The Securities and Exchange Commission has filed a civil enforcement action against a Philadelphia, Pennsylvania based hard money lender, Paul Singer, and his company, Singer Financial Corp., alleging an illegal and unregistered offering of securities to the investing public.
In its complaint, the SEC asserts that Singer and his company raised around $4.5 million from approximately 70 investors in an unregistered offering of unsecured promissory notes. The SEC further contends that Singer and his company conducted the unregistered securities offering without a registration statement in place, and without meeting an applicable registration exemption.
In a somewhat more sinister claim, the SEC’s alleges that Singer first sought an exemption from registration for an investment certificate offering, the financial instruments of which were nearly identical to the promissory notes at issue in the litigation. However, once the SEC staff raised questions about the nature of certain non-interest bearing related party loans Singer received from his company, Singer opted to quit the process and, instead, commenced the alleged illegal promissory note offering.
By failing to register the promissory notes with the SEC or, in the alternative, qualifying for a registration exemption, Singer and his company failed to provide investors with material information as to the investment risks inherent in the unsecured promissory notes, the SEC contends.
Interestingly, in this case the SEC sued only on an alleged violation of Section 5(a) and (c) of the Securities Act of 1933, which prohibits the sale of unregistered securities or those securities sold without an applicable exemption. No fraud charges were leveled.
Section 5 of the Securities Act of 1933 is, however, an extremely powerful, but little understood, weapon in the SEC’s enforcement arsenal. It is a non-scienter based statute, meaning the SEC is not required to prove the defendant knew the law and intended to violate it (i.e., intent). Rather, Section 5 is a strict liability provision — intent is irrelevant. If you sold unregistered securities you are liable, notwithstanding that you did not know it or realize it. In fact, reliance on legal advice is not even a viable defense to this charge.
By utilizing Section 5, the SEC can seek and obtain essentially the same relief as if it had leveled fraud charges, without the attendant headaches of having to prove the defendant’s mental state. This relief includes disgorgement of ill-gotten gains, a civil penalty and an injunction. Over the years, I have seen the SEC increasingly opt to bring cases solely alleging a Section 5 violation, a clever chess move, but not one without potential pitfalls to the SEC.
David Chase is a SEC defense lawyer and former SEC Enforcement Division attorney who represents nationwide those under SEC investigation or FINRA inquiry. Mr. Chase is the principal of the Law Firm of David R. Chase, a SEC law firm, located in Fort Lauderdale, Florida. His law firm handles the defense of matters involving Ponzi Schemes, insider trading, market manipulations, and securities offering frauds. For a confidential consultation, you may contact Mr. Chase at: firstname.lastname@example.org or toll-free at: (800) 760-0912. The law firm’s website is: securitiesfrauddefense.net.