SEC v. JBH Consulting Group LLC

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF MISSOURI
WESTERN DIVISION

U.S. SECURITIES AND EXCHANGE
)

COMMISSION, )

)
Plaintiff, )

)
v. )
Case No. 4:17-cv-00059

)

BRIAN S. HUDNALL and

)

JBH CONSULTING GROUP LLC, )

 )

Defendants. )

  )

COMPLAINT

Plaintiff U.S. Securities and Exchange Commission (“Commission” or “SEC”), as and
for its Complaint against Defendants Brian S. Hudnall and JBH Consulting Group LLC, alleges:
SUMMARY

1. From September 2008 through at least June 2014, Defendants JBH Consulting
Group LLC (“JBH”) and Brian S. Hudnall, JBH’s President and CEO, made materially false and
misleading statements to potential investors in order to sell securities in numerous oil and gas
offerings.  None of the securities offerings – or purported “joint ventures,”  as Defendants
labeled them—were registered with the SEC.  And none of the individuals working for JBH to
sell the securities, including Hudnall, were licensed or associated with registered brokers.
2. Through the false and misleading securities offerings, JBH and Hudnall raised
millions of dollars from dozens of investors nationwide, with Hudnall personally receiving
over $3 million for himself.
3. To attract and retain investors, JBH and Hudnall made numerous materially

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false and misleading statements and omissions in the offering documents and other written
communications they sent to prospective and existing investors, including by:
• falsely representing that title to “joint venture” assets would be held by the
“joint ventures”;

• misrepresenting the costs of the offerings and how Defendants would use
investor funds;

• hiding substantial (30-50%) markups Defendants charged to investors;

• understating the amount of working interest in the wells Defendants retained
for themselves; and

• failing to disclose discounts and other favorable side deals made with certain
investors, some of whom were Defendants friends and relatives.

4. The SEC brings this civil enforcement action seeking permanent injunctions,
disgorgement plus pre- and post-judgment interest, and civil penalties for Defendants’ violations
of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§
77e(a), 77e(c), 77q(a)], and Sections 10(b), 15(a), and 20(a) of the Securities Exchange Act of
1934 (“Exchange Act”) [15 U.S.C. §§ 78j(b), 78o(a) and 78t(a)], and Rule 10b-5 thereunder [17
C.F.R. §240.10b-5].
JURISDICTION AND VENUE

5. The Commission brings this action under Section 20(b) of the Securities Act [15
U.S.C. § 77t(b)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)].  The Commission
seeks the imposition of civil penalties pursuant to Section 20(d)(2)(C) of the Securities Act [15
U.S.C. § 77t(d)(2)(C)] and Section 21(d)(3)(B)(iii) of the Exchange Act [15 U.S.C. §§
78u(d)(3)(B)(iii)].
6. The Court has jurisdiction over this action pursuant to Sections 20(b) and 22(a)
of the Securities Act [15 U.S.C. §§ 77t(b) and 77v(a)] and Sections 21 and 27 of the Exchange

3
Act [15 U.S.C. §§ 78u and 78aa] because Defendants directly and indirectly made use of the
means or instrumentalities of interstate commerce and the mails in connection with the
transactions described herein.
7. Venue is proper in this District under Section 22(a) of the Securities Act [15
U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa].    Defendants reside and
transact business in this District, and the acts and transactions constituting the securities
violations described herein occurred in this District.
DEFENDANTS

8. JBH is a Missouri limited liability company headquartered in Liberty, Clay
County, Missouri.  It was incorporated by Hudnall in June 2007.  JBH has never been registered
with the Commission, nor has it ever registered any offering of securities under the Securities
Act or any class of securities under the Exchange Act.
9. Brian S. Hudnall, age 39, is a resident of Liberty, Clay County, Missouri.
Hudnall is, and was at all times relevant to the events described herein, the owner, managing
member, and CEO of JBH.  Prior to incorporating JBH, Hudnall sold securities for other oil and
gas businesses.
FACTS

A. SUMMARY OF DEFENDANTS’ OIL AND GAS INVESTMENT PROGRAMS

10. From September 2008 until at least 2014, JBH and Hudnall offered and sold
securities in at least 20 investment programs, raising over $16 million, created for the purpose of
acquiring interests in oil and gas wells (“prospect wells”) that were drilled and operated by third
parties in Kansas and Texas.
11. Hudnall and JBH solicited investors by purchasing lead lists or customer lists

4
from third parties and then directing JBH employees to make cold calls to potential investors.
Hudnall also directly solicited investors, including by telephone, in person, and by email.  After
the initial sales call, Defendants sent written offering materials to interested prospects.
12. JBH paid sales commissions, ranging from 15 to 20%, to employees for
soliciting investors.  Hudnall also received commissions on sales of the oil and gas securities
offerings.
13. Although Defendants labeled their investment programs as “joint ventures,” the
investments were and are “securities” under the federal securities laws.  Investors in each of
Defendants’ oil and gas offerings made an investment of money, in a common enterprise, with
an expectation of profits derived from the efforts of others.  Moreover, investors in Defendants’
oil and gas offerings received a certificate of interest or participation in a profit-sharing
agreement.
14. According to Defendants’ offering materials, each “joint venture” would
purchase from a well operator a certain percentage of the “working interest,” and corresponding
“net revenue interest” (i.e., the percentage of the oil and gas production profits) in one to four
prospect wells.  Investors were offered the opportunity to purchase “Units” in the “joint
venture,” with each Unit entitling the investor to a certain percentage of the working interest
(most often about 2.68%) and corresponding net revenue interest (most often about 2.26%) from
the wells in the offering.  Defendants’ offering materials generally stated that each investor
would share in the costs and revenues of the “joint venture” in proportion to the Units they
owned.  The offering materials also stated that JBH would serve as the managing venturer of
each purported “joint venture.”
15. The following chart contains a list of 18 separate oil and gas “joint ventures”
created by Defendants.  The chart includes: (a) the name of each offering, (b) the date of the

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offering documents, (c) the offering amount, (d) the amount of investor money raised by
Defendants for each offering, and (e) the amounts paid out to investors (“Cumulative
Revenues”) as of September 9, 2014.
Offering

 Date on
Offering
Documents
Offering
Amount
Amount
Raised
Cumulative
Revenues as of
9/2014
JBH Dean Project 9/15/08 $3,000,000 $254,000 $43,378
JBH Spanish Fort Project 3/20/09 $3,100,000 $502,770 $390,317
JBH Kansas JV III 6/21/10 $1,400,000 $620,455 $0
JBH Kansas JV IV 1/15/ 11 $2,800,000 $1,584,249 $254,804
JBH Texas JV V 2/25/11 $3,900,000 $130,000 $0
JBH Kansas JV VII 9/26/11 $3,000,000 $1,491,742 $544,053
JBH Kansas JV VIII 12/9/11 $3,000,000 $911,359 $191,656
JBH Kansas JV IX 12/19/11 $3,000,000 $1,106,427 $667,770
JBH Kansas JV X 12/19/11 $3,000,000 $1,074,291 $540,971
JBH Kansas JV XI 3/13/12 $750,000 $516,059 $418,228
JBH Texas JV XII 4/20/12 $875,000 $173,469 $2,134
JBH Kansas JV XIII 8/15/12 $3,000,000 $987,486 $406,748
JBH Kansas JV XIV 10/29/12 $750,000 $430,450 $0
JBH Kansas JV XV 2/15/13 $3,200,000 $1,096,900 $0
JBH Kansas JV XVI 2/15/13 $3,200,000 $1,131,000 $20,705
JBH Texas JV XVII 5/15/13 $2,250,000 $511,843 $0
JBH Kansas JV XVIII 7/15/13 $750,000 $414,040 $73,010
JBH Kansas JV XIX 6/15/13 $3,200,000 $1,090,400 $65,329
TOTAL   $14,026,940 $3,619,103

16. Defendants raised more than $14 million from over 80 different investors in the
18 offerings described above.
17. Defendants’ offering documents state that participation in the “joint ventures”
was limited to accredited investors; however, Hudnall admits non-accredited investors were
allowed to participate in some “joint ventures.”
B. DEFENDANTS’ OFFERING MATERIALS

18. Defendants offered and sold “Units” in their oil and gas “joint ventures” using
written offering materials.  From 2008 until June 2014, the offering materials remained

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substantially the same and included a Confidential Information Memorandum (“CIM”), a
“Prospect Information Package” or “Program Summary,” a “Joint Venture Agreement,” an
“Investor Questionnaire,” and an “Application Agreement.”  Defendants, through Hudnall,
helped draft these documents, made the final decisions regarding the information included in
each document, and were responsible for updating the documents with current information.  At
all times, Defendants held and exercised ultimate authority over the statements contained and
omitted from each document.
19. Defendants’ offering documents made representations regarding the number of
wells in the offering, the amount of interest the purported “joint venture” would obtain in each
well, the use of funds, and the structure of the investments.  For each new offering, Defendants
typically altered only the description or number of wells, the total offering amount, the
percentage of the working interests the alleged “joint venture” intended to obtain, the percentage
interest offered to investors, and other similar details.
C. D
EFENDANTS MADE NUMEROUS MATERIAL MISREPRESENTATIONS AND OMISSIONS
IN CONNECTION WITH THE OFFERINGS.

