STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

STATE OF FLORIDA, DEPARTMENT ) OF BANKING AND FINANCE, )

)

Petitioner, )

)

vs. ) CASE No. 88-1680

)

VINCENT R. CAVALLO, )

)

Respondent. )

)

RECOMMENDED ORDER

This matter was heard in Fort Lauderdale, Florida, on July 7, 1988, by William R. Dorsey, Jr., the Hearing Officer designated by the Division of Administrative Hearings. The Department of Banking and Finance filed a proposed recommended order, and a response to that proposed order was filed by Mr.

Cavallo. Rulings on proposed findings by the Department of Banking and Finance are contained in the appendix to this recommended order.

APPEARANCES

For Petitioner: Lawrence S. Krieger, Esquire

111 Georgia Avenue, Suite 211 West Palm Beach, Florida 33401

For Respondent: Vincent R. Cavallo, pro se

405 South Pine Island Road Plantation, Florida

ISSUE

The issue is whether Mr. Cavallo is subject to administrative sanctions for violation of the Florida Securities and Investor Protection Act for conduct while he was employed with three Florida firms which dealt in securities, Bond Management Corporation, Bond Administration Service Corporation and Bond Services International Corporation.

BACKGROUND

On March 3, 1988, the Department of Banking and Finance issued a cease and desist order and notice of rights against a number of people, including Mr.

Cavallo, which alleged violations of the Florida Securities and Investor Protection Act, Chapter 517, Florida Statutes. Mr. Cavallo filed an answer and requested a formal hearing.

During the hearing, the following exhibits were admitted for the Department of Banking and Finance: exhibits 5, 20, 22, 23, 41, 42, 44, 45, 51, 52, 101A,

102, 103, 104, 106, 108, 109, 121, 123, 125, 127 and 128. The deposition of Mr.

Cavallo, exhibit 5, also includes exhibits which had been attached to it.

The Department called the following witnesses at final hearing: Tiffany M. Lynn, the area financial manager for the Division of Securities, Department of Banking and Finance; Helen Reynolds and Lori Douglass, financial investigators; and John L. Wallace. Mr. Cavallo testified, but he offered no exhibits.

After the final hearing, the Department moved to supplement the record with addition exhibits, numbers 110, 112A, 113 and 114. Mr. Cavallo did not object to this motion and admission of these exhibits was granted on July 26, 1988.

FINDINGS OF FACT

1. The Department of Banking and Finance, Division of Securities, administers the provision of the Florida Securities and Investor Protection Act, Chapter 517, Florida Statutes. The Department had investigated the activities of the several respondents named in the Cease and Desist Order filed in this case, including Bond Management Corporation, Bond Administration Services Corporation, Bond Services International Corporation, Bond Premium Corporation and Mr. Cavallo. The business plan of Bond Management Corporation.

   
   

2. Bond Management Corporation and Bond Administration Services Corporation were principally operated by Thomas Whalen, who was assisted by Mr. Cavallo. These corporations had been founded by Robert DiStefano, who had sold them to Mr. Whalen in 1985. Mr. Cavallo began working for Mr. Whalen in approximately March of 1986. The offices of these corporations were first located on State Road 7 in Plantation, Florida, but later were moved to Hollywood, Florida.

   
   

3. The business of Bond Management Corporation and Bond Administration Services Corporation consisted of issuing, selling and administering the registration and redemption of Certificates of Beneficial Interest in pools of bonds. The two companies actually operated as an integrated entity. Bond Management was to be the trustee for the bonds which comprised the trust corpus and issue the Certificates of Beneficial Interest. These were sold to telephone marketing companies and to time-share companies. These companies then used the certificates as premiums or incentives to attract people to travel to their developments or to listen to sales presentations. Bond Administration Services Corporation handled the sales and the registration of the certificates by the ultimate purchasers. The certificates were sold from offices in Broward County, Florida, to corporations in Florida and throughout the United States. Bond Management Corporation represented in its private placement memorandum that 68% of the funds it received from the time-share developers and telemarketing companies or others who bought the Certificates of Beneficial Interest would form the trust corpus, and this money would be used to buy zero-coupon government securities.

