STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CURRENCY TRADING INTERNATIONAL, ) INC., BRIAN R. MOORE, and )

CRAIG A. CUNNINGHAM, )

)

Petitioners, )

)

vs. ) CASE NO. 94-5428

)

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

)

Respondent. )

)

RECOMMENDED ORDER

A hearing was held in this case in Clearwater, Florida on August 9 - 11, 1995, before Arnold H. Pollock, a Hearing Officer with the Division of Administrative Hearings.

APPEARANCES

For Petitioners: William C. Glynn, Esquire

Vedder, Price, Kaufman & Kammholz

222 N. LaSalle Street, Suite 2400 Chicago, Illinois 60601-1003

For Respondent: Mindy K. Raymaker, Esquire

Department of Banking and Finance Suite 1302, The Capitol Tallahassee, Florida 32399-0350

STATEMENT OF THE ISSUES

The issue for consideration in this hearing is whether Petitioners, Currency Trading International, Inc., Brian R. Moore and Craig A. Cunningham, should be registered in Florida as a securities dealer firm and securities brokers, respectively, or whether registration should be denied because of the matters alleged in the Department's letter of intent to deny.

PRELIMINARY MATTERS

By letter dated June 22, 1994, the Department of Banking and Finance, (Department), informed the Petitioners that it intended to deny their applications for registration as a dealer, (as to Currency Trading International, Inc., (CTI)), and registration as associated persons/principals, (as to, Moore and Cunningham), respectively. The basis for denial as to Moore and Cunningham was that they had, while previously employed, violated Chapter 517, Florida Statutes, and were unworthy to be registered. Because Moore and

Cunningham were to be the principals of CTI, its application was to be denied as well. Petitioners thereafter filed a request for formal hearing and this hearing ensued.

At the hearing, Petitioners Moore and Cunningham testified in their own behalves and presented the testimony of William Beckley, an expert in the field of churning, suitability, excessive trading, and state and federal securities laws, and introduced Petitioners' Exhibits 1, 5 and 62. Petitioner's Exhibits 4, 6 - 10, 13, 14, 16 - 18, 20 - 22, 25, 27, 30 - 38, 40, 45, 47 - 52, 54, 56,

73 - 75, 77, 78, 81 and 83 were identified but not offered. Respondent presented the testimony of Dennis Farrar, the Division's area financial manager; Pam Schrenker, one of its examiners; Nancy Wood, the supervisor of its Bureau of Registrations; William Reilly, Chief of its Bureau of Examinations; Jean Robinson, the consumer whose complaint is, in part, responsible for the Department's denial decision; and Dr. Stewart Brown, an expert in securities regulation, churning, suitability and fraud. Respondents also introduced Respondent's Exhibits 1 - 4, 7 - 9 and 12. Respondent's exhibits 5 and 6 were identified but not introduced.

A transcript of the proceedings was furnished and subsequent thereto, counsel for the Department timely submitted Proposed Findings of Fact which have been ruled upon in the Appendix to this Recommended Order. Counsel for Petitioner did not timely submit Proposed Findings of Fact which, by direction of the Hearing Officer and agreement of the parties were due by September 15, 1995. However, on September 27, 1995, substitute counsel for Petitioners filed a Motion for Leave to File Proposed Findings of Fact and Conclusions of Law Instanter, citing as basis therefor the fact that original counsel for Petitioners had left the firm and had not completed the Proposed Findings prior to his departure because of "... the overwhelming amount of activities that required the attention of [Counsel] in advance of his departure ...." Counsel for the Department thereafter moved to strike Petitioners' Proposed Findings of Fact and Conclusions of Law.

Petitioners have not shown with any detail the "overwhelming" duties which prevented their former counsel from filing a timely submittal. Also, as pointed out by the Department's counsel, Petitioner's did not move for an enlargement of the time to file their proposal when, fifteen days before it was due, they were made aware their former counsel was departing the firm. Counsel for the Department quite aptly pointed out that Petitioners' counsel had the benefit of the Department's Proposed Recommended Order for the preparation of their submittal. For that reason, the undersigned, on October 19, 1995, granted the Department an additional 15 days to review Petitioners' proposal and submit such matters in response thereto and in supplement to their original submittal as were necessary.

Respondent also correctly points out that Petitioners' submittal exceeds by at least twenty pages, the forty page limitation placed on Proposed Recommended Orders by the terms of Rue 60Q-2.031, F.A.C. Therefore, though the undersigned considered the proposed Findings of Fact submitted by Petitioners as well as their proposed Conclusions of Law in the preparation of this Recommended Order, specific rulings on the 87 proposed Findings of Fact by Petitioners have not been made.

In a collateral issue Petitioners have claimed that the Department failed to timely evaluate and process Mr. Moore's application for registration. There is no merit to Petitioner's contention. Section 120.60(2), Florida Statutes, provides:

... Every application for license shall be approved or denied within ninety days after receipt of the original application or receipt of the timely requested additional information or correction of errors or omissions unless a shorter time for agency action is provided

by law.