20. The offering materials and other communications Defendants used to sell
interests in the offerings contained numerous materially false and misleading statements and
omissions.
1. Title To The Working Interests

21. JBH purchased the working interests in the prospect wells by executing
agreements with the well operators.  Defendants CIMs and Program Summaries given to
investors stated that the “joint venture” intended to acquire a certain percentage of the working
interests and corresponding net revenue interests in one to four prospect wells.  The CIMs stated
that title to “joint venture” property would be held in the name of the “joint venture,”  except that

7
title could be held temporarily in the names of nominees in order to facilitate acquisition of the
property by the “joint venture” and that JBH “will use its best efforts to have title transferred to
the Venture as soon as is practicable upon Completion of the Prospect Well.”
22. These representations were false.  JBH, not the “joint ventures,” purchased the
working interests from the well operator and never transferred title to the “joint ventures.”
Instead, JBH retained ownership of all working interests and corresponding revenue interests in
the prospect wells.  JBH and not the “joint ventures,” therefore, was entitled to receive all net
revenues generated from the prospect wells.
23. This was significant because, as a result of the failure to transfer title, the “joint
ventures” and their respective investors had no control over operations and no rights against the
operator to the revenue from any specific wells.
24. In addition to promising that title to “joint venture” property would be held by
the “joint venture,” the CIMs also stated that JBH intended to own only between 1-3% of the
working interest, depending on the venture, in each prospect well.  This statement was false
because, as a result of JBH keeping all the working interest, it owned substantially more than 1-
3% of the working interest in the wells.  Despite the language in the CIMs, Defendants never
intended for JBH to own only a 1-3% working interest in the wells.
2. Costs Of The Offerings And Use Of Investor Proceeds

25. Defendants substantially marked-up the stated costs of each “joint venture”
offering in order to increase their own profits.  Without disclosing the markups, Defendants
misled investors by claiming that the drilling and well completion costs for each “joint venture”
would be anywhere from 30-50% higher than what Defendants truly believed they would be.
Defendants kept the difference between the marked-up costs, which investors paid, and the
actual costs as undisclosed profits.

8
26. Defendants knew the approximate actual cost to drill, test, and complete a well,
which the CIM defined as “initial operations.”   The operator who sold the majority of the
working interests to JBH told Hudnall on that the estimated cost of initial operations was
approximately $365,000 to $425,000 for 100% of the working interests in a well (i.e., 1% of the
working interests in a prospect well was about $3,650 to $4,250 for drilling, testing and
completion).  Defendants, however, typically charged investors nearly $10,000 per 1% working
interest in a well.
27. For example, Defendants’ CIM for JV VII represented that JBH sought to
raise $3,000,000 from investors.  It further claimed that the $3,000,000 offering amount
“includes $2,200,000 for the Venture’s share of the anticipated costs for drilling the Prospect
Wells and $800,000 for the Venture’s share of the anticipated costs for completion of the
Prospect Wells.”  The CIM also represented that JBH would collect no management fee for
this “joint venture.”
28. The CIM for JV VII included the following chart describing the expected
expenditure of investor funds on initial operations:
ESTIMATED EXPENDITURES OF VENTURE FUNDS
Drilling and Completion Prices
(1)
$2,200,000
(2)
$800,000
(2)
Organizational Costs
(3)
-0- -0-
Managing Venturer’s Management
Fee

-0- -0-
TOTAL $2,200,000 $800,000
(1) The Drilling and Completion Prices will depend on the terms of the Drilling Contract and the Completion
Contract.
(2) The Initial Capitalization of $3,000,000 includes $2,200,000 for the Venture’s share of the anticipated initial

9
costs for drilling the Prospect Wells and $800,000 for the Venture’s share of the anticipated costs for the
completion of the Prospect Wells.
(3) The Organizational Costs are being paid by JBH Consulting without charge to the Venture.

29. Defendants’ representations were materially false and misleading.  The actual
drilling and completion costs for JV VII were approximately 30-50% less than what Defendants
represented to investors.  Defendants knew from prior communications with the operator, as
well as from their experience with prior projects, that the true costs would be much lower.
30. By inflating the estimated costs of the “joint venture,” Defendants were able
to pay themselves substantial fees without telling investors.   For example, although the CIM
for JV VII states that JBH would receive no management fee on that offering, Hudnall took
for himself approximately 15-20% of every investment as his undisclosed commission.
Defendants also gave JBH sales employees a 15-20% commission for each sale they closed.
31. The CIMs for the other offerings contained similar misrepresentations
regarding the estimated costs and expenditure of investor funds.  Generally, the CIMs
represented that at least 80% of the money raised from investors would be spent on initial
operations.  Eleven of the CIMs for “joint ventures” JV III through JV XIX represented that
JBH would be paid no management fee; while other CIMs stated that JBH would receive a
specific amount as its management fee.    In reality, the amounts Defendants spent on initial
operations costs and the amounts Defendants took as fees and commissions were much
different than they represented.
32. The following chart shows Defendants’ actual average use of investor funds.
The figures in the following chart are based on information provided by Defendants’
accountant, bank statements, and billing statements from the operator of the wells.

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Average Use of Proceeds
Drilling, Testing, and Completion 35-50%
JBH Profit and Overhead 20-30%
Commissions to Sales Employees 15-20%
Payments to Hudnall 15-20%

33. Similarly, even though Defendants represented in the CIMs that a certain
percentage of their investment money would be spent on completion costs, some “ joint
ventures” incurred little or no completion costs because one or more of the wells in the
offering turned out to be dry holes.
34. If a well was dry, JBH generally spent no money to complete it.  JBH kept the
unspent money instead of returning it to investors.
35. Defendants did not tell investors they were taking the unspent completion
costs for themselves. For example, in JV III, JV V, JV XIV, and JV XV, none of the wells in
the joint ventures were completed, yet none of the completion costs were returned to
investors.  Moreover, each of the ventures with more than one well had at least one well
where no completion costs were spent.
3. Operator’s Carried Working Interest

36. As part of the compensation for operating a well, JBH agreed to provide the
operators, at no cost, a certain percentage of the working interest in each well.  However,
JBH was not required to provide the working interest to the operator until “payout.”  Payout
occurs when the revenues generated from the well equal the costs of the well.  This
arrangement was set forth in an agreement between JBH and the operators.

