Crude to act as BECC’s

covert sales arm, installing Hallam, Miller, and Handkins as Crude’s officers and transitioning

nearly all of BOG’s employees and sales staff over to Crude. (Id. at ¶¶ 10, 77, 78, and 82.)

Like BOG before it, Crude (through Hallam, Miller, and their salespeople) offered and sold

working interests in oil-and-gas prospects to investors on the basis of materially misleading

offering materials. (Id. at ¶¶ 10, 87, and 94.) Between December 2013 and April 2015, Hallam

and Miller spearheaded Crude raising more than $38 million from hundreds of investors, mostly

from sales of working interests. (Id. at ¶ 83.)

1. Crude’s Offering Materials Contained Misrepresentations and Omissions.

Faulkner drafted—and Hallam and Miller reviewed and approved—Crude’s offering

materials—which included CIMs, marketing brochures, and subscription agreements. (Id. at ¶ 87.)

Hallam and Miller, who led Crude’s sales efforts and managed its salespeople, were aware that the

statements in the CIMs were attributable to them. (Id. at ¶ 87; Decl. of Handkins [Dkt. No. 105-

1] at ¶¶ 11 [APP 314-15]; Decl. of Hallam [Dkt. No. 105-1] at ¶ 19 [APP 323]; Decl. of Miller

[Dkt. No. 105-3] at ¶ 19 [APP 1126].) Similarly, Hallam signed marketing brochures for each

offering as Crude’s CEO, and Hallam, Miller, and Handkins were identified in the brochures as

Crude’s executives. (First Am. Compl. [Dkt. No. 22] at ¶ 87.)


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Just like the BOG CIMs, the Crude CIMs were replete with material misstatements and

omissions, including, but not limited to:

• that Hallam and Miller were Crude’s key executives while omitting to disclose Faulkner’s actual control over the entity (id. at ¶ 87);

• the Faulkner-inflated AFEs (id. at ¶¶ 88-89);

• that Crude would segregate investor funds (id. at ¶ 90); and

• the payment of transaction-based compensation to salespersons (id. at ¶ 94).

Hallam and Miller knew and/or were severely reckless in not knowing that particular

representations were false or misleading. (Id. at ¶¶ 148, 153, and 155.)

a. Faulkner Surreptitiously Controlled Crude.

According to Crude’s CIMs, Hallam and Miller were Crude’s managing members and

controlling officers. (Id. at ¶ 77.) Hallam and Miller knew this was a farce and that Faulkner

directed and controlled Crude’s operations. (Id. at ¶¶ 77, 87.) Under Faulkner’s actual control,

Crude served as BECC’s covert sales arm and primary funding source. (Id. at ¶ 78.) Crude

also became responsible for making ongoing expense payments on BOG’s prospects. Id. And

Faulkner’s control facilitated the inclusion of the inflated AFEs. (Id. at ¶¶ 88-89.)

b. Crude Paid Salespersons Transaction-based Compensation.

According to Crude’s CIMs, only company officers (specifically Hallam and Miller) would

offer and sell working interests to investors, and no one would receive transaction-based

compensation. (Id. at ¶ 94.) This was a lie. Id. Although Hallam and Miller offered and sold

these investments to investors and obtained investor funds as a result of material

misrepresentations in the offering documents, the sales staff also received millions of dollars in

transaction-based compensation. (Id. at ¶ 94; Decl. of Hallam [Dkt. No. 105-1] at ¶ 21 [APP 324].)


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c. Crude Did Not Segregate Investor Funds.

Hallam and Miller knew that Crude misrepresented to investors that their funds would be

deposited into a segregated bank account, and used to pay the costs to drill, test, and complete

specific prospects. (First Am. Compl. [Dkt. No. 22] at ¶¶ 90-91.) In reality, Handkins commingled

investor funds in Crude’s operating account shortly after they were deposited. (Id. at ¶¶ 11, 90;

Decl. of Handkins [Dkt. No. 105-1] at ¶ 10 [APP 314].) Handkins then used the Crude operating

account to pay expenses and, more often, funnel investor funds to BECC. (First Am. Compl. [Dkt.

No. 22] at ¶ 90; Decl. of Handkins [Dkt. No. 105-1] at ¶¶ 10-11 [APP 314-315].) Without asking

what the funds were for or why Crude needed to send the money, Handkins initiated practically

all of these transfers, ultimately sending $36 million (or 94% of all funds raised by Crude) to

BECC. (First Am. Compl. [Dkt. No. 22] at ¶ 11.) Even though Handkins managed the Crude

investor lists and tracked the amount of money coming in from investors for each prospect, she

made the transfers without regard for the intended use of the funds as represented to Crude’s

investors. (Id. at ¶ 90.) Hallam and Miller were aware of or approved this practice for the duration

of Crude’s operations without any checks or balances. (Id. at ¶ 91; Decl. of Handkins [Dkt. No.

105-1] at ¶ 12 [APP 315]; Decl. of Hallam [Dkt. No. 105-1] at ¶ 27 [APP 325]; Decl. of Miller

[Dkt. No. 105-3] at ¶ 24 [APP 1127].) In fact, Hallam initiated some of these transfers from Crude

to BECC, knowing that they were not tied to specific prospects. (First Am. Compl. [Dkt. No. 22]

at ¶ 91.) This arrangement, like the one previously with BOG, gave Faulkner access to millions

of dollars of investor funds. Id.

2. Crude Sold Working Interests It Did Not Own.

As with BOG, Hallam, Miller, and the salespeople they managed offered and sold a larger

percentage of working interests in a prospect than BOG actually owned. (Id. at ¶ 91.) Hallam and

Miller were well aware of this practice. Id.


