STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BANKING AND )

FINANCE, )

)

Petitioner, )

)

vs. ) CASE NO. 90-3699

)

EDWARD GRIFFIN CAPLINGER, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, K. N. Ayers, held a formal hearing in the above- styled case on July 9, 1991, at Tampa, Florida.

APPEARANCES

For Petitioner: Stephen M. Christian, Esquire

1313 N. Tampa Street, Suite 615

Tampa, Florida 32602-3394

For Respondent: Lori Brown, Esquire

Post Office Box 3288 Tampa, Florida 33601

STATEMENT OF THE ISSUES

Whether the securities license of Edward Griffin Caplinger should be revoked or otherwise disciplined for violation of provisions of Chapter 517, Florida Statutes.

PRELIMINARY STATEMENT

By Administrative Complaint dated March 21, 1990, the State of Florida, Department of Banking and Finance, Division of Securities, Petitioner, seeks to discipline the securities licenses of Edward Griffin Caplinger, Respondent, Berachah Securities and several other Respondents. As grounds therefor, it is alleged that Respondents sold unregistered securities, sold securities to investors who did not meet suitability requirements, made misrepresentations to these clients and engaged in a scheme to defraud clients. All Respondents other than Caplinger were dismissed prior to the commencement of these proceedings.

At the hearing, Petitioner called six witnesses, Respondent called two witnesses, including himself, and 23 exhibits were admitted into evidence. Proposed findings have been submitted by the parties. Proposed findings submitted by Petitioner are accepted. Those proposed findings not included below were deemed unnecessary to the results reached.

Proposed findings submitted by Respondent are not numbered. However, unnumbered paragraph 1 is accepted, deleting exception to Eiardi; paragraph 2 is rejected; paragraph 3 is rejected insofar as it indicates Respondent did not assure those investors that the general partner would repurchase their shares; paragraph 4 is rejected; and paragraph 5 is rejected.

Based upon the evidence submitted I submit the following findings of fact.

FINDINGS OF FACT

1. At all times relevant hereto Respondent was licensed by Petitioner as a securities dealer. He acquired a 7 series license in 1985, a 63 series license while working at Berachah Securities Corporation (Berachah) and a 24 series license in 1990.

   
   

2. Respondent was registered as a securities dealer at Berachah commencing in January 1988, and he remained so registered until he resigned in October 1989.

   
   

3. Sheldon Thorne was president of Berachah during the time Respondent was registered there. Thorne was also president of First Financial Consultants of Florida, Inc., which office was co-located with Berachah. Thorne had set up several private limited partnerships, and Berachah was peddling units in these partnerships to the public. Among those partnership interests sold by Respondent and other Berachah registrants were Family Bowling Centers Ltd., Pines of Northdale Ltd. and Financial Centers Ltd.

   
   

4. These limited partnership interests are securities within the meaning of Chapter 517, Florida Statutes, and have never been registered with Petitioner. (stipulation by the parties)

   
   

5. Thorne was the president of the corporations acting as general partners in these limited partnerships. Thorne also had final approval authority to accept investors in these limited partnerships.

   
   

6. Family Bowling Centers Ltd. was a private limited partnership established to construct and operate three family bowling centers, two of which were to be built in Florida and Georgia. Thorne had earlier formed a similar limited partnership in North Carolina which was successful, and he contemplated similar success with this new limited partnership. At the time these securities were being sold, no financing had been secured, and the success of the project hinged, among other things, on adequate financing.

   
   

7. Using pro forma figures provided by Brunswick Corporation, the manufacturer of bowling lanes and automatic pin setting equipment, Thorne calculated a 15 percent return would be made on investors money invested in this project. Prospective clients were told this was the return to be expected from this investment and that payments would be made monthly. Shortly after Family Bowling Centers Ltd. was fully subscribed and monthly payments to investors commenced, funds dried up, payments stopped, the partnership went into default and investors lost all of their investment less the monthly payments previously received.

