STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

KENNETH JOSEPH WHITEHEAD, )

)

Petitioner, )

)

vs. ) DOAH CASE NO. 86-4055

) FILE NO. 632-S-10/86

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

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was conducted in this case on January 15, 1987, in Tallahassee, Florida, before M. M. Parrish, a duly designated Hearing Officer of the Division of Administrative Hearings. Appearances for the parties at the hearing were as follows:

FOR PETITIONER: James S. McClellan, Esquire

314 North Broadway, Suite 1930 St. Louis, Missouri 63102

FOR RESPONDENT: Charles E Scarlett, Esquire

Assistant General Counsel Office of the Comptroller The Capitol, Room 1302 Tallahassee, Florida 32399

ISSUES AND INTRODUCTION

The basic issue in this case is whether the Petitioner's application for registration as an associated person in the state of Florida with Value Equities Corporation should be granted or denied. The Department proposes to deny the application on the basis of Section 517.161(1)(h) and (k), Florida Statutes, contending that the Petitioner has demonstrated his unworthiness to transact the business of an associated person and is of bad business repute. The Petitioner has little, if any dispute with the facts relied upon by the Department, but offered evidence in mitigation and asserts that, on the facts in this case, he is entitled to registration.

Subsequent to the hearing in this case, a transcript was filed on March 4, 1987, and, pursuant to ruling at the close of the hearing, the parties were allowed until March 16, 1987, within which to file their proposed recommended orders. Both parties filed timely post-hearing documents, containing proposed findings of fact. A specific ruling on all proposed findings of fact is contained in the Appendix attached to and incorporated into this recommended order.

FINDINGS OF FACT

Based on the stipulations of the parties, on the testimony of the witnesses at the hearing, and on the exhibits received in evidence, I make the following findings of fact.

1. Petitioner, Kenneth Joseph Whitehead, ("Whitehead") filed a Form U-4 application to be registered as an associated person in the state of Florida with Value Equities Corporation, located at 216 South Fairway Drive, Belleview, Illinois. Said application was received at the Department of Banking and Finance ("Department") in due course on June 21, 1986.

   
   

2. By letter dated September 3, 1986, the Department advised the Petitioner that it intended to deny his application for registration for the reasons set forth at length in the letter. Thereafter, the Petitioner filed a timely request for hearing.

   
   

3. The National Association of Securities Dealers ("NASD") District Business Conduct Committee, District #4, on July 11, 1978, accepted a "Letter of Admission, Waiver and Consent" against Weinrich, Zitzman & Whitehead, Inc., Kenneth J. Whitehead and others. In said agreement, Whitehead personally consented to a censure, a fine in the amount of $2000, and a ten day suspension from NASD membership. The sanctions imposed by the NASD resulted from violations of Regulation T imposed against Whitehead individually.

   
   

4. The State of Missouri issued an order entitled "ORDER TO CEASE AND DESIST" in the matter of: Weinrich, Zitzman and Whitehead, Inc., Kenneth Whitehead, et al., on February 24, 1982, and found Whitehead to have personally made sales of unregistered securities, to have effected Unauthorized transactions, to have distributed promotional materials while not providing a prospectus and to have omitted to purchasers the fact that said securities were unregistered. Further, all respondents in that proceeding, including Whitehead, were found by the State of Missouri to have omitted the fact that unsuccessful attempts were made to register certain stocks, the fact that certain stocks could not justify their offering price, and the fact that the promoter's equity position could not be justified with respect to certain stock. All of the aforementioned were found to have constituted violations of Missouri law. As a result, Whitehead and others were ordered to cease and desist from violating Missouri law. Petitioner was afforded his due process rights to contest said order which was subsequently upheld.

   
   

5. On May 31, 1983, the NASD District Business Conduct Committee #4 ("Committee"), entered a "Decision in Complaint No. KC-261" as to Whitehead and others. The Committee found that Whitehead failed to maintain minimum margin equity on certain accounts and failed to deliver securities as required by Article III, Sections 1 and 30, of the NASD Rules of Fair Practice. As a result of said violations, Whitehead was censured, fined $2500 and suspended by the NASD for three days.

   
   

6. On September 19, 1985, the Committee issued a second complaint (KC-339) against Whitehead and others alleging violations of Article III of the NASD Rules of Fair Practice by failing to maintain required net capital, proper books, and records. As a result of an offer of settlement, Whitehead was censured and fined $1500.

7. On December 20, 1985, the Committee issued a third Complaint (KC-343) against Whitehead and others for failure to maintain required net capital in violation of SEC Rule 15C3-1 and Article III, Section 1, of the NASD Rules of Fair Practice. The complaint remains pending.

   
   

8. In 1982, eleven suits were filed by individual plaintiffs against WZW Financial Services, Inc., Whitehead, and others in the Circuit Court of the City of St. Louis to effect rescission of the sale of unregistered securities in the state of Missouri. The suits were settled for an aggregate of $240,000. The Petitioner was not directly involved in the sales that led to these suits, but he was vicariously liable as an officer of the corporation.

