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Securities and Exchange Commission v. Tennstar Energy, Inc.

United States District Court, S.D. Georgia, Savannah Division

January 15, 2020

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
TENNSTAR ENERGY, INC. f/k/a BLACK GOLD RESOURCES, INC., DAVID R. GREENLEE, DAVID A. STEWART, JR. AND RICHARD "RIC" P. UNDERWOOD, Defendants.

          FINAL JUDGMENT BY DEFAULT AS TO DEFENDANT RICHARD "RIC" P. UNDERWOOD

          HON. LISA GODBEY WOOD, JUDGE.

         The Securities and Exchange Commission filed its Complaint against Richard "Ric" P. Underwood ("Underwood" or "Defendant") on August 11, 2017. The SEC served defendant Underwood personally at the Chatham County Detention Center, and Underwood's answer or responsive pleading was due September 26, 2017. Underwood failed to file an answer or responsive pleading. The SEC moved for entry of default against Underwood, and the Clerk granted the entry of default on September 27. 2017. Shortly thereafter this matter was stayed by Order of the Court pending resolution of three related criminal cases. United States v. Underwood. No. CR417-197 (S.D. Ga.); United States v. Greenlee, No. CR417-203 <S.D. Ga.); and United States v. Stewart, No. CR417-213 (S.D. Ga.), all of which arose from the same facts and circumstances as this civil enforcement action. By later order of this Court, the stay was extended to December 6, 2019. On that day, the SEC filed its motion for default judgment against Underwood. The Court hereby grants the SECs motion and has set forth relevant findings of fact and conclusions of law below, in addition to injunctive relief, and the imposition of disgorgement, prejudgment interest, and a civil penalty as appropriate.

         FINDINGS AND CONCLUSIONS

         The Declaration of Stephen E. Donahue, provided by the Commission establishes that from the Commission's investigation, disgorgement and prejudgment interest in specific amounts are appropriate based upon the knowledge of the declarant. (Donahue Declaration, ¶¶ 6-13). Given the failure of defendant Underwood to answer or otherwise defend the allegations against him, the following allegations of the SEC's Complaint are now deemed to be true as to Underwood and are made the findings of this Court:

         1) Findings of Fact

         1. Between at least January 2013 and February 2016, Greenlee and Stewart, acting individually and through a network of salesmen whom they recruited and controlled, fraudulently sold to more than 150 investors at least $15 million of interests in various limited partnerships and joint ventures that were purportedly created to extract and sell oil from existing wells in Kansas, Oklahoma and Texas, (¶1, Complaint).

         2. Greenlee and Stewart operated their scheme through two Tennessee corporations, Southern Energy Group, Inc. ("SEG"), which is now administratively dissolved, and Black Gold Resources, Inc. ("BGR"), which later changed its name to Tennstar Energy, Inc. ("Tennstar"). (¶2, Complaint).

         3. Richard P. Underwood ("Underwood") substantially assisted in the scheme. He acted as a principal salesman of the offerings, helped draft the false offering materials given to investors and oversaw the operations of one of the boiler room sales teams that solicited and sold these investments. (¶3, Complaint).

         4. In soliciting investors, Greenlee, Stewart and Underwood represented that the limited partnerships and joint ventures would use investor funds to (a) acquire "working interests" in various oil wells and (b) employ enhanced oil recovery techniques, such as fracking, to develop and recover oil from the wells. Greenlee, Stewart and Underwood also told investors that the entities would sell the oil in order to earn for investors returns ranging from 15 to 55 percent, or more, per year "for decades." (¶4, Complaint).

         5. These representations were false. Although Greenlee and Stewart used a portion of investor money to produce oil from several wells that they controlled, they used nearly two-thirds of the $15 million of investor funds raised for their own benefit, to pay salesmen, such as Underwood, or to advertise for new investors for their scheme. (¶5, Complaint).

         6. Of the funds they actually used for oil production, most was spent at only a few of the wells in order to create an appearance of activity to dupe investors who wanted to see the wells in production. The small amount of oil produced was sold to generate nominal profits which, in turn, were distributed to various investors to lull or induce further investments. (¶6, Complaint).

         7. Greenlee, Stewart, and Underwood also represented that SEG would manage the limited partnerships and Tennstar would manage the joint ventures, and that each of these companies was headed by an individual experienced in the oil industry. (¶7, Complaint).

         8. In fact, neither SEG, nor Tennstar was managed by someone with experience in the oil industry. Instead, Greenlee and Stewart installed figureheads that had little or no experience in the oil industry and created and distributed false biographies for these figureheads that misrepresented that they had significant relevant experience. (¶8, Complaint).

         9. When soliciting investors themselves, Greenlee and Stewart used fake names to hide their identities and criminal records. (¶9, Complaint).

         10. Underwood knew of these falsehoods, helped facilitate the sales, and was aware that investor funds were being dissipated. (¶10, Complaint).

         11. As a result of the conduct described in this Complaint, Tennstar, Greenlee, Stewart and Underwood (collectively, the "Defendants"), directly or indirectly, have engaged and unless enjoined, will engage in violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. (¶11, Complaint).

         12. The Commission brings this action pursuant to Sections 20(b), (c) and (d) of the Securities Act [15 U.S.C. §§ 77t(b)-(d)] and Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d)-(e)] to enjoin the Defendants from engaging in the transactions, acts, practices and courses of business alleged in this Complaint, and transactions, acts, practices and courses of business of similar purport and object, for disgorgement of illegally obtained funds, prejudgment interest and other equitable relief, and for civil money penalties. (¶12, Complaint).

         13. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d) and 22(a) of the Securities Act [15 U.S.C. §§77t(b), 77t(d) and 77v(a)] and Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. §§78u(d), 78u(e) and 78aa]. (¶13, Complaint). (¶13, Complaint).

         14. The Defendants, directly and indirectly, have made use of the mails, the means and instrumentalities of transportation and communication in interstate commerce, and the means and instrumentalities of interstate commerce, in connection with the transactions, acts, practices, and courses of business alleged in this Complaint. (¶14, Complaint).

         15. Venue lies in this Court pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa] because certain of the transactions, acts, practices and courses of business constituting violations of the Securities Act and Exchange Act have occurred within the Southern District of Georgia. Moreover, the Defendants have solicited and obtained investors in this fraudulent offering who reside within the State of Georgia, including within the Southern District of Georgia. (¶15, Complaint).

         16. Tennstar Energy Inc. is a Tennessee corporation formerly known as Black Gold Resources, Inc. It was formed in December 2013 to serve as the purported manager of the joint ventures that Greenlee, Stewart and Underwood offered and sold to investors. In January 2016, BGR changed its name to Tennstar following a trademark dispute with another, unrelated entity. (¶16, Complaint).

         17. David R. Greenlee, aged 41 at the time of the SEC's Complaint, and a resident of Gallatin, Tennessee, was convicted in state court and served time in a Kentucky prison during 1999 to 2000 for forgery and burglary, and again in 2004 for vehicular manslaughter. Following his most recent incarceration from 2007 to 2009 for probation violations, Greenlee became involved in various unregistered securities offerings. Through one such offering, he became friends with Stewart, who was a fellow salesman. When communicating with investors regarding the offer and sale of the investments at issue here, Greenlee frequently used the aliases "David Johnson" or "David Morrill" to conceal his criminal record, (¶l 7, Complaint).

         18. David A. Stewart Jr., aged 46 at the time of the SEC's Complaint, and a resident of Gallatin, Tennessee, is a former registered representative of two Commission-registered broker-dealers in 2001 and 2002. He previously held FINRA series 22 and 63 licenses. Stewart became friends with Greenlee while working with him in selling unregistered securities offerings. In 1998, the Wisconsin Division of Securities issued a prohibition and revocation of exemptions order against Stewart, among others, for fraud in the offer of securities by an unlicensed broker-dealer which had falsely claimed in a filing with state regulators that the entity did not pay commissions for the sale to investors of its natural gas well investment "units." In April 2007, Stewart was convicted of federal income tax evasion and sentenced to federal prison. Later, in 2008, the Alabama Securities Commission issued a cease-and-desist order against Stewart, among others, for previously participating in a separate oil and gas offering scheme. As part of the SEG and Tennstar schemes, Stewart used the alias "David Johnson," to conceal his criminal and disciplinary history from investors, (¶l 8, Complaint).

         19. Richard "Ric" P. Underwood, aged 65 at the time of the SEC's Complaint, and a resident of Fort Lauderdale, Florida, held the title of Tennstar's Vice President of Sales. In addition to his selling duties, Underwood assisted in drafting many of the limited partnerships' and joint ventures' offering materials. From 1994 to 1997, Underwood was a registered representative of a broker-dealer unrelated to this case and held FINRA series 22, 24, 39, 62 and 63 licenses. In 1996, a former customer won a $25, 000 arbitration award against him for investment misrepresentations. Underwood worked with Stewart for a period of time at another broker-dealer. The State of Wisconsin also issued a cease-and-desist order against Underwood in 1998 for his role in the fraudulent offer and sale of securities. The State of Alabama also issued a cease-and-desist order against Underwood in 2006 for his role in offering and selling securities while unregistered with the state. In 2007, Underwood pled guilty to federal income tax evasion. (¶19, Complaint).

