Opinion
Civil Action No. 4:22-CV-755
2022-05-12
DISCOVER GROWTH FUND, LLC, and Antilles Family Office, LLC, Plaintiffs, v. CAMBER ENERGY, INC., Defendant.
Jesse Z. Weiss, Ryan Trent Shelton, Edmundson Shelton Weiss PLLC, Austin, TX, for Plaintiffs. Daniel David, Emily Arleen Rohles, Amy Pharr Hefley, Anthony Joseph Lucisano, Baker Botts LLP, Houston, TX, for Defendant.
Jesse Z. Weiss, Ryan Trent Shelton, Edmundson Shelton Weiss PLLC, Austin, TX, for Plaintiffs.
Daniel David, Emily Arleen Rohles, Amy Pharr Hefley, Anthony Joseph Lucisano, Baker Botts LLP, Houston, TX, for Defendant.
ORDER ON JOINT MOTION FOR APPROVAL OF SETTLEMENT AGREEMENT
Andrew S. Hanen, United States District Court Judge
The Joint Motion for Approval of Settlement Agreement ("Motion") filed by plaintiffs Discover Growth Fund, LLC and Antilles Family Office, LLC, and defendant Camber Energy, Inc. came on for hearing on May 12, 2022 before the Honorable Andrew S. Hanen, U.S. District Court Judge.
The court, having considered the Verified Complaint, the Motion, the Settlement Agreement between plaintiffs and defendant (Exhibit 1 to the Motion), the Declaration of John Burke (Exhibit 2 to the Motion), the Declaration of James A. Doris (Exhibit 3 to the Motion) and arguments of counsel, and having conducted a hearing on the motion, and, good cause appearing therefor, the Motion will be granted for the reasons explained below.
I. FINDINGS OF FACT
Defendant is a Nevada corporation based in Houston, Texas, that is engaged in the oil and gas business. Motion, Ex. 3 at ¶ 4. Its stock is publicly traded on the NYSE American stock exchange under the trading symbol "CEI." Id. Plaintiff Discover is an institutional investor and plaintiff Antilles is a family office, both of which invested their own money in Defendant. Motion, Ex. 2 at ¶ 5.
Trading in defendant's shares is volatile and unpredictable. Motion, Ex. 2 at ¶14. Over the last year, the market price for CEI shares has fluctuated substantially from $0.33 to $4.85, and as of April 13, 2022 was $0.82 per share. Id. Trading volume has been even more volatile, ranging from 1,163,100 to 988,353,200 shares traded per day. Id.
The parties entered into stock purchase agreements, pursuant to which each of the plaintiffs purchased shares of defendant's convertible preferred stock. Plaintiff Discover holds 30 shares of the Defendant's Series C convertible preferred stock, and the Plaintiff Antilles holds 1,575 shares and 7,908 shares of the Defendant's Series C convertible preferred stock and Series G convertible preferred stock, respectively. Motion, Ex. 2 at ¶ 11. Under the agreements and the Certificates of Designation for the preferred stock, plaintiffs have the right to convert their preferred shares into shares of defendant's common stock, which they can then sell to recoup their investment and, depending on market conditions, earn a profit. See Motion, Ex. 2 at ¶ 19. To ensure that plaintiffs can sell the common stock in the public market in compliance with federal securities laws, the agreements require defendant to timely file all necessary reports under the Securities Exchange Act of 1934, including annual reports on Form 10-K and quarterly reports on Form 10-Q. Providing current public information is necessary for plaintiffs to be able to rely on Rule 144 under the Securities Act of 1933 to sell their shares without registration. See 17 CFR § 144(c). However, defendant has not filed certain of its required periodic reports for more than a year. Plaintiffs therefore claim to have been unable to obtain the benefit of their bargain, and consequently have asserted claims against defendant for its breaches of the agreements.
See Dkts. 1-1 through 1-3.
Dkts. 1-4 (Series C Convertible Preferred Stock) & 1-5 (Series G Convertible Preferred Stock).
Dkts. 1-1 at 4(B); 1-2 at 4(B); 1-3 at 5(B).
Rule 144 provides a safe harbor that permits plaintiffs to convert their preferred shares into common stock and then sell that common stock in the public market, provided that defendant has complied with its periodic reporting requirements.
See Dkts. 1-6 through 1-8 at Sec. J; Dkt. 1-9 at Secs. F, K
See Dkt. 1 at ¶¶ 11-27.
Defendant acknowledges that plaintiffs have the right to exchange their preferred stock for free-trading shares of common stock, that plaintiffs' claims against defendant for breaches of the agreements are bona fide outstanding claims that resulted from arms-length agreements that were negotiated in good faith, as was the settlement agreement. Motion, Ex. 3 at ¶¶ 5, 7, 8, 10, 14.
Plaintiffs and their attorneys have worked cooperatively with defendant and its attorneys to reach a mutually-beneficial agreement. Motion, Ex. 2 at ¶ 15; Motion, Ex. 3 at ¶ 9. The parties have agreed to the terms of the Settlement Agreement to settle the claims in exchange for stock, subject to court approval following a fairness hearing. See Motion, Ex. 1. Defendant's chief executive officer and board of directors have determined that the settlement is fair to defendant and in the best interests of its stockholders. Motion, Ex. 3 at ¶ 14.
Plaintiffs are highly sophisticated and fully aware of the significant risks involved. Motion, Ex. 2 at ¶ 18. Plaintiffs invested only their own money, can afford a complete loss of their investment and are willing to accept that risk, provided defendant abides by the terms of the Settlement Agreement. Id. at ¶¶ 5, 18. Plaintiffs have analyzed the provisions of the Settlement Agreement, defendant's business fundamentals and market dynamics, and determined that the negotiated agreement is fair and reasonable, and adequate to warrant exchange of their preferred stock and claims. Id. at ¶¶ 17-20.
II. CONCLUSIONS OF LAW
A. Proposed Settlement
The parties have agreed to settle this case pursuant to the Settlement Agreement, which requires defendant to exchange plaintiffs' shares of defendant's preferred stock into free-trading common stock, from time to time upon notice from plaintiffs. See Ex. 1 at ¶ 1. Because the settlement consideration will be in the form of unregistered shares of defendant's common stock, court approval is required under Section 3(a)(10) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(10), and the comparable provision of Nevada state "blue sky" law, NRS 90.280(6)(c). See Chapel Investments, Inc. v. Cherubim Interests, Inc. , 177 F. Supp. 3d 981, 987 (N.D. Tex. 2016). B. Jurisdiction and Venue
This Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1332(a)(2) because there is complete diversity of citizenship between the parties and the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332(c)(1) ; (Complaint at ¶ 8.) Defendant is a Nevada corporation with its headquarters in Houston, Texas. Motion, Ex. 3 at ¶ 4. Plaintiffs and their common parent are all based in the United States Territory of the Virgin Islands. Motion, Ex. 2 at ¶ 5; see 28 U.S.C. § 1332(e) ("The word ‘States,’ as used in this section, includes the Territories"). Accordingly, this Court has diversity jurisdiction. Chapel Invs. , 177 F. Supp. 3d at 984.
Venue is proper in this Court pursuant to 28 U.S.C. § 1391(b)(1) because Defendant's headquarters are within this district.
C. Application of the Exemption
Generally, public companies are not permitted to issue their stock without first filing a registration statement, nor are persons receiving it permitted to immediately resell the shares into the public markets. See 15 U.S.C. § 77e(c), 15 U.S.C. § 77d(a)(1). Section 3(a)(10) of the Securities Act provides an exemption for:
any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court....
15 U.S.C. § 77c(a)(10) (emphasis added).
The Section 3(a)(10) exemption is often used to effectuate settlements of claims against public company defendants. See, e.g., Discover Growth Fund, LLC v. Beyond Commerce, Inc. , 561 F.Supp.3d 1035, 1037–38 (D. Nev. 2021) ; YA II PN, Ltd. v. Taronis Techs., Inc. , 435 F. Supp. 3d 622, 626 n.5 (S.D.N.Y. 2020) ("The Settlement Shares are to be issued in exchange for bona fide outstanding claims; all parties to whom it is proposed to issue such securities have had the right to appear at the hearing on the fairness of the Settlement; and the Settlement Shares are therefore unrestricted and freely tradeable exempted securities pursuant to Section 3(a)(10) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(10)"); Chapel Invs. , 177 F. Supp. 3d at 987.