The appropriate interpretation of that provision indicates that the time begins to run from the receipt of a complete and accurate application. Pursuant to Section 517.12(10), Florida Statutes, non-exempt applicants for initial or renewal registration must also be registered as a broker or dealer with the Securities and Exchange Commission and shall be subject to insurance coverage by the Securities Investor Protection Corporation. At the time of filing on October 20, 1993 the Petitioner's application did not show evidence of compliance with SIPC. Within 30 days of receipt of the application, on November 17, 1993, the Department requested evidence of compliance with SIPC. This request was within the Division's discretion.

The application for registration was held open only so long as was necessary to complete the accumulation of the necessary documentation. When all required supporting information was received from the applicants, the file was deemed complete and the processing time started to run. The decision to deny registration was, therefore, timely made and noticed to Petitioners.

FINDINGS OF FACT

1. At all times pertinent to the issues herein, the Respondent, Department of Banking and Finance, through its Division of Securities and Investor Protection, was the state agency in Florida responsible for the licensure and registration of securities and commodities dealers and brokers/firms, and the regulation of the securities and commodities markets in this state.

   
   

2. On October 20, 1993, the Petitioners filed an application for broker/dealer registration with the Department seeking to have CTI registered as a dealer organization and Messrs. Moore and Cunningham as brokers. The application was assigned to an analyst within the Division who examined it and completed a background check on the owners and officers of the company.

   
   

3. As a result of his analysis of the application for registration, the analyst, Mr. Mackenzie, on November 17, 1993, notified the Petitioners by letter that their application was insufficient and requested additional information in order to complete the file. The additional information requested included SEC certification of effectiveness as a dealer; evidence of compliance with SIPC requirements; designation of a CPA; an unaudited financial statement under oath completed within 30 days of filing; and evidence of sufficient net capital.

   When this request for information was forwarded to the Petitioners they were advised that failure to respond to the request for information within 60 days could result in denial of the application.

   
   

4. With regard to the organizations mentioned in the paragraph next above, the SEC is the Securities and Exchange Commission; the SIPC is the Securities Investor Protection Corporation; and the NASD is the National Association of Securities Dealers.

5. The SEC is a federal agency charged with the regulation of the conduct of securities transactions in interstate commerce. The SIPC is a corporation formed to provide insurance coverage to consumers who invest in the stock market. The NASD is an organization similar to the New York Stock Exchange which is made up of securities dealers who trade in securities through their own market. To be approved by the NASD, a broker/dealer firm must be approved for registration in its home state. The NASD approval process is much more detailed than that of the SEC, and includes an in personam interview. The SEC has delegated much of its regulatory power to the NASD, and, therefore, the Department of Banking and Finance accepts evidence of membership in NASD in lieu of SEC registration.

   
   

6. The request for background check was filed with the Central Registration Depository, (CRD), a clearing house of information relating to the securities industry, and includes such information as registration status, enforcement information and activities related to the securities industry. The information in the CRD is placed there by NASD, the New York Stock Exchange, (NYSE), regulatory authorities in all 50 states and member firms who participate therein. The information possessed by the CRD can be and is accessed by the Division through computer terminals. The Division accepts evidence of SEC registration or proof of NASD membership as reflected in the CRD. This evidence also can be submitted by the applicant, however, it is the Division's practice not to accept self-serving statements of applicants relative to compliance with the application process.

   
   

7. By letter dated December 6, 1993, Petitioners responded to the Division's November 17, 1993 deficiency letter, indicating that proof of SEC effectiveness had been filed with the NASD and indicated that Petitioners' SEC number is 8-46643. SEC approval was pending, as was compliance with SIPC requirements, and the Petitioners indicated that when SEC final approval was given, that approval would automatically become effective. This did not constitute adequate evidence of SIPC compliance, in the Division's view, and a telephone memo dated December 9, 1993 in the application file so indicates.

   
   

8. Though the Division could have denied Petitioners' application at that time for failure to timely complete the application file, it granted Petitioners an extension of time to provide the requested information to the Division. Whereas, applicants are normally granted 60 days from date of deficiency letter to provide requested information, the Division has the discretion to grant an extension and did so in this case. Numerous conversations were conducted and letters were exchanged between Mr. Moore and the Division between December 19, 1993 and March 24, 1994. On January 10, 1994, a second background check on Petitioners Moore and Cunningham was begun which resulted in additional information to the effect that the CRD had an open examination going on relating to them. This information was transmitted by the analyst to Ms. Wood, his supervisor, on January 18, 1994. In the interim, on January 14, 1994, the Division acknowledged receipt of evidence of sufficient net capital from the Petitioners.

