PIPE Issuer Accused of Manipulation In Multiple Suits By Restricted Shareholders

Coral Capital Partners, and its President, Erik Nelson were mentioned and quoted in the article below, which was originally published on August 16th, 2011 in the PIPE’s Report.

PIPE Issuer Accused of Manipulation In Multiple Suits By Restricted Shareholders

By Dan Lonkecich, Posted August 16, 2011


PIPE issuer Sun River Energy is accused by multiple investors, contractors, and other holders of its restricted stock of refusing to lift the legends that would permit sale of the shares and repeatedly filing lawsuits to take back the stock.

Alleged victims of the strategy include LPC Investment LLC, a Castle Rock, Colo.-based hedge fund that invested $1.1 million in a May 2007 PIPE by Sun River; Mirador Consulting, a Boca Raton, Fla.-based firm that introduced Sun River to possible investors and investment bankers; Nova Leasing LLC, a Casper, Wyo.-based oil and gas producer that sold several properties to Sun River; and Coral Capital Partners, an Atlanta-based investment consulting company whose president Erik Nelson researched and wrote analyst reports on Sun River’s properties.

All four victims were issued shares of restricted stock. When they asked Sun River to lift the restrictive legends after the six-month waiting period under Rule 144, they were not only rebuffed, but forced into litigation.

In lawsuits or countersuits filed by Mirador, Nova Leasing and Nelson, Sun River is accused of stock manipulation. The OTC Bulletin Board-listed company is alleged to be trying to boost its share price so its stock can be listed on Nasdaq Stock Market, and to use its higher-valued stock as currency for acquisitions.

“The allegations on their face, if true, certainly are manipulative,” said Jacob Frenkel, a former Securities and Exchange Commission attorney, who now chairs the Securities Enforcement, White-Collar Crime and Government Investigations practice at the law firm of Shulman Rogers in Potomac, Md. Frankel isn’t involved in the Sun River litigation.

“They’re creative because the intended effect is to reduce liquidity in favor of other investors for a narrow window.

“By the time the lawsuits are resolved, the window is expired,” he said. “The manipulative window needs to be only big enough for the preferred investor to sell. The best outcome is to settle the case before there is any discovery. That takes away the ability of anyone to prove there was manipulation.”

Frenkel said it’s surprising anyone would do business with Sun River given its pattern of litigation. He said it raises serious questions about Sun River’s business ethics and underscores the importance of due diligence.

Sun River “denies all allegations of wrongdoing and plans to vigorously defend these allegations in court,” the company’s general counsel James Pennington said in an email. He declined to discuss them further, citing company policy against commenting on pending litigation.

LPC Dispute

In May 2007, Sun River raised $1.1 million from a private placement of 2.2 million shares of common stock issued to LPC Investment, a hedge fund run by Kevin Paul.

LPC also paid $74,600 for a promissory note from Sun River in April 2008. The note paid 8.75% interest from Nov. 14, 2007 and was set to mature on Sept. 30, 2008. Under the terms of the note, Sun River granted LPC the right to convert its 2.2 million Sun River shares into a preferred note due March 1, 2009.

Sun River first refused to lift the restrictions on the 2.2 million shares and then failed to make payments or convert the shares into debt under the terms of the note. As a result, LPC sued Sun River in a state court in Golden, Colo., on Sept. 24, 2009.

Sun River told the court that LPC was not entitled to convert its shares because the promissory note was invalid and that it was not a binding contract. Sun River claimed that the person who signed the promissory note on its behalf wasn’t authorized to do so and that its board wasn’t aware of and didn’t approve the note.

The court rejected Sun River’s arguments and found that the company breached its contract with LPC. Sun River agreed to buy back 1.9 million shares for $1.48 million as part of a settlement reached in June of last year.

It’s not clear that Sun River ever honored the terms of the settlement. A sworn affidavit filed in another case by Harry McMillan, who controls a third of Sun River’s stock, suggests that the company didn’t have the money to pay LPC.