For the exemption to apply, the court must: (1) find that the person to receive shares holds securities, claims or property interests that were outstanding prior to the hearing, (2) conduct a fairness hearing at which all persons to whom the securities will be issued has the right to appear and be heard, and (3) find that the terms and conditions of the proposed exchange are fair. See Chapel Invs. , 177 F. Supp. 3d at 987. "Fundamentally, the court must find the proposed issuance and exchange of securities is fair after considering the totality of the evidence." See Oceana Capitol Group Ltd. v. Red Giant Entertainment, Inc. , 150 F.Supp.3d 1219, 1224 (D. Nev. 2015).
The Securities & Exchange Commission plays no role in connection with Section 3(a)(10) participants, because the exemption falls "entirely within the purview of the long-established court system." Oceana Capitol , 150 F.Supp.3d at 1223 ; Chapel Inus. , 177 F. Supp. 3d at 987.
D. Fairness of the Proposed Exchange
Here, the parties have entered into the Settlement Agreement for settlement of the outstanding claims by exchanging the outstanding shares of preferred stock for shares of common stock, subject to Court approval. The terms and conditions of the settlement are fully set forth in the Settlement Agreement. See Ex. 1. Upon receiving a notice of conversion from Plaintiffs, Defendant will promptly issue that plaintiff the appropriate number of shares of free-trading common stock pursuant to the conversion formulas in the applicable certificate of designation for the preferred stock being exchanged and converted. See id. at ¶ 1.
The plaintiffs purchased a fixed number of preferred shares, and the parties have already agreed upon the formulas to be used to determine the number of common shares that shall be issued, specifically as provided in the certificates of designation previously filed by Defendant with the Nevada Secretary of State. Accordingly, given the issuance of common stock pursuant to this Order will be pursuant to the terms of the SPAs and CODs, the dilution associated with such issuances will be a foreseeable consequence of the agreements the parties entered into before this action was filed.
Plaintiffs are "sophisticated investor[s], not in need of the protections afforded by registration." Ackerberg v. Johnson , 892 F.2d 1328, 1337 (8th Cir. 1989) ; see Berckeley Inv. Grp., Ltd. v. Colkitt , 455 F.3d 195, 215 (3d Cir. 2006). Plaintiffs have conducted an independent market analysis for defendant's securities and understand both the upside potential and the downside risks inherent in the Settlement Agreement. Motion, Ex. 2 at ¶ 17-18. Similarly, defendant is a public company whose chief executive officer and board of directors have reviewed the Settlement Agreement with counsel. Motion, Ex. 3 at ¶¶ 10, 14. These factors are sufficient for the Court to find the negotiated agreement between commercial parties is fair. See Chapel Invs. , 177 F. Supp. 3d at 987.
E. Consideration of Registration Requirements
If the court approves the exchange as fair, defendant will not be required to register its shares under Section 5 of the Securities Act, 15 U.S.C. § 77e, because the shares to be issued will be entirely exempt from application of the federal securities laws. See 15 U.S.C. § 77c(a)(10) ; Chapel Invs. , 177 F. Supp. 3d at 989 ; Oceana Capitol , 150 F. Supp. 3d at 1225 ; Beyond Commerce, 561 F.Supp.3d at 1039–41.
In addition, plaintiffs are not required to register as dealers under Section 15(a) of the Exchange Act, 15 U.S.C. § 77o(a), because plaintiffs are private investors or traders, rather than dealers. See In re Scripsamerica, Inc. , 634 B.R. 863, 872-73 (D. Del. 2021) ; In re Immune Pharmaceuticals Inc. , 635 B.R. 118, 124-25 (Bankr. D.N.J. 2021) ; Chapel Invs. , 177 F. Supp. 3d at 990-91.
A "dealer" is a person "engaged in the business of buying and selling securities" for his own account. See 15 U.S.C. § 78c(a)(5)(A). The purpose of the "engaged in the business" language is to distinguish dealers from traders. See Scripsamerica , 634 B.R. at 871 (citing Louis Dreyfus Corp. , 1987 WL 108160, at *2 (July 23, 1987) (SEC No-Action Letter)). A person "who invests his own money ... is buying and selling securities for his own account, but within normal interpretation of that language he is not engaged in the business of buying and selling securities for his own account." See Sen. Comm, on Banking and Currency, The Exchange Act of 1934: Hearings on S. Res. 84 and S. Res. 56 and S. Res. 97, 73rd Congress, 6581 (1934) (emphasis added). The statute "excludes from the definitions of a broker and dealer a man who just buys securities for his own account and is not in the business of making a profit merchandising them, like an ordinary dealer." See H.R. Comm. on Interstate and Foreign Commerce, The Exchange Act of 1934: Hearings on H.R. 7852 and H.R. 8720, 73rd Cong., 687 (1934). Because Discover and Antilles invest only their own money, they are not engaged in the business of buying and selling securities as dealers.
"Merchandising" means "sales promotion as a comprehensive function including market research, development of new products, coordination of manufacture and marketing, and effective advertising and selling." Merriam Webster Dictionary , available at: https://www.merriam-webster.com/dictionary/merchandising.
The meaning of "dealer in securities" is "limited to one who, as a merchant, buys and sells securities to customers for the profit thereon." Schafer v. Helvering , 299 U.S. 171, 174, 57 S.Ct. 148, 81 L.Ed. 101 (1936). A dealer is "a person who holds himself out as being willing to buy and sell a particular security on a continuous basis." See SEC Guide to Broker-Dealer Registration , Division of Trading and Markets, U.S. Securities and Exchange Commission (April 2008). Buying and selling is an "offsetting two-sided activity." See Further Definition of "Swap Dealer," 77 Fed. Reg. 30,596, 30,607 & n.174 (May 23, 2012). The plain meaning of "buying and selling" is "buying and selling the same security simultaneously." Broker-Dealer Regulation § 2:3.2, at 2-62 (updated 2016). A dealer is "a person who makes a business of buying and selling" the same items "without altering their condition." See State v. San Patricio Canning Co. , 17 S.W.2d 160, 162 (Tex.App.—San Antonio 1929, no writ hist.) (quoting Webster's dictionary and citing State v. Yearby , 82 N.C. 561, 562 (1880) ("buy and sell the same article and in the same condition")). See also SEC Report on the Feasibility and Advisability of the Complete Segregation of the Functions of Dealer and Broker (1936), at XIV ("The characteristic activities of a dealer in securities are similar to those of a dealer ... in merchandise."). Plaintiffs bought Defendant's preferred stock, and later converted it into newly-issued shares of common stock which they then sold anonymously through brokerage accounts and alternative trading systems. See Motion, Ex. 2 at ¶ 11. Plaintiffs did not buy and sell the same security simultaneously, did not buy and sell a particular security on a continuous basis, and did not hold themselves out as being willing to buy and sell a particular security on a continuous basis. See id. , Accordingly, Plaintiffs are not dealers.
https://www.sec.gov/reportspubs/investor-publications/divisionsmarketregbdguidehtm.html
https://www.federalregister.gov/documents/2012/05/23/2012-10562/further-definition-of-swap-dealer-security-based-swap-dealer-major-swap-participant-major
https://www.sechistorical.org/collection/papers/1930/19360620SECSegregationReport.pdf
The statute does not make "every securities trader who makes money through buying and selling of securities" a dealer. SEC. v. Federated All. Grp., Inc. , No. 93-CV-0895E, 1996 WL 484036, at *5 (W.D.N.Y. Aug. 21, 1996). Subdivision B provides a broad exception for persons "not engaged in the business of dealing." See 15 U.S.C. § 78c(a)(5)(B). The term "dealer" does not include a party who buys or sells securities for its own account "but not as a part of a regular business." See id. ; SEC v. Keener , No. 20-21254, 580 F.Supp.3d 1272, 1282 (S.D. Fla. Jan. 21, 2022) ("Section 3(a)(5)(B) specifically excludes from the term ‘dealer’ a person that buys or sells securities ‘for such person's own account, either individually or in a fiduciary capacity, but not as a part of a regular business. ’ ") (emphasis original); SEC Guide to Broker-Dealer Registration , Division of Trading and Markets, U.S. Securities and Exchange Commission (April 2008) ("The definition of ‘dealer’ does not include a ‘trader,’ that is, a person who buys and sells securities for his or her own account ..., but not as part of a regular business. Individuals who buy and sell securities for themselves generally are considered traders and not dealers.").
