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IN THE MATTER OF: CHERRYHOMES JOINT VENTURE THOMAS C. HANSCOME AIR-BYRD/RIVER AIR-BYRD OPERATIONS LLC LANCE DAVID BROOKS REGAL ROYALTY RESOURCE (collectively "Respondents") * * * * * * * * * * * * * * * * * * |
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ORDER TO CEASE AND DESIST NOTICE OF INTENT TO FINE AND NOTICE OF RIGHT TO HEARING DOCKET NO. CF-11-7790-S |
I. PRELIMINARY STATEMENT
| 1. | The Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and the regulations promulgated thereunder (Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies) (“Regulations”). |
| 2. | Pursuant to Section 36b-26(a) of the Act, the Commissioner, through the Securities and Business Investments Division (“Division”) of the Department of Banking, has conducted an investigation into the activities of Respondents to determine if they had violated, were violating or were about to violate provisions of the Act or the Regulations (“Investigation”). |
| 3. |
As a result of the Investigation, the Commissioner has reason to believe that Respondents have violated certain provisions of the Act. |
| 4. | As a result of the Investigation, the Commissioner has the authority to issue a cease and desist order against Respondents pursuant to Section 36b-27(a) of the Act. |
| 5. |
As a result of the Investigation, the Commissioner has the authority to impose a fine on Respondents pursuant to Section 36b-27(d) of the Act. |
II. RESPONDENTS
| 6. |
Respondent CherryHomes Joint Venture (“CherryHomes JV”) is a Texas joint venture organized in 2003. CherryHomes JV was purportedly formed for the purpose of oil and gas development and production in Jack County, Texas. CherryHomes JV’s addresses last known to the Commissioner are 3609 Williams Drive, Suite 105, Georgetown, Texas 78628; and c/o MidAmerica Resources, Inc., 3943 Irvine Boulevard, Suite 439, Irvine, California 92602. |
| 7. | Respondent MidAmerica Resources, Inc. a/k/a MA Resources, Inc. (“MRI”) is a purported Texas corporation formed in 2003. MRI’s address last known to the Commissioner is 3943 Irvine Boulevard, Suite 439, Irvine, California 92602. MRI was, at all times pertinent hereto, the Joint Venture Manager and the Joint Venture Operator of CherryHomes JV. |
| 8. | Respondent Thomas C. Hanscome (“Hanscome”) is or was the president of MRI. Since January 2008, Hanscome has been associated with Capital Growth Resources (Central Registration Depository number 7779), a broker-dealer registered under the Act, but Hanscome is not currently registered in any capacity under the Act. Hanscome’s address last known to the Commissioner is 14 Shelby Street, Irvine, California 92714. |
| 9. | Respondent Air-Byrd/River Joint Venture (“River”) is a Kansas joint venture formed for the purpose of oil and gas development in Cowley, Kansas. River’s addresses last known to the Commissioner are 10695 Wild Road Court, McKinney, Texas 75070; and c/o Air-Byrd Operations, LLC, P.O. Box 263, Prosper, Texas 75078-0263. |
| 10. | Respondent Air-Byrd Operations LLC (“AB Operations”), a Texas based limited liability company, is or has been the joint venture manager of River. AB Operations is or was also the joint venture manager of Air-Borne III Joint Venture. AB Operations’ address last known to the Commissioner is P.O. Box 263, Prosper, Texas 75078-0263. |
| 11. | Respondent Lance David Brooks (“Brooks”) is an individual whose addresses last known to the Commissioner are 10695 Wild Road Court, McKinney, Texas 75070; and P.O. Box 263, Prosper, Texas 75078-0263. Brooks is or was the president of River as well as the president of Regal Royalty Resource. |
| 12. | Respondent Regal Royalty Resource (“Regal”) is an unincorporated entity whose address last known to the Commissioner is 10695 Wild Road Court, McKinney, Texas 75070. |
III. STATEMENT OF FACTS
The CherryHomes JV Offering
| 13. | From at least 2003 to the present, CherryHomes JV has been an issuer of securities in the form of joint venture units (“CherryHomes JV Units”). |
| 14. | Commencing in at least August 2006, MRI, Brooks and Hanscome, on behalf of CherryHomes JV, offered and sold CherryHomes JV Units to at least one elderly Connecticut investor. In connection with the purchase of the CherryHomes JV Units, Hanscome, at the request of Brooks, provided at least one Connecticut investor with an August 1, 2003 private placement memorandum relating to the CherryHomes JV Units (“PPM”). MRI materially aided Brooks and Hanscome in the offer and sale of the CherryHomes JV Units to at least one elderly Connecticut investor. At the time of the offers and sales of the CherryHomes JV Units, Brooks was not a principal of the joint venture manager. |
