Court Rules Against SEC in Penny Stock Fraud Case

The Securities and Exchange Commission can’t permanently bar an individual from trading penny stocks for allegedly engaging in fraud before a 1990 federal securities reform law took effect, a federal appellate court ruled Wednesday.

The ruling stems from the SEC’s 1995 attempt to bar over-the-counter securities dealer Russell Koch from participating in the offer of any penny stock after he allegedly provided materially false and misleading information about a company called Unifirst Corp.

Koch’s allegedly wrongful activity took place before Congress passed a 1990 law that increased the SEC’s powers to deal with suspected misconduct in the penny stock business.

Koch argued the SEC has no right to bar him for alleged misconduct that took place prior to the law’s enactment, and a federal appellate court agreed.

“We disfavor retroactive laws based on concerns about their fairness,” the U.S. 9th Circuit Court of Appeals in San Francisco said.