and were dependent upon his undertaking to drill a well for a return on their investment. The purchasers were to derive their profits from the discovery values that would accrue to their leaseholds and assignments upon completion of the test well. Neither registrant nor the purchasers ever intended that the purchasers would develop the tracts they acquired. Nor were the purchasers, residing as they did throughout the United States and having no special competence in the oil business, in any position to undertake the development of the interest which most of them had acquired in 1 to 10 acre tracts. Moreover, the 40-acre Federal Spacing Rule, then in effect, would have prohibited the purchasers from drilling on their tracts had they so desired, unless they entered into a unitization agreement.

Prior to the sale of these leases and assignments, two representatives of our regional office at Fort Worth, Texas, had informed the registrant of the registration requirements of the Securities Act and had advised him that an offering of gas and oil leases coupled with undertakings of the type under consideration involved an offering of securities subject to such requirements. Thereafter, registrant made certain filings under the Act in connection with an offering of oil and gas leases practically identical with the one in question. He nevertheless made no attempt to comply with the Act in the instant offering.10

Accordingly, we find that the registrant willfully violated Section 5 (a) of the Securities Act.

2. MISREPRESENTATIONS AND OMISSIONS

In soliciting the sale of leases and assignments registrant mailed a series of letters, of which he was the author, to some 300 or 350 persons. It is alleged that these letters contained fraudulent and misleading statements and that the registrant willfully violated Section

Registrant filed a letter of notification pursuant to Regulation A adopted under the Securities Act. That regulation provides, in substance, for an exemption from registration when an issuer offers securities with an aggregate offering price not exceeding $300,000, provided that the issuer files a letter of notification containing the information prescribed by the regulation.

10 Registrant states that in December 1934 he was advised by our general counsel that assignments of oil and gas leases, copies of which registrant submitted, were not within the scope of the Securities Act. However, it does not appear that registrant informed our general counsel of any collateral undertaking to drill a well which, as has been indicated, is an important element in determining the existence of an investment contract in this type of case. And, as we have pointed out, registrant was later specifically advised that an offering of the type under consideration was within the purview of the Act.

25 S. E. C.

17 (a) of the Securities Act," Sections 10 (b) and 15 (c) (1) of the Exchange Act 12 and Rules X-10B-5 and X-15C1-2 (a) and (b) adopted under the latter Act.18

The registrant represented in his soliciting letters that the "Electronic Electrometer", which had been used in exploring the lease block, had never failed to show correctly the presence or absence of oil in commercial quantities and that the device had affirmatively recorded the existence of two definite pay levels of oil underlying the lease block. Operation of the electrometer is carried out by two persons

11 Section 17 (a) provides:

"It shall be unlawful for any person in the sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly

"(1) to employ any device, scheme, or artifice to defraud, or

"(2) to obtain money or property by means of any untrue statement of a material fact or any omission 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

"(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."

12 Section 10 (b) provides :

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange

"(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Section 15 (c) (1) provides:

"No broker or dealer shall make use of the mails or of any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security (other than commercial paper, bankers' acceptances, or commercial bills) otherwise than on a national securities exchange, by means of any manipulative, deceptive, or other fraudulent device or contrivance. The Commission shall, for the purpose of this subsection, by rules and regulations define such devices or contrivances as are manipulative, deceptive, or otherwise fraudulent."

12 Rule X-10B-5 provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange

"(1) to employ any device, scheme, or artifice to defraud.

"(2) to make any untrue statement of a material fact or to omit 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

"(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

Rule X-15C1-2 (a) and (b) provides:

"(a) The Term 'manipulative, deceptive, or other fraudulent device or contrivance,' as used in section 15 (c) (1) of the Act, is hereby defined to include any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. "(b) The term 'manipulative, deceptive, or other fraudulent device or contrivance,' as used in section 15 (c) (1) of the Act, is hereby defined to include any untrue statement of a material fact and any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, which statement or omission is made with knowledge or reasonable grounds to believe that it is untrue or misleading."

each holding two metal rods attached to a box without dials or indicators other than an ammeter, which records the strength of an electric disturbance set up from batteries in the box. Two rods attached to the box are thrust into the ground, and it is claimed that in some unexplainable manner when the device is located over an oil deposit it forces the two persons holding the rods to bring these rods in a position forming a double cross. The number of levels of oil deposits is said to be indicated by the number of pulsations produced by the device. In the instant case it is stated that two pulsations were produced.

Stewart, inventor of the electrometer, who is neither a geologist nor a geophysicist and who has had no formal training in these subjects, testified that he had never located a new oil field with his device, that he has never discussed his instrument with a physicist or any expert in the electronic or radio field, that he knows of no device similar to his that is used by a major oil company, and that he knows nothing about the geology of Brewster County where the lease block is located. Phillip Maverick, a senior petroleum geologist on our staff, testified that the electrometer is not capable of locating or indicating the existence of oil deposits, that it is not based on any accepted scientific principle, that it has no scientific value, and that it falls in the category of instruments commonly known as "doodle bugs." It further appears that Morrissey himself had knowledge of previous failures of the instrument to determine the presence of oil.