   
   

8. Pines of Northdale Ltd. was a private limited partnership established to acquire an existing 66,400 square feet shopping center in Tampa, Florida, and to contract for leasing and management of this shopping center. This partnership would be fully subscribed when 700 units with a unit value of $1000

   are sold. Minimum purchase pursuant to the offering memorandum (Exhibit 20) is

   10 units. This project was also to be highly leveraged with 90 percent of the purchase price in the form of a mortgage on the property. Shortly after these partnership interests were fully subscribed, the cash flow was insufficient to make required payments, the mortgage was foreclosed and investors lost their investments in this limited partnership.

   
   

9. Financial Center Ltd. was a private limited partnership established to acquire land in northwest Hillsborough County and erect thereon a two-story office building containing 25,000 square feet of leasable office space. The offering memorandum contemplated the sale of 40 units at $32,500 per unit to generate $1,300,000 less fees and expenses. The land was to be purchased from a partnership which included Thorne for $650,000 to be paid from the proceeds of the offering and a construction loan to be obtained for constructing the office building. No commitment for the loans had been obtained when the limited partnership interests were sold. This partnership soon ran into financial difficulties, and investors lost what they had paid for their units.

   
   

   SUITABILITY REQUIREMENTS

   
   

10. Suitability standards for purchases of these limited partnerships are contained in the offering memorandums. (Exhibits 19, 20 and 21) To qualify as an "accredited investor" as defined in Rule 501(a) of Regulation D as promulgated by the United States Securities and Exchange Commission, the investor, in order to be suitable to purchase units in Family Bowling Centers Ltd., must have a net worth exceeding $1,000,000 or whose gross income in each of the two proceedings years and expected income in the current year exceeds

    $200,000. No more than 35 of these units can be sold to nonaccredited investors who qualify if they can establish a net worth of not less than $250,000 or the combination of net worth of not less than $200,000 and taxable income for the current year of at least $100,000.

    
    

11. Units in Family Bowling Centers Ltd. were offered at $100,000 per unit. However, partial units were offered by Berachah. To qualify more potential investors, Thorne came up with the formula to proportion the net worth requirements to the fraction of unit purchased. Thus, a person with a net worth of at least $250,000 could qualify to purchase one unit for $100,000, and a person with a net worth of $25,000 could qualify to purchase 1/10 of a unit for

    $10,000. No legal basis for such a formula to determine suitability exists--nor was any attempt made to show such proportional adjustment is authorized or proper.

    
    

12. To qualify as a suitable investor to purchase $1000 units in Pines of Northdale Ltd., investors must show a net worth (excluding home, home furnishings and automobiles) of at least $70,000 and an estimated income of

    $30,000. (Exhibit 20)

    
    

13. To qualify as a suitable investor to purchase the $32,500 units in Financial Centers Ltd., investors must be "accredited" as in Family Bowling partnership above or qualify as a nonaccredited investor with a net worth of not less than $100,000 or a combination of net worth of not less than $75,000 and a taxable income for the current year of $50,000. (Exhibit 21)

    
    

14. Commissions on the sale of these three limited partnerships range from

    8 to 9 percent to the securities dealers selling the units and a 2 percent "due diligence" commission to Berachah.

    INVESTORS

    
    

15. Respondent was invited to the home of Melba S. Ross by her husband who had heard a presentation on investing given by Respondent at the Senior Life Festival. At the time, Mrs. Ross had recently retired from Maas Brothers and had assets, including home and automobile, of approximately $100,000. Her husband had only a small pension and no other assets. After receiving a complete list of Mrs. Ross' assets, Respondent provided a list of proposed investments which included, inter alia, Family Bowling Centers Ltd. and Pines of Northdale Ltd. The package included the sale of some $50,000 in mutual funds owned by Mrs. Ross and an IRA account of $29,000. Although aware that Mrs. Ross' assets less home and automobiles was considerably less than $100,000, Respondent checked on the offeree questionnaire (Exhibit 7) that Mrs. Ross' investable assets exceeded $100,000.

    
    

16. Mrs. Ross testified that she carefully explained to Respondent that she was adverse to purchasing any risky investments; however, she signed Exhibit 4, a disclaimer statement, in which she acknowledged that she understood the risks of investing. On the other hand, her reticence in investing $30,000 in Family Bowling Centers Ltd. is supported by Exhibit 9 which consists of a letter from Thorne dated immediately after her purchase of this limited partnership saying that any time her cash distribution from the partnership fell below 15 percent on an annualized basis, the general partner would buy back her investment unit at the original purchase value.

