The case is interesting to me for two reasons.  First, the SEC doesn’t actually team up with state regulators on particular matters that often.  Unlike with the situation with the Department of Justice, when the reasons for pursuing parallel civil and criminal actions will be more obvious, it is more likely for either the SEC or a state regulator to bring a civil case, and not both.  Of course, it is impossible to tell how much the SEC and the N.C. Securities Division cooperated in this case, and perhaps they didn’t cooperate at all.

Second, the SEC’s matter has the usual securities fraud charges under Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act.  But the complaint also includes charges under Section 15(a) of the Exchange Act.  That provision requires that anyone acting as a securities broker to be registered as such.  Proving a violation of Section 15(a) does not require evidence of scienter or any intent to defraud at all.  But once a defendant has been found to have acted as an unregistered securities broker, trouble follows if the defendant has also been charged with securities fraud.  As Judge Rakoff said in SEC v. Platinum Inv. Corp., 2006 WL 2707319, at *3 (S.D.N.Y. 2006):

"A broker . . . has a duty to investigate the truth of the representations he makes to clients, because, by virtue of his title, clients are entitled to presume that the representations made were the result of reasonable investigation.  Hanly v. SEC, 415 F.2d 589, 596 (2d Cir.1969).  Thus, when recommending specific securities, a broker has a duty to do some independent investigation and cannot rely solely on the materials submitted by the issuer or given to him by his employer.  SEC v. Hasho, 784 F.Supp. 1059, 1107 (S.D.N.Y. 1992).  The amount of independent investigation required varies with the circumstances, but the duty to investigate is greater whenever the legitimacy of an investment is in some way questionable.  SEC v. Milan Capital Group, Inc., 2000 WL 1682761, at *5 (S.D.N.Y. Nov.9, 2000).  Moreover, “[s]ecurities issued by smaller companies of recent origin obviously require more thorough investigation.”  Hanly, 415 F.2d at 597. Where circumstances “raise enough questions,” “a person’s failure to investigate before recommending that investment [may be considered] reckless.”  Milan Capital Group, 2000 WL 1682761, at *5 (citing various examples)."

The effect is to take red flags about an investment that might not have reached the level of severe recklessness and to catapult any lingering concerns well past that threshold.  Not only should those red flags have been worrisome, the defendant now is retrospectively saddled with a duty to have figured out what was going on.  In this kind of Ponzi scheme case, the Section 15(a) charge thus has power that goes far beyond the technical-sounding, registration-based claim that lies on the surface.  It can go a long way toward making the fraud charges much more likely to stick.