STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
DEPARTMENT OF BANKING & FINANCE, ) DIVISION OF SECURITIES, )
)
Petitioner, )
)
vs. ) CASE NO. 88-3419
)
DAVID JOHN KURY and KURY ) INVESTMENT ADVISORY CORPORATION, )
)
Respondents. )
)
RECOMMENDED ORDER
Pursuant to notice, this cause came on for hearing before P. Michael Ruff, duly designated Hearing Officer, on August 15 and 16, 1988, in Pensacola, Florida. The appearances were as follows:
APPEARANCES
For Petitioner: Reginald R. Garcia, Esquire
Charles E. Scarlett, Esquire Office of Comptroller, The Capitol Tallahassee, Florida 32399-0350
For Respondent: Philip J. Snyderburn, Esquire
SNYDERBURN, RISHOI & SWANN
280 West Canton Avenue, Suite 240 Winter Park, Florida 32789
and
Donald A. Rett, Esquire MANG, RETT & COLLETTE, P.A.
Post Office Box 11127 Tallahassee, Florida 32302-3127
This matter has arisen upon the Petitioner's complaint and Notice of Charges seeking revocation of the Respondents' registration as an "associated person" with American Equities Corporation, which authorized the Respondents to engage in the offer and sale of securities to clients and the Respondents' registration as an "investment advisor." The Respondents' licenses were suspended by a "Summary Suspension of Registration as an Associated Person and Investment Advisor" and concomitantly the administrative charges were filed against the Respondents incorporating the grounds and allegations contained in the "Immediate Final Order and Summary Suspension of Registration." The cause came on for hearing on the charges incorporated in those pleadings pursuant to Section 120.57(1), Florida Statutes.
The Respondent, at the outset of the hearing, took the position that it was challenging the Summary Suspension Order as well as the question of permanent revocation or other disciplinary action with regard to the Respondents' licenses
or registrations. The appropriate remedy for the Respondents, however, in contesting the Summary Suspension Order would have been to challenge the Order by seeking to enjoin it in Circuit Court or filing an immediate appeal of it in accordance with Section 120.59(3) and (4) as well as Section 120.68, Florida Statutes. The appropriate forum to contest the summary suspension action was to seek to enjoin the Order in Circuit Court or to file for an expedited judicial review of it, pursuant to Section 120.68(1), (3) and (6), Florida Statutes. The Respondent elected not to exercise those options and therefore has waived them. In any event, pursuant to the prehearing stipulation executed by the parties, the Respondent has effectively acknowledged that he was proceeding to hearing pursuant to Section 120.57(1), Florida Statutes.
The cause thus came on for hearing as noticed on the Department's intent to revoke both the Respondents' registrations for numerous alleged violations of Chapter 517, Florida Statutes, and related administrative rules. On August 14, 1988, prior to hearing, the parties entered into a Prehearing Stipulation describing uncontested facts, contested facts, as well as the agreement on the admissibility of certain documentary evidence. The Prehearing Stipulation, including Schedule I, identified 23 stipulated exhibits, which were adopted and were admitted by the Hearing Officer at the outset of the hearing. Those exhibits were admitted into evidence as Exhibits 1-23. Several witnesses testified for the Petitioner at hearing, including certain investors who dealt with the Respondents (Twiss, Addonizio, Miller, Vail, Lampkin and Kirkland); former employers of the Respondent David Kury (Mr. Nakagiri of Associated Planners and Mr. Ron Brown of E. F. Hutton); representatives of the Division of Securities, Messrs. Taylor, Saxon and Blaker; and a law professor accepted as an expert in securities law, Professor Cohn. The Respondents' witnesses were certain investors (Dr. Engelman, Mr. Boyd and Mr. Catone). Additionally, witnesses O'Connor, Hooper and Albright were Respondents' character witnesses and additionally the Respondent adduced the testimony of witness Wiggins, a former E. F. Hutton employee and the Respondent's testimony himself. The depositions of two unavailable witnesses, Ms. Sanders and a Mr. Hillyer were adduced and admitted into evidence. During the course of the hearing, Exhibits 24-30 were also moved and admitted into evidence, Exhibit 28 being the telephone deposition of Ms. Martha Sanders.
After conducting approximately 22 hours of hearing over the course of the two days set for this hearing, the parties elected to file Proposed Findings of Fact and Conclusions of Law after obtaining a transcript of the proceedings.
Those Proposed Findings of Fact are addressed in this Recommended Order and treated once again in the Appendix attached hereto and incorporated by reference herein.
The issue to be resolved in this proceeding concerns whether the notes issued to various alleged investor clients in return for borrowed money were "securities" and/or "investments," pursuant to Chapter 517, Florida Statutes, and, if they were securities, whether they were sold in violation of Chapter 517, Florida Statutes, as unregistered securities, not exempt from the registration requirements. Also to be determined was the matter of whether certain material misrepresentations or omissions were made in connection with the issuance of the notes, either as "securities" or "investments," in alleged violation of Chapter 517, Florida Statutes. Also at issue is the allegation that the Respondent David Kury was operating a "ponzi scheme" or "pyramid" by using loan proceeds from newer clients to pay off principal and interest due to older client-note-holders. Finally, it must be decided whether the Respondent and/or his corporation failed to maintain certain records required by the rules of the Department; whether the Respondent violated a Department rule prohibiting
registered persons from borrowing funds from clients, and whether the Respondent acted as an "investment advisor" prior to being registered as such on March 2, 1988.
FINDINGS OF FACT
The Office of the Comptroller, Department of Banking and Finance, Division of Securities and Investor Protection (Department), is an agency of the State of Florida charged with the responsibility to administer and to enforce the provisions of Chapter 517, Florida Statutes (1987), and administrative rules promulgated thereunder, related to regulating the practice of securities dealers, "associated persons" and investment advisors. It regulates sales and other transactions in securities and investments, as those items are defined in that chapter.
The Respondent, David John Kury, has been registered with the Department since 1967 as an associated person under Chapter 517, Florida Statutes. Pursuant to that registration, he is authorized to engage in the offer and sale of securities to clients. Since 1967 he has also been registered with the National Association of Securities Dealers (NASD). Since July 21, 1987, Respondent Kury has been registered with the Department as an associated person of American Capital Equities, Inc. (American), and he has also been registered as an associated person with the following broker/dealers:
Associated Planner Securities Corporation (Associated); Prudential Bache Securities, Inc.; and E. F. Hutton. These registrations cover the period of time from April 1978 through May 1987. During all times Respondent Kury has been registered with the Department as an associated person of American, he has been simultaneously registered with the NASD as a "principal" of American.
American is a corporation incorporated under the laws of the State of Missouri, which has been lawfully registered with the Department as a broker/dealer since approximately August 1984. American operates a branch office at 116 West Government Street, Pensacola, Florida. This office has been lawfully registered with the Department and in continuous operation since approximately August 21, 1987. Respondent Kury has been the branch manager of the office during all the period of time it has been registered with the Department.
Kury has been registered with the Department as a principal of the Kury Investment Advisory Corporation (KIAC), pursuant to Chapter 517, Florida Statutes, since approximately March 2, 1988. That corporation is incorporated under the laws of the State of Florida and has been registered itself with the Department as an investment advisor, pursuant to Chapter 517, since approximately March 2, 1988. The Respondent corporation maintains its principal place of business also at 116 West Government Street, Pensacola, Florida, at which address Respondent Kury maintains the branch office of American. Respondent Kury is and has been at all pertinent times the sole owner, officer, director and chief operating officer of the Respondent corporation.
Since March 2, 1988, Respondent David Kury has been registered as an investment advisor himself, with KIAC. He is also registered in approximately
15 other states as an associated person, thereby being authorized to offer and sell securities in those states as well. Kury Financial Planning Group, Inc. (Group) is a corporation organized under the laws of the State of Florida on or about October 23, 1985. It maintains its principal place of business at the above-referenced address as well. Respondent David Kury is the registered agent, sole officer and director of Group.
Since approximately 1976, Kury has engaged continuously in the business of financial planning for individuals in the Pensacola area. Pursuant to this business, he has recommended various financial products, including securities and insurance products for individuals' personal portfolios. He has also rendered advice to clients concerning matters that are not involved with securities or insurance, although the bulk of his financial planning advice and experience relates to these two areas.
During the twenty or more years he has been licensed as an associated person only one minor complaint has been lodged against Kury by a client. He has never been the subject of a complaint or an investigation by the Securities Exchange Commission, the NASD, the State of Florida or any other state securities regulatory agency. Neither has he been the subject of a complaint or investigation by the Florida Department of Insurance. He is a member of the Institute of Certified Financial Planners, a member of the International Association for Financial Planning and is in the Registry of Financial Planning Practitioners, a very select group comprised of only a very small percentage of the total number of certified financial planners in the United States. The Respondent, Mr. Kury, has been highly successful as an associated person dealing in securities and as a financial planner. In 1983, while employed with E. F. Hutton as a salesperson, selling securities and investments, the Respondent earned commissions in excess of $500,000 for that year and was one of the largest producers for E. F. Hutton in the entire nation for that year. He received commendations directly from the Chairman of the Board of E. F. Hutton and other senior management for his sales efforts and his integrity. His personal share of the commissions earned that year amounted to $330,000. It is obvious that the Respondent has substantial earning power due to his knowledge, experience and other capabilities in the field of securities and investment sales and advice and the field of financial planning.
The Department, commencing on or about May 20, 1988, conducted an investigation and examination of the affairs of Kury Investment Advisory Corporation and the branch office of American, of which Respondent David Kury was branch manager, located at 116 West Government Street, Pensacola, Florida. It was thus determined (and established by clear and convincing evidence in this proceeding) that David Kury, as well as Kury Financial Planning Group, Inc. ("Group") sold or offered for sale both personal notes of David Kury, as well as corporate promissory notes of the Group, since approximately 1975. At the present time, there are approximately 50 persons holding 83 notes in amounts ranging from $5,000 to $200,000. These notes have maturities ranging from three months to four years, with investment return rates ranging from 9 percent to 13 percent. Some of the note-holders were told by Respondent Kury that certificates of deposit, by comparison, were then available to the note-holders or investors at rates ranging from two to three percent less than the rates offered by Kury and Group for the subject personal and/or corporate promissory notes. The total principal amount outstanding, represented by the corporate and personal promissory notes at issue, is approximately $2.4 million. The total principal and accrued interest as of June 15, 1988 is approximately $2.8 million. The total principal amount with accrued interest at the maturity of the notes in question would amount to approximately $3.1 million. The 50 note- holders are clients of the Respondent's. The notes were offered to them in the context of being investment alternatives to certificates of deposit and other "passive" investments, with the primary inducement being higher rates of return on the notes.
