STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

LOVELL B. NORTHERN, )

)

Petitioner, )

)

vs. ) CASE NO. 95-4679

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

INVESTOR PROTECTION )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal administrative hearing was held in this case on January 9, 1996, in West Palm Beach, Florida, before Patricia Hart Malono, a duly designated Hearing Officer of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Lovell B. Northern, pro se

2560 South Ocean Boulevard, Number 517 Palm Beach, Florida 33480

For Respondent: Craig D. Stein, Esquire

Department of Banking and Finance Division of Securities and

Investor Protection

401 Northwest Second Avenue North Tower, Suite 708-N Miami, Florida 33128-1740

STATEMENT OF THE ISSUE

Whether the petitioner's application for registration as an associated person of Hardman Financial Services, Inc., should be granted or denied.

PRELIMINARY STATEMENT

In a letter dated July 19, 1995, the Department of Banking and Finance, Division of Securities and Investor Protection ("Department"), notified Lovell

1. Northern that his application for registration as an associated person of Hardman Financial Services, Inc., was denied. The letter identified the basis for the denial as the "Department's determination that you have been the subject of an action which is grounds for denying your pending application for registration pursuant to the provisions of Section 517.161(1)(m), Florida Statutes." Mr. Northern timely requested a formal administrative hearing, and the case was forwarded to the Division of Administrative Hearings for formal proceedings. By Notice of Hearing, this case was set for final hearing on January 9, 1996.

   Mr. Northern testified in his own behalf and Petitioner's Exhibits 1 through 7, 10 through 12, and 16 were received into evidence. The Department called no witnesses, and Respondent's Exhibits 1 through 8 were received into evidence. At the Department's request, official recognition was taken of section 517.161, Florida Statutes (1993), and section 4b of the Commodity Exchange Act, title 7, section 6b, United States Code.

   
   

   The transcript was filed, and both parties timely submitted proposed recommended orders. Rulings on the proposed findings of fact are contained in the Appendix to this Recommended Order.

   
   

   FINDINGS OF FACT

   
   

   Based on the oral and documentary evidence presented at the final hearing and the entire record of this proceeding, the following findings of fact are made:

   
   

   1. The Department is the state agency charged with the administration of chapter 517, Florida Statutes (Florida Securities and Investor Protection Act), and is responsible for registering associated persons. The Division of Securities and Investor Protection carries out this function.

      
      

   2. In January 1995, Mr. Northern applied to the Department for registration as an associated person of Hardman Financial Services, Inc., pursuant to section 517.12, Florida Statutes.

      
      

   3. Mr. Northern is currently registered with the National Association of Securities Dealers and with the State of California.

      
      

   4. On November 24, 1992, the Commodity Futures Trading Commission ("CFTC") filed a Complaint and Notice of Hearing charging Mr. Northern with fraudulent allocation, that is, with cheating or defrauding or attempting to cheat or defraud his customers with respect to trades in the purchase and sale of commodities, a violation of section 4b of the Commodity Exchange Act, title 7, section 6b, United States Code. 1/ Specifically, the CFTC alleged in the complaint that, from "at least December 1987 to May 1989," Mr. Northern, "fraudulently allocated profitable trades to the Northern account and unprofitable or less profitable trades to his customers' accounts."

      
      

   5. The CFTC based the fraudulent allocation charge on an inference drawn from two facts alleged in the complaint. First, the CFTC alleged that, during the period extending from December 1987 to May 1989, 180 out of 184 trades on Mr. Northern's personal trading account were profitable, producing a profit of

      $53,517, while his customers' accounts lost $696,889. Secondly, the CFTC alleged that Mr. Northern's name was included by Paine Webber's Compliance Department on lists variously known as "ACL lists", "Discretionary Broker lists", and "Account Number Later lists", which meant that Mr. Northern was allowed to batch his orders and telephone them directly to the Paine Webber clerks on the floors of the exchanges, who then accepted and executed the orders even though Mr. Northern did not provide account identification at the time the orders were placed.

