Last month the Supreme Court of
Mississippi handed down its 6-3 split opinion in the matter of
Harrington v. Mississippi Secretary of State. The
appellants in this case were officers in a real estate investment
company. The officers solicited and sold over $1,500,000 of
membership interests in the investment company through a private
placement memorandum (PPM). The solicitation projected $60,000,000
in revenue and $20,000,000 in earnings over five years. Finally, the
PPM provided that full and complete “records and books of accounts
would be maintained and available to the investors.”
The Secretary of State's Securities and
Charities Division ultimately issued a summary Cease and Desist Order
against the company—SteadiVest, LLC. Among other things, the
Division alleged that StediVest was a Ponzi scheme and that the PPM
misled investors. The Division charged the two officers with five
violations of the Mississippi Securities Act.
An administrative hearing was held on
the allegations after which the hearing officer recommended that a
penalty of $1,585,000 be imposed—the amount raised by the offering.
Regardless, the Secretary of State issued a Final Order fining one
officer $850,000 and the other $170,000. The officers appealed to
the court system. The lower court upheld the Secretary of State's
Order, and the officers appealed once again.
The Supreme Court dispensed with ease
the officers' challenge to the sufficiency of the evidence against
them. It also rejected their claims that the warnings in the PPM
were sufficient and that the Division should have been required to
prove scienter (knowing or intentional conduct). The Court's
scienter analysis was grounded in the parallel between the Model
Securities Act and Section 17 of the Federal Securities Act of 1933,
as well as the variant scienter requirements within 17(a)(b) and (c).
Perhaps more on this aspect of the opinion in a future blog.
This blog is intended to draw the
reader's attention to one specific portion of the Supreme Court's
analysis that deals with the calculation of fines for the two
officers. Why is this important? In my experience, regulators
frequently seek to ratchet up the total potential statutory fine by
dissecting a single violation into a multitude of violations in
order to achieve a drastic multiplier of the statutory fine exposure.
The Supreme Court's analysis in this
regard can be found on pp.18-19 of the opinion. The Supreme Court
upheld the Secretary of State's determination that two separate
violations occurred, segregating the PPM violation from the books and
records violation, but it rejected the Secretary of State's
subsequent application of a multiplier of 17 for each affected
investor.
Finally, anyone who has defended an
agent or investment adviser representative before a state securities
regulator might take some comfort in the Presiding Justice's
dissenting opinion in this case. To give you just a taste:
If the majority intends to say that the Legislature has given the
Secretary of State the power and authority to find a violation for
ever representation in a securities offering that the Secretary of
State subjectively believes might (as opposed to did
or, unless abated, is going to) operate as a fraud, then it is enough
for me to say that I simply reject that tortured interpretation of
the statute. In my view, some proof is required that someone
actually did detrimentally rely, or actually would have detrimentally
relied, on the representations.
And:
The word fraud is understood by nearly everyone who can spell it
(including my esteemed colleagues in the majority), to mean an
intentional material, less than truthful, representation upon which
the speaker intends the victim to rely, and upon which the victim
does actually, detrimentally, rely1.
This Court has applied that meaning since before Mississippi became
a state, and the English were employing it in the Common Law when
Henry VIII schemed a way to marry Anne Boleyn. Law students must
know and apply that meaning on law school and bar exams.
Food for thought.
________________________________________________________
1Hobbs
Auto, Inc. v. Dorsey, 914 So.2d 148, 153 (Miss.2005)
No comments:
Post a Comment