11

3. Handkins Facilitated Faulkner’s Misappropriation of Crude’s Investor Funds.

In addition to diverting Crude investor funds to BECC, Handkins made more than $18

million in direct payments on Faulkner’s Amex cards from BECC and Crude bank accounts. (Id.

at ¶¶ 12, 85, and 97.) Hallam knew about some of these payments and even authorized them from

time to time. (Id. at ¶ 85; Decl. of Handkins [Dkt. No. 105-1] at ¶ 12 [APP 315]; Decl. of Hallam

[Dkt. No. 105-1] at ¶ 27 [APP 325].) As with Faulkner’s expenditures while he was at BOG, a

significant portion of Faulkner’s Amex card charges were for personal expenses. (First Am.

Compl. [Dkt. No. 22] at ¶ 98.) In 2014 alone, Handkins made payments directly to Amex for

overwhelming personal expenditures on cards Faulkner used, including, among others: (i) more

than $950,000 to Status Luxury Group, Faulkner’s personal concierge company, for private

entertainment; (ii) approximately $480,000 to In the Know Experience, a travel/lifestyle company;

(iii) more than $220,000 for private jet carriers; (iv) approximately $190,000 to three New York

nightclubs; and (v) more than $100,000 to Amazon. (Id.; Decl. of Handkins [Dkt. No. 105-1] at ¶

12 [APP 315].) Worse, numerous charges on the Amex cards were the source of Faulkner’s

expense reimbursement requests. (First Am. Compl. [Dkt. No. 22] at ¶ 98.) This “double dipping,”

facilitated by Hankins and Hallam, enabled Faulkner to receive a check as “reimbursement” and

also have the credit card charge paid for by the company. Id.

As detailed above, Hallam, Miller, and Handkins knowingly or at least recklessly played

critical roles in defrauding Crude investors out of $38 million. Given that Crude fraudulently

obtained funds from investors as a result of its fraudulent offerings, a significant portion of the

compensation that Hallam, Miller, and Handkins received from Crude was ill-gotten. (Id. at 86.)

D. PATRIOT – PHASE THREE OF THE FAULKNER SCHEME

In March 2015, the Faulkner Scheme transitioned again. (Id. at ¶ 16.) This time, Faulkner

moved his oil-and-gas sales arm from Crude to Patriot after he had a falling out with Hallam. (Id.


12

at ¶¶ 16, 134; Decl. of Handkins [Dkt. No. 105-1] at ¶ 30 [APP 326]; Decl. of Miller [Dkt. No.

105-3] at ¶ 26 [APP 1128].) He installed Miller as Patriot’s President and sole director/officer,

and seamlessly continued Crude’s sales operations. (First Am. Compl. [Dkt. No. 22] at ¶¶ 16,

134.) Handkins, at Faulkner’s direction, set up new bank accounts to intercept incoming checks

from Crude investors who had invested in Crude offerings, and deposited them into an account

that Patriot and Miller controlled. (Id. at ¶¶ 16, 135.) Miller assigned all of Crude’s oil-and-gas

working interests to Patriot, and Patriot took over Crude’s sales staff and the role as BECC’s covert

sales arm. (Id. at ¶¶ 16, 136-137.) Patriot’s offering materials—drafted by Faulkner, but signed

by and attributed to Miller—included substantively identical misrepresentations as Crude’s

offering documents. (Id. at 16, 138, 139, 142.) Miller, who led Patriot’s sales efforts and managed

Patriot’s sales staff, never reviewed or edited Patriot’s CIMs, even though he knew that the

statements contained therein were attributed solely to him. (Id. at ¶ 138.) At Faulkner’s request

and with Miller’s approval, Handkins transferred millions of dollars from Patriot’s investors to

BECC. (Id. at ¶ 141.)

And as with BOG, BECC, and Crude, Handkins continued to facilitate Faulkner’s

misappropriation of investor funds. (Decl. of Handkins [Dkt. No. 105-1] at ¶¶ 14-15 [APP 315].)

She made more than $500,000 in Amex payments for Faulkner’s personal Amex cards, and more

than $365,000 in additional payments to entities controlled by Faulkner. (First Am. Compl. [Dkt.

No. 22] at ¶ 141.)

Faulkner’s repeated and extensive misappropriation of investor funds, which was

facilitated by, among others, Handkins, Hallam, and Miller, finally derailed his scheme in April

2016. (Id. at ¶ 17.) Even though Patriot had raised exponentially more funds than needed to drill,

test, and complete its prospects, Faulkner siphoned off so much money—with the assistance of


13

Handkins and the approval of Miller—that Patriot could no longer fund the drilling and completion

of its prospects. Id. This was problematic not only for the Patriot prospects, but also for the BOG

and Crude prospects for which Patriot was responsible to make ongoing expense payments. Id.

As a result, numerous prospects have been shut-in or have had liens placed on them, and many

investors were left with no interest in the prospects in which they invested. Id.

As detailed above, Miller and Handkins knowingly or at least recklessly played critical

roles in defrauding Patriot investors out of millions of dollars. (Id. at ¶¶141, 143.) Because Patriot

obtained funds from investors as a result of its fraudulent offerings, the compensation that Miller

and Handkins received from Patriot was ill-gotten. (Id. at ¶ 144.)

III. ARGUMENT AND AUTHORITIES

A. THE COURT SHOULD ORDER THE DEFENDANTS TO DISGORGE THE TOTAL AMOUNT OF THEIR ILL-GOTTEN GAINS AND TO PAY PREJUDGMENT INTEREST.

1. Defendants Agreed That They Shall Pay Disgorgement of Ill-Gotten Gains and Prejudgment Interest, and the Court Shall Determine the Amounts.

