United States Securities and Exchange Commission v. Benger et al
Filing
530
MEMORANDUM OPINION AND ORDER Signed by the Honorable Jeffrey Cole on 8/13/2014. Mailed notice(cdh, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
Plaintiff,
v.
STEFAN H. BENGER, et al.,
Defendants.
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No. 09 C 676
Magistrate Judge Jeffrey Cole
MEMORANDUM OPINION AND ORDER
The Securities Exchange Commission (“SEC”) requests the imposition of a permanent penny
stock bar against defendant, Phillip Powers. In February of this year, Mr. Powers, without admitting
or denying the allegations in Count I of the Complaint, agreed to the entry of a Final Judgment
against him for having violated the broker dealer registration requirements of the Securities
Exchange Act, 15 U.S.C. §78o(b). Under the terms of the Final Judgment, the court would later
determine whether Mr. Powers should be permanently barred from participating in an offering of
penny stock. Mr. Powers agreed that in those proceedings he could not argue that he did not violate
the federal securities laws as alleged in Count I of the SEC’s complaint, could not challenge the
validity of the judgment he consented to, and that the allegations in Count I of the SEC’s complaint
would not be contested. [Dkt. #468, at 4-5].
The SEC originally brought this case to address a purported scheme concerning the offer and
sale of Regulation S stock in various penny stock issuers.1 Making a long story short, when investors
1
Penny stocks are low-priced, highly speculative stocks generally sold in the over-the-counter market
(continued...)
purchased shares, only about 40% of what they paid went to the issuing companies. The lion’s share
went to the defendants in this case, who acted as distribution agents or, in Mr. Powers’ case, as
escrow agents. In turn, this was disbursed to overseas accounts in the form of commission payments.
With the exception of the $50 escrow/transfer fee, all this was unknown to the investors. It should
be noted that, along the way, the SEC has filed four versions of its complaint in an effort to charge
Mr. Powers and his co-defendants with fraud. Those efforts ultimately failed. [Dkt. #405, 465]. In
the end, Mr. Powers conceded that he had failed to register as a broker dealer as charged in Count
I.2
Mr. Powers is presently operating as an attorney under the strictures of an injunction, which
prohibits him from “directly or indirectly, participating in any offering of penny stock (as that term
is defined in Rule 3a51-1 of the Securities Exchange Act of 1934 [17 C.F.R. § 240.3a51-1]).” [Dkt.
#129, at 2]. The terms of the order, as modified by Judge Lefkow, allow Mr. Powers “to engage in
advising clients in his capacity as a lawyer concerning securities law compliance that may entail
advice about penny stocks.” [Dkt. #152]. The SEC, however, wants a more encompassing
injunction – one that is not burdened with Judge Lefkow’s limitations, but would “permanently bar
[Mr. Powers] from participating in an offering of penny stock, including engaging in activities with
a broker dealer, or issuer for purposes of issuing, trading, or inducing or attempting to induce the
purchase or sale of any penny stock.” [Dkt. #474-1, §IV].
1
(...continued)
and generally not listed on an exchange. SEC v. Bronson, 2014 WL 1613020, 13 (S.D.N.Y.2014).
2
Count I of the Third Amended Compliant charged violation of the broker dealer registration
requirements. The facts comprising the alleged “international boiler room scheme” were spelled out in Count
I.
2
This would prohibit Mr. Powers from advising clients about penny stocks and thus, impact,
pro tanto, his ability to practice law. While Mr. Powers does not contest that he violated the
securities laws by failing to register as a broker-dealer, 15 U.S.C. §78o(b), he does vigorously object
to the SEC’s proposed punishment as too draconian.
A lifetime bar is an extraordinary remedy, usually reserved for those defendants who
intentionally engaged in prior securities violations under circumstances suggesting the likelihood of
future violations. SEC v. Blatt, 583 F.2d 1325, 1334 (5th Cir.1978); SEC v. Boey, 2013 WL 3805127,
3 (D.N.H.2013); SEC v. Drexel Burnham Lambert, Inc., 837 F.Supp. 587 (S.D.N.Y.1993), aff'd, SEC
v. Posner, 16 F.3d 520 (2d Cir.1994). In determining whether a defendant should be permanently
enjoined for violations of the securities laws, courts consider a number of non-exclusive, interrelated
factors,3 which include: (1) the “egregiousness” of the underlying securities law violation; (2)
whether the defendant is a “repeat offender”; (3) the defendant's role or position when he engaged
in the securities law violation; (4) the defendant's degree of scienter;4 (5) the defendant's economic
stake in the violation; and (6) the reasonable likelihood that misconduct will recur.5 See SEC v.
