vs. ) Case No. 97-2603
Respondent. )
On October 20, 1997, a formal administrative hearing was held in this case in Tallahassee, Florida, before J. Lawrence Johnston, Administrative Law Judge, Division of Administrative Hearings.
For Petitioner: James A. Bossart, Esquire
For Respondent: Cynthia S. Tunnicliff, Esquire
Pennington, Moore, Wilkinson & Dunbar, P.A.
The issue in this case is whether the Respondent, Michael Crudele, should be disciplined for alleged violations of the statutes and rules governing the conduct of insurance agents.
The Department filed an Administrative Complaint against the Respondent, Dept. Case No. 15372-95-A, on or about July 15, 1996. The Respondent requested formal administrative proceedings, and the matter was referred to the Division of Administrative Hearings (DOAH), where it was assigned DOAH Case No. 96-4122.
Case No. 96-4122 was set for final hearing on December 18, 1996, but the Petitioner filed a Motion to Relinquish Jurisdiction based on an agreement to entry of a Consent Order, and an Order Dismissing Proceeding and Closing File was entered on
December 11, 1996.
Notwithstanding the parties' supposed agreement, disagreements arose during its implementation. No Consent Order was entered, and the settlement agreement was rescinded. The case was returned to DOAH, where a new file was opened under DOAH Case No. 97-2603. DOAH Case No. 97-2603 was set for final hearing on October 20, 1997.
On July 14, 1997, Respondent's Motion for Partial Summary Final Order was filed. An Order Denying Summary Order was entered on August 8, 1997.
At final hearing, the Department called one witness and had Department Exhibits 1 through 4, 6 and 7 admitted in evidence.
Department Exhibits 3 and 4 were the transcripts of deposition testimony of Mary Clem and Charles Perks. They were received subject to objections raised by the Respondent during the
depositions, mostly on grounds of relevance; those objections are overruled.
The Department also requested the admission of Department Exhibit 5 as evidence of the inappropriateness of Zuma promissory notes as investments for Mary Clem. Exhibit 5 is the Department's Final Order in the case of Dept. of Insurance vs.
Robert Darren Carlson, DOAH Case No. 95-4947, entered on
April 23, 1996. The Respondent objected on grounds of hearsay, and ruling was reserved.
After the Department rested, the Respondent testified and called one additional witness.
In rebuttal, the Department expressed its intention to have a transcript of the Respondent's deposition received in evidence as Department Exhibit 8 for impeachment purposes. The Respondent objected, and ruling was reserved until the completion and filing of the transcript.
After presentation of the evidence, the Department ordered the preparation of a transcript of the final hearing, and the parties were given ten days from the filing of the transcript to file proposed recommended orders. The transcript was filed on November 5, 1997. The parties' proposed recommended orders were filed on November 17, 1997.
Along with its proposed recommended order, the Department filed a Memorandum of Law addressing the admissibility of Department Exhibit 5. A Response to Petitioner's Motion to Admit
Final Order was filed on November 21, 1997, and the Department filed a reply on November 26, 1997.
Department Exhibit 5 clearly is hearsay. But hearsay is not inadmissible in administrative proceedings. See Section 120.569(2)(e), Florida Statutes (Supp. 1996). Rather, its use may be restricted. Section 120.57(1)(c), Florida Statutes (Supp. 1996), provides: "Hearsay evidence may be used for the purpose of supplementing or explaining other evidence, but it shall not be sufficient in itself to support a finding unless it would be admissible over objection in civil actions." Contrary to the Department's argument, and unlike the Federal Rules of Evidence, the Florida Evidence Code intentionally omitted from its public records exception to the hearsay rule "factual findings resulting from an investigation made pursuant to authority granted by law." Compare Section 90.803(8), Florida Statutes (1995) with Federal Rule of Evidence 803(8)(c). See also Dykes vs. Quincy Tel. Co.,
539 So. 2d 503 (Fla. 1st DCA 1989). As a result, Department Exhibit 5 is not "sufficient in itself to support a finding" because it would not be "admissible over objection in civil actions." Nonetheless, it is admissible to supplement or explain the Respondent's own admissions regarding the inappropriateness of Zuma promissory notes as investments for Mary Clem.
Department Exhibit 8 never was filed, and it must be assumed to have been withdrawn.
The Respondent, Michael Crudele, is currently eligible for licensure and is licensed in Florida as a life insurance agent and as a life and health insurance agent.
The Respondent was the agent-of-record on two American Life and Casualty Insurance Company (American Life) annuities purchased by Mary Clem, one in the face amount of $30,000 dated October 28, 1992, and the other in the face amount of $20,000 dated December 28, 1992. Clem was 84 years old at the time and a widow. The annuities represented more than 80 percent of her life savings.
