HEI wins court battle; state plans appeal

Colorado Securities Commissioner Fred Joseph will appeal a court decision rendered last month in favor of a Colorado Springs company.

The Colorado Court of Appeals will hear the case, which pits the state against oil and gas developer Reed Cagle, HEI Resources Inc. and Heartland Energy Development Corp.

Last month, after a seven-day trial, District Judge Michael A. Martinez ruled in favor of HEI in stating the company sold joint ventures, not securities. Under the Colorado Securities Act, persons must be licensed to sell securities; in selling interest in joint ventures, no such licensing is required.

The state attempted to show the company was selling securities. “I will be appealing some time this month,” Joseph said.

Last week, Cagle celebrated his win.

“It’s a vindication of my company,” Cagle said. “It’s an exoneration of all the malicious allegations the state has spread about my company.

“It’s a guidepost for companies that do business through raising capital through joint ventures.”

Filed in 2009, the lawsuit involved seven wells and the effort to raise capital to drill and operate the wells. Each well had dozens of investors from dozens of states. The company raised money by cold-calling individuals and using other methods.

During the trial, several investors testified, including Evelyn Ensminger, who was 75 at the time she invested in an HEI-sponsored joint venture. Martinez’s decision said Ensminger has both bachelor’s and master’s degrees and work toward a Ph.D. Ensminger’s sister, Lois Fretter, a retired educator, also invested.

Together, they lost more than $600,000, they said.

Now 85, Fretter said Cagle and his team used high-pressure tactics and made promises of large returns on their investments.

“How can they promise me this huge return and then give me nothing?” Fretter asked. “What I would like to see is for them to go to trial and ask for my money back. He cannot be allowed to do this.”

Others, including a man who has a master’s in business administration, invested $1.9 million and received back $250,000. He had persuaded his friends — a partner at Goldman Sachs, a cardiologist and a bank president — to invest. The list of investors includes physicians, an electrical engineer, an architect, lawyers, teachers and others.

“If the joint venture partners don’t like how HEI is doing, they can fire us.”

– Reed Cagle, HEI

Fretter lives north of Denver in Brighton, “in an area where people have invested in oil wells and they get checks of $60,000 a year,” she said. “I lost $300,000 before I woke up. Boy, my kids sure wish I didn’t lose that.”

Now 83, Ensminger invested in three wells.

“Reed said No. 4 was a home run, a sure shot,” Ensminger said. “I should have gone to a lawyer.”

Neither sister spoke with an attorney before investing.

Cagle explained that in a joint venture, the partners are jointly and severally liable for all the debts of the joint venture. When a decision is to be made, the partners unite, typically in a phone call, to vote on the issues.

In a joint venture, 51 percent of the vote decides.

“If the joint venture partners don’t like how HEI is doing, they can fire us,” Cagle said.

In the joint ventures, HEI held a 1 percent non-voting interest, he added.

“With a security, none of that happens. You put your money in and you go along with what the management decides,” Cagle said.

The court decision said the investors were aware of the risks of investing in an oil and gas venture. HEI and HEDC sent investors over 70 years old a “senior letter” reminding them of the risks of oil and gas exploration.

“The partners in the joint ventures were capable of intelligently exercising the partnership powers granted to them in the joint venture agreements,” the court decision read.

Cagle took issue with stories in the Denver Post, saying the investors were unsophisticated.

“They are sophisticated wealthy individuals who have a tremendous amount of power they’re able to exercise,” Cagle said. “We weren’t targeting a specific demographic. HEI looks for individuals who are wealthy and sophisticated.”

Cagle also said his company made no promises, something Fretter and Ensminger disputed.

Cagle said the lawsuit has impacted his ability to raise money by 40 to 50 percent. In the past 12 months, he said he has raised $8 million to $10 million.

“In terms of building new business, it’s been tough on us,” Cagle said. “The people who have done business with us didn’t buy into the [negative] media.”

As to the appeal, “it’s a waste of taxpayers’ dollars,” Cagle said.