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.
Lexisnexis
Showing posts with label unregistered distribution. Show all posts
Showing posts with label unregistered distribution. Show all posts
Corporate Officers, Registered Reps And Supervisor Sanctioned
Time between appeal and opinion - 2 years, 5 months, 26 days.
Time between final brief and opinion - 2 years, 1 month, 3 days.
Time between oral argument and opinion - 11 months, 24 days.
Pages - 51.
I supervised this matter when I was still at the Commission so I will not provide editorial comment or extensive discussion. However, please note that the dates listed above are not typographical errors. A brief summary of the case follows.
This matter involved a complex unregistered public distribution of stock by officers of a public company assisted by two registered representatives at a broker-dealer. It involves very complex issues under the registration provisions of Section 5 of the Securities Act and also the supervisory duties of a broker-dealer.
Anyone interested in a comprehensive discussion of Securities Act registration would be advised to consider the Commission's discussion of these sometimes difficult issues. The opinion reiterates that broker-dealers must be vigilant to red flags that may alert them that they are participating in an unregistered distribution of stock by corporate insiders.
Cease and desist orders were entered against all respondents charged with violations (failure to supervise is not a violation). One registered representative was barred, another was barred with a right to reapply after five years and the supervisor was barred from acting in a supervisory capacity.
The two corporate officers were ordered to disgorge a total of $4 million between them and ordered to pay prejudgment interest totaling $2 million. Each of the registered representatives was ordered to disgorge $873,000 and pay prejudgment interest of $454,000. Each representative was also ordered to pay a civil penalty of $110,000 and the supervisor was ordered to pay a $55,000 penalty.
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