MISSISSIPPI SECRETARY OF STATE IMPROPERLY CALCULATES SECURITIES LAW PENALTIES

In a recent case we handled before the Mississippi Supreme Court, the Court significantly limited the power of the Secretary of State to impose administrative penalties for securities law violations. The amount a person or company may be fined for securities violations is covered by state statute. Under the applicable statute (currently Miss. Code. Ann. § 79-11-509) , the Secretary of State may impose “an administrative penalty up to a maximum of Twenty-five Thousand Dollars ($25,000.00) for each offense and each violation shall be considered as a separate offense in a single proceeding or a series of related proceedings.”

Historically, the Mississippi Secretary of State has multiplied the number of violations by the number of investors in order to increase the total fine. Calculating fines this way has given the Secretary of State enormous leverage when it comes to forcing alleged violators to settle rather than contest the allegations. For example, in the case we appealed the administrative hearing officer recommended a fine of $1,585,000. It goes without saying that for an individual corporate officer or small company, the potential for such a large and devastating fine makes it harder not to accept a lesser sanction even when there was no wrongdoing.

On behalf of our client, on appeal we argued that the Secretary of State’s method of calculating the penalties was illegal, and that the penalty itself was imposed in an arbitrary and capricious manner. In the decision recently handed down by the Mississippi Supreme Court, the Court stated that “we do not find a basis in the law for the Secretary of State’s method of calculating the penalties by multiplying the number of violations by the number of investors.” The Court went on to hold that “[t]he number of persons affected is not to be used as a multiplier for each violation.” Rather, the number of investors adversely affected is “a factor to be used-along with frequency, persistence, willfulness, and the violator’s resources-in determining the amount of the sanction up to $25,000.”

Since there were only two violations, the case was remanded back to the administrative hearing officer impose a new fine of up to $25,000.00 for each of the two violations.  For a look at the full opinion, CLICK HERE (the court’s discussion concerning the fine is contained in Section VII of the opinion). NOTE: the underlying conduct in this case predated the Mississippi Securities Act of 2010. Therefore, the opinion references Miss. Code. Ann. § 75-71-715 (West) rather than Miss. Code. Ann. § 79-11-509. While the statutory language the opinion is based on is unchanged, the relevant language is now contained in Miss. Code. Ann. § 79-11-509.

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