Patel, 61 F.3d 137, 141 (2nd Cir. 1995); Jayne W. Barnard, When is a Corporate Executive
“Substantially Unfit to Serve”?, 70 N.C.L.Rev. 1489, 1492-93 (1992).
3
See e.g.,SEC v. Mannion, 2014 WL 2957265, 6 (N.D.Ga.2014)(“The “egregiousness” of
Defendants' conduct turns largely on whether Defendants acted with scienter.”).
4
Scienter is generally defined as a mental state embracing intent to deceive, manipulate, or defraud.
Ernst & Ernst v. Hochfelder, 425 U.S. at 185,193 (1976).
5
In one formulation or another, these factors have been used throughout the Circuits. See, e.g., SEC
v. Gann, 565 F.3d 932, 940 (5th Cir. 2009)(whether the violation is isolated or recurrent; the sincerity of the
defendant’s recognition of his transgression, and whether his job would provide further opportunities for
violations); SEC v. Global Express Capital Real Estate Inv. Fund, I, LLC, 289 Fed.Appx. 183, 189 (9th Cir.
2008).
3
A district court may determine that some of the factors are inapplicable in a particular case,
and it may take other relevant factors into account in deciding whether to impose the bar and, if so,
its duration. SEC v. Bankosky, 716 F.3d 45, 48 (2013). It is not a single factor, but rather the sum
of the circumstances surrounding the defendant and his past conduct that governs whether to grant
or deny injunctive relief. SEC v. Zale Corp. 650 F.2d 718, 720 (5th Cir.1981).
A defendant's past violation of the securities laws, without more, is insufficient to support
permanent injunctive relief. Gann, 565 F.3d at 940; SEC v. Commonwealth Chemical Securities,
Inc., 574 F.2d 90, 99-100 (2nd Cir. 1978); SEC v. Blatt, 583 F.2d 1325, 1334 (5th Cir.1978). The
critical question in issuing the injunction and also the ultimate test on review is whether defendant's
past conduct gives rise to an inference that, in light of present circumstances, there is a “‘reasonable
likelihood’ of future transgressions.” Gann, 565 F.3d at 940. To obtain injunctive relief, the
Commission must offer positive proof of the likelihood that the wrongdoing will recur. Blatt, 583
F.2d at 1334.
Since the resolution of any legal problem requires “ascertaining the factual background and
sifting through the facts with an eye to the legally relevant,” Sandra T.E. v. South Berwyn School
Dist., 100, 600 F.3d 612, 619 (7th Cir.2010), we turn to the factual record in this case. During the
relevant period, Mr. Powers was “senior counsel” at the law firm of Handler, Thayer & Duggan,
LLC (“Handler Thayer”) in Chicago. According to the firm’s website, he focused his practice on
“business, corporate and securities law with an emphasis on domestic and international private equity
formation and related transactions,” with experience as a “general counsel to broker-dealers and
other financial services firms, focusing on domestic regulatory compliance.” [Dkt. #460, ¶ 4]. Mr.
Powers was also a principal of Global Financial Management, LLC (“GFM”), a Chicago-based,
4
finance management company. [Dkt. #460, ¶¶ 4, 6]. GFM touted itself as providing “a complete
line of escrow services, including the ability to receive and send funds in any foreign currency.”
Through Mr. Powers and another defendant, Frank I. Reinschreiber, GFM acted as an escrow
agent for several of the issuers of stock sold through the “scheme” that was the subject of this suit.
[Dkt. #460, ¶ 6]. Mr. Powers and other defendants drafted the contract documents for the stock
sales. [Dkt. #460, ¶ 16]. They worked with another group of defendants – distribution defendants
– who had sales agents located outside the United States. [Dkt. #460, ¶ 20]. Neither GFM, nor Mr.
Powers or Mr. Reinschreiber, were registered with the Securities Exchange Commission as a brokerdealer. [Dkt. #460, ¶ 6].