The Respondent became agent-of-record on these annuities at the request of Charles Perks, a good friend and former fellow Metropolitan Life agent. Clem had been an insurance customer of Perks since approximately 1985. When Clem complained to Perks that "the bottom fell out of interest" on her certificates of deposit, he suggested the American Life annuities as a safe alternative that paid higher interest. But Perks was not an authorized agent for American Life, so he asked the Respondent to participate in the sales and split the commissions.
In 1992, the Respondent became involved in the Zuma Engineering Co., Inc., a startup tire recycling venture. After being introduced to Zuma, the Respondent became very enthusiastic about its prospects. He invested $30,000 in Zuma, received stock in return for his investment, and became a thirty percent owner. He also became involved in all aspects of the startup business,
from promoting the business to the public, to raising capital from and working with private investors, to cleaning up Zuma's recycling facility. He understood that he was a corporate director, but corporate filings with the Secretary of State indicate that he was a vice-president from October 27, 1993, until March 20, 1994.
The Respondent not only solicited investors himself, he participated in recruiting a sales force. As part of this effort, he recruited his friend Charles Perks. In late 1993 and early 1994, Perks and the Respondent approached Mary Clem to solicit her investment in Zuma.
It is not clear from the evidence how the solicitation of Mary Clem proceeded. It is believed that Clem may have initially contacted Perks around the time of the anniversary date of the $30,000 annuity to complain that she had been notified of a drop in the interest rate paid by the annuity.
Mary Clem received a guaranteed 5.75 percent interest, plus a one percent interest "bonus" for a total of 6.75 percent interest during the first year of her two American Life annuities. The "bonus" interest automatically terminated at the end of the first year. In addition, the evidence was that the standard interest guarantee decreased to five percent starting with the second year.
It is not clear when Clem received notice of the decrease in the interest guarantee or whether she received notice
from American Life as to the elimination of the interest "bonus," but it is found that by December 2, 1993, Clem knew the interest rate on her $30,000 annuity was being decreased to five percent for the second year of the annuity. It is possible that she also knew by then that the interest on her $20,000 annuity was being decreased to five percent as well.
Perks saw Mary Clem's dissatisfaction with the American Life annuities as an opportunity to sell Zuma promissory notes to her. On or about December 2, 1993, Charles Perks approached Mary Clem and sold her a $10,000 promissory note issued by Zuma. On its face, the promissory note was dated December 3, 1993, and paid twelve percent interest, with a single balloon payment of principal and interest due on June 3, 1995.
The evidence was that the Respondent did not participate in this transaction on December 2, 1993. Mary Clem does not recall, and both Perks and the Respondent testified that the Respondent was not present.
The Respondent testified that he was not even aware of this $10,000 Zuma note until the Department's Order of Emergency Suspension and Administrative Complaint on or about July, 1996, but this testimony is rejected as not being credible. It is found that the Respondent knew about Clem's purchase of the
$10,000 promissory note either on December 2, 1993, or soon thereafter.
It is found that by December 2, 1993, or shortly
thereafter, Clem complained to both Perks and the Respondent about the interest on her annuities. It is found that all three of them discussed Zuma promissory notes as an alternative investment. Contrary to the Respondent's testimony, it is found that, if he did not already know about Clem's purchase of the
$10,000 Zuma promissory note by then, the Respondent would have learned of the $10,000 Zuma promissory note during these discussions. It also is found that, based on those discussions, Clem decided to surrender her $20,000 annuity and use the money to buy Zuma promissory notes.
It is found that Perks and the Respondent helped Clem with the surrender of her $20,000 annuity. It also is found, contrary to the Respondent's testimony, that Perks and the Respondent assisted in arranging for Clem to be able to purchase a Zuma promissory note in the face amount of $20,000 for the net cash surrender value of the $20,000 annuity, after deduction of premium tax and surrender penalty.
When American Life was notified of Clem's desire to surrender the $20,000 annuity, the company contacted the Respondent and asked him to "conserve" the annuity, i.e., dissuade Clem from surrendering it. It is found that, if he did not already know about it by then, the Respondent would have learned of Clem's intentions to buy Zuma promissory notes when he contacted her on behalf of American Life to comply with American Life's request that he attempt to conserve the annuity. It also
is found that, if he did not already know about Clem's purchase of the $10,000 Zuma promissory note, he would have learned of the
$10,000 Zuma promissory note at this time.
