SEC v. Shields: Colorado District Court Denies SEC’s Motion for Injunctive Relief

In SEC v. Shields, No. 11cv02121REB, 2011 WL 3799061 (D. Colo. Aug. 26, 2011), the District Court for the District of Colorado denied the Securities and Exchange Commission’s (“SEC”) motion for temporary restraining order and other emergency relief.

According to the SEC’s Complaint, Jeffory Shields (“Shields”) formed Geodynamics in September of 2009. Shields and Geodynamics created several joint ventures with Geodynamics as the “Managing Venturer” of each joint venture. The SEC alleged that the interests in the joint ventures were securities and that the securities were unregistered, in violation of federal securities laws.  According to the SEC, Shields and Geodynamics defrauded investors by promising each investor an annual return of 548%. The SEC also alleged that Shields spent over $2 million for personal expenses including a personal aircraft, luxury vehicles, and other items.

The SEC filed its Motion for a Temporary Restraining Order and Other Emergency Relief on August 15, 2011.  To obtain injunctive relief, the SEC was required to show that the Defendants violated a securities law “and that there is a likelihood of future violations.” The SEC was not required to show irreparable injury or the inadequacy of other remedies.   

The court relied on a three-part test to determine if an investment is an “investment contract,” and therefore, a security. For an investment to be an investment contract, it must be: “(1) an investment, (2) in a common enterprise, (3) with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”  The court focused on the third element. During a hearing on the issue, the Defendant presented evidence from Glenn Carroll, one of the joint venture’s partners. Mr. Carroll essentially testified that he did not rely on the efforts of the promoters.

The court considered both the credibility of the witnesses, the law presented by the parties, the parties’ briefs, documentary evidence, including affidavits, declarations, and exhibits, and live testimony in making its decision. The court considered several factors to evaluate witness credibility, including “the witness's means of knowledge, ability to observe, and strength of memory; the manner in which the witness might be affected by the outcome of the litigation; the relationship the witness had to either side in the case; and the extent to which the witness was either supported or contradicted by other witnesses or evidence presented.”

Ultimately, the court found Mr. Carroll to “be a particularly cogent, credible, and persuasive witness. . . .” Focusing on the third element of the “investment contract” test, the court held there was not enough evidence to establish that the Defendants’ investment was an “investment contract.” Therefore, the SEC failed to make a prima facie showing that the Defendants violated a federal securities law.  

Although the court denied the SEC’s motion for injunctive relief, it restrained and enjoined the Defendants from “destroying, mutilating, concealing, altering, or disposing of any document referring or relating in any manner to any transactions described in the Compliant.”  The Defendants are also prohibited from destroying any evidence of communications between themselves.  

The primary materials for this case may be found on the DU Corporate Governance website.