cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 1 of 23

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1 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 1 of IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION IN RE PRIMERA ENERGY, LLC Case No cag Debtor Chapter 11 FREDERICK PATEK, GERALDINE PATEK, JIM GREGORY, CAL CURTNER LISA SIMPSON, JASPER CAMPISE, Adversary No cag KAREN SMITH, WILLIAM CRAWFORD, MIKE COVINGTON, MARC KEESE MIKE MCPHERSON, ED MCPHERSON WESLEY CROW, DIETER JANSEN QUACKENBUSH PETROLEUM LLC, JAMES REILEY, BETTY REILEY RICK REILEY, GREG SHILTS, JANA SHILTS, VINCENT J. GILLETTE, MARJORIE A. GILLETTE, THOMAS J. GILLETTE, EDWARD A. GILLETTE, SHARON WALLS AND BUDDY WALLS, DC OIL COMPANY, INC., BUFORD AND LILIAN SALMON, JOHN BERTSCH, REG, LLC, JOSEPH HART, BRIAN HUBER, DAVID DAVALOS, DANIEL DAVALOS, R+E+G, LLC, K & Z DISTRIBUTING, INC., DENNIS MCMILLIAN, FREDERICK JOHNSTON, MILAN KNEZOVICH II, AND ON BEHALF OF ALL OTHER SIMILARLY SITUATED INVESTORS OF DEFENDANTS SCREAMING EAGLE, MONTAGUE LEGACY AND BUDA WELL INVESTMENTS Plaintiffs VS. BRIAN K. ALFARO, PRIMERA ENERGY, LLC, ALFARO OIL AND GAS, LLC, ALFARO ENERGY, LLC, KING MINERALS, LLC, SILVER STAR RESOURCES, LLC, 430 ASSETS, LLC, A MONTANA LLC, KRISTI MICHELLE ALFARO, BRIAN AND KRISTI ALFORO, AS TRUSTEES OF THE BRIAN AND KRISTI ALFARO LIVING TRUST, & & ANA AND AVERYS CANDY ISLAND, LLC Defendants. 1

2 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 2 of PLAINTIFFS THIRD AMENDED COMPLAINT 1 TO THE HONORABLE JUDGE OF SAID COURT: The above styled and named Plaintiffs, ( Plaintiffs ) in the above-entitled and numbered cause, file this Third Amended Complaint complaining of Defendants Brian K. Alfaro, Primera Energy, LLC, Alfaro Oil and Gas, LLC, Alfaro Energy, LLC, King Minerals, LLC, Silver Star Resources, LLC, 430 ASSETS, LLC, Kristi Michelle Alfaro, Ana and Averys Candy Island LLC, and Brian Alfaro and Kristi Alfaro as Trustees of the Brian and Kristi Alfaro Living Trust, hereinafter collectively Defendants. Plaintiffs assert causes of action under the Texas Securities Act, TEX. REV. CIV. STAT. ANN. art et seq. ( Securities Act ), fraud, fraud in the inducement, unjust enrichment, disgorgement, restitution, money had and received, fraud in a real estate transaction, negligent and intentional misrepresentations, conversion, negligence, gross negligence, breach of fiduciary duty, and unconscionable and unsavory acts under the Deceptive Trade Practices Act. Plaintiffs further seek the imposition of a constructive trust and equitable lien with respect to assets of any kind obtained through the fraudulent scheme, including, but not limited to, assets fraudulently transferred to third parties. In support thereof, would show the court the following: I. PARTIES 1. Plaintiffs are investors and purchasers of Defendants oil and gas investments involving the Montague Legacy, Screaming Eagle and Buda Well projects. Plaintiffs, Tommy 1 The Plaintiffs Original Verified Petition, First Amended Petition, and Second Amended Petition, all of which also included applications for the Appointment of a Receiver and Temporary and Preliminary Injunctions were filed in the Bexar County District Court before the action was removed to this Court. This Complaint is amended pursuant to the consent of the Parties in accordance with Fed. R. Civ. P. 15. The Plaintiffs request for injunctive relief have been brought by separate motion pursuant to Fed. R. Civ. P. 65, made applicable to this proceeding by Fed. R. Bankr. P