   
   

9. On February 17, 1994, the Division's registration section, by memo, advised the Bureau of Examinations of Petitioners' pending application and indicated that the file was not complete since evidence of compliance with SIPC was still outstanding. A letter from SIPC, dated March 23. 1994, was received in the Division on March 24, 1994. The Division determined this letter to be evidence of compliance with SIPC requirements, the only outstanding uncompleted requirement, and as of its receipt, Petitioners' file was deemed complete. At that time the 90 day deadline for processing began.

10. NASD approved CTI's registration on June 23, 1994. Neither the activities of the Division's Bureau of Examination nor the arbitration action involving Jean Robinson, to be discussed below, had any bearing on when CTI's application was deemed complete.

    
    

11. The history of CTI can be understood only by review of the background of the Petitioners Moore and Cunningham who decided to establish CTI in late 1993 when they were both employed as registered representatives with Atlanta- One, Inc., a retail securities trader specializing in foreign currency options.

    
    

12. Atlanta-One, Inc. was founded in 1986 by two individuals, one of whom was Kevin McCarthy who was licensed as a registered options principal and foreign currency options principal. Mr. McCarthy handled the technical market analyses and formulated the firm's recommendations for foreign currency operations trading. The firm's procedures and policies, including its commission structure, were dictated by its two owners, McCarthy and Blodgett, without input from any of the registered representatives who were employees of the firm.

    
    

13. Mr. Moore joined Atlanta-One, Inc. in February, 1988 as a registered representative. Over the years he became interested in purchasing an equity share in the firm but by 1993 was convinced that neither McCarthy nor Blodgett were willing to take him in as an investor. Therefore, at that time Moore invited Mr. Cunningham, who had been with Atlanta-One, Inc. since January, 1991, to join him in establishing CTI. This new firm would conduct its business in retail foreign currency options.

    
    

14. The partners, Moore and Cunningham, decided to begin business in Florida in part because of personal family considerations of Mr. Moore. Another consideration was that the partners hoped to expand and felt that a location near a large trading port, such as Tampa, would let them gain an entry into the business to be generated by large corporations which used foreign currency options for hedging. As a result, in 1993 Moore and Cunningham initiated the application process for registration which culminated in this hearing, and in February, 1994, resigned from and severed all connections with Atlanta-One, Inc.

    
    

15. It is also imperative to understand somewhat the operation of foreign currency options dealing, a highly specialized and complicated process. In substance, foreign currency options in the United States are traded on the Philadelphia stock exchange. They are used as trading vehicles primarily by large corporations to hedge against fluctuations in currency values in international markets, and by speculators who purchase options in the hope of profiting from short term changes in the currency exchange rates.

    
    

16. An option is a contract which requires the delivery of a fixed amount of a commodity, (here, a currency), at a specified price within a stated period of time. It is designated as a "call" or a "put" option. The former grants the purchaser the right to demand delivery of the commodity at the exercise price dictated in the option at any time before the expiration date of the contract. "Call" options are highly speculative, and the writer of a call option, who is the seller and who typically does not own the underlying currency, faces no limit as to the loss he might incur. "Put" options give the purchaser the right to make the writer buy the stated amount of the currency at the exercise price within a specified period of time. As with the call, the writer's risk is nearly unlimited because there is no artificial boundary for the deterioration of the price of the currency.

17. Since currency exchange rates are subject to many different economic forces, and since fluctuations in currency exchange rates have a direct impact on the value of a currency option, the economic conditions which effect currencies will also effect currency options. As a result foreign currency options are very high risk instruments. The customer options agreement utilized by Atlanta-One, Inc. at the time Ms. Robinson's dealings took place clearly indicates this.

    
    

18. Having determined the complexity and the volatility of currency options trading, it becomes necessary to turn to the background of the individuals involved in the trading herein. Mr. Cunningham's experience in the securities and commodities industry consists of his employment for several months in 1990 with a commodities broker and three years with Atlanta-One, Inc. prior to the forming of CTI in conjunction with Mr. Moore. His formal training in options and commodities includes a four day course with Leonard Training Centers preparatory to obtaining his Series 3 commodities trading license and self study involved in obtaining his Series 15 and Series 63 options trading licenses. He also received on the job training with Atlanta-One, Inc. He is a member of the NASD.

    
    

19. Mr. Cunningham has been named in four arbitration proceedings, all of which took place while he was with Atlanta-One, Inc. The District Business Conduct Committee, (DBCC), of the NASD on December 5, 1994 entered an order censuring Mr. Cunningham and finding him personally liable in the amount of

    $10,000. It also ordered him to re-qualify by examination within 60 days of its decision, and to reimburse his share of commissions totaling $39,558.29 within

    90 days of the decision.

    
    

20. Mr. Moore's background in the securities industry includes a Bachelor of Science degree in Business Administration and employment with Atlanta-One, Inc. starting in February, 1988. After six to seven months with the firm, he was promoted to floor manager. He, too, is a member of the NASD.

