11th Circuit Upholds Unregistered Dealer Justin Keener SEC Judgment
On May 29, 2024, the U.S. Court Of Appeals for the Eleventh Circuit entered its Opinion in the Securities and Exchange Commission’s (“SEC“) case against Justin Keener dba JMJ Financial (together “Keener”), upholding the United States District Court for the Southern District of Florida’s earlier ruling on all points.
On March 24, 2020, the SEC filed a complaint against Keener, alleging that Keener bought and sold billions of newly issued shares of penny stock from at least January 2015 through January 2018, obtaining the shares directly from issuers after converting debt securities known as convertible notes. The SEC argued that by failing to register as a dealer, Keener avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory inspections and oversight, financial responsibility requirements, and maintaining books and records.
On December 20, 2022, the United States District Court for the Southern District of Florida entered a final judgment against Justin W. Keener d/b/a JMJ Financial, ruling that Keener met the statutory definition of a dealer because he operated a regular business of buying and selling securities for his own account. The court found that his failure to register as a dealer or associate with a registered dealer violated the dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934.
In its final judgment, the district court ordered Keener to pay disgorgement of $7,786,639, prejudgment interest of $1,425,266, and a civil penalty of $1,030,000, for a total judgment of $10,241,905. The court also entered a permanent injunction and five-year penny stock bar against Keener and ordered him to surrender for cancellation of certain stock and conversion rights under existing convertible securities.
Keener immediately appealed the lower court’s ruling, arguing that (i) he did not operate as an unregistered dealer, (ii) the district court violated his rights to due process, (iii) the district court abused its discretion by imposing an injunction and (iv) the district court abused its discretion by ordering disgorgement.
In its Opinion, the U.S. Court Of Appeals for the Eleventh Circuit divided the opinion into four main parts:
- First, it explained that Keener operated as an unregistered dealer in violation of section 15(a) of the Exchange Act.
- Second, it explained that Keener’s arguments that the district court violated his rights to due process and equal protection are meritless.
- Third, it explained that the district court did not abuse its discretion by imposing an injunction.
- Fourth, it explained that the district court did not abuse its discretion by ordering disgorgement.
Part 1 – Keener operated as an unregistered dealer in violation of section 15(a) of the Exchange Act
Keener contended that because he never effectuated securities orders for customers, he could not have been an Exchange Act dealer.
In upholding the lower court’s ruling that Keener operated as an unregistered dealer in violation of section 15(a) of the Exchange Act, the U.S. Court Of Appeals for the Eleventh Circuit cited a recent ruling against Ibrahim Almagarby, who lost a similar appeal. The court determined that Keener’s business model was materially similar to Almagarby’s. Most of Keener’s profits were made from converting microcap debt into stock at a discount and selling the resultant shares in high volumes. Like Almagarby, Keener’s conversions and sales brought new microcap shares to the public market. If anything, Keener’s business operations were more extensive: he purchased more debt, sold a higher volume of shares in the public market, made significantly more profit, and directly employed others in his scheme. And unlike Almagarby’s activity, Keener’s activity did directly implicate the SEC’s public guidance for defining broker-dealers.
Part 2 – The district court violated his rights to due process
Keener argued that the SEC violated his due-process right to “fair notice,” by pressing an enforcement theory that “[n]o one could’ve seen . . . coming.” He asserted that he “acted in accord with longstanding industry practice” and pointed to the SEC’s tolerance of penny-stock flipping—i.e., the discounted acquisition and resale of existing microcap shares—and convertible debt lending. Keener also argued that his equal-protection right was violated because the SEC sought sanctions against him while offering other “prominent [market] participants” a yearlong grace period to register as dealers without penalty.
The U.S. Court Of Appeals for the Eleventh Circuit determined that the SEC’s enforcement theory does not deprive Keener of fair notice and is not a due-process violation. The court also called Keener’s other claims meritless.
Part 3 – The district court did not abuse its discretion by imposing an injunction
Keener argued that the district court imposed an impermissibly vague “obey-the-law” injunction that failed to “clearly and specifically describe permissible and impermissible conduct.” He proposed instead a narrower injunction that would prohibit him only from “engaging in the convertible note transactions, note conversions, acts, practices or courses of business described in the Complaint.”
The U.S. Court of Appeals for the Eleventh Circuit determined that the district court did not abuse its discretion by imposing an injunction. In supporting its opinion, the court wrote that the district court described the proscribed dealer activity in great detail and used plain language to describe the acts addressed by the injunction. The district court also recognized Keener’s “decade-long history of noncompliance and nondisclosure”; his “firm position in the financial industry”; and his “misrepresentation and obfuscation” of his securities transactions while this very litigation was ongoing, to determine that a broader injunction was necessary to prevent future misconduct.
Part 4 – The district court did not abuse its discretion by ordering disgorgement
Keener argued that the district court abused its discretion in two ways: first, there is no causal connection between Keener’s profits and his failure to register; and second, the disgorged profits would not “be awarded for victims.”
In concluding that the district court did not abuse its discretion by ordering disgorgement, the U.S. Court of Appeals for the Eleventh Circuit pointed out that the SEC offered evidence that Keener’s conduct harmed investors: his sales caused price declines for 93 percent of microcap issuers who borrowed from him, and the price declines primarily affected retail investors who held those issuers’ shares. The court also determined that the SEC’s promise to distribute the disgorged profits to investor-victims who suffered from Keener’s activity satisfies the victim-benefit requirement.
The final judgment against Keener follows other wins by the SEC against:
- John Fierro on May 21, 2024 (read more here)
- Alexander J. Dillon, Cosmin I. Panait, and their corporate entities GPL Ventures LLC and GPL Management LLC on May 2, 2023 (read more here)
- BHP Capital NY, Inc. and Bryan Pantofel on July 29, 2023
- Ibrahim Almagarby and his company Microcap Equity Group LLC on September 29, 2021, which was later upheld by an appeals court (read more here)
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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