3 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 3 of Gillette, Sharon Walls and Buddy Walls are investors in the Buda Well project. 2. Defendants Primera Energy, LLC, Alfaro Oil and Gas, LLC, Alfaro Energy, LLC, King Minerals, LLC, and Silver Star Resources, LLC are Texas limited liability companies that have their principal place of business located at Gathering Oak, Suite 2101, San Antonio, Bexar County, Texas Defendants Primera Energy, LLC, Alfaro Oil and Gas, LLC, and Alfaro Energy, LLC have already appeared in this case. 3. Defendants King Minerals, LLC and Silver Star Resources, LLC may be served with process by serving their registered agent, Brian K. Alfaro, at Gathering Oak, Suite 2101, San Antonio, Bexar County, Texas Defendant Brian K. Alfaro is an individual who resides in San Antonio, Texas has already appeared in this case. 5. Defendant 430 Assets, LLC, a Montana limited liability company, whose home office is located at nd Street, Suite B, Whitefish, Montana 59937, may be served with process by serving the Texas Secretary of State at 1019 Brazos Street, Austin, Texas 78701, as agent for service because Defendant engages in business in Texas but has not designated or maintained a resident agent for service of process in Texas. 6. Kristi Michelle Alfaro is an individual who resides in San Antonio, Texas, and may be served with process at her usual abode, Cat Springs, Boerne, Texas 78006, and 310 Huntington Place, Shavano Park, Texas 781, or wherever she may be found. 7. Ana and Averys Candy Island is a Texas limited liability company, and may be served with process through its registered agent and Defendant Brian Alfaro, Cat Springs, Boerne, Texas 78006, and 310 Huntington Place, Shavano Park, Texas 781, or wherever he may be found. 3

4 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 4 of II. JURISDICTION AND VENUE 8. This Court has jurisdiction over this matter under 28 U.S.C Venue is appropriate in this Court under 28 U.S.C & III. NATURE OF THE CASE 10. Defendant Brian K. Alfaro serves as the Chief Executive Officer of Defendants (1) Primera Energy, LLC, (2) Alfaro Oil and Gas, LLC, (3) Alfaro Energy, LLC, (4) King Minerals, LLC, and (5) Silver Star Resources, LLC, all of which operated or operate out of a single office in San Antonio, Texas. Defendants are not registered to sell securities. Exhibits 1, 2 and 3 to Plaintiffs Second Amended Verified Petition. The investment contracts they are selling are securities, and these securities are not registered. Defendants are engaging in fraudulent activities. All of these acts are felony violations of the Securities Act and are violations of other Texas laws and pose an immediate threat to the public. Plaintiffs seek to cause an immediate halt to Defendants illegal and fraudulent operations and to freeze the account(s) where investors funds are held. 11. Brian Alfaro and his companies have a long and storied past in the sale of oil and gas investment securities. Alfaro entered the securities industry in October 1999 through registered firm The Champion Group, Inc. ("Champion"). Alfaro's employment was terminated by Champion in June He was employed by Pinnacle from September 2006 until March 3, During his career in the securities industry, Alfaro obtained Series 7, 39, and 63 licenses. FINRA Enforcement initiated a Temporary Cease and Desist proceeding alleging that Respondents were continuing to commit fraud and misuse customer funds. On February 10, 2011, Enforcement served a Notice of Suspension on Respondents based on Respondents' violations of the January TCDO. On April 25, 2012, FINRA Department of Enforcement expelled Alfaro s former entity, Pinnacle Partners Financial Corporation from FINRA membership, and barred Alfaro from associating with any member firm in any capacity, for violations of the Securities Exchange Act of 1934, NASD, and 4

5 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 5 of FINRA rules including: making material misrepresentations in connection with the sale of securities; misusing customer funds; unregistered sales of securities; failure to accurately report; failure to supervise, establish and maintain supervisory controls; and the willful failure to maintain books and records Alfaro was ordered to offer restitution to the customers who were the victims of these fraudulent securities sales involving 11 separate schemes, marketed as joint venture interests (general partnerships) for participation in the acquisition of working interests and net revenue interests in oil and gas wells. However, once Alfaro was barred, FINRA no longer had any authority to enforce the required restitution. Plaintiffs who were investors in these schemes were never offered restitution by Alfaro. The allegations contained in the foregoing complaint were deemed admitted, including the following: Alfaro operated a boiler room where registered representatives placed thousands of cold calls each week to solicit investments in Alfaro's captive oil and gas drilling joint ventures. The operators of the ventures are entities owned or controlled by Alfaro. Alfaro raised more than $10 million from more than 100 investors for offerings that misrepresented or omitted material facts. From August 2008 to Respondents' March 2011 suspension from FINRA registration and membership, Alfaro offered and sold fraudulent offerings to investors throughout the United States. These fraudulent sales, misrepresentations and omission of material facts caused significant harm to his customers. Alfaro provided investment summaries to all of the investors in these offerings. The investment summaries included numerous misrepresentations and omissions. Alfaro Oil and Gas charged exorbitant additional fees to all investors that are not typically incurred by other interest holders in similar oil and gas drilling projects. Alfaro failed to disclose to all investors that none of the joint ventures offered through 2 See the Order and Complaint attached to Plaintiff s Second Amended Verified Petition as Exhibit A. 5