    
    

17. Respondent delivered a copy of the offering memorandums for Family Bowling Centers and Pines of Northdale to Mrs. Ross concurrently with her execution of her checks in the amount of $30,000 and $15,000. He also told Mrs. Ross that the general partner would buy back the partnership interest at her cost any time she was dissatisfied with the investment.

    
    

18. Mrs. Ross did not meet the investor suitability requirements for either of these limited partnerships she purchased. Respondent appears to have assumed that the sole responsibility for qualifying investors rested in the general partner and that Respondent had no responsibility in this regard.

    
    

19. Irene Eiardi was an 85 year old widow when introduced to Respondent by her son-in-law, a school teacher who had learned of Caplinger through other teachers. At the request of the son-in-law, Caplinger came to the son-in-law's home where he met with Mrs. Eiardi to advise her financially. At the time, Mrs. Eiardi owned stocks which her husband had acquired over many years, generally in "blue chip" companies. During his lifetime, Mr. Eiardi had made all of the family investments. When he died in 1984, Mrs. Eiardi relied on a financial advisor in Sarasota, Florida. When she moved to Tampa, her son-in-law suggested Caplinger. Mrs. Eiardi's son-in-law, with no investment experience, believed Mrs. Eiardi's income from her investments was lower than it should be, and he suggested she could get more income from these assets. Respondent had never before had a customer with the liquid assets possessed by Mrs. Eiardi.

    
    

20. The first step in this financial advising program by Respondent was to convert Mrs. Eiardi's holdings in General Motors, Ford, AT&T, John Deere, etc., with a market value of approximately $600,000, into cash. These stocks were sold through Berachah.

    
    

21. Respondent consulted with Robert A. Skeldon, an officer at Berachah and First Financial Consultants, who prepared an investment program which included, inter alia, a $240,000 investment in Family Bowling Centers Ltd. and

    $20,000 in Pines of Northdale Ltd. and $46,200 in Financial Centers Ltd. The evidence is clear that Mrs. Eiardi invested $240,000 in Family Bowling Centers Ltd. and infers she also made the other suggested investments.

    
    

22. Initially, Mrs. Eiardi was skeptical about the Bowling Centers as an investment, but Respondent assured her, her daughter and her son-in-law, upon whom she relied, that the investment was sound. Mrs. Eiardi and her daughter frequently expressed to Respondent their concerns regarding the safety of the investments he was recommending and their desire that she invest in nothing risky.

    
    

23. Although Respondent testified that he delivered the offering memorandums on the limited partnership interests purchased by Mrs. Eiardi before the sale was made, the son-in-law disputes this position, contending that the offering memorandums were not received until after the check in the amount of

    $240,000 to purchase Family Bowling Center Ltd. was written. Regardless of which version is correct, Respondent was fully aware that the offering memorandums had not been read, and all parties were relying on the representations made by him. From the pattern involving the other investors who testified in these proceedings, it is found the offering memorandums were not delivered before investments were purchased.

    
    

24. Mrs. Eiardi met the suitability requirements of a nonaccredited investor to purchase the limited partnerships here involved.

    
    

25. Goldie Johnson and her husband were visited by Respondent in 1988 to present financial planning advice. Both Johnsons are retired, the husband was

    75 and had Alzheimer's Disease, they had investable assets of approximately

    $60,000 and a monthly income of $1500-$1600. After their gross assets were made known to Respondent, he advised them to cash in their life insurance and invest in Family Bowling Centers to increase their monthly income. Mrs. Johnson was told by Respondent that the general partner would buy back her units for what she paid if she wasn't satisfied, and relying on that representation, Mrs.

    Johnson invested $20,000 in Family Bowling Centers Ltd. and $10,000 in Pines of Northdale. The Johnsons met none of the suitability requirements for investments of this nature, and Respondent was fully aware of this situation.

