COURT OF APPEALS, STATE OF COLORADO

2 East 14th

Avenue

Denver, CO 80203

District Court, City and County of Denver

Honorable Michael Martinez, Judge

Case No. 2009CV7181

FRED J. JOSEPH, Securities Commissioner for the State

of Colorado

Plaintiff-Appellant,

v.

HEI RESOURCES, INC. f/k/a HEARTLAND ENERGY,

INC., CHARLES REED CAGLE, BRANDON DAVIS,

HEARTLAND ENERGY DEVELOPMENT

CORPORATION, BEDROCK ENERGY

DEVELOPMENT, INC., JOHN SCHIFFNER, and JAMES

POLLAK,

Defendants-Appellees.

COURT USE ONLY

Case No. 2013 CA 2090

Attorneys for AARP Foundation Litigation:

JAY SUSHELSKY*

Bar Registration Number: 496378 (Washington DC)

MELVIN RADOWITZ*

601 E Street NW

Washington, DC 20049

Telephone: (202) 434-2151

E-Mail: jsushelsky@aarp.org

PAULA GREISEN*

Bar Registration Number: 19784

King & Greisen, LLP

1670 York Street

Denver, CO 80206

Telephone: (303) 298-9878

*Counsel of Record

BRIEF AMICUS CURIAE OF AARP IN SUPPORT OF

PLAINTIFF-APPELLANT

i

CERTIFICATE OF COMPLIANCE

I hereby certify that this brief complies with all requirements of C.A.R. 28

and C.A.R. 32, including all formatting requirements set forth in these rules. The

undersigned certified that:

This brief complies with C.A.R. 28(g). It contains 6,386 words.

This brief complies with C.A.R. 28(e). Citations to the record are to precise line

and page numbers (Trial Tr. page : line, date), not to an entire document.

/s/ Jay E. Sushelsky

Jay E. Sushelsky

ii

TABLE OF CONTENTS

CERTIFICATE OF COMPLIANCE ..................................................................... i

TABLE OF AUTHORITIES ................................................................................. v

I. STATEMENT OF AMICUS CURIAE ISSUE ........................................... 1

II. STATEMENT OF THE CASE ................................................................... 1

III. IDENTITY OF AMICUS CURIAE ............................................................ 1

IV. INTEREST OF AMICUS CURIAE ............................................................ 2

V. SUMMARY OF ARGUMENT ................................................................... 3

VI. ARGUMENT ............................................................................................... 4

1) OLDER INVESTORS, BECAUSE THEY ARE

PARTICULARLY VULNERABLE TO SCAMS, ARE IN

NEED OF ALL AVAILABLE PROTECTIONS ............................. 4

a) Under The Defined Contribution Retirement Regime,

Older Investors Bear Substantial Risks ................................. 5

b) Older Americans are Particularly Vulnerable to

Investment Fraud and Financial Exploitation ......................... 8

i) Older Investors Face Higher Risks of

Fraud Because They Are Attractive Targets ................ 9

ii) Older Investors Face Higher Rates of

Diminished Financial Decision-Making

Capacity ........................................................................ 9

iii

iii) Older Investors Face Higher Rates

of Cognitive Decline ...................................................11

iv) Older Adults Suffer from Higher Rates

of Isolation ..................................................................12

v) Older Adults Face High Rates of

Financial Abuse and Exploitation ..............................13

2) HEI USED HIGH PRESSURE SALES TECHNIQUES TO

HAWK INAPPROPRIATELY RISKY INVESTMENTS TO

OLDER PEOPLE WHO COULD NOT AFFORD TO LOSE

THEIR INVESTED FUNDS ..........................................................15

a) HEI Used Questionable Sales Techniques and

Concealed Risks to Press Vulnerable People into

Inappropriate Investments .....................................................15

i) HEI’s Boiler Room Salesmen Used Targeted,

Persistent Cold Calls to Wear Down

Potential Investors ......................................................17

ii) HEI Created a False Sense of Urgency to

Encourage Precipitous Investment

Decision-Making ........................................................19

iii) HEI Claimed to Drill Near Producing Wells and

Promoted Its Advanced Technology to Create an

Illusion of Guaranteed Returns ...................................20

iv) HEI Unrealistically Guaranteed Success to

Appeal to Vulnerable Investors ..................................22

v) HEI Materially Misrepresented the Risks

of Investment ..............................................................24

iv

b) HEI Sold Oil and Gas Interests that Violated Generally

Accepted Investment Principles ............................................26

VII. CONCLUSION ..........................................................................................31

CERTIFICATE OF SERVICE ..................................................................33

v

TABLE OF AUTHORITIES

Cases

LaRue v. DeWolff, Boberg & Assocs., 552 U.S. 248 (2008) ................................. 5

Statutes

Colorado Securities Act, Colo. Rev. Stat. § 11-51-101 (2013) ............................. 5

Colo. Rev. Stat. § 18-6.5-102 (2013) ...................................................................13

Record

Trial Tr., July 22, 2013 ............................................. 18, 22, 23, 24, 25, 26, 28, 29

Trial Tr., July 23, 2013 ....................................... 19, 20, 21, 23, 24, 25, 28, 30, 31

Trial Tr., July 24, 2013 ................................................................................. 20, 26

Trial Tr., July 25, 2013 ........................................................................... 19, 21, 25

Trial Tr., July 26, 2013 ................................................................................. 17, 18

Miscellaneous

Alzheimer’s Assn., 2013 Alzheimer’s Disease Facts and Figures (2013) ..........11

Zvi Bodie & Dwight B. Crane, Personal Investing: Advice, Theory,

and Evidence, 53 Fin. Analysts J. 13 (1997) ...................................... 26, 27

Cmty. Oriented Policing Servs., U.S. DOJ, Prob. Oriented Guides for Police

No. 20, Financial Crimes Against the Elderly (2003) ...............................12

