STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BANKING AND )

FINANCE, DIVISION OF )

SECURITIES, )

)

Petitioner, )

)

vs. ) CASE NO. 90-7347

)

JAMES SAMUEL JOHNSON, III, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to written Notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, Daniel Manry, held a formal hearing in the above-styled case on June 4, 1991, in West Palm Beach, Florida.

APPEARANCES

For Petitioner: Deborah Guller

Assistant General Counsel Office of the Comptroller

111 Georgia Avenue, Suite 211 West Palm Beach, Florida 33401

For Respondent: James Samuel Johnson II, Pro Se

1531 North Federal Highway Lake Worth, Florida

STATEMENT OF THE ISSUES

The issues for determination in this proceeding are whether Respondent, by and through his employees: (a) sold unregistered securities in the secondary market which were marked up in excess of 10 percent of the prevailing market price and which were not exempt from registration; (b) permitted an agent to service accounts prior to the agent's effective date of registration in the State and concealed such action; and (c) failed to maintain minimum net capital requirements for his corporation; and (d) failed to properly supervise the activities of his employees and agents.

PRELIMINARY STATEMENT

Petitioner issued an Administrative Complaint with Notice of Intent to Enter Cease and Desist Order and Notice of Rights against Respondent on August 30, 1990. 1/ The complaint charged that an examination of Respondent's business, for the time period November 8, 1988, through May 31, 1989, revealed multiple violations of Chapter 517, Florida Statutes, and applicable agency rules.

Respondent requested a formal hearing, and the matter was referred to the Division of Administrative Hearings for assignment of a hearing officer on November 21, 1990. The matter was referred to Hearing Officer Steve Menton on November 28, 1990. A formal hearing was scheduled for January 17, 1991, and rescheduled for June 4, 1991, pursuant to an Order Granting Continuance and Rescheduling Hearing entered on April 23, 1991.

At the formal hearing, Petitioner presented the testimony of Robert M. Long and Brent A. Peterson who were employees of Respondent during the period at issue in this proceeding. Petitioner also presented the testimony of Tiffany Lynn, an Area Financial Manager for Petitioner. Petitioner submitted one composite exhibit ("Petitioner's Exhibit A") which was admitted in evidence over objection. Respondent testified in his own behalf and offered no exhibits for admission in evidence.

A transcript of the record of the formal hearing was requested by Petitioner and filed with the undersigned on June 24, 1991. Petitioner timely filed its proposed findings of fact and conclusions of law on July 5, 1991.

Respondent did not file proposed findings of fact and conclusions of law. Rulings on Petitioner's proposed findings of fact are included in the Appendix to this Recommended Order.

FINDINGS OF FACT

1. Respondent owned the stock of a holding company and was an officer in a wholly owned subsidiary of the holding company. Respondent and another individual owned the stock of Dean, Johnson and Burke Holding Company ("Holding"). Holding owned the stock of Dean, Johnson and Burke Securities, Inc. ("Securities"). Respondent was the Secretary of Securities.

   
   

2. Respondent had ultimate responsibility for disbursements and profits for Holding and Securities. Respondent monitored the checkbooks and daily expenses for Securities. Respondent's accountant provided financial information to Respondent concerning the daily operations of both companies. The information was provided on forms supplied by Respondent. Respondent kept a daily record of how much each company made or lost, how much was owed, and other accounting information. Respondent made sure that the bills were paid and that the credit of each company remained good. Respondent also controlled the hiring of key personnel.

   
   

3. Brent A. Peterson was a manager and principal for Securities. 2/ Mr. Peterson set prices for the firm. Mr. Peterson engaged in transactions in which prices were set for securities to be sold to customers in excess of 10 percent above and below the prevailing market price. Out of 457 trades, approximately

   38 were sold at prices that exceeded a 10 percent markup (the "marked up securities").

   
   

4. The marked up securities were sold at prices in excess of 10 percent of the prevailing market rate. The National Association of Securities Dealers, Inc., ("NASD") determined that the securities were marked up in excess of 10 percent of the prevailing market price based upon Securities' contemporaneous costs. When a dealer is simultaneously making a market in a security (a "market maker"), the NASD looks to the prevailing market price for the purpose of determining if a markup exceeds 10 percent. The prevailing market price is the price at which dealers trade with one another, i.e., the "current inter-dealer market." 3/ When a dealer is not simultaneously making a market in a security (a "non-market maker"), the contemporaneous costs of the dealer are used for the

   purpose of determining if the securities have been marked up in excess of 10 percent. The contemporaneous costs reflect the prices paid for a security by a dealer in actual transactions closely related in time to the dealer's retail sales of that security. Such a standard is normally a reliable indication of prevailing market price in the absence of evidence to the contrary.

