Oklahoma STACK Play Produces Lawsuits

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After negotiating a $7 million judgment last year against a former partner and manager, an Arkansas-heavy investment group hasn’t given up trying to recover damages from others they say helped him in his scheme.

Three limited liability companies controlled by Little Rock businessman Stephen LaFrance Jr. and Chris Reeder of Dallas obtained the 2019 ruling against Joseph Blake Smith.

The case against Smith outlined schemes in which he acquired mineral rights with investor-backed funding through inflated transactions that benefited him personally. According to court filings, the arrangements allowed Smith and others to pocket millions before passing ownership of the leases to his unsuspecting fellow investors.

Smith said the money he collected reflected transaction fees that should’ve been covered as part of the operating agreement with investors. But they weren’t, and as such, he should’ve disclosed them but didn’t.

“That was a breach of fiduciary duty on my part,” Smith said. “That’s where I got in trouble. The LaFrance family has been nothing but good to me.”

Allegations of fraud and breach of fiduciary duty against Smith became undisputed facts as part of the negotiated settlement that led to the arbitration award on May 15, 2019.

The ruling, which became part of the public court record five days later, noted Smith’s decision to exercise his Fifth Amendment right against self-incrimination. The 36-year-old declined to talk about the dispute when first contacted recently, but he reconsidered.

“I didn’t want to face it, but I need to own this,” Smith said. “I got in a really, really bad spot. Divorce. Rehab. I’ve been sober and worked in the AA program for months now. I’m not hiding anymore. I was hiding the past two years.

“My mother was bipolar and committed suicide, and cirrhosis of the liver killed my father nine months later. I’m not making excuses. But that’s my background, and it’s been a struggle. I’m bipolar and an alcoholic. Mistakes? I’ve made a lot of them.”

The $7 million judgment awarded to Bold Entergy III LLC and its two wholly owned affiliates, Crixus Resources LLC and Crixus Resources II LLC, remains outstanding, according to the trio’s attorney.

“We’re still trying to collect,” said Bill Waddell of Little Rock’s Friday Eldredge & Clark law firm. “We took his deposition concerning his assets, but he’s been somewhat elusive.”

According to court filings, Smith’s monthly income averaged more than $67,000 during 2016-17.

Also on the hook for the $7 million judgment are his Crixus Holdings LLC and Rock Partners 2 LLC, which did business as Rock Capital Partners and where he was CEO.

Mixed in with the 2018-19 oil and gas investor litigation against Smith was more turmoil that resulted in additional legal action.

Smith went through a divorce that ended his 18-month marriage and on-again, off-again family-initiated court-ordered intervention for alcoholism. He also was hit with a $520,000 foreclosure suit tied to his Round River condominium in Little Rock.

These days, Smith is a partner in a newly formed Little Rock venture: Golden Bear Capital. His fellow Golden Bear partner is Michael Flannery, associate dean and distinguished professor of law at the William H. Bowen School of Law in Little Rock.

“I taught Blake when he was in law school, and we stayed friends afterward,” Flannery said. “He’s been through some rough things in his life, and I promised I would help him if I could. He wants to get back on his feet, and I want to help him where I can.”

In addition to oil and gas, Golden Bear’s fields of investment include precious minerals, commercial real estate and venture capital. Two related liability companies, Golden Bear Gold Group and Golden Bear Venture, round out the Golden Bear family.

Internet footprints indicate that Smith’s interest in oil and gas plays has shifted from the Anadarko Basin of western Oklahoma to the Permian Basin of west Texas.

The sale of oil and gas leases in Oklahoma took center stage in the fraud case against Smith and the 2019 follow-up lawsuit against others who LaFrance, Reeder and other investors believe helped facilitate his scheme.

The group’s investments in mineral rights are part of the STACK play, an acronym referring to the Sooner Trend oil field, the Anadarko Basin and Canadian and Kingfisher counties, where much of the activity is occurring.

Defendants in the ongoing case include James McFerron of Edmond, Oklahoma, and James Meyer of Oklahoma City and his Raintree Energy LLC. Investors are accusing them of fraud along with aiding and abetting Smith’s fraud and breach of fiduciary duty.

James Hearnsberger of Little Rock, chief financial officer of Rock Capital Partners, was a defendant. He reached an undisclosed settlement and was dismissed from the lawsuit in January.

Unlike the Smith case, this legal wrangling has remained in Pulaski County Circuit Court without detouring into arbitration. Smith tapped the arbitration clause of the operating agreement of Bold Energy to pull the dispute out of court a month after the lawsuit was filed against him on Sept. 23, 2018.

Seven months later, the settlement that produced the $7 million arbitration award became part of the court docket.

The findings of fact note that Smith formed separate entities with others to buy oil and gas leases to resell at a marked-up price to Bold Energy, which he managed and in which he was also an investor.

According to court filings, Smith orchestrated the arrangement for personal gain to the financial detriment of other Bold Energy investors, who didn’t learn of the scheme until 2018.

An example of one of the tainted transactions cited in the litigation is the purchase of mineral rights on 1,541 acres across six Oklahoma counties associated with the STACK play.

Under the direction of Hearnsberger or Smith, Bold Energy’s Crixus Resources wired $9 million to fund the acquisition of the properties coordinated by Raintree Energy. However, the actual cost was only $7.4 million plus nearly $367,000 paid for Raintree’s services.

The overpayment of nearly $1.2 million was returned in the form of a cashier’s check. But the check didn’t go to Crixus Resources. As instructed by Smith or Hearnsberger, the check was made out in the name of Smith’s Crixus Holdings.

According to the complaint, Hearns-berger received a 25% cut of the overpayment, alternately referred to as a commission by some and a kickback by others.

Except for Smith, other Bold Energy investors were unaware of the overpayment and where all the money went until months later.

According to the ongoing litigation against his alleged accomplices, one of the entities helping facilitate his secret profiteering was Ames Energy Partners LLC.

The limited liability company represented a joint venture between Rock Capital Partners, led by Smith, and McFerron’s Acorn Petroleum Services.

Mineral rights were acquired by Ames Energy and resold at a profit to Bold Energy investors, who didn’t know about Smith’s stake in the venture.

Smith’s profiteering through Ames was a breach of fiduciary duty to Bold Energy investors and a violation of the venture’s noncompete provisions in its operating agreement, according to court filings.

Among the plaintiffs in the ongoing case is Bold Energy II LLC, which shares common ownership with Bold Energy III but also encompasses other investors.

In addition to Stephen LaFrance Jr. the group includes his brother and sister, Jason LaFrance and Amy Beth LaFrance Bancroft. In addition to Chris Reeder, Bold Energy II includes members of his family: Carol Reeder and Bryan Reeder.

Rounding out the Bold Energy II investor roster is Dr. Scott Schlesinger of Little Rock, Tanner Musso of Chicago and Blake Smith.