DEPARTMENT OF BANKING AND ) FINANCE, DIVISION OF SECURITIES ) AND INVESTOR PROTECTION, )
vs. ) CASE NO. 91-0704
Respondent. )
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, Mary Clark, held a formal hearing in the above- styled case on April 2, 1991, in Orlando, Florida.
For Petitioner: Robert K. Good
For Respondent: Edward W. Dougherty, Jr.
Mang, Rett & Collette, P.A. 660 East Jefferson Street Post Office Box 11127 Tallahassee, Florida 32302
An Administrative Complaint and Cease and Desist Order was filed by the Department of Banking and Finance on March 29, 1990, against the Respondent and thirty-one other persons, alleging various violations of Chapter 517, Florida Statutes (the "Florida Securities and Investor Protection Act").
The only allegation of wrongdoing by Eric Pepper is that he offered or sold an unregistered security in violation of Section 517.07, Florida Statutes.
The issues for disposition are whether that violation was committed and if so, what discipline should be imposed. The facts are substantially uncontroverted. Respondent opposes the penalty offered by Petitioner as inappropriate.
Eric Pepper received his copy of the Administrative Complaint on or about April 6, 1990, and made a timely request for an Administrative Hearing.
At the hearing, Petitioner presented the testimony of Richard A. White, by telephone (without objection). Respondent testified in his own behalf and presented one exhibit, the proposed stipulation and consent agreement, received without objection.
After the hearing a transcript was prepared and the parties submitted proposed recommended orders. The findings of fact proposed by each are substantially adopted herein.
The following facts are reflected in the parties' Prehearing Stipulation filed on March 27, 1991, and required no proof at hearing:
Eric Pepper was registered with the Department as an associated person of Thomas James Associates, Inc., from on or about December 11, 1987 until the termination of his registration with Thomas James Associates, Inc., on or about January 28, 1989. During all times Eric Pepper was registered with the Department, he was simultaneously registered with the National Association of Securities Dealers. He was also registered with the Department as an associated person of Prudential-Bache Securities, Inc., from February 8, 1989 until October 18, 1990.
Thomas James Associates, Inc., offered to the public, units, shares, and warrants of Electronic Assembly Services, Inc., from their offices in Florida. Electronic Assembly Services, Inc., was a "firm commitment" securities offering underwritten by Thomas James Associates, Inc. A unit of Electronic Assembly Services, Inc. consisted of four (4) shares of common stock plus two
(2) common stock purchase warrants and was sold to the public for two dollars ($2.00) per unit. The units, shares, and warrants of Electronic Assembly Services, Inc., were securities as that term is defined by Section 517.021, Florida Statutes.
The effective date of the offering (that is, the date at which the units could first legally be sold) was July 6, 1988.
The Initial Public Offering of Electronic Assembly Services, Inc., consisted of 1.5 million (1,500,000) units which were offered to the public at two dollars ($2.00) per unit.
The total number of units of Electronic Assembly Services, Inc., initially ordered by Eric Pepper for his clients was four thousand (4,000) for a total price to the customer of eight thousand dollars ($8,000.00). The total number of units of Electronic Assembly Services, Inc., received by those clients was three thousand (3,000) for a total purchase price to the customer of six thousand dollars ($6,000.00).
Prior to selling the units of Electronic Assembly Services, Inc., Eric Pepper was told by Brian Thomas (President of Thomas James Associates, Inc.) and Robert Setteducati (Branch Manager of the Orlando Office) that he could sell the units. He inferred from this that the securities were properly registered.
On approximately June 15, 1988, Eric Pepper contacted Loretta Horn, Keith MacIntosh, Hal Woodyard, Roxane Morgenthaler, and Willis Devier by telephone. Mr. Pepper told them that a new stock called Electronic Assembly Services (EAS) would soon be distributed. Mr. Pepper indicated these clients could place an order for EAS stock at that time, but that the entire order would probably not be filled because of the limited amount of stock which would be available. Mr. Pepper also told each of his clients that they should send a payment equal to the entire amount of the order as soon as possible, that the payment would be placed in a money market fund pending actual distribution, and that excess funds would remain in the money market for further investment or return to the customer.
Loretta Horn placed an order for one thousand (1,000) units of Electronic Assembly Services, Inc., for a total price of two thousand dollars ($2,000.00). She sent Thomas James a check for two thousand dollars ($2,000.00) dated June 23, 1988. Thomas James Associates received the check on or about June 27, 1988. She received seven hundred fifty (750) units as a final price of one thousand five hundred dollars ($1,500.00).