      
      

   6. Mr. Northern presented the CFTC with an offer of settlement dated June 1, 1994, and, on July 19, 1994, the CFTC entered an Opinion and Order Accepting Offer of Settlement of Lovell Braxton Northern, III. In the Opinion, the CFTC found that "[s]olely on the basis of the consent evidenced by the Offer, and

      without any adjudication on the merits, the Commission finds that Northern has violated section 4b of the [Commodity Exchange] Act." The CFTC noted in footnote 2 of the Order that Mr. Northern neither admitted nor denied the allegations against him and that he "stipulates that the record basis on which this Opinion and Order . . . is entered consists of the Complaint and the findings consented to in the Offer, which are incorporated in this Order." 2/

      
      

   7. The CFTC, in accordance with the terms of Mr. Northern's offer, denied Mr. Northern trading privileges on any contract market for a period of seven years and ordered him to liquidate all futures and options positions in which he had any beneficial interest. In addition, the CFTC directed Mr. Northern to "comply with his undertakings" never to seek registration with the CFTC or to act in any position requiring registration or requiring him to hold customer funds. This Opinion was the basis for the CFTC's Order of Dismissal, dated July 19, 1994, which finally resolved the action brought against Mr. Northern and his former employer, Paine Webber. 3/

      
      

   8. Mr. Northern explained that he offered to settle the CFTC case only because he could not travel to California for the hearing. At the time, his father was gravely ill with cancer, and he feared losing his job.

      
      

   9. Mr. Northern maintains that he did not fraudulently allocate any commodity trades, although he concedes that he placed orders by telephone without simultaneously providing account identification numbers to the floor clerks. He claims that he was required by Paine Webber's Compliance Department to place orders and provide account numbers after the orders were executed; he considers himself an innocent victim, whose only fault was adhering to Paine Webber's policy with regard to order entry.

      
      

   10. In response to a request by the National Futures Association, Paine Webber reported in a letter dated August 15, 1989, that, as a result of several consumer complaints, it had done a thorough analysis of Mr. Northern's trades and that the analysis had shown that orders were entered by Mr. Northern without proper account identification. It reported that, although purchases and sales in Mr. Northern's personal account were all profitable and purchases and sales in Mr. Northern's customer accounts were primarily unprofitable, it had found no conclusive evidence that Mr. Northern had fraudulently allocated trades. Paine Webber also notified the National Futures Association in the August 15, 1989, letter that Mr. Northern did not explain the transactions in his account to the satisfaction of Paine Webber and that he was permitted to resign on May 26, 1989.

       
       

   11. In a report dated August 19, 1993, an expert hired by Mr. Northern to examine several commodity order slips concluded that, in his opinion, his examinations failed to prove that the account numbers were written at the same time as the other information on the slips or at a different time. Six slips were examined, five of which were time-stamped in 1989 and one of which was time-stamped in 1988.

       
       

   12. Mr. Northern had approximately fifteen customer complaints filed against him during the period from 1985 through 1992. All but one of the complaints arose out of Mr. Northern's activities as an associated person of Paine Webber in California, and all of the complaints were related to commodity trading. Two of these complaints were resolved in Mr. Northern's favor, one was resolved adverse to Mr. Northern, and ten were settled by Paine Webber. Mr. Northern attributes most of the complaints to customer panic following the October 1987 stock market crash.

   13. Mr. Northern has failed to prove by a preponderance of the evidence that he is entitled to be registered as an associated person of Hardman Financial Services, Inc.

       
       

       CONCLUSIONS OF LAW

       
       

   14. Section 517.12(1), Florida Statutes, gives the Department responsibility for registering associated persons who work in Florida's securities industry.

       
       

   15. For purposes of the instant case, an associated person is defined in section 517.021(2)(c), Florida Statutes, as "[a]ny natural person, . .

       .employed, appointed, or authorized by a dealer, investment adviser, or issuer to sell securities in any manner."

       
       

   16. Section 517.12(11) provides that the Department shall register an applicant for registration if it "finds that the applicant is of good repute and character and has complied with the provisions of this chapter and the rules made pursuant hereto."

       
       

   17. Section 517.161(1) contains a list of criteria which, if proven, justify denial of an application for registration under chapter 517. Section

       517.161 provides in pertinent part:

       
       

       1. Registration under s. 517.12 may be denied or any registration granted may be revoked, restricted, or suspended by the depart- ment if the department determines that such applicant or registrant:

       * * *

       (m) Has been the subject of any decision, finding, injunction, suspension, prohibition, revocation, denial, judgment, or administra- tive order by any court of competent juris- diction, administrative law judge, or by any state or federal agency, national securities, commodities, or option exchange, or national securities, commodities, or option association, involving a violation of any federal or state securities or commodities law or any rule or regulation promulgated thereunder, or any injunction or adverse administrative order

       by a state or federal agency regulating banking, insurance, finance or small loan companies, real estate, mortgage brokers, or other related or similar industries.