Richard Fry et al., Pew Research Ctr., The Old Prosper Relative to the

Young: The Rising Age Gap in Economic Well-Being (2011) .................... 9

Richard L. Kaplan, Enron, Pension Policy, and Social Security

Privatization, 46 Ariz. L. Rev. 53 (2004) .................................................... 7

vi

Naomi Karp & Ryan Wilson, AARP Pub. Policy Inst.,

Protecting Older Investors: The Challenge of

Diminished Capacity (2011) ......................................................... 5, 8, 9, 11

Eun-Jin Kim & Loren Geistfeld, What Makes Older Adults Vulnerable

to Exploitation or Abuse?, 13 F. for Fam. & Consumer Issues (2008),

http://ncsu.edu/ffci/publications/2008/v13-n1-2008-spring/Kim-

Geistfeld.php ..............................................................................................12

Jeff Langenderfer & Terence A. Shimp, Consumer Vulnerabiltiy

to Scams, Swindles, and Fraud: A New Theory of

Visceral Influences on Persuasion,

18 Psychol. & Marketing 763 (2001) ........................................................17

Peter A. Lichtenberg et al., Is Psychological Vulnerability Related

to the Experience of Fraud in Older Adults?,

36 Clinical Gerontologist 132 (2013) ........................................................12

Annamaria Lusardi, Financial Literacy and Financial Decision-Making

in Older Adults, 36 Generations 25 (2012) ...............................................11

Kevin McCormally, Protect Yourself, Loved Ones from Financial

Abuse of the Elderly, Kiplinger, Nov. 2011 ................................................ 9

Oil & Gas Investment Fraud, N. Am. Sec. Adm’rs Ass’n,

http://www.nasaa.org/6782/oil-gas-investment-fraud/ ....................... 14, 21

Oil and Gas Scams: Common Red Flags and Steps You Can Take

to Protect Yourself, U.S. SEC, http://www.sec.gov/investor/

pubs/oilgasscams.htm ................................................................................16

Karla Pak & Doug Shadel, AARP Foundation National Fraud Victim

Study (2011) .................................................................................... 8, 10, 17

State of Colo. Elder Abuse Task Force, S.B. 12-078 Elder Abuse Task Force

Policy Decisions (2012) .............................................................................13

vii

U.S. DOL, Private Pension Plan Bulletin Historical Tables

and Graphs (2013) ....................................................................................... 6

U.S. GAO, Elder Justice: National Strategy Needed to Effectively

Combat Elder Financial Exploitation (2012)............................... 13, 14, 16

U.S. GAO, Income Security: The Effect of the 2007-2009

Recession on Older Adults (2011) ............................................................... 7

U.S. SEC, A Guide for Seniors: Protect Yourself Against Investment

Fraud (2013) ....................................................................................... 14, 16

U.S. SEC, Investor Alert: Private Oil and

Gas Offerings (2013) ........................................................ 15, 16, 21, 22, 27

U.S. Treasury Inspector Gen. for Tax Admin., Statistical Trends

in Retirement Plans (2010) .......................................................................... 7

Edward A. Zelinsky, The Defined Contribution Paradigm,

114 Yale L.J. 451 (2004) ............................................................................. 6

Jason Zweig, Finances and the Aging Brain, Wall St. J.,

Mar. 28, 2014, http://online.wsj.com/news/articles/

SB10001424052702304185104579435470263886360 ............................10

1

I. STATEMENT OF AMICUS CURIAE ISSUE

Whether a broad application of the Colorado securities laws is necessary to

protect vulnerable investors from investment fraud and financial exploitation?

II. STATEMENT OF THE CASE

For purposes of this amicus curiae brief, the relevant background facts and

procedural history are sufficiently set forth in the Petitioner-Appellant’s Brief.

III. IDENTITY OF AMICUS CURIAE

AARP is a nonpartisan, nonprofit organization with a membership that helps

people turn their goals and dreams into real possibilities, strengthens communities

and fights for the issues that matter most to families such as healthcare,

employment and income security, retirement planning, affordable utilities and

protection from financial abuse. AARP fosters the economic security of

individuals as they age by supporting laws and public policies designed to protect

older people from fraudulent business practices and preserve the legal means for

them to seek redress for exploitation. Among these activities, AARP advocates for

improved access to the civil justice system and supports the availability of the full

range of enforcement tools, including federal and state consumer protection

statutes and securities regulation provisions.

2

A significant percentage of the investing public in the United States markets

is comprised of members of the age 50 and older population. Older persons are

frequent targets of financial fraud, often because they have significant assets or are

looking for investment opportunities that will supplement Social Security and other

sources of retirement income. As a result, AARP prioritizes initiatives that combat

financial exploitation and fraud perpetrated against its constituency. AARP

regularly comments on legislative and regulatory proposals that address securities

and investment fraud, files amicus briefs in cases involving the securities laws and

consumer issues, and opposes legislative efforts to limit the remedies available to

defrauded investors.

IV. INTEREST OF AMICUS CURIAE

The resolution of this case will have a significant impact on the State of

Colorado’s power to maintain the integrity of the market place for investment

products within the state and to protect Colorado’s citizens from financial abuse

through the marketing of fraudulent investment products. This is of particular

concern at this time to AARP, given the entry of many first-time investors into the

market and the enhanced responsibility for retirement investing that employees

have assumed as a result of the shift in the retirement plan paradigm from defined

3

benefit pension plans (under which employers bear the risk of loss) to defined

contribution pension plans (under which plan participants bear the risk of loss). In

light of the significance of the issues presented by this case, AARP respectfully

submits this brief, as amicus curiae, to facilitate a full consideration by the Court of

these issues.