Respondent David Kury and/or the Corporation failed to maintain and preserve an adequate record of purchases and sales of equity securities by
maintaining a "purchase and sales blotter," as well as a "securities received and delivered blotter" and failed to maintain a current "trial balance." These items were not maintained in the ordinary course of business by Respondent David Kury and the Corporation. (See Section 517.121, Florida Statutes, and Rule 3E- 600.014, Florida Administrative Code).
During approximately the last 13 years, Respondent David Kury has utilized the proceeds of the personal and corporate notes to pay business expenses for himself and the corporations he controls, as well as certain personal expenses, including the financing of his home (at a cost of approximately $1,000,000). The Respondents have sold or offered for sale the notes, both personal and corporate, without having them registered with the Department, which is required if they are deemed securities. The Respondents did not provide the purchasers of these notes a prospectus for purposes of Section 517.07, Florida Statutes.
Group has engaged in the offer and sale of these notes to the note- holders or investors without being registered with the Department to engage in such activities, as required by law, if it be deemed that these notes indeed are securities.
Respondent David Kury, in his individual capacity, and on behalf of Group, has engaged in the offer or sale of the notes without being registered with the Department to engage in such activities, either in his individual capacity or on behalf of Group, if the notes are deemed securities. Kury and the Corporation engaged in the business of "investment advisor" prior to lawful registration of that corporation with the Department to engage in such activity. Kury and the Corporation have rendered investment advice since at least September 18, 1987, notwithstanding the fact that the Corporation did not obtain lawful registration with the Department to engage in such activities until March 2, 1988.
David Kury was the branch office manager for the registered branch office of American. He failed to establish, maintain and preserve certain books and records required by Florida law for registered branch offices of brokerage firms. In particular, he failed to establish and maintain the purchase and sales blotter reflecting all equity securities sold by American through Kury's branch office. Additionally, as branch office manager for a registered branch office of American, he failed to maintain and preserve a "securities received and delivered blotter."
The Corporation, and Kury acting on its behalf, has failed to maintain a current trial balance indicating proof of current money balances in the corporate accounts.
Respondent Kury, in his individual capacity and on behalf of Group, sold securities and/or investments (the notes) without making disclosures as to certain material facts, which disclosures were necessary in order for the purchasers or investors not to be misled. Statements were made in conjunction with the sales to the investors under circumstances, such that the omitted material facts, which were not disclosed, were necessary in order to prevent these investors or purchasers from being misled. See Section 517.081, Florida Statutes. Specifically, Kury and Group omitted to inform the investors of the following material facts:
Information about the risks to the purchasers of the notes, including his
and the Group's ability or inability to repay the notes generally and provision
for repayment in the event of Kury's death.
Information as to the use to be made of the proceeds of the notes, which in fact
were used to finance business operating losses, business operating expenses and to repay personal debts of Kury, and to assist in the financing of personal living expenses of Respondent Kury.
(d) Information concerning approximately
$4,000,000 in liabilities and outstanding indebtedness of Respondent Kury individually and/or the Corporation and/or the Group.
The $2.3 million negative net worth of Kury and/or the Corporation and/or the Group.
The fact that Kury's previous employment with E. F. Hutton and Company had been terminated in 1984, partially because of
his borrowing money from investors, in violation of Hutton's internal policies and NASD rules. In fact, Respondent Kury had borrowed an aggregate sum of approximately $327,172 from approximately 17 different clients by the time of his termination by Hutton.
The fact that Kury's previous employment with Associated Planners Securities Corporation had been terminated in 1987
due to his borrowing money from investors in violation of that company's internal policies and NASD rules.
The fact that Kury's personal and group life insurance policies were inadequate
to pay the total indebtedness represented by the subject notes, in the event of Kury's death.
The fact that Kury's representations concerning his abilities to borrow from banks and other financial institutions were predicated in part on inaccurate financial statements which under- estimated liabilities and overstated net worth without including on those statements the aggregate indebtedness represented by the outstanding personal and corporate notes.
The fact that he had submitted an inaccurate financial statement to the Florida Comptroller's Office in connection with the charter application of American Bank and Trust Company during the Summer and Fall of 1985 in the process of becoming an organizer and founding director of that bank.
The fact that he was using the money
generated from the sale of the promissory notes, at least in part, to repay principal and interest payments due on other, earlier promissory notes.
The fact that Kury failed to relate to the note-holders and investors how the promised rate of interest on the notes
was reasonably related, if at all, to the risk associated with the investment involved and how it might be related to any other factor commonly known to influence interest rates.
Witnesses Catone, Engelman and Boyd, testifying as Respondent's witnesses, in part established that the appropriate disclosures referenced above were not made. Additionally, Kury's explanation for submitting the false financial statements to lending institutions and to the Comptroller was to the effect that he did not wish to violate the confidentiality of the note sales transactions with the note-holders or investors. This rationale is illogical and self-serving, however, and is not accepted. Disclosing accurate financial information, required by law, to banks would have only required, at most, that Kury list the aggregate indebtedness he owed, the type of indebtedness owed, as well as information concerning principal balances, interest rates and repayment terms. Such information required on these financial statements would not have involved divulging the note-holders names or any confidential information
pertaining to the note-holders, including the amounts of their individual notes.
Law Professor Stuart Cohn was accepted as an expert in state and federal securities laws and corporate finance. It has thus been established that Kury and the Group sold approximately $2.4 million worth of personal and corporate promissory notes which are established to be securities and investments, as discussed infra., to at least 50 investors. This constituted, in effect, the borrowing of money from clients or customers, which is a prohibited business practice for a registered "associated person," investment advisor and financial planner. See Rule 3E-600.013(2)(a), Florida Administrative Code, and Article III, Section 2, NASD Rules of Fair Practice.
Kury also effected securities transactions with customers which were not recorded on the regular books and records at American Capital Equities, for whom he was functioning and registered as an "associated person." In particular, he engaged in, sales and offers to sell securities in his capacity as an associated person of American, the Corporation and the Group and failed to record those transactions on the books of American. This is a prohibited business practice. See Rule 3E-600.13(2)(c), Florida Administrative Code. He engaged in private securities transactions without notifying his principal, American. See also Article III, Section 40, NASD Rules of Fair Practice.
The Respondents' activities, largely ongoing at the time of the investigation, posed an immediate, serious threat to investors or potential investors because the Respondent's activities constituted, at least in part, the operation of a "pyramid" or "ponzi" scheme. This occurs when funds from new investors, in this case the more recent purchasers of the notes, are used to satisfy interest and principal obligations coming due to earlier investors or note purchasers. Therefore, as time progresses, and more of such notes or securities are sold, then more and more investors will be subject to losing their investments and suffer financial hardship. This occurred in the instant situation through the practice engaged in by the Respondent of "note rollovers"
or renewals when due without paying principal and interest owed, or all of it, as well as by making new note sales and using the proceeds, or some of them, to pay earlier investors in spite of the above-described adverse consequences. The threat to the public welfare, as described above, is also represented by the fact that Kury and the Group have undergone an obligation to the note purchasers in excess of $2.8 million as of June 15, 1988, with ultimate liability on the notes of more than $3.1 million, at the respective maturity dates, in the aggregate. The $2.4 million to $3.1 million liability to these investors vastly exceeds the assets available to the Respondents to satisfy the note obligations. Kury admitted that the Respondents are insolvent and currently unable to meet the total financial obligations represented by the notes.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter of and the parties to this proceeding. Section 120.57(1), Florida Statutes.
Subsection 120.59(3), Florida Statutes provides as follows: "120.59 Orders. - ...
(3) If an agency head finds that an immediate danger to the public health, safety, or welfare requires an immediate Final Order, it shall recite with particularity the facts underlying such finding in the Final Order, which shall be appealable or enjoinable from the date rendered. (Emphasis added.)
The administrative hearing held herein was clearly a formal proceeding pursuant to Section 120.57(1), Florida Statutes, on the issue of the potential revocation or other penalty regarding the Respondents' licensure or registration. It was not a proceeding to contest the Summary Suspension Order. The procedure for accomplishing that goal is an action for injunctive relief in the Circuit Court or immediate review to the District Court of Appeal under Section 120.68, Florida Statutes. See Sections 120.59(3) and (4) and 120.68, Florida Statutes. When these sections are read in pari materia, it is clear that the appropriate remedy to contest such a suspension order is in the Circuit Court or in the District Court of Appeal. The Respondent, however, waived the right to exercise those options, and thus it was determined at the outset of this hearing that this proceeding was pursuant to Section 120.57(1), Florida Statutes, only. Further, it should be pointed out that the Prehearing Stipulation executed by the parties clearly provides their understanding that the "hearing was being held pursuant to Section 120.57(1), and 120.68, Florida Statutes ..." See also Denney vs. Connor, 462 So.2d 534 (Fla. 1st DCA 1985); Criterion Insurance Co. vs. Department of Insurance, 458 So.2d 22 (Fla. 1st DCA 1984); Saviak vs. Gunter, 375 So.2d 1080 (Fla. 1st DCA 1979) and Tauber vs. State Board of Osteopathic Medical Examiners, 362 So.2d 90 (Fla. 4th DCA 1978).
Section 517.161, Florida Statutes, provides in relevant part as follows:
"517.161 Revocation, denial or suspension of registration of dealer, investment advisor or associated person.
(1) Registration under s. 517.12, may be
denied or any registration granted may be revoked or suspended by the Department if the Department determines that such application or registrant:
(a) Has violated any provision of this chapter or any rule or order made under this chapter;
Has been guilty of a fraudulent act in connection with any sales securities,
has been or is engaged or is about to engage in making fictitious or pretended sales or purchases of any such securities, or has been or is engaged or is about to engage in any practice or sale of securities which is fraudulent or in violation of the law;
Has made a misrepresentation or false statement to, or concealed any essential
or material facts from, any person in the sale of a security to such persons;
* * *
Has demonstrated his unworthiness to transact the business of a dealer, investment advisor, or associated
person;
Is, in the case of a dealer or investment advisor, insolvent;
* * *
(4) It shall be sufficient cause for denial of an application or revocation of registration, in the case of a partnership, corporation, or unincor- porated association, if any member of
the partnership or any officer or director of the corporation or association has been guilty of an act or omission which would be cause for denying or revoking the registration of an individual dealer, investment advisor, or associated person."
