## Facts

- The SEC sued Jeffory D. Shields, GeoDynamics, Inc., and related entities for alleged securities fraud involving four oil-and-gas drilling ventures.
- Defendants sold “joint-venture agreements” giving investors interests in specific drilling projects marketed as joint ventures rather than passive investments.
- The ventures used “turnkey drilling and completion contracts” under which GeoDynamics would perform drilling and completion for a fixed price, making venture performance heavily dependent on GeoDynamics’ expertise and execution.
- The SEC alleged investors generally lacked oil-and-gas experience and in practice depended on Shields and his entities to select drilling sites, manage operations, and make key technical and managerial decisions.
- The SEC alleged Shields restricted investor access to information, including denying requested financial statements and venture reports.
- The SEC alleged offering materials and communications contained misrepresentations and omissions regarding the use of proceeds, risks, and defendants’ experience and performance.
- The district court dismissed under Rule 12(b)(6) for failure to plead that the interests were “investment contracts” under the federal securities laws; the SEC appealed.

## Issues

1. Whether the complaint plausibly alleged that the joint-venture interests were “investment contracts,” and therefore “securities,” under the Howey test.
2. Whether, despite formal joint-venture labels and purported investor rights, the alleged economic reality showed investor reliance on defendants’ essential managerial efforts sufficient to survive a Rule 12(b)(6) motion.

## Decision

- The Tenth Circuit reversed the dismissal and remanded.
- The court held the SEC pleaded sufficient facts to make it plausible that the interests were investment contracts under Howey.
- The court accepted that the complaint adequately alleged an investment of money in a common enterprise and focused its analysis on whether profits were expected from the efforts of others.
- The court concluded the allegations supported a reasonable inference that investors, as a practical matter, lacked meaningful control and had to rely on Shields and GeoDynamics’ managerial and technical efforts.

## Legal Principles

- An “investment contract” exists when there is (1) an investment of money, (2) in a common enterprise, (3) with profits to come from the efforts of others; “solely” is applied flexibly to ask whether others’ efforts are the essential managerial ones driving profits.
- Labels such as “joint venture” or “general partnership” are not dispositive; courts assess economic reality and practical investor control.
- Even if documents grant investors formal powers (e.g., voting or removal rights), an interest may still be a security when those powers are effectively impractical or illusory given investor dispersion, inexperience, information limits, and reliance on a promoter’s specialized expertise.
- At the pleading stage, the SEC need only plausibly allege facts supporting security status; the court does not decide the ultimate merits of whether the interests are securities.

## Conclusion

The Tenth Circuit reinstated the SEC’s enforcement action, holding that allegations of investor inexperience, dependence on turnkey managerial performance, and restricted access to information plausibly showed the oil-and-gas joint-venture interests functioned as investment contracts under federal securities law.


SEC v. Shields, 744 F.3d 633 (10th Cir. 2014)