Hester Peirce Asks: Are SEC Penny Stock Bars Fair?
On June 21, 2023, the SEC announced the resolution of four administrative proceedings that had been filed against unregistered broker-dealers and associates of unregistered broker-dealers in 2019. All four respondents had defaulted on the Orders Instituting Proceedings served on them. For the offenses they failed to defend, they were permanently enjoined from violating the registration provisions of the federal securities laws. The SEC also found it in the public interest to bar them from “association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization [… and] from participating in any offering of a penny stock, including acting as a promoter, finder, consultant, agent, or other person who engages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.”
Only one of the five Commissioners had a problem with these unremarkable adjudications particularly the penny stock bar. Hester Peirce, often controversial and always clever, immediately produced a statement titled “Perpetual Personal Penny Stock Prohibitions: Statement on the Recent Orders Imposing Penny Bars in the Public Interest”. What was the difficulty? Peirce explained: “I do not agree that the records in these matters establish that imposing a complete and permanent penny stock bar on each respondent is in the public interest, I dissented from the imposition of the bars.” Her reasons are more complicated than one might expect.
The SEC Enforcement Actions: White
The administrative proceedings, all brought in the summer of 2019, lay dormant through the COVID crisis, and were finally readdressed recently. The respondents were Alexander Charles White, Steven G. Blasko, Mitchell B. Dow, and William Harper Minor, Jr. All but Minor had been successfully sued by the SEC prior to the initiation of the administrative proceedings.
White was a Georgian who had acted as a broker, though he held no securities licenses and was not registered with the Commission or with the Financial Industry Regulatory Authority (FINRA) at any time. The SEC alleged that he “solicited and raised money from investors in unregistered, fraudulent securities offerings conducted by Aegis Oil, LLC (‘Aegis’) and 7S Oil & Gas, LLC (‘7S’).” No prospectuses for these offerings were filed with the SEC.
In August 2018, the SEC sued White and an associate in Florida. This was no penny ante scheme; White was said to have received commissions of about $6.84 million from the Aegis offerings and $229,000 from the 7S offerings. He paid some to his sales staff but kept more than $4 million for himself.
The SEC won a default judgment in the case on June 28, 2019. On July 3, it filed its OIP against White. White did not respond. The SEC first filed an order to show cause and then, when White remained silent, filed a motion for default and other relief on October 11. The judgment had permanently enjoined him from future violations of Sections 5(a) and 5(c) of the Securities Act of 1933 (“Securities Act”) and Section 15(a)(1) of the Exchange Act of 1934 (“Exchange Act”), but the Commission felt more was needed and in the OIP determined to discover.
[w]hether, pursuant to Section 15(b) of the Exchange Act, it is appropriate and in the public interest to suspend or bar White from participating in any offering of penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock; or inducing or attempting to induce the purchase or sale of any penny stock.
In its motion for default, the Enforcement attorneys reiterated their belief that industry and penny stock bars would be appropriate sanctions and introduced a discussion of the reasons they felt a penny stock bar was not only necessary but should be permanent. Citing what are generally known as the “Steadman factors,” established in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Circuit 1979), they explain that in determining the appropriateness of such sanctions, the Commission
considers, among other things, the egregiousness of the respondent’s actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the respondent’s assurances against future violations, the respondent’s recognition of the wrongful nature of his conduct, and the likelihood that the respondent’s occupation will present opportunities for future violations.
In the case of White, the SEC believed the necessary standard for industry and penny bars had been met. But what kind of bars should they be? Temporary or permanent? Offering an example from 2017, in which Allen M. Perres had received bars that allowed him to apply for reinstatement after five years, the attorneys argue that although Perres’ violations had been egregious and recurrent, and that he most certainly knew what he was doing was wrong, he admitted to all that. And he realized a mere $125,145 from his malfeasance. They believed the White case was different:
Here, White’s conduct is worse—he violated the registration provisions for more than three years in connection with two separate offerings, he led a sales team, and he received over $4 million for his efforts. While we do not have direct evidence that White acted knowingly, he has passed up numerous opportunities—the investigative subpoena, the civil action, and this proceeding—to explain himself.
In addition, since White had defaulted, the Commission had no assurances that he intended to avoid violating the securities laws in the future. Perres had a “relatively clean” disciplinary history and, once he realized his situation, cooperated with the SEC. White, on the other hand, had failed to respond first to the civil lawsuit and then to the administrative proceeding. The SEC had no idea of his future intentions. And so “the Commission should impose the bars without a stated right to reapply.”
