No second chances when it comes to securities fraud

Aug 26, 2012 @ 12:01 am

At the risk of sounding like a Hallmark commercial, I believe in second chances. I believe that no matter how much people screw up, they deserve a chance to make amends and to be forgiven for a stolen candy bar, for hurtful words or even for a breach of trust that leaves a heart broken.

We all make mistakes, and we all deserve a second chance, at least once.

Fortunately, I am not charged with protecting millions of investors from financial fraud.

That thankless job goes to the Securities and Exchange Commission, which does not have the luxury of forgiving and forgetting when it comes to keeping investors safe from crooks.

So why is the SEC dragging its feet on a rule proposal aimed at keeping convicted felons and other “bad actors” (not you, Steven Seagal) from soliciting investors for some private placements?

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 directed the SEC to adopt rules that would prevent less than reputable characters from taking advantage of the exemption under Rule 506 of Regulation D in order to avoid registering their securities.

The SEC frequently uses that exemption to facilitate offerings for unregistered securities. For the fiscal year ended Sept. 30, 2010, the commission received 17,292 initial filings for offerings under Regulation D, of which 16,027 — nearly 93% — claimed a Rule 506 exemption.

That's a lot of opportunity for bad actors to wreak havoc.

On May 25, 2011, the SEC approved, by a 3-2 vote, a provision that would disqualify convicted felons from using Rule 506 to bring unregistered securities to market.

The public comment period on the “bad actors” provision ended more than a year ago, on July 14, 2011.

Since then, nothing. Nada. Zilch. Zip.

In fact, the rule proposal still is under consideration, and no date has been set for further action.

That means that a convicted felon, fresh out of an orange jumpsuit, can solicit millions of dollars from unwary investors.


Oh, it happens.

Consider Jerry L. Aubrey, a recidivist securities criminal if ever there was one.

Mr. Aubrey, along with his brother and two other cohorts, allegedly sold $11 million in fraudulent oil and gas securities to more than 200 investors between 2005 and 2009, according to a SEC complaint filed last fall.

In 2010, he pleaded guilty to securities fraud in connection with the sale of security interests in a body-scan-imaging business.

Some years earlier, the commission had charged him with violating the broker-dealer registration provisions of the Securities Exchange Act of 1934 in connection with the sale of securities in a fictitious cruise ship.

Mr. Aubrey spent some of the $11 million that he allegedly snookered from investors in his oil and gas scam on limo services, box seats at Los Angeles Lakers basketball games, strip clubs and “just being a high roller,” according to the complaint.

He also used part of the money to pay attorney's fees related to one of his previous fraud cases, for which he is now behind bars.

You can't make this stuff up.

So again, why is the SEC fence-sitting on what seems to be a no-brainer rule change?

Republican Commissioners Kathleen Casey and Troy Paredes voted against the proposal because it would apply to conduct that occurred before Dodd-Frank was enacted. They say that though the law directed the SEC to enact the rule, it didn't instruct the agency to do so retroactively.

“Because of the significance of the consequences of the proposed rules for affected persons, I believe the commission should be particularly cognizant of concerns about fairness and settled expectations,” Ms. Casey said in a statement released in May 2011.

I am for fairness as much as the next person. But to my thinking, Ms. Casey ought to be more worried about fairness for investors than for securities crooks.

Providing fraudsters with a second chance to engage in misconduct is definitely unfair to investors.

And, just like one of those sappy Hallmark commercials, it makes me want to cry.


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