STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

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

)

Petitioner, )

)

vs. ) Case No. 86-3445

) PIONEER DIVERSIFIED INVESTMENTS, INC. ) and STEVEN J. HURTIG, )

)

Respondents. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing in the above captioned case was held before the Division of Administrative Hearings by its duly designated Hearing Officer, Donald R. Alexander, on December 30, 1986 in Fort Lauderdale, Florida.

APPEARANCES

For Petitioner: Charles E. Scarlett, Esquire

Suite 1302, The Capital Tallahassee, Florida 32399-0350

For Respondents: Steven J. Hurtig, pro se

4651 Sheridan Street, Suite 270

Hollywood, Florida 33021 BACKGROUND

This matter arose when respondent, Department of Banking and Finance, Division of Securities, issued an administrative complaint on July 31, 1986 charging respondents, Pioneer Diversified Investments, Inc. and Steven J. Hurtig, with violating various agency rules and provisions within Chapter 517, Florida Statutes. 1/ Respondents are licensed by petitioner as a broker-dealer and associated person, respectively, and as such are authorized to sell securities in the State of Florida. In general terms, the complaint alleged Pioneer had failed to keep certain books and records as required by agency rules and federal regulatory bodies, that Pioneer could not produce its proof of membership in the Municipal Securities Rulemaking Board, that Pioneer failed to conspicuously display its broker-dealer license in its office, and that Hurtig, who had no options registration, had traded thirty-three options with a registered options principal during an unnamed period of time. Respondents disputed these findings and requested a formal hearing to contest the proposed agency action. The matter was forwarded by petitioner to the Division of Administrative Hearings on August 28, 1986, with a request for a formal hearing. At the request of the parties, a final hearing was scheduled for December 30, 1986 in Fort Lauderdale, Florida.

On December 10, 1986 petitioner filed a motion for leave to amend its complaint. This motion was granted on December 19, 1986. The amended complaint incorporated the same charges previously made against Pioneer in the original complaint, dismissed the charges against Hurtig involving the trading of the options, and added a new-charge that Hurtig had executed at least ten security trades involving municipal securities between July 1 and August 21, 1985 even though Pioneer was not registered with the Municipal Securities Rulemaking Board and Hurtig has agreed by stipulation and consent agreement not to engage in any managerial functions during that period of time. Respondents' motion for continuance filed on December 24, 1986 was denied by order dated December 26, 1986. A renewed ore tenus request for continuance at the outset of the hearing was also denied.

At final hearing, petitioner presented the testimony of Jerome Jordon, a Division financial specialist, and Craig Miller, a Division financial administrator, and offered petitioner's exhibits 1-12 which were received in evidence. Respondent Hurtig testified on his own behalf, presented the testimony of Debbie McClain, his former secretary, and Ellen Kracoff, a former associated person of Pioneer, and offered respondents' exhibits 1-11. All were received in evidence.

The transcript of hearing was filed on February 4, 1987. Proposed findings of fact and conclusions of law were filed by the parties on February 19, 1987.

A ruling on each proposed finding is made in the Appendix attached to this order.

The issue is whether respondents' registrations should be disciplined for the reasons stated in the amended administrative complaint.

Based on all the evidence, the following facts are determined:

FINDINGS OF FACT

1. At all times relevant hereto, respondent, Pioneer Diversified Investments, Inc.(PDI), was registered as a broker-dealer of securities with petitioner, Department of Banking and Finance, Division of Securities (Division). PDI's registration became effective on June 25, 1985 and it commenced operations on that date at 4651 Sheridan Street, Suite 270, Hollywood, Florida. Respondent, Steven J. Hurtig (Hurtig), was also registered with petitioner as an associated person of PDI. In addition, he is registered as a financial/operations principal, full registration/general securities representative, general securities principal and a municipal securities principal. On June 25, 1986 the firm ceased doing business and is now inactive but both respondents are still registered with the Division.

   
   

2. As a condition to licensure, Hurtig agreed to the entry by the Division of a Stipulation and Consent Agreement and Final Order on June 25, 1985 wherein the following pertinent conditions were imposed:

   
   

   Hurtig agrees that on the effective date of the applications as aforesaid, and for sixty

   (60) days thereafter he shall not have, assume, or perform any management responsibilities for or on behalf of Pioneer Diversified Investments, Inc., and his activities during said period shall be limited to those of a salesman. Hurtig

   further agrees that Ellen Kracoff shall assume and discharge all management responsibilities for and on behalf of Pioneer during said period.