       
       

   18. An applicant has the burden of proving entitlement to a license, certificate, or registration by a preponderance of the evidence. Department of Banking & Finance, Division of Securities & Investor Protection v. Osborne Stern & Co., 21 Fla. L. Weekly S142, S143 (Fla. Mar. 28, 1996)("[W]hile the burden of producing evidence may shift between the parties in an application dispute proceeding, the burden of persuasion remains upon the applicant to prove her entitlement to the license."). The licensing function is regulatory, and the granting or denial of a license is "within the discretionary authority granted

       by the Florida legislature to administrative agencies responsible for regulating professions under the State's police power." Id.

       
       

   19. Here, as in Osborne Stern, the ultimate issue is whether an applicant for registration as an associated person "ha[s] demonstrated worthiness to transact business in Florida. [section] 517.12(11), Fla. Stat. (1989)." Id.

       
       

   20. The Department has presented evidence that an order was entered on July 19, 1994, by the United States Commodity Futures Trading Commission finding Mr. Northern guilty of violating section 4b of the Commodity Exchange Act. Pursuant to section 517.161(1)(m), Mr. Northern's application for registration as an associated person may be denied on this basis alone, and the Department is not required to prove the underlying violations.

       
       

   21. The decision to deny registration pursuant to the provisions of section 517.161(1) is, however, discretionary. Osborne Stern, 21 Fla. L. Weekly at S143. Therefore, even though one criterion for denial has been proven, an applicant must be given the opportunity to "demonstrate[] worthiness to transact business as a dealer of securities in this state." Osborne Stern & Co. v. Department of Banking & Finance, Division of Securities & Investor Protection, 647 So. 2d 245, 248 (Fla. 1st DCA 1994), quashed in part, 21 Fla. L. Weekly S142 (Fla. Mar. 28, 1996). 4/ Consequently, an applicant for registration as an associated person is permitted "to explain and mitigate the circumstances of any violations of chapter 517 found to have occurred," id., in order to "demonstrate that he is not now a person . . . unworthy to transact securities business." Castleman v. Office of Comptroller, Department of Banking & Finance, Division of Securities & Investor Protection, 538 So. 2d 1365, 1367 (Fla. 1st DCA 1989).

       
       

   22. Mr. Northern has failed to demonstrate his worthiness to transact securities business in Florida, and he has failed to prove by a preponderance of the evidence that he is entitled to be registered as an associated person with Hardman Financial Services, Inc. The CFTC accused Mr. Northern of a very serious offense; he consented to a finding that, based on the allegations in the CFTC complaint, he had violated federal securities law, and he consented to the imposition of severe sanctions. The evidence presented by Mr. Northern regarding the circumstances in which the charges of fraudulent allocation arose, his denial of the charges, and his explanation of the reasons for offering to settle the CFTC case, taken together, is not sufficient to support the conclusion that he is worthy of transacting securities business in Florida.

       
       

       RECOMMENDATION

       
       

       Based on the foregoing Findings of Fact and Conclusions of Law, it is:

       
       

       RECOMMENDED that the Department of Banking and Finance enter a Final Order denying the application of Lovell B. Northern, III, for registration as an associated person of Hardman Financial Services, Inc.

       DONE AND ENTERED in Tallahassee, Leon County, Florida, this 1st day of May 1996.

       
       

       
       

       PATRICIA HART MALONO, 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 1st day of May 1996.

       
       

       ENDNOTES

       
       

       1/ Section 4b of the Commodity Exchange Act, title 7, section 6b, United States Code, provides in pertinent part

       Contracts designed to defraud or mislead; bucketing orders; buying and selling orders for commodity

       1. It shall be unlawful (1) for any member of a contract market, or for any correspondent, agent, or employee of any member, in or in connection with any order to make, or the making of, any contract of

          sale of any commodity in interstate commerce, made, or to be made, on or subject to the rules of any contract market, for or on behalf of any other person, . . .

