DOLOMITE ENERGY LIMITED LIABILITY COMPANY , ET AL. VS. COMMONWEALTH OF KENTUCKYAnnotate this Case
RENDERED: SEPTEMBER 5, 2008; 10:00 A.M.
NOT TO BE PUBLISHED
ORDERED PUBLISHED: NOVEMBER 14, 2008; 10:00 A.M.
Commonwealth of Kentucky
Court of Appeals
DOLOMITE ENERGY, LLC;
JERRY F. FINZELL; AND
DAVE R. HALL
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE THOMAS D. WINGATE, JUDGE
ACTION NO. 07-CI-00522
COMMONWEALTH OF KENTUCKY EX REL.
DIRECTOR OF THE OFFICE OF FINANCIAL
INSTITUTIONS, DIVISION OF SECURITIES
AFFIRMING AND REMANDING
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BEFORE: NICKELL AND THOMPSON, JUDGES; ROSENBLUM,1 SPECIAL
Retired Judge Paul W. Rosenblum presiding as Special Judge by assignment of the Chief
Justice pursuant to Section 110(5)(b) of the Kentucky Constitution.
ROSENBLUM, SPECIAL JUDGE: Dolomite Energy, LLC (Dolomite), Jerry
Finzell, and Dave Hall appeal from a Franklin Circuit Court order requiring them
to comply with a subpoena duces tecum issued by the Commonwealth of Kentucky
Office of Financial Institutions, Division of Securities (Commonwealth).
Dolomite, Fenzell, and Hall claim that the Circuit Court erred in its decision
because Dolomite does not solicit or sell to Kentucky residents, and therefore is
not within the subpoena powers of the Commonwealth. We disagree and affirm
the order of the Franklin Circuit Court.
Dolomite is a limited liability company located in Lexington,
Kentucky, that conducts oil and gas explorations in Kentucky and Tennessee.
Dolomite sold interests in those explorations to investors. The Commonwealth
filed an administrative complaint against Dolomite. On May 2, 2003, the
Commonwealth and Dolomite, Fenzell, and Hall entered into a settlement
agreement resolving the administrative complaint. On November 14, 2006, the
Commonwealth was notified by an investor that Dolomite had violated the terms
of the 2003 settlement. The Commonwealth opened an investigation to further
explore the allegation.
During the investigation, the Commonwealth issued a subpoena to
Dolomite on November 21, 2006, by certified mail. The subpoena requested that
Dolomite provide a broad list of records, memoranda, contracts, receipts, permits,
invoices, bills, accounts, statements, and other information pertaining to the
company. After Dolomite failed to comply with the subpoena, a petition to enforce
the subpoena was filed in the Franklin Circuit Court.
At a hearing on the Commonwealth’s petition, the Franklin Circuit
Court granted the Commonwealth’s motion for enforcement of the subpoena. The
order was entered June 13, 2007. Following the court’s order of enforcement,
Dolomite, Fenzell, and Hall filed a motion to alter, vacate, or amend the court’s
order. The Circuit Court denied the motion in an order entered July 5, 2007. This
Dolomite, Fenzell, and Hall claim that the Commonwealth’s
investigative subpoena exceeded its power of authority and is thus void. They
claim that the Commonwealth only has subpoena power over Kentucky companies
that solicit or sell to Kentucky residents. Dolomite, Fenzell, and Hall claim that
the investigatory powers of the Commonwealth only extend to Dolomite if the
Commonwealth can prove that the company solicited or sold to Kentucky
investors. We disagree.
To provide protection for investors, many states have adopted the
Uniform Securities Act. Kentucky adopted the Act in 1961 and codified it in KRS2
Chapter 292. The purposes of Chapter 292 are set out in KRS 292.530 (1) (a) (b)
Kentucky Revised Statutes.
(c), and (2).3 It is thus clear that the purposes of KRS Chapter 292 are not limited
to the protection of Kentucky investors.
Under KRS 292.313 (1), (2), (3), and (4),4 the Blue Sky laws are
applicable whether or not the investor is a Kentucky resident when buying
securities from Kentucky companies.
