vs. ) CASE No. 87-0056
Respondent. )
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Healing Officer, William J. Kendrick, held a public hearing in the above-styled case on June 1, 1987, in Fort Lauderdale, Florida.
For Petitioner: Richard L. Hoffman, pro se
For Respondent: Charles E. Scarlett, Esquire
At issue in this proceeding is whether the application of Petitioner for registration as an associated person with First Southern investment Corporation should be approved.
At hearing, Petitioner testified on his own behalf, and called Robert McClure, Herman Granlick, Trudy Ann Rozelle, Bruce Ross, Gary Aboff, Harvey Ross, Martin Schaffer, and Orlando Colametteo as witnesses. Petitioner's exhibits 1-10 and 13-15 were received into evidence. Respondent called Robert McClure, Anne Pollack, Irving Cauvar, Marc Rubin, and Nick Christos as witnesses. Respondent's exhibits 1-24 were received into evidence.
The transcript of hearing was filed June 15, 1907, and the parties were granted leave until July 3, 1987, to file proposed findings of fact and conclusions of law. The parties proposed findings have been addressed in the appendix to this recommended order.
Petitioner, Richard L. Hoffman (Hoffman), applied to Respondent, Office of the Comptroller, Department of Banking and Finance, Division of Securities and Investor Protection (Department), for registration as an associated person
with First Southern Investment Corporation. By letter dated November 25, 1986, the Department advised Hoffman that his application had been denied, and Hoffman filed a timely request for formal hearing.
By "memorandum of understanding" dated June 10, 1986, Hoffman was employed by First Florida Securities Group, Inc. (First Florida) as the manager and compliance officer of its Fort Lauderdale branch office. Pertinent to this case, the memorandum of understandings provided:
It is today agreed that Richard Hoffman, as manager of a branch office of First Florida Securities Group, Inc., and representing a certain "Group" in that office agrees to work for and manage the office for First Florida Securities Group, Inc., under the following conditions: 1/
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E. The "Group" will be allowed an inventory bank of $50,000.00 of cost -- no one item to exceed
This will be reviewed periodically. It maybe exceeded only with written approval of two officers of First, Florida Securities Group Inc. 2/
The branch office opened on June 15, 1986, and by June 27, 1986, Serious problems in the operation of the branch office began to surface. These problems were addressed in a meeting on Monday, June 30, 1986, between Nick Christos, chief executive officer of First Florida; Jim Palmer, compliance officer for First Florida; and, Hoffman. The results of that meeting were memorialized in a memorandum to Hoffman of July 7, 1986, which provided, inter alia:
This is to summarize the
results of my meeting with you on Monday, June 30, 1986. In attendance, also, was Jim Palmer, Compliance Officer. The following is intended as a summary of conclusions, without benefit of detailed conversations that led to our mutual understanding
Letter to be sent to Jim Palmer from you, with respect to "as of" trades and other trades Purchased by customers at prices under the market on Jocom. (Not yet received as of this date).
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Understanding by you that your office would henceforth adhere strictly to the $25,000 limit
with respect to maximum inventory levels per corpora- tion -- with a $50,000.00 maxi- mum for your office at the end of each trading day. (Note that this limit was violated on Friday, June 27 when 41,200 International Communications was in inventory, with a value of $51,500).
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We reviewed the fact that
our Bear Stearns Margin Clerk was concerned about the Sy Schwartz account (purchases of 30,000 and 110,000 shares of Jocom) of which 110,000 shares or $96,250 still remains unpaid as of this date.
Review of concern about the number and total dollars involved in over-due payments of Ft. Lauderdale customers (not materially reduced as of this date).
The proof established that Hoffman failed to comply with his agreement to explain the "as of" trades and other trades purchased by customers at prices under the market in Jocom, adhere to the maximum inventory levels, and address over- due payments. Since there was no improvement in the operation of the branch office, Mr. Christos advised Hoffman on Monday, July 14, 1986, that:
Your Ft. Lauderdale group, as of pre-opening this morning, will have no authority to represent the firm in trading NASDAQ stocks.
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3. You will have one week, effec- tive with the termination of business on Friday, July 18, 1986, for your branch to find another "home" ... (associate themselves with another deal- er).
