Securities Exchange Commission v. Sheinwald

Background

The Securities and Exchange Commission sued Alan T. Sheinwald and Alliance Advisors, LLC, alleging that they violated Section 15(a) of the Securities Exchange Act of 1934 by acting as unregistered brokers in connection with securities offerings for two companies. A third defendant, Ren Hu, was also named in the action but was not a party to the final judgment at issue in this motion.

On March 14, 2014, the court entered a final judgment based on the parties’ settlement. The judgment permanently restrained Sheinwald, Alliance, and certain related persons from directly or indirectly violating Section 15(a), which generally prohibits using interstate commerce to carry out or induce securities transactions unless the broker or dealer is registered with the Commission or associated with a registered broker or dealer. The judgment also imposed disgorgement, prejudgment interest, and civil penalties.

On April 2, 2014, the Commission issued a separate administrative order. Sheinwald and Alliance consented to that order, which barred them from associating with specified securities-industry entities and from participating in penny-stock offerings, while allowing them to apply for reentry after two years. The Commission later vacated some language concerning association with an investment adviser, municipal securities dealer, or transfer agent, but otherwise left that order unchanged.

Motion to Modify

The defendants moved under Federal Rule of Civil Procedure 60(b)(5) and 60(b)(6) to modify the permanent injunction. They sought clarification that the injunction did not prohibit them from owning brokerage accounts, trading through brokerage accounts, participating in stock offerings, trading on behalf of a hedge fund, or voting as a general partner of a hedge fund.

The defendants argued that unrelated third parties had repeatedly misunderstood the injunction as imposing broader restrictions. They relied on an advisory notice sent by Equifax Compliance Data Center, LLC to Scottrade, the closure of Sheinwald’s account by E*TRADE, alleged closures of accounts at Scottrade and Park Avenue Securities, and statements in Sheinwald’s declaration that securities firms had refused to work with him because of the injunction.

Court’s Analysis

The court explained that a permanent injunction may be modified when significant changes in facts or law make continued enforcement inequitable. The party requesting relief bears the burden of showing that changed circumstances justify modification.

The court first found that the injunction’s language was clear. It did not prohibit the specific activities identified by the defendants; it prohibited future violations of Section 15(a). The defendants did not identify any language in the injunction that caused the alleged confusion or explain why third parties would read it as barring lawful activities.

The court also found insufficient evidence that third parties had actually misinterpreted the injunction. E*TRADE’s letter said only that it was exercising its discretion to close Sheinwald’s account and did not mention the injunction. The defendants did not provide dates or direct evidence showing that the Scottrade and Park Avenue Securities account closures were caused by the injunction. The court found that Sheinwald’s general statements did not establish the required connection between the alleged harm and the injunction.

The court further noted that the separate Commission order, which expressly imposed industry-association restrictions, was a reasonable alternative explanation for any confusion. The court stated that the defendants could show the Commission’s briefing on this motion to third parties to clarify the injunction’s scope. The court also observed that the defendants provided no evidence about hedge-fund work or how the injunction affected it.

Disposition

The court concluded that the defendants had not shown that conditions had changed enough to make modification equitable. It denied the defendants’ motion to modify the final judgment, directed the Clerk to terminate the motion at docket entry 59, and ordered the case closed. The opinion does not state that the motion was denied with or without prejudice.