   
   

9. In 1984, a suit was filed in the U.S. District Court for the Southern District of Illinois by certain individual plaintiffs against WZW, Inc., Kenneth Whitehead, and others in the sale of limited partnership interests wherein the allegations included violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C 78j(b), Rule 10b-5, involving securities fraud; violations of Section 1964c of the Racketeer Influence and Corrupt Organizations Act ("RICO") of 18 U.S.C. 1962C, 1964c, involving racketeering activity; and violations of 18

   U.S.C. 1341, involving mail fraud. The case is currently pending.

   
   

10. On January 30, 1986, O. R. Securities, Inc., filed a Form U-5 termination notice in which Whitehead was terminated for violating the firm's policy concerning margin accounts. The termination was investigated by the NASD. Following the investigation, the NASD determined that no further action was warranted.

    
    

    CONCLUSIONS OF LAW

    
    

    Based on the foregoing findings of fact and on the applicable legal principles, I make the following conclusions of law.

    
    

11. The Division of Administrative Hearings has jurisdiction over the subject matter of and the parties to this case. Sec. 120.57, Fla. Stat.

    
    

12. Section 517.161, Florida Statutes, provides in pertinent part:

    
    

    1. Registration under S. 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:

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

       (k) Is of bad business repute.

       
       

13. In Rule 3E-600.11, Florida Administrative Code, the Department has determined "prima facie evidence of unworthiness" to be as follows:

    
    

    Prima Facie evidence of unworthiness to transact the business of a dealer, investment adviser, principal, or agent in the State of Florida shall include, but shall not be limited to:

    1. a conviction of any felony or first degree misdemeanor which relates to the registration being sought; or

       
       

    2. Any injunction, suspension, prohibition, revocation, denial or administrative order by any state or federal agency, national securities exchange, or

       national securities association, involving a violation of any federal or state securities law or any rule or regulation promulgated thereunder, and 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 or similar industries, or any court of competent jurisdiction;

       
       

    3. Evidence of the applicant or registrant previously or presently engaging in any

       of the practices outlined in Rule 3E-600.13.

       
       

14. Based on the foregoing findings of fact, especially the findings in paragraphs 3 through 6, it is concluded that the Petitioner is unworthy to transact the business of an associated person. Accordingly, the denial of the Petitioner's application is warranted pursuant to Section 517.161(1)(h), Florida Statutes.

    
    

15. Based on the foregoing findings of fact, it is concluded that the Petitioner is of bad business repute. Accordingly, the denial of the Petitioner's application is warranted pursuant to Section 517.161(1)(k), Florida Statutes.

RECOMMENDATION

Based on all of the foregoing, it is recommended that the Department of Banking and Finance issue a final order in this case which denies the Petitioner's application for registration as an associated person with Value Equities Corporation.

DONE AND ENTERED this 19th day of March 1987, at Tallahassee, Florida.

M. M. PARRISH 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 19th day of March, 1987.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-4055

The following are my specific rulings on each of the proposed findings of fact submitted by both parties.

Findings submitted by Petitioner

First unnumbered paragraph: Accepted in substance with unnecessary details omitted.

Second unnumbered paragraph: First sentence accepted in substance. Second sentence covered in introductory portion of this recommended order.

Paragraph 1: All but last sentence is accepted in substance. Last sentence is rejected as irrelevant because there is no persuasive competent substantial evidence that customers were not hurt or jeopardized.

Paragraph 2: First sentence accepted. Second sentence rejected as incomplete. Third sentence rejected as irrelevant in light of other evidence. Fourth and fifth sentences rejected as contrary to the greater weight of the evidence. Sixth sentence accepted. Seventh sentence rejected as contrary to the greater weight of the evidence and as not supported by persuasive competent substantial evidence.

Paragraph 3: Accepted in substance.

Unnumbered paragraph following paragraph 3: First sentence is rejected as irrelevant in light of other evidence. Second and third sentences are rejected as in part contrary to the greater weight of the evidence and in part not supported by persuasive competent substantial evidence.

Paragraph 4: Accepted in substance. Paragraph 5: Accepted in substance.

Paragraph 6: The first four sentences are rejected as constituting irrelevant and unnecessary details. The fifth sixth, and seventh sentences are rejected as contrary to the greater weight of the evidence and as not supported by credible competent substantial evidence.

Paragraph 7: Accepted in substance with unnecessary details omitted.

Findings submitted by Respondent Paragraph 1: Accepted.

Paragraph 2: Accepted in substance.

Paragraph 3: Accepted.

Paragraph 4: Accepted.

Paragraph 5: Accepted.

Paragraph 6: Accepted.

Paragraph 7: Accepted.

Paragraph 8: Accepted.

Paragraph 9: Accepted.

Paragraph 10: Accepted with additional facts for clarity and accuracy.

Paragraph 11: Rejected as constituting proposed conclusions of law or legal argument regarding what was not proved, and not constituting findings of fact based on evidence.

COPIES FURNISHED:

James S. McClellan, Esquire

314 North Broadway, Suite 1930 St. Louis, Missouri 63102

Charles E Scarlett, Esquire Assistant General Counsel Office of the Comptroller Suite 1302, The Capitol Tallahassee, Florida 32399

Honorable Gerald Lewis Comptroller, State of Florida The Capitol

Tallahassee, Florida 32399-0305

Docket for Case No: 86-004055

Orders for Case No: 86-004055