Pennington declined to comment on whether Sun River ever paid LPC Investment. LPC’s Paul also declined to comment, saying that he signed a non-disclosure agreement. An attorney who represented Paul also declined to comment.

Nova Leasing Litigation

On March 10 of this year, Dallas-based Sun River filed a lawsuit in Texas state court against Nova Leasing and Securities Transfer Corp. in a dispute involving a series of transactions between Nova and Sun River, in which Nova received 1.2 million shares of Sun River stock.

Sun River is seeking the return of the 1.2 million shares plus damages and attorneys’ fees from Nova Leasing, based on claims of unjust enrichment and breach of contract.

Nova filed a countersuit against Sun River in federal court in Denver, over the company’s refusal to register and transfer the shares.

Nova claims that Sun River filed its lawsuit in retaliation for Nova’s refusal, in April of last year, to accept a lock-up agreement that would have limited its ability to sell the stock and its refusal in September to agree to Sun River’s demand to “get out of the market” for the company’s stock.

At the time, Sun River and two companies controlled by McMillan were trying to “artificially inflate the price of Sun River’s stock for their own pecuniary benefit,” Nova’s countersuit states.

McMillan controls two companies, Cicerone Corporate Development and J.H. Brech, that together hold about a third of Sun River’s stock. Sun River put McMillan in charge of its investor relations, corporate governance and capital-raising efforts in 2009, according to Nova.

Nova claims that last September, McMillan told Nova’s manager Robert Fowler that if Nova didn’t immediately “‘get out of the market’ for Sun River shares, McMillan and Sun River would ‘deal with the situation with you’ and ‘God damn make sure’ that Nova’s shares of Sun River stock would not be cleared for sale on the open market ‘for the next two or three years.'”

McMillan allegedly carried out that threat last November and January, instructing Sun River’s transfer agent not to clear for sale any shares held by Nova or by Fowler’s wife, Sharon K. Fowler.

Neither the Fowlers nor their attorneys could be reached for comment.

Who Is Harry McMillan?

McMillan became involved with Sun River in May 2008 when Brech and Cicerone provided consulting services to the company, according to an affidavit he filed in the suit against Nelson. McMillan has since been involved in making various business arrangements for Sun River. That includes the naming of its current management team, President and CEO Donal Schmidt Jr. and Chief Operating Officer Thimothy Wafford, who joined Sun River through an acquisition. They had controlled PC Operating Texas Inc. and FTP Oil and Gas LP, whose assets were acquired by Sun River about a year ago, in a transaction valued at about $3.1 million.

Schmidt was unavailable for comment due to his “extremely busy schedule,” Sun River’s Pennington said.

In addition to controlling a third of Sun River’s stock, Cicerone has for several years collected consulting fee from Sun River. The fees relate to the implementation of Sun River’s corporate strategies, achievement of market listing standards, debt and equity financings, corporate governance, and shareholder matters. Under an amended agreement announced in April, Sun River is paying Cicerone $8,333 a month for its services, plus 5% of the purchase price for any acquisitions introduced by Cicerone. The fee is payable 50% in cash and 50% in stock. Sun River also agreed to reimburse Cicerone for pre-approved expenses related to its consulting services.

McMillan didn’t respond to a list of questions submitted to him by The PIPEs Report through Sun River’s general counsel Pennington. Pennington said McMillan was difficult to reach and that he would pass the questions to McMillan’s attorney, Dan Newman. Newman didn’t return several calls for comment.

Mirador Suit

Sun River and McMillan are also in litigation with Mirador Consulting, which had provided consulting services to the company and introduced potential investors including Aspenwood Capital and Seaside 88.

Mirador was paid a monthly fee of $2,000 under its Aug. 5, 2010 agreement with Sun River. Mirador also purchased 100,000 shares of Sun River restricted stock. The restrictive legends became eligible for removal on Feb. 6.

Even though Mirador claimed to have satisfied all the preconditions for removal of the restrictive legends, Sun River refused to do so on the grounds that Mirador wasn’t licensed as a broker-dealer and had failed to perform all the services required under the agreement, according to the litigation filed in state and federal courts in Texas.

