Securities Regulation Daily Kokesh frees unregistered broker from disgorgement order, injunction not a ‘penalty’
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Friday, June 30, 2017

Kokesh frees unregistered broker from disgorgement order, injunction not a ‘penalty’

By Amy Leisinger, J.D.

An Eighth Circuit panel has vacated the portion of an order requiring an unregistered broker to pay disgorgement of $240,000 obtained in connection sales of securities. According to the panel, following the Supreme Court’s decision in Kokesh v. SEC, the disgorgement ordered operates as a "penalty" under 28 U.S.C. § 2462 and involves conduct accruing outside the five-year limitations period. However, the court found, the injunction imposed is not a penalty, as it is designed to protect the public from further violations, not to penalize. In making these determinations, the court rejected the defendant’s contention that he qualifies for a "finder" exception to the Exchange Act’s registration requirement, noting that he engaged in numerous activities indicative of broker status (SEC v. Collyard, June 29, 2017, Benton, W.).

Unregistered broker activities. A Minnesota federal court ruled that a company and its founder acted as unregistered brokers when they sold shares of an alternative energy company. The court said that the efforts to connect investors with the issuer were "significant and multi-faceted" and that the defendant received transaction-based commissions, actively solicited investors, offered optimistic assessments of potential returns, and interposed himself as an intermediary. The court granted the SEC’s request for injunctive relief and ordered disgorgement of $240,000 of ill-gotten gains. The court, however, did not impose a civil penalty, finding that the complaint involved allegations dating back from 2004 to 2006, while the complaint was filed in 2011, outside Section 2462’s five-year limitations period on seeking "penalties."

Disgorgement is penalty, injunction is not. After the case was argued, the Supreme Court issued its Kokesh decision, announcing that disgorgement operates as a penalty under Section 2462 and that a claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued. The panel noted that the SEC concedes that, under Kokesh, it is now barred from seeking disgorgement and vacated the disgorgement order.

As to the injunction, the panel explained that Kokesh states that a "penalty" is a punishment "imposed in a punitive way for an infraction of a public law," and an injunction could be construed as a penalty. However, the panel found, the district court’s injunction in this case is not a penalty, as it enjoins only violations of Exchange Act Section 15(a) and does not seek to redress a public wrong but instead to protect the investing public. "[I]t is not imposed ‘for the purpose of punishment’ or to ‘deter others from offending in like manner,’" as noted in Kokesh, the court stated. Deterrence is only an "incidental effect" of imposing the injunction, not the primary purpose, and the district court did not err in allowing the SEC’s action for the injunction, the panel found.

No "finder" exception. The court also rejected the defendant’s argument that he did not violated the prohibition on acting as an unregistered broker because he qualified for a "finder" exception or defense to the registration requirement. Adopting the Sixth Circuit’s list of nonexclusive factors to determine whether someone is a broker, the panel noted that the SEC presented undisputed evidence that the defendant participated in numerous securities transactions, handled client checks to purchase securities, advised and recruited investors, and earned commissions for his activities. When courts have found an exception or defense for a "finder," the activities at issue have been substantially more limited than those of the defendant in this case, the court found. Because of his "extensive" broker activities, there is no genuine issue of material fact as to whether he was a broker, the court concluded.

The case is No. 16-1405.

Attorneys: Charles J. Kerstetter for the SEC. Paul C. Engh (Paul Engh Law Office) for Paul D. Crawford and Crawford Capital Corp.

Companies: Collyard Group, LLC; Crawford Capital Corp.

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