The Respondent David Kury, in his individual capacity and/or acting on behalf of Group and/or the Respondent Corporation, has violated Section 517.07, Florida Statutes, in that in his individual capacity and acting on behalf of Group he has engaged in the sale of personal and corporate promissory notes which constitute unregistered securities.
Section 517.07, Florida Statutes, provides in pertinent part that no securities shall be sold or offered for sale within the State unless they have been registered and unless, prior to sale the purchasers are furnished with their prospectus, meeting the requirements of rules adopted by the Department.
Law Professor Stuart Cohn was qualified and accepted as an expert in the field of state and federal securities laws and corporate finance, based upon his knowledge, skill, experience, training and education. Professor Cohn testified that the sale of the personal and corporate promissory notes constituted a sale of securities in violation of Section 517.07, Florida
Statutes. His opinion was based upon review of the facts of this case, the pleadings, the investor statements and affidavits as well as the promissory notes themselves. He also reviewed Mr. Kury's financial position, the Department's cash flow analysis and certain correspondence, as well as Kury's reorganization plan and the Department's examination report.
In this connection, Section 517.021, Florida Statutes, provides as follows:
"Definitions. - When used in this chapter, unless the context otherwise indicates, the following terms have the following respective meanings:
* * *
(21) `Security' includes any of the following:
(a) A note.
* * *
(f) An evidence of indebtedness."
Since notes are specifically enumerated in the securities definition in the above statute, there is a presumption that notes are securities. The presumption is strengthened since the Legislature has seen fit to exempt a certain class of notes, those in the amount of $25,000 or more face value, with a maturity date not exceeding nine months, by virtue of Section 517.051(8), Florida Statutes. The Respondents herein, however, failed to establish that this or any other exemption comes into play as to the notes involved in this proceeding.
The Florida Securities Statute, Chapter 517, is remedial in purpose. Its enactment is predicated on the inherent police power of the State authorizing it to protect citizens from fraudulent or insufficiently disclosed and explained investment schemes. Being a remedial statute, it should be accorded a liberal construction in order to best carry out the public purpose of protecting its consumers against fraud and securities transactions. The Supreme Court of Florida has stated in McElfresh vs. State, 9 So.2d 277 (1942), that:
"Statutes of this character are upheld under the police power of the State. Their purpose is to protect the public against fraud and the statute will be given a broad and liberal interpretation to effectuate its purpose. Of necessity, no definition of a security can be given to fit all cases. The thing sold will in each case be examined to determine if it falls within the purview of the statutes."
In interpreting the statutes, Florida courts have looked to federal courts and SEC opinions for guidance, as the Florida and federal security statutes are substantially the same in terms of defining "securities." See Rudd vs. State, 386 So.2d 1216 (Fla. 5th DCA 1980).
Notes are the first form of securities enumerated in both Florida and the federal securities statutes in terms of defining "security." It is uniformly recognized, however, that not ,every "note" is a "security." Otherwise, every home mortgage and attendant note, for example, would be subject to the securities laws. Courts and regulatory agencies have therefore developed guidelines for determining what types of notes are to be considered securities.
The two most important factors that have been developed are an examination of the controlling statute itself and secondly an examination of the economic realities of the particular transaction under scrutiny.
The United States Supreme Court has stated that, "the starting point in every case involving construction of a statute is the language itself." See Landreth Timber Co. vs. Landreth, 471 U.S. 681 (1985), where an argument had been made that "stock" was not a security under the peculiar circumstances of the transaction involved, which was the sale of 100 percent of a business. The Court therein held that the stock was indeed a "security," because it possessed characteristics commonly associated with stock, stock coming within the definitional language of the statute which described "security."
In a case dealing directly with the question of "notes," indeed promissory notes issued by a brokerage firm to fund its own operation, the Second Circuit Court of Appeals reviewed existing case law and concluded that, "the best alternative now available may lie in greater recourse to the statutory language." See Exchange National Bank of Chicago vs. Touche Toys and Co., 544 Fed.2d 1126, 1137 (2nd Cir. 1976). The Court went on to list certain examples of notes that would not qualify as securities, such as consumer financing notes, home mortgages, short-term notes secured by a lien on business assets, a "character loan" from a bank to an individual customer and other short-term notes secured by accounts receivable, or notes formalizing open-ended account debts. The Court then stated that, unless a note bore a "strong family resemblance to these examples," then the plain language of the statute, defining notes as securities, should generally be held to apply.
The Respondents in this case did not assert any exemptions regarding the notes. See Section 517.171, Florida Statutes. It is instructive to note, however, that the Florida Statute at issue, cited above, contains express exemptions from registration for certain types of notes, i.e., notes providing a fixed return which have been outstanding for at least five years, and upon which there has been no default, and notes of $25,000 or more, with a maturity not exceeding nine months. See Section 517.051(6,) and (8), Florida Statutes. None of the notes involved in this case fall within the first exemption; a few of them fall within the second. There is a strong presumption that notes which do not meet the statutory exemptions are within the intended field of coverage and are securities.
The statutory language thus creates a strong presumption that notes are securities, if they do not fall within one of the expressed statutory exemptions. It does not, however, provide a complete answer to the question of when "notes" are to be deemed securities. A personal "IOU" between friends is obviously not a transaction to which the securities laws were intended to apply. Notes are securities only if they come within the general nature of investments, concerning which the securities laws were enacted. In addition to the general guidance provided by the Florida Supreme Court in the McElfresh case, supra., the following opinions from the U.S. Supreme Court are instructive: "Security embodies a flexible, rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on a promise of profits." SEC vs. W. J. Howey Co., 328 U.S. 293, 299 (1946). In Thereprin vs. Knight, 389 U.S. 332, 336 (1967), the Court stated: "In searching for the meaning and scope of the word
`security' in the act, form should be disregarded for substance and emphasis should be on economic reality." (Emphasis supplied.)
In considering economic reality, the federal courts have focused on whether notes are "commercial" or "investment-oriented." The statutory protection of the securities laws is not generally accorded commercial notes. Commercial notes are typically notes given to banks and other lending institutions by businesses and other bank customers. Investment notes, on the other hand, are usually characterized by large numbers of individual non- institutional "lenders" who purchase the notes, that is, lend the money they represent. They do so under typical inducements of high economic return, and such instruments are typically characterized by a lack of the ordinary bank protections such as security, collateral, inspection authority and the like. Finally, the manner in which the notes are marketed (as investment opportunities for the clients or lenders) rather than being marketed as mere loans has been consideered an important consideration by the courts. See McClure vs. First National Bank of Lubbock, Texas, 497 F.2d 490 (5th Cir. 1974), cert. den. 420 U.S. 930 (1975); Sanders vs. Nuveen, 463 F.2d 1975 (7th Cir. 1972).
Professor Cohn established that the notes issued by the Respondents, individually and corporately, are indistinguishable from each other for legal purposes and are all investment-oriented notes. The economic realities of the note transactions involved herein indicate that all or nearly all of the note- holders regarded these notes as merely one of the various types of investment opportunities recommended by and marketed by David Kury. His representations and offers regarding them were on the basis that they were to be favorable, return-earning investments for the note-holders.
The notes were marketed as investments. Investors testifying generally indicated that they had an amount of money they were seeking to invest and that they went to Kury as clients for investment advice. He then sold them the notes as an attractive alternative form of investment to various other possibilities, such as their "putting their funds into money market accounts and the like. Kury offered the notes as an investment whereby they could earn one or more "points" higher return than other forms of investment. In any event, he sold the notes as a form of investment attractive because of the promised higher interest rates than were obtainable elsewhere. The scenario varied among individual investors. Some persons may have genuinely believed they were making a personal loan to Kury or his company for whatever use he desired of the proceeds. The overwhelming majority of investors, however, were induced into making the loans for purchasing the notes, as one of several alternative investment opportunities. The Court in Farag vs. National Data Bank Subscriptions, Inc., 448 So.2d 1098 (2nd DCA 1984), stated:
"Several considerations (in determining a security) are necessary, such as what character the investment is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out by the sellers. It is not inappropriate that a promoter's offerings be
judged as being what they were represented to be."
Another characteristic of the transactions and notes at issue, which tends to identify them as securities, concerns the fact that they were sold to many investors. A personal loan is usually characterized by the involvement of only two or several people, with the securities laws generally not applying to those situations. In fact, two Florida courts have refused to define a note as a security where there has been only one investor involved in the transaction. Rudd vs. State, 386 So.2d 1216 (Fla. 5th DCA 1980) and State vs. Fried, 357
So.2d 211 (Fla. 3rd DCA 1978). See also Brown vs. Raleigh, 363 So.2d 590 (Fla. 4th DCA 1978). A distinction based on numbers was made in McClure vs. First National Bank of Lubbock, Texas, supra. That case involved a situation where there was only one lender, as opposed to the notes being offered to "some class of investors." The 42 purchasers of notes sold by a brokerage firm in Sanders vs. Nuveen, supra., were also determined to have purchased securities, in great part because of the multiple purchasers of the same type of notes. The number of note-purchasers was also important in determining that the notes involved were securities in Ahern vs. Gaussoin, 611 F.Supp. 1465 (D. Ore. 1985), wherein the Court, in determining that the notes were securities, found that ... "the notes, though not publicly offered, were offered and sold to a large number of persons." In the instant situation, multiple investors are involved, instead of the single lenders or investors involved in the McClure and Rudd cases and others cited above. In fact, at least 50 people purchased at least 83 notes, excluding the numerous "rollovers" (or refinancing of notes), which arguably constitute new transactions and new notes each time such refinancing is done.
The various judicial decisions cited above, in which notes were not determined to be securities, all involved only one purchaser/investor.