KRS 292.530 Purpose of Chapter
(1) The purpose of this chapter is to:
(a) Protect Kentucky investors by preventing investment fraud and related illegal
conduct or, if this fraud or illegal conduct has already occurred, remedying, where
possible, the harm done to Kentucky investors through active implementation and
application of this chapter’s enforcement powers;
(b) Educate the investing public as to the best methods for making informed investment
(c) Assist companies in their legitimate attempts to raise capital and transact in securities
(2) In addition, this chapter shall be so construed as to effectuate its general purpose to make
uniform the law of those states which enact it and to coordinate the interpretation and
administration of this chapter with the related federal regulation.
KRS 292.313 (1), (2), (3) and (4).
(1) KRS 292.320(1), 292.330(1), 292.340, 292.450, and 292.480 apply to persons who sell or
offer to sell when an offer to sell is made in this state, or an offer to buy is made and accepted in
(2) KRS 292.320(1), 292.330(1), and 292.450 apply to persons who buy or offer to buy when an
offer to buy is made in this state, or an offer to sell is made and accepted in this state;
(3) For the purpose of this section, an offer to sell or to buy is made in this state, whether or not
either party is then present in this state, when the offer originates from this state or is directed by
the offeror to this state and received at the place to which it is directed (or at any post office in
this state in the case of a mailed offer);
(4) For the purpose of this section, an offer to buy or to sell is accepted in this state when
acceptance is communicated to the offeror in this state and has not previously been
communicated to the offeror, orally or in writing, outside this state; and acceptance is
communicated to the offeror in this state, whether or not either party is then present in this state,
when the offeree directs it to the offeror in this state reasonably believing the offeror to be in this
state and it is received at the place to which it is directed (or at any post office in this state in the
case of a mailed acceptance).
Kentucky’s commitment to protect the reputation of the Kentucky
marketplace is evidenced by KRS 292.320, which prohibits certain fraudulent
practices in connection with the offer, sale, or purchase of any security in
Kentucky. Specifically, this subsection of the securities act forbids Kentucky
companies from conducting any business practice which would operate as a fraud
or deceit upon any person. KRS 292.320 (1).
Under Kentucky law, the Commonwealth bears the responsibility of
supervising the sale, purchase, or the offer to sell or purchase securities in the
Commonwealth. KRS 292.500. As a part of its supervisory responsibility, the
Commonwealth also has broad authority to investigate potential violations of the
Kentucky Securities Act. KRS 292.460. Under KRS 292.460 (2), the
Commonwealth has the power to “administer oaths and affirmations, subpoena
witnesses, compel their attendance, take evidence, and require production of any
books, papers, correspondence, memoranda, agreements, or other documents or
records which the executive director deems relevant or material to the inquiry.”
The Blue Sky Laws provide such broad investigatory powers that the
Commonwealth is given the responsibility to thoroughly investigate “whether any
person has violated or is about to violate . . .” the securities laws. KRS
In Commonwealth ex rel Hancock v. Pineur, 533 S.W.2d 527, 529
(Ky. 1976), the Court, citing United States v. Morton Salt Company, 338 U.S. 632,
652 (1950), stated:
Even if one were to regard the request for
information in this case as caused by nothing more
than official curiosity, nevertheless law-enforcing
agencies have a legitimate right to satisfy
themselves that corporate behavior is consistent
with the law and the public interest . . . .[It] is
sufficient if the inquiry is within the authority
of the agency, the demand is not too indefinite and
the information sought is reasonably relevant.
Although the Commonwealth’s subpoena was broad and requested an
extensive list of documents, under Kentucky’s Blue Sky Laws, the Commonwealth
has the power to request such extensive lists when the inquiry is within the
authority of the agency, the demand is not too indefinite, and the information
sought is reasonably relevant. The broad powers granted to the Commonwealth
not only protect Kentucky investors but also serve to preserve the reputation of
legitimate Kentucky companies and maintain national and international confidence
in the Kentucky market.
