The allegations read: Sec admin releases 33-9188, 34-63926, february 17, 2011: the securities and exchange commission ("commission") deemed it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted pursuant to section 8a of the securities act of 1933 ("securities act") and section 15(b) of the securities exchange act of 1934 ("exchange act") against johnny clifton ("clifton" or "respondent").
the division of enforcement ("division") alleged that:
clifton, was a principal at a registered broker-dealer (bd) associated with an oil and gas exploration business ("oil and gas issuer"). The bd began offering limited partnership interests in a six-well oil and gas drilling project in oklahoma on behalf of the oil and gas issuer.
the oil and gas issuer began drilling with seed money provided by its industry partners. The first well was not commercially viable. The second well produced excessive amounts of water. After three more failed attempts to drill a commercially viable well, the oil and gas issuer notified investors that it was shutting down the field and returned 25% of the investors' principal. The oil and gas issuer timely informed clifton of these developments.
clifton supervised the bd's sales representatives and sales practices. Clifton instructed the sales representatives to use the private placement memorandum ("ppm") and oral information he provided to pitch the project, but gave them no additional written materials. Clifton was the only representative at the bd who received project updates from the issuer.
although the oil and gas issuer provided clifton with all of the material information about the project in a timely manner, clifton failed to ensure that all sales representatives were informed of these developments. As a result, investors were not adequately informed about the project by the bd before investing. In addition, clifton made false and misleading statements or omitted material information in at least one sales presentation call he made that was attended by several prospective investors.
clifton failed reasonably to supervise the bd's sales representatives, who violated section 17(a) of the securities act.
clifton was responsible for drafting and approving his firm's written supervisory procedures ("wsps"). Such wsps were inadequate in two significant areas: outgoing correspondence and providing material information to investors regarding recommended investments. The wsps did not contain instructions as to supervisory review of the outgoing correspondence. Clifton failed to establish a formal correspondence review system and failed to record whether any outgoing correspondence was reviewed. Had clifton established an effective correspondence review process, he could have prevented and detected materially misleading statements in the sales representatives' outgoing correspondence to investors in connection with recommending the limited partnership interests offered by his firm.
the wsps included a section on due diligence that required the firm and associated persons to "have reasonable grounds to believe, based on the information provided by the issuer, that all material facts are adequately and accurately disclosed." further, the wsps required the "[m]maintenance of records indicating steps taken in order to verify the adequacy of the disclosures made to investors." the wsps, however, did not include procedures to ensure that the firm provided material information it learned after completion of the initial offering memorandum to sales representatives and, consequently, to prospective investors. There is no evidence that updated information was provided timely to sales representatives. The firm had no procedures to follow up with investors after the sale to confirm that the investors had received adequate, updated information about the project at the time of the investment. [cont'd in comment]