The alleged scheme involved the offer and sale of Regulation S stock in various pennystock
issuers, including China Voice Holding Corp., Biomoda, Inc., World Energy Solutions, Inc.,
Revolutions Medical Corp., Earthsearch Communications, Inc., and Essential Innovations
Technology Corp. [Dkt. #460, ¶ 14]. The defendants, other than Mr. Powers, effectuated the sales
of shares to foreign investors with sales commission – unbeknownst to the investors – exceeding
60%. [Dkt. #460, ¶¶ 19, 25, 26]. Once an individual agreed to invest, he received a share purchase
agreement and, in most cases, would send payment and a signed agreement to an escrow agent like
Mr. Powers. [Dkt. #460, ¶ 21].
Mr. Powers and the other escrow agents would then disburse the funds to companies, the
distribution agents, and the sales people – generally through accounts in foreign countries with strong
banking secrecy laws – while retaining a commission for themselves as well. [Dkt. #460, ¶¶ 23, 25,
36]. The language of the share purchase agreements, however, led the investor to believe that the
total investment amount was transferred to the issuing company. [Dkt. #460, ¶ 26]. For example,
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a typical China Voice share purchase agreement might list a share price of 56 cents, a volume of
122,000 shares to be purchased, and total consideration for the shares as $68,370, along with a
transaction fee of no more than $50. [Dkt. #460, ¶ 30].
Here, Mr. Power’s admitted violation of §17(a)(1) of the Securities Act, 15 U.S.C. §77q(a)(1)
– failure to register as a broker-dealer – while not insignificant, is not egregious when compared to
the violations that have confronted courts in the other cases on which the SEC relies. Mr. Powers
acted as an escrow agent in the transactions in this case, but they did not involve American
exchanges or American investors. SEC v. Benger, 934 F.Supp.2d 1008, 1011 (N.D.Ill. 2013). The
SEC, unable to make out a fraud claim against Mr. Powers, [Dkt. # 405, 465], abandoned the more
serious charges it had originally brought.
Moreover, in its motion for a permanent penny stock bar, it was unable to cite a case in which
a failure to register as a broker-dealer was punished with such a sanction. All of the cases the SEC
relies upon involved violations beyond the mere failure to register as a broker-dealer. See, e.g., SEC.
v. Reynolds, 2013 WL 3778830, 8 (N.D.Tex. 2013)(securities fraud); SEC. v. Verdiramo, 2013 WL
399230, 1 (S.D.N.Y. 2013)(selling illegally issued shares in unregistered, non-exempt transactions);
SEC. v. Elliot, 2012 WL 2161647, 1 (S.D.N.Y. 2012)(selling unregistered shares); SEC v. Offill,
2012 WL 1138622, 6 (N.D.Tex. 2012)(former SEC attorney offering and selling unregistered
securities). [Dkt. # 474].
When Mr. Powers pointed this out in his response brief, the SEC, in its reply brief, argued
that it is not accurate that no case law supports its request for a permanent penny stock bar, and thus
cited to reports of settlements in which such a bar was agreed to, and one case – SEC. v. Sky Way
Global, 2010 WL 3025033, 1 (M.D.Fla. 2010) – in which a bar was imposed in an unreported order.
6
There are several flaws in this approach. First, reply briefs are for replying – not for citing pertinent
authority that ought to and could have been provided in an opening brief. United States v. Kennedy,
726 F.3d 968, 974 n.3 (7th Cir. 2013); Nationwide Ins. Co. v. Cent. Laborers’Pension Fund, 704
F.3d 522, 527 (7th Cir. 2013). To fail to list a case in an opening brief and then take your opponent
to task for commenting on your lack of supporting case law in your reply is inappropriate.
Nationwide Ins. Co. v. Central Laborers' Pension Fund, 704 F.3d 522, 527 (7th Cir. 2013)(arguments
not developed until reply brief are deemed waived); Bodenstab v. County of Cook, 569 F.3d 651, 658
(7th Cir. 2009)(same).
Beyond the question of waiver, the cases involving settlements fail to inform a decision here,
where the defendant contests the imposition of such a bar and the SEC must “specifically”
demonstrate “compelling reasons” for it. Steadman v. SEC., 603 F.2d 1126, 1140 (5th Cir. 1979).
And, in the case that gave rise to the unreported order imposing a penny stock bar, the conduct was
far more egregious than Mr. Powers’. The defendant in Sky Way Global actively promoted
investment in the company, actively solicited investors for securities transactions, and received about
$2 million in commissions. He went on to evade service, failed to appear in court, attempted to
conceal his violations of the law, and refused to recognize the wrongfulness of his conduct, Sky Way
Global, 2010 WL 3025033, 1. Mr. Powers conduct falls far short of this.
