STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

LOUIS FELDMAN, )

)

Petitioner, )

)

vs. ) CASE NO. 90-7342

) DEPARTMENT OF BANKING ) AND FINANCE, )

)

Respondent. )

)

RECOMMENDED ORDER

A hearing was held in this case in Tampa, Florida on June 26, 1991, before Arnold H. Pollock, a Hearing Officer with the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Gregory G. Schultz, Esquire

Schultz & Associates, P.A. 26750 U.S. Highway 19, North Suite 310-A

Clearwater, Florida 34621

For Respondent: Margaret S. Karniewicz, Esquire

Department of Banking and Finance

Suite 1302, The Capitol Tallahassee, Florida 32399-0350

STATEMENT OF THE ISSUES

The issue for consideration in this matter is whether Petitioner should be granted registration as an associated person of FISCL Securities in Florida.

PRELIMINARY MATTERS

On October 11, 1990, the Respondent, Department of Banking and Finance, (Department), by letter, advised the Petitioner herein, Louis Feldman, that his application forregistration as an associated person with FISCL Securities in Florida was being denied. The basis for denial was that the Petitioner had been the subject of two Administrative Orders of the National Association of Securities Dealers, Inc.,(NASD), and that those Orders constituted prima facie evidence of his unworthiness to transact the business of an associated person.

Thereafter, on November 5, 1990, Mr. Feldman requested a formal hearing and, by letter dated November 19, 1990, the file was forwarded to the Division of Administrative Hearings for appointment of a Hearing Officer. After the parties responded to the Initial Order entered herein, by Notice of Hearing

dated January 30, 1991, H.O. James E. Bradwell set the case for hearing in Tampa on April 23, 1991. However, on April 9, 1991, Mr. Bradwell granted the Petitioner's Motion For Continuance and postponed the hearing until June 26, 1991, when it was held, as scheduled, by the undersigned to whom the case had been transferred in the interim.

At the hearing, Petitioner testified in his own behalf and presented the testimony of Tamara Cain, Assistant Director of the Department's Division of Securities, and introduced Petitioner's Exhibits A - C. Respondent also presented Ms. Cain's testimony, and introduced Respondent's Composite Exhibit 1 and 2. The undersigned also officially recognized sections of the Florida Statutes, the Florida Administrative Code, the Securities and Exchange Act of 1934; and rules of the NASD and the Municipal Securities Rulemaking Board, (MSRB).

At hearing, Petitioner's counsel indicated that a transcript of the proceedings would be furnished and the parties were given 10 days from the date the transcript was received by the Hearing Officer in which to submit their Proposed Findings of Fact. No transcript was received, however, and within the week prior to the date of this Order, counsel for Respondent advised the undersigned that the Petitioner's counsel had cancelled the order for the transcript. No information to this effect was provided the undersigned by Petitioner, however.

Nonetheless, counsel for Respondent submitted Proposed Findings of fact which have been, as appropriate, incorporated into this Recommended Order.

Counsel for Petitioner submitted a lengthy summation consisting of a recitation of Petitioner's legal positions and argument and citations in support thereof. Though no specific findings of fact were urged by the Petitioner, this submittal was thoroughly considered in the preparation of this Recommended Order.

FINDINGS OF FACT

1. At all times pertinent to the allegations herein, the Petitioner was an applicant for registration as an associated person of FISCL Securities. The Respondent, Department, was the state agency charged with the administration and enforcement of Chapter 517, FLORIDA STATUTES, the Florida Securities and Investor Protection Act, and the rules promulgated thereunder which include the registration of associated persons as securities dealers inthis state.

   
   

2. Under the rules of the Department, anyone who seeks to represent a securities dealer in Florida is required to file an application form, (Form U- 4), with the National Association of Securities Dealers, (NASD), which, upon review, is forwarded to the state in which the applicant resides and seeks registration. If the records of the NASD disclose any disciplinary action having been taken against the applicant, it is identified to the state in which registration is sought. In Florida the Department is the appropriate agency and Department officials review the application to see if it should be approved.

   
   

3. In this regard, all disciplinary information, the records of the NASD, is forwarded to the pertinent state for review in accordance with the rules and statutes of that state and, based on the information provided, a decision is made as to whether the application should be approved fully, approved with conditions, or denied. In Florida, all documents relating to the applicant's disciplinary history are secured and reviewed by the Department's Division of Securities prior to a recommendation being made as to approval or denial of the application for registration.

4. In the instant case, the information submitted by NASD, pertaining to the Petitioner herein, included evidence of a prior disciplinary record. Upon receipt of the notice, Ms. Cain, the Division's Assistant Director, sent out a discrepancy letter to the Petitioner and requested copies of the disciplinary record and his form U-4 from NASD.