6 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 6 of Pinnacle and Alfaro had ever been profitable for anyone other than Pinnacle, Alfaro, and entities that Alfaro owned and controlled. Alfaro sold the 11 joint venture interests to all investors at prices that were as much as 100% to 200% more than the cost estimates Alfaro received from the operators to drill the wells. As a result, investors received minority interests in oil and gas prospects at prices that included substantial additional costs: 1) to cover overhead; 2) to compensate the boiler room employees; and 3) to fund Alfaro's lifestyle. From January 2009 to March 2011, Alfaro misused customer funds to: (1) meet obligations for previous offerings; (2) cover Alfaro's personal expenses; and (3) make cash payments to Alfaro personally. Failing to inform investors that the recompletion funds they are providing will not be used for recompletion costs (but rather will be used to pay his past due obligations to the operator). Alfaro improperly diverted to his personal account and deleted all s related to Pinnacle and offerings sold by Pinnacle and Alfaro. The allegations strongly support an inference of intentional fraud. Alfaro s misconduct was egregious. Many of their misrepresentations discussed above were intentional, and the remainder were at least reckless. Alfaro systematically destroyed documents, maintained inaccurate books and records, and failed to report numerous written investor complaints. There was substantial injury to customers, whose losses were virtually assured at the time of their investments. Investors entrusted their funds to Alfaro with the belief that the funds would be used for drilling and production in the wells in which their ventures invested. The funds were used for Alfaro's personal expenditures and for business purposes that were not related to the purposes of the customers' investments The sales of the joint venture interests were fraudulent. Investors received little or no return for their investments. For some, the investments are already a complete loss, while there is at best a theoretical possibility for some cash flow from others. None of the investors who contributed additional funds were informed that their money was actually used to pay Alfaro's outstanding debts owed to various operators, Alfaro's unrelated business expenses, and Alfaro's personal expenses. This is particularly egregious given the fact that Alfaro marked up many of these offerings from 100 to 200%, took millions of dollars for unrelated business and personal purposes from investors' funds, and still failed to pay the operators what he owed. 13. This lawsuit concerns Alfaro s 11 th and 12 th Ponzi schemes, the Montague 6

7 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 7 of Legacy and Screaming Eagle projects. 3, 4 In his prior 10 schemes, he received a combined total of close to $10,000,000 in investor money, but the Montague Legacy and Screaming Eagle projects involved the drilling of horizontal wells in the Barnett and Eagle Ford Shale, and sought investments of around $10,000,000 for each well. Alfaro may have been barred from FINRA and his securities licenses revoked, but upon information his conduct and operations have remained virtually the same. In the Screaming Eagle project, there have been six (6) separate placements for six separate well proposals: the 1H, 2H, 3H, 4H, 5H (which was never drilled) and 6H wells. In order to fund this scheme, Alfaro and his sales representatives operated out of the same San Antonio boiler room, transacting cold calls all across the nation obtained from purchased lists of potential investors with a high net worth. Upon information, most of the targeted potential investors are elderly individuals over the age of 65. They are sent misleading colorful flyers and information from other companies designed to mislead potential investors. See Exhibit 10 to Plaintiffs Original Verified Petition. 14. The cold call salesmen that Alfaro hires are promised a salary with performance bonuses upon hiring. However, the salary is not a salary, but rather a 100% draw. The performance bonuses are a stated 10% commission of any investor money received by Alfaro. However, if Alfaro talks to said investor at any point in time before the investment money is received, the salesman only receives a 5% commission, if any at all. Alfaro also informs the salesmen that paychecks to them cannot reflect exacts, being the pure commission on the books, therefore the books are manipulated as to not accurately reflect the commission percentage of 3 A Ponzi scheme is an investment fraud wherein investors are enticed with the promise of extremely high returns or dividends over a very short period of time. Gutierrez v. Cayman Is. Firm of Deloitte & Touche, 100 S.W.3d 261, 266 n. 1 (Tex.App.-San Antonio 2002, no pet.). Investors are paid from monies obtained from later investors rather than from profits of the underlying business venture. Caldwell v. State, 95 S.W.3d 563, 566 n. 1 (Tex. App.-Houston [1st Dist.] 2002, no pet.). The scheme takes its name from Charles Ponzi, who in the late 1920s was convicted and punished for fraudulent schemes he conducted in Boston. Bryan A. Garner, Dictionary of Modern Legal Usage 671 (2d ed.1995). 4 The following is based upon information obtained from Plaintiffs, other investors in Defendants schemes, documents generated by Defendants, and ex-employees of Defendants. 7