V. SUMMARY OF ARGUMENT

First, older Americans are particularly susceptible to fraudulent investment

sales practices. The shift from the defined contribution to the defined benefit

system of retirement savings exacerbated the difficulties faced by workers in

ensuring adequate retirement savings. Older people may seek investment

opportunities to quickly grow their savings at precisely the time they become most

vulnerable to fraudulent investment sales techniques due to the onset of problems

that disproportionately plague older adults, such as reduced financial capacity and

risk perception, isolation, and financial exploitation. Financial fraud is particularly

devastating to this group because older people have little time to make up losses

through work or other investments. The securities laws must be broadly applied to

provide the older people of Colorado a remedy for investment fraud.

4

Second, HEI’s boiler room operation used high-pressure sales techniques to

take advantage of the vulnerabilities of potential investors. HEI materially

misrepresented the risks of oil and gas development to mislead potential investors.

Even though HEI knew these investments were inappropriate for many of its older

investors, who had low risk tolerance and could not afford to lose their

investments, HEI salesmen encouraged these investors to drain their retirement

savings to invest in HEI wells, even going so far as to help one investor mortgage

his farm to make payments. Many of these investors suffered devastating losses.

Colorado’s securities laws should be applied broadly to give these defrauded

investors a remedy, without which their losses will not be vindicated.

VI. ARGUMENT

1) OLDER INVESTORS, BECAUSE THEY ARE

PARTICULARLY VULNERABLE TO SCAMS,

ARE IN NEED OF ALL AVAILABLE PROTECTIONS.

Investors reach peak retirement savings at the age when they become most

vulnerable to investment fraud. The shift to the defined contribution system of

retirement savings has left older investors with smaller nest eggs, eager to find

investment opportunities to increase their savings and retirement income.

However, older investors are particularly vulnerable to fraud: AARP Public Policy

5

Institute estimates that 20% of Americans over the age of 65 have been victims of

fraud or financial exploitation. Naomi Karp & Ryan Wilson, AARP Pub. Policy

Inst., Protecting Older Investors: The Challenge of Diminished Capacity 13

(2011). Older investors are more likely to be swindled or exploited because

financial decision-making acuity declines with age, and because older adults face

higher rates of cognitive impairment, isolation, and elder abuse.

The statutory purposes of the Colorado Securities Act are to “protect

investors and maintain public confidence in securities markets” while avoiding

unnecessary burdens on market participants. Colo. Rev. Stat. § 11-51-101(2)

(2013). Moreover, as a remedial act the statute must be “broadly construed to

effectuate its purposes.” Id. § 11-51-101(3). A broad application of the Colorado

Securities Act here would fulfill the purposes of the law by protecting and

providing recourse to the investors, particularly the older investors who appear to

have been targeted by HEI.

a) Under The Defined Contribution Retirement Regime,

Older Investors Bear Substantial Risks.

In LaRue v. DeWolff, Boberg & Associates, the Supreme Court recognized

that “[d]efined contribution plans dominate the retirement plan scene today.” 552

U.S. 248, 255 (2008). While the traditional defined benefit plan was once “the

6

dominant paradigm for the provision of retirement income,” in the last thirty years

that paradigm has changed. Edward A. Zelinsky, The Defined Contribution

Paradigm, 114 Yale L.J. 451, 471 (2004). According to the most recent statistics

released by the U.S. Department of Labor, more than 88 million participants held

$3.8 trillion in assets in defined contribution plans at the end of 2011. U.S. DOL,

Private Pension Plan Bulletin Historical Tables and Graphs 5 (2013). The defined

contribution paradigm is entrenched in today’s retirement, tax and social policy,

and it has changed the way that American workers finance their retirement. See

Zelinsky, supra, at 457-58.

As a result of this shift, workers bear more risk. Under the defined benefit

paradigm, employees received a guaranteed pension benefit from the employer; if

the employee’s contributions were insufficient to fund that benefit, the employer

made up the difference. Today, by contrast, employees are responsible for

ensuring adequate retirement savings and they bear the risks of investment.

While these risks were challenging for employers to navigate, for employees

they are treacherous. Under the defined benefit model, institutional investors rely

on professional advisers, take advantage of economies of scale to minimize

transaction costs, and benefit from a long time horizon to maximize returns. Id. at

7

457-60. Individual investors, on the other hand, work on a shorter time horizon,

face higher transaction costs, and must learn how to invest. As a result,

individually managed retirement accounts underperform institutional accounts,

often by “significant margins.” Richard L. Kaplan, Enron, Pension Policy, and

Social Security Privatization, 46 Ariz. L. Rev. 53, 83 (2004).

Compounding these problems is the fact that most individuals do not save

enough. In 2007, before the recession, “one-half of the households with someone

aged 55 to 64 years had financial assets of $72,400 or less, not much more than the

median annual working income of $54,600.” U.S. Treasury Inspector Gen. for Tax

Admin., Statistical Trends in Retirement Plans 9-10 (2010). Additionally, the

value of defined contribution retirement plans decreased during the most recent

recession. The recession was particularly trying for older adults, who have higher

rates of unemployment than other groups but less time to make up the lost value of

their retirement plans. U.S. GAO, Income Security: The Effect of the 2007-2009

Recession on Older Adults 1 (2011).

The shift to defined contribution plans made employees responsible for their

own retirement savings plans, and then the recession decimated the value of these

savings. Retirees and employees nearing retirement age became desperate to

8

bolster their depleted retirement accounts. These individuals became particularly

susceptible to financial fraud and schemes designed to take advantage of this

vulnerability by holding out the prospect of financial gains out of proportion to

market realities.

b) Older Americans are Particularly Vulnerable to Investment

Fraud and Financial Exploitation.

While financial fraud is a problem for people of all ages, older investors are

more likely to be swindled. The mean age of an investment fraud victim is 69

years old. Karla Pak & Doug Shadel, AARP Foundation National Fraud Victim

Study 25 (2011). One 2010 study estimated that 20% of adults ages 65 and older

had “been taken advantage of financially in terms of an inappropriate investment,

unreasonably high fees for financial services, or outright fraud.” Karp & Wilson,

supra, at 13. However, rates of victimization are likely much higher; while

financial fraud is underreported in all demographic groups, older adults are

significantly less likely to report fraud than their younger counterparts. Pak &

Shadel, supra, at 5.