11
37. Although Defendants disclosed in the CIMs that a certain percentage of
working interest in each well would be provided to the operator, they did not tell investors —
in the offering documents or otherwise — that the operator’s working interest only became
effective at payout or that Hudnall kept for himself the pre-payout revenue associated with
the operator’s carried working interest.  Moreover, Defendants used investor funds to pay the
costs associated with operator’s carried working interest prior to payout.
38. For instance, if JBH purchased 37.5% of the working interest in a well,
Defendants were required to return 9.375% (i.e., one-fourth) of the working interest to the
operator at payout.  In addition, the operator’s working interest was considered a carried
working interest because the operator did not have to pay the costs associated with the
working interest.
39. In the CIMs, Defendants included a chart outlining the interest allocations that
noted that the well operator would receive a “CWI,” although this term was not defined in the
CIMs.  The CIMs defined only the term “carried working interest,” as a working interest where
the associated costs would be paid for by “a party other than” the operator.  The CMIs and
Defendants failed to disclose, however, that the other “party” was the investors.
40. Defendants’ CIMs misleadingly stated that each investor would be responsible
only for his or her proportional share of the costs of the “joint venture” ( and would be entitled to
his or her proportional share of the net revenues).  That is, according to Hudnall, if an investor
purchases Units equivalent to 14.29% of the “joint venture,” “the percentage of costs they’d
have to pay” is 14.29%.
41. Defendants, however, did not apportion costs as they said they would.  Each
month, the well operator sent invoices to JBH seeking payment of the initial operations costs

12
associated with the total working interests acquired by JBH in each well.  Defendants used
investor funds to pay for all the costs, including the costs for the operator’s carried working
interest.
42. To further conceal from investors the true proportion of initial operations costs
they had paid, Defendants sent investors misleading monthly operating statements once wells
began producing.  Defendants’ monthly operating statements represented that each investor was
paying costs equivalent to the percentage of working interests allocated to that investor, which
further misled investors into believing they had been paying the same percentage of costs for
initial operations.
4. Undisclosed Sales Of Working Interests In Producing Wells
43. In addition to using investor money to pay for the operator’s carried working
interest, Defendants used investor funds to pay the costs associated with working interests sold
to third parties after wells began producing.  As with the operator’s working interest,
Defendants kept the eventual sale proceeds, even though investors paid all the costs.
44. For example, in JV IX, JBH purchased from the operator a 37.5% working
interest in two wells, and a 60% working interest in the other two wells.  Defendants initially
sold to investors Units equivalent to approximately 22% working interests in each of the four
wells.  According to the CIM for JV IX and Hudnall, that meant investors in JV IX should have
paid only the costs associated with the 22% working interests in each well and not the costs
associated with the remaining unsold working interests.
45. Defendants, however, used investor funds to pay the drilling, testing, and
completion costs associated with all the working interests purchased by JBH, including the
15.5% unsold working interests in each of the first two wells and the 38% unsold working
interests in each of the last two wells.

13
46. Defendants were able to use investor funds to pay for the costs affiliated with the
unsold working interests because of the hefty markups Defendants charged investors as part of
their original investments.  Defendants never disclosed to investors that they were paying the
costs for the unsold working interests.
47. When the wells began producing, Defendants sold some of the previously unsold
working interest.  For example, in JV IX, when one of the wells in which JBH originally
purchased 37.5% of the working interests began producing, Defendants sold approximately 6%
of the remaining (15.5%) unsold working interest to new investors.  For example, one new
investor paid $4,200 for 1% of the working interests, whereas the other investors paid
approximately $26,000 for 1% of the working interests.  Because all expenses associated with
this 6% working interest had been paid by the other investors, Defendants kept the sale proceeds
as an undisclosed additional profit.  That left a 9.5% working interest in the well, which was the
operator’s carried working interest.
48. Defendants followed similar practices in connection with other “joint ventures”
containing wells that produced oil, including JV IV, JV VII, JV VIII, JV IX, JV X, JV XVI, and
JV XVIII.
5. Defendants’ Working Interest

49. In the CIMs, Defendants represented that JBH, the “managing venturer” for each
“joint venture,” intended to own between 1% and 3% working interest (depending on the
specific “joint venture”).  This representation was false because, as noted above, JBH (not the
“joint venture”) retained ownership of all working interests.
50. Defendants’ CIMs also stated that JBH could purchase units in the “joint
venture” at the same price offered to investors, or that Defendants could purchase additional

14
working interests outside the “joint venture” as an industry participant.  But that is not what
Defendants did.  Instead, they acquired additional working interests without paying for them.
6. Other Undisclosed Profits.

51. As a result of the undisclosed working interest schemes, Defendants were able to
substantially increase their own revenues while reducing the likelihood that their investors
would make a profit.
52. In one example, JBH purchased varying working interests in the four wells in JV
VII, ranging from 37.5% to 82.5%.  In the well for which JBH owned 82.5% of the working
interests, the investors in JV VII were allocated only 43.17%.  Defendants charged initial
investors $40,000 per 1% working interest.  Defendants distributed the remaining working
interests to themselves, JBH sales employees, and other select individuals.
53. Defendants used investor funds to pay for everything, including the purchase
price and drilling, testing and completion costs for the near 40% working interests Defendants
kept for themselves, their employees, and other individuals.  When the well began producing,
Defendants sold additional working interests at a rate of $4,200 per 1% working interest,
keeping the sales proceeds for themselves.
54. The breakdown of the working interests and net revenue interests in the well,
according to information provided by Defendants’ accountant, was as follows:
JV VII Well

Working
Interest
Net
Revenue
Interest
JV VII
43.17% 36.25%
JBH 13.68% 10.32%
Hudnall 11.91% 9.77%
CWI for Sales
Employees and
References
7.52% 6.17%

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Sales of Production 6.2% 5.09%
TOTAL 82.5% 67.6%

55. In sum, JV VII was assigned only 43.17% of the working interests in this well
compared to 39.31% assigned to JBH, Hudnall, and others.  Even though JV VII was allocated
only 43.17% of the working interests, Defendants made JV VII investors pay all the costs.  And
despite paying none of the costs, Defendants and their employees received over 20% of the net
revenue generated by the well.  JBH and Hudnall never disclosed this breakdown of working
and net revenue interests to investors.
56. Defendants employed similar practices for the other “joint ventures.”  From
January 2011 to August 2014, the well operators paid JBH over $4.3 million in revenue from
the sales of oil in the wells, but Defendants paid only approximately $3.3 million to investors.
After paying approximately $50,000 to JBH employees, Defendants kept the rest for
themselves.
7. Other Misleading Statements And Omissions

57. In addition to the false and misleading representations described above,
Defendants deceived investors in other ways as well.
58. Defendants let a select group of friends and relatives into the “joint ventures” at
discounted prices not available to other investors.  Although the CIMs stated that a 10%
discount would be provided to investors purchasing five or more Units, Defendants provided
some individuals with discounts larger than 10%.
59. For example, Hudnall allowed friends to invest at cost per 1% working interest in
several joint ventures, including JV XI, JV XII, JV XX, and JV XV.  That was approximately a
50-75% discount off the price paid by other investors.  In JV XI, Hudnall’s friend paid $4,200

16
for 1% working interest, whereas the other investors paid $8,753.50 per 1% working interest.  In
JV XX, Hudnall’s friend paid $11,200 for a 1% working interest, whereas the other investors
were charged $42,666 for a 1% working interest.  Similarly, in JV XII, Hudnall charged one
investor only $82,707.75 for a 9% working interest, whereas two others paid $70,000 for a 5%
working interest.
60. Moreover, to induce investments, Defendants provided potential investors the
names of earlier investors as references, who then touted the investments and JBH.  Defendants
compensated the touters through cash payments, special deals, and additional working interests.
61. As a result of Defendants’ actions, investors in the “joint ventures” were treated
disparately.  They received different amounts of working and corresponding net revenue
interests despite investing the same amounts.  Defendants did not disclose the preferential
treatments certain investors received to the other investors.  The result was that certain investors
bore greater responsibility for costs.
D. Investments in Defendants’ Offerings Are Securities.
62. Section 3(a)(10) defines a “security” to include any “certificate of interest or
participation in any profit-sharing agreement.”  Each investor received Units in the venture
representing a certain percentage working interest in oil and gas wells, including the right to
receive a certain percentage of the net revenue from well production.  Each Unit or working
interest equivalent is an interest or participation in a profit-sharing agreement.
63. Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act
define the term “security” to include an “investment contract.”  The investments in Defendants’
offerings are investment contracts because investors (a) invested money (b) in specified oil and
gas drilling programs (c) and were led to expect profits (d) derived from the efforts of