The plain meaning of the word "regular" is "usual; normal; customary" or "confirming to or governed by an accepted standard of procedure or convention." See Immune Pharms. , 635 B.R. 118, 124 (Bankr. D.N.J. 2021) (citing New Oxford American Dictionary 1470 (3rd ed. 2010)); Beyond Commerce , 561 F.Supp.3d at 1039–41 (citing Dictionary.com (2021)). The plain meaning of "regular business" as used in Section 78c(a)(5)(B) is "the business of dealing," i.e. "the regular business of providing dealer services to others such as soliciting investor clients, handling investor clients' money and securities, and rendering investment advice to investors." Immune Pharms. , 635 B.R. at 124 (citing Chapel Invs. , 177 F. Supp. 3d at 990 ).
These services "distinguish the activities of a dealer from those of a private investor or trader." Immune Pharms. , 635 B.R. at 124 (quoting In the Matter of Sodorff , 50 S.E.C. 1249, 1992 WL 224082, at *5 n.27 (Sept. 2, 1992) ). The definition of a dealer excludes "a person that buys and sells securities ... for such person's own account, ... but not as a part of a regular business." 15 U.S.C. § 78c(a)(5) "The plain language ‘part of a regular business’ means that ‘a dealer must be engaged in the securities business, and be buying and selling for his own account.’ " Beyond Commerce , 561 F.Supp.3d at 1040 (quoting Sodorff , 1992 WL 224082, at *5 ). If it were possible for an entity whose only activities are buying and selling securities for its own account to be a dealer, the statute would have said "all or part of" rather than "part of" a regular business. Id. (citing 18 U.S.C. § 1955(a) ("all or part of" a business)). Discover and Antilles are not dealers because their only activity is investing their own money in securities.
Whereas an investor or trader may buy securities from issuers at substantial discounts and resell them into the public market for a potentially significant profit, a dealer buys and sells securities from its customer and to its customer for a relatively small markup or fixed commission. See Immune Pharms. , 635 B.R. at 124 ; Beyond Commerce , 561 F.Supp.3d at 1041 ("dealers effect securities transactions for customers, for which they typically charge a commission or other transaction-based fee") (citing XY Planning Network, LLC v. SEC , 963 F.3d 244, 248 (2d Cir. 2020) ). Discover and Antilles are not dealers because they do not provide dealer services, and do not have any customers or any "authority over the accounts of others." See SEC v. Mapp , 240 F. Supp. 3d 569, 591–593 (E.D. Tex. 2017).
Accordingly, defendant is not required to register the common shares being issued in the settlement, and plaintiffs are not required to register as dealers. Chapel Invs. , 177 F. Supp. 3d at 990-91 ; Beyond Commerce , 561 F.Supp.3d at 1039–41 ; Oceana Capitol , 150 F. Supp. 3d at 1225 ("Reselling the freely tradeable shares acquired in a court approved Section 3(a)(10) exchange does not make the person receiving the shares a dealer that would be required to register."). Finally, the stock purchase agreements "are not voidable unlawful contracts" regardless, because nothing in them "explicitly requires" plaintiffs to act as dealers. ExeLED Holdings, Inc. , 2018 WL 6547160, at *5 (S.D.N.Y. Sept. 28, 2018).
ORDER
In consideration of the foregoing Findings of Fact and Conclusions of Law, IT IS HEREBY ORDERED AS FOLLOWS:
1. The exchange of preferred stock and claims for common stock, as set forth in the Settlement Agreement, is approved after a hearing upon the fairness of such terms and conditions at which plaintiffs, the only persons to whom it is proposed to issue securities in such exchange, had the right to appear, and did appear through counsel.
2. Defendant and its transfer agent shall issue to plaintiffs unrestricted and freely tradeable shares of its common stock upon delivery of notices as stated in the Settlement Agreement.
3. Defendant is not required to register the shares of its common stock to be issued pursuant to the Settlement Agreement, because they are exempt from the Securities Act pursuant to 15 U.S.C. § 77c(a)(10).
4. Plaintiffs are not required to register as dealers under Section 15 of the Exchange Act, because they are private investors or traders rather than dealers under 15 U.S.C. § 78c(a)(5)(B).