9

i) Older Investors Face Higher Risks of Fraud

Because They Are Attractive Targets.

There is no single explanation for the higher rates of fraud amongst older

adults. However, one likely driver has been dubbed the “Willie Sutton Effect:”

older people are more likely to be defrauded because “that’s where the money is.”

Kevin McCormally, Protect Yourself, Loved Ones from Financial Abuse of the

Elderly, Kiplinger, Nov. 2011, at 38. Despite low rates of retirement savings, older

households are still better off than their younger counterparts: in 2009, households

headed by people over the age of 65 had forty-seven times the net worth of

households headed by people ages 35 and below. Richard Fry et al., Pew Research

Ctr., The Old Prosper Relative to the Young: The Rising Age Gap in Economic

Well-Being 1 (2011).

ii) Older Investors Face Higher Rates of Diminished

Financial Decision-Making Capacity.

Rates of fraud against older adults may also be higher because of age-related

changes in financial decision-making capacity, which generally peaks around age

53, and then declines over time. Karp & Wilson, supra, at 11. An AARP

Foundation study found that, compared to the general population, adults over the

age of 50 are likely more vulnerable to fraud because they are more interested in

10

persuasion statements, more likely to expose themselves to sales situations such as

“free lunch” presentations, and less likely to take preventative measures, such as

checking references and signing up for the Do Not Call List. Pak & Shadel, supra,

at 38. A second study found that investors over the age of 65 made mistakes that

younger investors avoided, and showed “striking and costly inconsistencies” in

their financial behavior. Jason Zweig, Finances and the Aging Brain, Wall St. J.,

Mar. 28, 2014, http://online.wsj.com/news/articles/SB10001424052702304185

104579435470263886360.

These changes might be due to a process known as “socioemotional

selectivity,” which leads older people to pay more attention to others who make

them feel happy and comfortable, while neglecting “warning signs that might have

been obvious at a younger age.” Id. Socioemotional selectivity makes it more

difficult to avoid fraud or “distinguish safe investments from risky ones.” Id.

Compounding these problems is the fact that while financial decision-making

capacity may decline with age, confidence in financial decision-making does not;

if anything, confidence increases over time. This “mismatch between actual and

perceived knowledge may explain the prevalence of scams perpetrated against

11

elderly people.” Annamaria Lusardi, Financial Literacy and Financial Decision-

Making in Older Adults, 36 Generations 25, 27 (2012).

iii) Older Investors Face Higher Rates of Cognitive

Decline.

Older Americans are also particularly vulnerable to fraud because they

suffer from disproportionately high rates of cognitive decline. Over 13% of

Americans ages 71 and older have Alzheimer’s disease and other dementias.

Alzheimer’s Assn., 2013 Alzheimer’s Disease Facts and Figures 16 (2013). An

additional 22% of people ages 71 and older have mild cognitive impairment. Karp

& Wilson, supra, at 7.

Financial capacity is one of the “first abilities to decline as cognitive

impairment encroaches.” Karp & Wilson, supra, at 11. Financial capacity

deteriorates rapidly once cognitive impairment progresses to Alzheimer’s disease –

while nearly half of the subjects in a 2010 study were capable of understanding

investment options and returns after an initial Alzheimer’s diagnosis, just 26%

could do so one year later. Id. However, declines in financial capacity can be

detected in adults with mild cognitive impairment one year before they progress to

Alzheimer’s disease; without a diagnosis, individuals and their families likely do

not become aware of the issue immediately. Id.

12

iv) Older Adults Suffer from Higher Rates of Isolation.

Higher rates of isolation also contribute to the disproportionate rates of fraud

against older adults. Isolated adults are three times more likely to be victims of

fraud than other populations. Peter A. Lichtenberg et al., Is Psychological

Vulnerability Related to the Experience of Fraud in Older Adults?, 36 Clinical

Gerontologist 132, 141 (2013). Isolation increases adults’ reliance on service

providers and retailers as a source of social support, which “increases their risk of

being abused through deceptive market practices.” Eun-Jin Kim & Loren

Geistfeld, What Makes Older Adults Vulnerable to Exploitation or Abuse?, 13 F.

for Fam. & Consumer Issues 1 (2008), http://ncsu.edu/ffci/publications/2008/v13-

n1-2008-spring/Kim-Geistfeld.php. Older adults who are socially isolated are also

more vulnerable to financial fraud because they have fewer opportunities to seek

advice before a purchase due to their limited social networks, and “because the

sales pitch itself addresses an unmet need for social interaction, resulting in their

feeling obligated to be friendly or compliant in return.” Cmty. Oriented Policing

Servs., U.S. DOJ, Prob. Oriented Guides for Police No. 20, Financial Crimes

Against the Elderly 13 (2003).

13

v) Older Adults Face High Rates of Financial Abuse and

Exploitation.

Because older adults often control more assets than younger people, and

because of contributing factors such as isolation and cognitive decline, older

people may also lose assets through a form of elder abuse known as financial

exploitation. Financial exploitation is defined as the use of “deception,

harassment, intimidation, or undue influence to permanently or temporarily deprive

an at-risk elder of the use, benefit, or possession of his or her money, assets, or

property.” Colo. Rev. Stat. § 18-6.5-102 (2013). In Colorado, financial

exploitation is the fastest growing category of elder abuse and constituted 21% of

all reported elder abuse in 2012. State of Colo. Elder Abuse Task Force, S.B. 12-

078 Elder Abuse Task Force Policy Decisions 32 (2012).

Financial exploitation involves theft by friends and caretakers, as well as

exploitation perpetrated by financial services providers and strangers, such as the

sale of fraudulent investments or “financial products or services unsuitable for an

older adult’s circumstances.” U.S. GAO, Elder Justice: National Strategy Needed

to Effectively Combat Elder Financial Exploitation 5 (2012) [hereinafter Elder

Justice]. An investment is unsuitable for older adults if it will not provide its

intended benefit within the older adult’s lifetime. Investments that are highly risky

14

or speculative are also unsuitable for most older adults because they have low risk

tolerance: many will not live long enough to recover losses through work or other

investment performance, and most cannot afford the loss if a risk does not pay off.