          1. to cheat or defraud or attempt to cheat or defraud such other person; . . .

2/ Among the items Mr. Northern consented to in his offer of settlement was a finding by the CFTC that he had "violated Section 4b of the Commodity Exchange Act, as amended."

3/ The charges in the CFTC complaint against Paine Webber, which employed Mr. Northern from October 1985 until May 1989, included two counts of failure to keep proper records, a violation of section 4g of the Act, title 7 section 6g, United States Code, and of certain specified federal regulations. First, Paine Webber was charged with allowing its floor clerks to take orders from Mr.

Northern without preparing proper records, which must include an account identification number. Second, it was charged with allowing Mr. Northern to take orders from customers without preparing proper records, which must include a time-stamp reflecting the time at which the order was received. Paine Webber was also charged with a violation of Regulation 166.3, title 17, section 166.3, Code of Federal Regulations, by failing to diligently supervise the way in which commodity accounts were handled generally and with failing to diligently supervise the activities of Mr. Northern and other employees.

On November 24, 1992, the date on which the CFTC complaint was filed, the CFTC entered a Consent Order of Settlement Re: Paine Webber, Inc. The CFTC accepted the offer of settlement submitted by Paine Webber and found that it had violated section 4g of the Act and Regulation 166.3, among others. The CFTC;

ordered Paine Webber to cease and desist from such violations and to pay a civil penalty of $150,000.

4/ The Supreme Court noted that its ruling in Osborne Stern does "not disturb the district court's unanimous holding that mitigating evidence was improperly excluded." 21 Fla. L. Weekly at S143.

APPENDIX

The following are rulings on the petitioner's proposed findings of fact:

Paragraph 1: Adopted and incorporated in substance but not verbatim in paragraph 2 of the Recommended Order.

Paragraphs 2, 3, and 8: Included in the Preliminary Statement.

Paragraph 4: The first and third clauses are rejected because not proper findings of fact; the second clause is rejected because it is merely a recitation of the contents of a document and because the conclusion drawn is not supported by the contents of the document.

Paragraph 5: The first clause is rejected because not a proper finding of fact; remainder rejected because not supported by the evidence.

Paragraph 6: Accepted as an accurate statement of the petitioner's contentions at hearing and incorporated in substance but not verbatim in paragraphs 8 and 9.

Paragraphs 7 and 9: Rejected because unnecessary.

Paragraph 10: Adopted and incorporated in substance but not verbatim in paragraph 3.

Paragraph 11: Although and accurate statement of the contents of the exhibit and of the petitioner's contentions, the proposed finding of fact is rejected because unnecessary since the petitioner did not establish that Mr. Goldberg had the same or similar disciplinary history as petitioner.

Paragraph 12: Rejected because not supported by the weight of the evidence; as to the contentions in the final three sentences, rejected because not supported by any evidence of record.

Paragraph 13: Adopted and incorporated in substance but not verbatim in paragraph 11 that the petitioner hired an expert to examine certain commodity order slips. The proposed finding of fact is rejected, however, because unnecessary.

Paragraph 14: It is accepted that Exhibit 12 is Paine Webber's ACL list, that the petitioner's name was on the list, and that Paine Webber was found to have violated CFTC regulations, but the proposed findings of fact are not incorporated in the Recommended Order because unnecessary.

Paragraph 15: Accepted but not incorporated in the findings of fact because unnecessary.

The following are rulings on the respondent's proposed findings of fact:

Paragraphs 1 through 6: Adopted and incorporated in substance but not verbatim in paragraphs 1, 4, 6, and 7, except to the extent that subordinate or unnecessary.

Paragraph 7: Included in Preliminary Statement.

Paragraph 8: Rejected because not supported by the evidence cited.

Paragraphs 9 and 10: Accepted but not incorporated in proposed findings of fact because subordinate or unnecessary.

COPIES FURNISHED:

Lovell B. Northern

2560 S. Ocean Blvd. Number 517 Palm Beach, Florida 33480

Craig D. Stein, Esquire Office of the Comptroller

Banking and Finance

401 NW 2nd Avenue Suite N-708

Miami, Florida 33128-1796

Honorable Robert F. Milligan Comptroller

State of Florida

The Capitol, Plaza Level

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 ten 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: 95-004679

Orders for Case No: 95-004679