    Mrs. Johnson's testimony that she was told the general partners would buy back her interest in family bowling centers if it failed to pay the return promised is confirmed by letter dated December 2, 1988 to Mrs. Johnson from Thorne. (Exhibit 17)

    
    

26. Eleanor Leininger is a retired 72 year old widow who was introduced to Respondent by her daughter, a teacher at Jesuit High School. Mrs. Leininger had investable assets of $50,000, no investment experience and was interested in increasing her retirement income, if it could safely be done. Respondent was fully aware of Mrs. Leininger's financial situation, that she had not read the offering memorandum (if one was given her before she invested) and that she relied totally on his representations regarding the suitability of these investments. Mrs. Leininger invested $15,000 in Pines of Northdale, received monthly checks for 6 or 7 months, and has received nothing more from this investment. Mrs. Leininger did not meet suitability requirements for this investment.

    
    

27. Respondent contends that he initially questioned how these limited partnerships could return 10 to 15 percent to the investors, but was satisfied by the explanation given him by Thorne.

28. Respondent also testified that he had read the offering memorandums (Exhibits 19, 20 and 21), but he never emphasized the risky nature of these investments to his clients. Respondent's testimony that he was fully satisfied with Thorne's explanation of the expected return is inconsistent with his testimony that he read the offering memorandums.

    
    

29. It would not be anticipated that unsophisticated investors, like Respondent's clients who testified in these proceedings, would buy a security described as risky by the securities dealer. The sale of these limited partnerships produced commissions of 8 to 9 percent to the securities dealers. This fact alone should indicate to a knowledgeable dealer that the investments are not top grade.

    
    

30. Respondent appears to have believed that he had no responsibility with respect to the suitability of the investors in these limited partnerships; and, that, if he presented a true picture of the assets of the putative investors, those not suitable would be rejected by the general partner.

    
    

31. Respondent testified that he always looked at the tax avoidance aspect of investments--even for clients in the $10,000 income per year tax bracket. He further explained that in some of the partnerships here involved, the monthly payments to investors would be a return of capital and, therefore, not taxable as income. This would indicate Respondent was fully aware that during the initial phase of operations these limited partnerships would have a negative cash flow.

    
    

    CONCLUSIONS OF LAW

    
    

32. The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, these proceedings.

    
    

33. Section 517.161(1), Florida Statutes, provides that disciplinary action, including revocation of license, may be imposed if a registrant:

    
    

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

       * * *

       (d) Has made a representation or false statement to, or concealed any essential or material fact from, any person in the sale of a security to such person.

       * * *

       (h) Has demonstrated his unworthiness to transact the business of dealer, investment advisor, or associated persons; . . .

       
       

34. Rule 3E-600.013, Florida Administrative Code, provides in pertinent part:

    
    

    (2) The following are deemed demonstrative of unworthiness by an agent under Section 517.161(1)(h), Florida Statutes, without limiting that term to the practices specified herein.

    * * *

    (g) Engaging in any of the practices specified in subsections (1)(b), (c), (d), (e), (f), (g), (h), (o), (p), (q), (s) or (t).

    
    

35. Rule 3E-600.013(1)(c) and (p), Florida Administrative Code, provide:

    
    

    (c) Recommending to a customer the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the customer on the basis of the information furnished by the customer after reasonable inquiry concerning the customer's investment objectives, financial situation and needs, and any other information known by the dealer;

    
    

    (p) Violating any rule of a national securities association of which it is a member with respect to any customer, transaction or business in this state.

    
    

36. Section 517.301(1), Florida Statutes, provides in pertinent part it is unlawful and a violation of the provisions of this chapter for a person:

    
    

    1. 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 securities sold in a transaction exempted under the provisions of s. 517.161, directly or indirectly:

       
       

       2. 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 light of the circumstances under which they were made, not misleading; . . .

       
       

       (c) In any matter within the jurisdiction of the department, to knowingly and willfully falsify, conceal, or cover up, by any trick, scheme, or device, a material fact, make any false, fictitious or fraudulent statement or representation, or make or use any false writing or document,

       knowing the same to contain any false, fictitious, or fraudulent statement or entry.

       
       

37. Section 517.07, Florida Statutes, requires that all securities sold in Florida be registered with Petitioner, unless exempt. The parties stipulated that the limited partnership sold by Respondent to the individuals who testified in these proceedings were not registered nor exempt from registration.

38. Section 2 of the NASD Rules of Fair Practices provides:

    
    

    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.