17
Defendants and others.
64. Although Defendants referred to their oil and gas investment offerings as “joint
ventures,” and the Joint Venture Agreements purported to create general partnerships, the
powers provided for by the Joint Venture Agreements were illusory.  Defendants did not let
investors participate in the management of or in any decisions relating to the “joint ventures.”
65. For at least the 18 offerings identified in paragraph 15, Defendants controlled
every aspect of the “joint ventures’” operations and made all decisions.  Hudnall selected the
project and operator and determined the offering amount for each “joint venture.”  Per the Joint
Venture Agreements, JBH controlled who was admitted to the “joint venture.”  Hudnall
decided, without input from investors, whether to substitute new wells for the ones described in
the offering documents, and whether to complete or plug wells.
66. Defendants never distributed a ballot to investors or otherwise sought their vote
on any decision related to the “joint ventures” identified above in paragraph 15 or their
operation.  Investors were completely dependent upon Defendants for the management,
operation and success of the “joint ventures.”
CLAIMS  FOR  RELI EF

First Claim
Section 10(b) of the Exchange Act and Rule l0b-  5
[15 U.S.C. § 78j(b);17 C.F:R. §  240.10b-  5]

67. Plaintiff repeats  and  incorporates  by reference paragraphs  1   through 66 of this
Complaint  as if set forth  herein.
68. Defendants,  by engaging  in the conduct described  above, directly  and
indirectly,  with scienter, in  connection with  the purchase  or sale of securities,  and  by  use  of
the means  and  instrumentalities  of interstate  commerce the mails,  or any  facility of a national

18
securities  exchange,  have:  (a) employed  devices,  schemes and  artifices to defraud;  or (b)
made an untrue  statement  of a material  fact or omitted  to state a  material  fact necessary  in
order to  make the statements made,  in the  light of the circumstances  under  which  they  were
made,  not  misleading; or (c) engaged  in  acts, practices  or courses  of business  that  have
operated  or will operate as a fraud  and deceit  upon other persons.
69. By reason  of the  foregoing  acts and  practices,  Defendants  violated  and,
unless  enjoined, will continue to violate  Section  10(b) of the Exchange Act [15 U.S.C. §
78j(b)] and Rule  10b-5 [17 C.F.R. §   240.10b-5] thereunder.
Second Claim
Section  17(a)(1) of  the  Securities Act
[15   U.S.C.  §   77q(a)]

70. Plaintiff repeats  and  incorporates  by reference paragraphs 1 through 66 of this
Complaint as if set forth herein
.
71. Defendants  directly or indirectly,  in the offer or sale of securities, and by use of
the means  and  instrumentalities of interstate commerce or the mails,  or  any facility  of a
national  securities  exchange,  have employed  devices,  schemes,
 and  artifices to defraud.
72. Defendants  acted  knowingly or with  severe recklessness.
73. For these reasons, Defendants have violated and, unless enjoined, will
continue to violate Section l 7(a)(1) of the Securities Act [15 U.S.C. §  77q(a)(1)].

Third Claim
Section  17(a)(2) and (a)(3) of  the  Securities Act
[ 15   U.S.C.  §   77q(a)(2) and (a)(3)]

74. Plaintiff repeats  and  incorporates  by reference paragraphs 1 through 66 of this
Complaint as if set forth herein.
75. Defendants  directly or indirectly,  in the offer or sale of securities, and by use of

19
the means  and  instrumentalities of interstate commerce or the mails,  or  any facility  of a
national  securities  exchange,  have obtained money  or property by means  of untrue  statements
of a material  fact and omitted  to state a material  fact  necessary  in order to make the
statements  made,  in light of the circumstances under  which  they were made, not misleading;
and engaged
 in transactions, practices,  and  courses of business  which  operate or would
operate as a fraud  and deceit  upon the purchasers.
76. Defendants  were at least negligent  in their actions regarding  the
representations  and omissions  alleged  herein.
77. For these reasons, Defendants have violated and, unless enjoined, will
continue to violate Section l 7(a)(2)  and (a)(3) of the Securities Act [15 U.S.C. §  77q(a)(2)
and (a)(3)].
Fourth Claim
Section 5(a) and 5(c) of Securities Act
[15 U.S.C. §§ 77e(a) and 77e(c)]

78. Plaintiff repeats  and  incorporates  by reference paragraphs 1 through 66 of this
Complaint as if set forth herein
79. Defendants directly or indirectly have made use of the means of transportation or
communication in interstate commerce or of the mails to sell securities, when no registration
statement was in effect with the SEC as to such securities, and have made use of the means or
instruments of transportation or communication in interstate commerce or of the mails to offer
to sell such securities when no registration statement had been filed with the SEC as to such
securities.
80. There were  no applicable exemptions  from  registration,  and  Defendants
therefore
 violated, and unless restrained  and enjoined will in the future violate, Sections
5(a) and 5(c) of
 the Securities Act [  1 5 U.S.C. §§ 77e(a) and 77e(c)].

20
Fifth Claim
Violations of Exchange Act Section 15(a)
[15 U.S.C. § 78o(a)]

81. Plaintiff repeats  and incorporates  by reference paragraphs l through 66 of
this  Complaint  as if set forth herein.

82. Defendants, while engaged in the business of effecting transactions in
securities for the account of others, made use of the mails or the means or instrumentalities
of interstate commerce to effect transactions in, or to induce or attempt to induce the
purchase or sale of, a security without being registered in accordance with Section 15(a) of
the Exchange Act.
Defendants do not qualify for any exemption to the registration
requirements of Section 15(a).
83. Defendants violated, and unless restrained and enjoined will continue to
violate, Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
Sixth Claim
Section 20(a) of the Exchange Act
[20(a) (15 U.S.C. § 78t(a))]

84. Plaintiff repeats  and incorporates  by reference paragraphs l through 66 of
this  Complaint  as if set forth herein.

85. At all times, Hudnall possessed the power to direct or cause the direction of the
management and policies of Defendant JBH.  Hudnall participated in the daily affairs of JBH.
He possessed the power to control JBH’s corporate actions, and he exercised that power by
causing JBH to engage in all the acts and omissions alleged in this Complaint.
86. Hudnall is a “control person” of JBH pursuant to Section 20(a) of the Exchange
Act.
[15 U.S.C. § 78t(a)]
87. As JBH’s control person, Hudnall is liable for JBH’s violations of Section
10(b) of the Exchange Act and Rule 10b-5 thereunder.

21
PRAYER FOR RELIEF

WHEREFORE,  Plaintiff  respectfully  requests  that  this Court:

( 1 ) Enter  an  Order finding that  Defendants  committed,  and  unless  restrained
will conti nue  to  commit,  the  violations  alleged  in  this Complaint;
(2) Permanently enjoin Defendants  from  future  violations of Section  10(b) of
the Exchange Act  [15 U.S.C. §78j(b)] and  Rule  10b-5  thereunder  [17 C.F.R. §240. 10b-5]
and Section  17(a) of the Securities Act  [15 U.S.C.  § 77q(a)];
(3) Permanently  enjoin  Defendants  from  future violations  of Section 5(a) and
5(c) of the Securities Act  [15 U.S.C. §§ 77e(a) and  77e(c)];
(4) Permanently  enjoin Defendants  from  future violations  of Section  15(a) of
the Exchange Act  [15 U.S.C.  § 78o(a)];
(5)
Order Defendants  to disgorge all  ill-gotten gains from  the conduct  alleged
herein, with prejudgment  interest;
(6)
Order civil penalties  against  Defendants  pursuant  to Sections 21(d)(3) and
21A of the Exchange Act  [15 U.S.C.  §§ 78u(d)(3)  and 78u-1] and Section 20(d) of the
Exchange  Act  [15 U.S.C. § 77t(d)]  for violations of the federal  securities laws as alleged
herein;  and

(7)   Order such other and  further relief as the Court may deem just  and proper.