   
   

   Therefore, under the terms of this order, Hurtig was not allowed to assume any managerial responsibilities with PDI or act in any capacity other than as a salesman during the firm's first sixty days of operation.

   
   

3. As a registered broker-dealer, PDI was subject to certain recordkeeping requirements. By rule (3E-600.14, FAC) the Division has established a requirement that registered broker-dealers maintain their books and records in a manner described in Rules G-7 and G-8 adopted by the Municipal Securities Rulemaking Board (MSRB), a national rulemaking authority for municipal security dealers and brokers. Copies of Rules G-7 and G-8 have been received in evidence as petitioner's exhibits 8 and 11, respectively. In addition, Rule 3E-600.14, Florida Administrative Code, imposes certain broad recordkeeping requirements upon dealers.

   
   

4. On May 22, 1986, two Division financial specialists, Jerome Jordon and Zayre Espraza, conducted a routine audit of PDI's books and records. Jordon and Espraza had held those positions for approximately two months and their experience was limited to three or four prior audits and attendance at a two- week seminar in Tallahassee. The audit continued on May 23 and 28 and June 2 and 10. When the audit occurred, PDI was in the process of going out of business, and shut its doors about two weeks after the last visit by the auditors.

   
   

5. During the course of the audit, Jordon requested various documents from Hurtig. These documents were retrieved by Hurtig, initially reviewed by him, and then given to the auditors for their review, Among other things, Jordon requested a copy of PDI's complaint file, associated person's file, general ledger, cash receipts and disbursement journal, purchase and sales blotter, and records of receipts and deliveries of securities.

   
   

6. In response to Jordon's request for a complaint file, Hurtig advised him PDI had received no consumer complaints since the business had opened approximately eleven months earlier. Although Jordon did not see such a file during his audit, the firm did maintain a complaint folder (albeit empty) during that time as required by MSRD Rule G-8(a)(xii). The folder has been received in evidence as respondents' exhibit 2.

   
   

7. PDI was required to maintain in its office files a Form U-4 for all associated persons. These records are commonly referred to as "associated person's files". When the audit occurred, Ellen K. Kracoff was an associated person with PDI and her U-4 form should have been maintained in the associated person's file. When Jordan reviewed the file on June 2, he did not see Kracoff's U-4 form. However, on his return visit on June 10, Jordan found the U-4 form in the file. At hearing he acknowledged it was "possible" that he simply overlooked the form during his earlier review. The form has been received in evidence as respondents' exhibit 1.

   
   

8. According to MSRB Rule G-8(a)(i), which has been adopted by reference by the agency and a copy thereof received in evidence as petitioner's exhibit 8, a broker-dealer of municipal securities must maintain a "blotter or other records of original entry" containing the following information relative to the trading of municipal securities:

   ...an itemized daily record of all purchases and sales of municipal securities, all receipts and deliveries of municipal securities (including certificate numbers and, if the securities are in registered form, an indication to such effect), all receipts and disbursement of cash with respect to transactions in municipal securities, all other debits and credits pertaining to transactions in municipal securities, and in the case of municipal securities brokers and municipal securities dealers other than bank dealers, all other cash receipts and disbursements if not contained in the records required by other provision of this rule. The records of original entry shall show the name or other designation of the account for each such transaction effected (whether effected for the account of such municipal securities broker or municipal securities dealer, the account of a customer, or otherwise), the description of the securities, the aggregate par value of the securities, the dollar price or yield and aggregate purchase or sale price of the securities, accrued interest, the trade date, and the name or other designation of the person from whom purchased or received or to whom sold or delivered. With respect to accrued interest and information relating to "when issued" transactions which may not be available at the time a transaction is effected, entries setting forth such information shall be made promptly as such information becomes available.

   
   

   During his office visits, Jordan requested the general ledger of PDI. His purpose was to review all receipts and disbursements of cash. Jordon found no entries in the general ledger pertaining to commissions received by PDI on sales of municipal securities. This had the effect of understanding the net capital computation of the firm, which is a measuring tool for gauging the financial soundness of the firm. 2/ By having no then-current record of commissions received, PDI failed to adhere to the requirement in the foregoing rule that a municipal securities dealer keep an itemized daily record of "all receipts and disbursements of cash with respect to transactions in municipal securities" to the extent the firm engaged in that type of business during the period in question. Another recordkeeping rule [rule 17a-3(a)(1)] promulgated by the Securities and Exchange Commission (SEC) which governs other types of dealer transactions and which was relied upon in the amended administrative complaint was not addressed at final hearing, made an exhibit, or officially noticed.

   Accordingly, it has been disregarded.

