Crime

Former Texas State Senator Charged by SEC with Defrauding Investors of $11M

Carlos Uresti, a Texas state senator who was already in trouble after being forced to resign with 11 felony convictions for other matters, was just charged with by the Securities and Exchange Commission in a major fraud case.

In areas where shale-drilling/hydraulic fracturing is heavy, a dense web of roads, pipelines and well pads turn continuous forests and grasslands into fragmented islands. Regions like this were to be served by defendants Uresti and Bates, who claimed they used their fraudlent operations to buy and sell sand to be used with fracking. Photo: Simon Fraser University - University Communications, CC

According to the SEC lawsuit filed against Uresti and a colleague Stanley P. Bates on September 28, Bates and Uresti raised over $11 million in a complex fraud scam “to purportedly buy and sell sand used in hydraulic fracking to extract oil and gas”. In the process of setting up and running that scheme, the SEC says the two “violated, and unless enjoined will continue to violate, the anti-fraud and registration provisions of the federal securities laws.”

The two did so in part through Bates’ formation of FWLL, LLC, a Texas limited liability company based in San Antonio, Texas, and with the charter to buy and sell sand used in hydraulic fracturing, a process used to extract oil and gas from shale rock. In 2013, the year the company was formed, the shale oil industry was growing rapidly in the Eagle Ford region where Bates formed the company. His own personal “get rich quick” idea was to buy fracking sand elsewhere, get it to the Eagle Ford, then sell it at a big markup.

In 2014, Bates recruited then Texas State Senator and licensed attorney Uresti to help solicit investors and build an organization of others who would also solicit investors. Starting in May 2014, Uresti signed on as corporate counsel for FWLL, LLC, in return for 1% ownership in the company and a monthly retainer. He also operated as an escrow agent for some investors, something else for which he earned a fee. Uresti rounded out his employment with FWLL, LLC by acting as an unlicensed broker for any investments he brought in; for his efforts on those investments he was to be given a 3% commission on the investment and 10% of the profits secured by that investment. He also had other profit-sharing methods built into his agreements with FWLL, LLC and Bates.

Uresti and Bates also concocted an unusual Joint Venture Agreement (JVA) approach to bringing on those new investors. Rather than invest directly in the company itself, as the suit says, “each investor or investment group executed a separate JVA, which gave a distinct name to the new venture entity, designated FWLL as the managing venture, and dictated the terms of the investment.”

As part of the arrangements, generally 50% of the profits for each JVA went to FWLL and 50% went to the investor. All of the ventures had decision-making authority for the investments in the hands of FWLL as the managing partner in the JVA. All ventures also supported FWLL’s stated purpose of buying and selling fracking sand.

Part of the crimes Bates and Uresti are charged with involves how FWLL “frequently disregarded the entity form [of the Joint Venture] by commingling investor funds between joint ventures and, in at least one instance, paying investors fictitious returns with another investor’s money”. This is alleged to have been done in part as part of a Ponzi scheme in which early investors would get paid off with later investors’ monies.

As part of the investment scheme, Bates and Uresti proceeded to go after the investments without securing any legal accreditation or license to do so from the SEC, despite that these JVA constituted securities investments under U.S. Federal law. They also took no step to qualify their investors in the JVAs, which they were mandated to do under Federal law as well.

Bates in particular also misrepresented many aspects of the investment to potential investors, and Uresti backed him up on these issues, compounding the fraud. As the suit notes, “Bates name-dropped local business personalities, celebrities, and professional athletes who had purportedly invested or were interested in FWLL, bragged about being a sniper in the U.S. Marine Corps, claimed to have invested $2million of his own money in FWLL, and proclaimed that another company had offered to buy FWLL for $200 million.” The suit goes on to say that, “As Bates knew, these claims were false.”

One of the more outrageous – and criminally liable – actions Bates did for the FWLL deal was by creating doctored bank statements for the company when certain investors questioned how financially solid the company was. “When [one] investor expressed concerns that FWLL did not have sufficient funds to support the company’s operational and administrative costs, Bates showed him [a] $18.8 million bank statement. In reality, there was only $98,897 in the account. Bates had ordered FWLL’s IT employee to alter the bank statement.”

Uresti himself was called on account by the SEC suit for a particularly disgusting abuse of trust. After helping one of his legal clients win a large sum of money in a wrongful death lawsuit, one in which that client lost both of her children. Leveraging the woman’s trust in an arrangement which also involved an “intimate relationship” with her, the lawsuit says that “Uresti convinced his client to pull $900,000 form her investments with her financial advisor and to invest those funds in the FWLL venture”. He even used the false bank statement Bates and his IT person had fabricated as part of the “proof” to convince her to make the investment.

Uresti also neglected to tell his client that he was getting a 3% commission on her investment, plus a percentage of any profits made on that investment.

The SEC also charged Uresti and Bates with misuse of investor funds. The suits says that, “Among other improper expenditures, Bates used investor funds to pay for prostitutes, to buy drugs, to pay models to work in the office, to pay for his mother’s residential move (classified as ‘corporate housing’), to make child support payments, to payhis son’s fraternity dues, and to purchase expensive clothing, dining, luxury car rentals (including a Ferrari), designer shoes for his girlfriends (classified as ‘investor relations expenses’), an ATV and other personal luxury items.”

The Securities and Exchange Commission case against Carlos I. Uresti and Stanley P. Bates was filed in United States District Court, Western District of Texas, San Antonio Division, as Case No. 5:18-cv-1013 on September 28, 2018.