Securities Arbitration Lawyer Blog
On August 6, 2021, the Chairman and Chief Executive Officer of Energy 11 GP, LLC, the general partner of Energy 11, L.P. (“Energy 11”), sent a letter to investors of Energy 11. Despite the upbeat and optimistic tone of the letter, as well as the representations made by David Lerner Associates, Inc.’s financial advisors to customers, investors have the right to feel concerned about their investments based on Energy 11’s public filings with the United States Securities and Exchange Commission (“SEC”). Most notably for investors:
- Energy 11 has not made distributions to its limited partners since March 2020.
- Energy 11 owes its limited partners 18 months of unpaid distributions, totaling more than $36 million.
- On May 13, 2021, Energy 11 entered into a new loan agreement, borrowing approximately $40 million.
- According to the terms of the loan, Energy 11 is not allowed to make any distributions to limited partners until the loan balance is paid down from its current balance of $39 million to $30 million (representing one half of its current maximum borrowing amount of $60 million).
- Energy 11 is required to make a monthly payment of $1 million to pay down the loan’s principal. According to the firm’s most recent financial statements, based on its cash flow over the first six months of 2021, Energy 11 does not appear to be able to afford to pay down the loan balance any quicker.
- Even when Energy 11 does pay down the loan balance and is contractually able to resume distributions, Energy 11 is not required to resume distributions at that time.
- Energy 11’s debt has tripled since the end of 2018, whereas its assets have remained relatively stable.
- Based on the amount of Energy 11’s outstanding debt, unpaid distributions, and recent cash flow, investors are not likely to receive distributions anytime soon.
Customers of David Lerner Associates, Inc. that have purchased Energy 11 should contact New York securities arbitration law firm Iorio Altamirano LLP for a free and confidential consultation and review of their legal rights.
Iorio Altamirano LLP represents investors that have disputes with their financial advisors or brokerage firms, such as David Lerner Associates, Inc.
Energy 11, L.P.
Energy 11 is an illiquid, non-traded limited partnership sold as private placement security by David Lerner Associates, Inc. The limited partnership invests in the oil, gas, and energy sector, which has been extremely volatile the past several years. Energy 11 is not suitable for most conservative or retired investors.
Energy 11 sought to acquire interests in both producing and non-producing oil and gas properties located onshore in the United States. In other words, Energy 11 was speculating that non-producing leaseholds would eventually produce.
In March 2020, Energy 11 suspended distributions to its limited partners. Energy 11 currently owes 18 months of unpaid distributions to its limited partners, totaling more than $36 million.
However, pursuant to the terms of Energy 11’s latest loan agreement, Energy 11 cannot make any distributions until the loan is paid down to one-half of the account maximum borrowing amount of $60 million. The loan balance as of July 31, 2021, was $39 million. Accordingly, Energy 11 cannot resume distributions to investors until it pays down its current loan balance by $9 million, from $39 million to $30 million.
Energy 11 is required to make a monthly payment of $1 million to pay down the principal of the loan.
[On May 13, 2021, Energy 11 entered into a new $60 million revolving credit facility with BankFirst. At closing, the Partnership borrowed approximately $40 million. The proceeds were used to pay the $40 million outstanding balance and accrued interest on the Partnership’s prior loan arrangement. Any further advances under the revolving credit facility with BankFirst are to be used to fund capital expenditures for the development of the Partnership’s undrilled acreage. The revolving credit facility with BankFirst is secured by a mortgage and first lien position on at least 90% of the Partnership’s producing wells.]
Energy 11’s August 6th letter to investors stated that the Partnership intends to pay down the loan balance from excess monthly cash flow. However, Energy 11 might not have enough excess cash flow to pay much more than the monthly minimum required amount of $1 million. According to Energy 11’s latest 10-Q filing with the SEC, the Partnership’s net cash flow from operating and investing activities for the first six months of 2021 was approximately $9.5 million, or an average of $1.58 million each month.