The principal of First Florida, Mr. Winkler, declined to support Mr. Christos because of his belief that the branch office had generated substantial revenues and that it would work out its problems. Accordingly, since Hoffman and the "Group" were not to be terminated, Mr. Christos and Mr. Palmer resigned as chief executive officer and compliance officer, respectively, for First Florida. On July 15, 1986, Hoffman, who held a principal's license, was elected president of First Florida, although he continued to operate as branch manager.
The confidence Mr. Winkler placed in the branch office and Hoffman was short lived. Between July 19, 1986, and July 31, 1986, First Florida received
complaints from over thirty customers of the branch office regarding unauthorized transactions, the failure to report or process trades, and the failure to provide confirmations or proceeds of sale. As a consequence of these complaints, Hoffman was terminated on July 31, 1986.
First Florida's loss from the operation of the branch totaled approximately $657,000. Of this sum, $357,000 was expended to cover the debit balance with its correspondent Bear Stearns for unpaid securities accounts, and
$300,000 for settlements with customers who alleged that purchases in their accounts were unauthorized. While First Florida's association with the "Group" may have been unprofitable, Hoffman benefited quite well. During the period of June 15-July 15, 1986, Hoffman earned over $60,000 in commissions through First Florida.
While Hoffman concedes that trades he received from customers were not processed, he asserts that the blame for such failure rests on Mr. Brazel, the "trader" for the branch office. According to Hoffman, Mr. Brazel frequently traded at home, rather than at the office, and during the week of July 21- 25, 1986, traded exclusively at home. Because of Brazel's absence, Hoffman asserted that trades were not executed or they were "lost" because of some motivation of Brazel not to process them. Hoffman concludes: "I didn't have any idea what was going on" and there was "no way (I) could control the trades."
Hoffman's attempt to "pass-the-buck" to Brazel is unpersuasive. While Brazel may be culpable, Hoffman also knew by mid-July 1986, if not by early July, that serious trading problems existed at the branch office, and that Brazel, if Hoffman is to be believed, was no small part of those problems. Yet Hoffman, who had been in the business for over 30 years, was the manager of the small branch office for First Florida, was president of the firm, was the firm's trader in Brazel's absence, and was a salesman for his own accounts, denies any responsibility for his failure to assure that trades were executed on behalf of his clients or the firm. Hoffman's testimony is inherently improbable and unworthy of belief. Hoffman's failure to diligently exercise his responsibilities as branch manager, president, trader, and salesman resulted in losses to his clients, as well as to other clients of the firm, since he failed to assure that their requests to sell securities were properly processed. 3/
In addition to Hoffman's failure to properly manage the branch office and his clients accounts, several other irregularities surfaced during his tenure with First Florida. Inexplicably, while employed by First Florida, Hoffman provided a customer, Sy Schwartz, with a written guarantee against loss. That guarantee provided:
Sy Schwartz:
This is to inform you, I agree that if Jocom is not up by July 7, 1986 you do not have to pay for it and I will take the trade back into my trading account.
/s/ Richard L. Hoffman
Also unexplained by Hoffman, was his personal payment of over $119,000 to his customer, Bruce Ross, between June 19, 1986, and July 15, 1986. These monies were variously described by Ross as involving the repayment of loans or his dealings in stocks. The substance of these transactions was not, however, further explained by either Mr. Ross or Hoffman.
Following his termination with First Florida, Hoffman associated himself with First Southern Investment Corporation (First Southern). During his tenure at First Southern, although not registered, Hoffman held himself out as a senior account executive, and attempted to sell securities to customers he had previously serviced at First Florida.
Both Hoffman and the Department offered the testimony of various witnesses concerning their opinion of Hoffman's reputation in the business community. Not surprisingly, those who had a good experience with Hoffman found him reputable, and those who felt they had suffered adversely under his representation found him to be of bad repute. The proof of Hoffman's reputation, offered through these witnesses, was not persuasive.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, these proceedings.
Pertinent to this proceeding, Section 517.12(1), Florida Statutes, provides:
No dealer, associated person,
or issuer of securities shall sell or offer for sale any securities in or from offices in the state
by mail or otherwise, unless the person has been registered with the department pursuant to the provisions of this section.