There is nothing to suggest he was beating the bushes for investors or actively promoting the
shares involved, and he realized just $77,560 for his efforts as an unregistered broker-dealer. While
not a pittance, it is a far cry from $2 million. See Patel, 61 F.3d at 141 (considering defendant’s
economic stake in the scheme); SEC v. Baldassare, 2014 WL 2465622, 8 (E.D.N.Y. 2014)(imposing
lifetime penny stock bar where, as the actual stockholders, defendants stood the most to gain in
7
scheme to defraud investors of millions of dollars). If the SEC’s claims in the instant case are
accurate, “tens of millions of dollars” were invested during the scheme. [Dkt. # 474, at 11]. Even
if the total were just two “tens of millions” – i.e., $20,000,000 – Mr. Powers’ slice was a minuscule
0.3%. That’s hardly any economic stake at all. There is nothing here to convince one to accept the
SEC’s characterization of his conduct as so egregious as to warrant a life-time bar that makes no
allowance for him to practice law in the limited area the SEC objects to. Compare, Global Express
Capital Real Estate Inv. Fund, I, LLC, 289 Fed.Appx. at 190 (defendant violated the securities laws
over an extended period of time, was principal, owner, and manager of each of the entity defendants,
violated her duty to fund investors, acted with a high level of scienter, profited from her fraud by
diverting millions of dollars to entities that she controlled, and sought to escape responsibility by
blaming others).
The SEC seeks to support its arguments for a lifetime penny stock ban by excising statements
from a handful of emails from Mr. Powers to his co-defendants during the period charged in the
complaint. Mr. Powers’ contact information was on the stock purchase agreements, so he would
receive on occasion complaints from investors when concerns arose. It should be noted
parenthetically that there were only 20 such complaints. He would forward these complaints to
someone in charge of distribution for instructions or resolution. Here are the emails from which the
SEC has excised the statements on which it relies:
1.
“How should I respond to this. I get these kinds of letters several times a
month.” [Forwarding an inquiry about China Voice stock’s potential to be listed on
an American stock exchange] [Dkt. # 474-1, Ex. 2]
2.
“Another group of aggressive brokers. This is not good when I get all these
emails” [forwarding a complaint regarding a promised return on investment; the
distribution agent states that “he will get to the bottom of it”] [Dkt. # 474-1, Ex. 3]
8
3.
There has been an up tick in people complaining of fraudulent schemes in the
UK. Hutchinson and Levi come to mind. They both used similar language. Has
anyone done UK google search for our deals to see if chatrooms are spreading
negative information? If this continues we should probably establish contingency
fund to buy these people off if the heat gets to [sic] high. I for one cant [sic] be
dragged into UK investigation via my law firm. We have no way of knowing what
promises were made to these individuals and buyers remorse is strong motive
However the choice of language used in the past couple of letters seem to suggest
there is some pot stirring going on and in any event there needs to be some bridge
building by the issuers to keep their shareholders informed and not feeling scammed.
Thoughts? [Dkt. # 474-1, Ex. 4]
4.
This highlights the problem have seen with some of the broker groups and
possibly why we are getting an uptick in unhappy investors. The tactics described
below are unconscionable These brokers prey on retirees, old ladies and the mentally
infirm. And of course they picked one old lady whose daughter is in compliance and
might even be barrister. Obviously we need to reverse this trade. The question is
how given that the commissions have already been paid. I am sure Marcelo wont
[sic] have problem sending the funds back.
5.
I have spoken to Frank about adding line to the signature page of the contract
note for date of birth and telephone number. I think to protect ourselves (since unlike
will of the wisp brokers we are sitting ducks for regulators) we need to confirm
purchases for anyone who is over the age of 65. We are working with good
companies and they don’t need the negative publicity of being dragged into an
abusive boiler room scandal.
6.
Ironic isn’t it that Mrs. Broady’s daughter works for an energy trading firm?
Going forward have to rethink whether our firm can be involved in paying out to the
brokers. I think it puts us in position to “know” who the brokers [sic] and could make
us liable for their sales practice abuses. Lets discuss our response on Monday.
[Dkt. # 474-1, Ex. 5].