Registrant also made numerous misrepresentations as to the results produced by the test well. He represented that oil was struck at a depth of 565 feet and that oil was bailed from that depth down to 610 feet, that there were 45 feet of oil saturated lime formation between the depths of 565 feet to 610 feet, that the oil saturation of the formation at the depth of 600 to 610 feet was even richer than at the depth of 565 feet, and that a geologist for one of the largest oil companies, James Waters, after an examination of samples of formation taken from a water well drilled on the lease block had stated that this acreage would make a well. The record dscloses that there was no basis for these assertions.

The log of the test well, which contains daily drilling reports, makes only three references to detection of oil. It notes "a fair trace of oil" at 565 feet, a "good trace of oil" at 580-585 feet, "a show of oil" at 590-595 feet.15 Kelly H. Rhodes, who did the actual drilling at the depth of approximately 500 to 605 feet, testified that the thickness of the saturated formation he found was at most only from one to two

14 Maverick is a registered petroleum geologist in the State of Texas and has been actively engaged in his profession for 26 years.

15 The log was submitted to the registrant, at his request, on June 20, 1945.

feet and that at no time did he encounter, as registrant represented, an oil saturated lime formation 45 feet thick. He also stated that there was no richer formation at 600 feet than at 565 feet and that he bailed only a total of one-half gallon or at a maximum one gallon of oil from the test well. Finally, James Waters, a geologist for the Sun Oil Company, who prepared a paleontological report on samples taken from a water well drilled on the lease block, testified that at no time did he advise that the acreage would make an oil well. Likewise, a representative of the Arco Oil Company, who spoke to Waters and relayed Waters' report to the registrant, testified that at no time did he inform the registrant that Waters had stated the acreage would make a well.

Registrant also represented that a geologist of high reputation had many years ago "geologized" favorably the Brewster County area and that from all indications it was potentially a great oil producing field, that an analysis of the samples of formation taken from the test well showed a high solubility, and that the prospects for opening up a great new oil field were excellent. Registrant testified that the basis for these representations was that Hopson, who had leased the acreage to him, had told him that a geologist had recommended the general area for drilling and had prepared a map of the area. However, registrant did not know whether the map or the geologist's recommendation covered the area of the lease block. He did recall that the map, which he saw, showed that two wells had been drilled about three miles north of the lease block and had resulted in dry holes.18 Registrant did not disclose this information to investors. Nor did he disclose to investors that a total of 46 dry holes had been drilled in Brewster County where the lease block is located; that no producing oil well has ever been drilled in Brewster County, and that the nearest oil production was approximately 75 miles away from the lease block. Furthermore, registrant concealed from investors the unfavorable results shown by tests made by two laboratories of samples of the formation taken from the test well. On June 11, 1945, the Fort Worth Laboratories reported that four samples taken at different depths disclosed the following oil content:

A representative of the laboratory testified that the traces of oil thus found were 150th to 100th of the quantity deemed to be sufficient

16 Actually these two wells were five and seven miles, respectively, from the lease block.

to locate a commercially profitable well. Similarly, on June 19, 1945, after an analysis of 29 samples taken at five foot intervals from 603 to 752 feet, the laboratories of Dowell, Incorporated, submitted a report which stated: "Each sample was tested for oil content and in none of the samples was there a show of oil. Since the samples received were cuttings and had been washed with mud the negative results for the detection of oil are not conclusive for the presence or absence of oil."

Registrant further represented to investors that he had obtained a lease on 10,000 acres. He did not disclose that he had only a contract right to obtain such lease contingent on his drilling a well to a specified depth. In addition, the registrant represented to certain purchasers that leases and assignments delivered to them conveyed rights to acreage in the lease block. But at the time of these representations, the lease on the lease block was deposited in escrow, and being unable to convey any interest in the lease block, the registrant delivered to the purchasers leases on land he owned adjoining the lease block. Subsequently, however, registrant did deliver leases and assignments to acreage in the lease block to the purchasers.17

In the light of the registrant's background and experience in the oil promotion business it is evident that he was aware of the materiality of the facts he misrepresented as well as of the omissions in his letters of solicitation and that his purpose was to deceive investors. It is clear from the record that registrant either knew his statements were false when he made them, or that he made them with gross carelessness and indifference to the truth and without any reasonable grounds to believe they were true.18

We find that registrant willfully violated Section 17 (a) of the Securities Act, Sections 10 (b) and 15 (c) of the Securities Exchange Act, and Rules X-10B-5 and X-15C1-2 (a) and (b) adopted pursuant to the latter statute.

3. INJUNCTION AGAINT REGISTRANT

In December 1945, the Commission instituted injunction proceedings against the registrant in the United States District Court for the Northern District of Texas, Fort Worth Division. The complaint charged that the activities described above constituted violations of Sections 5 (a) and 17 (a) of the Securities Act. The registrant filed a stipulation consenting to the entry of a permanent injunction, and on December 19, 1945, the Court entered an order enjoining registrant

17 Registrant's letters to investors contain numerous additional misrepresentations of fact as to which we make no findings since they were not specified in the notice of and order for hearing.

18 Cf. Foreman and Company, 3 S. E. C. 133, 135 (1938).