8 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 8 of investment money received in any given month. In addition, Alfaro paid himself a bi-monthly salary of $50,000.00, annualized at $1,200,000.00, in addition to the commissions he credits himself with. 15. The cold call salesman are taught by Alfaro how to manipulate potential investors on the phone. Alfaro conducts regular meetings with the salesman on how to answer specific questions, guiding them on how to tell lies, stretch truths, and qualify answers to skirt around the specific questions being asked. For example, cold call salesman are taught to inform potential investors that the wells they were selling were next to high producing wells pumping out 1600 barrels of oil a day, and used this as a basis to entice investors on the expected returns they would receive upon investing, thereby manipulating X to come up with a completely unfounded Y. When investors asked the cold call salesman to provide them with real numbers on their investments, Alfaro refused to disclose this information to the cold call salesman, and instead directly talked with the investors to convince them that his made up numbers were a reality. Furthermore, Alfaro does not allow internet access or accounts for his cold call salesman, because of the foregoing FINRA investigation and the reduction of likelihood that he would get in trouble if writings existed evidencing the fraud. 16. After a cold call salesman has a potential investor on the hook over the phone, they are required to immediately send out a very colorful, professional looking, bound packet containing around 100 pages. Once a potential investor receives the packet, they are instructed to call the salesman back so that the packet can be explained to them. Alfaro trained his cold call salesman what to say and how to phrase the actual language contained therein, in order to get them to the signature page as quickly as possible, without setting off any red flags to the numerous amounts of unconscionable clauses contained therein. The materials provided to Plaintiffs concerning the above-mentioned wells contain numerous inaccuracies, nondisclosures, 8

9 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 9 of unconscionable and unenforceable provisions, blatant misrepresentations, and grossly inflated, unreasonable production estimates and projected investor returns. 5 Defendants purposely took advantage of Plaintiffs to an unconscionable degree. Upon information, Defendants induced investments totaling over $40,000, in the Montague Legacy and Screaming Eagle ventures through these procedures. However, none of these projects have ever been profitable for anyone other than Defendants. 17. Once an investment check is received by Defendants, Alfaro takes approximately 10% of the investment and diverts it into his own personal bank account. Around 60% of the investment money is then placed in the Defendants general accounts. Roughly only 30% of an investment for a particular well goes into an account designated for that particular well investment. 18. Alfaro offers the participation units in Defendants drilling projects for more than the actual and true estimated cost to drill these wells, then purchases used and/or substandard equipment, employ cheap, negligent and unskilled labor, and then retain the excess funds to further line Alfaro s pockets and support his lavish lifestyle. For example, the drilling of the Screaming Eagle 3H well occurred in the winter of Defendants experienced, without insurance coverage, what they have deemed as a collar and casing failure at that time, but did not inform the investors of this. Instead, in February of 2014 Defendants send out notice claiming the 3H well tested at a rate of 1,777 barrels of oil equivalent. See Exhibit 6 to Plaintiffs Original Verified Petition. Along with this notice, Defendants tried to induce investors to invest in the newest investment, the 5H well. On April 4, 2014, again without informing investors of the problems incurred on the 3H well, notice was sent informing that the 2H well had to be shut in for 61 days. See Exhibit 7 to Plaintiffs Original Verified Petition. It was not until May 20, 2014, that 5 The only perceived change from the materials provided on other schemes underlying the FINRA Order is the fact that there are more contradictory statements present and the fine print purports to show that by signing up Investors agree that Defendants can perpetrate a fraud upon them. 9

10 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 10 of Defendants sent notice to the 3H investors which began with Congratulations and ended with notice of the collar and casing failure and an invoice for expenses incurred. See Exhibit 8 to Plaintiffs Original Verified Petition. This was done despite the fact that the actual costs to drill the well did not even come close to exceeding the AFE amount presented in the Screaming Eagle 3H placement memorandum. 19. Furthermore, Defendants then assess fraudulent expenses by claiming that said expenses are overages for work done above and beyond the investments contributed. When some investors complain about this, Alfaro forgave the assessment without cause. Defendants have also used investors moneys on subsequent wells to pay expenses and liabilities incurred on previous wells. 20. Additionally, Defendants assess fraudulent lease operating expenses after the well has been completed and is in production. These costs are incurred in the actual maintenance of production activities on a monthly basis. Investors are being charged these monthly expenses showing that they were being paid to an outside entity for actual costs incurred in production. However, Defendants assess lease operating expenses on a flat rate basis under the justification that non-existent overages still need to be paid. 21. These overages are due to the fact that Defendants do not pay their vendors and need to raise additional investments on future schemes in order to pay back those vendors, but usually at a discounted rate, if any at all. Vendors employed by Defendants have in the past accepted substantially lower amounts for work performed, written off the money owed as bad debt, and some have threatened or actually filed liens against investors wells. Furthermore, Defendants kept investors from being able to find out who the other investors were on any given project so that Defendants house of cards would not collapse. 10