The SEC submits that these emails show Mr. Powers “narcissistically” focusing on himself,
and not the plight of investors. [Dkt. #474 at 8]. That might be overstating it a bit. The full emails
quoted above– the SEC’s brief quotes only partially from them although it properly included the
entire emails as exhibits to its brief – give a more balanced depiction. If Mr. Powers were truly the
callous narcissist the SEC contends, the emails would have taken on a very different cast. What they
9
show, at least in large part however, is a person concerned about aggressive brokers; a concern about
the inability to know what promises had been made to U.K. investors; and a recognition of the need
to have the issuers of the stocks keep their shareholders informed and not feeling taken advantage
of. Another email shows Mr. Powers not as the smirking self-satisfied narcissistic boiler room
operator or confederate of those who would prey on retirees, old ladies, and the mentally infirm, but
as a concerned person.
The emails reveal Mr. Powers’ distress at fraudulent and high pressure tactics directed to
those who cannot protect themselves. In one email, the concern is how to reverse a particular trade
Mr. Powers found reprehensible. That Mr. Powers’ emails expressed some awareness and concern
about possible improprieties in sales tactics is as equally susceptible to a favorable reading of his
motives as it is to an unfavorable one. Perhaps more so. If Mr. Powers were the self-focused,
smirking cheat suggested by the SEC, one would expect the emails not to have had any concern
about “unconscionable tactics,” shoddy sales practices, and those who prey upon the infirm and the
elderly.
Still, the fact remains that although there were apparently isolated instances of suspected
impropriety, or at least claimed impropriety by others, Mr. Powers did not extricate himself from the
venture. Even if one views the emails in a less tendentious way than does the SEC, that failure is
relevant and does bear upon scienter. But, a counterweight is the fact that of the 1400 transactions
involved in these targeted offerings, Mr. Powers received just 20 complaints. [Dkt. #490-1, ¶ 33].
In the case of Mrs. Broady – referred to in the final email above – Mr. Powers assisted her in getting
her money back. [Dkt. #490-1, ¶ 34]. And, through all these transactions, there was only a single
complaint regarding what the SEC based its case on – the high-percentage commissions and low
10
percentage of funds going to the issuers. [Dkt. #474-1, Ex. 6].6
All of this is not to minimize Mr. Powers’ violation of the broker-dealer registration
requirement. He was a cog in the machinery of the overall scheme the SEC uncovered. But, at $50
a transaction in a deal the SEC claims reaped tens of millions of dollars in ill-gotten proceeds, he was
a small cog indeed.7
As for the remaining factors, surely, with Mr. Powers’ experience as a securities lawyer, it
must be concluded that he acted with scienter in failing to register as a broker-dealer. That infraction
was an isolated occurrence as was his participation as an escrow agent. While the SEC has not been
able to make the multiple fraud charges stick, it hopes to use all the transactions Mr. Powers handled
while he was not registered to paint him as a repeat offender and thus likely to commit further
violations in the future. But there is a subtle and significant flaw in that mode of analysis. Securities
violations are not like bank robberies – isolated events, limited in time and space. They are often
complex affairs, spanning extended periods of time, with multiple players. If the SEC’s view is right,
all securities law violators are automatically repeat offenders on the second and succeeding days of
the scheme.
If it be true that “‘[t]he soundness of a conclusion may not infrequently be tested by its
consequences,’” Posner, Cardozo: A Study in Reputation, 118 (1990), and that an argument may be
“scotched” where its acceptance would produce “outlandish consequences,” United Slates v.
Cinergy, Corp., 458 F.3d 705, 709 (7th Cir.2006), then the SEC’s recidivism argument must be
6
The SEC does not dispute any of these facts in its reply brief.
7
In what the SEC depicts as a 20, 30, or perhaps 40 million dollar pie, Mr. Powers took in, relatively
speaking, crumbs. He made about $77,000, meaning he took in approximately $55 per transaction.
11
rejected. Although the SEC does not concede it, a number of cases, some of which are discussed
below, implicitly but necessarily have rejected the SEC’s stained and incorrect view that a defendant
automatically becomes a recidivist by participating in a multi-faceted scheme.
