David Lerner’s Proprietary Energy 11 Partnership Discloses Significant Decline in Unit Value
On January 25, 2021, Energy 11, L.P. (Energy 11, or the Partnership) filed a Form 8-K with the SEC, disclosing an estimated value of $7.23 per common unit, as of December 31, 2020. Pursuant to this annual regulatory filing—notably, Energy 11 last disclosed an estimated value of $13.82 per common unit as of December 31, 2019—the Partnership indicated that the valuation was reached “based upon a third-party valuation, performed by Pinnacle Energy Services of Oklahoma City, Oklahoma” with a valuation range of $6.06 - $8.54 per common unit.
In light of this recent filing with the SEC, investors who acquired their Energy 11 units through the offering at $20 per common unit have likely sustained considerable losses of approximately 65% on initial capital invested (exclusive of any distributions received to date). Energy 11, through Syosset, NY-headquartered brokerage firm David Lerner Associates, Inc. (David Lerner), first began offering investors its common units in January 2015. Subsequently, on April 24, 2017, the Partnership completed its securities offering, having sold approximately 19 million common units for gross proceeds of $374.2 million.
Unfortunately, many retail investors of David Lerner have been steered into various proprietary energy products offered by the brokerage firm in recent years, including Energy 11, Energy Resources 12, L.P., as well as the Spirit of America Energy Fund (SOAEX). In particular, Energy 11 appears to have suffered considerable losses, stemming from the Partnership’s investment portfolio in various oil and gas wells (including both completed and uncompleted wells) in North Dakota in proximity to the Bakken Shale.
As most recently disclosed by Energy 11 through regulatory filings, as well as certain correspondence with investors, the Partnership’s operations of late have been negatively impacted by declining oil prices. Whereas oil prices exceeded $60 per barrel in early 2020, oil has since trended down in value and has been essentially rangebound between $35-50 per barrel for the past year. However, even if oil prices stage a recovery in the near-medium term, Energy 11’s revenues and cash flows have been significantly impacted. For example, the Partnership has drawn down on a $40 million credit facility with a lender, and additionally, has taken out another $15 million loan through GKDML, LLC, on or about July 21, 2020.
Energy 11 is an extremely risky and complex investment. Unfortunately, in some instances, financial advisors may have recommended an investment in the Partnership without adequately explaining its many risk components. To begin, Energy 11 is illiquid in nature, meaning that investors who seek to exit the investment cannot sell their units on a public market. Furthermore, Energy 11 is costly in nature. In fact, according to publicly available information, David Lerner received a total of 6% in selling commissions for units sold, as well as a marketing expense allowance based on the gross proceeds of total common units sold. Such high up-front commissions and expenses act as an immediate drag on investment performance.
Moreover, as an upstream oil and gas drilling concern, Energy 11 is directly exposed to the risky and capital-intensive subsector of the energy market which involves costly exploration and production (E&P) activity. When a financial advisor recommends an oil and gas investment to a client, the advisor should first seek to inform his or her client of the many risks associated with investing in the volatile oil and gas market. In addition, the financial advisor has a legal duty to perform a suitability analysis to determine if the investment is suitable in light of the customer’s profile and stated objectives. In instances where a financial advisor fails to disclose the risks associated with an investment (or investment strategy), or if an investor’s account becomes over-concentrated in oil and gas investments, then the advisor and his or her firm may well be held liable for losses sustained.
The attorneys at Giarrusso Law Group LLC possess considerable experience in successfully representing aggrieved investors in various complex and illiquid oil and gas investments. In many instances, investors may pursue claims to recover losses through securities arbitration before FINRA. Investors who wish to discuss a possible claim related to an oil or gas investment may contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, no-obligation consultation.