STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

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

)

Petitioner, )

)

vs. ) CASE NO. 91-6711

)

COLUMBUS EQUITIES ) INTERNATIONAL, INC. and ) ROGER L. PARSONS, )

)

Respondents. )

)

RECOMMENDED ORDER

Pursuant to notice, the above matter was heard by telephone before the Division of Administrative Hearings by its duly designated Hearing Officer, Donald R. Alexander, on April 17, 1992, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Bridget L. Ryan, Esquire

H. Richard Bisbee, Esquire The Capitol, Room 1302

Tallahassee, Florida 32399-0350

For Respondent: Benjamin B. Segel, Esquire Parsons 100 E. Wilson Bridge Road

Suite 209

Worthington, Ohio 43085

For Respondent: Roger L. Parsons (President) Columbus Equities 2211 Fair Lakes Drive

Columbus, Ohio 43135 STATEMENT OF THE ISSUES

The issue is whether respondents should cease and desist certain activities and whether they should have penalties imposed for the reasons stated in the administrative complaint.

PRELIMINARY STATEMENT

By an administrative complaint filed on August 5, 1991, petitioner, Department of Banking and Finance, Division of Securities and Investor Protection, charged that respondents, Columbus Equities International, Inc. and Roger L. Parsons, both registered with petitioner, had violated certain agency rules and statutes. More specifically, the complaint alleged that an

unregistered person employed by respondents had sold securities on three occasions to Florida residents in May, June and July of 1990. The complaint alleged further that the securities sold had not been registered with petitioner, respondents failed to keep certain required books regarding the firm's activities, and respondent Parsons had failed to properly supervise his employees' activities. Thereafter, respondents requested a formal hearing to contest the agency's preliminary decision. The matter was referred by petitioner to the Division of Administrative Hearings on October 22, 1991, with a request that a hearing officer be assigned to conduct a hearing.

By notice of hearing dated November 7, 1991, a final hearing was scheduled on January 27, 1992, in Tallahassee, Florida. At petitioner's request, the matter was continued to March 30, 1992, at the same location. Respondents' unopposed request for a continuance was granted and the matter was rescheduled to April 17, 1992. By agreement of the parties, the final hearing was conducted by telephone.

At final hearing, petitioner presented the testimony of Roger L. Parsons and Joanne M. Kraynek, a Division financial examiner analyst II. Also, it offered petitioner's exhibits 1-22. All exhibits were received in evidence. Respondent Parsons testified on his own behalf and offered respondents' exhibit

1. The exhibit was not received in evidence. 1/ Respondent Columbus Equities was represented by its president and majority stockholder, Roger L. Parsons. 2/ Finally, the undersigned took official notice of Chapter 517, Florida Statutes, Chapter 3E-600, Florida Administrative Code, Article III, Section 27 of the National Association of Securities Dealers Rules of Fair Practice, and copies of two agency final orders.

   
   

   The transcript of hearing was filed on May 4, 1992. Proposed findings of fact and conclusions of law were filed by petitioner on May 14, 1992. A ruling on each proposed finding of fact has been made in the Appendix attached to this Recommended Order.

   
   

   FINDINGS OF FACT

   
   

   Based upon all of the evidence, the following findings of fact are determined:

   
   

   1. At all times relevant hereto, respondent, Columbus Equities International, Inc. (Columbus Equities), was registered as a broker/dealer with petitioner, Department of Banking and Finance, Division of Securities and Investor Protection (Division), having been issued broker/dealer registration number 30936. The business address of the firm was 6321 East Livingston Avenue, Reynoldsburg, Ohio. Respondent, Roger L. Parsons, was registered with the Division as an agent with Columbus Equities. He was also registered with the National Association of Securities Dealers (NASD) as the financial and operations principal, general principal and representative of Columbus Equities. As such, Parsons was responsible for supervising the employees of Columbus Equities. Similarly, under the terms of Rule 3E-600.002(4), Florida Administrative Code, Columbus Equities was also responsible for the acts of its employees.

      
      

   2. Prior to June 1990, Columbus Equities was known as Parsons Securities, Inc. The business was originally formed in 1978 by Parsons, who is majority stockholder and serves as its president, secretary and director. In June 1990, the firm's name was changed to Columbus Equities International, Inc. In January

      1991, Columbus Equities filed for protection under Chapter 7 of the Federal Bankruptcy Law.

      
      

   3. When the events herein occurred, Vincent C. Lombardi was registered with the NASD as general securities principal, representative and registered options principal of Columbus Equities. Lombardi's business address was 450 Tuscarora Road, Crystal Bay, Nevada, where he managed the Nevada branch office of Columbus Equities. Except for Ohio, Lombardi was not registered to sell securities in any other state, including Florida.