   
   

5. Securities was not a market maker in the marked up securities. Even though securities may be sold at the same market price by one firm that is a market maker and one that is not a market maker, the latter may be deemed by the NASD to have marked up the security by more than 10 percent depending on the firm's contemporaneous costs. Many of the marked up securities were sold to customers at the same market price as that the customers would have paid other brokerage houses. 4/ Since Securities was not a market maker in the marked up securities, the standard used by the NASD to determine the amount of markup was the contemporaneous costs paid by Securities. The securities involved in the 38 trades were marked up more than 10 percent over Securities' contemporaneous costs.

   
   

6. Respondent sold unregistered securities that were not exempt from registration. Unregistered securities may be sold if they are reasonably related to the current market price. The marked up securities were not reasonably related to the prevailing market price because they were marked up more than 10 percent over Securities' contemporaneous costs.

   
   

7. Robert M. Long sold securities to customers as an employee of Securities prior to the effective date of his registration with Petitioner. Mr. Long was registered with Petitioner as a registered representative on May 18, 1988. Mr. Long was employed by Securities, from April 19, 1988, through September 20, 1989. Mr. Peterson advised Mr. Long that Mr. Long was authorized to trade securities. Pursuant to Mr. Paterson's advice, Mr. Long sold securities in Tel-optics prior to the effective date of his registration with Petitioner on May 18, 1988.

   
   

8. Respondent concealed the sale of securities by Mr. Long prior to the effective date of his registration with Petitioner. Mr. Long's registered representative number was 34. Relevant order tickets showed Mr. Long as the person engaged in the sale of securities prior to May 18, 1988. Registered representative number 30 had been used on the order tickets at the time of the trades. After Mr. Long was registered with Petitioner, Mr. Long's number 34 was added to the order tickets and number 30 was crossed out.

   
   

9. Securities operated with a net capital deficiency of approximately

   $30,000. The net capital deficiency resulted from the failure to accrue liabilities. The net capital deficiency was discovered by Mr. Long and Jeff Clark, an examiner for the NASD. The invoices for bills for the unaccrued liabilities were not filed where bills and invoices were normally filed and were found by Mr. Long concealed in drawers and other remote locations in the office.

   
   

10. The net capital deficiency was discovered by Mr. Long on August 28, 1989, but not reported to Petitioner until September 19, 1989. Mr. Long did not notify Petitioner of the net capital deficiency at Securities until the deficiency could be verified by Mr. Clark.

    CONCLUSIONS OF LAW

    
    

11. The Division of Administrative Hearings has jurisdiction in this proceeding pursuant to 120.57(1), Florida Statutes. The parties were duly noticed for the formal hearing.

    
    

12. The burden of proof is on Petitioner in this proceeding. Petitioner must show by clear and convincing evidence that Respondent committed the acts alleged in the administrative complaint and, if so, what disciplinary action should be taken against Respondent. Ferris v. Turlington, 520 So.2d 292 (Fla. 1987).

    
    

13. Respondent is liable for the actions of his agents and employees irrespective of whether Respondent has actual knowledge of such acts. Neither knowledge nor intent is a prerequisite to a finding that Respondent violated the provisions of Chapter 517, Florida Statutes. In State v. Houghtaling, 181 So.2d 636 (Fla. 1965), the Florida Supreme Court held that scienter" is not a necessary element of a violation of Section 517.12, Florida Statutes. Other courts have also held "scienter" is unnecessary in prosecutions relating to Section 517.301. Merrill, Lynch, Pierce, Fenner & Smith v. Byrne, 320 So.2d 436 (Fla. 3d DCA 1975); Silverberg v. Paine, Webber, Jackson & Curtis, Incorporated, 710 F. 2d 678, 690 (11th Cir. 1983); Messer v. E. F. Hutton and Co., 833 F. 2d 909, 919 (11th Cir. 1987). Principals are charged by law with knowledge of corporate conduct and affairs and cannot argue that they have "nothing to do with the management of the business." Whigham v. Muehl, 500 So.2d 1374, 1378 (F1a. 1st DCA 1987); Manatee County Growers' Ass'n v. Florida Power & Light Co., 152 So 181, 185 (1934).