Loans or notes offered for investment purposes, thus, are offered to groups of investors. Such transactions are not individually tailored to the situation of an individual borrower and a commercial or consumer lender. Personal notes or IOU's, on the other hand, are often given out of friendship and not as a result of economic inducement for the lender. Home mortgages are typically secured, as are loans on business accounts-receivable and other asset- type loans to small businesses. "Signature loans" or loans which are unsecured are typically made with the inducement to enter into the transaction coming from the lender instead of from the borrower, as is the case in investment loans,
the inducement being to lend money at a sufficiently low rate to attract the borrower who, in turn, needs the loan proceeds to finance some good or service. In the case at hand, however, the notes were unsecured, and the lender (the investor) received no collateral or other security and no immediate interest or principal payments, but rather the promise of interest at a favorable rate, payable in the future at maturity. The lender/investors had no access to books or records of the borrower and in most cases did not know what the money was to be used for. The lenders were using the funds which were available for various investment opportunities and had approached the borrower, Kury, with investment purposes in mind. These transactions were carried out in that vein and for that purpose on the part of the lender/investors.
In effect, none of the indicia of commercial loans, or personal, individually tailored consumer loans are present here. The loans here were induced by promises to the lenders of above market interest rates. They had a pure investment purpose on the part of the lenders and were represented to be such by the borrower, the Respondents. The common thread in the investor testimony is that these loans were made to Kury and the Corporation and Group for investment purposes. In at least one case, Ms. Vail testified that they were asked by Kury to "shop around" to see if they could achieve a better return that Kury's promised 11 percent rate of return. Many of these investors were already clients of David Kury's company for other investment and financial planning purposes. He knew that the promised return exceeded other investment opportunities. Because the investors placed their trust in him, this trust and the promised return was the primary economic inducement for them making the loans to the Respondents. The notes, in fact, were uniformly marketed to all these investors as investment vehicles, as evidenced by the fact, admitted by Kury, that the primary basis for his inducement to them lending the money was the promised high 11 to 13 percent rate of return on their investment capital.
Thus, the investors parted with large sums of money on the promise of an unusually high economic return. Where inducement to make investment or to lend money is based upon the economic return; where the notes are not secured; and where the note-holders are generally without sophistication in financial matters, not in the regular business of lending money and evaluating credit risks but are merely offered handsome rewards in the future, then the protection of the securities laws is essential. This is the kind of situation to which the protections of registration, State review, disclosure, licensing and the other requirements of the securities laws were tailored to by the Legislature.
Another indicia of an investment-type arrangement concerning these notes lies in the fact that the funds were used for operation of Kury's businesses. Some courts have suggested that investment notes typically involve the borrower using the funds for business development expense purposes. The McClure Court regarded it as important that the borrower "did not obtain investment assets" with the loaned funds. Although Professor Cohn opined that the determination of whether a note is a security really requires an objective analysis and is more importantly related to the marketing techniques and manner of offering the note as a security rather than the use of the proceeds of the note by the borrower, however, to some extent, the use made by the borrower of the funds is partially determinative of the investment character of the notes. In this case, the funds were partially used to fund Kury's business expenses. His overhead exceeded revenues. Kury even testified that the substantial portion of the money used to finance his $1,000,000-plus home was an "extension of his business" and in reality was for business purposes. Some of the investors were led to believe that the funds would be used for his own investment or business purposes. In fact, the funds were used for his business and the payment of interest was intended to be made out of the profits of that business. These are indicia of an investment loan, rather than personal or commercial loans and thus also indicate that the notes involved were securities.
The notes at issue also come within the definition of a security in Chapter 517 to the extent that they are concluded to be an "evidence of indebtedness." This is a similar concept to that of "notes" and refers generally to a class of obligations that are fixed income obligations rather than equity obligations. Braniff Airways, Inc. vs. L.T.V. Corp., 478 F.Supp. 1279 (N.D. Tex. 1979). These investors were induced to purchase the notes on promises of fixed returns of 11 to 13 percent annually. Investments often do qualify as securities under more than one category. In United States vs. Monjar, 47 F.Supp. 421 (D. Del. 1942), aff'd. 147 F.2d 916 (3rd Cir. 1945), loan receipts were held in a criminal trial to be both evidences of indebtedness and "investment contracts." Like a note, an evidence of indebtedness is a security where the transaction constitutes a loan for investment purposes as opposed to an ordinary personal or commercial loan. See McClure, supra. Thus, in a similar vein to the analysis regarding the "note" category, and based upon the opinion of Professor Cohn, and other related facts found above, it has been established that the notes herein constituted "evidences of indebtedness," under the above-cited provisions.
In summary, it has been demonstrated that the personal/corporate notes were unregistered securities. First, there is a strong presumption that they are securities because notes and evidences of indebtedness are statutorily defined to be securities under the above-referenced statutes. Secondly, the statutes specifically exempt certain types or categories of notes, thus creating the inference that other nonspecifically exempted notes are securities.
Thirdly, the commercial loan versus investment-type transaction analysis,
discussed above, clearly shows that the notes in question meet the criteria for securities. The "economic realities" looked to by some of the above-cited court decisions establish that the notes were securities. As Kury himself admitted, the notes were marketed as investments during discussions of various investment options with Kury's financial planning clients. The favorable interest rate offered as compared to other investment alternatives was the primary reason the notes were purchased and the monies lent. Also important is the fact that the notes were marketed in the same manner to a large number of people.
It has also been established that Respondent Kury has violated Section 517.12(1), Florida Statutes, by engaging in the business of a broker/dealer through "Group" without being lawfully registered with the Department to do so. He has violated that section by acting as an "associated person" on behalf of Group by engaging in the offer to sell and effecting the sale of the unregistered securities on behalf of Group without being lawfully registered as an associated person on behalf of Group.
Respondent Kury ,has also violated Section 517.12(4), Florida Statutes, by acting on behalf of the Corporation and engaging in the business of an investment advisor, as has the" corporate Respondent, prior to the time each was lawfully registered with the Department to engage in such activities. That subsection requires that investment advisors, or associated persons of an investment advisor, may not engage in the business of rendering investment advice unless they are registered with the Department. Section 517.021(13), Florida Statutes, provides in pertinent part as follows:
"(13)(a) `Investment advisor' includes any person who for compensation engages for all or part of his time, directly or indirectly, or through publications or writings, in the business of advising others as to the value of securities or as to the advisability of investments in, purchasing of, selling of securities, except a dealer whose performance of these services is solely incidental to the conduct of his business as a dealer and who receives no special compensation for such services..."
There follows then a list of types of professional persons exempt from this requirement, with only paragraph 6 of subparagraph (b) being possibly pertinent to Kury's situation. That paragraph provides as follows:
"6. Any person who does not hold himself out to the general public as an investment advisor and has no more than fifteen
clients within twelve consecutive months in this state."
If Kury fit this category, he would be exempt from the requirement of registration as an investment advisor, as would the corporate Respondent. Kury, however, was established to be engaged in the business of investment advising prior to his registration with the Department on March 2, 1988. It was also established that he was "holding himself out as an investment advisor" as indicated by that representation on his Kury Financial Planning Group letterhead which stated, "Investment Advice and Financial Plans through Kury Investment Advisory Corporation, a Securities and Exchange Commission Registered Advisor."
As shown in Exhibit 13, the Securities Exchange Commission (SEC) has ruled on numerous occasions that the use of stationery employing the term or representation of "investment advisor" has been uniformly considered to be "holding oneself out" to the general public as an investment advisor. (See also Exhibit 12 in evidence.) Because of the similarities in Federal and Florida Securities Law, this is considered persuasive on this point. There was thus no doubt that he was holding himself out as an investment advisor and thus did not meet the exemption provided in paragraph 6 quoted above.
The above Findings of Fact demonstrate that Kury has also violated Section 517.121(1), Florida Statutes, and Rule 3E-600.014(3) and (4), as well as Section 517.12(1), Florida Statutes, in that, while acting on behalf of the Corporation, he and the corporate Respondent failed to maintain certain books and records, specifically, a current trial balance indicating proof of money balances. They also failed to maintain a current record of purchases and sales of all equity securities sold by American through the branch office, a so-called "purchase and sales blotter," as well as a "securities received and delivered blotter." Kury committed these violations acting both in his capacity as branch manager of the branch office of American and as an investment advisor.
It has also been proven that Kury violated Section 517.301(1)(a)2., Florida Statutes, by, in his individual capacity, and acting on behalf of Group, by obtaining money or property by means of an untrue statement of material fact or an omission to state a material fact necessary in order to make the statements made, under the circumstances, not misleading, as detailed in the above Findings of Fact. Specifically, Kury individually and on behalf of Group, in connection with the offer and sale of the notes, obtained money from the investors by means of material omissions (as opposed to outright misrepresentations) concerning the risks involved, as related to the financial posture of Kury in his business and the use to which the funds were to be put. These omissions had a direct relationship to the risk to the investors in getting their money and rate of return back in the future.
Section 517.301, Florida Statutes, provides in relevant part as follows:
"517.301 Fraudulent transactions; falsification or concealment of facts.
It is unlawful and a violation of the provisions of this chapter for a person:
In connection with the offer, sale or purchase of any investment or security, including any security exempted under
the provisions of s. 517.051 and including any security sold in a transaction exempted under the provisions of s. 517.061, directly or indirectly:
* * *
To obtain money or property by means of any untrue statement of a material fact
or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
* * *
For purposes of this section, s. 517.311 and s. 517.312, the term `investment'
means any commitment of money or property principally induced by a representation that an economic benefit may be derived from such
commitment, ..." (Emphasis supplied.)
The sale of the notes in the instance at hand clearly constituted "investments" as defined above. As found and discussed above, the purchasers of the notes clearly considered that they had purchased an investment, and Kury marketed the notes in that context in the course of practicing as an investment advisor and offering financial planning services. This is shown by the fact that his primary inducement was the high rate of return promised and the fact that he employed comparisons with other investment vehicles, such as certificates of deposit, in his sales approach. Thus, he was required to make truthful representations and make material disclosures during the transaction which he did not make, as indicated in the above Findings of Fact.