| 15. | The PPM stated that “[a]ny offering to participate in the joint venture . . . shall only be made to qualified persons by a registered representative of a broker-dealer.” However, the PPM’s Plan of Distribution stated that the units would be offered and sold on a best efforts basis by the joint venture manager, MRI. |
| 16. | The PPM stated that Hanscome was the sole officer and director of MRI, and that the major shareholders of MRI were Hanscome and Margaret M. Hanscome. |
| 17. | The PPM contained no financial statements for the joint venture; no financial information on MRI, the joint venture manager; insufficient disclosure of the risks involved in the enterprise; no detailed background information on third parties whose services were critical to the success of the venture; and no information on Brooks’ role in the distribution. |
| 18. | The PPM stated that “[t]he Joint Venture Manager shall have full, exclusive and complete charge of all affairs of the Joint Venture and of the management and control of the Joint Venture.” The PPM also required that investors grant a Power of Attorney to the Joint Venture Manager. |
| 19. | At no time were the CherryHomes JV Units that were offered and sold by CherryHomes JV, Brooks, Hanscome and MRI registered under Section 36b-16 of the Act, nor had an exemptive claim or claim of covered security status been filed for the CherryHomes JV Units under Section 36b-21 of the Act. |
| 20. | At the time of the offers and sales of the CherryHomes JV Units, Hanscome and Brooks were not registered in Connecticut as an agent, broker-dealer or in any other capacity under the Act, nor were any of them an associated person. At the time of the offers and sales of the CherryHomes JV Units, MRI was not registered in Connecticut as a broker-dealer or in any other capacity under the Act. |
The River JV Offering
| 21. | From at least February 2005 to the present, River has been an issuer of securities in the form of joint venture units (“River JV Units”). |
| 22. | From at least 2006, Brooks and AB Operations, on behalf of River, effected multiple sales of River JV Units to at least one elderly Connecticut investor. AB Operations materially aided Brooks in the offer and sale of the River JV Units to at least one elderly Connecticut investor. |
| 23. | In connection with the purchase of the River JV Units, at least one Connecticut investor received a February 2005 summary offering memorandum for the River JV Units. |
| 24. | The February 2005 summary offering memorandum for the River JV Units stated that Brooks was the president of River. |
| 25. | The February 2005 summary offering memorandum for the River JV Units failed to disclose that, on January 7, 2005 the Commonwealth of Pennsylvania announced that it had entered a Summary Order to Cease and Desist against, inter alia, AB Operations and Brooks for violations of that state’s securities laws stemming from Brooks’ cold-calling Pennsylvania residents to invest in a separate joint venture managed by AB Operations. |
| 26. | The February 2005 summary offering memorandum for the River JV Units required investors to execute a Special Power of Attorney appointing the Joint Venture Manager with full power to act, inter alia, as tax matters partner on their behalf. |
| 27. | The Connecticut investors did not receive material disclosures concerning the risks involved in the offering, detailed background information on third parties whose performance was critical to the joint venture’s success or disciplinary information relating to Brooks, including the Pennsylvania cease and desist order that had been entered against him. |
| 28. | At no time were the River JV Units that were offered and sold by Brooks, AB Operations and River registered under Section 36b-16 of the Act, nor had an exemptive claim or claim of covered security status been filed for the units under Section 36b-21 of the Act. |
| 29. | At the time of the offers and sales of the River JV Units, Brooks was not registered in Connecticut as an agent, broker-dealer or in any other capacity under the Act, nor was he an associated person. At the time of the offers and sales of the River JV Units, AB Operations was not registered in Connecticut as a broker-dealer or in any other capacity under the Act. |
Regal Royalty Resource and Brooks
| 30. | From at least 2006 to the present, Regal has been an issuer of securities (“Regal Securities”). |
| 31. | On multiple occasions from at least 2006 to the present, Brooks, on behalf of Regal, offered and sold Regal Securities to at least one elderly Connecticut investor. One or more Connecticut residents tendered over One Hundred Thousand Dollars ($100,000) to Regal and Brooks for the purported purpose of investing in precious metals. |
| 32. | Documents supplied by Regal and Brooks to investors stated that investors depended on the seller to gain access to the metals markets and to monitor, chart, graph and follow the market. |