Id. at 5.

Oil and gas exploration partnerships are suspect investments for older

people. See, e.g., U.S. SEC, A Guide for Seniors: Protect Yourself Against

Investment Fraud 6 (2013) [hereinafter Guide for Seniors]; Oil & Gas Investment

Fraud, N. Am. Sec. Adm’rs Ass’n, http://www.nasaa.org/6782/oil-gas-investment-

fraud/. These investments are highly speculative because the chances of

discovering oil and gas are uncertain and typically very low. Additionally, these

investments are illiquid because investors cannot withdraw invested funds, and

may be pressured to invest additional money at regular intervals in the course of

completing a single well. These investments are therefore inappropriate for many

older investors.

15

2) HEI USED HIGH PRESSURE SALES TECHNIQUES TO

HAWK INAPPROPRIATELY RISKY INVESTMENTS TO

OLDER PEOPLE WHO COULD NOT AFFORD TO LOSE

THEIR INVESTED FUNDS.

a) HEI Used Questionable Sales Techniques and Concealed

Risks to Press Vulnerable People into

Inappropriate Investments.

Fraudulent offerings in the oil and gas industry have spiked in recent years,

and the SEC has investigated an average of twenty potentially fraudulent schemes

every year since 2006. U.S. SEC, Investor Alert: Private Oil and Gas Offerings 1

(2013) [hereinafter Investor Alert]. Even legitimate drilling operations are risky

investments because they are highly speculative and illiquid. Id. at 2. In

fraudulent schemes, however, promoters might take investor funds without ever

drilling, or they may take a significant cut of investors’ money, whether or not the

well is productive, leaving promoters with little incentive to make the venture

profitable for everyone else. Id. at 4.

The Securities Exchange Commission and other investor protection groups

have promulgated “red flag warnings” to help investors identify potentially

fraudulent investment opportunities in the oil and gas industry and other domains.

These red flags include the use of boiler rooms and cold-calls featuring high

pressure sales tactics to recruit investors, sales pitches about wells that “can’t miss”

16

but without adequately described risks, creation of a false sense of urgency to

“hard-close” sales, pitches focused on the implementation of new technologies to

make old wells more productive or the opportunity to drill near another

“tremendous discovery,” and a reluctance to share third-party well reports and

other pertinent information. See, e.g., id. at 1-3; Oil and Gas Scams: Common Red

Flags and Steps You Can Take to Protect Yourself, U.S. SEC, http://www.sec.gov/

investor/pubs/oilgasscams.htm; Guide for Seniors, supra, at 5.

Investor protection groups warn consumers about these techniques precisely

because they are effective in snaring already-vulnerable people in scams and

investments inappropriate for their circumstances. See, e.g., Elder Justice, supra;

Guide for Seniors, supra. HEI took advantage of these techniques and investor

vulnerabilities. HEI salesman employed boiler room tactics designed to push

vulnerable people into investing in highly speculative oil and gas ventures without

providing adequate disclosures of the risks of investment, and without regard for

investors’ ability to withstand the risks involved. Furthermore, after an investor

was on the hook, HEI continued to use these same tactics to induce the investment

of additional funds, even after the promised returns never materialized.

17

i) HEI’s Boiler Room Salesmen Used Targeted,

Persistent Cold Calls to Wear Down Potential

Investors.

First, HEI’s sales efforts were targeted at vulnerable people. HEI made

persistent, repeated, and unsolicited calls to potential investors, who were found

almost exclusively through telemarketing “lead lists” purchased by the company.

Trial Tr. 11:24—12:14, July 26, 2013. These “lead lists” likely included

disproportionate numbers of older investors at heightened risk of succumbing to

boiler room tactics. In 1996 AARP determined that older people were less likely

to hang up on telemarketers or take other protective measures to insulate

themselves from fraudulent marketing attempts; moreover, telemarketers’ target

lists were “comprised disproportionately of people over age 50 (56%) in

comparison to this group’s much smaller (36%) representation of the total

population.” Jeff Langenderfer & Terence A. Shimp, Consumer Vulnerabiltiy to

Scams, Swindles, and Fraud: A New Theory of Visceral Influences on Persuasion,

18 Psychol. & Marketing 763, 777 (2001). The proportion of older adults on

telemarketing lists has certainly grown since the advent of the Do Not Call list, as

older adults are significantly less likely than younger people to add themselves to

the list. Pak & Shadel, supra, at 38.

18

Moreover, cold calls are particularly effective with isolated adults, who are

often deprived of social contact and therefore may value relationships with

salespeople to the extent that they ignore the warning signs that a salesperson is not

trustworthy, or forego a meaningful analysis of a salesperson’s arguments before

buying. Salesmen may intentionally try to develop relationships with isolated

adults to increase their susceptibility to inappropriate sales pitches and fraud. See

supra Part IV.1.b.iv.

HEI employed 30 or more salesmen who made up to 300 calls per day to

phone numbers found on purchased lead lists. Trial Tr. 13:15—15:12, July 26,

2013. HEI’s cold calls were persistent; salesmen seized onto people who answered

the phone and did not hang up, even if they initially claimed not to be interested in

HEI investments. For instance, Walter Hojsak was the target of such a campaign

of unsolicited calls from HEI before he became an investor. Mr. Hojsak first

learned of HEI after receiving “numerous calls” from Dale Phillips. Trial Tr.

