STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

LINDA C. BALLOU,

Petitioner,

vs.

DEPARTMENT OF FINANCIAL SERVICES,

Respondent.

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) Case No. 04-2030

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RECOMMENDED ORDER

A hearing was held pursuant to notice in the above-styled case on August 30, 2004, by Stephen F. Dean, assigned Administrative Law Judge, of the Division of Administrative Hearings in Tallahassee, Florida.

APPEARANCES

For Petitioner: Linda C. Ballou, pro se

1001 Bridgeway No. 314

Sausalito, California 94965

For Respondent: Ladasiah Jackson, Esquire

Department of Financial Services 612 Larson Building

200 East Gaines Street Tallahassee, Florida 32399-0333

STATEMENT OF ISSUE

Whether the Petitioner is entitled to licensure in Florida as a Non-resident Life and Variable Annuity Agent?

PRELIMINARY STATEMENT

This case arose upon the denial of the Petitioner's application for licensure as a Non-resident Life and Variable Annuity Agent by letter dated March 8, 2004. The legal grounds asserted for the denial were Subsection 626.611(1), Florida Statutes, which provides that an applicant can be denied for lack of one or more of the qualifications for the license as specified by statute, and 626.611(7), Florida Statutes, which provides that an applicant can be denied for demonstrated lack of fitness or trustworthiness to engage in the business of insurance. In addition, the letter cites Sections 626.785(1) and Section 626.831(1), Florida Statutes, which provide that the Department shall not license any person found to be untrustworthy or incompetent. The Department found that factually the Petitioner was untrustworthy and incompetent because she had been enjoined permanently from violating specified sections of the Federal Securities Act and Federal Exchange Act. In addition the Securities and Exchange Commission issued an order that barred the Petitioner from association with any broker or dealer for a period of three years.

The Petitioner requested a formal hearing, and the Department forwarded the case to the Division of Administrative Hearings to conduct the formal hearing on June 9, 2004.

By Notice dated June 23, 2004, a formal hearing was set for July 29, 2004; however, on July 26, 2004, the parties jointly moved to continue the scheduled hearing. Their motion was granted, and the hearing rescheduled for August 30, 2004. The formal hearing was held as scheduled on this latter date.

At the formal hearing the Department introduced Respondent's Exhibits 1 through 8, which were received into the record. It called Hazel Muhammad to testify. The Petitioner testified in her own behalf and introduced as a late-filed exhibit a letter from the attorney who advised her regarding securities law. A transcript was ordered which was filed on September 10, 2004. The Department filed a Proposed Recommended Order, which was read and considered.

FINDINGS OF FACT

1. The Petitioner, Linda C. Ballou, applied for a license as a Non-resident Life and Variable Annuity license by application completed on October 30, 2003.

2. The Department denied her license by letter dated March 18, 2004. There is no explanation of why there was a delay in issuing the March 18, 2004 denial letter. There was no apparent request for additional information to complete the application after October 30, 2004, or information requested to resolve qualification issues.

3. The Department denied the Petitioner's application on the basis that the Petitioner was not trustworthy or competent based upon her having been enjoined from violating the Federal Securities and Exchange Law and being barred from associating with any broker or dealer for three years after which she could reapply for association. The Department introduced and properly authenticated Respondent's Exhibits 3, 5, 6, and 7, together with a copy of the Petitioner's statement, Respondent's Exhibit 4, regarding the action of the Securities and Exchange Commission (SEC).

4. The Petitioner testified regarding the events that were the subject of the SEC action. The Petitioner was counseling persons, particularly seniors, on purchasing life and annuity contracts primarily for long term care. She was an agent for CNA and New York Life, both of which were insurance companies. She was required to possess a "6-63 license" by her employer that authorized her to sell mutual funds and other instruments, which would be classed as securities. She carried errors and omissions (O & E) coverage with New York Life and paid the premium for O & E coverage for one year.

5. While so employed, she was introduced by the president of CNA to his father, who told her about bonds payable in full in nine (9) months. He explained to her that these bonds were not securities, which are instruments payable in year or longer.

   There were several of these bonds available; however, the only one that she sold was one issued by Sebastian International Enterprises (SIE), a Florida-based television production company.

6. These bonds paid very high rates of interest, and appeared to be a good investment. The Petitioner called the local bank and found that SIE was a viable company engaging in the business of producing films for television. She visited the company and saw them making television shows. The company had contracts to make additional television shows, and the company remained at all times pertaining to this case a viable company. After checking into the company, she invested in the company's bonds; she sold the bonds to members of her family; and members of the public. She never had any problems with the payment of premiums by the company.

7. After selling SIE bonds for approximately a year, she saw a news story about one of the other companies, which had been presented to her by the father of the president of CNA, being investigated for being a "Ponzi" scheme. She checked with her attorney about the sale of SIE bonds, and, thereafter, contacted the Federal Bureau of Investigation (FBI) on his advise. The FBI referred the matter to the SEC, which opened an investigation of SIE. The Petitioner cooperated fully with this investigation.

8. Ultimately, the financial records of SIE were seized, and the SEC determined that the sale of the nine-month bonds was a "Ponzi" scheme. Although no action was ever taken against SIE or the Petitioner's broker, the Petitioner and two others holding SEC licenses were disciplined.

9. Although as a result of the aforementioned, the Petitioner surrendered her California license to sell insurance, she has been reinstated, and was able to seek an SEC securities broker's license after the three years ran.

10. The administrative proceeding SEC brought against the Petitioner alleged that the Petitioner violated the Federal Securities and Exchange Act. The SEC order and complaint is based upon admissions by the Petitioner and recites that the Petitioner consents to the entry of the anticipated injunction without admitting or denying the allegations of the complaint. See Respondent's Exhibit 3.

