Jury finds Minnesota oilman Michael Reger liable for Dakota Plains securities fraud

A federal jury this week found that former Minnesota oil industry executive Michael Reger was responsible for securities fraud, capping a shareholder lawsuit against Dakota Plains Holdings.

While Reger stood for a weeklong trial, a federal judge on June 5 preliminarily approved a $14 million settlement between Dakota Plains shareholders and several other directors and executives of the now-defunct company.

The judge also approved a non-monetary shareholder settlement with Ryan Gilbertson, Reger's one-time partner in the North Dakota oil business.

Gilbertson testified against Reger by video feed from a Wisconsin prison, where he's serving a 12-year sentence for securities fraud in connection with Dakota Plains.

In a statement, Reger said he "declined to settle because I believe I did not do anything wrong and did not harm the company's shareholders. In fact, my family was the largest shareholder in the company even when it filed for bankruptcy."

Wayzata-based Dakota Plains filed for bankruptcy in 2016, a casualty of the oil bust that swept through North Dakota after the price of oil began crashing in late 2014.

Reger and Gilbertson co-founded Dakota Plains, which owned a facility in North Dakota that loaded oil onto rail cars. The company went public in 2012, and its stock quickly popped to $12 a share before fading.

Shareholders sued Gilbertson and Reger more than five years ago, claiming they intentionally manipulated the price of Dakota Plains stock in its first 20 days of trading. Dakota Plains' top two executives and its directors were also named in the suit.

A jury in U.S. District Court for southern New York found that Reger was liable for securities fraud, but not for insider trading. The jury found that the "inflation" of Dakota Plains' stock was 57 % during the period the lawsuit covered.

"The jury found that the conduct that gave rise to the verdict caused the stock to be inflated by 57 % over what it otherwise would have been through market forces," said Solomon Cera, a San Francisco-based attorney representing Dakota Plains shareholders.

"It's been a long, hard battle," he said of the lawsuit.

Reger said the jury's verdict was "inconsistent with the law and the facts," and that he will appeal. "At all times, I worked to benefit all Dakota Plains shareholders, and I expect to be vindicated."

U.S. District Court Judge Jed Rakoff will decide on any damages Reger must pay to shareholders. Plaintiffs estimated in a court filing that the $14 million settlement with eight Dakota Plains directors and executives accounted for only 21% of total damages.

That $14 million settlement is expected to be covered by a Dakota Plains insurance policy, the filing said.

The group of directors and executives — which included the company's one-time CEO and chief operation officer — argued that they acted responsibly in investigating allegations of wrongdoing by Reger and Gilbertson.

Reger and Gilbertson in 2006 co-founded Northern Oil, a publicly traded company now based in Minnetonka that invests in projects in North Dakota's oil fields. Both men are no longer involved in Northern Oil.

While serving as Northern's top executives, Reger and Gilbertson in 2008 also created Dakota Plains, which transported oil and frac sand for North Dakota's petroleum industry.

The pair initially installed their fathers as figurehead executives to run Dakota Plains, though they secretly controlled the company, the U.S. Securities and Exchange Commission (SEC) said in a civil law enforcement action filed in 2016. A 2017 indictment of Gilbertson made similar claims, but didn't mention Reger.

Dakota Plains issued notes with generous terms to Gilbertson and Reger, including bonus payments based on the price of the company's stock during its first 20 days of trading. Noteholders would receive bonuses if Dakota Plains' stock exceeded $2.50 per share; the higher it traded, the larger the bonuses.

The stock did well enough in its first few weeks of trading to trigger just over $32 million in bonus payments to Gilbertson, Reger and other note holders.

In November 2016, Reger consented to an SEC order, which found he received illicit payments and skirted public disclosure requirements. The order did not include a finding of stock manipulation. Reger paid nearly $8 million without admitting or denying guilt.

The SEC in November 2016 also publicly accused Gilbertson of violating multiple federal securities laws in conjunction with Dakota Plains' IPO. Gilbertson denied the allegations, fighting the SEC civil action. About five months later, he was indicted by a federal grand jury in Minnesota.

Gilbertson was convicted in 2018 on 14 counts of wire fraud; six counts of securities fraud; and one count of conspiracy to commit securities fraud. He's incarcerated at a medium-security federal prison in Oxford, Wis., about 20 miles northeast of Wisconsin Dells.

Patrick Schiltz, a U.S. District Court judge for Minnesota, also ordered that Gilbertson pay a $2 million fine and $15 million in restitution.

Gilbertson agreed to testify against Reger as part of his settlement with Dakota Plains shareholders, but he doesn't have to pay damages. "Gilbertson has already paid dearly for his conduct related to Dakota Plains," plaintiffs said in a court filing.

Amy Conners, a Minneapolis attorney representing Gilbertson, said she expects that he will not have to serve his entire 12-year sentence due to credits for both good behavior and participation in jobs and education programs in prison.