Finra has charged a small broker-dealer that created and sold private placement investments in saltwater disposal wells with defrauding investors by charging exorbitant, undisclosed markups totaling more than $8 million on the deals.
Sandlapper Securities, along with its CEO Trevor Gordon and Jack Bixler, the president of the firm's capital markets group, "defrauded investors" when they sold the private placements "through a middleman 'development' company they owned and controlled," according to the complaint filed Friday by the Financial Industry Regulatory Authority Inc.
Mr. Gordon did not return calls seeking comment.
Sandlapper has close to 60 registered representatives in 13 branch offices, according to Finra. In 2016, it reported $10.6 million in revenue and a loss of $50,000, according to a filing with the Securities and Exchange Commission.
Sandlapper's BrokerCheck report states that Finra told the company in January that it was facing a potential disciplinary action over violations of securities industry rules stemming from sales of direct investments and private placements.
According to Finra, Mr. Gordon, Mr. Bixler and two former brokers in 2011 created a fund to invest in saltwater disposal wells, which are used to get rid of water collected as a byproduct of oil and gas production. Shortly after starting the fund, they created a development company to facilitate the fund's investments in saltwater disposal wells in west Texas.
That's when the conflicts arose, the complaint alleges. Between December 2012 and July 2013, Mr. Gordon and Mr. Bixler used the development company to get in between the fund and the deals to buy pieces of saltwater disposal wells, charging the fund markups of 161% to 270%, according to the complaint.
The two Sandlapper executives "interposed their development company between the fund and the best available market for interest in two wells," Finra alleges. "The fund had the resources to directly purchase interests in these wells. But instead, Gordon and Bixler had their development company purchase interests in the wells and sell those interests to the fund at undisclosed, excessive markups."
For example, the development company, with less than $300 in the bank, in December 2012 acquired a 1% interest in a well for $45,000 for 1% of the well. Five days later, it sold that 1% interest to the fund, which was sitting on $640,000 in capital, for a price of $117,338 — a markup of 161%, Finra alleges.
And starting in 2013, Mr. Gordon "used the development company to extract ill-gotten profits from retail investors who purchased interest in individual saltwater disposal wells outside the fund," according to Finra. "The development company purchased these interests and resold them to retail investors, sometimes through Sandlapper, at undisclosed, excessive markups ranging from 67% to 376%."
The fund, Tiburon Saltwater Reclamation Fund I, and its management and development companies were all housed in Sandlapper's main office in Greenville, S.C., according to Finra. Commissions, fees and allowances totaled over 16% of investor funds on the securities. One hundred seventy investors bought $12.5 million of the fund's securities from August 2011 to December 2013.
Citing the fund's private placement memorandum, the Finra complaint listed the fund's principal objectives were to preserve and protect capital and provide a long-term return of 15%. Finra's complaint alleges that no appraisals were done for the purchases by the fund from the development company, which also allegedly borrowed money from investors in the fund to buy interests in the wells that were then sold back to investors with the exorbitant markups.
"In overseeing all the firm's sales activities, including sales of fund interests and interests in individual saltwater disposal wells, Gordon labored under numerous and obvious conflicts of interest," according to the complaint. "Nonetheless, the firm failed to adopt or implement an alternate supervisory structure for offerings where Gordon was conflicted."