The SEC does not make a convincing case that Mr. Powers’ participation in the violation in
this case makes him a repeat offender along the lines of the defendant in Metcalf or brings his
conduct into line with the defendant in Sky Way Global.8 See also In re Reserve Fund Securities
and Derivative Litigation, 2013 WL 5432334, 23 (S.D.N.Y. 2013)(“Given that these entities
operated for several decades without any significant regulatory sanction, the Court further concludes
that the infractions here are ‘isolated occurrence[s]. ‘... While the Commission points to two
violations committed more than thirty years ago to argue that RMCI is a repeat offender..., neither
case involved ‘the same or similar ... illegal conduct.’ Because the “Commission has adduced no
positive proof aside from Defendants' past alleged wrongdoing to suggest ‘some cognizable danger
of recurrent violation,’ ‘ an injunction is not warranted against [the defendants].”)(citations omitted);
SEC v. Metcalf, 2012 WL 5519358, *5 (S.D.N.Y. 2012)(even where the separate crime of bribery
was incident to a fraudulent market-manipulation scheme, the conduct was deemed to be part of a
“single scheme” and thus the defendant was not deemed a repeat offender);9 S.E.C. v. Dibella, 2008
WL 6965807, 11 (D.Conn.2008)(“Although DiBella acted with scienter, he is not the type of ‘repeat
8
The SEC submits that Mr. Powers’ inactivity in the face of the 20 complaints likens him to the
character of Colonel Klink from “Hogan’s Heroes.” [Dkt. # 504, at 11]. The SEC is likely confusing the
Colonel Klink character with Sergeant Schultz, whose standard line throughout the series when things were
going wrong was “I know nothing! Nothing!”
9
The court in Metcalf imposed a five-year penny stock bar, but the conduct involved was far more
egregious than that involved here. The defendant bribed an undercover agent to effect a $2 million purchase
of his company’s stock in order to commit a fraud on the market.
12
offender’ for whom an officer/director bar is especially appropriate. The conduct at issue in this case
constitutes his first and only violation of the securities law. Applying the factors in Patel, the Court
finds that there is insufficient evidence that an officer/director bar is warranted.); SEC v. Boey, 213
WL 3805127, 3 (D.N.H. 2013)(notwithstanding defendant’s participation in a fraud scheme, he was
a first time offender); Patel, 61 F.3d at 141–42 (reversing district court grant of an officer bar where
defendant abused his officer position, showed “some scienter” and was the sole economic
beneficiary of his actions, but was a first-time offender).
Finally, we must assess the likelihood of recurrence of wrongdoing by Mr. Powers. This is
the critical factor to be considered in the analysis. See cases cited supra at 4. Of course, it is
impossible to forecast the events still “in the womb of time,” Dennis v. United States, 341 U.S. 494,
551 (1951)(Frankfurter, J., concurring),10 and so any judgment regarding recurrence of bad behavior
is necessarily a prophecy, guided by common sense and ordinary human experience, which always
have a role to play in judging. United States v Montoya De Hernandez, 473 U.S. 531, 542 (1985);
Greenstone v. Cambex Corp., 975 F.2d 22, 26 (1st Cir.1992) (Breyer, C.J.); Cooney v. Rossiter, 583
F.3d 967, 971 (7th Cir.2009); Posner, How Judges Think at 116 (Harv. Univ. Press 2008).
Since the past is prologue, foreshadowing the future, Pan Am. World Airways, Inc. v. United
States, 371 U.S. 296, 310 (1963); United States v. Winter, 22 F.3d 15, 17 (1st Cir.1994), in
determining the reasonable likelihood of future violations, recourse must be had to a defendant’s
history of misbehavior. See, e.g., United States v. Stoller, 78 F.3d 710, 723 (1st Cir. 1996). After all,
as Wigmore observed, human experience teaches that a "bad" man is more likely to commit crimes
than a "good" one. 1 J.Wigmore, Evidence § 194 at 646 (3rd. ed. 1940). It is therefore significant that
10
The phrase was of course Iago’s in Othello.
13
Mr. Powers has had no prior violations of the securities or any other laws. Similarly, his decadeslong career as a lawyer has been unblemished. His only two prior involvements as an escrow agent
in 42 years were without incident.
Mr. Powers has not previously participated in a penny stock offering, aside from advising the
issuer in regard to the applicable regulations, and those undertakings were without incident. In short,
during the entirety of his long career as a lawyer and during the five-year pendency of this case, Mr.