McMillan has been “attempting to mask and conceal his dominant position with Sun River by shielding his holdings as the single largest shareholder of Sun River common stock holdings through the use of” Cicerone and J.H. Brech, Mirador says in legal filings.

Mirador also claims that, even though McMillan isn’t named as an officer in Sun River’s SEC filings, he “has acted in an executive officer’s official capacity on behalf of Sun River, in among other matters, Sun River’s dealings with Mirador.”

An attorney representing Mirador didn’t return phone calls seeking comment.

Nelson Suit

In another case, Sun River and McMillan sued Nelson, Steve Stephens and Coral Capital Partners in Texas state court to force them to relinquish about 150,000 restricted shares that they had received for assisting Sun River as an analyst and as part of an underwriting process.

After Nelson and Stephens waited the six-month restricted period under Rule 144 and asked the company to remove the legends, their request was refused. Sun River claims that Nelson, Stephens and Coral River were privy to material, non-public information that Nelson received when he was doing work for Sun River.

Sun River claimed that Nelson had already improperly sold some shares without first seeking the removal of the restrictive legends. Nelson denies this.

Sun River told the court it would be harmed if Nelson and Stephens were allowed to sell their stock based on the non-public information and that Sun River could face liability with the Securities and Exchange Commission under Regulation FD.

The confidential information that Nelson received included details about the geology of Sun River’s oil and gas holdings, information about a lawsuit that the company was involved in and details about financial structures, McMillan stated in an affidavit.

Nelson had been told non-public information related to Sun River’s lawsuit with LPC, including “Sun River’s inability to raise capital to settle with LPC and Kevin Paul,” the affidavit states.

Nelson, who has filed a counterclaim in federal court in Colorado, disputes that he ever sold restricted stock of Sun River or knows of any material, non-public information. He also denies telling Stephens about such information, or basing his decision to sell Sun River shares on inside information.

Nelson told The PIPEs Report that Sun River’s argument that he possesses material, non-public information suggests that Sun River itself may have violated regulations requiring disclosure of material matters.

Nelson blames McMillan for Sun River’s pattern of litigation and accuses him of orchestrating a scheme to inflate Sun River’s share price in order to list on the Nasdaq.

Alleged Settlement

Pennington told The PIPEs Report in an email that Sun River has already settled its litigation with Nelson. Nelson agreed to return all of the 25,000 shares he still holds in Sun River and Stephens agreed to return more than half of his Sun River shares, Pennington said.

But Nelson and his attorneys denied that any settlement had been reached.

A review of court documents shows that the parties did discuss a settlement in which Nelson would have agreed to relinquish all his shares and Stephens would have been allowed to keep 40,000 shares with restrictions on how much stock he could sell each day.

But Nelson and Stephens decided not to sign the settlement agreement and demanded a cash payment instead, their attorneys say and court documents show.

Sun River is seeking a court ruling to enforce the settlement anyway. The company characterized Nelson’s and Stephens’ rejection of the settlement as “buyer’s remorse” and “bad faith.”

Nelson said he’s provided evidence of Sun River’s and McMillan’s alleged market manipulation to the SEC and regulators in Texas and Colorado.

Officials at the SEC and at the Texas State Securities Board declined to comment. An official with the Colorado State Division of Securities couldn’t be reached.

“If the SEC is aware of these allegations, there certainly is an investigation to pursue,” said Frenkel, the former SEC Enforcement attorney.

Recent PIPE

In January, Sun River raised $10 million with a private placement of convertible preferred stock to investors including Centaur Value Fund, Sherbrook Partners, Next View Partners, Seaside 88, Warburg Opportunity Trading Fund, Brio Capital, Micro PIPE Fund, Fairfield Investment and Bank of Guttenberg. The six-month restricted period for the shares is up this month.