11 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 11 of 22. Investors in the Screaming Eagle wells have not received a check for production on any of the wells production and sales in over four months. Defendants have given Plaintiffs and various other investors differing excuses as to why they have not been paid including, chemical expenses, problems with a compressor, internal accounting issues, lack of staff, too much water being produced, need for a pump jack, and the list goes on. Plaintiffs fear that they will never receive another check from these wells from Defendants. Meanwhile, Alfaro has used Plaintiffs and all other investors moneys to make extravagant purchases to support his millionaire image and lifestyle. Upon information, Alfaro has purchased for himself multi-million dollar homes, extravagant vacations, lavish furnishings and jewelry, and luxury cars with an estimated value of over 1 million, including a Ferrari, a Bentley, a G-Class Mercedes adorned with the license plate Frack-It, and just within the last month or so, Alfaro purchased a brand new Porsche GT3 Sports Car for himself.. Defendants offering materials are filled with colorful maps, touting the Barnett and Eagle Ford Shale, stating that participation in the drilling of the well could prove to be a relatively low-risk venture, enticing language pointing potential investors to selected high producing wells in the area, whose numbers do not actually reflect actual production, and estimating monthly cash flow well over $10,000 based on an investment of $99, For example, the offering materials presented for the Montague Legacy 1H include an Estimated Peak Monthly Return from ownership of 1 unit therein of $10, to $20,160.00, based on production rates from BOPD. 24. It also contained an executive summary discussing the geology of the targeted drilling area for said well which purported to be authored by Randy Andrews, a certified Petroleum Geologist of the State of Texas. Upon information and belief based on the FINRA Order, Mr. Andrews did not actually author said executive summary, nor was his license valid at said time. 11

12 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 12 of Defendants were aware of the existence of multiple uneconomic wells near the proximity of each of these schemes, but chose to remove any reference to them in order to make the offering more attractive to potential investors, including Plaintiffs. 25. Finally, said materials failed to disclose that, upon information and belief, Alfaro s companies were near or at insolvency as of the time said offerings were made. The materials also identified Bruce I. Redfield as Vice President of Business Development for Alfaro Oil and Gas, LLC and Primera Energy, LLC, respectively, but failed to disclose that Mr. Redfield was then under federal indictment for multiple counts of mail fraud and wire fraud relating to his role in numerous mortgage fraud schemes. Upon information and belief, while under indictment, Mr. Redfield continued to work on drafting offering materials and cold-calling potential investors on Defendants behalf until ultimately pleading guilty in 2012, none of which was disclosed to potential investors. 26. The Screaming Eagle 1H offering materials discussed a well drilled by EOG Resources identified as the Bar Inverted T #1H, touting that the well flowed an initial production rate of 1809 BOPD. Defendants were aware, or at the very least should have known that by December 2011, the date of the Screaming Eagle 1H offering materials, production from said well had declined to around 60 BOPD, which was not disclosed or corrected. See Exhibit 9 to Plaintiffs Original Verified Petition. 27. The Screaming Eagle 1H well produced nothing more than a fraction of these estimates. The following are the production numbers allocated by month: Date Oil Produced Oil Disposed Jan Feb Mar Apr May Jun

13 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 13 of 28. Alfaro then assessed the investors additional expenses on the well. An investor with a 1 Unit share was assessed $15, Defendants represented that they carried insurance, but this turned out not to be true. At some point in the spring of 2014, Alfaro sent notice to the Screaming Eagle 1H investors that the well was no longer producing and needed to be shut-in and capped, leading the investors to believe that their investments had been a complete loss. However, it was not a complete loss to Defendants. At some point in the summer of 2014, Alfaro sold the 1H well to another company without informing the investors. See Exhibit 4 to Plaintiffs Original Verified Petition. Defendants kept the purchase money and at least $65, went into Brian Alfaro s personal bank account from the sale of the Screaming Eagle 1H well. Furthermore, the Screaming Eagle 1H well began dramatic production in July 2014 and thereafter. The following are the production numbers allocated by month: Jul Aug Sep Oct Nov Dec Jan Feb TOTAL: 3,006 2,870 Date Oil Produced Oil Disposed Apr May Jun Jul-14 1,260 1,018 Aug-14 1,505 1,542 Sep-14 1,841 1,846 Oct-14 1,565 1,728 Nov-14 1,334 1,8 TOTAL: 7,505 7,372 See Exhibit 5 to Plaintiffs Original Verified Petition. Upon information, Defendants have received and kept monies from this additional and substantial production without informing or distributing 13