   
   

9. Jordon also requested that PDI produce its "purchase and sales blotter" so that he could review a daily record of customer trades. Although PDI had no "blotter", it did have copies of the firm's daily trading report furnished once a month by its clearing broker, Mesirow and Company, which reflected all daily

   sales during that period (respondents' exhibit 3). In addition, PDI retained copies of tickets reflecting sales of securities as well as confirmations furnished by Mesirow approximately four days after each transaction was executed (respondents' exhibit 4). Since respondents' exhibits 3 and 4 constituted "other records of original entry", PDI was in compliance with MSRB Rule G- 8(a)(i). Moreover, since PDI did not take in any funds, no cash receipts journal relating to municipal securities was maintained.

   
   

10. The amended administrative complaint alleges that between July 1, 1985 and August 21, 1985 "Pioneer through Hurtig had engaged in at least ten (10) securities trades involving municipal securities in Hurtig's capacity as a municipal securities principal... in violation of the Stipulation... dated June 25, 1985". Records produced at hearing indicated that Hurtig (identified as salesman 014) executed three purchases of municipal securities for each of two accounts which were maintained by long time family friends (the estate of Harry Bender and his widow, Mina Bender) between June and August, 1985. Hurtig asserted that he was acting as a salesman (and not as a principal) at that time, and did not intend to violate the Stipulation. However, since no other person in the firm except Hurtig was registered as a municipal securities principal, the trades would have to have been executed under his supervision.

    
    

11. When the above transactions occurred, PDI had not paid the MSRB an initial $100 fee and $100 annual fee required by MSRB Rules A-12 and A-14, respectively. These fees are required for municipal securities brokers and dealers who conduct any business during the MSRB's fiscal year. Since no fees were paid, PDI was not a member of that organization. Even so, the failure to pay these assessments was an oversight, and there was no intent by PDI or its personnel to circumvent the law.

    
    

12. The amended administrative complaint also charges PDI with having failed to conspicuously display its Division broker-dealer license in its office. However, no testimony or documentation was offered to substantiate this charge.

    
    

13. There is no evidence that any customer or member of the public was injured economically or otherwise by the actions of PDI and Hurtig.

    
    

    CONCLUSIONS OF LAW

    
    

14. The Division of Administrative Hearings has jurisdiction of the subject matter and the parties thereto pursuant to Subsection 120.57(1), Florida Statutes (Supp. 1986).

    
    

15. The gravamen of petitioner's complaint is that PDI and Hurtig violated both a rule and agency order and accordingly demonstrated their "unworthiness to transact the business of dealer...or associated person". For this, the Division seeks to revoke the registrations of both respondents. Since respondents' livelihoods are at stake, petitioner must substantiate its allegations with a preponderance of the evidence. Moreover, applicable penal rules and statutes must be strictly construed in favor of the licensee. Bach V. Florida State Board of Dentistry, 378 So2d 34, 36 (Fla. 1st DCA 1979). The evidence will accordingly be reviewed in this light.

    
    

16. Initially, it is noted that no proof was submitted in support of the allegation that PDI failed to conspicuously display its broker-dealer license in its office in May or June, 1986, and accordingly this charge should be dismissed. Further, there is insufficient evidence to establish that PDI failed

    to maintain a complaint file or that its associated person's file did not have a copy of Kracoff's U-4 form. Therefore, these two charges should also be dismissed.

    
    

17. The remaining charges are not as clearcut. The first concerns an allegation that "Pioneer through Hurtig had engaged in at least ten (10) securities trades involving municipal securities in Hurtig's capacity as a municipal securities principal from at least July 1, 1989 through August 21, 1985 in violation of the... Consent Agreement... (and while) Pioneer was not registered with the MSRB at the time it executed said municipal securities transactions thus violating MSRB Rules A-12 and A-14". (paragraph 5 of amended complaint). The latter rules require payment of certain fees to maintain membership in that organization. The evidence reveals that PDI had not paid either the $100 initial fee or the $100 annual fee required by MSRB rules A-12 and A-14. 3/ Since the rules must be strictly construed, Bach, supra, and there is no evidence to the contrary, it is concluded that payment of such fees is a prerequisite to membership in that organization. Therefore, PDI was not a member of the MSRB when the relevant events herein occurred.