    
    

39. Section 517.221(3) authorizes the Department to impose an administrative fine against any person found to have violated provisions of Chapter 517, Florida Statutes, or any rule promulgated by the department in an amount not to exceed $5000 for each such violation.

    
    

40. With the exception of Mrs. Eiardi, none of the clients of Respondent who testified in these proceedings met the suitability requirements to purchase the limited partnership interests sold to them by Respondent. Respondent's argument that he only negotiated the sale and left the determination of suitability of the purchases to his superiors is without merit. Respondent acknowledged that all of these purchasers relied on his representations in deciding to invest in the securities he recommended. Respondent further acknowledged that he had read the offering memorandums and knew his clients had not. Under the terms of the offering memorandums, these investments were described as subject to a high degree of risk. Respondent told his clients these investments were safe. This constitutes misrepresentation.

    
    

41. Respondent's argument that he relied upon the statements made by Thorne regarding the safety of these limited partnerships is also without merit. The offering memorandums contradicted Thorne's offer to repurchase the securities if clients were not satisfied. Respondent was either gullible, greedy or both. The mere fact that a higher sales commission than usual was placed on these securities should have alerted a knowledgeable securities dealer that these investments would be hard to sell to a prudent investor.

    
    

42. Further, Respondent encouraged these elderly investors to invest their meager life savings in securities totally unsuitable for a person in their financial position. With the exception of Mrs. Eiardi, none of these clients even closely approached the suitability requirements for the purchase of the securities here involved. Although he had never before had a client with assets comparable to those held by Mrs. Eiardi, Respondent made the most of this opportunity. He obviously received commission on the sale of some $600,000 in securities held by Mrs. Eiardi as well as commissions on the sale of Family Bowling Centers Inc., etc., sold to Mrs. Eiardi.

    
    

43. It is significant that all of these clients of Respondent who testified in these proceedings emphasized to Respondent that they were opposed to high risk investments and wanted their money invested in a safe place. They were not the sophisticated investor who recognizes that high gain is invariably associated with high risk. Instead, they relied on Respondent's financial advice. In assuring these clients that these limited partnerships were safe investments and suitable for them, Respondent made representations he would know to be false if he had read the offering memorandums as he testified he did.

44. With respect to the charge of selling unregistered securities, although Respondent was also guilty of this allegation, this is not deemed as serious as the other charges. This for the reason that Respondent would not normally be privy to the registration of these securities or their qualification for exemption, if exempt. This does not relieve Respondent from this violation as scienter is not an element of the offense of selling unregistered securities.

    
    

45. Respondent's final argument that he too was a victim because he did not receive earned commissions when Berachah folded is sad; but, under the circumstances, earns little sympathy. Respondent's contention, that he has learned a valuable lesson as a result of these proceedings, is undoubtedly true; but is no assurance he would not repeat under different circumstances. However, this is accepted as penitence on the part of Respondent and the first step in recognizing and correcting in the future the errors here committed.

    
    

46. From the foregoing, it is concluded that Respondent made false representations as alleged, sold high risk securities to customers for whom those securities were unsuitable, failed to provide offering memorandums at or prior to the time of sale, and offered repurchase guarantees to some investors but not to all.

RECOMMENDATION

It is recommended that Edward Griffin Caplinger be found guilty of all violations alleged, that his registration as a securities dealer be revoked, and that he be assessed an administrative fine of $10,000.

RECOMMENDED this 22nd day of August, 1991, in Tallahassee, Florida.

K. N. AYERS Hearing Officer

Division of Administrative Hearings The Desoto Building

1230 Apalachee Parkway

Tallahassee, FL 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 22nd day of August, 1991.

COPIES FURNISHED:

Stephen M. Christian, Esquire Department of Banking and Finance 1313 N. Tampa Street, Suite 615

Tampa, FL 32602-3394

Lori Brown, Esquire Post Office Box 3288 Tampa, FL 33601

Honorable Gerald Lewis Comptroller

The Capitol, Plaza Level Tallahassee, FL 32399-0350

William G. Reeves General Counsel

Department of Banking and Finance The Capitol, Plaza Level Tallahassee, FL 32399-0350

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS:

All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 90-003699

Orders for Case No: 90-003699