   
   

4. Most of the certificates had face values of $1,000; a few were sold with face values of $500. The certificates would attain these values only if kept until the maturity of the underlying government bonds, which would be from 20-45 years. The actual value of the $1,000 certificates at the time delivered as premiums to those who attended sale presentations was between $17 to $18; the

   $500 certificates were worth between $8.50 to $9.00.

   
   

5. The clients of Bond Administration Services Corporation, the time-share developers or other entities which bought the certificates as premiums for consumers attending their sales presentations, would pay about $30 per $14000 certificate.

6. Bond Management Corporation and Bond Administration Services Corporation assisted the time-share developers and telemarketing companies which purchased the Certificates of Beneficial Interest in the redistribution of those certificates to consumers. Bond Administration Service Corporation sent letters to the purchasing companies to be given as handouts to the sales prospects (members of the public) who ultimately received the certificates instructing the recipient about how to register the Certificates of Beneficial Interest with Bond Administration Services Corporation. Regulation of the Certificates of Beneficial Interest

   
   

7. The Certificates of Beneficial Interest issued by Bond Management Corporation constitute securities under Federal law and Florida law. Bond Management Corporation made filings with the Securities and Exchange Commission of the United States under regulation D, which indicated that the securities were exempt from registration under the Federal Act.

   
   

8. The Certificates of Beneficial Interest were not registered with the State of Florida Department of Banking and Finance, Division of Securities.

   
   

9. Neither Bond Management Corporation, which issued the Certificates of Beneficial Interest, or the individuals in the corporation who offered them for sale or actually sold them (including Mr. Whalen and Mr. Cavallo), were registered with the State of Florida, Department of Banking and Finance, Division of Securities.

   
   

10. In May of 1986, the owner of Bond Management Corporation, Mr. Whalen, was visited by representatives of the Florida Division of Securities. Mr. Cavallo attended that meeting. The Division's representative told Mr. Whalen and Mr. Cavallo that the enterprise being operated would require the registration of the issuer of the securities, Bond Management, that the staff members at Bond Management Corporation and Bond Administration Services Corporation who sold the securities to their customers (the time-share developers and telemarketing companies) would have to be registered, and that the persons at the time-share developer or other entrepreneurs who were "giving" the certificates to prospective clients would have to be registered.

    Prospective clients of the time-share developers and telemarketing companies were required to attend sales presentations in order to receive a Certificate of Beneficial Interest; consequently, the Division of Securities maintained that the consumers were providing consideration for the receipt of the certificates, and were purchasing them from the clients of Bond Management Corporation.

    
    

    Mr. Cava1lo's role at Bond Management Corporation

    
    

11. Mr. Cavallo had a business card which represented that he was the Vice President of Marketing and Sales for Bond Management Corporation. In his capacity as Vice President of Sales and Marketing, Mr. Cavallo managed the day- to-day operation of Bond Management Corporation and Bond Administration Corporation. He offered to sell or actually sold Certificates of Beneficial Interest to many companies throughout the United States, at least five of which were located in Florida. Mr. Cavallo sent packages to time-share companies and other potential purchasers of blocks of Certificates of Beneficial Interest, which contained sample Certificates of Beneficial Interest, a private offering memorandum describing the securities, and instruction letters which would accompany the Certificates of Beneficial Interest when delivered to the purchasing corporation's prospective clients. The clients were told how to register those certificates with Bond Administration Services Corporation. When

    Mr. Cavallo first came to work at Bond Management Corporation, the registration coupons sent to the company by many consumers had not been processed, and Mr.

    Cavallo spent a good deal of his time in the first two months processing those registrations.

    
    

12. The private offering memorandum which Mr. Cavallo distributed as part of the business plan of Bond Management Corporation and Bond Administration Services Corporation contained false representations about the securities, including the amount of the compensation which the trustee, Bond Management Corporation, was to receive; the use of 68% of the proceeds of the sale of the certificates to purchase the bonds which were to be the trust estate; the promise to deposit the bonds comprising the trust estate with the Federal bank or similar financial institution, and the underlying value of the certificates. No government bonds were ever purchased, so the Certificates of Beneficial Interest which Bond Management Corporation issued were worthless. Bond Management Corporation and Bond Administration Services Corporation, dealt with the money paid for the Certificates of Beneficial Interest as their own.