By letter dated January 24, 1994, American Life responded to Clem's request to surrender her $20,000 annuity. American Life's letter advised Clem that she was entitled to principal and $69.67 in interest, less premium tax in the amount of $213.69 and surrender charges in the amount of $1,625.65, for a net of $18,230.33. A check for the net amount was enclosed. A copy of American Life's January 24, 1994, letter was sent to the Respondent as the agent-of-record.
On or about February 1, 1994, Perks and the Respondent went to Clem's home to complete the purchase of a $20,000 Zuma promissory note. The Respondent testified that, since all of the arrangements had been made in advance, the Respondent's role in the transaction was solely as "corporate director and verifier" on behalf of Zuma; however, the Respondent also would receive
$900 of the $2,000 commission paid by Zuma on the transaction. Meanwhile, his additional role as American Life's agent required him to attempt to "conserve" the annuity policy.
At one point, the Respondent testified that, as "corporate director and verifier," he inquired into Clem's assets (presumably to ascertain if the investment was appropriate for her). But he also testified that he assumed her assets were unchanged from 1992, raising a question as to whether the
Respondent undertook any inquiry into Clem's assets on February 1, 1994, at all.
At another point, the Respondent testified that he understood Mary Clem to have $200,000 in assets. See Department Exhibit 6. But, if so, those assets consisted of her home, the annuities and the $10,000 Zuma promissory note. It is found that the Respondent had no reason to believe she had any other assets.
The Respondent also testified that he did not determine from his alleged inquiry into Clem's assets, and did not know, that Clem already had purchased a $10,000 Zuma promissory note. As previously found, it is considered incredible that the Respondent did not already know by February 1, 1994, that Clem had purchased the $10,000 Zuma promissory note; it is all the more incredible that he would not have learned of it from a diligent inquiry into Clem's assets for purposes of determining the appropriateness of the $20,000 Zuma investment.
Mary Clem testified that the Respondent and Perks touted the safety of the Zuma investment as well as the higher interest it paid. The Respondent testified that, although acting in the conflicting roles described in the preceding finding, he discussed the differences between the two investments, including the risk of the Zuma investment. The Respondent testified that he read to Mary Clem from a written disclosure statement that defined Zuma's promissory notes as being a "risk investment," but no written disclosure statement was introduced in evidence.
In any event, the "verification" was a mere formality; as the Respondent knew full well, Clem already had decided to buy the promissory note. Clem wrote a personal check in the amount of $18,230, and Perks and the Respondent gave her Zuma's $20,000 promissory note bearing twelve percent interest. The note was erroneously dated February 1, 1993, and erroneously stated on its face that the single balloon payment of principal and interest was due on February 1, 1995. The note was supposed to have a 24- month term from February 1, 1994, to February 1, 1996. (This discrepancy would lead to problems later. See Findings 32-33, infra.)
In view of the conflict of interest inherent in the Respondent's multiple roles in the transaction, it is found that the Respondent did not make a good faith inquiry into appropriateness of the Zuma investment for Mary Clem and did not fully disclose the risk associated with it, as compared to the American Life annuity. If the Respondent disclosed the risk, it
is found that he did not do so fully and clearly, again probably due to the conflict of interest inherent in his multiple roles.
Neither Mary Clem nor her late husband had ever invested in any stocks, mutual funds or even bonds. Before Mary Clem invested in the American Life annuities, she and her late husband always invested in certificates of deposit. While it is true that Clem wanted higher interest than she was getting on her
annuities, she also wanted safety and security. It is found that, if the Respondent had fully and completely disclosed the risk of investing in Zuma promissory notes, Mary Clem would not have invested in them.
Mary Clem also surrendered her $30,000 American Life annuity and used the money she received to buy another Zuma promissory note. The Respondent claimed not to have known anything about the third Zuma note, and the Department was not able to prove that he did.
It is not clear exactly when Clem decided to surrender her $30,000 annuity and buy a third Zuma note. It was before March 3, 1994, the date of the American Life letter responding to Clem's request to surrender her $30,000 annuity. American Life's letter advised Clem that she was entitled to principal and $16.04 in interest, less premium tax in the amount of $324.71 and surrender charges in the amount of $2,474.92, for a net of
$27,216.41. A check for the net amount was enclosed.
As with Clem's request to surrender her $20,000 annuity, American Life contacted the Respondent and asked him to try to "conserve" the annuity. The Respondent also received a copy of American Life's March 3, 1994, letter as the agent-of- record. The Respondent admitted that he telephoned Clem on or about February 28, 1994, to try to conserve the annuity but that Clem was adamant. He claimed that Clem did not tell him what she intended to do with the money and that he did not ask.