As part of their agreed bifurcated judgments, Defendants agreed that they shall pay

disgorgement of ill-gotten gains,8 plus prejudgment interest thereon,9 and that the Court shall

8 Courts order parties to disgorge profits flowing from securities law violations in order to prevent the wrongdoers from enriching themselves by their wrongs and to deter future violations of the law. See, e.g., SEC v. AMX Int’l, Inc., 7 F.3d 71, 73, 76 n.8 (5th Cir. 1993); SEC v. Huffman, 996 F.2d 800, 802-03 (5th Cir. 1993); SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985); SEC v. Helms, No. A-13-cv-01036-ML, 2015 WL 5010298, at *19 (W.D. Tex. Aug. 21, 2015). As the Fifth Circuit recently reiterated in SEC v. Team Resources, Incorporated, “the principle that district courts may order disgorgement in SEC enforcement proceedings is well established in our circuit.” 942 F.3d 272, 276 (5th Cir. Nov. 5, 2019) (citing SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978) in support of the fact that “[s]ince at least 1978 we have recognized that a ‘trial court act[s] properly within its equitable powers in ordering [a defendant] to disgorge the profits that he obtained by fraud.’”). 9 Defendants’ bifurcated judgments recite that prejudgment interest shall be ordered based on the rate of interest used by the Internal Revenue Service for the underpayment of federal income tax, as set forth in 26 U.S.C. § 6621(a)(2), and shall be calculated: (1) as to Handkins, from March 1, 2016 [Dkt. No. 7, at p. 3]; (2) as to Miller, from April 28, 2016 [Dkt. No. 8, at p. 5]; and (3) as to Hallam, from March 31, 2015 [Dkt. No. 94, at p. 5]. The award of prejudgment interest is appropriate because it prevents wrongdoers from benefitting from what is, in effect, an interest-free loan resulting from their illegal activity. See SEC v. Evolution Capital Advisors, LLC, 2013 WL 5670835, *3 (S.D. Tex. Oct. 16, 2013).


14

determine the amounts of such disgorgement. (Dkt. No. 7 at 3-4; Dkt. No. 8 at 5; Dkt. No. 9 at 2-

3; Dkt. No. 94, at 5-6.

The Court has broad discretion in determining the amount of disgorgement. See Huffman,

996 F.2d at 803; Blatt, 583 F.2d at 1335; SEC v. AmeriFirst Funding, Inc., No. 3:07-cv-1188-D,

2008 WL 1959843, at *3 (N.D. Tex. May 5, 2008) (Fitzwater, C.J.). “Because disgorgement is

meant to be remedial and not punitive, it is limited to property causally related to the wrongdoing

at issue.” SEC v. Offill, No. 3:07-cv-1643-D, 2012 WL 1138622, at *1 (N.D. Tex. Apr. 5, 2012)

(Fitzwater, C.J.) (quoting Allstate Ins. Co. v. Receivable Fin. Co., 501 F.3d 398, 413 (5th Cir.

2007)). “In actions brought by the SEC involving a securities violation, ‘disgorgement need only

be a reasonable approximation of profits causally connected to the violation.’” Id. (quoting SEC

v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989)).

2. The Court Should Order Handkins, Miller, and Hallam to Disgorge the Total Amount of Investor Funds They Received.

“In the context of an offering of securities in violation of the securities laws, the proper

starting point for a disgorgement award is the total proceeds received from the sale of securities.”

AmeriFirst Funding, 2008 WL 1959843, at *3; see SEC v. Halek, 537 F. App’x 576, 581-82 (5th

Cir. 2013) (requiring defendant to disgorge $21 million raised from investors); see also SEC v.

Platform Wireless Int’l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010). The law does not require

precision in determining the amount of Defendants’ ill-gotten gains. Allstate Ins., 501 F.3d at 413.

As one court explained:

If exact information were obtainable at negligible cost, we would not hesitate to impose upon the government a strict burden to produce that data to measure the precise amount of the ill-gotten gains. Unfortunately, we encounter imprecision and imperfect information. . . . Rules for calculating disgorgement must recognize that separating legal from illegal profits exactly may at times be a near-impossible task.


15

First City Fin. Corp., 890 F.2d at 1231.

The Commission retained Rodney Sowards, C.P.A., of Veritas Advisory Group, who

reviewed and analyzed financial information and transactions relating to the Defendants in this

case. Sowards 2017 Decl. Ex. 1 at APP 0005; Sowards 2020 Decl. Ex. 1 at APP 2048.10 Mr.

Sowards and his team have reviewed tens of thousands of pages of information, including bank

statements, payroll information, and accounting records (including QuickBooks files). Sowards

2017 Decl. Ex. 1 at APP 0007. Mr. Sowards has concluded, among other things, that:

• BOG received the overwhelming majority of its funds (approximately $41.4 million) in 15 oil and gas working interest offerings. Id. at APP 9-10, 33;

• Similarly, Crude and Patriot were funded almost exclusively (96%) by investor deposits in connection with their oil and gas offerings. Id. at APP 0011.

• Contrary to representations to investors in the CIMs, BOG, Crude, and Patriot commingled the overwhelming majority of investor funds. Id. at APP 0009, 0011.

• Collectively, Crude and Patriot transferred more than $39 million, the vast majority of the investor funds they raised and commingled, to BECC, and BECC received an additional $13.2 million directly deposited in its bank accounts. Id. at APP 0011.

Thus, investor funds were the lifeblood of the Faulkner Scheme. The scheme was wholly-

dependent on Defendant’s continued ability to raise money from investors in oil-and-gas offerings.

Without the continued flow of investor funds, the scheme would have unraveled, as it eventually

did. (First Am. Compl. [Dkt. No. 22] at ¶ 17.) And the misrepresentations in the various offering

documents were important in influencing investors’ decisions to invest and, ultimately, keeping

the investor funds flowing. See, e.g., Dkt. No. 105-3 at ¶ 7 [APP 1307-1308]; Dkt. No. 105-4 at

¶¶ 6, 9 [APP 1354, 1356]; Dkt. No. 105-5 at ¶¶ 6, 8 [APP 1422]; Dkt. No. 105-5 at ¶¶ 6, 9 [APP

10 Two declarations from Mr. Sowards are included in the Record: (1) an August 8, 2017 declaration [Dkt. No. 105-11] at APP 001-237 (cited “Sowards 2017 Decl.”); and (2) a January 24, 2020 declaration filed herewith this Motion [APP 2047-2096] (cited “Sowards 2020 Decl.”).


16

1425]; Dkt. No. 105-5 at ¶ 12 [APP 1453]. Because BOG, Crude, and Patriot obtained funds from

investors as a result of fraudulent offerings, the compensation that Handkins, Miller, and Hallam

each received for their integral roles in the scheme was ill-gotten. (First Am. Compl. [Dkt. No.