    
    

13. In addition, the private offering memorandum Mr. Cavallo distributed did not disclose important facts, including the participation of Mr. Cavallo in the management of the issuer, and the identity of the founder of the company, John DiStefano, who had previously been convicted of securities violations.

    
    

14. Shortly after Mr. Cavallo went to work for Bond Management and Bond Administration Services Corporation, he came to doubt that Thomas Whalen was competent to act as a trustee to run the business, due to Mr. Whalen's apparent addiction to cocaine. Mr. Cavallo consulted with an attorney because of his concerns, who advised him that he should say nothing unless he could actually prove that Mr. Whalen was engaged in wrongdoing. Otherwise, Mr. Cavallo would expose himself to potential liability for slander or libel.

    
    

15. Although Mr. Cavallo was aware that bonds were not being purchased to create the trust estate that the Certificates of Beneficial Interest represented, he continued to engage in sales of the Certificates of Beneficial Interest until he left the companies in July of 1986. Bond Services Corporation and Bond Administration Services Corporation sold at least 10,000 Certificates of Beneficial Interest, which produced approximately $320,000 in revenue. By May 1986 approximately 3,500 of those worthless certificates had been distributed to individuals, approximately 1,100 of whom were Florida residents. Bond Services International Corporation

    
    

16. After Mr. Cavallo resigned from working with Bond Management Corporation and Bond Administration Services Corporation, he went to work for Bond Service International Corporation (Bond International). Bond International had the same business plan as Bond Management Corporation and Bond Administration Services Corporation, and even did business at what had been the location of Bond Management Corporation.

    
    

17. The owner of Bond International was John Wallace. He invited Mr. Cavallo to work for him because he knew Cavallo was unhappy at Bond Management Corporation because of the improper business practices of Mr. Whalen. Mr. Whalen had been involved in a previous business enterprise with Mr. Wallace. When Mr. Cavallo came to work at Bond International, Bond International had few clients. Many of Mr. Cavallo's clients from Bond Management Corporation followed him to Bond International.

18. Sales were carried out by Bond International in a manner essentially identical to that used at Bond Management Corporation and Bond Services Administration Corporation.

    
    

19. The Certificates of Beneficial Interest issued by Bon Services were essentially identical to that Bond Management Corporation. As with Bond Management Corporation, Mr. Whalen also failed to purchase the bonds which were to make up the trust estate represented by the Certificates of Beneficial Interest. The operation was a little better than at Bond Management Corporation because Bond International bought $225,000 worth of bonds, but that was only about 2-1/2% of the amount required to give the stated face value to the Certificates of Beneficial Interest. Ultimately, when Mr. Wallace was arrested for violation of Florida securities laws, those bonds were surrendered to Wallace's bail bondsman rather than maintained in trust.

    
    

20. As with the program at Bond Management Corporation, neither the Certificates of Beneficial Interest issued by Bond International, nor the individuals selling the certificates, including Mr. Cavallo, were registered with the State of Florida, Division of Securities.

    
    

21. Sales of Bond International's certificates were made to at least 40 companies. Offers of sale were made to additional businesses. Mr. Cavallo, himself, sent Certificates of Beneficial Interest in conjunction with sales or offers to sell those securities at least 54 times to 41 separate companies, four of which were located in Florida.

    
    

22. Bond International received at least $270,000 in revenue from the sale of approximately 10,000 Certificates of Interest. When Mr. Cavallo left the company in December of 1986 about 2,800 consumers had received the Certificates of Beneficial Interest.

    
    

23. The private offering memorandum of Bond International was essentially identical to that of Bond Management Corporation. It contained essentially the same false statements regarding the use of proceeds from the sale of certificates to purchase bonds which were to be held in trust by a financial institution, and the compensation of the trustee. The persons actually described as the company's managers, Mitchell Rymar and Janet Himmelheber did not manage the company, John Wallace and Mr. Cavallo did. The private placement memorandum also failed to disclose ongoing state and federal prosecutions of Mr. Wallace for securities fraud and credit card fraud.

