Friday, August 15, 2014

Court Trims Proposed "Draconian" Permanent Penny Stock Bar

[This story previously appeared in Securities Regulation Daily.]

By Rodney F. Tonkovic, J.D.

A district court declined to order a penny stock bar against a lawyer who took part in an international boiler room scheme. Phillip Powers acted as an escrow agent without registering as a broker-dealer. The Commission sought to permanently bar Powers from participating in penny stock offerings, but the court concluded that an injunction against such participation that was already in place was sufficient (SEC v. Benger, August 13, 2014, Cole, J.).

Background. The SEC brought this action against the participants in boiler room scheme that took in approximately $44 million from penny stock sales to foreign investors. The defendants, Illinois citizens acting as distribution or escrow agents (Powers, in this case), skimmed about 60 percent of the proceeds as commissions for themselves and the foreign boiler room operators. The stock purchase agreements seen by the investors represented that there were no commissions and that there was only a nominal transaction fee.

In February 2014, Powers, without admitting or denying the allegations, agreed to the entry of a final judgment against him for having violated the Exchange Act's broker-dealer registration requirements. The court noted that the Commission filed four versions of its complaint, all of which ultimately failed (see, for example, our coverage on March 29, 2013 and March 22, 2013). Powers, an attorney, conceded that he failed to register as a broker-dealer and was subject to an injunction prohibiting him from participating in penny stock offerings while allowing him to give his clients advice about penny stocks. In this case, the Commission sought a broader, permanent bar from participating in penny stock offerings, including advising Powers' clients about penny stocks. This would, the court observed, impact Power's ability to practice law, and Powers objected to the bar as "too draconian."

Penny stock bar. The court noted that a lifetime bar is an extraordinary remedy, usually reserved for defendant who intentionally violated the securities laws and who were likely to do so in the future. In seeking a permanent bar, the Commission relied on cases that involved violations beyond merely failing to register as a broker-dealer. Powers' gains from his efforts amounted to $77,560, which, the court remarked, while not a pittance, was "hardly an economic stake at all," and his conduct was not so egregious as to warrant a life-time bar with no allowance for him to practice law in a limited area.

In fact, the court continued, Powers' emails suggested that he had some awareness and concern about possible improprieties. He was likely not the "self-focused, smirking cheat" preying on the infirm and elderly, as suggested by the Commission, the court said. Powers ultimately stuck with the venture, however, but he was a "small cog" in a scheme the Commission claimed reaped tens of millions in ill-gotten proceeds.

Most importantly, the court said, Powers had no prior violations of the securities or any other laws. His record as a lawyer was "unblemished," and the court concluded that this episode was an isolated occurrence in Powers' career. There was no indication, the court said, that Powers would repeat this kind of behavior.

The court accordingly denied the Commission's motion for a permanent penny stock bar. Finding, however, that some bar was appropriate, the court modified the injunction against Powers to prohibit him from participating in penny stock offerings for five years, while allowing him to advise his clients about securities law compliance involving penny stocks.

The case is No. 09 C 676.