11. The complaint filed against the Petitioner in the United States District Court, Middle District of Florida is Respondent's Exhibit 5. This complaint states that the funds from the sale of the subject bonds were to fund the operations of SIE. The Petitioner testified that the proceeds were used to fund the daily operation of the company. This complaint also makes various allegations of misconduct and fraud against the Petitioner; however, no evidence was received at hearing in

    support of any of the SEC allegations, and the consent agreement signed by the Petitioner specifically states that she does not admit or deny the allegations contained in the complaint. By signing the agreement, the Petitioner avoided litigation on the issue and, although she voluntarily agreed to repay all commissions she earned from the sale of these notes (approximately $156,000), the agreement recites that she would not have to repay the money in light of her bankruptcy unless her statement were determined to be false.

12. 77 United States Code 77c provides in pertinent part regarding items that are exempted as securities as follows:

    (3) Any note, draft, bill of exchange, or banker's acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited[.] (Emphasis supplied.)

    
    

    CONCLUSIONS OF LAW

    
    

13. The Division of Administrative Hearings has jurisdiction over the parties and the subject of these proceedings pursuant to Section 120.57, Florida Statutes.

14. The Petitioner has the burden to show that she is qualified to be licensed as a Non-resident Life and Variable Annuity Agent. However, in a case in which the Department has specific grounds for denial, the Department must show by

    substantial and competent evidence that its grounds for denial are supported by the facts and the law.

15. The grounds for denial are as stated in the Department's letter of March 8, 2004. As stated above, the legal grounds asserted for the denial were Subsection 626.611(1), Florida Statutes, which provides that an applicant can be denied for lack of one or more of the qualifications for the license as specified in this code, and 626.611(7), Florida Statutes, which provides that an applicant can be denied for demonstrated lack of fitness or trustworthiness to engage in the business of insurance. In addition, the letter cites Sections 626.785(1) and Section 626.831(1), Florida Statutes, which provide that the department shall not license any person found to be untrustworthy or incompetent. The Department found that factually the Petitioner was untrustworthy and incompetent because she had been enjoined permanently from violating specified sections of the Federal Securities Act and Federal Exchange Act. The Department's sole witness, Ms. Muhammad, and its proposed findings argue that the Petitioner was not only untrustworthy, but was incompetent by failing to make adequate inquiry before selling a security.

16. The case, as presented by the Department, is solely based upon the administrative complaint filed by the SEC, the consent to the entry of a permanent injunction resolving the

    administrative proceeding brought by the SEC, and the resultant injunction.

17. The SEC's administrative complaint (Respondent's Exhibit 5) was received into evidence; however, no factual evidence was present at hearing to support any of the claims made in the complaint. The Consent to the Entry of Permanent Injunction and Other Relief (Respondent's Exhibit 6) recites in this first sentence that the Petitioner does not admit or deny the allegations contained in the Complaint filed by the SEC.

18. The Final Judgment of Permanent Injunctive and Other Relief (Respondent's Exhibit 7) also recites that the Petitioner did not admit or deny any of the allegations in the Commission's complaint, consenting only to the jurisdiction of the court. Thereafter, the order does not make any findings regarding the actions of the Petitioner; therefore, there are no findings that are res judicata.

19. Regarding allegations of incompetence due to failure to inquire about the company's SEC registration, the provision of the securities cited in paragraph 12, above, appears to facially exempt the bonds in question from registration. She had assurances from the father of the president of CNA that the bonds were exempt from registration requirements.

20. Regarding allegations of incompetence regarding inquiry about the company's financial stability, the Petitioner testified credibly that she had inquired regarding SIE and that she had determined that it was a viable company. Whether the sale of these bonds constituted a Ponzi scheme and fraud depends upon the ability of SIE to repay the bonds and continue to operate. No evidence was presented at hearing regarding whether SIE had the ability to repay the bonds and continue to operate. There was no evidence presented that officers of SIE were prosecuted as a result of the SEC allegations. The federal court made no findings on this issue. The evidence presented by the Petitioner and references contained in the exhibits presented by Respondent indicate that SIE was eventually sold and continued in business.

21. The Respondent presented no evidence establishing a legal obligation for the Petitioner to have made inquiry beyond that which she made regarding the financial health of SIE. Whether SIE could have repaid the bonds and continued to operate was outside the knowledge of Petitioner and appears to have been impacted by the federal enforcement activities.

22. As testified to by the Petitioner, her consent to the entry of the order was a means to avoid expensive litigation related to a license that she did not use because she did not regularly sell securities.

23. Based upon the facts, as presented, the Department did not show that factually or legally the Petitioner was unfit, untrustworthy, or incompetent to hold the license for which she applied.

24. The Petitioner surrendered her California license, and the Petitioner's insurance agent's license has been re-issued by the State of California. The Petitioner is eligible to apply for association with a securities broker due to the passage of time, although she has no desire to do so.

RECOMMENDATION

Based upon the foregoing findings of fact and conclusions of law, it is

RECOMMENDED:

That the Department issue the Petitioner a Non-resident Life and Variable Annuity Agent license.

DONE AND ENTERED this 18th day of October, 2004, in Tallahassee, Leon County, Florida.

S

STEPHEN F. DEAN

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847 www.doah.state.fl.us

Filed with the Clerk of the Division of Administrative Hearings this 18th day of October, 2004.

COPIES FURNISHED:

Linda C. Ballou

1001 Bridgeway No. 314

Sausalito, California 94965

Michael T. Ruff, Esquire Department of Financial Services 612 Larson Building

200 East Gaines Street Tallahassee, Florida 32399-0333

Pete Dunbar, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300

Tom Gallagher, Chief Financial Officer Department of Financial Services

The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of 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: 04-002030

Orders for Case No: 04-002030