Dated: January 27, 2017   Respectfully submitted,

     By: /s/ Daniel J. Hayes
Daniel J. Hayes (IL Bar No. 6243089)
Aleah Borghard ( NY Bar No. 4595054)
      U.S. Securities and Exchange Commission
      Chicago Regional Office
175 W. Jackson Blvd., Suite 900
Chicago, Illinois 60604
(312) 353-3370

IN THE UNITED STATES DISTRICT COURT 
FOR THE WESTERN DISTRICT OF MISSOURI 

WESTERN DIVISION 

  
U.S. SECURITIES AND EXCHANGE )  
COMMISSION, ) 
 ) 

Plaintiff, ) 
 )  

v. ) Case No. 4:17-cv-00059 
 )  
BRIAN S. HUDNALL and 
 

)  
JBH CONSULTING GROUP LLC, )  
 )  

Defendants. )  
  ) 

 
COMPLAINT 

 
Plaintiff U.S. Securities and Exchange Commission (“Commission” or “SEC”), as and 

for its Complaint against Defendants Brian S. Hudnall and JBH Consulting Group LLC, alleges: 

SUMMARY 
 

1. From September 2008 through at least June 2014, Defendants JBH Consulting 

Group LLC (“JBH”) and Brian S. Hudnall, JBH’s President and CEO, made materially false and 

misleading statements to potential investors in order to sell securities in numerous oil and gas 

offerings.  None of the securities offerings – or purported “joint ventures,” as Defendants 

labeled them—were registered with the SEC.  And none of the individuals working for JBH to 

sell the securities, including Hudnall, were licensed or associated with registered brokers.   

2. Through the false and misleading securities offerings, JBH and Hudnall raised 

millions of dollars from dozens of investors nationwide, with Hudnall personally receiving 

over $3 million for himself.     

3. To attract and retain investors, JBH and Hudnall made numerous materially 

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2 

false and misleading statements and omissions in the offering documents and other written 

communications they sent to prospective and existing investors, including by: 

• falsely representing that title to “joint venture” assets would be held by the 
“joint ventures”; 
 

• misrepresenting the costs of the offerings and how Defendants would use 
investor funds; 

 
• hiding substantial (30-50%) markups Defendants charged to investors; 

 
• understating the amount of working interest in the wells Defendants retained 

for themselves; and 
 

• failing to disclose discounts and other favorable side deals made with certain 
investors, some of whom were Defendants friends and relatives. 
 

4. The SEC brings this civil enforcement action seeking permanent injunctions, 

disgorgement plus pre- and post-judgment interest, and civil penalties for Defendants’ violations 

of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 

77e(a), 77e(c), 77q(a)], and Sections 10(b), 15(a), and 20(a) of the Securities Exchange Act of 

1934 (“Exchange Act”) [15 U.S.C. §§ 78j(b), 78o(a) and 78t(a)], and Rule 10b-5 thereunder [17 

C.F.R. §240.10b-5].  

JURISDICTION AND VENUE 
 

5. The Commission brings this action under Section 20(b) of the Securities Act [15 

U.S.C. § 77t(b)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)].  The Commission 

seeks the imposition of civil penalties pursuant to Section 20(d)(2)(C) of the Securities Act [15 

U.S.C. § 77t(d)(2)(C)] and Section 21(d)(3)(B)(iii) of the Exchange Act [15 U.S.C. §§ 

78u(d)(3)(B)(iii)]. 

6. The Court has jurisdiction over this action pursuant to Sections 20(b) and 22(a) 

of the Securities Act [15 U.S.C. §§ 77t(b) and 77v(a)] and Sections 21 and 27 of the Exchange 

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3 

Act [15 U.S.C. §§ 78u and 78aa] because Defendants directly and indirectly made use of the 

means or instrumentalities of interstate commerce and the mails in connection with the 

transactions described herein. 

7. Venue is proper in this District under Section 22(a) of the Securities Act [15 

U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa].  Defendants reside and 

transact business in this District, and the acts and transactions constituting the securities 

violations described herein occurred in this District. 

DEFENDANTS 
 

8. JBH is a Missouri limited liability company headquartered in Liberty, Clay 

County, Missouri.  It was incorporated by Hudnall in June 2007.  JBH has never been registered 

with the Commission, nor has it ever registered any offering of securities under the Securities 

Act or any class of securities under the Exchange Act. 

9. Brian S. Hudnall, age 39, is a resident of Liberty, Clay County, Missouri.  

Hudnall is, and was at all times relevant to the events described herein, the owner, managing 

member, and CEO of JBH.  Prior to incorporating JBH, Hudnall sold securities for other oil and 

gas businesses. 

FACTS 
 

A. SUMMARY OF DEFENDANTS’ OIL AND GAS INVESTMENT PROGRAMS 
 
10. From September 2008 until at least 2014, JBH and Hudnall offered and sold 

securities in at least 20 investment programs, raising over $16 million, created for the purpose of 

acquiring interests in oil and gas wells (“prospect wells”) that were drilled and operated by third 

parties in Kansas and Texas.    

11. Hudnall and JBH solicited investors by purchasing lead lists or customer lists 

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4 

from third parties and then directing JBH employees to make cold calls to potential investors.  

Hudnall also directly solicited investors, including by telephone, in person, and by email.  After 

the initial sales call, Defendants sent written offering materials to interested prospects. 

12. JBH paid sales commissions, ranging from 15 to 20%, to employees for 

soliciting investors.  Hudnall also received commissions on sales of the oil and gas securities 

offerings. 

13. Although Defendants labeled their investment programs as “joint ventures,” the 

investments were and are “securities” under the federal securities laws.  Investors in each of 

Defendants’ oil and gas offerings made an investment of money, in a common enterprise, with 

an expectation of profits derived from the efforts of others.  Moreover, investors in Defendants’ 

oil and gas offerings received a certificate of interest or participation in a profit-sharing 

agreement. 

14. According to Defendants’ offering materials, each “joint venture” would 

purchase from a well operator a certain percentage of the “working interest,” and corresponding 

“net revenue interest” (i.e., the percentage of the oil and gas production profits) in one to four 

prospect wells.  Investors were offered the opportunity to purchase “Units” in the “joint 

venture,” with each Unit entitling the investor to a certain percentage of the working interest 

(most often about 2.68%) and corresponding net revenue interest (most often about 2.26%) from 

the wells in the offering.  Defendants’ offering materials generally stated that each investor 

would share in the costs and revenues of the “joint venture” in proportion to the Units they 

owned.  The offering materials also stated that JBH would serve as the managing venturer of 

each purported “joint venture.” 

15. The following chart contains a list of 18 separate oil and gas “joint ventures” 

created by Defendants.  The chart includes: (a) the name of each offering, (b) the date of the 

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5 

offering documents, (c) the offering amount, (d) the amount of investor money raised by 

Defendants for each offering, and (e) the amounts paid out to investors (“Cumulative 

Revenues”) as of September 9, 2014. 

Offering  
 

 Date on 
Offering 

Documents 

Offering 
Amount  

Amount 
Raised 

Cumulative 
Revenues as of 

9/2014 
JBH Dean Project 9/15/08 $3,000,000 $254,000 $43,378 

JBH Spanish Fort Project 3/20/09 $3,100,000 $502,770 $390,317 
JBH Kansas JV III 6/21/10 $1,400,000 $620,455 $0 
JBH Kansas JV IV 1/15/ 11 $2,800,000 $1,584,249 $254,804 
JBH Texas JV V 2/25/11 $3,900,000 $130,000 $0 

JBH Kansas JV VII 9/26/11 $3,000,000 $1,491,742 $544,053 
JBH Kansas JV VIII 12/9/11 $3,000,000 $911,359 $191,656 
JBH Kansas JV IX 12/19/11 $3,000,000 $1,106,427 $667,770 
JBH Kansas JV X 12/19/11 $3,000,000 $1,074,291 $540,971 
JBH Kansas JV XI 3/13/12 $750,000 $516,059 $418,228 
JBH Texas JV XII 4/20/12 $875,000 $173,469 $2,134 

JBH Kansas JV XIII 8/15/12 $3,000,000 $987,486 $406,748 
JBH Kansas JV XIV 10/29/12 $750,000 $430,450 $0 
JBH Kansas JV XV 2/15/13 $3,200,000 $1,096,900 $0 
JBH Kansas JV XVI 2/15/13 $3,200,000 $1,131,000 $20,705 
JBH Texas JV XVII 5/15/13 $2,250,000 $511,843 $0 

JBH Kansas JV XVIII 7/15/13 $750,000 $414,040 $73,010 
JBH Kansas JV XIX 6/15/13 $3,200,000 $1,090,400 $65,329 

TOTAL   $14,026,940 $3,619,103 

 
16. Defendants raised more than $14 million from over 80 different investors in the 

18 offerings described above.   

17. Defendants’ offering documents state that participation in the “joint ventures” 

was limited to accredited investors; however, Hudnall admits non-accredited investors were 

allowed to participate in some “joint ventures.”   