14 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 14 of sales of production to the Screaming Eagle 1H investors. Defendants Actions Since this Lawsuit Was Filed 29. Plaintiffs originally filed this lawsuit in April 2015 against Defendants Brian K. Alfaro, Primera Energy, LLC, Alfaro Oil and Gas, LLC, and Alfaro Energy, LLC. The Honorable Larry Noll granted a Temporary Restraining Order and appointed an auditor on April 28, On May 22, 2015, the TRO was extended until June 1, 2015, because Monitoring Court did not have a court available to hear the Temporary Injunction and Application for Appointment of a Receiver until then. The Honorable Judge Antonio Arteaga presided over the Temporary Injunction and Receivership hearing. After hearing two days of testimony and the arguments of counsel, Judge Arteaga ordered that a receiver should be appointed over Primera Energy, Alfaro Oil and Gas, and Alfaro Energy. Judge Arteaga also entered a Temporary Injunction that was in effect until a receiver was selected. On June 3, 2015, Judge Arteaga appointed Lamont Jefferson of Haynes and Boone, LLP as receiver over the three Corporate Defendants. 30. However, ever since this lawsuit was filed, Defendants have engaged in a cat-andmouse game in an attempt to evade the ramifications of Plaintiffs lawsuit and the Court s orders. For example, on June 3, 2015, the same day Judge Arteaga appointed Mr. Jefferson as the receiver over Primera Energy, Alfaro Oil and Gas, and Alfaro Energy, Primera Energy filed for bankruptcy in the Western District of Texas. In addition, on information and belief, Mr. Alfaro has begun to use two additional companies, Defendants King Minerals, LLC, and Silver Star Resources, LLC, to carry on the fraud perpetrated by the original four Defendants. King Minerals and Silver Star Resources are owned and operated by Mr. Alfaro and, on information and belief, Mr. Alfaro has been using these companies to evade the receivership and to continue his fraudulent practices. If Alfaro s and Defendants King Minerals and Silver Star Resources assets are not frozen during the pendency of this lawsuit, he will continue to disregard the Court s orders and withdraw money 14

15 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 15 of that is rightfully Plaintiffs for his own personal use. 31. Moreover, it is now necessary to extend the injunctive relief already granted against Mr. Alfaro, Primera Energy, Alfaro Oil and Gas, and Alfaro Energy to King Minerals and Silver Star Resources as well. IV. CAUSES OF ACTION 32. All of the foregoing paragraphs are incorporated by reference into each cause of action, and all facts and causes of action are pled in the alternative, as well as a whole, and apply to all Defendants unless specifically limited hereafter. COUNT 1 COMMON-LAW FRAUD 33. Defendants made material false representations to Plaintiffs with the knowledge of their falsity or with reckless disregard of the truth with the intention that such representations be acted upon by Plaintiffs, and that Plaintiffs relied on these representations to their detriment. As a proximate result of such fraud, Plaintiffs sustained the damages described more fully herein below. COUNT 2 FRAUD IN A REAL ESTATE TRANSACTION 34. Plaintiffs will show that Defendants fraudulent representations as referenced above were made in connection with real estate transactions as defined by Section of the Texas Business & Commerce Code, as the transactions involved purchases and sales of interests in oil and gas wells, and that said representations or omissions were made by Defendants for the purposes of inducing Plaintiffs to enter into a contract. As a proximate result of such fraud, Plaintiffs sustained the damages described more fully herein below. COUNT 3 NEGLIGENT MISREPRESENTATION 35. Plaintiffs will show that Defendants made representations in the course of Defendants business, that said representations constitute misstatements of fact made without use of reasonable care in obtaining or communicating the information, and that Plaintiffs justifiably 15

16 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 16 of relied on Defendants representations to his detriment. As a proximate result of said negligent misrepresentations, Plaintiffs sustained the damages described more fully herein below. COUNT 4 DECEPTIVE TRADE PRACTICES ACT 36. Each Plaintiff is a consumer under the DTPA because Plaintiffs acquired a good or service by purchase from Defendants. Defendants are persons who can be sued under the DTPA. Plaintiffs will show that Defendants have engaged and are still engaging in misleading or deceptive acts or practices in connection with Plaintiffs s transactions. Specifically, Defendants actions constitute the following violations enumerated in Section of the Texas Business & Commerce Code: (1) Passing off goods or services as those of another; (2) Causing confusion or misunderstanding as to the source, sponsorship, approval, or certification of goods or services; (3) Causing confusion or misunderstanding as to affiliation, connection, or association with, or certification by, another; (5) Representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities which they do not have or that a person has a sponsorship, approval, status, affiliation, or connection which he does not; (6) Representing that goods are original or new if they are deteriorated, reconditioned, reclaimed, used, or secondhand; (7) Representing that goods or services are of a particular standard, quality, or grade, if they are not; (8) Disparaging the goods, services, or business of another by false or misleading representation of facts; (9) Advertising goods or services with intent not to sell them as advertised; 16