22] at ¶¶ 71, 86, and 144.)

Based on his extensive review of the financial records in this case, Mr. Sowards determined

that, during the five-year period immediately preceding the filing of the Commission’s lawsuit,11

Defendants received the following:

• Hallam: $1,901,480;

• Miller: $1,454,533; and

• Handkins: $838,950.

Sowards 2020 Decl. Ex. 1 at APP 2052-5. Thus, the Commission has met its burden to establish

reasonable approximations of Defendants’ ill-gotten gains.

Based on the above disgorgement amounts, the Defendants respective prejudgment interest

is as follows: (1) Hallam: $424,375.38; (2) Miller: $266,524.97; and (3) Handkins: $156,960.22.

Decl. of Ty Martinez at 2-3 and Exs. A-C [APP 2098-2102].

3. Defendants Cannot Overcome the Evidence Approximating their Ill-gotten Gains.

Since the Commission established reasonable approximations of each Defendant’s ill-

gotten gains causally connected to the Defendants’ securities law violations, the burden shifts to

Defendants to clearly demonstrate that the Commission’s disgorgement figures are not a

reasonable approximations. See SEC v. Reynolds, No. 3:08-cv-0438-B, 2013 WL 3479825, *2

(N.D. Tex. July 11, 2013); SEC v. ConnectAJet.com, Inc., No. 3:09-cv-1742-B, 2011, 5509896,

11 See Kokesh v. SEC, 137 S. Ct. 1635, 1644 (2017) (5-year statute of limitations for disgorgement).


17

*7 (N.D. Tex. Nov. 9, 2011); AmeriFirst Funding, 2008 WL 1959843, *2. Any risk of uncertainty

in calculating this amount falls on the wrongdoer—whose illegal conduct created the uncertainty.

SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995). “[D]oubts are to be resolved against the defrauding

party.” SEC v. MacDonald, 699 F.2d 47, 55 (1st Cir. 1983). Defendants are “obliged clearly to

demonstrate that the disgorgement figure [is] not a reasonable approximation.” First City Fin.

Corp., 890 F.2d at 1232. Thus, Hallam, Miller, and Handkins should be ordered to disgorge the

ill-gotten gains as alleged by the Commission.

B. THE COURT SHALL DETERMINE THE AMOUNTS OF CIVIL PENALTIES.

As part of their agreed bifurcated judgments, Defendants agreed that they shall pay civil

penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3)

of the Exchange Act [15 U.S.C. § 78u(d)(3), and the Court shall determine the amounts of such

civil penalties. (Dkt. No. 7 at 3-4; Dkt. No. 8 at 5; Dkt. No. 94 at 5-6.

1. The Court Should Impose Third-Tier Penalties

Section 20(d) of the Securities Act and Section 21(d) of the Exchange Act authorize the

Commission to seek, and the Court to impose, civil penalties against defendants who violate the

federal securities laws.12 15 U.S.C. §§ 77t(d) and 78u(d).

These statutory provisions set out a three-tier penalty structure that provides increasing

penalty amounts based on the severity of the violations. See, e.g., Helms, 2015 WL 5010298, *20-

21. In each tier, the statute provides differing per-violation penalty amounts for “a natural person”

and for “any other person.” See 15 U.S.C. §§ 77t(d) and 78u(d). These amounts are periodically

12 Civil penalties are designed to punish the violator and to deter future violations. See SEC v. Life Partners Holdings, Inc., 71 F. Supp. 3d 615, 622-23 (W.D. Tex. Dec. 2, 2014); SEC v. Offill, No. 3:07-cv-1643-D, 2012 WL 1138622, *3 (N.D. Tex. Apr. 5, 2012); SEC v. Kenton Capital, 609 F. Supp. 2d 1, 17 (D.D.C. 1998) (Congress enacted these penalty provisions to “achieve dual goals of punishment of the individual violator and deterrence of future violations”).


18

adjusted for inflation, as required by the Federal Civil Penalties Inflation Adjustment Act

Improvements Act of 2015. Pub. L. No. 114-7, § 701 (Nov. 2, 2015).

The first tier of penalties—which does not require scienter—provides that sanctions for

each violation shall not exceed the greater of $7,500 for a natural person or the gross amount of

pecuniary gain to that person. See 15 U.S.C. §§ 77t(d)(2)(A) and 78u(d)(3)(B)(i). The second tier

of penalties—which requires that the violation involve “fraud, deceit, manipulation, or deliberate

or reckless disregard of a regulatory requirement”—provides that sanctions for each violation shall

not exceed the greater of $75,000 (for violations occurring from March 4, 2009 to March 5, 2013)

or $80,000 (for violations occurring from March 6, 2013 to November 2, 2015) for a natural person

or the gross amount of pecuniary gain to that person. 15 U.S.C. §§ 77t(d)(2)(B) and

78u(d)(3)(B)(ii); 17 C.F.R. § 201.1001, Table 1. Finally, the third tier of penalties—which

requires that the violation involve “fraud, deceit, manipulation, or deliberate or reckless disregard

of a regulatory requirement” (Tier 2 basis) and that “such violation directly or indirectly result in

substantial losses or create a significant risk of substantial losses to other persons”—provides that

sanctions for each violation shall not exceed the greater of $150,000 (for violations occurring from

March 4, 2009 to March 5, 2013) or $160,000 (for violations occurring from March 6, 2013 to

November 2, 2015) for a natural person or the gross amount of pecuniary gain to that person. 15

U.S.C. §§ 77t(d)(2)(C) and 78u(d)(3)(B)(iii); 17 C.F.R. § 201.1001, Table 1.