         20. Southern Energy Group, Inc. was a Tennessee corporation that Greenlee and Stewart formed, through an intermediary whom they controlled, in January 2013. SEG served as the purported manager of oil and gas limited partnerships in which Stewart, Greenlee and Underwood sold interests to investors. In August 2016, the State of Tennessee administratively dissolved SEG. (¶20, Complaint).

         21. Robert Dorrance ("Dorrance"), aged 60 at the time of the SEC's Complaint, and a resident of Gallitin, Tennessee was a relative of Greenlee's wife and was recruited by Greenlee to serve as the President of SEG. Despite his title of President, Dorrance had no control over SEG. Instead, Greenlee and Stewart controlled SEG, providing Dorrance with assignments and tasks and determining his salary. (¶21, Complaint).

         22. Dorrance was featured prominently on the SEG website, which described him as having "nearly 40 years of business experience" and "association with some of the most capable and experienced professionals in the oil industry." In truth, Dorrance never worked in oil development. His prior work was selling stereos and helping to manage his spouse's dental practice. (¶22, Complaint).

         23. Jared G. Forrester ("Forrester"), aged 33 at the time of the SEC's Complaint, and a resident of Glasgow, Kentucky, was a friend of Stewart. Stewart and Greenlee directed Forrester to incorporate BGR (later known as Tennstar) with the State of Tennessee and installed him as the company's CEO and president to conceal their involvement with their company given their criminal backgrounds. (¶23, Complaint).

         24. Despite his title, Forrester had no control over BGR or Tennstar. Instead, he worked under the direction of Greenlee and Stewart, as they set Forrester's salary and gave him assignments to complete. At the direction of Greenlee and Stewart, Forrester sold interests in the BGR/Tennstar oil joint ventures to investors in numerous states and signed ownership unit certificates that were sent to investors on behalf of BGR/Tennstar. (¶24, Complaint).

         25. Contrary to statements in the websites and offering literature for BGR/Tennstar, Forrester had no meaningful experience in the oil industry. He previously worked as a stockbroker trainee, a hotel worker, and a furniture store salesman. (¶25, Complaint).

         A. Stewart and Greenlee Create SEC and Tennstar and Install Figureheads to Conceal Their Involvement

         26. After becoming friends while selling investments at an unrelated broker-dealer, Greenlee and Stewart began working together again selling oil investments through TexStar Energy Corp. ("TexStar"), an entity that they did not own or control. (¶26, Complaint).

         27. Not long thereafter, Greenlee and Stewart decided to create their own entity to offer and sell investments in oil development ventures. Specifically, in January 2013, Greenlee and Stewart, through an intermediary, incorporated SEG in Tennessee in order to receive investor funds and otherwise help orchestrate the fraud. (¶27, Complaint).

         28. To run SEG over the longer term while hiding their involvement due to their criminal histories, they installed Dorrance, a relative of Greenlee's wife, to become SEG's nominal president. Although Dorrance had no experience in the oil industry, Greenlee and Stewart drafted fake biographical information for SEG's website and brochures, falsely describing Dorrance as having, among other attributes, "years of experience in finance, sales, oil & gas, and almost every capacity of corporate America." (¶28, Complaint).

         29. In truth, Dorrance's prior work involved selling stereos and helping manage his spouse's dental practice. (¶29, Complaint).

         30. Later, in 2013, Greenlee and Stewart created a second entity, using an intermediary as they did with SEG, to help them perpetrate the fraud. Specifically, in December 2013, Greenlee and Stewart recruited Forrester to file incorporation documents for BGR (later known as Tennstar) with the State of Tennessee. (¶30, Complaint).

         31. Stewart and Greenlee then installed Forrester as the company's CEO and president to conceal their involvement with their company given their criminal backgrounds. (¶31, Complaint).

         32. Installing Forrester as the CEO-in-name-only of BGR/Tennstar was necessary, Greenlee explained to Forrester in a message on August 20, 2014, because "[t]he rest of us are the Manson family," alluding to the criminal and disciplinary records of others ...


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