Powers’ record is unblemished. Thus, “‘the record does not reveal [Mr. Powers’ misconduct] to be
so pervasively characteristic of [his] method of doing business as to indicate that he will continue
to violate the securities laws unless an injunction is issued.’” SEC v. O'Meally, 2013 WL 878631,
2 (S.D.N.Y. 2013). “‘Given that the SEC has not offered proof of other violations committed by [Mr.
Powers it must be] conclude[d] that the [this] episode ... was an ‘isolated occurrence.’” In re Reserve
Fund Securities and Derivative Litigation, 2013 WL 5432334, 23.
Beyond Mr. Powers’ unblemished history of law abidingness, is the nature of the violation.
Those who involve themselves in the kind of fraudulent, protracted, complicated schemes like those
in all of the cases cited by the SEC and act with a callous disregard for the interests of others over
a protracted period of time are more likely to be repeat offenders than someone like Mr. Powers.
While of course each case must be considered on its own facts, still the SEC’s insistence on a
lifetime ban that would preclude Mr. Powers from even acting as a lawyer advising a client in a
penny stock case is somewhat at odds with its stance in Thornton v. SEC, 199 F.3d 440 (5th
Cir.1999), which was a penny stock case. There, the evidence showed that the plaintiff “deliberately
obfuscate[d],” “use[d] excuses,” and “gave blatantly untruthful testimony” at the administrative
hearing. The administrative officer found he should be permanently banned from working in his
14
chosen profession as a registered representative. Nonetheless, the SEC lessened the sanction to a
three-year bar.
In the end, the SEC has failed to show that Mr. Powers’ conduct warrants the imposition of
a permanent penny stock bar, the scope of which would preclude him from acting as a lawyer in
connection with any penny stock transaction. Mr. Powers’ past gives no indication that he will repeat
the kind of behavior involved in this case. What the court said in S.E.C. v. Dibella, 2008 WL
6965807, 11 (D.Conn.2008) applies equally to Mr. Powers:
Although DiBella acted with scienter, he is not the type of “repeat offender” for
whom an officer/director bar is especially appropriate. The conduct at issue in this
case constitutes his first and only violation of the securities law. Applying the factors
in Patel, the Court finds that there is insufficient evidence that an officer/director bar
is warranted. See, e.g. Patel, 61 F.3d at 141–42 (reversing district court grant of an
officer bar where defendant abused his officer position, showed “some scienter” and
was the sole economic beneficiary of his actions, but where defendant was a firsttime offender and the SEC failed to demonstrate the likelihood of future
misconduct); Snyder...(applying the Patel factors and holding that although the
defendant acted with scienter and had an economic stake in the violation, an
officer/director bar was “unnecessary and unwarranted” in light of “[t]he lack of
egregiousness, the isolated nature of Defendant's actions, and the strong unlikelihood
of Defendant's ever obtaining another officer/director position or committing future
violations”) SEC v. Shah, ... (...finding an officer/director bar unwarranted where
defendant was an officer during his illegal conduct and pled guilty in related criminal
case, but was not a repeat offender, his gain of $121,340 not egregious in comparison
with other insider trading schemes, the circumstances of Defendant's actions did not
evidence a high degree of scienter, and defendant was sufficiently punished by other
remedies).
See also Boey, 213 WL 3805127, 3 (finding a lifetime bar unnecessary in light of the defendant’s
role in a widespread fraud, his modest economic stake in the violation, his first time offender status,
and the small risk of recidivism).
Finally, there appear to be insufficient incentives to prompt Mr. Powers to embark on future
illegal enterprises. Why would he risk another violation of the securities laws, be hailed into federal
15
court as a defendant in an inevitably protracted proceeding lasting years, face the most formidable
of adversaries – the SEC – suffer thousands of dollars in legal fees or in lost income,11 be forced
to disgorge any gains, and be subject to an injunction, with the certainty of far harsher sanctions if
he were to be found liable. To ask the question is to answer it.
CONCLUSION
The SEC’s motion for a permanent penny stock bar [# 474] is DENIED. However, some bar
is appropriate, so long as it permits Mr. Powers to be able to act as a lawyer advising clients. That
is what Judge Lefkow’s injunction does, and that injunction, modified as necessary to comport with
the requirements of this Opinion, will be continued for a period of five years from the date of its
entry.
ENTERED:
UNITED STATES MAGISTRATE JUDGE
DATE: 8/13/14
11
Although Mr. Powers represented himself, every hour spent on his own case was an hour he could
not devote to earning a living as a lawyer.
16
17
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