investors that the nine months of gas contract negotiations were showing signs of paying off and that COPCO in fact had a contract proposal in hand.
By late March a gas contract was finally executed between COPCO and Tangram Transmission Corporation ("Tangram"). As a condition precedent to Tangram's incurring any expense for setting up a delivery system, COPCO obliged itself to perform and report the results of a deliverability gas test on the fields. To that end COPCO engaged Milton M. Cook Company to perform the testing. Later in 1985 Tangram merged with Techline Industries, Inc. ("Techline") and the COPCO contract was assigned to Techline. On June 4, 1985 COPCO and Techline executed a contract. By letter dated June 21, 1985 COPCO informed the COPCO-1, -2 and -3 investors of the gas contract and the need for testing. At that time it also reminded the investors that COPCO was under no obligation to advance funds for the testing and said that because COPCO had already expended substantial amounts above the price of the turnkey contract it was not in a position to pay for the testing. Accordingly the letter requested pro rata contributions from the investors to fund the tests.
Approximately two weeks after the call was made to the investors, Cole informed Nortman that the call had been unnecessary because Bridges had informed Cole that Bridges would pay for the test personally. Bridges later denied that statement to Nortman, saying instead that he had merely obtained credit from the company performing the test. In the meantime Nortman and Berrettini determined that based on Cole's report the investors' funds that had been forwarded for the test should be returned. At an August 28 limited partnership meeting in Northbrook (with Bridges, Berrettini, Nortman, Arnold, Bergquist and a number of investors present), Bridges and Arnold reported that Don Owens of Techlines was to supervise the testing, which would be completed within the succeeding two or three weeks.
Drilling on COPCO-4 began in the spring of 1985 and proceeded quite smoothly. COPCO-4 operated on budget, and funds were made available through Theis as needed. By June 1 D'Abre reported that the majority of the COPCO-4 wells were drilled and pumping although no tank battery had been built, no flow lines had been installed and no electrical systems had been installed. At the end of that month Berrettini and Nortman made an inspection trip to the COPCO-4 field. On that occasion Bridges and D'Abre represented that five wells had been completed and two had been cased and cemented and that there was initial oil production from the five completed wells, verified by the logs. Nortman, Berrettini and Bergquist all confirmed by physical inspection the presence of oil in the temporary tank batteries of COPCO-4. D'Abre and Bridges both recommended completion of the remaining two wells, said that there was an excellent probability that COPCO-4 would be a good oil program and added that there was no evidence of gas production at that time. COPCO then sent a letter summarizing that information to the COPCO-4 investors and made the call for the 15% capital contribution provided for in PPM-4.
In mid-August 1985 Nortman and Berrettini were advised that the COPCO-4 15% call had, with the acquiescence of Cole and Bergquist, been redirected to Bridges. In fact Bridges had sent letters to the COPCO-4 investors directing them to mail their contributions directly to Texas in self-addressed envelopes he had enclosed. Without the knowledge of Nortman and Berrettini, Bridges began taking a lot of unilateral actions at that time. First of all he was communicating directly with Bergquist, who in turn dealt with investors about the 15% capital call without any notification to Nortman and Berrettini. Bergquist was also conducting negotiations with Techlines for gas testing, informing only Bridges of the substance of those negotiations. Furthermore, in September 1985 Nortman and Berrettini learned that Bridges had granted BGB Investments a 1% overriding interest in the acreage where COPCO-4 had been drilled.
Bridges also gave Arnold a.5% overriding interest in COPCO-4 and also explained to Arnold that he had renegotiated the Bartlett lease and in so doing had granted overrides to various people.
Beginning in April 1985 and continuing through mid-1986, Nortman, Berrettini, Firsel and even Bridges' Texas attorney Gregory Sweeney ("Sweeney") made repeated unsuccessful requests to Bridges and Arnold to provide COPCO with an allocation of equipment between the programs, an inventory of equipment and copies of all logs for the programs. On October 18, 1985 Bridges resigned as chief executive of COPCO and advised Nortman and Berrettini that his stock should be put in the name of the limited partners' investment group and sent to Donohoe. On November 4, 1985 Bridges resigned from the Board of Directors of COPCO, stating he would no longer act as a representative of COPCO except to execute his responsibilities as individual general partner of COPCO-4.
Throughout the remainder of 1985 and into 1986, Nortman and Berrettini attempted to find an operator for the COPCO fields to replace Bridges. To that end they communicated with Bob Stovall ("Stovall") of Southern Petroleum Company, Everett Sharp and Galoostian, ultimately hiring Stovall for the job. Throughout the same period Nortman and Berrettini continued to try to obtain from Bridges and Arnold the allocations and inventories of equipment and logs and other geological data to provide to potential new operators. Again their efforts were rebuffed.
In November and December 1985 COPCO again issued a call for voluntary contributions from the limited investors in all four programs. For the first three programs the funds were to conduct further gas tests to permit execution of the pending gas contracts (as already stated, all funds collected earlier for that purpose had been returned to investors). As for COPCO-4, the sought-after contributions were to provide funds for an operator for that field -- only a limited number of investors contributed, because many took the position that COPCO had the responsibility for advancing funds for such work. On that score, despite repeated requests from COPCO Bridges did not release the approximately $ 42,000 he had received in connection with the 15% capital contribution call in COPCO-4.
On March 11, 1986 a meeting was held in Chicago with Stovall and Owen of Techlines, to discuss once again the gas contract for COPCO-1, -2 and -3. Present at that meeting were Nortman, Berrettini, Bergquist and investors Clarence Sopko and Arnie Jensen. This time it was agreed that Stovall would perform the deliverability tests, which had still not been completed, and that he would complete an inventory of all equipment of the four COPCO programs (never prepared by Bridges and Arnold). Stovall agreed to do that work at a reduced price, which was to be paid out of funds advanced by the contributing limited partners and COPCO. Following that meeting a number of documents were provided to Stovall to assist him with his work. Among those were checks for services to be performed, all well tests in COPCO files, copies of logs and other items related to the fields.
On April 22, 1986 Bridges wrote to Nortman and told him that Bridges had acquired the lease to COPCO-4 and was resigning as the individual general partner of COPCO-4. Bridges added that he was going to give the wells back to the investors and have Stovall operate the field. Stovall's April 24, 1986 letter confirmed that Bridges had in fact obtained the leases but stated that Bridges had instructed Stovall not to perform any work on COPCO-4. Unable to do anything else as to COPCO-4 under those circumstances, COPCO (on behalf of itself and the limited partnerships) took legal action against Bridges, Ona and Theis.
On April 29, 1986 Stovall informed Nortman that COPCO-1, -2 and -3 could be made into a paying endeavor, although he could not then state how much it would cost to make them operational. By July 1986 COPCO had learned that it would take approximately $ 80,000 to transform the programs into productive gas fields. Because insufficient funds were available to COPCO to make that transformation COPCO ceased operating the wells in COPCO-1, -2 and -3. At that point all operations in all the COPCO programs ceased, and soon thereafter this action was filed.
Alleged Fraudulent Scheme
Complaint paras. 12-17 set out the alleged fraudulent scheme that underlies all the charged violations except for the securities registrations and breach of fiduciary duty claims, which will be dealt with separately. Direct quotation from the Complaint proves simplest in conveying the essence of plaintiffs' gripes:
12. Although the formal structure of the Limited Partnerships was modified from time to time, the fraudulent scheme applied to all of the Limited Partnerships as a whole and involved in a common purpose, as well as common misrepresentations and omissions concealed from Plaintiffs. The basic elements of this fraudulent scheme were as follows:
(a) there was no reasonable possibility of economic gain;