Francesca and Keith MacIntosh placed an order for five hundred (500) units of Electronic Assembly Services, Inc., for a total price of one thousand dollars ($1,000.00). They sent Thomas James a check dated June 22, 1988 in the amount of one thousand dollars ($1,000.00). The check was received by Thomas James Associates, Inc., on or about June 27, 1988. They received three hundred seventy-five (375) units at a final price of seven hundred fifty dollars ($750.00).
Hal Woodyard placed an order for one thousand (1,000) units of Electronic Assembly Services, Inc., for a total price of two thousand dollars ($2,000.00). Woodyard sent Thomas James a check dated June 20, 1988 in the amount of two thousand dollars ($2,000.00). Thomas James Associates, Inc., received the check on or about June 23, 1988. He received seven hundred fifty (750) units for a final price of one thousand five hundred dollars (1,500.00).
Roxane Morgenthaler placed an order for five hundred (500) units of Electronic Assembly Services, Inc., for a total price of one thousand dollars ($1,000.00). Morgenthaler sent Thomas James a check dated June 24, 1988 in the amount of one thousand dollars ($1,000.00). The check was received by Thomas James on or about June 27, 1988. She received three hundred seventy-five (375) units for a final price of seven hundred fifty dollars ($750.00).
Willis and Dale Devier placed an order for one thousand (1,000) units of Electronic Assembly Services, Inc., for a total price of two thousand dollars ($2,000.00). The Deviers sent Thomas James a check dated between June 22 and 27, 1988. The check was received by Thomas James on or about June 27, 1988. They received seven hundred fifty (750) units for a final price of one thousand five hundred dollars ($1,500.00).
The total commission paid to Eric Pepper for the sale of the units of Electronic Assembly Services, Inc., was three hundred and fifteen ($315.00) dollars. Eric Pepper earned these commissions during a two-week pay period which ended June 17, 1988.
The Electronic Assembly Services, Inc., units were delivered to the accounts of Eric Pepper's clients on or after July 6, 1988.
These facts are addressed from the evidence presented at hearing, including the weighing of credibility of the witnesses:
Eric Pepper's first job in the securities industry was with First Investor's Corporation, from May 1987 through December 1987. He left there to work for Thomas James and to get more varied experience.
Eric Pepper has held three jobs in the securities industry. His job at Thomas James was his second in the securities industry.
Beginning in early June, 1988, registered representatives at Thomas James were informed by the Branch Manager that an IPO (Initial Public Offering) would soon be coming up.
During the middle of June, 1988, another meeting was held, this time with Brian Thomas (President of Thomas James), speaking to the registered representatives on the loudspeaker. Brian Thomas told the registered representatives about Electronic Assembly Services and gave them information concerning the company. At that point, the representatives were told to go ahead and begin the sales of the units of Electronic Assembly Services. Brian Thomas specifically said that the securities were "cleared for sale".
From this, Eric Pepper assumed that they were taking orders for units. They were encouraged to get the money in for the securities as soon as possible and were encouraged to use Federal Express.
At the time he sold the units, Eric Pepper believed that the securities were registered. He did not believe that he was taking indications of interest, which are revocable by the customer prior to sale.
It was the firm's policy at Thomas James to oversell Initial Public Offerings. That is, the firm would solicit more orders than it had securities to sell. The broker was then told to call the customer back and inform the customer that the broker could only get the customer a percentage of the units the customer ordered. The customer would then be asked to place the remainder of the money he had already sent into the secondary market. The secondary market consisted of securities being sold at a higher price for which the broker received a higher commission. Therefore, the broker had a built-in incentive to sell the Initial Public Offering to as many customers as possible so that he could later switch the customer to the secondary market and receive a higher commission.
Under normal circumstances, a security is registered with the Florida Department of Banking and Finance or the Securities and Exchange Commission, or both agencies. The agency review prior to registration is to determine whether the offering is fair, just and equitable and whether there is proper disclosure of material information in the Prospectus.
Unless and until the offering is registered, the statutory protection of the investor is not available.
It is the policy of the Department with regard to individuals who have sold unregistered securities in violation of the law to work out an agreement with those individuals, unless there are other violations also involved at the same time. These agreements typically include restrictions on operating, a fine, and sometimes a brief suspension.
The proposal offered to Eric Pepper was similar to those offered to other Respondents with similar alleged violations. The proposal included primarily a registration agreement restricting his actions as an associated person and requiring his employer, who at that time was Prudential-Bache Securities, to make certain reports and provide supervision.
Eric Pepper did not accept the proposal because he felt that his only wrongdoing was being egregiously misled by his supervisors at Thomas James. Moreover, his new employer refused to sign the agreement and he was terminated from Prudential-Bache in October, 1990.
He is currently unregistered and is working as an executive recruiter with International Recruiting Services.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction in this proceeding pursuant to Section 120.57(1), Florida Statutes.