   
   

5. The information submitted to the Department by Ellen J. Badler, Assistant Director, Special Registration, with NASD, dated July 18, 1990, reflected three letters of admission, waiver and consent from First Heritage Corporation, a securities dealer in Southfield Michigan, and Louis Feldman, Petitioner, a registered options principal with and president of the firm. The documents show that on the basis of periodic review of the company records in October and November, 1981, the corporation failed to obtain or maintain option account agreements for 7 of its option customers; that in 5 cases it failed to obtain or maintain sufficient background and financial information on customers approved for trading; and that it failed to show the date prospectuses were furnished to options customers. All of the above were cited as violations of Article III, Section 33, Appendix E, NASD's Rules of Fair Practice.

   
   

6. This inquiry also indicated that the corporation and Petitioner failed to inform its customers, in writing, of the method it used to allocate exercise notices to its customers' accounts, and failed to explain the way the system operated and its consequences, in violation of Section 63, of NASD's Uniform Practice Code.

   
   

7. Mr. Feldman, along with the company, admitted those violations in a Letter of Admission, Waiver and Consent he executed in response to NASD's District 8 Business Conduct Committee, (Committee), and they were punished with a censure to the company and a joint fine of up to $500.00 for Mr. Feldman andthe company.

   
   

8. No further disciplinary action was taken against the Petitioner or his company by NASD, the SEC, or the state of Michigan until, in 1989, NASD entered its Decision and Order of Acceptance of Respondents' Offer of Settlement regarding three Complaints filed by the Committee in 1988 for alleged violations of rules of the Municipal Securities Rulemaking Board, (MSRB), and the Rules of Fair Practice. These complaints, filed against Petitioner, First Heritage, and as to one of the three, to a third party as well, related to:

   
   

   1. effecting the purchase and sale of municipal securities at prices in which the aggregate price at which the securities were purchased or sold were not reasonable and fair under the circumstances;

      
      

   2. placing several different advertisements which omitted material facts and were mis- leading;

      
      

   3. again, purchasing and selling municipal securities at prices which were not fair and reasonable.

9. The Committee found that the Petitioner and the other parties involved were in violation of the rules as alleged, and fined Petitioner and First Heritage $10,000.00 jointly as to the two price allegations, and $5,000.00 as to the advertising allegation.

   
   

10. Petitioner claims the violations were more ministerial and technical than substantive and that no customer ever complained about or was in any way injured by those actions. As to the advertisements, he claims they were not misleading. Examination of the advertisements does not necessarily support that claim, however, He also claims that the policies complained of were the same as those followed for the 13 years the company was in business and prior audits by NASD had never resulted in any noted discrepancies.

    
    

11. The Department does not consider as pertinent the fact that injury to a consumer was not involved. By the same token, given, as here, the completed disciplinary action which has become final, it will not look behind that action and re-litigate, at a hearing such as this, the truth of the allegations.

    
    

12. Petitioner also claims that in each case he was advised by counsel that it would be useless to fight the allegations of misconduct since it appeared the collective mind of the agency was made up to take action. Further, weighing the minimal fines sought against the extensive cost to Petitioner in attorney fees and lost commissions while litigating the allegations, he elected to take that route less expensive to him in the short run and accept punishment. This decision did not, it would appear, redound to his benefit.

    
    

13. Petitioner also claims, and it is so found, that at no time has any disciplinary action ever been taken against him for actions in the securities business by the states of Michigan or Florida.

    
    

14. On the basis of those actions, by letter of October 11, 1990, the Department notified the Petitioner that his application for registration was denied. The two page letterclearly indicated the Petitioner's professional history and the fact that he was the subject of "at least two regulatory actions filed by the NASD." The letter then listed the specific allegations of misconduct charged against the Petitioner in each of the two actions and noted the agency action taken in each case.

    
    

15. The Department's letter also cited the pertinent statute which authorizes it to deny an application for registration and the bases therefor, and noted the reasons for its action. Petitioner was also notified of his right to and the procedure for contesting the Department's action.

    
    

    CONCLUSIONS OF LAW

    
    

16. The Division of Administrative Hearings has jurisdiction over the parties and the subject matter of theses proceedings. Section 120.57(1), Florida Statutes.

17. Under the provisions of Chapter 517, Florida Statutes, the Department is charged with the registration of securities dealers in this state under conditions outlined in Section 517.12, Florida Statutes. Under the provisions of Section 517.161(1)(h), Florida Statutes, the Department may deny, revoke, restrict or suspend the registration of any applicant or registrant who;

    
    

    has demonstrated his unworthiness to transact the business of dealer, investment advisor, or associated person.