Nothing more was heard of the White matter until June 21, 2023, when the SEC issued its opinion and order. White, who is characterized as “unfit to participate in the securities industry,” receives associational and penny stock bars with no stated right to reapply.
The SEC Actions: Blasko, Dow, and Minor Penny Stock Bars
The other three SEC administrative actions adjudicated are very similar to the White case. In the Matter of Steve G. Blasko began, as did White, with an SEC civil lawsuit entitled SEC v. Carol J. Wayland, et al., filed on July 7, 2017. It involved a fraudulent offering selling interests in oil properties in Kentucky and Tennessee. They are collectively referred to in the relative documents as the “KT-50 Wells.” Final judgments in the case were handed down on April 18, 2019. Blasko was ordered to pay disgorgement of $67,658 and a civil penalty of $160,000. He was also permanently enjoined from future violations of Sections 5(a) and 5(c) of the Securities Act, and Section 15(a) of the Exchange Act.
On August 13, 2019, the SEC issued an OIP against Blasko. Blasko didn’t respond, and the SEC filed an order to show cause. On March 8, 2021, the SEC filed a motion for entry of default judgment and sanctions. The enforcement division notes at the outset that it “specifically requests” a permanent industry and penny stock bar and, in its motion, explains why in some detail. Blasko had been acting as an unregistered broker selling a fraudulent investment; that had been established in the underlying civil lawsuit. The Commission regularly issues associational and penny stock bars against unregistered brokers pursuant to Section 15(b)(6) of the Exchange Act. It had also been established that Blasko had violated Section 15(a) of the Exchange Act and Sections 5(a) & (c) of the Securities Act. His violations were egregious; his fraud was not an isolated incident; he failed to appear at his administrative hearing to account for his actions and offer assurances that they would not be repeated. The final Steadman factor considers “the likelihood that the respondent’s occupation will present future opportunities for violations.” The SEC enforcement attorneys acknowledge they have no crystal ball: they don’t know where Blasko currently resides or what his current occupation may be. But they note that he used an alias when selling the fraudulent oil and gas securities, and that he was on probation for DUI when he engaged in that conduct. Their conclusion: “all of the Steadman factors favor the imposition of the penny stock bar, which is strongly in the public’s interest.”
Mitchell B. Dow, the subject of the third administrative proceeding, is known to Blasko: the two men worked together on the fraudulent KT-50 Wells offering. Dow, however, had no mere drunk driving criminal conviction; he’d pled guilty to wire fraud charges. Like the other respondents in these cases, he failed to respond to the OIP he was served with, and so the SEC eventually filed a motion for default and sanctions. The motion is virtually identical to the one filed in connection with Blasko. As before, the SEC issued its opinion, complete with an industry and penny stock bar with no provision for reapplication, on June 21, 2023.
The final action, brought against William Harper Minor, Jr., is slightly different. Minor was not involved in dicey oil plays. He kept company with investment advisers, gave investment advice himself, and ran a pension fund from which he converted more than $2 million over 25 years. In 2018, he was caught and was charged with fraud by the Department of Justice in the Southern District of Florida. He negotiated a plea bargain—though not, it seems, a very smart one—and was sentenced to 41 months in prison. He got lucky and was granted compassionate release at the height of the COVID pandemic in April 2020.
The SEC never sued Minor civilly, so there was no injunction in place when the OIP was issued. But Minor, like the others in this series of administrative proceedings, failed to appear at his hearing or respond to the OIP, and so the enforcement attorneys filed a motion for default and other relief.
In the motion, the SEC once again rolls out the Steadman factors. It also cites In the Matter of Frederick W. Wall: “Absent extraordinary mitigating circumstances, an individual who has been convicted cannot be permitted to remain in the securities industry.” Enforcement did not, however, request a penny stock bar. It concluded:
[…]Although Minor is currently in custody, he will be released in April 2022, and unless he is barred from the securities industry he will have the chance to again harm investors.
Finally, in light of the fact that Minor’s association with a broker-dealer and investment adviser ended before the enactment of the Dodd-Frank Act, the Commission should impose only the broker-dealer and investment adviser bars.
