Recommendation of unsuitable investments, and an investment strategy, negligence, common law fraud, breach of fiduciary duty, the failure to supervise, financial elder abuse

$104,500.00

$57,000.00

Negligence; suitability; negligent misrepresentation and omission; intentional misrepresentation and omission; fraud; breach of fiduciary duty; failure to supervise; violations of California Securities Act; control person liability; breach of FINRA Rules; breach of contract ; loss of investment opportunity

$693,123.29

Sophisticated investors seeking refund of investment dollars on a single unsuccessful investment made as part of a more broadly diversified portfolio. Respondent named due to position as executive of the firm and played no role in the management of the offering nor had any affiliation with the company managing the asset in question. Respondent denies allegations.

FINRA

Bixler was named a respondent in a FINRA complaint alleging that he, with his member firm and the firm's CEO, participated in a fraudulent scheme and defrauded investors by selling investments in saltwater disposal wells at excessive, undisclosed markups through a middleman "development" company they owned and controlled. The complaint alleges that the fraudulent markups totaled over $8 million. The complaint also alleges that investors were not informed, in the private placement memorandum (PPM) or otherwise, that the fund would pay or had paid excessive markups for its purchases of interests in saltwater disposal wells from the development company. Bixler repeatedly violated his fiduciary duties of loyalty to the fund by causing the development company to usurp opportunities to invest in the wells and by causing the fund to purchase interests in those wells from the development company at excessively marked up prices. Bixler breached his fiduciary duties of care to the fund by engaging in transactions with affiliates without taking steps to ensure that the fund was paying fair prices for its investments, such as abiding by the promise to obtain independent appraisals as represented in the PPM. As a result, among other things, the fund owned a smaller percentage of each well it purchased, and investors in the fund earned correspondingly lower distributions resulting from the fund's well interests. As a result, Bixler willfully violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5(a)-(c) thereunder, and FINRA Rules 2010 and 2020. The complaint further alleges that the development company was largely engaged in buying and reselling well interests, which were securities. Although this rendered it a dealer of securities, Bixler failed to register the development company with FINRA or the SEC. By virtue of his ownership and control of the development company, Bixler had the ability to cause the development company to register as a dealer but failed to do so. As a result, Bixler willfully violated Section 15(a) of the Securities Exchange Act of 1934 and FINRA Rule 2010.

Decision

Bar (Permanent)

All capacities

Indefinite

6/30/2020

Monetary Penalty other than Fines

$28,934.60

Restitution

$901,418.00

Extended Hearing Panel decision rendered November 29, 2018. The sanctions are based on findings that Bixler willfully defrauded investors by charging unreasonable and undisclosed markups on sales of fractional interests in saltwater disposal wells in violation of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), Exchange Act Rule 10b-5 thereunder and FINRA Rules 2020 and 2010. The findings stated that Bixler and the firm's chief executive officer (CEO) formed a business relationship with a development company that constructed and operated disposal wells that return saltwater byproduct from nearby oil wells to rock formations below the ground. Bixler and the CEO, with two firm associates, formed a salt-water reclamation fund (the fund) to bring in investors along with the capital needed to construct and operate the wells. Bixler, the CEO and the sales associates made all investment decisions for the fund, were the fund's Investment Committee and owners of the fund's managing member. The firm served as the managing broker dealer for the distribution of fund shares, selling the interests through firm representatives as well as brokers at other firms within the selling group. Investors purchased units in the fund at a cost of approximately $12.4 million. The fund's original private placement memorandum (PPM) did not disclose to investors that the development company would resell interests to the fund at substantially higher prices than it purchased them. The findings also stated Bixler breached fiduciary duties of loyalty and care to the fund by causing the development company to usurp opportunities to purchase lower priced well interests that should have been reserved for the fund, and by causing the fund to purchase those interests at marked up prices. The findings also included Bixler was aware the primary reason the development company existed was to buy working interests as a principal from the market and to sell the interests to investors, including the fund, which qualified it as a dealer of securities. As a result, Bixler caused the development company to act as an unregistered dealer in willful violation of Section 15(a) of the Exchange Act and FINRA Rule 2010. On December 21, 2018, Bixler appealed the decision to the NAC. NAC decision rendered June 23, 2020 wherein the findings made are affirmed and the sanctions imposed by the Hearing Panel are affirmed. The bar is in effect as of June 30, 2020. The decision became final on July 27, 2020.

The Panel's decision on appeal was denied by NAC. This is a case of first impression. FINRA has never before heard a case involving alleged markups in purchases and sales of saltwater disposal well interests ("SWDs"). SWDs are an unusual product which FINRA was unfamiliar with when its investigation began. The FINRA Panel issued a decision on November 29, 2018 which ignored important exculpatory evidence, including the fact that no investors lost money on the purchase of an SWD and the fact that the PPM for the Fund disclosed that the Development Company was formed, among other reasons, to facilitate IRC Section 1031 exchange transactions. The PPM also contained numerous disclosures concerning actual and potential conflicts of interest between the Fund, the Development Company and principals of the Firm. The evidence at the hearing established that, contrary to FINRA's allegations, the Development Company's acquisition costs were not material to customers who invested in SWDs. After the Firm elicited testimony to this effect and other exculpatory testimony, FINRA voluntarily decided not to call additional customers as witnesses. Although the Panel found that the Firm, its President and its CEO had a good-faith belief that SWDs were not securities but instead were real property, they nonetheless ignored this finding and the ample exculpatory evidence presented at the hearing and ultimately reached erroneous conclusions. While the Panel ordered "restitution" based on the alleged markups, customers have the option to reject this restitution due to the fact that many SWD investors made their investment to capitalize on the tax-advantaged savings available under IRC Section 1031. The Firm, its President and its CEO maintain that the Panel's decision was based on erroneous factual and legal conclusions, including allowing FINRA to call incorrectly-identified witnesses at the hearing.