STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CONSTABLE ATLANTIC, INC. and )

RICHARD SCHULZE, )

)

Petitioners, )

)

vs. ) CASE NO. 86-1065

) DEPARTMENT OF BANKING AND FINANCE, ) DIVISION OF SECURITIES, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing in the above captioned case was held before the Division of Administrative Hearings by its duly designated Hearing Officer, Donald R. Alexander, on September 19, 1986 in Fort Lauderdale, Florida.

APPEARANCES

For Petitioners: Edward Brodsky, Esquire

Sarah S. Gold, Esquire Spengler, Carson, Gubar,

Brodsky and Frischling

280 Park Avenue

New York, New York 10017

For Respondent: Calianne P. Lantz, Esquire

Office of the Comptroller

401 Northwest 2nd Avenue, Suite 870 Miami, Florida 33128

BACKGROUND

This matter arose when respondent, Department of Banking and Finance, Division of Securities, issued proposed agency action on February 18, 1986 advising petitioners, Constable Atlantic, Inc. and Richard Schulze, that their applications for registration as a broker-dealer and principal, respectively, had been denied because (a) Constable Atlantic, Inc. had been the subject of administrative orders by the State of Minnesota and the Commodities Futures Trading Commission involving violations of state and federal securities laws, rules or regulations, and (b) Schulze had violated the Commodity Exchange Act, which is also a violation of Section 517.275, Florida Statutes (1985). The agency construed these violations to be prima facie evidence of unworthiness to transact business in the State of Florida within the meaning of Subsections 517.161(1)(h) and (4), Florida Statutes (1985), and Rule 3E-60D.11, Florida Administrative Code. Petitioners disputed the above findings and requested a formal hearing to contest the proposed agency action. The matter was forwarded by respondent to the Division of Administrative Hear- ings on March 31, 1986, with a request for a formal hearing. By notice of hearing dated May 13, 1986, a

final hearing was sched- uled for June 20, 1986 in Fort Lauderdale, Florida. At petitioners' request the matter was rescheduled to August 13, 1986 and then to September 19, 1986 at the same location.

At final hearing, petitioner, Richard Schulze, testified on his own behalf.

Petitioners also offered petitioners' exhibits 1-16 which were received in evidence. Respondent offered respondent's exhibits 1-6. All were received in evidence.

The transcript of hearing was filed on October 9, 1986. Proposed findings of fact and conclusions of law were filed by the parties on October 27, 1986. A ruling on each proposed finding is made in the Appendix attached to this order.

The issue is whether petitioners meet the qualifications for registration as a broker-dealer and a principal.

Based on all the evidence, the following facts are determined:

FINDINGS OF FACT

1. On November 20, 1985, petitioners, Richard Schulze and Constable Atlantic, Inc., made application with respondent, Department of Banking and Finance, Division of Securities (Divi- sion), for licensure as a principal and broker-dealer, respec- tively. In response to a Division request, petitioners submitted amended applications containing additional information on January 31, 1986. After conducting an investigation of petitioners' backgrounds, the agency issued a proposed final order on February 18, 1986, denying the application on the grounds (a) Schulze had violated the federal Commodity Exchange Act and had been the subject of a final administrative order in the State of Minnesota involving a violation of that state's security laws, and (b) an officer or director of Constable Atlantic, Inc. (Schulze) had been guilty of an act which would be cause for denying or revoking the registration of an individual dealer. The agency action prompted the instant proceeding.

   
   

2. Schulze is president of Wyndwood Merchantile Corporation (Wyndwood) and various affiliated organizations. Wyndwood is involved in the sale of precious metals and is currently doing business in the State of Florida and other states. Constable Atlantic, Inc. is a Delaware corporation authorized to do business in the State of Florida. Schulze is Constable's president, his wife Theodora treasurer, and his son Otto secretary. The three are also the directors and shareholders of the corporation. Constable is now registered as a broker and dealer with the federal Securities and Exchange Commission. Just recently, Schulze was licensed as an associated person and a commodity pool operator by the National Futures Association, which is the licensing arm of the Commodities Futures Trading Commission (CFTC), a federal agency in Washington, D.C.