119:7-8, July 22, 2013. He testified that there “must have been a half dozen calls

of not interested” before the HEI salesman eventually wore him down. Id. at

119:19-20. “[A]s the calls persisted, he got further and further into the topic.” Id.

at 119:24-25. The HEI salesman developed a relationship with Mr. Hojsak

19

through these frequent calls. Eventually Mr. Hojsak invested in multiple HEI

wells. David Topp, a retired farmer, was the target of a similar campaign by HEI

– “you get a call and you can’t get rid of them,” he said of the HEI salesman. Trial

Tr. 84:6, July 23, 2013. Mr. Topp also eventually invested.

ii) HEI Created a False Sense of Urgency to Encourage

Precipitous Investment Decision-Making.

HEI used high pressure sales techniques on these persistent calls to

encourage investment, including the creation of a false sense of urgency to

pressure potential investors to act. Defrauded investors are statistically less likely

to take protective measures to prevent fraud, such as calling references and

performing independent research to determine the merits of an investment. See

supra Part IV.1.b.ii. High-pressure sales tactics that create a false sense of urgency

increase vulnerable investors’ tendency to rely exclusively on the salesperson’s

assertions. Id.

For instance, Thomas Carpenter invested in the first well within five days of

the first cold call from HED. The salesman “pushed – he continually pushed that I

should get this done. And he said, you’ve got to get this done or you’re going to

miss the opportunity.” Trial Tr. 17:20-25, July 25, 2013. Mr. Zipperlen also

experienced time pressure to invest – in fact, HEI salesmen called while he was in

20

the hospital recovering from spinal fusion surgery, and after discovering that he

was in a hospital and not at home, they persisted in making repeated calls to

encourage him to invest before he missed his special opportunity. Trial Tr.

161:2—162:25, July 23, 2013. HEI investors did in fact rely on HEI’s promises

and did not consult with a geologist or expert in oil and gas exploration to

determine whether HEI’s claims were backed up by the well reports or any other

data. See, e.g., id. at 123:16-22; Trial Tr. 75:17-24, July 24, 2013.

iii) HEI Claimed to Drill Near Producing Wells and

Promoted Its Advanced Technology to Create an

Illusion of Guaranteed Returns.

HEI sales staff used two additional red-flag sales techniques to promote its

investments: they touted HEI’s use of advanced technologies to increase the

production of wells or increase the chances of drilling a successful well, and they

discussed the fact that proposed drill sites were proximate to producing wells or

proven fields to give investors false confidence that HEI wells would succeed. For

instance, HEI touted its 3D seismic technology to Mr. Zipperlen and Mr. Topp – it

was “a can’t-miss thing.” Trial Tr. 151:22-23, July 23, 2013. Thomas Carpenter

testified that he was first approached with an “extraordinary investment”

opportunity in a “proven field;” although the “top portion . . . had been pretty well

21

depleted . . . there was a lot of potential in the deep area . . . [and] recent

technology allowed them to go down to that deep area.” Trial Tr. 9:7-19, July 25,

2013. Likewise, Sherman Minckler invested because he was told the field where

the well was located was “a known, proven area,” so the “risks were minimal.”

Trial Tr. 121:23—123:9-10, July 23, 2013.

However, HEI’s rhetoric was misleading. The risks associated with oil and

gas development are never “minimal” – they are substantial – even when the well

is drilled with 3D seismic technology and near producing wells. The SEC

identifies claims that modern technology can increase production or the chances of

success as red flags of potential fraud because they lend an air of truth to

potentially bogus claims for investors who read the news and are aware of rapid

advances in technology, but who lack the necessary background to understand

them. See Investor Alert, supra; Oil & Gas Investment Fraud, supra. Similarly,

claims that wells are likely to succeed because of their proximity to “proven

reserves” or known producing wells are misleading. The use of the term

“reserves” makes an investment sound like a “sure thing,” but in reality the

chances of success of a well vary significantly based on the well’s position in a

field, the depth of drilling, and many other factors. See Investor Alert, supra.

22

The fact that a proposed well is located next to a producing well does not

guarantee success. By repeating these claims, however, HEI led investors to

believe that its wells presented little risk. Mr. Hojsak described the way he was led

to invest more with HEI after hearing repeatedly about other successes in the area

and HEI’s technology: “after numerous phone calls and then conversations . . . I

was led to believe that it was a secure investment . . . at some point, I started

having confidence in what was being presented to me, and particularly the

reference to the seismic data and the way that it was interpreted and the high level

of assurance, and then stipulating that other wells are doing very well in the area.”

Trial Tr. 137:5-13, July 22, 2013.

iv) HEI Unrealistically Guaranteed Success to Appeal

to Vulnerable Investors.

The SEC has noted that “one common thread among all fraudulent schemes,

including those related to oil and gas, are claims that they are about to strike it

rich.” Investor Alert, supra, at 3. Potential HEI investors were promised

guaranteed returns but were not given adequate disclosures of the potential risks of

the drilling enterprises. Over time, it becomes more difficult for some older adults

to distinguish safe investments from risky ones, see supra Part IV.1.b.iv, so high-

pressure sales techniques that wildly overstate the chances of success and potential

23

payoffs become more believable. For older investors with insufficient savings,

desperate to bolster their retirement accounts after losses in the market, promises of

high returns and low risks are particularly appealing.

For instance, Evelyn Ensminger was a 75-year-old retired teacher who “had

a big loss in the market” during the economic downturn and “was looking for

something that might bring back some of the funds.” Trial Tr. 34:24—35:1, July

22, 2013. She invested because she believed the HEI salesman who promised her

“extensive” returns on her investment, with figures “in millions.” Id. at 32:9-10.

Not only was the investment guaranteed to pay out, but the salesman promised an

income stream: she was told that some of the wells may produce for a long time,

and “some of them may go 25 years.” Id. at 32:11-12. Ms. Ensminger never

received the promised return on her investment.

