## Facts

- The Securities and Exchange Commission (SEC) sued Ronald Margolin and others, alleging a securities “freeriding” scheme and related violations of federal securities laws.
- The SEC alleged that, from about September 1991 to April 1992, Margolin placed trades totaling more than $35 million through multiple brokerage firms but refused to pay for unprofitable trades.
- According to the SEC, Margolin concealed from at least nine brokerage firms that he planned to use proceeds from sales to finance other trades and failed to reimburse firms for losses when trades moved against him.
- The SEC alleged Margolin made misrepresentations to brokers to obtain trading access, including false statements about net worth, ability to deliver funds or securities, intent to settle losing trades, and, in some instances, identity.
- The SEC alleged that by directing brokers to sell securities Margolin (and others) did not own and leaving brokers to cover unsettled sales, Margolin caused brokers to violate the Federal Reserve Board’s credit rules, including Regulation T.
- Separately, the SEC alleged that Margolin acted as an unregistered broker: he received transaction-based compensation, advertised for clients, and possessed customer funds and securities while effecting securities transactions for others.
- The SEC moved for a preliminary injunction, including relief aimed at stopping violations of Exchange Act § 15(a)(1) (broker registration) and preventing further unlawful conduct connected to the freeriding scheme.

## Issues

1. Whether the SEC showed a likelihood of success that Margolin functioned as a “broker” and violated Exchange Act § 15(a)(1) by effecting or inducing securities transactions without being registered.
2. Whether the SEC established a basis for preliminary injunctive relief, including a reasonable likelihood of future violations if relief were not granted.

## Decision

- The court granted the SEC’s motion for a preliminary injunction.
- The court found the SEC made a sufficient showing that Margolin’s conduct fit the functional definition of broker activity (including transaction-based compensation, client solicitation/advertising, and custody of customer funds and securities) and therefore likely violated Exchange Act § 15(a)(1) because Margolin was not registered.
- The court concluded that the alleged pattern of conduct supported injunctive relief to prevent future violations, including further unregistered-broker activity and further misconduct tied to the freeriding scheme and related credit/settlement obligations.

## Legal Principles

- A person is a “broker” under the Securities Exchange Act of 1934 when he is engaged in the business of effecting transactions in securities for the account of others; brokers generally must register with the SEC, and § 15(a)(1) bars unregistered broker activity using interstate commerce or the mails.
- Courts look to what a defendant actually does, not the label he uses, when deciding whether conduct amounts to broker activity.
- Common indicators that a person is acting as a broker include:
  - receiving compensation that depends on securities transactions (transaction-based compensation),
  - soliciting customers or holding oneself out as available to arrange securities transactions (including advertising), and
  - handling or having possession of customer funds or securities in connection with trades.
- In SEC enforcement actions, a preliminary injunction may issue when the SEC shows a likelihood of success on the merits and that the circumstances indicate a meaningful risk of future violations absent court-ordered restraints.

## Conclusion

The court preliminarily enjoined Margolin after concluding the SEC was likely to prove that he operated as an unregistered broker—through soliciting clients, receiving transaction-based compensation, and handling customer assets—and that the alleged freeriding and related conduct presented a sufficient risk of continued violations to justify immediate injunctive relief.


Securities and Exchange Commission v. Margolin, Fed. Sec. L. Rep. (CCH) 97,025 (1992)