B. DEFENDANTS’ OFFERING MATERIALS 
 

18. Defendants offered and sold “Units” in their oil and gas “joint ventures” using 

written offering materials.  From 2008 until June 2014, the offering materials remained 

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6 

substantially the same and included a Confidential Information Memorandum (“CIM”), a 

“Prospect Information Package” or “Program Summary,” a “Joint Venture Agreement,” an 

“Investor Questionnaire,” and an “Application Agreement.”  Defendants, through Hudnall, 

helped draft these documents, made the final decisions regarding the information included in 

each document, and were responsible for updating the documents with current information.  At 

all times, Defendants held and exercised ultimate authority over the statements contained and 

omitted from each document. 

19. Defendants’ offering documents made representations regarding the number of 

wells in the offering, the amount of interest the purported “joint venture” would obtain in each 

well, the use of funds, and the structure of the investments.  For each new offering, Defendants 

typically altered only the description or number of wells, the total offering amount, the 

percentage of the working interests the alleged “joint venture” intended to obtain, the percentage 

interest offered to investors, and other similar details.   

C. DEFENDANTS MADE NUMEROUS MATERIAL MISREPRESENTATIONS AND OMISSIONS 
IN CONNECTION WITH THE OFFERINGS. 
 
20. The offering materials and other communications Defendants used to sell 

interests in the offerings contained numerous materially false and misleading statements and 

omissions.   

1. Title To The Working Interests 
 

21. JBH purchased the working interests in the prospect wells by executing 

agreements with the well operators.  Defendants CIMs and Program Summaries given to 

investors stated that the “joint venture” intended to acquire a certain percentage of the working 

interests and corresponding net revenue interests in one to four prospect wells.  The CIMs stated 

that title to “joint venture” property would be held in the name of the “joint venture,” except that 

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7 

title could be held temporarily in the names of nominees in order to facilitate acquisition of the 

property by the “joint venture” and that JBH “will use its best efforts to have title transferred to 

the Venture as soon as is practicable upon Completion of the Prospect Well.”   

22. These representations were false.  JBH, not the “joint ventures,” purchased the 

working interests from the well operator and never transferred title to the “joint ventures.”  

Instead, JBH retained ownership of all working interests and corresponding revenue interests in 

the prospect wells.  JBH and not the “joint ventures,” therefore, was entitled to receive all net 

revenues generated from the prospect wells. 

23. This was significant because, as a result of the failure to transfer title, the “joint 

ventures” and their respective investors had no control over operations and no rights against the 

operator to the revenue from any specific wells. 

24. In addition to promising that title to “joint venture” property would be held by 

the “joint venture,” the CIMs also stated that JBH intended to own only between 1-3% of the 

working interest, depending on the venture, in each prospect well.  This statement was false 

because, as a result of JBH keeping all the working interest, it owned substantially more than 1-

3% of the working interest in the wells.  Despite the language in the CIMs, Defendants never 

intended for JBH to own only a 1-3% working interest in the wells. 

2. Costs Of The Offerings And Use Of Investor Proceeds 
 

25. Defendants substantially marked-up the stated costs of each “joint venture” 

offering in order to increase their own profits.  Without disclosing the markups, Defendants 

misled investors by claiming that the drilling and well completion costs for each “joint venture” 

would be anywhere from 30-50% higher than what Defendants truly believed they would be.  

Defendants kept the difference between the marked-up costs, which investors paid, and the 

actual costs as undisclosed profits.   

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8 

26. Defendants knew the approximate actual cost to drill, test, and complete a well, 

which the CIM defined as “initial operations.”  The operator who sold the majority of the 

working interests to JBH told Hudnall on that the estimated cost of initial operations was 

approximately $365,000 to $425,000 for 100% of the working interests in a well (i.e., 1% of the 

working interests in a prospect well was about $3,650 to $4,250 for drilling, testing and 

completion).  Defendants, however, typically charged investors nearly $10,000 per 1% working 

interest in a well.   

27. For example, Defendants’ CIM for JV VII represented that JBH sought to 

raise $3,000,000 from investors.  It further claimed that the $3,000,000 offering amount 

“includes $2,200,000 for the Venture’s share of the anticipated costs for drilling the Prospect 

Wells and $800,000 for the Venture’s share of the anticipated costs for completion of the 

Prospect Wells.”  The CIM also represented that JBH would collect no management fee for 

this “joint venture.” 

28. The CIM for JV VII included the following chart describing the expected 

expenditure of investor funds on initial operations: 

ESTIMATED EXPENDITURES OF VENTURE FUNDS 

Drilling and Completion Prices(1) $2,200,000(2) $800,000(2) 

Organizational Costs(3) -0- -0- 

Managing Venturer’s Management 
Fee 

 

-0- -0- 

TOTAL $2,200,000 $800,000 

(1) The Drilling and Completion Prices will depend on the terms of the Drilling Contract and the Completion 

Contract. 

(2) The Initial Capitalization of $3,000,000 includes $2,200,000 for the Venture’s share of the anticipated initial 

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9 

costs for drilling the Prospect Wells and $800,000 for the Venture’s share of the anticipated costs for the 

completion of the Prospect Wells. 

(3) The Organizational Costs are being paid by JBH Consulting without charge to the Venture. 

 

29. Defendants’ representations were materially false and misleading.  The actual 

drilling and completion costs for JV VII were approximately 30-50% less than what Defendants 

represented to investors.  Defendants knew from prior communications with the operator, as 

well as from their experience with prior projects, that the true costs would be much lower.  

30. By inflating the estimated costs of the “joint venture,” Defendants were able 

to pay themselves substantial fees without telling investors.   For example, although the CIM 

for JV VII states that JBH would receive no management fee on that offering, Hudnall took 

for himself approximately 15-20% of every investment as his undisclosed commission.  

Defendants also gave JBH sales employees a 15-20% commission for each sale they closed.   

31. The CIMs for the other offerings contained similar misrepresentations 

regarding the estimated costs and expenditure of investor funds.  Generally, the CIMs 

represented that at least 80% of the money raised from investors would be spent on initial 

operations.  Eleven of the CIMs for “joint ventures” JV III through JV XIX represented that 

JBH would be paid no management fee; while other CIMs stated that JBH would receive a 

specific amount as its management fee.  In reality, the amounts Defendants spent on initial 

operations costs and the amounts Defendants took as fees and commissions were much 

different than they represented.    

32. The following chart shows Defendants’ actual average use of investor funds.  

The figures in the following chart are based on information provided by Defendants’ 

accountant, bank statements, and billing statements from the operator of the wells. 

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10 

Average Use of Proceeds 

Drilling, Testing, and Completion 35-50% 

JBH Profit and Overhead 20-30% 

Commissions to Sales Employees 15-20% 

Payments to Hudnall 15-20% 

  

33. Similarly, even though Defendants represented in the CIMs that a certain 

percentage of their investment money would be spent on completion costs, some “joint 

ventures” incurred little or no completion costs because one or more of the wells in the 

offering turned out to be dry holes.   

34. If a well was dry, JBH generally spent no money to complete it.  JBH kept the 

unspent money instead of returning it to investors.   

35. Defendants did not tell investors they were taking the unspent completion 

costs for themselves. For example, in JV III, JV V, JV XIV, and JV XV, none of the wells in 

the joint ventures were completed, yet none of the completion costs were returned to 

investors.  Moreover, each of the ventures with more than one well had at least one well 

where no completion costs were spent.    

3. Operator’s Carried Working Interest 
 

36. As part of the compensation for operating a well, JBH agreed to provide the 

operators, at no cost, a certain percentage of the working interest in each well.  However, 

JBH was not required to provide the working interest to the operator until “payout.”  Payout 

occurs when the revenues generated from the well equal the costs of the well.  This 

arrangement was set forth in an agreement between JBH and the operators. 

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11 

37. Although Defendants disclosed in the CIMs that a certain percentage of 

working interest in each well would be provided to the operator, they did not tell investors — 

in the offering documents or otherwise — that the operator’s working interest only became 

effective at payout or that Hudnall kept for himself the pre-payout revenue associated with 

the operator’s carried working interest.  Moreover, Defendants used investor funds to pay the 

costs associated with operator’s carried working interest prior to payout.   