Other investors were attracted to HEI with similar guarantees of success, and

the risks of these investments were minimized, if they were disclosed at all. David

Topp, a retired farmer who invested with HEI because he needed income during

his retirement years, said that HEI salesman were “always sure they[ would] hit

gas.” Trial Tr. 92:17-18, July 23, 2013. Mr. Topp invested in the Aviator project

after Reed Cagle told him he “knew there was gas there, so there was no risk to

24

us.” Id. at 94:19-20. Likewise, Mr. Hojsak testified that at one point the salesman

“guaranteed [the well was] going to produce oil;” otherwise he was guaranteed

success with a “95, 98 percent certainty. All the conversations that I had with them

would have quoted numbers in that range.” Trial Tr. 137:23—138:1, July 22,

2013. However, these highly touted prospects never materialized.

v) HEI Materially Misrepresented the Risks of

Investment.

Not only did HEI misstate the possibility of success in its wells, but it

actively concealed the risks that the investments would fail. For instance, the risks

of investment were concealed from Evelyn Ensminger, who did not receive the

Confidential Information Memorandum containing disclosures about the well until

after she had already invested, and she had “no opportunity to ask questions” about

the disclosure forms. Trial Tr. 36:9-10, July 22, 2013.

Moreover, the “conversion tables” produced by HEI to inform investors of

potential risks and payouts for each well “implied the chance of failure.” Trial Tr.

211:11-12, July 23, 2013. However, the conversion tables omitted the percentage

chance of failure routinely calculated by geologists before drilling a well

considering factors such as the probability of encountering source rock, trap, or a

reservoir. Id. at 211:9-14. The percentage chance of failure is highly variable by

25

well, and was not disclosed to HEI investors. Id. at 211:9—212:3. These investors

therefore lacked the information necessary, and relied on by experts in the field, to

assess the risks posed by each well because HEI did not provide it. Not only did

HEI claim its wells were guaranteed to succeed, but it withheld information that

would prove otherwise.

This pattern of concealment and deception continued throughout the lifetime

of HEI investors’ relationships with the company. For instance, Lois Fretter

testified that Reed Cagle would start conference calls by announcing “You made a

home run,” which to her was “proof that we had a successful well . . . [when it] had

nothing to do with success in the well.” Trial Tr. 89:6-10, July 22, 2013. Ms.

Fretter and Mr. Carpenter were both routinely excluded from investor conference

calls. “I was not included, even included, in one meeting, and I received

notification of the meeting three hours after the meeting was concluded.” Trial Tr.

25:2-5, July 25, 2013.

Multiple HEI investors requested information that would help them

understand and manage their investments, but HEI denied these requests. For

instance, Michael Cox sought the contact information of other investors and an

accounting of investment funds, but HEI did not produce these documents. Trial

26

Tr. 217:9-15—218:9-23, July 24, 2013. Likewise, Walter Hojsak requested an

accounting of funds spent and contact information for other investors after

becoming frustrated with the HEI operation. Although HEI claimed to operate

these oil and gas investments as partnerships in which each investor-partner had a

right to manage and make decisions for the group, Mr. Hojsak had to ask three

times before HEI finally agreed to divulge the other investors’ names, and his

request for an accounting was completely ignored. Trial Tr. 131:16-18, July 22,

2013. Mr. Hojsak also requested the 3D seismic data that would have helped him

make an informed decision about fracking a well – HEI refused to share it, and

“said it was proprietary information, that HEI did not want to release the data

because of concern with competitors.” Id. at 123:15-17.

b) HEI Sold Oil and Gas Interests that Violated Generally Accepted

Investment Principles.

HEI used these high pressure sales techniques to encourage investors to

make inappropriate investments in light of their circumstances and financial goals

and in violation of all generally accepted principles of personal investment. For

instance, financial experts agree that individuals should diversity their portfolios by

investing in different classes of assets, different assets within each class, and a mix

of safer and riskier investments in order to minimize risk. See Zvi Bodie &

27

Dwight B. Crane, Personal Investing: Advice, Theory, and Evidence, 53 Fin.

Analysts J. 13, 14 (1997). Second, investors should decrease the proportion of

high-risk investments in their portfolios as they age and approach retirement. Id.

Finally, when investing in high-risk enterprises, investors should not invest more

than they can afford to lose.

This is particularly true of private offerings, including oil and gas

enterprises. As the SEC notes, “Private securities offerings are generally limited

by law to certain institutional and high net worth investors. This limitation exists

because of the greater risks involved in private offerings as compared to, for

example, investing in publicly traded stock.” Investor Alert, supra, at 2.

Therefore, even legitimate oil and gas investments are often inappropriate for

people who simply cannot afford to lose the money. The labeling of HEI’s

investment units as partnerships does nothing to minimize the risks that accompany

investing with HEI; nor does it distinguish the units from fraudulent securities

offerings.

First, the portfolios of many HEI investors were not adequately diversified

by class and risk. HEI salesmen knew these wells were overly risky investments

for many HEI investors but encouraged investment in HEI wells nevertheless.

28

Many HEI investors carried too much risk as a result, and suffered the

consequences. For instance, Mr. Hojsak depleted his retirement savings by taking

funds from his IRA to invest with HEI. Mr. Hojsak testified that “on a couple of

occasions, [the salesman] specifically told me that I should use my IRA accounts,

that the return would be much better than anything that I could get if I left them

where they were.” Trial Tr. 130:17-20, July 22, 2013. Similarly, Kenneth

Pompliano depleted his 401(k) to invest in HEI wells. He believed HEI “looked

like a guaranteed return” so he also took out a second mortgage on his home in

order to finance additional investments. Trial Tr. 159:19, July 24, 2013. Today his

retirement savings account is depleted and his house is “way under water” as a

result of his investment with HEI. Id. at 160:6-7.