Section 517.07, Florida Statutes, provides:
No securities except of a class exempt under any of the provisions of Section 517.051 or unless sold in any transaction exempt under any of the provisions of Section 517.061 shall be sold or offered for sale within this state unless such securities have been registered, as hereinafter defined, and unless prior to each sale the purchaser is furnished with a Prospectus meeting the requirements of Rules adopted by the Department.
See also Rule 3E-600.013(1)(h), F.A.C., designating the execution of orders for purchase of unregistered securities as a "prohibited business practice".
The parties have stipulated that none of the exemptions under Section
517.051 or 517.061, Florida Statutes, apply to the sale of the units of Electronic Assembly Services, Inc.
"Offer to sell", "offer for sale", or "offer", means any attempt or offer to dispose of, or solicitation of an offer to buy a security or interest in a security, or an investment or interest in an investment, for value.
Section 517.021(15), F.S.
"Sale" or "sell" means any contract of sale or disposition of any investment, security, or interest in a security, for value. With respect to a security or interest in a security, the term defined in this subsection does not include preliminary negotiations or agreements between an issuer or any person on whose behalf an offering is to be made any any underwriter or amond underwriters who are or are to be in privity of contract with an issuer.
Section 517.021(20), F.S.
Section 517.161(1), Florida Statutes, provides that the registration of a dealer, associated person, investment adviser, and branch office may be denied, revoked, restricted, or suspended by the Department if the Department determines that the registrant has violated any provision of Chapter 517, Florida Statutes, or any Rule or Order under that Chapter.
Section 517.221, Florida Statutes, similarly provides that the Department may issue Cease and Desist Orders and impose and collect administrative fines, not to exceed five thousand dollars ($5,000.00) per violation, for any violation of Chapter 517, Florida Statutes, or Rule or Order issued under that Chapter.
Suspension or revocation of a professional license requires proof of the allegations of a complaint by evidence that is clear and convincing. Ferris
v. Turlington, 510 So.2d 292 (Fla. 1987).
Petitioner met its burden of proof. The testimony and parties' stipulations established the nature of the contacts by the Respondent prior to the registration of the securities. These contacts were sales or offers to sell as defined above, and constituted violations of Section 517.07, Florida Statutes. The Respondent knew that he was making a sale, not taking an indication of interest, and his actions constituted the actual sale of a security. The question of whether or not Eric Pepper knew he was selling unregistered securities is not important. The only thing the State needs to prove is that Pepper offered to sell or did sell the unregistered securities. Scienter does not need to be alleged or proven in an action under Section 517.07, Florida Statutes. State v. Houghtaling, 181 So.2d 636 (Fla. 1965).
Respondent's state of mind can be considered, however, when assessing a penalty. At the time of the violations, Eric Pepper was inexperienced and relied on the directions of his superiors. The registration agreement proposed by the Department effectively precludes his employment unless he can find a firm willing to assume the obligations imposed therein. He has already lost his employment as an associated person.
In its proposed recommended order, the Department recommends a penalty of two years suspension and fine of $315.00, the amount of commissions Respondent earned on the unregistered sales. This recommendation is likely based on a prior case, Department of Banking and Finance v. Robert Micalizio, DOAH #90-2509, involving one of the co-respondents from Thomas James. In the Micalizio case the agency recommended revocation based on the Respondent's lack of candor at the formal hearing. The Hearing Officer found the Respondent's testimony was contradictory and disingenous, but recommended a two-year suspension and fine, primarily in consideration of his youth and inexperience.
The agency accepted that recommendation. Respondent, here, made no effort to gloss over his actions and was candid and direct.
Although Eric Pepper also is inexperienced, nothing in the record suggests that he will be a danger to the public, and a lesser penalty is suggested as appropriate in the absence of guidelines promulgated as rules by the agency.
Based on the foregoing, it is hereby recommended that a Final Order be entered, finding Eric Pepper guilty of violating Section 517.07, Florida Statutes; suspending his registration for one year, retroactive to October 1990, when he became no longer registered; and imposing a fine of $315.00, the amount of commissions he earned on the unregistered sales.
RECOMMENDED this 5th day of June, 1991, in Tallahassee, Leon County, Florida.
Filed with the Clerk of the Division of Administrative Hearings this 5th day of June, 1991.
Robert K. Good
Asst. General Counsel Office of the Comptroller
Edward W. Dougherty, Jr. Mang, Rett & Collette, P.A.
P.O. Box 11127 Tallahassee, FL 32302
Hon. Gerald Lewis Comptroller, State of Florida The Capitol, Plaza Level Tallahassee, FL 32399-0350
William G. Reeves General Counsel
Dept. of Banking & Finance
The Capitol, Plaza Level, Rm. 1302 Tallahassee, FL 32399-0350
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.
