A recent decision out of the Southern District of Florida highlights the importance of businesses taking an expansive approach when considering whether to register as a broker dealer and the applicability of other requirements under the federal securities laws, as well as prioritizing basic statutory language over general guidance (even when that guidance is provided by the very federal agencies who regulate the industry).
In Securities and Exchange Commission v. Keener,1 the U.S. Securities & Exchange Commission (“SEC”) brought an enforcement action against Justin Keener, an individual who allegedly purchased convertible notes from penny stock issuers, held the notes for at least six months, converted the notes into newly issued shares of stock, and then sold those shares to the public market for a profit. According to the SEC’s complaint, Keener purchased and converted more than 100 notes from more than 100 different issuers, and he sold over 17.5 billion newly issued shares to the public generating approximately $21.5 million in profits between January 2015 and January 2018.
The SEC charged Keener with violating Section 15(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”), which prohibits anyone not registered as a broker or dealer from engaging in the sale of securities. Since Keener was not a registered broker dealer, the issue in the case was whether Keener qualified as a “dealer” subject to this provision of the Exchange Act.
According to the SEC, the term “dealer” was intentionally defined broadly by Congress to encompass a wide range of activities involving investors and securities markets, and the scope and extent of Keener’s activities qualified him as a dealer. In his motion to dismiss, Keener emphasized a distinction between a “dealer” and a “trader,” arguing that he was the latter and analogizing the distinction to the difference between a restaurant and a grocery store, both of which deal with similar products but are still different entities subject to different regulatory requirements.2 Keener also pointed to the SEC’s Guide to Broker-Dealer Registration (“Guide”), which lists several criteria for determining whether an individual is a dealer or a trader, and argued that he did not possess any of the attributes listed in the Guide.
While the court ultimately determined that the substantive question as to whether Keener was a “dealer” within the meaning of the Exchange Act was best resolved at a later stage in the litigation, it did rule that the SEC had sufficiently alleged facts supporting its claim that Keener was a dealer and thus subject to Section 15(a)(1) of the Exchange Act to survive Keener’s motion to dismiss. The court emphasized the statutory language of the Exchange Act over a more holistic factorial analysis based on the criteria from the Guide, and even acknowledged that someone who did not fit any of the criteria from the Guide could still be considered a dealer. The court also agreed with the SEC that the level of participation in purchasing and selling securities was relevant to determining whether someone qualified as a dealer, noting the extent of Keener’s alleged securities trading, both in terms of the number of shares and the amount of money involved. This approach is consistent with that taken by at least one other district court, the Northern District of Illinois, when it considered the scope of the definition of a “dealer” under the Exchange Act.3
In focusing on the basic statutory language of the Exchange Act rather than the Guide, the court highlighted the importance for anyone who might be subject to the requirements of the federal securities laws to look beyond agency guidance to the statutory language itself, and prepare for an expansive and inclusive interpretation of such language by both the SEC and the courts.
1 No. 20-cv-21254, 2020 WL 4736205 (S.D. Fla. Aug. 14, 2020).
2 Id. at *2.
3 See SEC v. River North Equity LLC, 415 F. Supp. 3d 853 (N.D. Ill. 2019).