Despite the enforcement attorneys’ very specific request, in its opinion, the Commission says, “We have weighed all of these factors, and find a bar from associating with a broker, dealer, or investment adviser and from participating in an offering of penny stock is warranted to protect the investing public.” Contradictory as that may seem, it is explained:
The Division’s motion states repeatedly that the Commission should bar Minor from the securities industry, and Exchange Act Section 15(b) authorizes a bar from several associational capacities as well as from participating in an offering of penny stock. But the Division also acknowledges that a collateral bar—a bar from associating in capacities with which Minor had no association at the time of the misconduct—is not appropriate “in light of the fact that Minor’s association with a broker-dealer and investment adviser ended before the enactment of the Dodd-Frank Act.” See Bartko v. SEC, 845 F.3d 1217, 1222–24 (D.C. Cir. 2017) (holding that the imposition of a collateral bar is impermissibly retroactive if based on conduct before Dodd- Frank’s 2010 enactment); see also infra text accompanying note 11 (finding that Minor was associated with a broker-dealer and investment adviser through July 2009). As a result, at one point in its motion the Division says that the Commission “should impose only the broker-dealer and investment adviser bars.” In light of the Division’s repeated requests for an industry bar, and its reference to Barkto v. SEC, we construe its motion as requesting the relief that Barkto does not preclude—namely a bar from association with a broker, dealer, or investment adviser and from participating in an offering of penny stock.
In the end, the penny stock bar is employed by the Commission as a means of making it impossible for Minor to work in the securities industry again, because that is “in the public interest.”
Hester Peirce’s Partial Dissent
When the SEC Commissioners voted on these administrative adjudications, Hester Peirce had some objections. She began by quoting from a 1994 SEC enforcement action:
“It is well-settled that . . . administrative proceedings” such as the ones at issue here “are not punitive but remedial. When we suspend or bar a person, it is to protect the public from future harm at his or her hands.” Howard F. Rubin, Rel. No. 34-35179, 1994 WL 730446, *1 (Dec. 30, 1994). A bar designed to protect the public is remedial, not punitive. Whether the public is in need of protection turns in large part on the likelihood that the person will again violate the law in a manner that poses a risk to the investing public. The Commission typically uses the factors set out in Steadman v. SEC… as a guide to assess that likelihood.
At that time, the concept of the kind of “remedial” sanctions like bars was in fact only a few years old. As Jon Carlson explains in “Securities Fraud, Officer and Director Bars, and the “Unfitness” Inquiry after Sarbanes-Oxley,” for many years, the only recourse the SEC had against many violators of the securities laws was an injunction. An injunction is often more hopeful than effective; an instruction not to do whatever it is again. It was in part to address this problem that in 1990, Congress passed the Securities Enforcement Remedies and Penny Stock Reform Act (“Remedies Act”). Congress hoped the new law would grant the SEC the authority to “maximize the remedial effects of its enforcement actions” and to “achieve the appropriate level of deterrence in each case.” One of the new powers granted to the SEC was the authority to seek officer and director bars in federal court. It was not until passage of the Sarbanes-Oxley Act in 2002 that the Commission received the authority to impose those bars in administrative proceedings.
Peirce does, however, accept these remedial sanctions, designed to protect the public rather than aggressively punish the wrongdoers. And she agrees with Enforcement and with her fellow Commissioners that the respondents in these actions are disagreeable people who have no compunctions about ripping others off. What she finds objectionable is the language used in the four identical penny stock bars. The respondents are prohibited from:
participating in any offering of a penny stock, including acting as a promoter, finder, consultant, agent, or other person who engages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.
She takes the prohibition on “inducing or attempting to induce the purchase or sale of any penny stock” to mean the respondents cannot ever again “trade penny stocks in their own accounts with their own money.” Is that really what the phrase means? It could be interpreted that way: a person who places an order to buy or sell a stock with his broker is, perhaps, “inducing” the broker to sell or buy it. It’s always best to avoid confusion when possible, so why not alter the wording?
Such a solution would, apparently, be fine with Peirce. She suggests that the Commission could have proposed narrower penny bars that would not interfere with what she believes is “the respondents’ right to engage in lawful economic activity with their own money.”
We’re inclined to agree, up to a point. As she points out, no penny stocks are featured in these four sordid stories. They’re about fraudulent offerings and, in the case of Minor, good old-fashioned theft. Peirce adds that “the opinions offer no explanation as to why prohibiting the respondents from trading in penny stocks in their own accounts with their own money is necessary to protect the public from harm.”
But is she right? In three of the four cases, the term “boiler room” is used to describe the “sales force” hired and managed by the respondents. Did any of the respondents ever promote pennies in the distant or more recent past? Anyone can run a pump and dump operation. No real boiler rooms are needed in the age of social media. No knowledge of the securities industry is needed, either. Would the offerings fraud respondents be able to resist? And if they couldn’t, would that be in the public interest?
To speak with a Securities Attorney about penny stock bars, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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