38. For instance, if JBH purchased 37.5% of the working interest in a well, 

Defendants were required to return 9.375% (i.e., one-fourth) of the working interest to the 

operator at payout.  In addition, the operator’s working interest was considered a carried 

working interest because the operator did not have to pay the costs associated with the 

working interest.   

39. In the CIMs, Defendants included a chart outlining the interest allocations that 

noted that the well operator would receive a “CWI,” although this term was not defined in the 

CIMs.  The CIMs defined only the term “carried working interest,” as a working interest where 

the associated costs would be paid for by “a party other than” the operator.  The CMIs and 

Defendants failed to disclose, however, that the other “party” was the investors.   

40. Defendants’ CIMs misleadingly stated that each investor would be responsible 

only for his or her proportional share of the costs of the “joint venture” (and would be entitled to 

his or her proportional share of the net revenues).  That is, according to Hudnall, if an investor 

purchases Units equivalent to 14.29% of the “joint venture,” “the percentage of costs they’d 

have to pay” is 14.29%.   

41. Defendants, however, did not apportion costs as they said they would.  Each 

month, the well operator sent invoices to JBH seeking payment of the initial operations costs 

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12 

associated with the total working interests acquired by JBH in each well.  Defendants used 

investor funds to pay for all the costs, including the costs for the operator’s carried working 

interest.   

42. To further conceal from investors the true proportion of initial operations costs 

they had paid, Defendants sent investors misleading monthly operating statements once wells 

began producing.  Defendants’ monthly operating statements represented that each investor was 

paying costs equivalent to the percentage of working interests allocated to that investor, which 

further misled investors into believing they had been paying the same percentage of costs for 

initial operations.      

4. Undisclosed Sales Of Working Interests In Producing Wells 

43. In addition to using investor money to pay for the operator’s carried working 

interest, Defendants used investor funds to pay the costs associated with working interests sold 

to third parties after wells began producing.  As with the operator’s working interest, 

Defendants kept the eventual sale proceeds, even though investors paid all the costs. 

44. For example, in JV IX, JBH purchased from the operator a 37.5% working 

interest in two wells, and a 60% working interest in the other two wells.  Defendants initially 

sold to investors Units equivalent to approximately 22% working interests in each of the four 

wells.  According to the CIM for JV IX and Hudnall, that meant investors in JV IX should have 

paid only the costs associated with the 22% working interests in each well and not the costs 

associated with the remaining unsold working interests.  

45. Defendants, however, used investor funds to pay the drilling, testing, and 

completion costs associated with all the working interests purchased by JBH, including the 

15.5% unsold working interests in each of the first two wells and the 38% unsold working 

interests in each of the last two wells.   

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13 

46. Defendants were able to use investor funds to pay for the costs affiliated with the 

unsold working interests because of the hefty markups Defendants charged investors as part of 

their original investments.  Defendants never disclosed to investors that they were paying the 

costs for the unsold working interests. 

47. When the wells began producing, Defendants sold some of the previously unsold 

working interest.  For example, in JV IX, when one of the wells in which JBH originally 

purchased 37.5% of the working interests began producing, Defendants sold approximately 6% 

of the remaining (15.5%) unsold working interest to new investors.  For example, one new 

investor paid $4,200 for 1% of the working interests, whereas the other investors paid 

approximately $26,000 for 1% of the working interests.  Because all expenses associated with 

this 6% working interest had been paid by the other investors, Defendants kept the sale proceeds 

as an undisclosed additional profit.  That left a 9.5% working interest in the well, which was the 

operator’s carried working interest. 

48. Defendants followed similar practices in connection with other “joint ventures” 

containing wells that produced oil, including JV IV, JV VII, JV VIII, JV IX, JV X, JV XVI, and 

JV XVIII.     

5. Defendants’ Working Interest 
 

49. In the CIMs, Defendants represented that JBH, the “managing venturer” for each 

“joint venture,” intended to own between 1% and 3% working interest (depending on the 

specific “joint venture”).  This representation was false because, as noted above, JBH (not the 

“joint venture”) retained ownership of all working interests.   

50. Defendants’ CIMs also stated that JBH could purchase units in the “joint 

venture” at the same price offered to investors, or that Defendants could purchase additional 

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14 

working interests outside the “joint venture” as an industry participant.  But that is not what 

Defendants did.  Instead, they acquired additional working interests without paying for them.   

6. Other Undisclosed Profits. 
 
51. As a result of the undisclosed working interest schemes, Defendants were able to 

substantially increase their own revenues while reducing the likelihood that their investors 

would make a profit.   

52. In one example, JBH purchased varying working interests in the four wells in JV 

VII, ranging from 37.5% to 82.5%.  In the well for which JBH owned 82.5% of the working 

interests, the investors in JV VII were allocated only 43.17%.  Defendants charged initial 

investors $40,000 per 1% working interest.  Defendants distributed the remaining working 

interests to themselves, JBH sales employees, and other select individuals.   

53. Defendants used investor funds to pay for everything, including the purchase 

price and drilling, testing and completion costs for the near 40% working interests Defendants 

kept for themselves, their employees, and other individuals.  When the well began producing, 

Defendants sold additional working interests at a rate of $4,200 per 1% working interest, 

keeping the sales proceeds for themselves. 

54. The breakdown of the working interests and net revenue interests in the well, 

according to information provided by Defendants’ accountant, was as follows: 

JV VII Well 
 Working 

Interest  
Net 
Revenue 
Interest 

JV VII 43.17% 36.25% 
JBH 13.68% 10.32% 
Hudnall 11.91% 9.77% 
CWI for Sales 
Employees and 
References 

7.52% 6.17% 

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Sales of Production 6.2% 5.09% 
TOTAL 82.5% 67.6% 

 

55. In sum, JV VII was assigned only 43.17% of the working interests in this well 

compared to 39.31% assigned to JBH, Hudnall, and others.  Even though JV VII was allocated 

only 43.17% of the working interests, Defendants made JV VII investors pay all the costs.  And 

despite paying none of the costs, Defendants and their employees received over 20% of the net 

revenue generated by the well.  JBH and Hudnall never disclosed this breakdown of working 

and net revenue interests to investors. 

56. Defendants employed similar practices for the other “joint ventures.”  From 

January 2011 to August 2014, the well operators paid JBH over $4.3 million in revenue from 

the sales of oil in the wells, but Defendants paid only approximately $3.3 million to investors.  

After paying approximately $50,000 to JBH employees, Defendants kept the rest for 

themselves.  

7. Other Misleading Statements And Omissions 
 

57. In addition to the false and misleading representations described above, 

Defendants deceived investors in other ways as well. 

58. Defendants let a select group of friends and relatives into the “joint ventures” at 

discounted prices not available to other investors.  Although the CIMs stated that a 10% 

discount would be provided to investors purchasing five or more Units, Defendants provided 

some individuals with discounts larger than 10%.   

59. For example, Hudnall allowed friends to invest at cost per 1% working interest in 

several joint ventures, including JV XI, JV XII, JV XX, and JV XV.  That was approximately a 

50-75% discount off the price paid by other investors.  In JV XI, Hudnall’s friend paid $4,200 

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for 1% working interest, whereas the other investors paid $8,753.50 per 1% working interest.  In 

JV XX, Hudnall’s friend paid $11,200 for a 1% working interest, whereas the other investors 

were charged $42,666 for a 1% working interest.  Similarly, in JV XII, Hudnall charged one 

investor only $82,707.75 for a 9% working interest, whereas two others paid $70,000 for a 5% 

working interest.   

60. Moreover, to induce investments, Defendants provided potential investors the 

names of earlier investors as references, who then touted the investments and JBH.  Defendants 

compensated the touters through cash payments, special deals, and additional working interests.   

61. As a result of Defendants’ actions, investors in the “joint ventures” were treated 

disparately.  They received different amounts of working and corresponding net revenue 

interests despite investing the same amounts.  Defendants did not disclose the preferential 

treatments certain investors received to the other investors.  The result was that certain investors 

bore greater responsibility for costs.    

