Today, the Commission resolved four long-pending adjudication matters.[1]  The Commission’s order in each of the matters imposes a penny stock bar on the respondent.  Because I do not agree that the records in these matters establish that imposing a complete and permanent penny stock bar on each respondent is in the public interest, I dissented from the imposition of the bars.  I write to explain why.

“It is well-settled that . . . administrative proceedings” such as the ones at issue here “are not punitive but remedial.  When we suspend or bar a person, it is to protect the public from future harm at his or her hands.”  Howard F. Rubin, Rel. No. 34-35179, 1994 WL 730446, *1 (Dec. 30, 1994).  A bar designed to protect the public is remedial, not punitive.  Whether the public is in need of protection turns in large part on the likelihood that the person will again violate the law in a manner that poses a risk to the investing public.  The Commission typically uses the factors set out in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), as a guide to assess that likelihood. Using the Steadman factors, which require consideration of the particular facts of the case, also facilitates satisfying the Commission’s obligation to “devote individual attention to the unique facts and circumstances” of each case and to provide a “reasoned basis” that “link[s] the sanction imposed to those circumstances” when we determine that a bar is in the public interest.  McCarthy v. SEC, 406 F.3d 179, 189-90 (2d Cir. 2005).    

All four respondents in today’s adjudication matters face permanent penny stock bars. Specifically, the orders impose identical bars that prohibit the respondents from:

participating in any offering of a penny stock, including acting as a promoter, finder, consultant, agent, or other person who engages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.

This language, in particular the unqualified prohibition on “inducing or attempting to induce the purchase or sale of any penny stock,” permanently prohibits the respondents from participating in penny stock transactions.  In other words, the respondents are prohibited in perpetuity from trading in penny stocks in their own accounts with their own money.  This extraordinary limitation on the respondents’ right to engage in lawful economic activity requires equally extraordinary facts to justify it, but such facts are not present here.  The conduct described in the opinions is bad conduct.  It includes (i) acting as an unregistered broker in an unregistered offering,[2] (ii) misleading investors in an unregistered offering while also acting as an unregistered broker,[3] and (iii) misappropriation of funds from investors and clients.[4]  That conduct shows that the respondents should not be trusted with other people’s money.  For this reason, associational bars designed to prevent the respondents from gaining access to other people’s money by way of association with regulated entities are remedial and in the public interest.   

None of the opinions, however, indicates that the respective respondent’s unlawful conduct involved penny stocks.  To obtain a penny stock bar in court, the Commission must establish that the defendant was participating in a penny stock offering at the time of the misconduct.[5]  Congress granted the Commission broader authority, and the Commission may impose penny stock bars in an administrative proceeding either when the person is engaged in a penny stock offering at the time of the misconduct or when the person is associated with, or seeking to associate with, a broker or dealer at the time of the misconduct.[6]  But even in our administrative proceedings we must provide a “reasoned basis” for the conclusion that a penny stock bar protects the public and therefore is remedial, not punitive.  When the misconduct involves penny stocks, explaining the link between the facts and the need for a penny stock bar to protect the public is usually not difficult, especially when the person engaging in the misconduct is associated with a broker or dealer.  In the absence of misconduct involving penny stocks, however, the link between the facts and the need for a penny stock bar to protect the public is less clear, even when the person engaging in the misconduct is associated with a broker or dealer.  The challenge of explaining why misconduct that does not involve penny stocks nonetheless supports a penny stock bar becomes even more pronounced when, as here, the penny stock bar reaches not only trading on behalf of others using their money, but also trading in one’s own account with one’s own money.  The mere fact that the person engaged in misconduct while associated with a broker or dealer does not, on its own, support imposition of a bar that prohibits that person from trading in penny stocks on her own behalf, using her own money in her own account.    

The opinions in the various matters fail to articulate a reasoned basis for the conclusion that the penny stock bars imposed are in the public interest because they fail to adequately explain the link between the facts and the need for the broad penny stock bars.  Indeed the opinions offer no explanation as to why prohibiting the respondents from trading in penny stocks in their own accounts with their own money is necessary to protect the public from harm.  

We could have imposed narrower penny stock bars that limited the respondents’ participation in the penny stock markets to trading in their own accounts with their own money.  Given an appropriate factual predicate, such tailored bars could serve the public interest by preventing respondents from using other people’s money and accounts to trade in penny stocks without unnecessarily impinging on the respondents’ right to engage in lawful economic activity with their own money.