    
    

21. Mr. Moore has been named in five NASD arbitration Proceedings, all of which took place while he was an agent with Atlanta-One, Inc. On December 5, 1994, the DBCC of NASD entered an order against him which censured and suspended him for a year from associating with any member of NASD; fined him $25,000; ordered him to re-qualify for examination; and ordered him to reimburse customers his share of commissions received of $74,581.19, all within 90 days of the decision of the Committee.

    
    

22. Much of the information upon which the Department relied for its denial of the Petitioners' application concerns the dealings which Moore and Cunningham had with Ms. Jean Robinson in 1991 and 1992. Ms. Robinson operates a business in the Pinellas/Hillsborough County area which involves the purchase of hotel accommodations, tourist attraction admissions and rental vehicles, and the packaging of those elements for resale to foreign tourists visiting the United States. She is a successful business person. She began her business, See Florida, Inc., with an initial investment of $1,500 in 1984. The business now generates $2 million in gross revenues per year. She also has a partnership interest in a travel agency located in Dublin, Ireland. Her prior experience with foreign currency included converting US dollars for personal expenses while overseas and converting Irish pounds to US dollars for investment in an apartment in the United States. Because of the strong position of the US dollar at the time of that transaction, Ms. Robinson made a substantial profit on it.

23. Sometime in 1991, before she made any investment with Atlanta-One, Inc., Ms. Robinson was advised in a report from Dunn and Bradstreet that her business was making inefficient use of its capital since it carried a substantial balance in a market line account which paid an average of 2 percent interest. This money was being under-utilized. In late 1991 and early 1992, Ms. Robinson began receiving telephone calls from James Lukes, an agent of Atlanta-One, Inc., who during the period between September and December, 1991, made between 20 and 30 calls soliciting her participation in investment in foreign currency options. Ultimately, on January 6, 1992, after these calls piqued her interest, Ms. Robinson made an initial determination to invest based on representations by Lukes that she could make as much as $5,000 profit over night on a $10,000 investment. When Ms. Robinson agreed to make the investment, she was referred to Mr. Cunningham to manage her account, and after that connection was made, she had no further contact with Mr. Lukes.

    
    

24. Ms. Robinson ultimately agreed with Cunningham to invest $10,000 initially, and once that decision was made, Cunningham transferred her to the confirmation department at Atlanta-One, Inc. where an individual named Teresa recorded Ms. Robinson's background information and, purportedly, her investment experience on an account approval form. This information was then transferred to an "individual customer options agreement", (ICOA). It was Atlanta-One, Inc. procedure at the time for the confirmation department, (Teresa), to take the verbal client background and financial information provided by the client and forward this information to the registered options principal in the firm who, without any effort being made to determine the accuracy of the information, approved or disapproved the purchase. The options agreement form furnished to the client is not prepared by the broker.

    
    

25. In the instant case, the individual ICOA for Ms. Robinson was incorrect when it received by her in that her address was misspelled, her age was recorded incorrectly and her actual investment experience actually did not include 3 to 4 years of options trading on a monthly basis with an account averaging $10,000, or 10 years of experience in trading foreign currency in an account of $70,000, as appeared thereon. In fact, the decision made by the principal at Atlanta-One, Inc. that Ms. Robinson was suitable as a trader in foreign currency options, was based on the information on the account approval form which was incorrect.

    
    

26. Ms. Robinson agreed to deal with Atlanta-One, Inc., at least partially on the basis of information regarding the company sent to her by Mr. Lukes which indicated it was a member of SIPC and of NASD. Before making any investment, however, Ms. Robinson requested a Dunn and Bradstreet report on the company which showed it was a bona fide company which had been in business since 1986.

    
    

27. When Mr. Cunningham first contacted Ms. Robinson, after being referred by Mr. Lukes, he did not request any financial background from her other than to inquire if her net worth was in excess of $100,000. He did not explain the risks associated with foreign currency options. He did, however, explain how foreign currency options moved and he inquired as to whether she felt comfortable putting money into this market. He also inquired whether her life style would be jeopardized if she were to lose the amount invested. He did not verify the information on her new account approval form but made the initial determination that she was qualified to trade in foreign currency options based on the information contained on the form and the limited information he received from her regarding her net worth and her life style susceptibility.

28. Before making any investment, Ms. Robinson did not do any research on foreign currency options, and she claims that when she made her initial investment of $10,000, she did not understand how foreign currency options worked. It is so found. She also made additional investments with Mr. Cunningham after her initial investment on January 6, 1992, and on January 15, 1992, invested $22,000 based on Mr. Cunningham's statement that she had to invest it as insurance or run the risk of losing the funds previously invested. Though she made the investment as requested, she did not understand how she could insure her positions in options. She believed that Cunningham coerced and harassed her into making the investment, and within 10 days of her initial investment of $10,000, she had approximately $70,000 invested with the company.