| 33. | Regal and Brooks provided investors with a Schedule K-1 tax form describing the interests of investors as that of a “limited partner or other LLC member”, together with a cover letter sent on behalf of “the Regal Royalty Resource partnership.” Investors had no role in the management of Regal and relied solely on the efforts of Regal and Brooks. |
| 34. | Investors received no disclosure from Regal or Brooks concerning the risks of investing in precious metals or Regal’s ability to effectuate the precious metals purchases, nor did they receive any independent credible evidence that the precious metals purchases purportedly made by Regal and Brooks occurred or that the precious metals holdings existed. |
| 35. | At no time were the Regal Securities that were offered and sold by Regal and Brooks registered under Section 36b-16 of the Act, nor had an exemptive claim or claim of covered security status been filed for the interests under Section 36b-21 of the Act. |
| 36. | At the time of the offers and sales of the Regal Securities, Brooks was not registered in Connecticut as an agent, broker-dealer or in any other capacity under the Act, nor was he an associated person. |
IV. STATUTORY BASIS FOR ORDER TO CEASE AND DESIST
AND ORDER IMPOSING FINE AGAINST RESPONDENTS
a. Violation of Section 36b-16 of the Act -
Offer and Sale of Unregistered Securities
| 37. | Paragraphs 1 through 36, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 38. |
Respondents offered and sold securities to at least one Connecticut investor, as more fully described in paragraph 13, 14, 21, 22, 30 and 31, which securities were not registered in Connecticut under the Act nor the subject of an exemptive claim or claim of covered security status, as more fully described in paragraphs 19, 28 and 35. The offer and sale of such securities absent registration constitutes a violation of Section 36b-16 of the Act, which forms a basis for an order to cease and desist to be issued against Respondents under Section 36b-27(a) of the Act, and for the imposition of a fine against Respondents under Section 36b-27(d) of the Act. |
| 39. | MRI materially aided Brooks and Hanscome’s violation of 36b-16 of the Act, as more fully described in paragraphs 14, 19 and 20, which forms a basis for an order to cease and desist to be issued against MRI under Section 36b-27(a) of Act, and for the imposition of a fine against MRI under Section 36b-27(d) of the Act. |
| 40. | AB Operations materially aided Brooks’ violation of 36b-16 of the Act, as more fully described in paragraphs 22, 28 and 29, which forms a basis for an order to cease and desist to be issued against AB Operations under Section 36b-27(a) of the Act, and for the imposition of a fine against AB Operations under Section 36b-27(d) of the Act. |
b. Violation of Sections 36b-4(a)(2) and 36b-4(a)(3) of the Act –
Fraud in Connection with the Offer and Sale of any Security
| 41. | Paragraphs 1 through 40, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 42. |
The conduct of Respondents, as more fully described in paragraphs 17, 27 and 34, constitutes, in connection with the offer, sale or purchase of any security, directly or indirectly, employing a device, scheme or artifice to defraud, making an untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or engaging in an act, practice or course of business which operates or would operate as a fraud or deceit upon any person. Such conduct constitutes a violation of Section 36b-4(a) of the Act, which forms a basis for an order to cease and desist to be issued against Respondents under Section 36b-27(a) of the Act, and for the imposition of a fine against Respondents under Section 36b-27(d) of the Act. |
c. Violation of Sections [sic] 36b-4(b) of the Act –
Engaging in Dishonest or Unethical Practices in Connection with
the Offer and Sale of any Security
| 43. | Paragraphs 1 through 42, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 44. |
The conduct of Respondents, as more fully described in paragraphs 17, 27 and 34, constitutes, in connection with the offer, sale or purchase of any security, directly or indirectly, engaging in dishonest or unethical practices. Such conduct constitutes a violation of Section 36b-4(b) of the Act, which forms a basis for an order to cease and desist to be issued against Respondents under Section 36b-27(a) of the Act, and for the imposition of a fine against Respondent under Section 36b-27(d) of the Act. |
d. Violation of Section 36b-6 of the Act –
Unregistered Agent Activity
| 45. | Paragraphs 1 through 44, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 46. |
Brooks transacted business as an agent of issuer of CherryHomes JV, River and Regal, as more fully described in paragraphs 14, 20, 22 31, and 36, absent registration. Such conduct constitutes a violation of Section 36b-6(a) of the Act, which forms a basis for an order to cease and desist to be issued against Brooks under Section 36b-27(a) of the Act, and for the imposition of a fine against Brooks under Section 36b-27(d) of the Act. |