      
      

   4. In the fall of 1990, a Division financial analyst, Joanne Kraynek, received a letter from the Nevada Securities Commission. Based upon that letter, Kraynek wrote a letter on November 21, 1990, to "Parsons Securities/Columbus Equities International, Inc." regarding that firm's alleged sale of unregistered securities to a Florida resident. The letter requested various items of information. On December 6, 1990, Lombardi replied to Kraynek's letter on behalf of Columbus Equities and enclosed a number of documents in response to her request. Based upon this information and a subsequent investigation by the Division, the following facts were determined.

      
      

   5. On May 31, 1990, Charles D. Flynn conducted a transaction on behalf of his wife, Susan, for the purchase of 4,933 shares of World Videophone, an unregistered security. On June 22, 1990, Flynn purchased 2,500 shares of White Knight Resources Limited on behalf of his wife. That security was also not registered in the State of Florida. On July 9, 1990, Flynn purchased an additional 2,000 shares of White Knight Resources Limited on behalf of his wife. In each transaction, the trade was executed by Lombardi from the Nevada branch office of Columbus Equities. When the sales occurred, Flynn and his wife resided at 2045 Parkside Circle South, Boca Raton, Florida. In finding that the Flynns were Florida residents at the time of the trades, the undersigned has rejected a contention by Parsons that Flynn purchased the stocks while residing in Canada and thus the transactions were not subject to the Division's jurisdiction. Evidence of these transactions and the Flynns' Florida domicile is confirmed by the deposition testimony of Mr. Flynn, admissions by Lombardi, and copies of the order tickets from the Nevada branch office. The order tickets reflect the code "MM" (market maker), which means that Columbus Equities held the securities in its own inventory and did not have to go to an outside source to obtain the stocks. Thus, Parsons (on behalf of Columbus Equities) should have been familiar with these securities. However, at hearing he acknowledged that he was not. This in itself is an indication that Parsons was not properly supervising his employees. Finally, there was no evidence that the three transactions were exempt within the meaning of Sections 517.051 and 517.061, Florida Statutes, and thus were beyond the Division's jurisdiction.

      
      

   6. As the principal for Columbus Equities, Parsons was responsible for supervising the activities of both Lombardi and the Nevada branch office. Indeed, section 27, article III of the NASD Rules of Fair Practice requires that a NASD member such as Parsons supervise the activities of all associated persons to insure that those persons are complying with all securities laws and regulations. In order to fulfill this duty, Parsons should have reviewed on a timely basis the monthly statements generated by the Nevada office as well as that office's new account applications. For the reasons stated hereinafter, Parsons' review of Lombardi's activities was neither complete nor timely.

      
      

   7. The Flynn account was opened by Lombardi in April 1990 and Lombardi was the only employee who dealt with the Flynns. Parsons had no knowledge that the Flynn account had been opened because he did not review new account

      applications. This failure to review new account applications prevented Parsons from detecting whether Lombardi was selling securities in states such as Florida where he was not registered.

      
      

   8. Lombardi was required to send Parsons a monthly statement reflecting the activity of the branch office. During his review of the May statement in the second or third week of June 1990, Parsons became aware of the first Flynn transaction. Just prior to that, Parsons had learned that Lombardi had also engaged in another illicit trade. In addition, Parsons subsequently became aware of at least four other transactions (including two more with the Flynns) involving the sale of securities by Lombardi in states where he was not registered. However, except for a verbal warning given to Lombardi to discontinue that type of trade, Parsons took no disciplinary action against Lombardi until September 13, 1990, when Lombardi was terminated as an employee and the Nevada branch office closed. By failing to review the new account applications and to take prompt action against Lombardi after having learned of his indiscretions, Parsons failed to properly supervise his employees.

      
      

   9. Rule 3E-600.014(6), Florida Administrative Code, requires that each member establish, maintain and enforce written procedures governing the conduct of its employees to ensure compliance with all security laws and regulations. To this end, Parsons developed a policy (compliance) manual which was to serve as a guide in the conduct of all employees of Parsons Securities, Inc. and its successor, Columbus Equities. A copy of this manual should have been given to each employee, including Lombardi, for his or her review. However, Parsons did not know if Lombardi ever received and reviewed the manual. In addition, the

      manual itself was deficient in that it failed to indicate whether employees were to be given a copy for review, and it contained no provisions for taking disciplinary action against an agent if he violated a manual proscription. By failing to develop and utilize an appropriate manual, respondents violated the above cited rule.

      
      

      CONCLUSIONS OF LAW

      
      

   10. The Division of Administrative Hearings has jurisdiction of the subject matter and the parties hereto pursuant to Subsection 120.57(1), Florida Statutes (1991).

