The SEC sued St. Anselm, an oil and gas exploration and development company, its three principals, and one other individual, in March 2011 alleging that the defendants engaged in a Ponzi-like scheme. The SEC also alleged that the defendants misrepresented or failed to disclose information to investors about its deteriorating financial condition. The parties tried the case in July and August 2012 and, on March 29, 2013, Judge Blackburn of the U.S. District Court for the District of Colorado issued his decision. In that decision, Judge Blackburn found that St. Anselm had none of the true hallmarks of a Ponzi scheme. Judge Blackburn summarized his findings as follows:
“What this court perceives from the evidence presented in this case is not fraud, whether intentional or reckless, or even negligence, but a company that got too far out over its skis. [St. Anselm’s] business model worked well for years, and there was nothing inherently suspect about relying on investor financing as one piece among several to service debt and operate a business. Beginning in 2007, the confluence of several promising opportunities that seemed likely to yield enormous returns enticed the company to take on additional debt in order to acquire additional assets. Yet with the economic downtown of 2008 and the sudden decline in the relevant markets, the company’s historical ability to sell assets to fund operations was compromised. No defendant is charged with clairvoyance in the prediction of such external events. When defendants realized their business model no longer worked in the then-current economy, they moved with appropriate speed to revamp it and save investors’ principal. That strategy worked, as [St Anselm] is still operating today.”
The SEC’s downfall seems to have been in focusing on too narrow of a time period. Judge Blackburn stated that, “[w]hen considered over a period representing the typical business cycle in the industry, [St. Anselm] had adequate revenue apart from income and promissory notes to pay its debt – both principal and interest – to note holders.” The SEC also failed to establish alleged misrepresentations were actually ever made, or that the defendants had a duty to disclose more information than they did in their communications with investors.