Securities Regulation Daily Scheme to resell used oil and gas gear leads to fraud charges
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Friday, April 24, 2020

Scheme to resell used oil and gas gear leads to fraud charges

By Rodney F. Tonkovic, J.D.

Oleaginous individuals promised profits from reselling used oil equipment, but instead pilfered the money, and investors lost almost everything.

The SEC has charged the operators of oil and gas equipment companies with cheating investors out of over $3.6 million. The Commission alleges that two individuals promised investors that their funds would be used to buy and refurbish oil and gas equipment that would then be sold at a profit. The money was instead misappropriated and squandered (SEC v. Hudnall, April 23, 2020).

Refurbishment scam. Phillip Hudnall and Todd Esh founded and controlled two companies, BirdDog Business, LLC and BirdDog Oil Equipment, LLC. According to the complaint, between February and June 2019, Hudnall and Esh sold promissory notes to investors, claiming that the funds would be used to buy and refurbish used oil and gas equipment, which would then be resold at a profit. The investors were promised that the notes would pay a 30 percent return after nine months and that the principal was safely secured by a "first priority security interest" in specific equipment. Significantly, Hudnall assured investors that BirdDog had experience in such matters and that two highly-profitable equipment transactions had already been completed.

In reality, however, the two completed transactions were fake, and BirdDog had never resold any refurbished equipment, at a profit or otherwise. And, Hudnall allegedly misappropriated most of the investors' funds to, for example, buy $1.7 million of land in Colorado, make nearly $900,000 in Ponzi-type to investors in other securities offerings, and to support his lavish lifestyle. The funds were misappropriated through a complex series of transfers through entities controlled by Hudnall and his brother, who was also paid in investor funds.

The only time investor funds were used as promised failed in a fittingly ironic manner. BirdDog investor funds were transferred to an individual who represented that he had equipment to refurbish and a buyer lined up. BirdDog took this individual at his word, without verifying his experience or capabilities, and transferred almost $1.2 million to him. It was a sham, however, and the individual (who is a relief defendant in this action) took all of the money for himself.

Ultimately, the investors lost nearly everything. BirdDog neither received nor refurbished any equipment. The "first priority security interest" that investors were told about was also fake, since BirdDog never had any equipment to pledge as collateral. In the end, BirdDog had less than $500 in its bank account.

Violations. The Commission asserts that the defendants violated the antifraud provisions of the Securities Act and of the Exchange Act. The complaint seeks permanent injunctions, disgorgement and prejudgment interest, and civil penalties. The Commission notes that Esh agreed to a bifurcated settlement through which a permanent injunction will be imposed. The settlement is subject to court approval, and the issues of disgorgement, prejudgment interest, civil penalties are reserved.

The case is No. 20-cv-327.

Attorneys: Timothy Leiman for the SEC.

Companies: BirdDog Business, LLC; BirdDog Oil Equipment, LLC

MainStory: TopStory FraudManipulation GCNNews SecuritiesOfferings MissouriNews

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