    
    

29. Ms. Robinson at first would not sign the initial options agreement forwarded to her by the company because, as she explained, it contained several erroneous pieces of information. Nonetheless, on January 15, 1992, she signed it and returned it to the company, under duress, knowing that the agreement was incorrect in some particulars, primarily because Mr. Cunningham represented to her that if she did not send back the agreement, signed, the firm would freeze her account and she would lose all the money she had previously invested. Relying on those representations by Mr. Cunningham, Ms. Robinson believed she had no choice but to sign the agreement form because she did not want to lose the $70,000 she had invested in the account.

    
    

30. Even though Mr. Cunningham never fully explained the risks of each investment to her, Ms. Robinson continued to invest with Atlanta-One, Inc. On January 24, 1992, she invested $44,844 in British pounds based on Cunningham's representation that he would send her a check back for $44,000 as profit from her investment in Deutchmarks. Notwithstanding this representation, and the investment made in reliance thereon by Ms. Robinson, the check from the company for the Deutchmark investment was not forthcoming and she never received it. It should be noted that the investment of $44,844 was made in response to a solicitation by Cunningham of an investment of in excess of $80,000. When that request was made, Ms. Robinson sought the advice of an investor friend who suggested she halve the amount requested. This she did. That was the only advice she solicited or received from anyone outside Atlanta-One, Inc. regarding currency options trading.

    
    

31. Ultimately, on March 19, 1992, Ms. Robinson was informed by another employee of Atlanta-One, Inc., Mr. John Williams, that her account balance had diminished to almost nothing. She requested to speak with one of the owners but was told none was available. She was, however, placed in contact with Mr. Moore who took over her account when she declined to have any further dealing with Mr. Cunningham, indicating he had verbally abused her. Mr. Moore was sales manager of Atlanta-One, Inc. during the period January to September, 1992.

    
    

32. By the time Ms. Robinson's account was transferred to Mr. Moore, she had invested $88,000 in currency options with Atlanta-One, Inc. which, at that time, had a market value of between $8,000 and $10,000. Within twenty-four hours of taking over the management of her account, Mr. Moore explained to her what course of action could pursue on the options market and recommended she invest an additional $88,000 to recoup her money. He indicated that by making the additional investment she could recoup her prior investment, and he assured her that he would not place her in any risky positions. During their conversation, she explained to Mr. Moore that her investment experience was exclusively in the area of real estate. Mr. Moore did not ask any questions about her investment goals or objectives or her assets, nor did he check her qualifications to determine whether she was suitable to be a trader in foreign

    currency options. Nonetheless, relying on Mr. Moore's advice, Ms. Robinson made additional investments with him through Atlanta-One, Inc.

    
    

33. During the period from June to September, 1992, when Mr. Moore was handling her account, Ms. Robinson repeatedly asked him questions about the foreign currency options market. In fact, while he handled her account, Mr. Moore did recoup and return to Ms. Robinson approximately $33,000. On June 5, 1992, after he had recouped a substantial portion of Ms. Robinson's initial looses, Mr. Moore persuaded her, even though she wanted the money returned to her, to reinvest the balance in her account, worth at that point about $123,000, and an additional $30,000 in Swiss francs. An initial $105,000 of this sum was invested while Ms. Robinson was out of the country attending her brother's funeral. To bring this about, Mr. Moore had represented to her that she would miss out on a great opportunity to recoup more of her money if she did not act immediately.

    
    

34. On September 11, 1992, Ms. Robinson determined that her entire position in Swiss francs had expired and all her money invested in them was lost. This resulted in a total loss of $169,889.13 on her investment with Atlanta-One, Inc. through the dealings she had with Mr. Cunningham and Mr. Moore. The loss had a negative impact on Ms. Robinson's other business since the money invested with Atlanta-One, Inc. came from reserve accounts from which she normally paid the operating bills for her business. For Ms. Robinson personally, it was a traumatic and upsetting experience.

    
    

35. The relationship between Ms. Robinson and Cunningham and Moore appears to be somewhat one-sided. They proposed continuing investments and when she demurred from a lack of familiarity or from caution, they pressed her to commit with ominous predictions of potential loss. Moore received a 5 percent override on all sales made by other brokers, and earned commissions of between 10 and 20 percent of the trade amount. That means that even when not directly dealing with Ms. Robinson, he earned a 5 percent commission on the sales made by Mr. Cunningham.

    
    

36. Ms. Robinson, to be fair, did not act entirely alone in her dealings with the representatives of Atlanta-One, Inc. The initial investment was her decision based on the representations of Lukes and Cunningham, but, as was noted previously, on one occasion, she discussed a proposed purchase with another stock broker who convinced her to cut the proposed investment in half. In all other cases, she relied on the representations of Mr. Cunningham and Mr. Moore.

