Hard Rock Exploration, Inc. (“Hard Rock”) of Charleston, West Virginia and certain of its affiliate entities, including Blue Jacket Gathering LLC, Blue Jacket Partnership, Caraline Energy Company, and Brothers Realty, LLC (“Hard Rock Affiliates”), are independent oil and gas development companies.
On September 5, 2017, Hard Rock and Hard Rock Affiliates filed for bankruptcy protection in the Southern District of West Virginia Bankruptcy Court (2:17-bk-20459). Shortly after filing for Chapter 11 bankruptcy, Hard Rock reported a monthly cash flow shortage of $325,000. According to Hard Rock’s lender, Huntington National Bank, “rehabilitation of the Debtors’ business is impossible” due to their ongoing hemorrhaging of cash.
Hard Rock and Hard Rock Affiliates operate approximately 390 well sites in the Appalachian Basin. In addition, Caraline Energy Co. owns and maintains approximately 365 miles of pipeline developed to support natural gas collection.
Included among Hard Rock’s offerings are private placement investments such as Hard Rock Partners 2011-A L.P. Structured as a limited partnership, such an investment is very complicated and risky. To begin, private placements often carry considerable up-front commissions and fees, which serve as an immediate “drag” on any investment. Further, private placements are illiquid investments; thus, once an investor buys in, it is often difficult to readily exit the investment position.
Brokerage firms that market private placements must first conduct due diligence on the investment. The due diligence rule stems from FINRA Rule 2111, the so-called suitability rule, which mandates that a brokerage firm have reasonable grounds to believe that an investment recommendation to purchase a security is suitable for a given customer. This principle is further expanded and amplified in FINRA Notice to Members (NTM) 03-71, which states that a brokerage firm must perform significant due diligence before recommending a private placement investment to a customer. By recommending an investment to a customer, the brokerage firm is essentially representing that a reasonable investigation of the merits of the investment has been conducted.
Additionally, through NTM 10-22, FINRA has provided further guidance to brokerage firms and their registered representatives with regard to the degree and scope of due diligence required when vetting oil and gas investments. Specifically, FINRA has advised the brokerage industry that due diligence on an oil and gas investment may include: “visiting and inspecting a sample of the issuer’s assets and facilities,” in addition to “carefully examining any geological, land use, engineering or other reports by third-party experts…”, and “obtaining, with respect to energy development and exploration programs, expert opinions from engineers, geologists and others…” as necessary to determine the suitability of the investment.
Investors in private placement investments may have arbitration claims if the broker or investment advisor who recommended the investment lacked a reasonable basis to make the recommendation, or failed to disclose the risks associated with such an investment. Investors may contact attorneys at Law Office of Christopher J. Gray, P.C. by telephone at (866) 966-9598 or via email at email@example.com for a no-cost, confidential consultation.