| 47. | Hanscome transacted business as an agent of issuer of CherryHomes JV, as more fully described in paragraphs 14 and 20, absent registration. Such conduct constitutes a violation of Section 36b-6(a) of the Act, which forms a basis for an order to cease and desist to be issued against Hanscome under Section 36b-27(a) of the Act, and for the imposition of a fine against Hanscome under Section 36b-27(d) of the Act. |
| 48. | MRI materially aided Brooks’ and Hanscome’s violation of 36b-6(a) of the Act, as more fully described in paragraphs 14 through 17, inclusive, which forms a basis for an order to cease and desist to be issued against MRI under Section 36b-27(a) of Act, and for the imposition of a fine against MRI under Section 36b-27(d) of the Act. |
| 49. | AB Operations materially aided Brooks’ violation of Section 36b-6(a) of the Act, as more fully described in paragraphs 22, 28 and 29, which forms a basis for an order to cease and desist to be issued against AB Operations under Section 36b-27(a) of the Act, and for the imposition of a fine against AB Operations under Section 36b-27(d) of the Act. |
| 50. | CherryHomes JV employed Brooks and Hanscome as agents of issuer at a time when Brooks and Hanscome were not registered as agents of issuer under the Act, as more fully described in paragraphs 13, 14 and 20. Such conduct constitutes a violation of Section 36b-6(b) of the Act, which forms a basis for an order to cease and desist to be issued against CherryHomes JV under Section 36b-27(a) of the Act, and for the imposition of a fine against CherryHomes JV under Section 36b-27(d) of the Act. |
| 51. | River employed Brooks as an agent of issuer at a time when Brooks was not registered as an agent of issuer under the Act, as more fully described in paragraphs 21, 22 and 29. Such conduct constitutes a violation of Section 36b-6(b) of the Act, which forms a basis for an order to cease and desist to be issued against River under Section 36b-27(a) of the Act, and for the imposition of a fine against River under Section 36b-27(d) of the Act. |
| 52. |
Regal employed Brooks as an agent of issuer at a time when Brooks was not registered as an agent of issuer under the Act, as more fully described in paragraphs 30, 31 and 35. Such conduct constitutes a violation of Section 36b-6(b) of the Act, which forms a basis for an order to cease and desist to be issued against Regal under Section 36b-27(a) of the Act, and for the imposition of a fine against and Regal under Section 36b-27(d) of the Act. |
V. ORDER TO CEASE AND DESIST, NOTICE OF INTENT TO FINE
AND NOTICE OF RIGHT TO HEARING
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, Respondents have violated Sections 36b-16, 36b-4(a), 36b-4(b) and 36b-6 of the Act as more particularly set forth above;
WHEREAS, the Commissioner further finds that the issuance of this Order to Cease and Desist and the imposition of a fine is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policies and provisions of the Act;
WHEREAS, notice is hereby given to Respondents that the Commissioner intends to impose a fine not to exceed One Hundred Thousand Dollars ($100,000) per violation against Respondents;
WHEREAS, the Commissioner ORDERS that CherryHomes JV, River, and Regal CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation, (1) offering and selling unregistered securities, (2) in connection with the offer, sale or purchase of any security, directly or indirectly, employing a device, scheme or artifice to defraud, making an untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or engaging in an act, practice or course of business which operates or would operate as a fraud or deceit upon any person, and (3) employing an agent of issuer absent registration;
WHEREAS, the Commissioner ORDERS that Hanscome and Brooks CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation, (1) offering and selling unregistered securities, (2) in connection with the offer, sale or purchase of any security, directly or indirectly, employing a device, scheme or artifice to defraud, making an untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or engaging in an act, practice or course of business which operates or would operate as a fraud or deceit upon any person, and (3) acting as an agent of issuer absent registration;
WHEREAS, the Commissioner ORDERS that MRI and AB Operations CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation, (1) offering and selling unregistered securities, and (2) materially aiding violations of the Act, including without limitation Sections 36b-16 and 36b-6(a) of the Act;
AND WHEREAS, pursuant to Section 36b-27 of the Act, Respondents will be afforded an opportunity for a hearing on the allegations set forth above.
