Sandlapper Securities, LLC, a broker-dealer located in Greenville, South Carolina, as well as its majority owner and founder, Trevor Lee Gordon, and vice president, Jack Charles Bixler, have been charged by Financial Industry Regulatory Authority (FINRA) in a Complaint alleging that they defrauded the firm’s customers through its sales of saltwater disposal wells investments. Department of Enforcement v. Sandlapper Securities, LLC, et al., Disciplinary Proceeding No. 2014041860801 (Sept. 29, 2017).
According to the Complaint, from April of 2011 to November of 2015, customers were charged excessive and undisclosed markups totaling $8,000,000.00 pertaining to their investments in saltwater disposal wells. Apparently, the firm owned and managed the company that it sold the investments through. The Complaint stated that the investments were sold during the time that Gordon was the firm’s chief executive officer and chief compliance officer, and while Bixler was the president of the firm’s Capital Markets sector.
The Complaint alleged that revenue of saltwater disposal wells was generally accumulated through the acceptance of saltwater and byproducts of extracting oil and gas. In order to invest in the saltwater disposal wells, a fund was created in 2011 by Bixler, Gordon, as well as two of the firm’s registered representatives, where they were responsible for selling the shares of the fund to investors and making decisions for the fund’s investments, such as the price and type of wells to be acquired.
The Complaint alleged that a development company had been formed by Bixler, Gordon and the registered representatives for the facilitation of the fund’s saltwater disposal well investments. Apparently, as part of the fund’s initiative of reducing conflicts of interest, the offering documents of the fund contained representations that the fund would utilize investment guidelines and procure independent appraisals when transacting with the fund’s affiliates.
The Complaint stated that Bixler and Gordon, as fund managers, failed to abide by the offering document’s pledge, utilizing their control over the fund to profit at the investors’ expense. Particularly, from December of 2012 to July of 2013, the development company was utilized by Bixler and Gordon to purchase interests in the saltwater wells. Then, unbeknownst to customers, Bixler and Gordon marked up the interests between one-hundred-sixty-one percent and two-hundred-seventy percent in the sales of interests in the two wells to investors. The Complaint alleged that the fund was capable of buying the wells directly to obtain the best market price, but utilized the development company instead.
Further, the Complaint alleged that no independent appraisal took place for the transactions prior to them having been effected. Bixler and Gordon’s scheme was apparently known to Sandlapper based on Sandlapper’s role as the fund’s broker-dealer. Consequently, FINRA Department of Enforcement alleged that Bixler, Gordon and Sandlapper were liable for omissions and misrepresentations, excess charges, and the scheme to defraud investors; conduct violative of FINRA Rules 2010, 2020, Securities Exchange Act of 1934 Section 10(b) and Securities and Exchange Commission (SEC) Rule 10b-5(a), 10b-5(b) and 10b-5(c).
Moreover, the Complaint alleged that Bixler and Gordon breached their fiduciary duties to the fund through interjecting the development company in the transactions involving the fund and overcharging investors, all while neglecting its obligation to make sure that the fund obtained fair pricing. Consequently, FINRA Department of Enforcement alleged that Bixler’s and Gordon’s conduct was violative of FINRA Rule 2010.
Furthermore, Gordon utilized the development company starting in January of 2013 to accumulate profits from customers purchasing saltwater disposal wells in another manner than investing through the fund. Apparently, retail investors purchased saltwater disposal well interests from the development company through Sandlapper, paying markups that ranged from sixty-seven percent to three-hundred and seventy-six percent. The Complaint alleged that Gordon’s and Sandlapper’s conduct in that regard was violative of FINRA Rules 2010, 2020, Securities Exchange Act of 1934 Section 10(b), and SEC Rule 10b-5(b).
The Complaint additionally alleged that Gordon and Sandlapper failed to supervise the activities of the firm, and allowed the firm’s registered representatives to effect transactions despite having been cognizant of their fraudulent scheme. Apparently, the firm and Gordon enabled the saltwater disposal well interests to be sold away from the firm and without its supervision; an outside business activity form was all that the firm required to be completed. Consequently, FINRA Department of Enforcement alleged that Sandlapper and Gordon committed violations of FINRA Rules 2010, 3110 and NASD Rule 3010.
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