Securities Private Offering Exemption Applies in SEC Enforcement Action

The Eleventh Circuit rejected the SEC’s narrow construction of registration exemptions in SEC v. Levin, 2017 WL 711018 (Feb. 23, 2017), reversing a grant of summary judgment to the defendant but still affirming a jury verdict for securities fraud on multiple counts.  The defendant, George Levin, invested his personal funds in a Ponzi scheme that operated by soliciting investors to purchase purported confidential settlement agreements supposedly reached in sexual harassment or whistleblower lawsuits. No such agreements existed, and the investors were paid with funds from other investors.  Levin then used funds from a dormant legal entity, Banyon, which issued promissory notes to approximately 90 investors for an approximate total of $50 to $58 million. These notes were not registered with the SEC.

The SEC brought suit against Levin after the Ponzi scheme failed, and a jury found him liable for numerous securities fraud violations. Though it affirmed the district court’s evidentiary decisions, reviewing for abuse of discretion and plain error, the court reversed the district court’s grant of summary judgment to the SEC on a separate failure-to-register claim, holding that the Banyon note offerings were eligible for a Regulation D exemption from the registration requirements of Section 5 of the Securities Act.

In response to the SEC’s Section 5 claim, Levin argued that this type of securities transaction fit the private offering exemption known as Regulation D, under the Code of Federal Regulations Rule 506. A safe harbor is available according to Rule 508 when there are “insignificant deviations” from Rule 506(b).  The SEC argued that Levin could not avail himself of this exemption because it was applicable only in private actions, not SEC enforcement actions. While the district court agreed with the SEC, the Eleventh Circuit did not.

The court used traditional methods of statutory interpretation to reach its decision. First, it looked to the phrase “failure to comply.” Noting that it appeared several times in Rule 508, the court observed that it must be interpreted in the same manner in each place. Because reference to “failure to comply” in 508(a) appeared in the context of private offering exemptions, it followed that the same phrase in 508(b) related to compliance with Regulation D, not to compliance with Section 5. Second, if the SEC had intended for Rule 508(b) to address non-compliance with Section 5, it would have expressly stated so. Third, the district court’s interpretation of Rule 508 rendered the first sentence superfluous. Lastly, the court looked to the regulatory history and found that the SEC had proposed a standard on good faith compliance before any distinction had been made between private actions and SEC enforcement actions. Therefore, the court held that Rule 508(a) preserves the safe harbor for certain insignificant deviations in private actions and in SEC enforcement actions and reversed and remanded for further proceedings on the section 5 count.

Author:  Keith Emanuel

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