    
    

37. Within that relationship, Ms. Robinson claims she never indicated to either Cunningham or Moore that she wanted to buy a specific option after the initial trade. In each case, she was persuaded and, she claims, coerced by Cunningham and/or Moore to invest. She contends they dictated the amounts to be invested and the specific foreign currency position to be taken. Both would, in their conversations with her, make recommendations on new purchases from time to time, and during all this, though she would make notes and try to understand while talking on the telephone with them regarding her investments, it is clear she never completely understood what she was buying and what was happening to her investment. She always felt, based on what she was advised by the Petitioners, that her investments with the company had to be made immediately and could not wait overnight. She did not feel she had control over her account and relied primarily on Petitioners to protect her investment. They controlled the activity in her account, not she.

38. This is a substantial departure from the way she conducts her personal business. There, she, her staff and her accountant maintain the books for her company, while she maintains her personal finances. She relies on her accountant to reconcile her business accounts and properly to prepare her taxes. Her present investments consist of certificates of deposit in the United States and in Ireland, of which she is a native.

    
    

39. Based on her relationship with Cunningham, Moore and Atlanta-One, Inc., Ms. Robinson filed an arbitration claim with the NASD. The arbitration panel, on May 5, 1994, found Cunningham and Moore to have engaged in "willful, wanton, and gross misconduct of a nature which evidenced an entire want of care, and which raised a presumption of conscious indifference to the rights of the client." The panel awarded Ms. Robinson $169,899 in compensatory damages, and

    $509,667 in punitive damages from Moore, Cunningham, Lukes and Atlanta-One, Inc., jointly and severally. In addition to this, on December 5, 1994, NASD's District Business Committee imposed disciplinary sanctions against Moore and Cunningham for engaging in unlawful high commissions with regard to foreign currency options. Both decisions have been appealed and the latter was remanded to the DBCC for reconsideration. As of the hearing, both were still pending.

    
    

40. An analysis of Ms. Robinson's dealings with Atlanta-One, Inc., from January 8, 1992 through September 11, 1992, reveals there were nineteen purchases made for her by either Cunningham or Moore. All of the first sixteen purchases were subsequently sold, some at a loss and some at a profit. In fact, during those first sixteen purchase/sales, eight were profitable for a total of

    $98,128.85, and eight resulted in losses which totaled $109,367.98, for a net loss over the period of $11,239.13. Considering the amount of the total purchases and sales during the period, this is not an unreasonable loss.

    
    

41. In June, 1992, however, notwithstanding Ms. Roinson was on her way to or in Ireland for her brother's funeral and had asked that her account be maintained "as is" during her absence, Mr. Moore made three purchases for Ms. Robinson, all of Swiss francs, on June 5, 1992 in the amount of $103,250; on June 11, 1992 in the amount of $24,287.50; and on June 26, 1992 in the amount of

    $30,812.50, for a total of $158,350. On September 11, 1992, all three purchases were declared worthless, for a total loss of the entire amount invested. When this amount, ($158,350) is added to the prior net loss on investments, ($11, 239.13), the entire loss sustained by Ms. Robinson is seen to be $169,589.13.

    This figure is $309.87 less than the arbitration award by the NASD as compensatory damages. The difference is negligible and meaningless.

    
    

42. The Department's analyst evaluated those transactions and determined them to constitute excessive trading or "churning" in Ms. Robinson's account. Churning takes place when a broker, disregarding the interests of his customer, engages in excessive trading for the purpose of generating commissions. To prove churning, analysts usually show (1) that the broker exercised control over the level and frequency of trading in the account; (2) the overall volume of the broker's trading was excessive in light of the customer's trading objective; and

    (3) the broker acted with intent to defraud or in reckless disregard of the customer's interest.

    
    

43. In the instant case, the commissions charged by Atlanta-One, Inc. on Ms. Robinson's account totaled 18 percent. This is considerably higher than a discount broker would charge, but the standard is not that of a discount broker. Nonetheless, the commissions charged Ms. Robinson, are still higher than those charged by a non-discount broker, and are higher than commissions charged on

    equity investments. In that regard, however, currency options are not considered equity type investments.

    
    

44. Expert testimony was presented by both parties in support of their respective positions on whether the commissions charged herein were unreasonably high and the activity conducted in the account amounted to churning. On balance, the better weight of evidence is that they were and it did.

    
    

45. In this case, the evidence indicates that Petitioners exercised control over the level and frequency of the trading in the account either directly or through manipulation of their client, Ms. Robinson. Petitioners failed to show that her experience and success in the travel and tour business carried over to or evidenced a comparable expertise or business acumen in the specialized currency trading markets. Further, it is clear that this investment was a totally unsuitable investment for this investor.

