SEC V. MICHAEL A. BODANZA ET AL., Case No. 1:12-CV-1954 (N.D. Ohio, filed July 27, 2012)
SEC Charges Ohio Oil and Gas Concern with Offering Fraud
The Securities and Exchange Commission recently announced that it filed a civil injunctive action alleging fraud in connection with the unregistered offer and sale of securities by Michael A. Bodanza (“Bodanza”), the former chief financial officer and a founding member of Preferred Financial Holdings Co., LLC (“Preferred Holdings”), a company formed in 2006 to engage in oil and gas exploration, drilling, and leasing through operating subsidiaries.
In the complaint, filed in the U.S. District Court for the Northern District of Ohio, the Commission alleges that, from June 2007 to August 2010, Defendants Bodanza and Preferred Holdings raised $6,769,635 from at least 61 investors through the unregistered sale of Preferred Holdings promissory notes. During this period, Preferred Holdings experienced through its operating subsidiaries a series of material operational problems and suffered significant losses, including net losses of $1.0 million in 2007, $2.2 million in 2008, $1.8 million in 2009, and $1.3 million in 2010, according to consolidated financial statements prepared in 2011. Bodanza nonetheless depicted Preferred Holdings’ oil and gas operations in a positive light and failed to disclose to most investors that the company had suffered significant losses from 2007 through 2010. Further, Bodanza failed to disclose the following material facts to several investors: (i) Preferred Holdings removed one of its founding members and its chief operating officer in early 2008 and sued him for causing Preferred Holdings to suffer between $3 million to $4 million in damages; (ii) the only operating drilling rig held by Preferred Holdings’ drilling subsidiary suffered an irreparable breakdown in August 2008; (iii) Preferred Holdings was embroiled in an insurance coverage dispute to recover $1 million in losses and expenses incurred as a result of the rig breakdown; (iv) Preferred Holdings’ drilling subsidiary incurred $260,000 in drilling expenses above its original cost estimates in connection with a significant joint venture in 2009; and (v) Preferred Holdings’ subsidiary had failed to acquire certain property in Tennessee that could be used to drill and sell gas from its own producing wells. Finally, Bodanza also failed to disclose to at least three individuals who purchased promissory notes in 2010 that their investment proceeds would be used to make payments to other investors. The complaint further alleges that Preferred Holdings has failed to repay most of the investors whose notes have already come due and likely will default on a significant number of additional notes which come due in 2012. The complaint names Preferred Holdings’ subsidiaries, Preferred Drilling Co., LLC, Preferred Financial Investment Co., LLC, Preferred Financial Leasing Co., LLC, and Preferred Well Management Co., LLC as Relief Defendants based on their receipt or benefit from the funds raised through the unregistered, fraudulent offering.
The Defendants and Relief Defendants consented to entry of judgments against them without admitting or denying the allegations in the SEC’s complaint. Bodanza consented to a judgment permanently enjoining him from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 and ordering disgorgement of $359,656 and prejudgment interest of $50,551, but waiving payment of all but $154,000 and not imposing a civil penalty based upon his financial condition. Preferred Holdings consented to a judgment permanently enjoining it from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5; and ordering disgorgement of $4,485,647 and prejudgment interest of $268,143, jointly and severally with the Relief Defendants. Each of the Relief Defendants consented to a judgment ordering disgorgement of $4,485,647 and prejudgment interest of $268,143, jointly and severally with Preferred Holdings.