D. Investments in Defendants’ Offerings Are Securities. 

62. Section 3(a)(10) defines a “security” to include any “certificate of interest or 

participation in any profit-sharing agreement.”  Each investor received Units in the venture 

representing a certain percentage working interest in oil and gas wells, including the right to 

receive a certain percentage of the net revenue from well production.  Each Unit or working 

interest equivalent is an interest or participation in a profit-sharing agreement. 

63. Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act 

define the term “security” to include an “investment contract.”  The investments in Defendants’ 

offerings are investment contracts because investors (a) invested money (b) in specified oil and 

gas drilling programs (c) and were led to expect profits (d) derived from the efforts of 

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Defendants and others. 

64. Although Defendants referred to their oil and gas investment offerings as “joint 

ventures,” and the Joint Venture Agreements purported to create general partnerships, the 

powers provided for by the Joint Venture Agreements were illusory.  Defendants did not let 

investors participate in the management of or in any decisions relating to the “joint ventures.”  

65. For at least the 18 offerings identified in paragraph 15, Defendants controlled 

every aspect of the “joint ventures’” operations and made all decisions.  Hudnall selected the 

project and operator and determined the offering amount for each “joint venture.”  Per the Joint 

Venture Agreements, JBH controlled who was admitted to the “joint venture.”  Hudnall 

decided, without input from investors, whether to substitute new wells for the ones described in 

the offering documents, and whether to complete or plug wells.   

66. Defendants never distributed a ballot to investors or otherwise sought their vote 

on any decision related to the “joint ventures” identified above in paragraph 15 or their 

operation.  Investors were completely dependent upon Defendants for the management, 

operation and success of the “joint ventures.” 

CLAIMS FOR RELI EF 
 

First Claim 
Section 10(b) of the Exchange Act and Rule l0b-5  

[15 U.S.C. § 78j(b);17 C.F:R. § 240.10b-5] 
 

67. Plaintiff repeats and incorporates by reference paragraphs 1 through 66 of this 

Complaint as if set forth herein. 

68. Defendants, by engaging in the conduct described above, directly and 

indirectly, with scienter, in connection with the purchase or sale of securities, and by use of 

the means and instrumentalities of interstate commerce the mails, or any facility of a national 

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securities exchange, have: (a) employed devices, schemes and artifices to defraud; or (b) 

made an untrue statement of a material fact or omitted to state a material fact necessary in 

order to make the statements made, in the light of the circumstances under which they were 

made, not misleading; or (c) engaged in acts, practices or courses of business that have 

operated or will operate as a fraud and deceit upon other persons. 

69. By reason of the foregoing acts and practices, Defendants violated and, 

unless enjoined, will continue to violate Section 10(b) of the Exchange Act [15 U.S.C. § 

78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder. 

Second Claim 
Section 17(a)(1) of the Securities Act  

[15 U.S.C.  § 77q(a)] 
 

70. Plaintiff repeats and incorporates by reference paragraphs 1 through 66 of this 

Complaint as if set forth herein. 

71. Defendants directly or indirectly, in the offer or sale of securities, and by use of 

the means and instrumentalities of interstate commerce or the mails, or any facility of a 

national  securities exchange, have employed devices, schemes, and artifices to defraud. 

72. Defendants acted knowingly or with severe recklessness. 

73. For these reasons, Defendants have violated and, unless enjoined, will 

continue to violate Section l 7(a)(1) of the Securities Act [15 U.S.C. § 77q(a)(1)]. 

Third Claim 
Section 17(a)(2) and (a)(3) of the Securities Act  

[ 15 U.S.C.  § 77q(a)(2) and (a)(3)] 
 

74. Plaintiff repeats and incorporates by reference paragraphs 1 through 66 of this 

Complaint as if set forth herein. 

75. Defendants directly or indirectly, in the offer or sale of securities, and by use of 

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the means and instrumentalities of interstate commerce or the mails, or any facility of a 

national  securities exchange, have obtained money or property by means of untrue statements 

of a material fact and omitted to state a material fact necessary in order to make the 

statements made, in light of the circumstances under which they were made, not misleading; 

and engaged in transactions, practices, and courses of business which operate or would 

operate as a fraud and deceit upon the purchasers. 

76. Defendants were at least negligent in their actions regarding the 

representations and omissions alleged herein. 

77. For these reasons, Defendants have violated and, unless enjoined, will 

continue to violate Section l 7(a)(2) and (a)(3) of the Securities Act [15 U.S.C. § 77q(a)(2) 

and (a)(3)]. 

Fourth Claim 
Section 5(a) and 5(c) of Securities Act 

[15 U.S.C. §§ 77e(a) and 77e(c)] 
 

78. Plaintiff repeats and incorporates by reference paragraphs 1 through 66 of this 

Complaint as if set forth herein 

79. Defendants directly or indirectly have made use of the means of transportation or 

communication in interstate commerce or of the mails to sell securities, when no registration 

statement was in effect with the SEC as to such securities, and have made use of the means or 

instruments of transportation or communication in interstate commerce or of the mails to offer 

to sell such securities when no registration statement had been filed with the SEC as to such 

securities.  

80. There were no applicable exemptions from registration, and Defendants 

therefore violated, and unless restrained and enjoined will in the future violate, Sections 

5(a) and 5(c) of the Securities Act [ 15 U.S.C. §§ 77e(a) and 77e(c)]. 

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Fifth Claim 
Violations of Exchange Act Section 15(a)  

[15 U.S.C. § 78o(a)] 
 

81. Plaintiff repeats and incorporates by reference paragraphs l through 66 of 

this Complaint as if set forth herein. 

82. Defendants, while engaged in the business of effecting transactions in 

securities for the account of others, made use of the mails or the means or instrumentalities 

of interstate commerce to effect transactions in, or to induce or attempt to induce the 

purchase or sale of, a security without being registered in accordance with Section 15(a) of 

the Exchange Act.  Defendants do not qualify for any exemption to the registration 

requirements of Section 15(a). 

83. Defendants violated, and unless restrained and enjoined will continue to 

violate, Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)]. 

Sixth Claim 
Section 20(a) of the Exchange Act  

[20(a) (15 U.S.C. § 78t(a))] 
 

84. Plaintiff repeats and incorporates by reference paragraphs l through 66 of 

this Complaint as if set forth herein. 

85. At all times, Hudnall possessed the power to direct or cause the direction of the 

management and policies of Defendant JBH.  Hudnall participated in the daily affairs of JBH.  

He possessed the power to control JBH’s corporate actions, and he exercised that power by 

causing JBH to engage in all the acts and omissions alleged in this Complaint.   

86. Hudnall is a “control person” of JBH pursuant to Section 20(a) of the Exchange 

Act.  [15 U.S.C. § 78t(a)]   

87. As JBH’s control person, Hudnall is liable for JBH’s violations of Section 

10(b) of the Exchange Act and Rule 10b-5 thereunder.  

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PRAYER FOR RELIEF 
 

WHEREFORE, Plaintiff respectfully requests that this Court: 
 

( 1 ) Enter an Order finding that  Defendants  committed, and unless restrained  

will continue to commit, the violations  alleged  in this Complaint; 

(2) Permanently enjoin Defendants from future violations of Section 10(b) of 

the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240. 10b-5] 

and Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)]; 

(3) Permanently enjoin Defendants from future violations of Section 5(a) and 

5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)]; 

(4) Permanently enjoin Defendants from future violations of Section 15(a) of 

the Exchange Act [15 U.S.C. § 78o(a)]; 

(5) Order Defendants to disgorge all ill-gotten gains from the conduct alleged 

herein, with prejudgment interest; 

(6) Order civil penalties against Defendants pursuant to Sections 21(d)(3) and 

21A of the Exchange Act [15 U.S.C. §§ 78u(d)(3) and 78u-1] and Section 20(d) of the 

Exchange Act [15 U.S.C. § 77t(d)] for violations of the federal securities laws as alleged 

herein; and 

(7) Order such other and further relief as the Court may deem just and proper. 

 
Dated: January 27, 2017   Respectfully submitted,  
    
     By: /s/Daniel J. Hayes     

Daniel J. Hayes (IL Bar No. 6243089) 
Aleah Borghard (NY Bar No. 4595054) 

      U.S. Securities and Exchange Commission 
      Chicago Regional Office 

175 W. Jackson Blvd., Suite 900  
Chicago, Illinois 60604 
(312) 353-3370 

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