THE COMMISSIONER FURTHER ORDERS that a hearing will be granted to each Respondent if a written request for a hearing is received by the Department of Banking, 260 Constitution Plaza, Hartford, Connecticut 06103-1800, within fourteen (14) days following each Respondent’s receipt of this Order. The enclosed Appearance and Request for Hearing Form must be completed and mailed to the above address. If any Respondent will not be represented by an attorney at the hearing, please complete the Appearance and Request for Hearing Form for any such Respondent as “pro se”. Once a written request for a hearing is received, the Commissioner may issue a notification of hearing and designation of hearing officer that acknowledges receipt of a request for a hearing, designates a presiding officer and sets the date of the hearing in accordance with Section 4-177 of the General Statutes of Connecticut and Section 36a-1-21 of the Regulations of Connecticut State Agencies. If a hearing is requested, the hearing will be held on March 31, 2011, at 10 a.m., at the Department of Banking, 260 Constitution Plaza, Hartford, Connecticut. The hearing will be held in accordance with the provisions of Chapter 54 of the General Statutes of Connecticut. At such hearing, each Respondent will have the right to appear and present evidence, rebuttal evidence and argument on all issues of fact and law to be considered by the Commissioner.
This Order to Cease and Desist shall remain in effect and become permanent against any Respondent that fails to request a hearing within the prescribed time period or fails to appear at any such hearing.
The Commissioner may order that the maximum fine be imposed upon any Respondent that fails to request a hearing within the prescribed time period or fails to appear at any such hearing.
| So ordered at Hartford, Connecticut, | ________/s/________ | |
| this 16th day of February 2011. | Howard F. Pitkin | |
| Banking Commissioner |
CERTIFICATION
I hereby certify that on this 17th day of February 2011, the foregoing Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing was sent by certified mail, return receipt requested, to each Respondent at the addresses below:
CherryHomes Joint Venture
3609 Williams Drive - Suite 105
Georgetown, TX 78628
Certified Mail No. 7010 1870 0001 3619 4417
CherryHomes Joint Venture
c/o MidAmerica Resources, Inc.
3943 Irvine Boulevard - Suite 439
Irvine, CA 92602
Certified Mail No. 7010 1870 0001 3619 4424
MidAmerica Resources, Inc.
a/k/a MA Resources, Inc.
3943 Irvine Boulevard - Suite 439
Irvine, CA 92602
Certified Mail No. 7010 1870 0001 3619 4431
Thomas C. Hanscome
14 Shelby Street
Irvine, CA 92714
Certified Mail No. 7010 1870 0001 3619 4448
Air-Byrd/River Joint Venture
10695 Wild Road Court
McKinney, TX 75070
Certified Mail No. 7010 1870 0001 3619 4455
Air-Byrd/River Joint Venture
c/o Air-Byrd Operations, LLC
P.O. Box 263
Prosper, TX 75078-0263
Certified Mail No. 7010 1870 0001 3619 4462
Air-Byrd Operations LLC
P.O. Box 263
Prosper, TX 75078-0263
Certified Mail No. 7010 1870 0001 3619 4479
Lance David Brooks
10695 Wild Road Court
McKinney, TX 75070
Certified Mail No. 7010 1870 0001 3619 4486
Lance David Brooks
P.O. Box 263
Prosper, TX 75078-0263
Certified Mail No. 7010 1870 0001 3619 4493
Regal Royalty Resource
10695 Wild Road Court
McKinney, TX 75070
Certified Mail No. 7010 1870 0001 3619 4509
____/s/___________
Paul A. Bobruff
Prosecuting Attorney