Additionally, Professor Cohn's opinion, which is persuasive and accepted, established that the notes in fact constituted investments. This Florida definition of "investment" has recently been applied and upheld by the United States District Court for the Southern District of Florida in Commodity Futures Trading Commission and the State of Florida vs. Wellington Precious Metals, Case No. 85-3565, opinion entered July 12, 1988. It is thus clear from the evidence of record and the above Findings of Fact that the notes purveyed by Mr. Kury constituted investments concerning which he failed to make adequate and material disclosures, as delineated in the above Findings of Fact, and he is thus in violation of the above-cited provisions of Section 517.301, Florida Statutes.
His activities also constituted, in part, a particular type of fraudulent scheme prohibited by Section 517.301, Florida Statutes, as a so- called "pyramid" or "ponzi" scheme. This type of scheme occurs when a promoter obtains funds from investors by the promise of a favorable rate of return and continues to sell such "investments" and uses the more recent proceeds of the sales to pay off the earlier notes and/or investors as the principal and interest on the earlier obligations matures, rather than legitimately obtaining- investment for purposes, for instance, of financing business operations, upon which a profit is made, from which the investor's principal and interest can be repaid.
Respondent Kury admitted that he had utilized part of the proceeds from the sale of notes to repay principal and interest to other note-holders. According to the Department's cash flow analysis in evidence, and Mr. Blaker's and Mr. Kury's testimony, during the 18 month period between January 1987 and June 1988, it was established that, but for the new promissory note proceeds in the amount of approximately $745,000, he could not have covered his business operating losses and paid the promissory note interest ($51,000) and promissory note principal ($108,000) coming due to previous note-holders. In other words, but for the new note proceeds, Kury simply could not have had sufficient non- note income or revenue to repay any principal and interest to note-holders.
Further, when specific periods are analyzed and actual note proceeds traced through various bank accounts, it becomes clear that, but for the periodic infusions of new note proceed funds, Kury could not have met approaching principal and interest payments due to individual investors. See Exhibit 9 in evidence. Professor Cohn established that a "ponzi" scheme generally exists when new investor funds are used to pay earlier investors and
that "but for" infusions of new capital, the earlier investors will not be paid off. This is generally coupled with material misrepresentations and/or material omissions regarding the availability of funds or the promoter's ability to repay the investors. In Professor Cohn's opinion, the facts and evidence in this case indicated that the transactions were characteristic of a "ponzi" scheme and that Kury's activities constituted fraudulent transactions of that category. That opinion is unrebutted and is accepted.
In addition, Kury has violated the aforementioned Rule 3E-600.014(3) and (4), Florida Administrative Code, and he has committed prohibited business practices in violation of Rule 3E-600.013(1)(t), Florida Administrative Code, by violating the incorporated Article III, Section 4, of the NASD Rules. This is so because he engaged in private securities transactions (the note sales through Group) without written notification to American, his principal, and has violated Article III, Section 2 of the NASD Rules by the "unauthorized use or borrowing of customer's funds or securities." He has thus violated Rule 3E-600.013(2)(a) and (c), Florida Administrative Code, by borrowing money from a customer and by effecting securities transactions with a customer not recorded on the regular books or records of the dealer which the agent represents.
Rule 3E-600.011(3), Florida Administrative Code, provides in relevant part as follows:
"3E-600.011 Prima Facie Evidence of Unworthiness. Prima facie evidence of unworthiness to transact the business of a dealer, investment advisor, principal, or agent in the State of Florida shall include, but shall not be limited to:
* * *
Evidence of the applicant or registrant previously or presently engaging in any
of the practices outlined in Rule 3E-600.013,"
Rule 3E-600.013, Florida Administrative Code, provides as follows concerning prohibited business practices:
The following are deemed demonstrations of unworthiness by a dealer under section 517.161(1)(h), Florida Statutes, without limiting that term to the practices specified herein:
(p) Violating any rule of a national securities exchange or a national securities association of which it is a member with respect to any customer, transaction or business in the state;
* * *
The following are deemed demonstration of unworthiness by an agent under
section 517.161(1)(h), Florida Statutes, without limiting that term to the practices specified herein:
Borrowing money or securities from a customer;
* * *
(c) Effecting securities transactions with a customer not recorded on the regular
books or records of the dealer which the agent represents, unless the transactions are disclosed to, and authorized in writing by, the dealer prior to the execution of the transactions;
* * *
(g) Engaging in any of the practices specified in subsections (1) ... (p)
Kury admitted violating Subsection (2)(a) cited above, which makes it unlawful to borrow money or securities from a customer. In addition, he has violated Article III, Section 2 of the NASD Rules, incorporated by reference in the above rules, which state, as pertinent hereto:
"Recommendations to customers.
Section 2. In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs... misuse
of customer's funds or securities.
(d) Unauthorized use or borrowing of customer's funds or securities."
Kury has admitted borrowing $2.4 million from at least 50 clients in the course of at least 83 note transactions. As a registered securities associated person and investment advisor, he is charged with having knowledge of and complying with the provisions of Chapter 517, Florida Statutes, and the rules cited and discussed herein. His violation of the above rule alone, because of the cumulative amount of $2.4 million (or $3.1 million, upon maturity, including interest accrued), the number of investors involved, the number of transactions and the extent and frequency of the transactions over at least the last ten years; coupled with his predictable inability to likely every honor these obligations, would alone warrant permanent revocation of his registrations.
This rule is clearly intended to prevent potential conflicts of interest with the registered person's clients. Here, but for Kury's relationship as the investors' financial planner, securities agent and investment advisor, he would not have been aware of their ability to "loan" him money, as he himself admits. He would not have been in a position of trust with them so as to effectively recommend the "loans" to them as allegedly lucrative investments. Further, because, by his own testimony, he was permitted to resign from E. F. Hutton and Associated Planners on account of his making loans from customers, he was additionally on notice as to the illegality of that practice and of the fact that the loans violated industry standards and policies. He thus systematically and consistently breached a trust and duty to the investors he represented by borrowing huge amounts of money on an ongoing basis, knowing that his recommendations effectively were against their interest; because he
knew that he did not have the current or future predictable revenue prospects to permit him to pay off the obligations.
These customers expected to be paid within three months to four years, depending upon the notes' maturity dates. Kury's own best prediction now is that it will require twelve years to repay the investors, if he is allowed to keep his registrations and keep practicing. This case is thus an apt demonstration of the need for, as well as the abuse of, the above-quoted "borrowing rule." The extent of the borrowing, coupled with the material omissions regarding his ability to pay off the loans, was particularly egregious. Kury testified that since 1983 his financial situation was steadily worsening and yet he continued borrowing the funds from customers without disclosing his financial situation or any financial basis for them to consider these to be secure investments. He also misrepresented the fact, in many instances, that the money was going to the business he operated, when in fact he was borrowing the money from the business to meet personal obligations, including a very expensive home and generally extravagant life-style. If he were dealing with these clients in a legitimate fashion, he should have requested personal loans of them instead of corporate loans, with the representation that the proceeds were to be used for business purposes, so that the investors could have evaluated his true intent and the nature of the transaction and attendant risks. During the 18 month period alone from January 1987 through June 1988, Kury borrowed (from Group) $696,990 of the $745,109.48 that the investors loaned to Group by virtue of the corporate notes. Kury sold securities in violation of the registration and anti-fraud provisions of Sections 517.07 and 517.301, Florida Statutes. Any one violation of Section 517.161(1)(d) is grounds for revocation. In this connection, Kury made numerous sales in which he concealed essential and material facts from investors. Likewise, any one violation of Section 517.161(1)(h) is grounds for revocation. In this context, the Respondent demonstrated his unworthiness to transact business as an investment advisor and associated person by his violations of the above rules and by engaging in numerous prohibited business practices. Additionally, his violation of Section 517.161(1)(i), by being, in his capacity as an investment advisor and an associated person, at least $2.3 million in debt and accordingly insolvent, is grounds for revocation. The corporate Respondent has committed the same violations in view of Kury's sole ownership and control and on which behalf he acted. In summary, in view of the violations of Section 517.161(1)(a), (c), (d), (h) and (i) and the other statutes and rules referenced herein, revocation of the Respondent's registrations has been justified since the Department has proven the various allegations of violation by clear and convincing evidence. See Ferris vs. Turlington, 510 So.2d 292 (Fla. 1987) and Slomowitz vs. Walker, 429 So.2d 797, 800 (Fla. 4th DCA 1983).
Finally, although Kury testified that he considered the notes only personal loans and not securities or investments and although he admitted borrowing the money, but testified he was unaware that the Florida securities laws prohibited borrowing from clients, the fact remains that there is no "good faith" exemption for these and the other violations enumerated herein based upon the perpetrator's lack of knowledge of the illegality. The Florida Supreme Court has held that there is no such good faith defense under the Florida securities law. State vs. Houghtaling, 181 So.2d 636 (1966). Scienter, a willful intent to violate the securities laws, is not a requisite to guilt, and the absence of such an intent is not a defense. A general intent, that is, to merely do the acts with which the person is charged, is sufficient. Kury clearly had the general intent to commit the aforementioned acts, and his lack of knowledge of the illegality involved, concerning some of the violations, is irrelevant. Merrill Lynch vs. Byrne, 320 So.2d 4326 (Fla. 3rd DCA 1975).
Accordingly, it is concluded that the violations charged, as found, discussed and concluded above, have been established and that, in view of their egregious nature, a substantial penalty is warranted. However, in view of the substantial wrongs committed against the interests of the investors, a way should be found to make the investors whole insofar as possible.
Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record, the candor and demeanor of the witnesses and the pleadings and arguments of the parties, it is, therefore
RECOMMENDED that a Final Order be entered by the Department of Banking and Finance finding the, Respondents guilty as charged, and in the above particulars, and that the registrations of the Respondents as associated person and investment advisors be revoked, provided however, that such revocation should be suspended and held in abeyance contingent on the Respondent David John Kury, under the close supervision and direction of the Department, embarking upon a plan whereby, by continued practice under his registrations, he will repay the principal and interest due all the investors involved in this proceeding within a time certain, as directed by the Department. That plan should include creation of an escrow or trust account, managed by an independent escrow agent, such as a bank, into which, pursuant to an approved plan and schedule, a substantial portion of revenues earned by Kury in the practice as an associated person, investment advisor and any other registration pursuant to the regulation of the Department, shall be deposited for the use and benefit of the subject investors. This arrangement should continue until the investors have been fully repaid principal and interest due them. Should the Respondents, David John Kury and Kury Investment Advisory Corporation, refuse to accept such an arrangement or violate its terms and conditions, their registrations should be immediately revoked.