Many courts have described states’ dual interests in the enforcement
of the Blue Sky Laws. The United States 3rd Circuit Court of Appeals described
the dual state interests underlying Blue Sky Laws by stating:
In particular, we consider two legitimate state
interests to be particularly strong ones. First,
preventing New Jersey companies from
offering suspect securities to out-of-state buyers
helps preserve the reputation of New Jersey’s
legitimate securities issuers. States that have
failed to monitor out-of-state sales by in-state
broker-dealers have suffered in the past, as their
legitimate broker-dealers suffered from association
with suspect firms offering questionable securities.
. . . . see also Stevens v. Wrigley Pharma. Co.,
154 A. 403 (N.J. Ch. Div. 1931)(noting that New
Jersey’s interest in regulating in-state offers to
out-of-state buyers is “not so much to protect the
citizens of other states, as to prevent this state from
being used as a base of operations for crooks
marauding outside the state.”); Simms Inv. Co. v.
E.F. Hutton & Co., 699 F.Supp. 543, 545 (M.D.N.C.
1988)(“[T]he laws protect legitimate resident issuers
by exposing illegitimate resident issuers.”). Although
this state interest is heightened when the state can
prove that the in-state firm has engaged in outright
fraud, the interest is nonetheless legitimate when the
state seeks to block the sales of securities that it
believes might be associated with dubious or manipulative
A.S. Goldmen & Co., Inc. v. New Jersey Bureau of Securities, 163
F.3d 780, 788 (3rd Cir. 1999).
Relying on Ward v. Commonwealth ex rel. Stephens, 566 S.W.2d 426
(Ky. App. 1978), Dolomite, Fenzel, and Hall also claim that the Circuit Court erred
in its function as a gatekeeper to protect against arbitrary investigative demands by
failing to question the Commonwealth about its basis for the subpoena. Although
the investigatory powers of the Commonwealth are very broad, we recognize the
important role courts play as gatekeepers in order to protect against unreasonable
demands. While the trial court must satisfy itself as to the basis for the subpoena,
the record reflects that the Commonwealth provided the trial court with ample
evidence supporting its petition. (TR, pgs. 8-14). The Commonwealth submitted
the 2003 settlement agreement and the 2006 investor complaint form, along with a
detailed summary of the investor’s allegations against Dolomite. Therefore, the
Circuit Court had sufficient evidence to determine that the investigatory subpoena
was a legitimate request.
Dolomite, Fenzell, and Hall further argue that the court’s inquiry
should have concerned whether the subpoena related to Kentucky investors and
whether any complaints from Kentucky investors had been received by the
Commonwealth. However, we do not find the residency of the investor to be
controlling. Kentucky’s adoption of the Blue Sky Laws clearly shows an intent to
protect not only Kentucky investors but also to protect the reputation of the
Kentucky marketplace by regulating the sale of securities to both Kentucky
investors and nonresident investors.
Dolomite, Fenzell, and Hall also claim that Hall was not properly
served with the subpoena and thus the court’s judgment as to Hall is void. The
Commonwealth contends that Hall was properly served in person by an
investigator in the Commonwealth’s Office of Financial Institutions. From our
review of the record, there is no evidence of Hall being served with the subpoena.
However, the Commonwealth contends that it does not seek to enforce the
subpoena against Hall. Therefore, the question of whether Hall was indeed
properly served is moot.
Dolomite, Fenzell, and Hall also seem to attack the Commonwealth’s
subpoena power under the Commerce Clause. However, any argument under the
Commerce Clause was waived because it was not raised before the Circuit Court
and thus was not properly preserved for appeal. We further note that this argument
was not asserted in the prehearing statement nor was any notice of this argument
provided to the Attorney General.
We find that the Commonwealth did not exceed its investigatory
powers by executing the subpoena on Dolomite. Therefore, we affirm the order
of the Franklin Circuit Court enforcing the Commonwealth’s subpoena issued to
Dolomite and Fenzell. Further, because the Commonwealth does not seek
enforcement of the subpoena as to Hall, we remand to the Franklin Circuit Court
with directions to vacate the order enforcing the subpoena as to Hall only.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Jeffrey W. Jones
William B. Owsley