Sun River issued 5 million preferred shares that converted at $2 each at a time when its common stock was trading at $4. Sun River had the right to force conversion if its common shares traded above $4 for 45 consecutive days. The stock traded above $4 from Jan. 26 until Aug. 2, when they closed at $3.90.

Several portfolio managers who invested in the PIPE said they fully expect Sun River to honor its commitment to remove the restrictive legends, and that if it fails to do so they will seek legal remedies.

“I did not know they had a history of this type of litigation,” said Stewart Flink, who invested $250,000 on behalf of Next View Partners in Deerfield, Ill. “I will be able to sell under Rule 144 in August, so time will tell. While I can’t predict what they’ll do, there are $10 million or so worth of sophisticated investors that invested in the last round, and they gave them the capital for further exploration. If they choose to play games with registration, that would create a lose-lose-lose scenario, and I know management has enough experience to avoid those types of situations.”

Matt Balaker, a portfolio manager for the Micro PIPE Fund, which invested $250,000 in Sun River, also said he was unaware of Sun River’s history of litigating disputes over attempts to lift restrictive legends. He declined to comment further.

A third portfolio manager, who requested anonymity because he hadn’t yet put in a request to Sun River to lift the restrictive legends on his shares, said it was his understanding that McMillan became actively involved in the company’s management about two years ago, pushed the old management out and brought in his own management to protect his investment.

“It’s not a clean ownership story,” the portfolio manager said. “There had been litigation. The explanations I got seemed to make sense. There’s a history of sharp elbows. The Texas wildcatter community is not known for being pacifists.

“We expect they will treat all the shareholders in a fair and equitable manner,” he said. “If they don’t, we will protect our interests.”

Sun River’s Pennington didn’t respond to a request for comment on whether the company planned to lift the restrictions on the preferred convertible stock issued in the most recent private placement when investors ask.

Nelson and other shareholders said Sun River has three assets that could be worth hundreds of millions of dollars if they could be developed. The company has mineral interests in the Raton Basin in New Mexico, the Permian Basin in western Texas, and in the East Texas Basin.

Sun River went public through a reverse merger with shell company Dynadapt System Inc. in 1998.

Prior to the fall of 2009, Sun River had focused on the development of coal-bed methane on its New Mexico properties. Since then, when the company changed its management team, it’s shifted its focus to identifying deep-basin-centered hydrocarbons on its New Mexico properties.

Sun River says in SEC filings that its current management team has significant experience in the development of basin-centered gas plays, such as those believed to exist on its New Mexico and Texas properties.

In the documents for its $10 million PIPE in January, Sun River said it planned to use the proceeds to purchase properties with proved producing reserves and pay costs related to exploration, drilling and completion on existing properties. The top priority listed was its East Texas Basin asset, which Sun River bought in February for $11 million. Other priorities included an agreement to farm out an East Texas property to Devon Energy Corp.


Coral Capital Partners was awarded a judgment in its favor against Sun River Energy, Inc. following a trial on October 23rd, 2013.  Please see our blog entry “Coral Capital Partners Victorious in Sun Energy Litigation” for a further explanation of the trial, and how Sun River dropped all of its claims prior to trial. It should also be noted that the District Court Judge ruled in our favor in the dispute over the proposed settlement, and our decision to not enter into what was a clearly one-sided agreement.

About Coral Capital Partners

Coral Capital Partners is an independent consulting and advisory firm focused on companies and participants in the lower and middle markets. We partner with our clients to provide cost effective solutions to real world issues and situations. Our experienced team brings a diverse set of skills that allows us to service a wide variety of needs.  Our area of services and expertise focuses on bringing services and solutions to our clients that are normally only available to much larger firms.  Coral Capital Partners, Inc.  provides services to Investment Banks,  Private Equity Funds, investors, and both privately held and publicly traded companies, as well as various stakeholders in those organizations.  This has included international public companies with operations on three (3) continents to smaller privately held domestic companies.  Our experience in the areas of corporate advisory, due diligence reviews, and regulatory compliance allows for a cost effective and efficient solution to the issues at hand.  Please feel free to contact our offices to see how we may be of assistance,