DONE and ENTERED this 9th day of January, 1989, in Tallahassee, Florida.
P. MICHAEL RUFF 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 9th day of January, 1989.
APPENDIX TO RECOMMENDED ORDER, CASE NO. 88-3419
Petitioner's Proposed Findings of Fact: 1-3. Accepted.
4. Rejected as not constituting a Finding of Fact.
5-19. Accepted.
Rejected as subordinate to the Hearing Officer's Findings of Fact on this subject matter and to some extent not supported by the evidence of record.
Accepted.
Accepted in part but subordinate to the Hearing Officer's Findings of Fact on this subject matter.
23-26. Accepted.
Respondent's Proposed Findings of Fact: 1-8. Accepted.
9-14. Constitute statements of issues presented and recitation of evidence presented and are not Proposed Findings of Fact.
COPIES FURNISHED:
Reginald R. Garcia, Esquire Charles E. Scarlett, Esquire Office of Comptroller
The Capitol
Tallahassee, Florida 32399-0350
Philip J. Snyderburn, Esquire SNYDERBURN, RISHOI & SWANN
Suite 240
280 West Canton Avenue Winter Park, Florida 32789
Donald A. Rett, Esquire MANG, RETT & COLLETTE, P.A.
Post Office Box 11127 Tallahassee, Florida, 32302-3127
Honorable Gerald Lewis Comptroller
State of Florida The Capitol
Tallahassee, Florida 32399-0350
=================================================================
AGENCY FINAL ORDER
========================================+========================
STATE OF FLORIDA DEPARTMENT OF BANKING AND FINANCE
DIVISION OF SECURITIES AND INVESTOR PROTECTION
STATE OF FLORIDA, DEPARTMENT OF BANKING AND FINANCE, DIVISION OF SECURITIES AND INVESTOR
PROTECTION, Administrative Proceeding No.: 906R-S-6/88
vs.
Petitioner,
DOAH CASE NO. 88-3419
DAVID JOHN KURY and KURY INVESTMENT ADVISORY CORPORATION,
Respondents.
/
FINDINGS OF FACT, CONCLUSIONS OF LAW AND FINAL ORDER REVOKING RESPONDENTS' SECURITIES ASSOCIATED PERSON AND INVESTMENT ADVISER
REGISTRATIONS UNDER SECTION 517.12, FLORIDA STATUTES
The Comptroller of the State of Florida, GERALD LEWIS, as administrative head of the Florida Department of Banking and Finance, Division of Securities and Investor Protection, (hereinafter "the Department") , being authorized and directed to administer the provisions of Chapter 517, Florida Statutes, the Florida Securities and Investor Protection Act, and the duly promulgated rules thereunder, after due consideration and review of the complete record of this proceeding hereby revokes Respondents' securities associated person and investment adviser registrations under Section 517.12, Florida Statutes (1987). In accordance with Section 120.59(1), Florida Statutes, and Rule 25-5.405, Florida Administrative Code, the grounds for the issuance of the Final Order are as follows:
FINDINGS OF FACT
On June 28, 1988, the Department issued an "Immediate Final Order Of Summary Suspension Of Registration As An associated Person and Investment Adviser" against Respondents. On the same date, the Department simultaneously issued an "Administrative Charges and Complaint With Notice of Rights" based on the findings of the aforementioned Immediate Final Order.
Respondents petitioned through counsel for an expedited formal administrative proceeding, which was held on August 15 and 16, 1988, in Pensacola, Florida before hearing Officer P. Michael Ruff. Subsequent to the hearing, both parties submitted proposed recommended orders to the hearing officer for his review and consideration. On January 9, 1989, Hearing Officer Ruff issued his Recommended Order to the Department containing his recommended
findings of fact, conclusions of law, and penalty. The Recommended Order, which is attached hereto and incorporated herein, included essentially all of the Department's proposed findings of fact, conclusions of law, and penalty.
However, the recommended penalty of revocation was conditioned on the revocation being "suspended and held in abeyance contingent on Kury establishing a plan to utilize his existing registrations to pay investors. Neither party submitted written exceptions to the recommended order.
The Department hereby adopts in this Order all of the findings of fact contained in the Hearing Officer's Recommended Order as detailed in paragraphs 1 through 17 thereof.
CONCLUSIONS OF LAW
The Department hereby adopts in this Order all of the Conclusions of Law contained in the Hearing Officer's Recommended Order as detailed on pages 15 through 42 thereof, including, by way of illustration and not limitation, the following:
The administrative hearing held was a formal proceeding pursuant to Section 120.57(1), Florida Statutes, on the issue of the potential revocation or other penalty regarding Respondents' registration; not a proceeding to contest the Summary Suspension Order;
Respondent Kury, individually and/or acting on behalf of the Kury Investment Advisory Group (hereafter "Group") and/or the Kury Investment Advisory Corporation, has violated Section 517.07, Florida Statutes, by engaging in the sale of personal and corporate promissory notes which constitute unregistered securities;
Respondent Kury has violated Section 517.12 (1), Florida Statutes, by engaging in the business of a broker/dealer through "Group" without being lawfully registered with the Department. Kury has violated that section by acting as an "associated person" on behalf of Group by engaging in the offer to sell and effecting the sale of the unregistered securities on behalf of Group without being lawfully registered as an associated person on behalf of Group;
Respondent Kury has also violated Section 517.12(4), Florida Statutes, by acting on behalf of the Corporation and engaging in the business of an investment adviser, as has the corporate Respondent, prior to the time each was lawfully registered with the Department to engage in such activities;
Respondent Kury has also violated Section 517.12(4) , Florida Statutes, by acting on behalf of the Corporation and engaging in the business of an investment adviser, as has the corporate Respondent, prior to the time each was lawfully registered with the Department to engage in such activities;
Respondent Kury violated Section 517.301(1)(a)2., Florida Statutes, by, in his individual capacity, and acting on behalf of Group, in connection with the offer, sale or purchase of any investment or security) obtaining money or property by means of an untrue statement of material fact or an omission to state a material fact necessary in order to make the statements made, under the circumstances, not misleading;
The sale of the notes in the instance at hand clearly constituted "investments" as defined by Section 517.301(2), Florida Statutes;
Kury's activities also constituted, in part, a particular type of fraudulent scheme prohibited by Section 517.301, Florida Statutes, a so-called "pyramid" or "ponzi" scheme;
Kury has violated Rule 3E-600.014(3) and (4), Florida Administrative Code, and he has committed prohibited business practices in violation of Rule 3E-600.013(1)(p), Florida Administrative Code, by violating the incorporated Article III, Section 4, of the NASD Rules by engaging in private securities transactions (the note sales through Group) without written notification to American Capital Equities, his principal; and has violated Article III, Section 2, of the NASD Rules by the "unauthorized use or borrowing of customer's funds or securities." He has thus violated Rule 3E-600.013(2)(a) and (c), Florida Administrative Code, by borrowing money from a customer and by effecting securities transactions with a customer not recorded on the regular books or records of the dealer which the agent represents. Kury has admitted borrowing
$2.4 million from at least 50 clients in the course of at least 83 note transactions;
Respondent demonstrated his unworthiness to transact business as an investment advisor and associated person by his violations of the above rules and by engaging in numerous prohibited business practices; and
Revocation of the Respondents' registrations is justified since the Department has proven these significant violations by clear and convincing evidence.
PENALTY
Essentially, the Hearing Officer has suggested a suspended revocation." His recommended penalty states:
RECOMMENDED that a Final Order be entered by the Department of Banking and Finance finding the Respondents guilty as charged, and in the above particulars and that the registrations of the Respondents as associated person
and investment advisors he revoked, pro- vided however, that such revocation should be suspended and held in abey- ance contingent on the Respondent David John Kury, under the close supervision and direction of the Department, embark- ing upon a plan whereby, by continued practice under his registrations be
will repay the principal and interest due all the investors involved in this proceeding within a time certain, as directed by the Department. That plan should include creation of an escrow or trust account, managed by an indepen- dent escrow agent, such as a bank, which, pursuant to an approved plan and schedule, a substantial portion of revenues earned by Kury in the practice as an associated person, investment advisor and any other registration
pursuant to the regulation of the Department shall be deposited for the use and benefit of the subject inves- tors. This arrangement should continue until the investors have been fully repaid principal and interest due them. Should the Respondents, David John Kury and Kury Investment Advisory Corpora- ion, refuse to accept such an arrange- ment or violate its terms and conditions, their registrations should be immediately revoked. (emphasis added) R.O. page 43.
Based upon a review of the complete record, be Department accepts and adopts the following portion of the recommended penalty:
RECOMMENDED that A Final Order be entered by the Department of Banking and Finance finding the Respondents guilty as charged, and in the above particulars, and that the registrations of the Respondents as associated person and investment advisor be revoked.
Based upon a review of the complete record, the Department rejects the remainder of the recommended penalty, which suggests conditions for Kury to continue to participate in Florida's securities industry with a "suspended revocation." This is effectively a "restriction" of registration which is authorized by Section 517.161(1), Florida Statutes. This penalty is rejected as inconsistent with the Hearing Officer's and the Department's findings of fact and conclusions of law, inconsistent with the legislative intent and judicial interpretation of Chapter 517, not in the best interest of existing and potential investors, impractical, and beyond the Department's resources.
Section 120.57(1)(b)10., Florida Statutes, provides that "the agency may adopt the recommended order as the final order of the agency ... The agency may accept the recommended penalty in a recommended order, but may not reduce or increase it without stating with particularly its reasons therefor in the order, by citing to the record in justifying the action." The Florida Supreme Court recently interpreted this provision as applied in a similar licensing dispute there the agency increased the hearing officer's recommended penalty. In DPR v. Bernal, 531 So.2d 967 at 968 (Fla. 1988) the Court ruled that an agency can modify a hearing officer's recommended penalty by complying with "the statute's requirement of stating valid reasons and citing to the record to justify its action." 531 So.2d at 968. The Court reaffirmed the importance of agency "expertise and discretion," and ruled that "reviewing courts cannot substitute their judgement for an agency's determination if valid reasons for the agency's order exist in the record and reference is made thereto." Id.