    
    

18. In that regard, Rule 3E-600.011, F.A.C., promulgated by the Department based on the legislative authority granted it, provides that prima facie evidence of unworthiness to transact the business of a dealer, investment advisor, principal, or agent in the State of Florida shall include: ...

    
    

    (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, ....

    
    

19. Here, the evidence introduced by the Respondent clearly indicated that the Petitioner individually and in conjunction with First Heritage Corporation was the subject of an administrative order entered by the National Association of Securities Dealers based on established violations of rules promulgated under federal law. Specifically, Mr. Feldman was cited for violations of the NASD Rules of Fair Practice and the rules of the Municipal Securities Rulemaking Board.

    
    

20. The NASD is a self-regulatory national securities association registered with the Securities and Exchange Commission, established pursuant to Section 15A of the Securities and Exchange Act of 1934. The NASD's Rules of Fair Practice are promulgated and adopted pursuant to that Act. The Orders entered by the NASD meet the test established for evidence of unworthiness in Rule 3E-600.011(2), F.A.C., and constitute "prima facie evidence of unworthiness." Therefore, Petitioner bears the burden of coming forward with evidence to overcome this prima facie evidence of his unworthiness. In that regard, Petitioner offered no evidence regarding that issue. Instead, he attempted to minimize theseriousness of the misconduct alleged against him, at no time denying that the actions took place. He further justified his failure to defend himself against the allegations initially by claiming that the proposed penalty was less onerous in amount than the cost of fighting the allegations. In doing so, he placed a dollar and cents valuation on his reputation, and this now redounds to his detriment.

    
    

21. The Department does not dispute that no disciplinary action has been taken against the Petitioner in Florida other than that in this denial action, and there is no evidence that the State of Michigan or the Securities and Exchange Commission or any other regulatory agency has disciplined Mr. Feldman in the past save for the matters in issue here. The fact remains, however, that Mr. Feldman had the obligation and burden to establish his worthiness for registration, Castleman v. Office of Comptroller, 538 So.2d 1365 (Fla. 1DCA 1989); Department of Banking and Finance v. Evans, 540 So.2d 884 (Fla. 1 DCA 1988).

22. Though the evidence may show Petitioner's misconduct to be of a minor nature, and though no evidence was presented to indicate that any customer of his suffered financial or other harm thereby, Petitioner's evidentiary thrust is one of mere mitigation of misconduct rather than a demonstration of worthiness, and it is clear Petitioner has failed to overcome the prima facie evidence of unworthiness established by the introduction of the disciplinary actions taken against him.

    
    

23. Petitioner's counsel asserts in his written summationthat the Department's October 11, 1990 letter was legally and constitutionaly deficient in that by its vagueness, it failed to provide Petitioner with due process of law. He also asserts that the Department failed to establish that the alleged violations by the Petitioner related to federal or state securities laws, rules or regulations in that the NASD is a private association governed by its own rules.

    
    

24. As to the first assertion, that of vagueness, that contention is without merit. The October 11, 1990 letter from the Department clearly sets out not only the specific miscondct attributed to the Petitioner, but also the statutory basis for using that information as a basis for denial.

    
    

25. As to the second, while NASD may be a private association, Rule 3E- 600.011, F.A.C., defining prima facie unworthiness, specifically refers to an administrative order by not only a state or federal agency, but also by a "national securities association," involving a violation of any rule promulgated under federal or state securities law.

    
    

26. Respondent has established, and Petitioner has failed to present any evidence to contradict, that NASD and its rules fall within that definition. Therefore, Petitioner's second assertion is also without legal or factual merit.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is therefore recommended that a Final Order be entered denyingPetitioner, Louis Feldman's application for registration as an associated person of FISCL Securities in Florida.

RECOMMENDED in Tallahassee, Florida this 17th day of September, 1991.

ARNOLD H. POLLOCK

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 17th day of September, 1991.

COPIES FURNISHED:

Gregory G. Schultz, Esquire Schultz & Associates, P.A. 26750 U.S. Highway 19 N. Suite 310-A

Clearwater, Florida 34621

Margaret S. Karniewicz, Esquire Department of Banking and

Finance

Suite 1302, The Capitol Tallahassee, Florida 32399-0350

Gerald Lewis Comptroller

The Capitol, Plaza Level Tallahassee, Florida 32399-0350

William G. Reeves General Counsel

Department of Banking and Finance

The Capitol, Plaza Level, Room 1302 Tallahassee, Florida 32399-0350

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS:

All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should consult with the agency which will issue the Final Order in this case concerning its rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency which will issue the Final Order in this case.

Docket for Case No: 90-007342

Orders for Case No: 90-007342