       
       

   11. Because respondents' security registrations are at risk, petitioner is obliged to prove the allegations in the administrative complaint by clear and convincing evidence. See, e. g., Newberry v. Florida Department of Law Enforcement, 585 So.2d 500, 501 (Fla. 3d DCA 1991).

       
       

   12. A number of statutes and rules are relevant to this controversy. First, Subsection 517.12(1), Florida Statutes (1991), makes it unlawful for any person to sell securities in this state unless that person is registered with the Division. Also, Section 517.07, Florida Statutes (1991) prohibits the sale of unregistered securities in this state unless the transaction is exempt under one of the exemptions contained in Sections 517.051 and 517.061, Florida Statutes (1991). In addition, Subsection 517.121(1), Florida Statutes (1991), requires that a dealer, investment adviser, branch office, or associated person maintain such books and records as the department may prescribe by rule. In this vein, the Division has promulgated Rule 3E-600.014(6), Florida Administrative Code, which requires that a dealer "establish and keep current a set of written supervisory procedures . . . which may reasonably be expected to prevent and detect any violations of Chapter 517 and rules thereunder." Finally, under Rule 3E-600.013(1)(p), Florida Administrative Code, a dealer is

       deemed to be unworthy if he violates any NASD rule, including the one in section

       27 of article III of the Rules of Fair Practice which requires a principal to properly supervise his employees.

       
       

   13. The administrative complaint alleges that as the dealer and principal responsible for the acts of their employees, Columbus Equities and Parsons (a) violated subsection 517.12(1) by virtue of Lombardi having sold securities in this state while unregistered to do so, (b) violated section 517.07 by virtue of Lombardi having sold an unregistered security in this state, and (c) violated rule 3E-600.014(6) and thus subsection 517.121(1) by failing to maintain a book (compliance manual) required by the Division. Finally, Parsons is charged with having demonstrated his unworthiness within the meaning of rule 3E-600.013(1)(p) by failing to properly supervise Lombardi as required by section 27, article III of the NASD Rules of Fair Practice.

       
       

   14. By clear and convincing evidence, petitioner has established the above violations. In reaching this conclusion, the undersigned has utilized the principle that the illicit actions of an employee can be imputed to the principal and dealer even if they had no actual knowledge of such acts. See, e.g., State v. Houghtaling, 181 So.2d 636, 638 (Fla. 1965)(scienter is not a necessary element in proving a violation of section 517.12); Department of Banking and Finance v. James Samuel Johnson, III, 14 F.A.L.R. 722 (Dept. of Banking and Finance, September 17, 1991). Therefore, the charges in the administrative complaint have been sustained.

       
       

   15. Although Columbus Equities is now a debtor in federal bankruptcy proceedings, there is no prohibition against assessing a fine against that entity so long as the agency makes no attempt to collect the same. See, e. g., United States v. Nicolet, Inc., 857 F.2d 202 (3d Cir. 1988). Therefore, respondents' contention that Columbus Equities is now immune from all state disciplinary action must be rejected. Given the circumstances herein, the Division's recommendation that respondents be ordered to cease and desist all unlawful activities and jointly and severally pay a $5,000 administrative fine is deemed to be appropriate.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that a final order be entered by petitioner finding respondents

guilty of all violations alleged in the administrative complaint, ordering respondents to cease and desist all unlawful activities, and imposing a $5,000 fine, jointly and severally, against them.

DONE and ENTERED this 26th day of May, 1992, in Tallahassee, Florida.

DONALD R. ALEXANDER

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 26th day of May, 1992.

ENDNOTES

1/ The admission of the exhibit into evidence was denied for two reasons. First, it was not timely submitted in accordance with the prehearing order of instructions and second, the document was not properly authenticated.

2/ At hearing, Parsons took the position that he did not represent the corporation. However, Parsons had previously filed a notice of appearance on behalf of the corporation and an affidavit of qualified representation under Rule 22I-6.008, Florida Administrative Code. Since no authorization to withdraw as representative had ever been granted, the undersigned treated Parsons as the designated representative.

APPENDIX TO RECOMMENDED ORDER

Petitioner:

COPIES FURNISHED:

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

William G. Reeves, Esquire The Capitol, Room 1302 Tallahassee, FL 32399-0350

Bridget L. Ryan, Esquire The Capitol, Room 1302 Tallahassee, FL 32399-0350

Benjamin B. Segel, Esquire

100 E. Wilson Bridge Road Suite 209

Worthington, OH 43085

Roger L. Parsons

2211 Fair Lakes Drive Columbus, OH 43135

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions to the 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 that will issue the final order in this case concerning their 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: 91-006711

Orders for Case No: 91-006711