United States District Court, N.D. Illinois, Eastern Division
For United States Securities And Exchange Commission, Plaintiff: Jonathan Stephen Polish, LEAD ATTORNEY, U.S. Securities and Exchange Commission, Senior Trial Counsel, Division Of Enforcement, Chicago , IL; Daniel J. Hayes, United States Securities and Exchange Commission, Senior Trial Counsel/Enforcement Division, Chicago , IL; Eric A. Celauro, John E Birkenheier, Kent W. McAllister, Securities and Exchange Commission, Chicago , IL; .
For Frank I Reinschreiber, Global Financial Management, LLC, Defendants: Peter B. Shaeffer, Attorney at Law, Barrington , IL.
MEMORANDUM OPINION AND ORDER
Jeffrey Cole, UNITED STATES MAGISTRATE JUDGE.
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. Making a
long story short, when investors 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.
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].
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, 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;  (5) the defendant's economic stake in the violation; and (6) the reasonable
likelihood that misconduct will recur. 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).
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, 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 broker-dealer. [Dkt. #460, ¶ 6].
The alleged scheme involved the offer and sale of Regulation S stock in various pennystock issuers, including China Voice Holding ...