The Florida Supreme Court has also determined the applicable standard by which an agency may impose a particular penalty: "So long as penalty imposed [by administrative agency] is within the permissible range of statutory law, appellate court has no authority to review the penalty unless agency findings are in part reversed." Florida Real Estate Commission v. Webb, 367 So.2d 201 (Fla. 1978).
The Department accepts the hearing officer's recommended penalty of revocation. To the extent that the Department's rejection of the recommended "conditions" of suspended revocation constitutes a "modification" or, an "increase" of the penalty, the particular reasons and record citations to support the penalty imposed by the Department are stated in Paragraphs 11 through 16 below.
The recommended suspended revocation is inconsistent with the Hearing Officer's and the Department's findings of fact and conclusions of law, including:
Kury was a registered associated person with the Department; a registered "principal" with the National Association of Securities Dealers (NASD); a branch manager of a securities broker/dealer; a principal and investment advisor with the Kury Investment Advisory Group; a registered associated person in 15 other states; an experienced and recognized financial planner; and a registered insurance agent in Florida. Hearing Officer's Recommended Order Pages 5-8. 1/ Accordingly, as a registered securities associated person and investment advisor, Kury is charged with having knowledge of, and complying with, Chapter 517 Florida Securities, and Florida Administrative Code Rules. Likewise, as a financial planner, insurance agent, associated person and investment advisor, Kury had an obligation and duty to have knowledge of and adhere to professional and industry standards and codes of conduct, all of which prohibited the various violations. Thus, he had a special duty and fiduciary responsibility, which he breached, to act only in the best interest of his investors and clients.
The Department established by clear and convincing evidence that Kury and the Kury Financial Planning Group sold personal and corporate notes to 50 Investors with a protected principal and interest total indebtedness of $3.1 million. The notes were offered to clients of his financial planning, investment advisory business or securities broker/ dealer firm as investment alternatives to certificates of deposit and other "passive" investments, with the primary inducement being higher rates of return on the notes. R.O. pages 8-
It is clear that Kury was intimately familiar with each client's financial situation and that he systematically built up their confidence and trust In him before he suggested they loan him money.
During the last 13 years, Kury utilized the proceeds of the notes to pay business expenses for himself and the corporations he controls, including financing his residence at a cost of approximately $1 million. R.O. page 10.
Kury and the Kury Investment Advisory Corporation engaged in the business of an "Investment advisor" prior to lawful registration. R.O. page 10.
The notes Kury sold are securities and/or investments. They were fraudulently sold without disclosing to clients material facts which were necessary for the purchasers to properly evaluate the risks of the investment and for them not to be misled. Statements made by bury in conjunction with the sales to the investors were such that the omitted material facts were necessary in order to prevent these investors from being misled. R.O. page 11. Kury omitted to tell investors at least eleven material facts, which are specifically enumerated in Paragraph 14 of the Recommended Order.
Kury failed to inform investors that he was submitting inaccurate financial statements to banks. Kury's explanation that he omitted this
information in order to maintain the confidentiality of investors is illogical and self-serving. R.O. page 13.
Kury's sale of notes constituted borrowing money from client, which is a prohibited business practice under Florida law and a violation of industry rules. R.O. page 14.
Kury's activities constituted, at least in part, the operation of a "ponzi scheme" and, as such, posed an immediate and serious threat to investors and potential investors. Kury's +2.4 to 3.1 million liability to investors vastly exceeds the assets available to satisfy the note obligations. Kury has admitted that he and his affiliated companies are insolvent and are currently unable to meet the financial obligations represented by the notes. R.O. page 15.
The Respondents fraudulently sold 2.4 million worth of notes to 50 investors during 83 transactions, each constituting the sale of unregistered, non-exempt securities through an unregistered entity, a felony under Florida law. The notes were determined to be securities because "notes" and "evidence of indebtness" are defined as securities in the statute, and since not exempt from registration, strongly presumed to be securities. The notes, moreover, are securities because they are within the general nature of investments, rather than commercial transactions. Thus, the "economic realities" of the note transactions -- including that the notes were marketed as investments, sold to numerous investors, sold without collateral, and primarily purchased because of the above-market interest rates -- establishes that the notes were securities and that they are required to be registered and accompanied by appropriate disclosures. R.O. pages 18-31.
Among his material non-disclosures, Kury failed to tell his clients: The risks associated with the notes; how the money would be used; that he had a
$2.3 million negative net worth; that he had been asked to resign from two securities broker/dealer firms because of his practices of borrowing from customers; that his personal and group life insurance policies were inadequate if needed to pay note obligations; that his loan applications to banks included inaccurate financial statements; that he had submitted an inaccurate financial statement to the Department in connection with a bank charter application; and that he was using new note proceeds to repay principal and interest to existing investors. Through these omissions of material fact and by misrepresenting that the note proceeds were going to operate a business enterprise, Respondents obtained investors' money by means of untrue statements and omissions of material facts. This constitutes fraudulent activity specifically forbidden under Florida's securities laws. R.O. pages 11-13, 33 and 40.
As illustrated by this summary of the incorporated findings of fact and conclusions of law, Respondents have seriously violated numerous securities rules and statutes. In particular, Kury's activities included illegal and fraudulent sales of unregistered, non-exempt securities, sales of securities by an unregistered entity, operation of a Ponzi scheme, and significant and illegal borrowing from his customers. These practices, were systematic, ongoing, and progressively escalating at the time of the Department's investigation. They constitute the most serious violations of Florida's securities laws. The note transactions resulted in investors parting with substantial sums of money without the benefits of appropriate disclosures or regulatory scrutiny. Furthermore, the hearing officer has determined that the legations have been proven by "clear and convincing evidence." Thus, it is inconsistent to allow Kury to participate in the securities industry, even with restrictions. These serious violations form the overwhelming basis for revocation under five
independent statutory grounds. Section 517.161(1) (a), (c), (d), (h), and (i), Florida Statutes (1987) By Kury's best prediction and the hearing officer's determination, it would take Kury 12 years to repay investors. The investors loaned him the money to begin with to achieve relative short-term liquidity with note maturities between 3 months and 4 years. Considering the number of violations, the seriousness of those violations, and the extent of Kury's financial difficulties, allowing him to sell securities and render investment advice is simply inconsistent with the findings and conclusions of this proceeding. The conditional "Suspended revocation" would effectively be a mere "restriction," the least severe disciplinary option (after suspension and revocation) provided under Section 517.161(1), Florida Statutes. As the hearing officer concluded, even one violation of any one of the five statutory provisions is grounds for revocation. His analysis and conclusions of law regarding the borrowing rule are most instructive and persuasive:
the extent of the borrowing, coupled with the material omissions regarding his ability to pay off the loans, was particularly egregious. Kury testified that since 1983 his financial situation was steadily worsening and yet he continued borrowing the funds from customers without disclosing his financial situation or any financial basis for them to consider these to be secure investments ... If he were dealing with these clients in a legiti- mate fashion, he should have requested personal loans of them instead of corporate loans, with the representa- tion that the proceeds were to be used or business purposes, so that the investors could have evaluated his true intent and the nature of the transac- tion and attendant risks. During the 18-month period alone form January 1987 through June 1988, Kury borrowed (from Group) $696,990 of the $745,109 that the investors loaned to Group by virtue of the corporate notes. Kury sold securities in violation of the regis- ration and ant-fraud provisions of Sections 517.07 and 517.301, F.S.
In this connection, Kury made numerous sales in which he concealed essential and material facts from investors
in this context, the Respondent demonstrated his unworthiness to transact business as an investment and associat- ed person by his violations of ha
above rules and by engaging in numerous prohibited business practices. (empha-
515 added) R.O. pages 40-41.
The recommended penalty is not in the best interests of current or potential clients or investors. While the Department shares the hearing officer's concern for the 50 investors victimized by the Respondents' actions,
the recommended conditional plan, assuming it can be implemented, does not provide for this protection. The recommendation IS silent on whether Investors would be a party to the formulation of the plan or be bound by the decisions of other investors who may agree or disagree with it. Many of the investors are contemplating, or have exercised, options including filing civil lawsuits, to attempt to recover their losses. This individual freedom of choice, rather than a Department-imposed plan, represents the more viable course. Moreover, the Department has an obligation to those potential clients or investors that Kury would have to presumably attract and convince to utilize his services. Kury has conclusively demonstrated his unworthiness to provide those services.
The recommended penalty is totally inconsistent with legislative intent and judicial interpretation of Florida's securities laws. To allow Kury, with the violations that have been proven against him, to remain in practice after it has been determined by clear and convincing proof that he no longer meets the regulatory criteria and standards to sell securities and render investment advice would create an unacceptable double standard for registration of securities professionals. An applicant to the Department with Kury's violations would certainly be denied registration pursuant to the same criteria detailed in Section 517.161(1), Florida Statutes, that requires Kury's revocation.
The hearing officer concluded as a matter of law that: [t]he Florida Securities Statute,
Chapter 517, is remedial in purpose. Its enactment is predicated on the inherent police power of the state authorizing it to protect citizens from fraudulent or insufficiently disclosed and explained investment schemes.
Being a remedial statute, it should be accorded liberal construction in order to best carry out the public purpose of protecting its consumers against fraud and securities transactions. R.O.
pages 19-20 citing McElfresh v. State, 9 So.2d 277 (Fla. 1942)
The Florida Supreme Court has recently affirmed the Department's discretion to interpret and enforce Chapter 517. While considering the Department's authority to seek temporary injunction without notice in securities fraud cases, the Court concluded that the Department "should not be unduly restricted" in its enforcement of Florida's securities laws. The Court stated:
The legislature enacted chapters 517 and 494 to protect the public from fraud and deceit in the investment in securities. The laws are especially concerned with inexperienced investors who may be duped by unscrupulous brokers. Because of the statutes' public importance, the state should not be unduly restricted in its attempt to enforce them. (emphasis added)
State v. Beeler, 530 So.2d 932 at 934
(Fla. 1988)
Similarly, Florida law provides the Department necessary discretion, when justified by the record, to determine the appropriate disciplinary penalty to impose upon a licensee who has violated the securities laws.