    
    

24. Mr. Cavallo drafted and mailed letters to be used by the companies purchasing the Certificates of Beneficial Interest when distributing them to consumers. These letters from Bond International to the certificate holders misrepresented that the certificates were guaranteed by the United States Government, when they were not, and that bonds were held in escrow to support the Certificates of Beneficial Interest when they were not.

    
    

25. Mr. Cavallo represented himself as the person in charge of Bond International, represented himself as a vice president, was a signatory on Bond International's bank accounts and established a securities account as the vice president of Bond International. He ran the day-to-day affairs of the company and had access to the books and records of the company from the time he began working there. Mr. Wallace considered Mr. Cavallo as a partner in the business.

    
    

26. In connection with his duties at Bond International, Mr. Cavallo offered and made sales of Certificates of Beneficial Interest issued by Bond

    International, by Federal Express delivery, by telephone, and by hand delivery of certificates to, local companies in Broward County. When Mr. Wallace was jailed in November of 1986, Mr. Cavallo continued to operate Bond Services throughout that month.

    
    

27. Mr. Cavallo knew that bonds were not being purchased as stated on the Certificates of Beneficial Interest and in the private placement memorandum, and that John Wallace was irresponsible and wasted funds of the company from the time Mr. Cavallo began working there. Nonetheless, Mr. Cavallo continued with the company and continued to sell Certificates of Beneficial Interest.

    
    

28. Mr. Cavallo signed numerous checks drawn on the accounts of Bond International, which included $2,500 to pay the criminal defense attorney Mr. Wallace retained to handle the Federal credit card fraud charges filed against him in Chicago, $349 for Wallace to travel to Chicago in connection with those charges, $1,000 to Robert Trachman, the local lawyer retained by Mr. Wallace to defend him with respect to securities fraud charges in Broward County, and

    $8,500 paid to John Gilbert Bailbonds, Inc., for Mr. Wallace's bail in connection with the Florida securities charges.

    
    

29. Mr. Cavallo also wrote a large number of checks to "cash" on accounts of Bond International beginning in August 1986, and ending in November 1986. These checks aggregated $34,093.66. It is by no means clear what the checks to "cash" were used for, but there is no proof that they were ever used to purchase the securities which Bond International should have purchased to back, the Certificates of Beneficial Interest.

    
    

30. Mr. Cavallo received direct payments by check made to him of at least

    $3,155.

    
    

31. Mr. Cavallo is sophisticated in financial matters. He holds a bachelors and masters degree from the University of Miami in Coral Gables, as well as a masters of foreign trade from the American Institute of Foreign Trade in Glendale, Arizona. After Mr. Cavallo severed his connection with Bond International, he took steps to establish Bond Premium Corporation, which would have followed a business plan similar to those of Bond Management Corporation and Bond International, although Mr. Cavallo maintains he would have purchased bonds to support his Certificates of Beneficial Interest. That company never did any business.

    
    

    CONCLUSIONS OF LAW

    
    

32. The Division of Administrative Hearings has jurisdiction over this matter. Section 120.57(1), Florida Statutes (1987)

    
    

33. The Certificates of Beneficial interest issued by Bond Management Corporation and by Bond International were securities as defined by Section 517.021(21)(i), (k), (p), (r), (s) and (u), Florida Statutes. They were not registered with the Florida Division of Securities. The burden of establishing the entitlement to an exemption from the registration requirements of Chapter

    517 rests with the person claiming the exemption. Section 517.171, Florida Statutes. No such evidence was produced at the hearing, and it is concluded that the securities sold by Bond Management Corporation, Bond Administration Services Corporation and Bond International Corporation were not exempt from the registration requirements of Florida law.

34. With respect to the trusts which were to be formed with the proceeds from the sale of the Certificates of Beneficial Interest, Mr. Cavallo was a "issuer" of securities since he acted "as a promoter for or on behalf of a . .