Here, third-tier civil penalties are appropriate, because: (1) Handkins, Miller, and Hallam

violated various provisions of the federal securities laws, including the antifraud provisions

(Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5

thereunder), so their conduct involved “fraud, deceit, manipulation, or deliberate or reckless

disregard of a regulatory requirement” (First Am. Compl. [Dkt. No. 22] at ¶¶ 19 and 146-162);


19

and (2) their violations “directly or indirectly result[ed] in substantial losses or, at the very least,

created a significant risk of substantial losses to other persons,” because the Faulkner Scheme

defrauded investors across the country out of approximately $80 million. (Id. at 2.)

2. Hallam’s, Miller’s, and Handkins’s Conduct Warrants Third-Tier Penalties

While the statutory tier determines the maximum penalty allowed per violation, the actual

amount of the penalty to be imposed is left to the Court’s discretion. See SEC v. Kern, 425 F.3d

143, 153 (2nd Cir. 2005); SEC v. Universal Express, Inc., 646 F. Supp. 2d 552, 567 (S.D.N.Y.

2009). In determining appropriate penalties, courts consider: (1) the egregiousness of the

defendant’s conduct; (2) the degree of the defendant’s scienter; (3) whether the defendant’s

conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the

defendant’s conduct was isolated or recurrent; and (5) whether the penalty should be reduced due

to the defendant’s demonstrated current and future financial condition. Offill, 2012 WL 1138622,

*3. “Other courts have considered such additional factors as the cooperation of the defendant with

law enforcement authorities and the adequacy of other criminal or civil sanctions to punish the

defendant. Id.; AmeriFirst, 2008 WL 1959843, *7.

An analysis of these penalty factors to the actual conduct of the Defendants weighs strongly

in favor of the Court imposing maximum third-tier penalties against Handkins, Miller, and Hallam

for each securities-law violation13 they committed (or, alternatively, for imposing penalties equal

13 Courts have significant discretion in selecting the method used to calculate a penalty, including by using the gross amount of pecuniary gain to the defendant or by multiplying the statutory tier amount by the number of violations that the Court finds the defendants committed. See, e.g., SEC v. Cavanagh, 2004 WL 1594818, at *31 (S.D.N.Y. July 16, 2004) (multiplying number of fraudulent sales or offers to sell by the number of statutes violated to compute maximum penalty amount); SEC v. Coates, 137 F. Supp. 2d 413, 424, 430 (S.D.N.Y. 2001) (holding misrepresentations of separate facts in communications with investors constituted distinct violations); SEC v. Robinson, 2002 WL 1552049, *12 (S.D.N.Y. 2002) (noting that each sale of common stock could be deemed a separate violation, despite ultimately accepting Commission’s recommendation of lesser penalty); SEC v. Milan Capital Group, Inc., 2001 WL 921169, at *3 (S.D.N.Y. Aug. 14, 2001) (holding defendants who sent false offering materials to 200 investors committed “at least 200 violations of the Exchange Act”).


20

to the gross amounts of Defendants’ pecuniary gains.

a. Defendants’ conduct was particularly egregious and displayed a high degree of scienter.

As detailed above, each of the Defendants engaged in egregious conduct, which reflected

a high degree of scienter, by actively defrauding or otherwise participating in schemes to defraud

investors. (First Am. Compl. [Dkt. No. 22] at ¶¶ 22-23.) For example, Hallam and Miller

spearheaded the sale of unregistered oil-and-gas offerings of BOG, Crude, and (for Miller alone)

Patriot. (Id. at ¶¶ 3, 27, and 29.) They knew that the CIMs, which were provided to investors,

contained key material misrepresentations, including, but not limited to:

• Faulkner’s education and experience in the oil and gas industry (id. at ¶¶ 43-45);

• BOG’s use investor funds (id. at ¶ 45);

• Hallam’s and Miller’s role as Crude’s and Patriot’s (Miller only) key executives, and the omission Faulkner’s actual control over the entity (id. at ¶¶ 16, 87, and 134);

• BOG’s and Crude’s alleged segregation of investor funds (id. at ¶¶ 57, 90);

• a purported independent, third-party geologist, who prepared geological reports and production projections (id. at ¶ 61); and

• BOG’s and Crude’s payment of transaction-based compensation to salespersons (id. a ¶¶ 64, 94).

Hallam signed the Crude CIMs as its President and disseminated them to investors, despite the fact

that they were drafted by Faulkner, but wholly failed to disclose Faulkner’s involvement in, or

control over, Crude. Likewise, Miller signed the Patriot CIMs as its President and disseminated

the CIMs to investors, despite the fact that they were drafted by Faulkner, wholly failed to disclose

Faulkner’s control of Patriot, and, admittedly, without having reviewed them personally. Further,

in some cases, Hallam and Miller approved of Handkins’s diversions of investor funds from Crude

and Patriot to BECC, knowing that they were not associated with specific prospect expenditures.


21

(Id. at ¶¶ 16, 83.) Additionally, Hallam, Miller, and their sales staffs used geologist projections to

entice investors to invest in offerings, but failed to disclose what they knew: that the projections

were consistently overstated and the performance of prior prospects was poor. (Id. at ¶¶ 61, 63.)

Finally, BOG’s sales staff, managed by Hallam and Miller, sold to investors a larger percentage

of working interests in prospects than BOG actually owned and, on occasion, sold interests in

prospects BOG did not even own. (Id. at ¶¶ 55-56.)

Handkins’ conduct was similarly egregious and reflects a high degree of scienter. She

controlled all bank accounts and regularly commingled investor funds from various offerings into

one bank account, despite knowing that this practice contradicted representations in the CIMs. (Id.

at ¶¶ 57, 90, and 143.) Similarly, she routinely diverted commingled investor funds to Faulkner

and BECC, in direct violation of the representations to investors in the CIMs, and without regard

for the known intended use of the funds. For example, she transferred $38 million of investor

funds from Crude to BECC (94% of all investor funds obtained by Crude). She also improperly

used commingled investor funds from BOG, Crude, and Patriot to pay personal expenses incurred

by Faulkner. (Id. at ¶¶ 8, 12-13, 16, 68-70, 85, 90-91, 97-98, 100, and 141.) In short, Handkins

facilitated and effected Faulkner’s misappropriation of approximately $30 million of investor

funds. Additionally, when Faulkner pivoted the scheme from Crude to Patriot, Handkins set up

new bank accounts, intercepted incoming checks from investors intended for investments in

Crude’s offerings, deposited them in Patriot accounts, and failed to apprise the investors.

b. Defendants’ conduct created substantial losses to investors.