    
    

46. The evidence also shows, especially as to the total loss of the last three investments in Swiss francs, a reckless disregard for her interests if not a total regard for her instructions, and bears on the issue of the Petitioners' worthiness to be licensed in this state.

    
    

47. Returning, for the moment, to the issue of the suitability of these investments for Ms. Robinson, the Division has relied on this as one of the grounds for denying registration to the Petitioners. The Department's rules make it a demonstration of unworthiness for registration for a dealer to recommend to a customer a transaction which is unsuitable for that customer, based on information furnished by the customer and after reasonable inquiry concerning the customer's financial objectives, financial situation and needs, and other pertinent information.

    
    

48. The determination of suitability, or the lack thereof, is made on the basis of the answer to several questions. The first is whether the investment is consistent with the client's investment objectives. The second is whether the client is capable of withstanding the risks inherent in the investment or objectives. The third is whether the client is able to understand the investment or the investment strategy. An answer of "no" to any one of those questions is considered to render the investment unsuitable to the client.

    
    

49. In this instant case, it is not clear what Ms. Robinson's investment objectives was. She was seeking more return on cash reserves, but it is not the best strategy to invest unused but to be needed cash in a highly volatile investment with a high risk factor. To be sure, Ms. Robinson could withstand the loss. She has done so, but it is also certain that she did not then and does not now understand sufficiently the nature of an investment in currency futures options or the real investment strategy behind them. Based on those determinations, it is found Ms. Robinson was not a suitable client for this type of investment or, in the alternative, currency futures options were not a suitable investment for her, and Petitioners knew that. Her acknowledgment of advice of risks printed on the form, in reality, is of no probative value in the analysis of this issue. It is form boiler plate, here totally devoid of any effective meaning.

    
    

50. Ms. Robinson adamantly denies she indicated on any forms signed by her, or indicated in any way, that she had traded foreign currencies over ten years, approximately once every six months. Even if that were the case, it is obvious that such trades were made in the course of overseas travel in connection with business or personal trips outside the United States, and

    exchanges of that nature are totally different from the speculative futures market in foreign currencies with which Petitioners' product dealt.

    
    

51. The Division also refers to a decision of the NASD's District Business Conduct Committee for District 2 which, in 1991, and in 1994, imposed sanctions against Atlanta-One, Inc., and its principals for charging excessive commissions. After an extended period of dispute and discussion, the sanction against the company and the principals was upheld, but the language of the remand by the National Business Conduct Committee indicated a question as to whether the commissions were so high that the representatives (Moore and Cunningham) could be held liable. This issue has not yet been determined, but in any case deals only with the issue of commissions and does not treat the other pertinent activity herein involved.

    
    

    CONCLUSIONS OF LAW

    
    

52. The Division of Administrative Hearings has jurisdiction over the parties and the subject matter in this case. Section 120.57(1), Florida Statutes.

    
    

53. The Division has indicated its intention to deny the registration of Petitioners Cunningham and Moore as securities broker/dealers because of unworthiness and of Petitioner CTI based on the denial of its principals. Though the applicants for registration are the Petitioners, the burden of proof is on the Division to prove unworthiness by clear and convincing evidence. Osborne Stern & Co. v. Department of Banking and Finance, 647 So.2d 245, 249 (Fla. 1DCA 1994).

    
    

54. Section 517.161(1), Florida Statutes, deals with registration of securities broker/dealers and, in pertinent part provides:

    
    

    1. Registration under Section 517.12 may be denied or any registration granted may be revoked, restricted, or suspended by the department if the department determines that such applicant or registrant:

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

          * * *

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

          * * *

          (m) Has been the subject of any decision, finding, injunction, suspension, prohibition, revocation, denial, judgment, or administrative order by any court of competent jurisdiction, administrative law judge, or by any state or federal agency, national securities, commodities, or option exchange, or national securities, commodities, or option association, involving a violation of any federal or state securities or commodities law or any rule or regulation promulgated thereunder, or any injunction or adverse administrative order by a state or federal agency regulating banking, insurance, finance or

          small loan companies, real estate, mortgage brokers, or other related similar industries [within the five years preceding application or denial].

          
          

55. The same statute, at subsections (3) and (4), also provides that the denial or revocation of a dealer's registration will also deny or revoke the registration of all his associated persons, ((3)), and for denial or revocation of the registration of a business entity, based on the actions of a partner, officer or equitable owner thereof, ((4)).

    
    

56. Under the provisions of Rule 3E-600.011, F.A.C., the NASD and DBCC determinations may be considered prima facie evidence of unworthiness and are sufficient basis to deny registration. By the same token, the NASD arbitration award and the DBCC sanction fall squarely within the proscriptive parameters of Section 517.161, Florida Statutes, as well. Since the Division has the authority to deny registration to Moore and Cunningham, it also has the authority to deny registration to CTI.

