The U.S. District Court for the District of Minnesota imposed a third tier civil penalty against defendants Sherwin Brown and Jamerica Financial, Inc., who were found to have violated Section 17(a) of the Securities Act of 1933, Section 10(b)(5) of the Securities Exchange Act of 1934, and the Investment Advisors Act of 1940. Mr. Brown, acting through his companies, including Jamerica, misappropriated several hundred thousand dollars in client funds for his own benefit and attempted to conceal his actions. Mr. Brown and Jamerica had sought a reduced penalty, arguing that the Court should consider his weakened financial condition in determining the appropriate amount.  

In imposing penalties of $80,000 against Mr. Brown and $400,000 against Jamerica, the Court noted that civil penalties are designed to punish the violator as well as to deter future violations. The Court explained that these goals cannot be accomplished through disgorgement, which “merely requires the return of illegal profits.” There are three tiers of civil penalties for violations of the applicable securities statutes: the first tier applies to basic violations; the second tier applies to violations involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement”; and the third tier applies to violations that meet the second tier and additionally “resulted in substantial losses or created significant risk of substantial losses.”  

Here, the Court imposed a third tier civil penalty because there was overwhelming evidence that defendants acted with reckless disregard to the regulatory requirements. In particular, the Court determined that a third tier penalty was appropriate because defendants misappropriated more than $800,000 of the $1.62 million in funds received from investors, the conduct was recurring, and defendants did not fully cooperate with authorities during the course of the lawsuit. The Court also rejected the argument that the penalty should be reduced because the SEC had introduced evidence that Mr. Brown had made substantial deposits into his own bank accounts and he and Jamerica did not come forward with any evidence of their financial condition. (United States Securities and Exchange Commission v. Brown, Civil No. 06-1213, 2009 WL 2163505 (D. Minn. July 20, 2009))