Faulkner and his co-Defendants, including Handkins, Miller, and Hallam, defrauded

investors out of approximately $80 million. (Id. at 2; Sowards 2017 Decl. at ¶ 1 [APP 13].) Mr.

Sowards calculated that investors collectively received back approximately $6.2 million ($2.4

million + $3.8 million) of their initial investments in the BOG, Crude, and Patriot offerings.


22

(Sowards 2017 Decl. at ¶¶ 6, 7 [APP 10-12].) Thus, investors have suffered catastrophic losses

due, at least in part, to the roles played (and conduct engaged in) by Handkins, Miller, and Hallam.

c. Defendants’ conduct recurred over several years.

Faulkner, Hallam, and Miller co-founded BOG in approximately 2009. (Dkt. No. 22 at ¶

39; Dkt. No. 105-1 at ¶ 1 [APP 318]; Dkt. No. 105-3 at 1 [APP 1121].) Hallam participated in the

Faulkner Scheme until late March 2015. (Dkt. No. 105-1 at ¶ 30 [APP 326]; Dkt. No. 22 at ¶ 134.)

Miller participated in the scheme until early 2016. (Dkt. No. 105-3 at ¶ 35 [APP 1130].) Handkins

participated in the scheme from 2010 to 2016. (Dkt. No. 105-1 at ¶ 1 [APP 311].) Thus,

Defendants’ fraudulent conduct recurred over the period of more than five years.

d. There is no record evidence about Defendants’ financial condition.

During the course of the Faulkner Scheme, Defendants received significant compensation,

as reflected by the disgorgement analysis in Section II.A.2.d., above. There is currently no

evidence in the record about Defendants’ financial condition.

e. Defendants have provided some cooperation to the SEC.

Before the Commission filed this enforcement action in June 2016, Handkins and Miller

agreed to bifurcated settlements with the Commission and have voluntarily met—both before and

after the filing of this lawsuit—with counsel for the Commission on a few occasions. While

Hallam did not agree to a bifurcated settlement with the Commission until several months after

the filing of this action, he and his counsel have voluntarily met with counsel for the Commission

on several occasions—both before and after the bifurcated settlement was entered in April 2017.

Further, Handkins, Miller, and Hallam provided sworn declarations in support of the

Commission’s August 2017 Motion for Preliminary Injunction, Ex Parte Temporary Restraining

Order, Asset Freeze, Appointment of Receiver, and Other Ancillary Relief. (See, generally, Dkt.

Nos. 102–105.)


23

Based on a balancing of the aforementioned factors, the Commission requests that the

Court order Defendants to pay maximum third-tier penalties for each of their violations of the

federal securities laws. Alternatively, the Commission requests that the Court order Defendants

to pay penalties equal to the gross amount of their pecuniary gain, which would be the

disgorgement amounts identified in Section III.A.2., above: (1) $1,901,480 for Hallam; (2)

$1,454,533 for Miller; and (3) $838,950 for Handkins.

C. THE COURT SHOULD PERMANENTLY ENJOIN HALLAM.

As part of his agreed bifurcated judgment, Hallam agreed that the Court shall determine

whether Hallam should be permanently restrained and enjoined from participating, directly or

indirectly, including but not limited to through any other entity owned or controlled by him, in the

issuance, purchase, offer, or sale of any security, provided however, that such permanent

injunction shall not prevent Hallam from purchasing or selling securities for his account

(collectively the conduct-based injunction, or “CBI”). (J. as to Hallam [Dkt. No. 94] at 5.) The

Commission requests that the Court enjoin Hallam from engaging in this specific conduct based

on the manner in which he violated the federal securities laws in this case, and post-Breitling

fraudulent activity in the securities industry, as referenced below.

Section 21(d) of the Exchange Act contemplates entry of permanent injunctions in SEC

enforcement actions when the evidence establishes a “reasonable likelihood” that a defendant will

engage in future violation of the securities laws. See 15 U.S.C. §§ 78u(d)(1) and 77t(b); see also

SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir. 1981); SEC v. Murphy, 626 F.2d 633, 655 (9th Cir.

1980). “[T]he Commission is entitled to prevail when the inferences flowing from the defendant’s

prior illegal conduct, viewed in light of present circumstances, betoken a ‘reasonable likelihood’

of future transgressions.” Zale Corp., 650 F.2d at 720; see also SEC v. Caterinicchia, 613 F.2d

102, 105 (5th Cir. 1980); Blatt, 583 F.2d at 1334. In predicting the likelihood of future violations,


24

the Court should evaluate the totality of the circumstances. Zale Corp., 650 F.2d at 720.

Courts consider a number of factors in determining whether to impose permanent

injunctions, including the: (1) egregiousness of the defendant’s conduct; (2) isolated or recurrent

nature of the violation; (3) degree of scienter; (4) sincerity of the defendant’s recognition of his

transgression; and (5) likelihood of the defendant’s job providing opportunities for future

violations. SEC v. Gann, 565 F.3d 932, 940 (5th Cir. 2009); Blatt, 583 F.2d at 1334-35. The

Commission addressed factors (1), (2), and (3)—which support the permanent injunctive relief—

in Section III.B., above, so it will not repeat its analysis here.

The Commission believes Hallam’s conduct since leaving the Faulkner Scheme in March

2015 is instructive on factors (4) and (5). On February 9, 2018, the Texas State Securities Board

(“TSSB”) entered an emergency cease and desist order against Hallam (and others) concluding

that: (a) Hallam was engaged in fraud in connection with the offer for sale and sale of securities;

(b) Hallam was making an offer containing a statement that is materially misleading or otherwise

likely to deceive the public; and (c) Hallam’s conduct, acts, and practices threaten immediate and

irreparable public harm. See Decl. of J. Reinsch Ex. 1 [APP 2105-2110]. As a result, the TSSB

ordered Hallam to cease and desist from engaging in fraud in connection with the offer for sale

and/or sale of any security in Texas, as well as from offering securities in Texas through an offer

containing a statement that is materially misleading or otherwise likely to deceive the public. Id.

Further, Hallam has worked in the oil and gas industry, primarily as a salesman, for the last

20 years. See, generally, Hallam Test. Trans. at 13:23-24:20 [APP 2112-4] (testimony regarding

Hallam’s various oil-and-gas positions beginning in 2000 with John Henry Petroleum.) As such,

there is a high likelihood that Hallam’s job will provide opportunities for future violations, as

evidenced by the 2018 TSSB Cease and Desist Order. All of these factors weigh strongly in favor


25

of the entry of the CBI against Hallam.

IV. REQUEST FOR RELIEF

WHEREFORE, the Commission respectfully requests that this Court enter a Final

Judgment that:

1. orders Hallam to pay disgorgement in the amount of $1,901,480, plus prejudgment interest thereon in the amount of $424,375.38;

2. orders Miller to pay disgorgement in the amount of $1,454,533, plus prejudgment interest thereon in the amount of $266,524.97;

3. orders Handkins to pay disgorgement in the amount of $838,950, plus prejudgment interest thereon in the amount of $156,960.22;

4. orders Hallam, Miller, and Handkins to each pay a civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] in an amount to be determined by the Court;

5. permanently enjoins Hallam from participating, directly or indirectly, including, but not limited to, through any entity owned or controlled by him, in the issuance, purchase, offer, or sale of any unregistered securities, provided however that such injunction shall not prevent him from purchasing or selling securities for his own personal account;

6. reaffirms and incorporates by reference sections I-IV, VI-VIII of the Judgment as to Parker R. Hallam [Dkt. No. 94]; sections I-V, VI-IX of Judgment as to Dustin Michael Miller Rodriguez [Dkt. No. 8]; and sections I-III, V-VII of Judgment as to Beth Handkins [Dkt. No. 7]; and

7. order such other relief as this Court may deem just, proper, and equitable.


26

CERTIFICATE OF SERVICE

I affirm that on January 24, 2020, I electronically filed the foregoing Motion with the Clerk of the Court for the Northern District of Texas, Dallas Division, by using the CM/ECF system which will send a notice of electronic filing to all CM/ECF participants, constituting service as provided in LR 5.1 (d). I further certify that on January 24, 2020, I served a true and correct copy of the foregoing document on the following parties and persons entitled to notice that are non-CM/ECF participants:

Michael P. Gibson (via UPS and E-mail) Burleson, Pate & Gibson, LLP Founders Square 900 Jackson St., Suite 330 Dallas, TX 75202 [email protected] Counsel for Defendant Beth C. Handkins

Alex More (Requested e-mail service only) Carrington Coleman 901 Main St., Suite 5500 Dallas, TX 75202 [email protected] Counsel for Defendant Gilbert R. Steedley

Christopher A. Faulkner (via Certified mail, return receipt requested) Register No. 76501-112 FCI Seagoville Federal Correctional Institution P.O. Box 9000 Seagoville, TX 75159 Pro Se Defendant

/s/ Jason P. Reinsch

JASON P. REINSCH




1

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION SECURITIES AND EXCHANGE COMMISSION, § §

Plaintiff, § § v. § Case No.: 3:16-cv-01735-D

§ CHRISTOPHER A. FAULKNER, § BREITLING ENERGY CORPORATION, § JEREMY S. WAGERS, § JUDSON F. (“RICK”) HOOVER, § PARKER R. HALLAM, § JOSEPH SIMO, § DUSTIN MICHAEL MILLER RODRIGUEZ, § BETH C. HANDKINS, § GILBERT STEEDLEY, § BREITLING OIL & GAS CORPORATION, § CRUDE ENERGY, LLC, § PATRIOT ENERGY, INC., § § Defendants, § § and § § TAMRA M. FREEDMAN and § JETMIR AHMEDI, § § Relief Defendants. § §

ORDER GRANTING PLAINTIFF’S MOTION FOR REMEDIES AS TO DEFENDANTS PARKER R. HALLAM, DUSTIN MICHAEL MILLER

RODRIGUEZ, AND BETH C. HANDKINS

BEFORE THE COURT is Plaintiff Securities and Exchange Commission’s (“SEC” or

“Commission”) Motion for Remedies as to Defendants Parker R. Hallam, Dustin Michael Miller

Rodriguez and Beth C. Handkins (the “Motion”) [Dkt. No. 507].

Case 3:16-cv-01735-D Document 507-1 Filed 01/24/20 Page 1 of 6 PageID 13458Case 3:16-cv-01735-D Document 507-1 Filed 01/24/20 Page 1 of 6 PageID 13458

2

This Court previously entered bifurcated judgments as to Defendants Parker R. Hallam

(“Hallam”), Dustin Michael Miller Rodriguez (“Miller”), and Beth C. Handkins (“Handkins”). (J.

as to Handkins [Dkt. No. 7]; J. as to Miller [Dkt. No. 8]; and J. as to Hallam [Dkt. No. 94].)

In those bifurcated judgments, the Court ordered each Defendant to pay disgorgement of

ill-gotten gains, prejudgment interest thereon, and a civil penalty pursuant to Section 20(d) of the

Securities Act [of 1933] [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C.

§ 78u(d)(3)] and stated that “[t]he Court shall determine the amounts of disgorgement and civil

penalty upon motion of the Commission.” (J. as to Handkins [Dkt. No. 7] at 3-4; J. as to Miller

[Dkt. No. 8] at 5; and J. as to Hallam [Dkt. No. 94] at 5-6.)

