Securities and Exchange Commission v. Almagarby, No. 21-13755 (11th Cir. 2024)
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The case in question concerns the United States Court of Appeals for the Eleventh Circuit's decision on whether Ibrahim Almagarby and his company, Microcap Equity Group, LLC, violated the Securities Exchange Act of 1934 by buying and selling securities without registering as a "dealer". Almagarby was a so-called “toxic” lender who bought the convertible debt of penny-stock companies, converted the debt into common stock at a discount, and then sold the stock in high volumes. The Securities and Exchange Commission (SEC) filed a civil action against Almagarby, alleging that his conduct constituted dealing, which required registration. The district court ruled in favor of the SEC, ordered Almagarby to disgorge all profits, and permanently enjoined him from future securities law violations and participation in penny-stock offerings.
On appeal, the Eleventh Circuit upheld the district court’s ruling that Almagarby was acting as an unregistered “dealer” in violation of the Exchange Act, but found that the district court abused its discretion by imposing a penny-stock ban. The court determined that Almagarby’s high volume of transactions, quick turnaround of sales, and the fact that his entire business relied on flipping penny stocks qualified him as a dealer under the Exchange Act. However, the court ruled that the district court overstepped in enjoining Almagarby from future participation in penny-stock offerings as his actions were not egregious enough to warrant such a bar. The court also rejected Almagarby's claim that the SEC's action violated his due process rights, noting that the Commission did not rely on a novel enforcement theory that contradicted longstanding agency guidance. The court affirmed in part and reversed in part, upholding the judgment against Almagarby but striking down the penny-stock ban.
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