17 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 17 of (12) Representing that an agreement confers or involves rights, remedies, or obligations which it does not have or involve, or which are prohibited by law; and (24) Failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed. Plaintiffs relied on the foregoing false and misleading acts and practices to their detriment. Defendants DTPA violations were committed knowingly and/or intentionally, which entitles Plaintiffs to recover treble economic damages under Section 17.50(b)(1) of the Texas Business & Commerce Code. Further, Defendants engaged in unconscionable conduct and actions which were glaringly noticeable, flagrant, complete and unmitigated, which entitles Plaintiffs to recover damages for mental anguish under Section 17.50(a)(3) of the Texas Business and Commerce Code. 37. Defendants wrongful conduct was a producing cause of Plaintiffs damages. COUNT 5 BREACH OF FIDUCIARY DUTY 38. Plaintiffs and Defendants have a fiduciary relationship. Defendants, as those operating control over the relationship owe Plaintiffs, who had no operational control, one of the highest fiduciary duties under the law. Huffington, 532 S.W.2d at 579. Defendants breached its duties to Plaintiffs. Defendants breaches resulted in injury to Plaintiffs, and also significant benefit to Defendants. COUNT 6 - VIOLATIONS OF THE TEXAS SECURITIES ACT 39. Section 4.A of the Securities Act defines securities to include any investment contract. The investment opportunities offered for sale and sold by Defendants for investor profit constitute investment contracts and, therefore, are securities as defined by the Securities Act. Under established Texas law, whether there is an investment contract is determined by reference to 17

18 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 18 of four factors, to-wit: investment of money, a common enterprise expectation of profits, and whether the investor makes any significant efforts, and whether the efforts made by those other than the investor are undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise. There is an expectation of profits. Defendants enticed potential investors with substantial rates of return. 40. After the investment of funds, investors have no duties other than to wait on their profits or returns. Investors have no way to remove Defendants from continually committing fraud, or any way to prevent Defendants from continually causing them harm. All four factors have been met in the instant case and the investment opportunities offered for sale and sold to people were investment contracts; thus, Defendants are selling securities. (A) SALE OF UNREGISTERED SECURITIES 41. These securities are not registered with the Commissioner as required by the Securities Act. Section 7.A(1) of the Securities Act prohibits the sale or offer for sale of unregistered securities as follows: No dealer or agent shall sell or offer for sale any securities issued after September 6, 1955, except those which shall have been registered by Notification under subsection B or by Coordination under subsection C of this Section 7 and except those which come within the classes enumerated in Section 5 or Section 6 of this Act, until the issuer of such securities or a dealer registered under the provisions of this Act shall have been granted a permit by the Commissioner.... The securities offered for sale and sold by Defendants have not been and are not currently registered with the Securities Commissioner, nor has a permit been granted for the sale of such securities as required by Section 7 of the Securities Act. (B) FAILURE TO REGISTER PERSONS SELLING 42. Section 12.A of the Securities Act requires that all persons selling or offering to sell 18

19 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 19 of securities in Texas must be registered under the Act as follows: Except as provided in Section 5 of this Act, no person, firm, corporation or dealer shall, directly or through agents, offer for sale, sell or make a sale of any securities in this state without first being registered as in this Act provided. No agent shall, in behalf of any dealer, sell, offer for sale, or make sale of any securities within the state unless registered as an agent for that particular registered dealer under the provisions of this Act. During the period that securities were sold and offered for sale, Defendants were not registered as dealers or agents as required by Section 12.A of the Securities Act. (C) FRAUDULENT PRACTICES IN THE SALE OF SECURITIES 43. The use of fraud and fraudulent practices in connection with the offer for sale and sale of securities is prohibited by Sections 4.F, 25-1, and 32.A of the Securities Act. In Section 4.F of the Securities Act, fraud is defined as follows: The term fraud or fraudulent practice shall include any misrepresentations, in any manner, of a relevant fact; any promise or representation or prediction as to the future not made honestly and in good faith, or an intentional failure to disclose a material fact;... provided, that nothing herein shall limit or diminish the full meaning of the terms fraud, fraudulent, and fraudulent practice as applied or accepted in courts of law or equity. 44. Defendants, in the issuance, sale, promotion, negotiations, advertisement, or distribution of securities in the State of Texas, have engaged in fraud and fraudulent practices by misrepresenting material facts and intentional failing to disclose material facts as outlined above. Defendants, with intent to deceive or defraud or with reckless disregard for the truth or the law, have materially aided, and are materially aiding, one another in the fraudulent practices set forth above. COUNT 7 CONVERSION 45. Plaintiffs, those who invested in the Screaming Eagle 1H well, owned, possessed and had the right to immediate possession of the personal property comprising Screaming Eagle 1H 19

