A federal judge has ruled that Georgia's penny-stock law - considered the toughest in the nation - is legal and will not adversely affect legitimate brokers.
In an order filed this week, U.S. District Judge Jack Camp said the public interest in having a strong anti-fraud law outweighed Pacific Southern Securities Inc.'s contention that it would be irreparably harmed by the law.The company said that the law violated its constitutional rights to due process, equal protection and commerce and that the state law was pre-empted by federal legislation.
Gerald Schechter, president of Colorado-based Pacific Southern, had testified in a hearing last month that he could not do business in Georgia under the law. Schechter said his firm has more than 1,200 Georgia customers.
"Regulating abuses in the penny-stock industry is a legitimate state government interest," Camp said in his order. "Limiting the effect of the regulations to firms that deal almost exclusively in penny stocks is not an irrational or arbitrary exercise of government power."
The new law, which went into effect July 1, includes several provisions to protect investors, including a three-day "cooling off" period during which deals to buy the stocks can be canceled.
The law also requires dealers to undergo training to ensure they know about what they are selling, and the secretary of state is given increased power to impose penalties on violators, including civil fines of up to $500,000 for each offense.
The law passed the Legislature overwhelmingly following a series of hearings, organized by Georgia Secretary of State Max Cleland, where investors made allegations of widespread abuse in the penny-stockindustry.
Penny stocks are low-price, high-risk securities that authorities say are easily subject to fraud. The securities are not listed on stock exchanges, and reliable information on their value is not readily available to investors.
Federal officials say penny-stock fraud causes investors to lose $2 billion annually.
"The reason we have this law is because . . . there were significant abuses to the public," said George Shingler, of the attorney general's office, who represented Cleland.