    
    

14. Employees and agents of Securities committed the acts alleged in the Administrative Complaint. Those acts violated relevant provisions of Chapter 517, Florida Statutes, and the rules promulgated thereunder. Respondent, by and through his agents and employees, committed the acts alleged in the Administrative Complaint.

    
    

15. Respondent violated Florida Administrative Code Rules 3D-600.013(1)(k) and (m) by permitting Securities to enter into a transaction for its own account with a customer in which the securities were marked up unreasonably and by entering into a transaction with or for a customer in which securities were sold at a price not reasonably related to the then current market price. Respondent engaged in approximately 38 trades in the secondary market involving securities that were marked up more than 10 percent of the prevailing market price based upon Respondent's contemporaneous costs. Barnett. United States, 319 F.2d 340,

    344 (8th Cir. 1963). See also, In the matter of Alstead, Dempsey & Company, Incorporated, SEC Admin. Proc. File NO. 3-6135.

    
    

16. Respondent violated Section 517.07, Florida Statutes, by selling securities in transactions that were not exempt from registration. Section 517.07, in relevant part, prohibits the sale of unregistered securities unless the securities are sold in a transaction exempted under she provisions of Section 517.061. The only provision of Section 517.061 which would have exempted the securities is Section 517.061(17). In order for a transaction to be exempt from registration under Section 517.061(17), the securities must be offered at a price reasonably related to the `current market price. The marked up securities were not offered at a price reasonably related to the current market price. The securities were offered in the secondary market at a markup

    in excess of 10 percent of the current market price based upon Respondent's contemporaneous costs. Barnett, 319 F.2d at 344. See also, The the Matter of Alstead, SEC Admin. Proc. File NO. 3-6135.

    
    

17. Respondent violated Florida Administrative Code Rule 3D-600.013 by engaging in transactions involving unregistered securities. Rule 3D-600.013(n) provides in relevant part that the act of executing orders for the purchase of securities not registered under Section 517.061, Florida Statutes, demonstrates the unworthiness of a dealer, within the meaning of Section 517.161. The marked up securities were neither registered nor exempt from registration.

    
    

18. Respondent engaged in securities transactions prior to the effective date of registration by Respondent's employee and agent in violation of Section 517.12, Florida Statues. Section 517.12(1) prohibits dealers, associated persons, or issuers of securities from selling or offering for sale any securities unless such persons are registered with Petitioner. Respondent, by and through his agent/employee, Robert M. Long, opened customer accounts which were serviced by Mr. Long prior to the effective date of Mr. Long's registration with Petitioner as a registered representative.

    
    

19. Respondent concealed the sale of securities by its unregistered agent in violation of Section 517.301(1), Florida Statutes. Section 517.301(1)(a) prohibits a person from directly or indirectly engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon another in connection with the offer, sale, or purchase of any investment or security. Section 517.301(1)(c) further prohibits a person from: knowingly and willfully falsifying, concealing, or covering up a material fact, by trick, scheme, or device; making any false, fictitious, or fraudulent statement or representation; or making or using any false writing or document which is known to contain a false, fictitious, or fraudulent statement or entry. Respondent, by and through his agents and employees, concealed the fact that Mr. Long opened and serviced customer accounts prior to the effective date of Mr. Long's registration with Petitioner.

    
    

20. Respondent violated Florida Administrative Code Rule 3D-600.013 by violating applicable rules of the NASD. Rule 3D-600.013(1)(p) provides in relevant part that a violation of any rule of a national securities exchange or a national securities association of which it is a member demonstrates the unworthiness of a dealer, within the meaning of Section 517.161, Florida Statutes. Respondent violated Article III, Section 17(a), NASD Rules of Fair Practice by failing to provide adequate supervision of his employees and agents.

    
    

21. Respondent also violated Florida Administrative Code Rule 3E-600.014 by failing to provide adequate supervision. Rule 3E-600.014(6) provides in relevant part:

    
    

    (6) All broker/dealers shall establish and keep current a set of written supervisory procedures, and a system for implementing such procedures, which may be reasonably expected to prevent and detect any violations of Chapter 517, Florida Statutes, and rules thereunder. The procedures shall include the designation by name or title of those persons delegated supervisory responsibility and in at least the area of sales, financial operations, and compliance. The complete set

    of such procedures and systems shall be kept in all branch offices registered with this Department.