Financial experts also generally agree that the fraction of high-risk

investments in an investor’s portfolio should decline with age; older people have a

shorter investment horizon, cannot afford to ride out major losses, and therefore

should reduce investment risk when retirement approaches. However, HEI

regularly sold its risky oil and gas investments to older investors and intentionally

targeted this older population, despite the fact that these investments were

inappropriate in light of their financial situations. HEI investors believed their

29

salesmen’s assurances that HEI wells were a “sure thing,” and ignored these well-

established investment principles to their detriment. For instance, Ms. Ensminger

was a 75-year-old retired teacher who bought into HEI because she “had a big loss

in the market” during the economic downturn and “was looking for something that

might bring back some of the funds.” Trial Tr. 34:23—35:1, July 22, 2013.

Likewise her sister, Ms. Fretter, was 76 years old when she invested in HEI; she

was also a retired teacher who “never reached 30,000 a year” while she was

working. Id. at 81:18-19. Neither of these women should have invested in HEI

because they could not afford to take on the risks involved in oil and gas

development in light of their age and financial circumstances. The HEI salesman

who targeted these women encouraged them to invest nevertheless. Both women

did invest thousands in HEI and never recovered their losses.

Finally, experts agree that investors should not invest more than they can

afford to lose when investing in high-risk enterprises. However, many HEI

investors invested more than they could afford to lose; in fact, HEI knew that these

oil and gas investments were not suitable for elderly investors, but the company’s

high-pressure sales team sold them interests in HEI wells notwithstanding.

Although HEI asked investors to sign forms indicating that they owned at least $1

30

million in assets and could afford to take on a risky investment, they did not screen

out investors who did not meet these criteria. In fact, Mr. Zipperlen told the

salesman who convinced him to invest in HEI that he had only $880,000 in assets,

less than the $1 million he claimed to own when he submitted his first payment to

the company. Nevertheless, the salesman told him to sign the statement that he

owned $1 million in assets. Trial Tr. 160:5-6, July 23, 2013.

Mr. Pompliano, who took out a second mortgage on his home to finance his

contributions to HEI, was not the only investor who went into debt in order to

finance his oil and gas investment. An HEI salesman actually helped Mr. Topp, a

retired farmer who invested in HEI because he needed an income stream to sustain

himself in retirement, mortgage his farm in order to invest in HEI. Id. at 85:19—

86:3.

As a result of HEI’s callous and deceptive practices, some investors suffered

such serious losses that they were forced to leave retirement. Mr. Zipperlen, a

former railroad employee who stopped working after sustaining serious injuries

and developing a disability, invested in HEI “because not having health insurance

after leaving the employ of the railroad and needing an income, that sounded like a

good opportunity. It sounded pretty positive.” Id. at 154:3-6. Mr. Zipperlen

31

invested thousands with HEI, and lost it all. He was forced to return to work,

despite a serious back condition, in order to make ends meet. Id. at 151:7-10. Mr.

Topp, the retired farmer who mortgaged his farm with the help of HEI, could not

afford his investment, either. He never recovered his money and was forced to

leave retirement and resume farming as a result of the failed investment in HEI.

See id. at 81:19-25. In fact, at this point Mr. Topp believes he owes money to HEI.

Id. at 93:14-15.

VII. CONCLUSION

HEI cold-called unknown investors on marketing lists, who had not added

themselves to the Do Not Call list; tenaciously developed telephone relationships

with people who did not hang up immediately; used inflated claims of investment

prospects and successes to encourage investment, while actively concealing risks

of oil and gas drilling; and was aware of investors’ inability to withstand the risks

of oil and gas investment but still helped them to contract debt in order to make

additional HEI investments that never paid off. HEI’s sales practices not only

targeted vulnerable older investors; they were designed to take advantages of their

vulnerabilities.

32

Colorado’s securities laws should be interpreted broadly, consistent with the

purpose of the laws, to protect vulnerable investors and to provide them with legal

recourse. It is respectfully submitted that the trial court’s judgment should be

reversed.

/s/Jay E. Sushelsky

Jay E. Sushelsky

Attorneys for AARP Foundation Litigation:

Jay E. Sushelsky*

Bar Registration Number: 496378 (Washington DC)

Melvin Radowitz*

601 E Street NW

Washington, DC 20049

Telephone: (202) 434-2151

E-Mail: jsushelsky@aarp.org

Paula Greisen*

Bar Registration Number: 19784

King & Greisen, LLP

1670 York Street

Denver, CO 80206

Telephone: (303) 298-9878

*Counsel of Record

33

CERTIFICATE OF SERVICE

This is to certify that I have served the Brief Amicus Curiae of AARP in

Support of Plaintiff-Appellant upon parties herein by e-filing pursuant to C.R.C.P.

121 this 15th

day of April 2014.

Counsel for Fred J. Joseph,

Securities Commissioner for the State

of Colorado:

John W. Suthers, Attorney General

Russell B. Klein, 31965*

Alexander C. Reinhardt, 34970*

Sueanna P. Johnson, 34840*

Charles J. Kooyman, 43595*

1300 Broadway, 8th Floor

Denver, CO 80203

Klein Tel: (720) 508-6413

Reinhardt Tel: (720) 508-6401

Johnson Tel: (720) 508-6155

Kooyman Tel: (720) 508-6440

russell.klein@state.co.us

alex.reinhardt@state.co.us

sueanna.johnson@state.co.us

charles.kooyman@state.co.us

*Counsel of Record

Counsel for HEI Resources, Inc. and

Charles Reed Cagle:

Donnie W. Wisenbaker, No. 45619

HEI Resources, Inc.

523 S. Cascade Ave., Unit D

Colorado Springs, CO 80903

Telephone: (719) 355-2911

Facsimile: (719) 355-3788

E-Mail: donnie@heipartners.com

Otto K. Hilbert, II, No. 18363

Robinson Waters & O’Dorisio, P.C.

1099 18th Street, Suite 2600

Denver, CO 80202

Telephone: (303) 297-2600

Facsimile: (303) 297-2750

E-Mail: ohilbert@rwolaw.com

/s/ Jay E. Sushelsky

Jay E. Sushelsky