   
   

3. Schulze has been involved in selling securities for the last six or seven years. At one time he was also a principal with Atlantic Futures, Inc. (AFI), which was then licensed as a commodity pool operator and trading advisor with the CFTC. AFI and Schulze were both under the regulatory jurisdiction of that agency. On October 2, 1984 the CFTC issued a complaint and notice of hearing alleging that AFI and Schulze had violated various provisions of the federal Commodity Exchange Act and CFTC regulations. More specifically, it alleged that:

   
   

   ...AFI and Schulze, aided and abetted by each other,...cheated and

   defrauded or attempted to cheat and defraud AFI's pool participants in violation of Section 46(A) of the

   
   

   Commodity Exchange Act, as amended...; that AFI, aided and abetted by Schulze, violated Section 40(1) of the Act and Sections 4.41(a) and 166.3 of the Commission's regulations; and that AFI violated Sections 4.21(a) and 4.21(a)(3) of the Commission's regulations.

   
   

   Thereafter, Schulze and AFI submitted an offer of settlement to the CFTC which was accepted and formalized in a consent decree entered by the CFTC on April 23, 1985. The consent decree made no adjudication of law or fact, or an adjudication on the merits of the case. Rather, it was entered solely for the purposes of accepting the offer of settlement and terminating the proceeding.

   Under the terms of that decree, which has been received in evidence as respondent's exhibit 2, Schulze and Atlantic paid a $100,000 fine and agreed to cease and desist from any violations. In addition, AFI agreed to a suspension of its registrations for six months and to never apply for any other registrations with the CFTC. Finally, for purposes of the settlement only, the CFTC found Schulze had violated certain portions of the Act and regulations and noted that "these findings may be used only in any other proceedings brought by the Commission." Schulze later made application with the CFTC for licensure as a dealer, and this application was approved on September 11, 1986.

   
   

4. On or about July 26, 1984 the State of Minnesota issued an ex parte cease and desist order against Wyndwood, Schulze and others requiring them to stop selling securities in that state without being registered. The order, which has been received in evidence as respondent's exhibit 1, required Schulze to request a hearing within a prescribed time, or the order would become final. Schulze did not timely request a hearing. However, after the prescribed time to request a hearing had expired, he filed a request with the State Commissioner and the order of July 26 was subsequently vacated on September 18, 1986. The outcome of the proceeding is not known.

   
   

5. Constable Atlantic, Inc. is a member firm of the National Association of Security Dealers (NASD) and is registered as a broker and dealer with the Securities and Exchange Commission (SEC). In obtaining their registrations, Constable and Schulze furnished the SEC and NASD the same information that was submitted to respondent.

   
   

   CONCLUSIONS OF LAW

   
   

6. The Division of Administrative Hearings has jurisdiction of the subject matter and the parties thereto pursuant to Subsection 120.57(1), Florida Statutes (1985).

   
   

7. Respondent's objections to licensure are based upon the following statutes and rules. First, Section 517.161, Florida Statutes (1985), provides in relevant part:

   
   

   1. Registration under s. 517.12 may be denied...by the department if the depart- ment determines that such applicant or registrant:

      1. Has violated any provision of this chapter or any rule or order made under this chapter.

         (h) Has demonstrated his unworthiness to transact the business of dealer, investment adviser, or associated person.

         
         

         (4) It shall be sufficient cause for denial of an application...if...any officer

         or director of the corporation...has been guilty of an act or omission which would be cause for denying or revoking the registra- tion of an individual dealer, investment advisor, or associated person.

         
         

8. The agency also relies upon Rule 3E-600.11, Florida Administrative Code, which provides in relevant part:

   
   

   3E-600.114 Prima Facie Evidence of Unworthi- ness. Prima facie evidence of untrustworthi- ness to transact the business of a dealer, investment adviser, principal or agent in the State of Florida shall include, but not be limited to:

   
   

   (2) Any injunction, suspension, prohibition, revocation, denial or administrative order by any state or federal agency, national securities exchange, or national securities association, involving a violation of any federal or state securities law or any rule or regulation promulgated thereunder, and any injunction or adverse administrative order by a state or federal agency regulating banking, insurance, finance or small loan companies, real estate, mortgage brokers, or other related or similar industries, or any court of competent jurisdiction;

   
   

9. Under respondent's theory, Schulze was subject to an administrative order entered by the State of Minnesota, and an order of a federal agency (CFTC) involving the violation of state or federal securities laws or agency rules and regulations. Accordingly, it posits that this constitutes prima facie evidence of unworthiness under Rule 3E-600.11, which in turn forms the basis for denial of the application under Subsection 517.161(h), F.S. (1985). It also contends that Schulze violated a provision in the federal Commodities Exchange Act, which constitutes a violation of Sections 517.161(1)(a) and 517.275, F.S. (1985). Respondent asserts this latter violation may also be used as a basis to deny the applications. Because Schulze is an officer and director of Constable, respondent also intends to deny the application of the dealer. Petitioners respond that the Minnesota order was vacated. They also assert that the CFTC consent decree was entered without Schulze admitting or denying the allegations, and that no adjudication of law or fact was made. Therefore, they contend that it is inappropriate to draw any unfavorable conclusion regarding the orders, and that registration is clearly warranted.