    .trust . . . to be formed. Section 517.021(14), Florida Statutes. He was also a "dealer" in securities as that term is used in Section 517.021(9)(a)2., Florida Statutes, because he is an issuer who engaged in the business of selling securities.

    
    

35. Section 517.07, Florida Statutes, requires that no securities "shall be sold or offered for sale" within Florida "unless such securities have been registered, as hereinafter defined." Mr. Cavallo repeatedly violated that section of the law by offering the sale of unregistered securities of Bond Management Corporation and Bond International Corporation. Mr. Cavallo was not registered as a dealer in securities under Section 517.12(1), Florida Statutes, so each of those sales also was a violation of that provision of the Florida securities laws.

    
    

36. Mr. Cavallo clearly had been placed on notice of the registration requirements in May of 1986 when he attended the meeting with the representatives of the Division of Securities at the office of Bond Management Corporation.

    
    

37. The securities of Bond Management Corporation and Bond International were sold with the intent that they would then be distributed to the general public as incentives for attending sales presentations. The requirement that the consumer travel and attend the meeting or purchase a product in order to obtain the security constitutes valuable consideration for the security and constitutes a sale of the security. The Division contends that by materially assisting in these further sales of securities to the general public, Mr. Cavallo had violated Sections 517.07 and 517.12, Florida Statutes, which govern the registration of securities and registration of dealers in securities. No language in those statutes appears to create liability for assisting in the sale of unregistered securities to the public. Consequently, no additional liability for securities violations which may have occurred when those certificates were sold by the purchasing corporations to their own consumers has been proven.

    
    

38. The Certificates of Beneficial Interest issued by Bond Management Corporation and Bond International were fraudulent on their face when offered and sold because there was no trust estate which supported the certificates. In addition, the offering memoranda of Bond Management Corporation and Bond International contained the material misrepresentations set forth in the findings of fact. Mr. Cavallo, therefore, violated of Section 517.301(1)(a)1., Florida Statutes, by employing a scheme or device to defraud the customers who paid $30 for each Certificates of Beneficial Interest. In addition, he obtained the payment for the certificates by means of untrue statements of material fact, and engaged in a course of business which operated as a fraud on both the corporations which purchased the Certificates of Beneficial Interest directly from Bond Management Corporation and Bond International, and upon the ultimate recipients of those Certificates of Beneficial Interest. Mr. Cavallo knew that no bonds had been purchased by either Mr. Whalen at Bond Management Corporation or Mr. Wallace at Bond International, but he continued to sell Certificates of Beneficial Interest, and used documents which contained false or fraudulent statements in the sale of those securities in violation of Sections 517.301(1)(a)2. and 3. and 517.301(1)(c), Florida Statutes.

    
    

39. Mr. Cavallo was financially sophisticated, and had positions in Bond Management Corporation and Bond International which made him aware of the frauds

    that were being perpetrated. Mr. Cavallo disregarded this knowledge and actively assisted both Bond Management Corporation and Bond International to continue to sell these fraudulent securities. It is no defense that Mr. Cavallo believed that Mr. Whalen or Mr. Wallace could, at a later date, have purchased the underlying securities which the Certificates of Beneficial Interest represented.

    
    

    Proposed penalty

    
    

40. Under Section 517.221(3), Florida Statutes, the Department of Banking and Finance may impose and collect an administrative fine against a person found to have violated provisions of Chapter 517, not to exceed $5,000 for each violation. The Division of Securities has recommended a fine of $2,500 be entered against Mr. Cavallo for the sale of unregistered securities of Bond Management Corporation and Bond International, and an additional fine of $2 500 for the sale of those unregistered securities by Mr. Cavallo when he was not appropriately registered to sell securities. These fines appear modest and should be increased to $5,000, for a total of $10,000.

    
    

41. The Division of Securities has also recommended an administrative fine of $15,000 for the sale of fraudulent securities of Bond Management Corporation and Bond International, coupled with the concurrent wasting of the assets of Bond International. A fine of $15,000 for fraud in the sale of securities is appropriate.