Sound public policy requires absolute revocation of Kury's license to protect Florida's investing public. By unfortunate necessity caused by a special vulnerability to investment fraud, Florida has been required to enact and enforce some of the toughest securities laws in the country to protect its often elderly public and to maintain the integrity of its industry. Legislative intent and underlying public policy regarding Florida's securities laws support the Department's decision to permanently revoke Kury's registration. Chapter
88-187, Laws of Florida contains an explicit statement of legislative intent regarding Chapter 517. It is relevant to this case in at least three respects. First, it restates the often-recognized purpose of Chapter 517 as the protection of investors in "securities offerings and other investment transactions." See,
, Nichols v. Yandre, 151 Fla. 87, 9 So.2d 157 (1942); McElfresh v. State, 151
Fla. 140, 9 So.2d 277 (1942); State by Knott v. Mince, 119 Fla. 515, 160 So.670
(1935); Rudd v. State, 386 So.2d 1216 (Fla. 5th DCA 1980); O'Neill v. State, 366 So.2d 699 (Fla. 4th DCA 1976); Edwards v. Trulis, 212 So.2d 593 (Fla. 1st DC 1968) and Leithauser v. Harrison, 168 So.2d 95 (Fla. 2nd DCA 1964) Second, the bill contains explicit directions to the Courts that the provisions of Chapter
517 are to be construed to require full and fair disclosure of all matters material to an investor's evaluation of a securities offering or other investment transaction. Finally, the law directs construction of Chapter 517 "to impose the standards provided by law on all those seeking to participate in the state's securities industry through registration as securities dealers, investment advisors, or their associated persons." These provisions have now been codified as Section 517.1205, Florida Statutes (1988 Supp.).
Other recent revisions of Florida's securities laws also demonstrate that legislative intent and public policy considerations require strict enforcement of the securities laws for consumer protection. In response to a series of investment frauds in Florida during the early 1980's, the Florida Comptroller appointed, in June of 1985, the "Comptroller's Task Force on Securities Regulation." Headed by former Florida Governor Reubin Askew, this panel of industry leaders, law enforcement officials, and citizens heard testimony throughout the state from victims of fraud and from experts on securities regulation. In its Report of March 17, 1986, the Task Force concluded that Florida's large elderly population, its proximity to off-shore banks, and the mobility of its population combined to make the state particularly vulnerable to investment fraud. To combat this problem, the Task Force recommended (1) strict enforcement of the Anti-Fraud provisions of Chapter 517; (2) improved standards for participants in the state's securities industry; and (3) greater public awareness of the danger of investment fraud. The Task Force made 48 specific recommendations including numerous statutory revisions. These recommendations were adopted by the Legislature as the "Securities Industry Standards Act of 1986," Chapter 86-85, Laws of Florida (1986). The Act substantially amended Chapter 517 to give the Department additional regulatory, administrative and civil enforcement authority.
Since virtually all of the Task Force's recommendations were adopted by the Legislature, the Task Force Report is a strong indication of legislative policy. Those recommendations included increasing the criminal penalties for violations of Section 517.301, authorizing administrative fines, and creation of an anti- fraud trust fund to facilitate prosecution of this offense. Of particular importance for this case, the Task Force recommended at Page 27 of its Report
that Section 517.301 be revised "to establish a well-defined framework for enforcement of the anti-fraud provisions of Chapter 517" by broadening the definition of "investment." As explained on Pages 70 and 83-84 of the Report, the expansion of Section 517.301 to prohibit fraud in connection with "investments" in addition to "securities" was made by the Legislature in 1984 to remove the technical defense that a particular investment scheme, though clearly fraudulent, did not involve the sale of a "security." See, e.g. Yeomans v.
State, 452 So.2d 1011 (Fla. 3rd DCA 1984). Revisions of Section 517.301 In 1984 and again in 1986 to remove defenses in actions for violation of that section are particularly relevant since the hearing officer specifically concluded as a matter of law that Kury's sale of notes constituted fraudulent sales of securities and "investments" under Section 517.301(2), Florida Statutes. R.O. pages 34-35. The 1986 revisions of the statutes governing the registration of professionals under Chapter 517, moreover indicate a legislative policy of strict standards for such registration. Those revisions required federal registration and insurance by the Securities Investor Protection Corporation (SIPC) as preconditions for registration in Florida and permitted the Department to suspend or restrict any registrant charged in a pending enforcement action or criminal prosecution involving conduct that would authorize denial or revocation. See Sections 8 and 10, Ch. 86-85, Laws of Florida.
The policies of the Department and of the state with regard to enforcement of the anti-fraud statutes and standards of conduct to be imposed on securities dealers are clear. In light of the state's vulnerability to securities fraud and its enunciated desire to impose strict standards of conduct on its securities industry, Florida law should never be interpreted to allow securities dealers to escape the consequences of their failure to disclose material information to investors. See, Hutton v. Rousseff, 14 FLW 3 (Jan. 6, 1988) Legislative history and intent, as well as clear public policy considerations provide the specific reasons to reject the conditional aspects of the recommended penalty.
The recommended penalty would be impractical to formulate and implement and it is beyond the Department's resources to effectuate. Assuming the plan's viability, it would be practically impossible for the Department to financially or effectively monitor, much less ensure compliance with the recommended conditional registration. It will take at least 12 years to earn enough income to repay Kury's 50 victims their principal. For reasons discussed earlier, is unlikely that all 50 investors would be in agreement with such a plan. It is, moreover, unlikely that a Department "established and directed plan" would be in the best interest of investors who can individually pursue other options to attempt to recoup their losses. It is also clear that for such a plan to even possibly be successful, a full-time regulator or court-appointed receiver would have to literally move in with Kury and monitor every transaction and financial decision. Without such a person, which would be financially prohibitive and thus counter-productive to the exclusive rationale for the recommended plan of repaying investors, such an effort would clearly fail. The Department currently regulates 120,000 associated persons (up 300% since 1981), 2,200 broker/dealers (up 150% since 1901), and 650 investment advisors (up 300% since 1981). This must be accomplished with only 40 securities examiners. The Department simply cannot have one or more examiners monitor, supervise, and ensure compliance with such a plan to the exclusion of regulating the rest of the securities industry. The plan is also impractical for another obvious reason. Subsequent to issuance of the hearing officer's recommended order, Kury was charged with 102 state criminal charges arising out of the activities that gave rise to the state's administrative action. (Circuit Court of Escambia County, Florida, Case No.: 89-1474-Div.B, filed March 17, 1989). Thus, under
Section 517.161(6), this pending criminal proceeding alone constitutes additional grounds for the Department to suspend or restrict Kury's registrations.
FINAL ORDER
Based upon an extensive review of the complete record -- including testimonial evidence from 22 witnesses, documentary evidence consisting of 30 exhibits, and the hearing officer's recommended order -- and upon the foregoing findings of fact, conclusions of law, having therein specific reasons and factors for partial rejection of the hearing officer's recommended penalty, it is hereby ordered that the Respondents' associated person and investment advisor registrations are hereby REVOKED. As such, Kury, the Kury Financial Planning Group, the Kury Investment Advisory Corporation and any other entity controlled or operated by Kury, are prohibited from rendering investment advice or engaging in any securities activities or transactions that require registration pursuant to Chapter 517, Florida Statutes.
DONE AND ORDERED in Tallahassee, Leon County, Florida this 10th day of April, 1989.
GERALD LEWIS as Comptroller of the State of Florida and as Head of the Department of Banking and Finance
ENDNOTE
1/ Throughout this Final Order, references to the Hearing Officer's Recommended Order will be designated "RO page(s) " or "paragraph(s)."
NOTICE OF RIGHT TO JUDICIAL REVIEW
NOTICE IS HEREBY PROVIDED that a party who is adversely affected by this Final Order may obtain judicial review of foregoing final agency action in accordance with Section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules of Appellate Procedure and may be commenced by filing one (1) copy of a Notice of Appeal with the Clerk of the Department of Banking and Finance, The Capitol, Legal Section, Tallahassee, Florida 32399-0350 and a second copy, accompanied by prescribed filing fees, with tone District Court of Appeal, First District, Martin Luther King Jr. Boulevard at Pensacola and West Jefferson Streets, Tallahassee, Florida 32301 or with the District Court of Appeal in the appellate district where the party resides. Such Notice of Appeal must be filed within thirty (30) days of rendition of the order to be reviewed in order to be timely. The Respondents may apply to the Department for a stay of its order or, in proceeding for judicial review under Section 120.68, Florida Statutes, request supersedeas from the Court. Respondents are notified, however, that the Department will oppose supersedeas of its order in this matter under the provisions of Section 120.68(3), Florida Statutes, as constituting a "probable danger to the health, safety, or welfare of the state." NOTICE IS FURTHER PROVIDED that Section 120.57(1)(b)10., Florida Statutes, authorizes the award of costs and reasonable attorneys' fees to the Department if the reviewing
court finds the appeal to be "frivolous, meritless, or an abuse of the appellate process."
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that true and correct copies of the foregoing have been served by U.S. Mail to Philip Snyderburn, Esquire, 280 West Canton ,40, Winter Park, Florida 32789; David J. Kury, P.O.Box 12069, Pensacola, Florida 32590- 2069; Michael Ruff, Hearing Officer, Division of Administrative Hearings, 1230 Apalachee Parkway, The DeSoto Building, Tallahassee, Florida 32399-1550 this 10th day of April, 1989.
CHARLES L. STUTTS
General Counsel
Office of the Comptroller Department of Banking of Finance Legal Section, The Capitol Tallahassee, FL 32399-0350
(904) 488-9896
| Issue Date | Proceedings |
|---|---|
| Jan. 09, 1989 | Recommended Order (hearing held , 2013). CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| Apr. 10, 1989 | Agency Final Order | |
| Jan. 09, 1989 | Recommended Order | Respondent shown to have violating numerous provisions of above authority by borrowing from clients under guise of selling "notes" to clients as "investments" restitution |
MICKIE A LEONARD, AS TO RAYMOND A. HENSLER vs DEPARTMENT OF BANKING AND FINANCE, 88-003419 (1988)
MICKIE A LEONARD, AS TO JAMES M. MCLAUGHLIN vs DEPARTMENT OF BANKING AND FINANCE, 88-003419 (1988)
DEPARTMENT OF BANKING AND FINANCE vs. TIMOTHY GIBBONS, 88-003419 (1988)
DALE VEITCH vs OFFICE OF FINANCIAL REGULATION, 88-003419 (1988)