    
    

    The supervisory procedures maintained by Respondent were not sufficient to prevent and detect violations of Chapter 517.

    
    

22. Respondent violated Section 517.301(1)(c), Florida Statutes, and Florida Administrative Code Rules 3E-600.014(1) and 3E-600.016(2)(b) by failing to maintain sufficient net capital and concealing the non-accrual of liabilities in order to give the appearance of adequate net capital. Rule 3E-600.014(1) requires Respondent to maintain adequate records. Rule 3E-600.016(2)(b) requires Respondent to accurately report prescribed information to Petitioner. Securities failed to accrue liabilities of approximately $30,000. The invoices establishing those liabilities were not maintained adequately, were not reported accurately to Petitioner, and were concealed in the corporate offices of Securities.

    
    

23. Sections 517.221(1) and (3), Florida Statutes, provide in relevant part that Petitioner may issue a cease and desist order and impose a fine for violations of Chapter 517 and any rule promulgated thereunder. Section 517.221(3) authorizes Petitioner to impose and collect an administrative fine against any person found to have violated any provision of Chapter 517 or any rule promulgated thereunder. Such a fine may be imposed in an amount up to

    $5,000 for each violation.

    
    

24. The violations committed by Respondent arose from three separate acts. First, Respondent sold securities at a markup in excess of 10 percent of the prevailing market price. The fact that Respondent sold unregistered securities not exempt from registration resulted from the same act. Second, Respondent permitted securities to be sold through an unregistered agent and tried to conceal those activities. Third, Respondent failed to maintain minimum net capital requirements and tried to conceal accrued liabilities that resulted in the failure to maintain net capital requirements.

    
    

25. There are mitigating circumstances surrounding the first of the three acts committed by Respondent. Securities is deemed under applicable law to have sold securities at a markup in excess of 10 percent of the prevailing market price because the prevailing market price was determined by reference to Respondent's contemporaneous costs. Many of the securities involved in the 38 trades at issue were sold to customers at the same market price that the customers would have paid at other brokerage houses. The other two acts committed by Respondent involve aggravating circumstances in the form of attempts to conceal the violations.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner enter a final order finding that Respondent is

guilty of committing the acts alleged in the Administrative Complaint, requiring Respondent to cease and desist from all violations of Florida statutes and rules, and imposing a fine in the aggregate amount of $9,000. The fine should be imposed in the amount of $2,000 for selling securities in excess of a 10 percent markup and $3,500 for each of the other two acts that constituted violations of applicable statutes and rules.

DONE AND ENTERED in Tallahassee, Leon County, Florida, this 25th day of July, 1991.

DANIEL MANRY

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 25th day of July, 1991.

ENDNOTES

1/ The Administrative Complaint was issued against eight respondents, including the Respondent in this proceeding. Proceedings against the other seven respondents were settled.

2/ Mr. Peterson was originally the firms general principle but later became the firm's Series 27, Financial Principle.

3/ Findings similar to those made in thin paragraph are

further explained in Barnett v. United States, 3;19 F.2d 340, 344 (8th Cir. 1963). See also, In the Matter of Alstead, Dempsey & Company, Incorporated, SEC Admin. Proc. File NO. 3-6135.

4/ Mr. Peterson was prosecuted by the NASD and was fined

$8,746.

APPENDIX

Petitioner has submitted proposed findings of fact. It has been noted below which proposed findings of fact have been

generally accepted and the paragraph number(s) in the Recommended Order where they have been accepted, if any. Those proposed findings of fact which have been rejected and the reason for their rejection have also been noted. No notation is made for unnumbered paragraphs. Respondent did not submit proposed findings of fact.

The Petitioner's Proposed Findings of Fact

Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection

1. Accepted in Finding 1

2. Accepted in Finding 2

3. Accepted in Finding 3

4. Accepted in Finding 7

5. Accepted in Findings 9-10

6-7 Rejected as recited testimony

COPIES FURNISHED:

The Honorable Gerald Lewis Comptroller, State of Florida The Capitol, Plaza Level Tallahassee, Florida 32399-0350

William G. Reeves General Counsel Department of Banking and

Finance

The Capitol, Plaza Level Tallahassee, Florida 32399-0350

Deborah Guller

Assistant General Counsel Office of Comptroller

111 Georgia Avenue, Suite 211 West Palm Beach, Florida 33401

James S. Johnson, III 1531 North Federal Highway Lake Worth, Florida 33460

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 contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 90-007347

Orders for Case No: 90-007347