    
    

42. The total of all fines is, therefore, $25,000.

RECOMMENDATION

It is recommended that a final order be entered by the Department of Banking and Finance, Division of Securities, finding Mr. Cavallo guilty of:

1. The sale of unregistered securities in violation of Section 517.07, Florida Statutes, and that he be fined $5,000;

   
   

2. The sale of unregistered securities by an unregistered person, in violation of Section 517.12(1), Florida Statutes, and that he be fined $5,000; and

   
   

3. Employing schemes to defraud and making false or fraudulent statements or representations in connection with the sale of the securities of Bond Management Corporation and Bond International in violation of Sections 51- 7.301(1)(a) and (c), Florida Statutes, and that for these acts he be fined

$15,000, so that a total fine of $25,000 be imposed, and requiring him to cease and desist from further participation in the sale of securities.

DONE AND ENTERED in Tallahassee, Leon County, Florida, this 20th day of January, 1989.

WILLIAM R. DORSEY, JR.

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32399-1050

(904) 488-9765

Filed with the Clerk of the Division of Administrative Hearings this 20th of January, 1989.

APPENDIX

The following are my rulings on the proposed findings of fact submitted by the petitioners pursuant to Section 120.59(2), Florida Statutes (1987).

Rulings on Petitioner's Findings of Fact

1. Covered in finding of fact 1.

2. Rejected as unnecessary.

3. Covered in finding of fact 2.

4. Covered in finding of fact 3.

5. Covered in finding of fact 3.

6. Covered in finding of fact 3.

7. Covered in finding of fact 11.

8. Covered in findings of fact 2 and 15.

9. Covered in finding of fact 7.

10. Covered in finding of fact 8.

11. Covered in finding of fact 9.

12. Covered in finding of fact 10.

13. Covered in finding of fact 15.

14. Covered in finding of fact 11.

15. Covered in finding of fact 11.

16. Covered in finding of fact 11.

17. Covered in finding of fact 11.

18. Covered in finding of fact 11.

19. Covered in findings of fact 11 and 12.

20. Covered in finding of fact 12.

21. Covered in finding of fact 13.

22. Covered in finding of fact 15.

23. Rejected as cumulative.

24. Covered in finding of fact 14.

25. To the extent appropriate, covered in finding of fact 15.

26 To the extent appropriate, covered in finding of fact 15.

1. Covered in finding of fact 16.

2. Covered in finding of fact 18.

3. Covered in finding of fact 18.

4. Covered in finding of fact 19.

5. Covered in finding of fact 19.

6. Covered in findings of fact 7 and 20.

7. Covered in finding of fact 21.

8. Covered in finding of fact 22.

9. Covered in findings of fact 17, 18 and 24.

10. Covered in finding of fact 23.

11. Covered in finding of fact 23.

12. Covered in finding of fact 23.

13. Covered in finding of fact 23.

14. Rejected as unnecessary.

15. To the extent appropriate, covered in finding of fact 25.

16. Rejected as cumulative.

17. Covered in finding of fact 26.

18. Covered in finding of fact 17.

19. Covered in finding of fact 5. It is not clear that Mr. Cavallo actually shared the profits equally with Mr. Wallace, however.

20. Covered in finding of fact 23.

21. Covered in finding of fact 26.

22. Covered in finding of fact 27.

23. Covered in finding of fact 28.

24. Covered in finding of fact 29. Although my calculations of the amounts involved are somewhat different.

25. Rejected as unnecessary.

26. Covered in finding of fact 29.

27. Covered in finding of fact 31.

28. Covered in finding of fact 31.

COPIES FURNISHED:

Lawrence S. Krieger, Esquire

111 Georgia Avenue Suite 211

West Palm Beach, Florida 33401

Vincent R. Cavallo, pro se

405 S, Pine Island Road Plantation, Florida

The Honorable Gerald Lewis Comptroller, State of Florida The Capitol

Tallahassee, Florida 32399-0350

Charles L. Stutts, Esquire General Counsel

Comptroller, State of Florida The Capitol

Tallahassee, Florida 32399-0350

Docket for Case No: 88-001680

Orders for Case No: 88-001680