20 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 20 of well. Plaintiffs also owned possessed and had the rights to a proportionate right of the production of oil, gas and other minerals from the wells. Defendants wrongfully exercised dominion or control over this property. As a proximate result of such conversion, Plaintiffs sustained the damages described more fully herein below. COUNT 8 TEXAS UNIFORM FRAUDULENT TRANSFER ACT 46. Defendants violated the Texas Uniform Fraudulent Transfer Act, Tex. Bus. & Comm. Code et seq., by operating a Ponzi scheme and transferring the profits of the Ponzi scheme directly and indirectly to Defendant Brian K. Alfaro. Defendant Alfaro then transferred and continues to transfer the profits to fund his lavish lifestyle. Defendant Alfaro also has incurred fraudulent obligations in support of his lifestyle. These transfers and obligations are all fraudulent as to Plaintiff-creditors because Defendant-debtors made said transfers and obligations after or within a reasonable time before Plaintiffs claims arose. These transfers and obligations are also fraudulent because Defendants made the transfers and obligations with actual intent to hinder, delay or defraud Plaintiffs. Upon information and belief, the property and monies transferred by Alfaro, Silver Star Resources, LLC, King Minerals, LLC have been transferred to Defendants, Kristi Alfaro, the Brian and Kristi Alfaro Living Trust, 430 Assets, LLC, among others. COUNT 9 UNJUST ENRICHMENT/DISGORGEMENT 47. Defendants have been unjustly enriched to the extent the funds they received from Plaintiffs as a part of the fraudulent investment scheme outlined in the preceding paragraphs. Therefore, Plaintiffs are entitled to a judgment in equity that Defendants be required to disgorge and pay those sums back to Plaintiffs. COUNT 10 MONEY HAD AND RECEIVED 48. For the equitable cause of action of money had and received, [a]ll the plaintiff need show is that defendant holds money which in equity and good conscience belongs to him. Staats v. 20

21 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 21 of Miller, 243 S.W.2d 686,687 (Tex. 1951). It aims at the abstract justice of the case, and looks solely to the inquiry whether the defendant holds money which belongs to the plaintiff. Id at , Defendants obtained money from Plaintiff-creditors either by fraud, duress, or undue advantage through the actions outlined in the preceding paragraphs, money that in equity and good conscience belongs to Plaintiffs. Plaintiffs have been damaged by Defendants conduct. Therefore, Plaintiffs are entitled to equitable relief. COUNT 11 CIVIL CONSPIRACY 49. Defendants and co-conspirators, Brian and Kristi Alfaro, both individually and as Trustees of the Brian and Kristi Alfaro Living Trust, 430 Assets, LLC, Silver Star Resources, LLC, King Minerals, LLC, Alfaro Energy, LLC, and Ana and Avery s Candy Island, in combination with one another, agreed to accomplish for an unlawful purpose or a lawful purpose by unlawful means. These members and Defendants had a meeting of the minds on the object or course of action to divert Plaintiffs moneys and property from them under the above causes of action. One or more of these members and Defendants committed an unlawful, overt act to further this object or course of action. Plaintiffs have suffered a substantial injury as a proximate result of these wrongful acts. V. DAMAGES 50 Defendants conduct proximately caused significant damages to Plaintiffs, for which they seek recovery, both past and future damages, as follows: a) Out of pocket damages; b) Actual damages; c) Benefit of the bargain damages; d) Damages for mental anguish under Section 17.50(a)(3) of the Texas Business & Commerce Code; 21

22 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg 22 of e) Treble damages under Section 17.50(b)(1) of the Texas Business & Commerce Code; f) Exemplary damages; g) Attorney's fees, expert witness fees, costs for copies of depositions, and costs of court under Section of the Texas Business & Commerce Code; h) Pre-judgment and post-judgment interest; i) Restitution; j) Disgorgement; k) Equitable relief; l) Appropriate injunctive relief; m) Constructive trust; n) Receivership; o) such other and further relief to which the Plaintiffs may be entitled at law or in equity. VI. CONCLUSION AND PRAYER WHEREFORE, PREMISES CONSIDERED, Plaintiffs pray the Defendants be cited to answer and appear herein, and that upon final trial that it recover judgment for all of Plaintiffs damages, pre-judgment interest, post-judgment interest, attorneys fees for the statutory violations, costs of court, and for such other and further relief as it may show itself to be justly entitled. Dated: August 14, Respectfully Submitted, LANGLEY & BANACK, INC. 745 East Mulberry, Suite 900 San Antonio, TX Telephone: (210) Fax: (210)

23 cag Doc#29 Filed 08/14/15 Entered 08/14/15 11:06:09 Main Document Pg of By: /s/ Natalie F. Wilson David S. Gragg State Bar No Natalie F. Wilson State Bar No FAULK BARCHUS PLLC /s/ Brandon Barchus Brandon M. Barchus State Bar No Bering Drive Suite 400 Houston, Texas Tel Fax CERTIFICATE OF SERVICE THE MORALES FIRM, P.C. /s/ Lawrence Morales II Lawrence Morales II State Bar No E. Travis, Suite 1530 San Antonio, Texas Telephone No. (210) Facsimile No. (210) ATTORNEYS FOR PLAINTIFFS I do hereby certify that on August 14, 2015, I served the attached instrument on Defendants counsel via the Court s electronic transmission facilities and electronic mail. Mitch Little Patrick Schurr SCHEEF & STONE 500 North Akard, Suite 2700 Dallas, Texas Fax: mitch.little@solidcounsel.com; patrick.schurr@solidcounsel.com /s/ Natalie F. Wilson Natalie F. Wilson