Appellate Panel Divided on Penny Stock Trader’s Punishment

(CN) – The Fifth Circuit panel upheld a lifetime ban on a penny stock trader for the purchase and resale of $7.7 million worth of unregistered securities.

Yossef Kahlon owned and operated TJ Management, which bought large blocks of penny shares subject to agreements that provided he did not intend to resell the investments. But Kahlon made a business of selling the shares on the open market as soon as it was profitable to do so.

Between 2008 and 2010, Kahlon invested in 11 companies, purchased and resold more than 18 billion unregistered shares, and earned a gross trading gain of more than $7.7 million.

He also registered his company in Texas to take advantage of the state exemption on penny stocks, but conducted all of his business in New York.

After determining that these sales violated securities laws, the Securities and Exchange Commission sued Kahlon in Texas. A federal judge there ordered Kahlon to disgorge his ill-gotten gains and banned Kahlon for life from trading in penny stocks.

The New Orleans-based Fifth Circuit affirmed 2-1 Monday.

“Even if it is fair to characterize the violations as ‘technical,’ meaning we suppose that they did not lead to any specific economic loss to anyone, they are still reckless and quite likely knowing violations,” the unsigned lead opinion states. “We see no innocent straying across hidden limits but instead a well-planned march beyond the boundaries that were sufficiently marked for investors.”

U.S. Circuit Judge Edith Jones dissented, saying the majority decided to “throw the book” at Kahlon.

“No fraudulent injury occurred to the sophisticated actors with whom they traded or the penny stock market more generally,” Jones said. “The district court’s perfunctory analysis of the six factors used to justify such harsh penalties is insufficient. There is no justification for a lifetime penny stock bar under the circumstances of this case.”

%d bloggers like this: