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$967,000 Disgorgement Order Based On Unregistered Stock Sales Upheld

Rodney R. Schoemann, Securities Act Rel. 9076, October 23, 2009

Time since last brief filed – 6 months 7 days
Time since appeal filed – 8 months 25 days

Schoemann is a professional stock market trader. The ALJ found that he had violated the registration provisions of § 5 of the Securities Act and entered a cease and desist order against him as well as requiring him to disgorge his profits of $967,901. The Commission upheld the sanctions on appeal.

Schoemann bought the stock from an individual in the business of purchasing shell companies with a view toward selling their stock publicly. He later sold the stock into the markets.

The Commission found that due to the seller's ownership of a large block of the issuer's stock and his activities on behalf of the company that he was a control person of the issuer. Therefore, Schoemann was a statutory underwriter since he bought the stock from an "issuer" with a view toward re-selling it to the public. Thus, his sales were not exempt from the registration provisions of the Securities Act. As the opinion summarizes, "[i]ndividual investors who are not securities professionals may be deemed 'underwriters' within the statutory meaning of that term if they act as links in a chain of securities transactions from issuers or control persons to the public."

The Commission rejected Schoemann's advice of counsel defense, noting that § 5 is a strict liability statute and that good faith is not a valid defense. As is its practice, the Commission also applied a strict test of the privilege and found Schoemann's claim wanting as the lawyer in question was not Schoemann's counsel. It noted that one cannot legally rely on the advice of another's counsel.

This case presents a useful summary of some of the key concepts underlying the registration provisions of the Securities Act. Those who participate in a "distribution," the process by which stock is transferred to the public by issuers or their control persons are likely to violate the statute.