    
    

18. The Division contends that PDI violated MSRB rules by trading the six municipal securities in question between June and August, 1985 when it had not paid its initial and annual fees. The Division goes on to argue that this in turn constituted a violation of Rule 3E-600.13(1)(p), Florida Administrative Code, which makes it unlawful for a registrant to violate "any rule of a national securities exchange or national securities association of which it is a member". (Emphasis added) Since PDI was not a member (by virtue of having failed to pay its fees), it could not have violated Rule 3E-600.13(1)(p). 4/ Similarly, the allegation that Rule 3E-600.11, Florida Administrative Code, was violated must also fail since that allegation is founded on there being a contravention of Rule 3E-600.13(1)(p). While PDI may have violated some other statute or agency rule by making the trades in question, it has not been so charged, and the above allegations must fail.

    
    

19. Hurtig was the salesman who executed the foregoing transactions. The amended complaint alleges that when the transactions occurred, Hurtig did so "in (his) capacity as a municipal securities principal" even though the "had agreed not to engage in any activity, other than that of an associated person for Pioneer until August 24, 1985". (paragraph 5 of amended complaint). At hearing Hurtig contended he acted only as a salesman, but if this is true, someone else in the firm would have had to be authorized to act as a municipal securities principal to sanction the trades. Since there was none, it is concluded that Hurtig was acting as a principal when the trades occurred. By doing so, he violated (although perhaps unintentionally as he claims) the terms of the consent order which prohibited him from acting in any capacity other than as an associated person. This constitutes a violation of Subsection 517.161(1)(a), Florida Statutes (1985), which makes it unlawful to violate any agency order.

    
    

20. The final charges concern allegations that PDI's books and records failed to conform with certain rules promulgated by the MSRB, SEC and the National Association of Securities Dealers (NASD). In this regard, the amended complaint relies upon a failure by PDI to conform to various SEC and/or NASD rules in four respects. But copies of such rules were not tendered into evidence or officially noticed and accordingly need not be considered. 5/ While Rule 3E-600.14(2), Florida Administrative Code, also imposes certain recordkeeping requirements upon all dealers, the agency's complaint does not rely upon this rule as a basis for taking disciplinary action against the licensees for recordkeeping deficiencies. Instead, it relies upon Rules 3E-

    600.14(1) and (9) and 3E-600.18, Florida Administrative Code. (paragraph 12 of amended complaint). Since Rule 3E-600.14(1) simply adopts by reference applicable SEC and MSRB Rules, of which the "applicable" SEC rules were not officially noticed or placed in evidence, only reference to MSRB Rules G-7 and G-8 will be made. Even then, these rules relate only to municipal securities

    transactions, and not other transactions typically engaged in by dealer-brokers. The other two cited agency rules pertain to associated persons' files [3E- 600.14(5)j and the display of a licensee's registration (3E- 600.18) and underlie charges previously dismissed in paragraph 3 of the conclusions of law.

    
    

21. In view of the above, the only recordkeeping deficiency requiring discussion is Pioneer's failure to prepare and maintain appropriate books and records in conformity with MSRB Rules G-7 and G-8. The Division alleges that because of this failure, "the firm's commissions receivable account was inaccurate". (paragraph 6.(d) of amended complaint). The evidence reveals that, when the audit was performed, PDI had no entries in its general ledger pertaining to commissions received by PDI. While the agency has not identified the precise portion of MSRB Rule G-8 that it relies upon to support the charge, the undersigned concludes that this charge is covered generally by subsection (a)(i) which requires that a record be kept of "all receipts and disbursement of cash with respect to transactions in municipal securities" and "all other debits and credits pertaining to transactions in municipal securities". Because no commissions were recorded by PDI, the foregoing requirement has been violated. This in turn constitutes a violation of Rule 3E- 600.14(1), Florida Administrative Code, which requires dealers to prepare and maintain their books and records in accordance with MSRB Rule G-8. However, the charge that PDI also violated Rule 3E-600.13(1)(p) through the foregoing conduct must fail since PDI was not a member of the MSRB.

    
    

22. Summarizing the above conclusions, it is concluded that the Division has substantiated its allegations that (a) Hurtig executed six transactions of municipal securities while Hurtig had agreed to act only in a salesman's capacity, and (b) PDI violated MSRB Rule G-8 by failing to record commissions received on six transactions. 6/ All other charges must fail.

