Harrington v. Office of the Mississippi Secretary of State
2013 Miss. LEXIS 590
| Miss. | 2013Background
- SteadiVest, LLC was formed in 2007; Wolfe (CEO) and Harrington (president/CFO/COO) solicited investors via a PPM promising escrowed funds, maintained books, and optimistic financial projections. 17 investors provided about $1.585 million.
- Instead of escrow, investor funds were commingled in operating accounts and used to pay company obligations; some transfers benefitted related entities and officers. Wolfe used company credit for personal expenses.
- The Mississippi Securities Division issued summary and final cease-and-desist orders; it charged Wolfe and Harrington with violations of Miss. Code § 75-71-501(2) and (3) (material misstatements/omissions and practices operating as fraud). Administrative hearing adjudicated parts of the case; the Secretary of State fined Wolfe $850,000 and Harrington $170,000.
- The chancery court affirmed; the Mississippi Supreme Court reviewed: it affirmed liability findings (failure to escrow; failure to maintain promised books/records) but reversed the methodology for calculating penalties and remanded for correct sanctioning under § 75-71-715.
- Court held that (1) administrative standard of proof is preponderance under Miss. Sec. Act R. 817(B), (2) scienter is not required for subsections (2) and (3) (negligence suffices), (3) the "bespeaks caution" doctrine does not render non‑performance statements immaterial, and (4) multiplying the $25,000-per‑violation cap by the number of investors was improper.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Burden of proof at administrative hearing | Division: preponderance applies under Rule 817(B) | Harrington: clear and convincing required for fraud | Preponderance applies to securities enforcement here; Holland’s clear-and-convincing application was erroneous absent explanation |
| Scienter requirement | Division: scienter not required for § 75-71-501(2) & (3) | Harrington: scienter required | Scienter required only for subsection (1); not required for (2) and (3) (negligence suffices) |
| Materiality / "bespeaks caution" doctrine | Defendants: PPM warnings render alleged misstatements immaterial | Division: warnings apply to predictions not to promised business practices | Bespeaks-caution applies to predictive statements; it does not negate misstatements about non‑predictive promises (escrow, records) |
| Penalty calculation under § 75-71-715 | Division: assessed $25,000 per violation per investor (multiplier) | Wolfe/Harrington: multiplier improper, arbitrary, excessive | Liability affirmed for two violations each; remanded because statute’s $25,000 cap is per violation and number-of-persons-affected is a factor in determining amount but not a mandatory multiplier; chancery to re-calculate sanctions |
Key Cases Cited
- Herman & MacLean v. Huddleston, 459 U.S. 375 (U.S. 1983) (preponderance suffices for liability under federal Securities Act antifraud provisions)
- Steadman v. SEC, 450 U.S. 91 (U.S. 1981) (preponderance standard upheld for SEC civil enforcement proceedings)
- Aaron v. SEC, 446 U.S. 680 (U.S. 1980) (scienter required under §17(a)(1) but not under §17(a)(2) or (3))
- Rubinstein v. Collins, 20 F.3d 160 (5th Cir. 1994) (explains "bespeaks caution" doctrine and materiality analysis for predictive statements)
- Allyn v. Wortman, 725 So.2d 94 (Miss. 1998) (discusses relation between Mississippi statute and federal securities law principles)