STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

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

)

Petitioner, )

)

vs. ) CASE NO. 78-1471

)

UNIVERSITY PREP, INC. and )

KYE HARRIS, )

)

Respondents. )

)

RECOMMENDED ORDER

This matter came on for hearing in Orlando, Florida, before the Division of Administrative Hearings, by its duly designated Hearing Officer, Robert T. Benton, II, on January 4, 1979.

APPEARANCES

For Petitioner: Philip J. Snyderburn, Esquire

Office of the Comptroller The Capitol

Tallahassee, Florida 32304

For Respondent: Nobody appeared on behalf of the

respondents named above, although respondent Harris earlier submitted written statements in his own behalf.

Pursuant to Rule 3E-10.08(1), Florida Administrative Code, petitioner entered a temporary cease and desist order forbidding respondents to sell the revenue bonds of University Prep, Inc. described in offering circulars dated December 23, 1976, and July 1, 1975. After this order had been made final, respondent Kye Harris, petitioned for an administrative hearing, pursuant to Section 120.57, Florida Statutes (1977). Petitioner referred the matter here on the issue "whether or not the order should continue in force and effect." Rule 3E-10.08(2), Florida Administrative Code.

FINDINGS OF FACT

1. Respondent, Kye Harris, was president of respondent, University Prep, Inc., at all pertinent times. The corporation was originally organized for profit, as a vehicle for the establishment of a private school in Orlando, Florida. On the advice of a lawyer and an underwriter, however, Dr. Harris caused the corporation to be reorganized on a non-profit basis, so as to qualify bonds respondents proposed to issue for an exemption from certain registration requirements. Thereafter University Prep, Inc. did in fact issue bonds, including series A and B sinking fund revenue bonds dated January 1, 1976, in the aggregate principal amount of one hundred seventy-five thousand dollars

   ($175,000.00). Accompanying this issue was an offering circular dated December 23, 1975, which stated the corporation's net income for the period August 1, 1975, to September 30, 1975, as seven thousand four hundred seventy dollars ($7,470.00) and valued certain land and improvements at one hundred twenty thousand dollars ($120,000.00). According to the circular, the unaudited statements presented in the circular were "certified by the President/Treasurer and the Secretary. . ." Petitioner's exhibit No. 6, p. 5. According to the minutes of the corporation's board of directors meeting on September 28, 1975, however, the corporation was experiencing "a per month loss of $7,630." Petitioner's exhibit No. 7. Investors purchased some of the bonds dated January 1, 1976.

   
   

2. On behalf of the corporation, Dr. Harris contracted for the purchase of an improved, 22 acre tract of real estate on Semoran Boulevard in Orlando, for six hundred fifty thousand dollars ($650,000.00). The transaction, which closed on June 22, 1976, was the result of arm's length negotiations. Respondents gave ten thousand dollars ($10,000.00) and a separate parcel of real estate (variously valued at from $35,000 to $63,000) as a down payment. The improvements on the property respondents acquired consisted of "approximately 52 units. . .in various stages of completion." (T.24) A few days later, G. E. Naumann, the real estate broker who had represented respondents in this acquisition, prepared an "appraisal" of the property assuming, contrary to fact, that most of the buildings were completed. Petitioner's exhibit No. 1. Mrs. Naumann was not compensated for this "appraisal," which set the value of the property at two million one hundred fifty-five thousand dollars ($2,155,000.00). Although she was aware that respondents "had a bond issuance that they were going through" (T.27), Mrs. Naumann did not expressly authorize the use of her "appraisal" in that connection.

   
   

3. University Prep, Inc. issued another series of sinking fund revenue bonds dated July 1, 1976, this one in the aggregate principal amount of one hundred thousand dollars ($100,000.00). Accompanying this issue was an offering circular dated July 1, 1976, which included an unaudited balance sheet "as of June 24, 1976." The value of the 22 acre tract of improved real estate on Semoran Boulevard acquired on June 22, 1976, was stated as two million one hundred fifty-five thousand dollars ($2,155,000.00) more than one and one half million dollars in excess of the land's purchase price. This statement was false and misleading and resulted in a grossly exaggerated statement of net worth. Investors also purchased some of the bonds dated July 1, 1976.

   
   

   CONCLUSIONS OF LAW

   
   

4. All non-exempt securities must be registered. Section 517.07, Florida Statutes (1977). Respondents attempted to bring the bonds within the exemption available for securities "issued by a corporation organized exclusively for. .

   .educational. . .purposes and not for pecuniary profit. . .provided that each offeree receives. . .full disclosure of the method of financing. . ." Section 517.05(5), Florida Statutes (1977). The burden to establish the facts which would make this exemption available rests on respondents, State v. Buchman, 361 So.2d 692 (Fla. 1978), but respondents did not establish, for example, that each offeree received full disclosure of the method of financing.

   
   

5. In any event, petitioner established that respondents violated provisions of Chapter 517, Florida Statutes (1977), by "knowingly and willfully falsify[ing]. . .a material fact. . .or us[ing] any false writing or document. .

." Section 517.301(3), Florida Statutes (1977).

RECOMMENDATION

Upon consideration of the foregoing, it is RECOMMENDED:

That petitioner continue its cease and desist order in force and effect. DONE and ENTERED this 13th day of February, 1979, in Tallahassee, Florida.

ROBERT T. BENTON, II

Hearing Officer

Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304

(904) 488-9675

COPIES FURNISHED:

Philip J. Snyderburn, Esquire Office of the Comptroller

The Capitol

Tallahassee, Florida 32304

University Prep, Inc.

2000 North Semoran Boulevard Orlando, Florida 32807

Kye Harris

Post Office Box 102 Mountlake Terrace, WA 98043

Docket for Case No: 78-001471

Orders for Case No: 78-001471