    
    

57. However, the Division does not rely solely on the two NASD actions as its grounds for denying registration to Moore and Cunningham. The Division asserts that the evidence of record demonstrates that both Mr. Moore and Mr. Cunningham gave Ms. Robinson advice to make investments by use of untrue statements and the omission of necessary material information which was, under the circumstances, misleading. If proven, this constitutes a violation of Section 517.301, Florida Statutes.

    
    

58. In addition, pertinent parts of Rule 3E-600.013, F.A.C. identifies as demonstrations of unworthiness such practices as trading in a customer's account which is excessive either in size or frequency, in view of the customer's financial resources and the character of the account; and recommending trading activity without reasonable grounds to believe the recommendation is suitable for the customer's investment objectives, financial situation and needs. This latter proscription is also the subject of direction outlined in the NASD Rules of Fair Practice, a violation of which is also prima facie evidence of unworthiness under the Department Rule in issue. Included therein are a requirement to obtain all reasonably available information regarding the customer's financial status; tax status; investment objective; and other reasonably necessary information; and to refrain from such practices as manipulation, deception, fraud, contrivance; or the recommendation of unsuitable investments.

    
    

59. The evidence submitted at the hearing establishes that neither Mr. Moore nor Mr. Cunningham had any reasonable indication of Ms. Robinson's investment objectives, her true assets, her level of investment sophistication, or any other truly pertinent and necessary information about her before they started urging her to invest in a highly speculative and volatile product. Both claim she was conversant with currency trading from her frequent travels abroad and her one time currency trade relevant to her apartment purchase. The evidence indicates otherwise. Neither Moore nor Cunningham dealt with Ms. Robinson at the time Mr. Lukes was soliciting her business. She claims not to have given the company any substantive information regarding her assets or her investment objectives. While it may be inferred she indicated her desire to put her liquid assets to work more productively, she denies having made the comments regarding experience and frequency of trading which appears on the application form. There is no evidence either Cunningham or Moore ever seriously tried to determine if she was a suitable investor in their product but, instead,

    repeatedly tried to impress upon her the need to invest more to either protect her assets or to recoup her losses.

    
    

60. In substance, it is clear that the actions of both Mr. Cunningham and Mr. Moore were not consistent with the requirements of the NASD Rules of Fair Practice, and constitute evidence of unworthiness under the provisions of both the Department's rule and the statute cited. This is in relation to inappropriate product and a failure to do the proper inquiry prior to recommending the product.

    
    

61. Also at issue is the question of whether both individual Petitioners excessively traded Ms. Robinson's account. The evidence of record indicates that during the period in issue, the account was turned over 16 times which is far more than twice the accepted standard utilized in the securities industry. In addition, the commission to equity ratio was 239 percent which is far in excess of the industry indicia of excess of 26.4 percent. Even applying the Petitioners' counsel's formula using the commodity basis of a 20 percent ratio of commissions as percent of average equity, the ratio in Ms. Robinson's account was an excessive 30 percent. The Division considers this as evidence of fraud by the brokers. In this regard, the evidence is in more a state of equipoise, however, and the Division cannot rely on this particular aspect of misconduct as a basis for denial.

    
    

62. Taken together, however, the evidence of the Petitioners' prior disciplinary actions before the NASD and the clear evidence of misconduct with regard to their dealing with Ms. Robinson supports denial of their registration as individuals. In addition, since they would be the principals of CTI, denial of that application is also appropriate.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is, therefore:

RECOMMENDED the registration of Currency Trading International, Inc., Brian

R. Moore and Craig A. Cunningham as securities broker/dealer firm and associated person/principals be denied.

RECOMMENDED this 1st day of November, 1995, in Tallahassee, Florida.

ARNOLD H. POLLOCK, Hearing Officer Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 1st day of November, 1995.

APPENDIX TO RECOMMENDED ORDER IN CASE NO. 94-5428

The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the parties to this case.

FOR THE PETITIONER:

1. Not submitted timely. Considered but not ruled upon.

   
   

   FOR THE RESPONDENT:

   
   

   1. Accepted and incorporated herein.

   2. Accepted and incorporated herein.

100. - 103. Accepted and incorporated herein.

COPIES FURNISHED:

William C. Glynn, Esquire James A. Arpaia, Esquire

Vedder, Price, Kaufman & Kamholz

222 North LaSalle Street Suite 2400

Chicago, Illinois 60601-1003

Mindy K. Raymaker, Esquire Department of Banking

and Finance

Suite 1302, The capitol Tallahassee, Florida 32399-0350

Honorable Robert F. Milligan Comptroller

The Capitol, Plaza Level Tallahassee, Florida 32399-0350

Harry Hooper General Counsel

Department of Banking and Finance

The Capitol, Room 1302 Tallahassee, Florida 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 consult with the agency which will issue the Final Order in this case concerning its rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency which will issue the Final Order in this case.

Docket for Case No: 94-005428

Orders for Case No: 94-005428