10. Since the Minnesota order has been vacated, no "administrative order" within the meaning of Rule 3E-600.11(2) exists under which adverse action against petitioners could be taken. This leaves only the CFTC consent decree at issue.

    
    

11. The CFTC consent decree is another matter. It presents the question of whether this type of order falls within the purview of Rule 3E-600.11(2),

    F.A.C. This is crucial since an applicant who has been the subject of one of the enumerated orders in the rule is deemed to be unworthy, and therefore ineligible for licensure. The consent decree was the result of a settlement between the CFTC and Schulze. Importantly, it made no adjudication of any issue of fact or law, and was entered solely for the purposes of terminating the proceeding. The rule upon which respondent relies (Rule 3E-600.11(2), F.A.C.) speaks of an "injunction, suspension, prohibition, revocation, denial or administrative order by any...federal agency...involving a violation of any federal...securities law or any rule or regulation promulgated thereunder..." Because the rule is penal in nature, it should be strictly construed against the agency. Cf. Bach v. Fla. State Board of Dentistry, 378 So.2d 34 (Fla. 1st DCA 1980) (penal statute should be strictly construed against the agency). Consent decrees are apparently an apparatus commonly used by federal agencies to settle disputed matters. They are unique in the sense that they make no adjudication on the merits of the case, but are entered for the sole purpose of terminating the proceeding and accepting an offer of settlement from a licensee. If the Division had intended its rule to cover this type of order, it could have easily drafted the rule in such a manner. In the absence of such clarity in the rule, and there being no record foundation to support such an interpretation favorable to respondent, it is concluded that a consent decree does not fall within the purview of Rule 3E-600.11(2), and that Schulze has not been shown to be unworthy. Finally, because there was no adjudication of fact or law by CFTC, there can be no formal finding that a violation of federal law or rules has occurred. Therefore, there is no corresponding violation of Sections 517.16(1)(a) and 517.275.

    
    

12. After final hearing, respondent filed a motion to supplement record and for matters to be judicially noticed. By this motion respondent seeks to make a part of the record certified copies of various documents pertaining to a civil action by the Secretary of State of the State of Georgia against Schulze and others. Inasmuch as the record is closed in this matter, and use of this data would clearly deprive petitioners of their due process, the motion is hereby denied. This reaffirms an earlier ruling made at final hearing.

    
    

13. There being no ground for denying the applications herein, the applications of Constable Atlantic, Inc. and Richard Schulze should be approved.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the applications of Constable Atlantic, Inc. and Richard

Schulze for registration as a broker- dealer and principal, respectively, be APPROVED.

DONE and ORDERED this 26th day of November, 1986, in Tallahassee, Florida.

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 26th day of November, 1986.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-1065

1. Covered in finding of fact 3.

2. Covered in finding of fact 2.

3. Covered in finding of fact 2.

4. Rejected as being irrelevant.

5. Covered in finding of fact 5.

Respondent:

1. Covered in finding of fact 1.

2. Covered in finding of fact 1.

3. Covered in finding of fact 1.

4. Covered in finding of fact 4.

5. Covered in finding of fact 4.

6. Covered in finding of fact 3.

7. Rejected as being irrelevant.

8. Rejected as being irrelevant.

COPIES FURNISHED:

Edward Brodsky, Esquire Sarah S. Gold, Esquire SPENGLER, CARSON, OUBAR,

BRODSKY and FRISCHLING

280 Park Avenue

New York, New York 10017

Calianne P. Lantz, Esquire Office of the Comptroller

401 Northwest 2nd Avenue Suite 870

Miami, Florida 33128

Honorable Gerald Lewis, Comptroller

The Capitol

Tallahassee, Florida 32301-8054

Charles E. Scarlett, Esquire Room 1302, The Capitol Tallahassee, Florida 32301-8054

Docket for Case No: 86-001065

Orders for Case No: 86-001065