In addition, in the Judgment as to Parker R. Hallam, the Court stated that it would determine

“upon motion of the Commission, whether [Hallam] should be permanently restrained and

enjoined from participating, directly or indirectly, including but not limited to through any other

entity owned or controlled by him, in the issuance, purchase, offer, or sale of any security, provided

however, that such permanent injunction shall not prevent [Hallam] from purchasing or selling

securities for his account (collectively the conduct-based injunction, or “CBI”)

UPON CONSIDERATION of the Motion and being otherwise fully advised in the

premises, it is ORDERED AND ADJUDGED that the Motion is GRANTED.

IT IS FURTHER ORDERED AND ADJUDGED that Defendant Parker R. Hallam shall

pay disgorgement in the amount of $1,901,480, plus prejudgment interest thereon in the amount

of $424,375.38.

IT IS FURTHER ORDERED AND ADJUDGED that Defendant Dustin Michael Miller

Rodriguez shall pay disgorgement in the amount of $1,454,533, plus prejudgment interest thereon


3

in the amount of $266,524.97.

IT IS FURTHER ORDERED AND ADJUDGED that Defendant Beth C. Handkins shall

pay disgorgement in the amount of $838,950, plus prejudgment interest thereon in the amount of

$156,960.22.

IT IS FURTHER ORDERED AND ADJUDGED that, pursuant to Section 20(d) of the

Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. §

78u(d)(3)], Defendant Parker R. Hallam shall pay a penalty in the amount of _________________.



78u(d)(3)], Defendant Dustin Michael Miller Rodriguez shall pay a penalty in the amount of

_________________.



78u(d)(3)], Defendant Beth C. Handkins shall pay a penalty in the amount of _________________.

IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendants

Parker R. Hallam, Dustin Michael Miller Rodriguez, and Beth C. Handkins shall satisfy their

obligations by paying the above amounts to the Securities and Exchange Commission within 30

days] after entry of this Final Judgment.

Defendants may transmit payment electronically to the Commission, which will provide

detailed ACH transfer/Fedwire instructions upon request. Payment may also be made directly

from a bank account via Pay.gov through the SEC website at

http://www.sec.gov/about/offices/ofm.htm. Defendants may also pay by certified check, bank


http://www.sec.gov/about/offices/ofm.htm

4

cashier’s check, or United States postal money order payable to the Securities and Exchange

Commission, which shall be delivered or mailed to

Enterprise Services Center Accounts Receivable Branch 6500 South MacArthur Boulevard Oklahoma City, OK 73169

and shall be accompanied by a letter identifying the case title, civil action number, and name of

this Court; Defendant’s name as a defendant in this action; and specifying that payment is made

pursuant to this Final Judgment.

Defendants shall simultaneously transmit photocopies of evidence of payment and case

identifying information to the Commission’s counsel in this action. By making this payment,

Defendants relinquishes all legal and equitable right, title, and interest in such funds and no part

of the funds shall be returned to Defendants.

The Commission may enforce the Court’s judgment for disgorgement and prejudgment

interest by moving for civil contempt (and/or through other collection procedures authorized by

law) at any time after 30 days following entry of this Final Judgment. Defendants shall pay post

judgment interest on any delinquent amounts pursuant to 28 U.S.C. § 1961. The Commission shall

hold the funds, together with any interest and income earned thereon (collectively, the “Fund”),

pending further order of the Court.

The Commission may propose a plan to distribute the Fund subject to the Court’s approval.

Such a plan may provide that the Fund shall be distributed pursuant to the Fair Fund provisions of

Section 308(a) of the Sarbanes-Oxley Act of 2002. The Court shall retain jurisdiction over the

administration of any distribution of the Fund. If the Commission staff determines that the Fund


5

will not be distributed, the Commission shall send the funds paid pursuant to this Final Judgment

to the United States Treasury.

Regardless of whether any such Fair Fund distribution is made, amounts ordered to be paid

as civil penalties pursuant to this Judgment shall be treated as penalties paid to the government for

all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty,

Defendants shall not, after offset or reduction of any award of compensatory damages in any

Related Investor Action based on Defendants’ payment of disgorgement in this action, argue that

he or she is entitled to, nor shall he or she further benefit by, offset or reduction of such

compensatory damages award by the amount of any part of Defendant’s payment of a civil penalty

in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty

Offset, Defendants shall, within 30 days after entry of a final order granting the Penalty Offset,

notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to the

United States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be

deemed an additional civil penalty and shall not be deemed to change the amount of the civil

penalty imposed in this Judgment. For purposes of this paragraph, a “Related Investor Action”

means a private damages action brought against Defendants by or on behalf of one or more

investors based on substantially the same facts as alleged in the Complaint in this action.

IT IS FURTHER ORDERED AND ADJUDGED that Defendant Parker R. Hallam is

permanently enjoined from participating, directly or indirectly, including, but not limited to,

through any entity owned or controlled by him, in the issuance, purchase, offer, or sale of any

unregistered securities, provided however that such injunction shall not prevent him from

purchasing or selling securities for his own personal account.


6

IT IS FURTHER ORDERED AND ADJUDGED that Sections I-IV, VI-VIII of the

Judgment as to Parker R. Hallam [Dkt. No. 94] are hereby incorporated in this order by reference

and that those Sections remain in full force and effect.

IT IS FURTHER ORDERED AND ADJUDGED that Sections I-V, VI-IX of Judgment

as to Dustin Michael Miller Rodriguez [Dkt. No. 8] are hereby incorporated in this order by

reference and that those Sections remain in full force and effect.

IT IS FURTHER ORDERED AND ADJUDGED that Sections I-III, V-VII of Judgment

as to Beth Handkins [Dkt. No. 7] are hereby incorporated in this order by reference and that those

Sections remain in full force and effect.

IT IS FURTHER ORDERED AND ADJUDGED that that this Court shall retain

jurisdiction of this matter for the purposes of enforcing the terms of this Final Judgment.

IT IS FURTHER ORDERED AND ADJUDGED that, there being no just reason for

delay, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, the Clerk shall enter this Final

Judgment forthwith and without further notice.

DATED: _________________, _______

__________________________________ UNITED STATES DISTRICT JUDGE


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