    
    

23. In its proposed order, petitioner seeks revocation of the registrations of both PDI and Hurtig. This disciplinary action is apparently premised, at least in part, upon the notion that all charges are valid. Subsection 517.161(1), Florida Statutes (1985), provides that when disciplinary grounds are proven by the Division, it may revoke or suspend the registrations previously granted to a licensee; therefore, revocation is not mandatory. In the case at bar, Hurtig has been shown to have violated Subsection 517.161(1)(a) by violating an agency order when he conducted six trades of municipal securities in July, 1985. PDI has violated Rule 3E-600.14(1) by not having recorded commissions, if any, on the six trades executed by Hurtig. Since no violations of Rule 3E-600.13 have occurred, that rule cannot be used as a basis for finding respondents "unworthy" to transact business in the state. Thus, the only basis for disciplinary action against Hurtig and PDI is grounded upon a single violation by each of Subsection 517.161(1)(a), Florida Statutes (1985). These violations do not rise to the level of justifying revocation, particularly since the violations were internal in nature and did not affect the general public in any way. Moreover, the firm was in the process of going out of business when the audit occurred, and its doors were shut two weeks after the audit ended. Finally, no member of the public was harmed in any way.

Therefore, it is appropriate that both registrations be placed on probation for one year.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that PDI and Hurtig be found guilty of the violations set forth

in the conclusions of law, and that all other charges be DISMISSED. It is further recommended that their registrations be placed on probation for one year.

DONE AND ORDERED this 25th day of February, 1987 in Tallahassee, Leon County, Florida.

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 25th day of February, 1987.

ENDNOTES

1/ The complaint also named Ellen K. Kracoff as a respondent. However, she was later dismissed as a respondent by order dated December 19, 1986.

2/ This violation is not as serious as a firm overstating commissions in its ledger since the latter would cause an inflated net capital computation and overstate a firm's financial position.

3/ MSRB Rule A-12 provides in part that "prior to effecting any transaction... the purchase or sale of any municipal security, a broker, dealer.... shall pay to the Board an initial fee of $100". MSRB Rule A-14 provides in relevant part that "...each municipal securities broker and... dealer shall pay an annual fee to the Board of $100 with respect to each fiscal year of the Board in which the broker or dealer conducts business".

4/ PDI was not charged with, nor was any statute or rule cited, which makes it unlawful to sell securities without having first become a member of a national securities association or exchange.

5/ Only four MSRB rules were tendered into evidence by petitioner. Rules relied upon in quasi-penal proceedings must be either introduced into evidence or officially noticed under Section 120.61, Florida Statutes (1985). Even if the latter course is chosen, copies must be furnished to all parties so that they may have the opportunity to review and contest those matters. General Development Utilities, Inc. V. Hawkins, 357 So2d 408, 409 (Fla. 1978). The reason for this is obvious -- so that a party may question the relevancy, accuracy and completeness of a tendered regulation.

6/ Since it was shown that PDI had only six municipal transactions, and any violations must necessarily rest upon the municipal security requirements of MSRB Rule G-8, the failure to record commissions, if any, must be limited to those six trades.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-3445

Petitioner:

1. Covered in background.

2. Rejected as irrelevant to the charges in the complaint.

3. Covered in finding of fact 2.

4. Covered in findings of facts 1 and 2.

5. Covered in finding of fact 4.

6. Covered in findings of facts 10 and 11.

7.a. Rejected as being contrary to the more persuasive evidence.

1. Rejected as being contrary to the more persuasive evidence.

2. Rejected since respondents maintained "other records of original entry" which satisfied the rule. Reference to the SEC rule is irrelevant since the rule was not tendered into evidence or officially noticed.

3. Partially used to the extent the firm's commission receivable account did not conform with the MSRB rule. The remainder is irrelevant for the reason stated above.

Respondents:

1. Covered in finding of fact 1.

2. Covered in background.

3. Covered in findings of facts 2 and 10.

4. Rejected since Kracoff could not supervise the trade of municipal securities.

5. Partially covered to the extent it reflects Hurtig's intentions.

6. Rejected since only Hurtig could supervise a trade of municipal securities within his firm.

7. Rejected as irrelevant since PDI must have a super- vising principal.

8. Covered in finding of fact 11.

9. Covered in finding of fact 11.

10. Covered in finding of fact 7.

11. Covered in finding of fact 6.

12. Covered in finding of fact 9.

13. Covered in finding of fact 9.

14. Covered in finding of fact 8.

15. Covered in finding of fact 4.

16. Covered in finding of fact 1.

17. Rejected as being irrelevant.

COPIES FURNISHED:

Honorable Gerald A. Lewis Comptroller

The Capitol

Tallahassee, Florida 32301-8054

Charles E Scarlett, Esquire Suite 1302, The Capitol Tallahassee, Florida 32399-0350

Mr. Steven J. Hurtig 4651 Sheridan Street

Suite 270

Hollywood, Florida 33021

Docket for Case No: 86-003445

Orders for Case No: 86-003445