Pursuant to Section 517.161(1), Florida Statutes, the Department may deny an application for registration under Section 511.12 were the applicant:
(a) Has violated any provision of this chapter or any rule or order made under this chapter;
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(c) ... has been or is engaged or is about to engage in any practice or sale of securities which is
in violation of law;
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(h) Has demonstrated his unworthi- ness to transact the business of dealer, investment adviser, or associated person
Proof that the applicant has engaged in any practice outlined in Rule 3E-600.13, Florida Administrative Code, is, pursuant to Rule 3E-600.11, prima facie evidence of unworthiness to transact the business of agents in the State of Florida. Rule 35-600.13(2) provides:
The following are deemed demon- strations of unworthiness by an
agent under Section 517.161(1)(h), Florida Statutes, without limiting that term to the practices speci- fied herein:
(a) Borrowing money or securities from a customer;
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(g) Engaging in any of the practices specified in subsections (1) .... (p) ....
Subsection 3E-600.13(1)(p), Florida Administrative Code, provides that the following is a demonstration of unworthiness:
Violating any rule of a national securities exchange or
national securities association of which it is a member with respect to any customer, transaction or business in this state ....
Notably, Article III, Section 19(e) of the National Association of Securities Dealers' Rules of Fair Practice provides that:
No member or person associated with a member shall guarantee a customer against loss in any
securities account of such customer carried by the member or in any securities transaction effected by the member with or for such customer.
The proof established that Hoffman, contrary to the provisions of Section 517.12(1), Florida Statutes, offered for sale securities from offices in this state when he was not registered with the Department. Consequently, Hoffman violated the provisions of Section 517.161(1)(a), Florida Statutes.
The proof further established that Hoffman borrowed money from a customer and guaranteed a customer against loss in a securities transaction in violation of Rule 3E-600.13(1)(p) and Rule 3E-600.13(1)(a) and (g), Florida Administrative Code. Such activities are, pursuant to Rule 3E-600.11, Florida Administrative Code, prima facie evidence of unworthiness to transact the business of an agent in the State of Florida, and stand unrebutted on the record in this case. Consequently, Hoffman has violated the provisions of Section 517.161(1)(a) and (h), Florida Statutes.
Finally, the proof further demonstrated Hoffman's unworthiness to transact the business of associated person because of his failure to exercise his responsibilities as president of First Florida, branch manager, and account executive. As a consequence of his mismanagement, Hoffman's customers were deprived of the representation to which they were entitled, and suffered monetary losses.
Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED:
That the application of petitioner, Richard L. Hoffman, for registration as an associated person with First Southern Investment Corporation be DENIED.
DONE AND ORDERED this 15th day of July, 1987, in Tallahassee, Florida.
WILLIAM J. KENDRICK
Filed with the Clerk of the Division of Administrative Hearings this 15th day of July, 1987.
1/ The "Group" referred to in the "memorandum of understanding" consisted of Hoffman, Abraham Brazel, Ann Tonjum, Thomas Boyer, and David Kennedy. These individuals had, for the three month period immediately preceding their association with First Florida, operated a Fort Lauderdale office for another dealer, Monvest Securities, Inc. During their tenure with Monvest, Hoffman learned that Brazel had previously been barred from the industry. No proof was offered in this case, however, concerning the reason Brazel had been previously barred, and he was apparently successfully registered with Monvest and First Florida.
2/ The reason for the inventory limit was to limit the company's total capital exposure, as well as its exposure in any one stock.
3/ Hoffman offered proof to demonstrate that Brazel had a motive not to process trades in Jocom or Icon stock. According to Hoffman, Brazel was then marketing another security (Sooner), and to process the trades in the other securities would have breached their inventory levels. While Brazel may have had such a motive, it is doubtful in light of the historic practice of the branch office in exceeding inventory levels. In any event, Brazel's failings do not exculpate Hoffman from the losses occasioned by his failure to exercise his responsibilities as president, branch manager, and account executive.
Mr. Richard L. Hoffman
Charles E. Scarlett, Esquire Office of the Comptroller Suite 1302, The Capitol Tallahassee, Florida 32399