Based on Energy 11’s most recent financial statements and its cash flow over the first six months of 2021, Energy 11 does not appear to be able to afford to pay down the loan balance any quicker. Consequently, it is possible that Energy 11 will not be able to resume distributions for another 8 to 9 months.
Even when Energy 11 does pay down the loan balance and is contractually able to resume distributions, Energy 11 is not required to resume distributions at that time.
After paying down its loan balance, will Energy 11 be able to afford to pay back investors? The answer to that remains uncertain. However, the Partnership’s financials are not likely to give investors much confidence.
For starters, for each month that passes without the payment of distributions, the amount owed to limited partners, which was about $36 million at the end of June 2021, will likely grow by an additional $2.25 million.
In addition, over the past two and a half years, the Partnership’s debt has exploded. In contrast, the Partnership’s assets and revenues have not. From the end of 2018 through June 2021, Energy 11’s debt has tripled from approximately $17.5 million to around $53.5 million. While the Partnership’s liabilities have increased over 300%, the Partnerships’ assets only increased by approximately 5%, from about $323 million on December 31, 2018, to about $341 million on June 30, 2021.
Even assuming that Energy 11 gets back to 2018 income levels by 2022 ($18.6 million / year) (which one could argue is a generous assumption), it appears that it is going to take the Partnership years of good fortune to be able to pay down its debt, resume regularly scheduled distribution, and make past owed distributions to limited partners.
David Lerner Associates, Inc.
David Lerner Associates, Inc. (“David Lerner Associates”) is facing numerous customer complaints related to its sale and marketing of Energy 11, L.P. The complaints allege that Energy 11, an illiquid non-traded limited partnership that invests in the volatile energy sector, was unsuitable for investors with modest financial means, low or moderate risk tolerance, and liquidity needs. The complaints also include allegations that David Lerner Associates and its financial advisors misrepresented material features and risks associated with these illiquid, concentrated, and high-fee products, as well as ongoing misrepresentations related to when distribution payments would resume.
David Lerner Associates was the exclusive dealer-manager for Energy 11 and received 6% in selling commissions. David Lerner Associates is also entitled to a contingent incentive fee of up to an amount equal to 4% of gross proceeds of units sold. Based on public disclosures, it appears that David Lerner Associates has received over $22 million in seller commissions for selling Energy 11 to its customers and is potentially entitled to an additional $15 million in contingent incentive fees.
Iorio Altamirano LLP is investigating claims on behalf of David Lerner Associates’ customers that purchased Energy 11. To read more about the investigation, please click on the following link: Energy 11, L.P. and Energy Resources 12 L.P.: How to Recover Investment Losses from David Lerner Associates, Inc.
David Lerner Associates has also received several customer complaints related to brokers’ recommendations to purchase the Spirit of America Energy Fund (SOAEX). To read more about the Spirit of America Energy Fund, please click on the following link: Spirit of America Energy Fund (SOAEX): How to Recover Investment Losses From David Lerner Associates, Inc.
Earlier this year, the Financial Industry Regulatory Authority (“FINRA”) suspended former David Lerner Associates financial advisor Charles Bonilla from the securities industry for five months for recommendations of what is believed to be SOAEX and Energy 11. FINRA concluded that Mr. Bonilla lacked a reasonable basis to recommend these products because he did not perform reasonable diligence before making the recommendations and failed to understand their fundamental features and risks. To read more about the suspension of Charles Bonilla and FINRA’s allegations, click on the following link: Former David Lerner Associates Financial Advisor, Charles Bonilla, Suspended by FINRA for Unsuitable Energy-Sector Securities – Boca Raton, FL
If a broker at David Lerner Associates recommended Energy 11 to you and you have suffered investment losses, contact New York securities arbitration lawyers Iorio Altamirano LLP for a free and confidential consultation. Customers may be entitled to compensation without paying any out-of-pocket fees or costs through a contingency fee arrangement with securities arbitration law firm Iorio Altamirano LLP.