The meeting at which Clem bought the third Zuma promissory note took place on March 10, 1994. Mary Clem thought the Respondent was there but could not swear to it. Perks also testified that he thought the Respondent was there. The Respondent testified that he definitely was not there and did not know the transaction took place.
By that time of the meeting on March 10, 1994, the Respondent had become suspicious and distrustful of Zuma's principals. They had diluted his thirty percent share of the company to a mere 0.3 percent. In addition, the Respondent did not think that the principals were following the business plan they had "sold" the Respondent, and which the Respondent in turn had "sold" to private investors, including Mary Clem. By early March 1994, the Respondent began to take steps to attempt to protect the investors in Zuma, including himself, and force Zuma to follow its business plan. Eventually, he emptied Zuma's accounts and placed the funds in the trust account of the lawyers he hired to sue Zuma and its principals to enjoin them to follow the business plan. The court ruled against the Respondent and required him to return the money to Zuma. The Respondent paid his lawyers' fees out of his own pocket.
Based on the timing of events, it seems probable that the Respondent did not meet with Perks and Clem on March 10, 1994. By that time, he was becoming deeply involved in his
dispute with Zuma and its principals. It is less clear that the Respondent was completely ignorant of Clem's intention to use the money from the surrender of the $30,000 American Life annuity to buy a third Zuma note, but he may well have lost track of Mary Clem and her intentions in the midst of his dispute with Zuma and its principals.
It had been arranged before the March 10, 1994, meeting for Clem to be able to purchase a Zuma promissory note in the face amount of $30,000 for the net cash surrender value of the
$30,000 annuity, after deduction of premium tax and surrender penalty. The Respondent denied participating in making these arrangements or having any knowledge of them. A similar arrangement already had been made for the $20,000 annuity and Zuma note, and it is conceivable that Perks did not require the Respondent's participation to arrange it for the $30,000 annuity and Zuma note. It is found that the evidence did not prove the Respondent's participation.
On March 10, 1994, Clem wrote a personal check in the amount of $27,2126.41, and received Zuma's $30,000 promissory note dated March 10, 1994. On its face, the note paid twelve percent interest, with quarterly payments of $900 interest and the principal payable on March 10, 1996.
The Respondent contacted Mary Clem in June or July, 1994, to inquire about her Zuma investment. Clem told him everything was fine. In December 1994, the notes were revised to
show Mary Clem's daughter as a beneficiary on the notes in the event of Clem's death. The revised $20,000 note preserved the erroneous issuance and due dates. See Finding 21, supra.
The $900 interest payment due on the $30,000 Zuma note on March 1995, was seriously past due. In addition, no payments were made on the $20,000 note.
On April 1, 1995, the $20,000 note was renewed upon payment of $6,200 interest and penalties. Under the renewal note, monthly interest payments of $200 were due, and a balloon payment of principal and remaining interest was due on September 1, 1995.
By mid-1995, Zuma was in default again, and Clem received no payments after August 8, 1995. Zuma paid Clem a total of just $23,400 on the three promissory notes.
The Respondent conceded that there was a high risk of losing one's entire investment in Zuma and that someone investing in Zuma had to be prepared to lose the entire investment. He also conceded that Mary Clem should not have invested the bulk of her life savings in Zuma. He also conceded that it would have been significant to know, and he should have wanted to know, the extent of Clem's investment in Zuma before increasing her investment in Zuma.
CONCLUSIONS OF LAW
The Department had the burden of proving its allegations by clear and convincing evidence. See Ferris vs.
Turlington, 510 So. 2d 292 (Fla. 1987). "Clear and convincing" evidence requires:
that the evidence must be found to be credible; the facts to which the witnesses testify must be distinctly remembered; the testimony must be precise and explicit and the witnesses must be lacking in confusion as to the facts in issue. The evidence must be of such weight that it produces in the mind of the trier of fact a firm belief or conviction, without hesitancy, as to the truth of the allegations sought to be established.
Slomowitz vs. Walker, 429 So. 2d 797 (Fla. 4th DCA 1983). The findings made in this case were made based on the Ferris standard.
The Department conceded in its proposed recommended order that there was no violation under two of the statutes charged--Sections 626.561 and 626.611(10), Florida Statutes (1993).
The Respondent argued that charges under several of the statutes--namely, Sections 626.611(9), 626.621(2), and 626.621(6), Florida Statutes (1993)--cannot be sustained because those statutes define the violations as being "in the conduct of business under the license" or "in the course of dealing under the license," whereas the charges in this case are based on the sale of Zuma promissory notes. In support of his argument, the Respondent has cited rulings in the Final Order, Dept. of Insurance vs. Robert Darren Carlson, DOAH Case No. 95-4947, entered April 23, 1996, with respect to the sale of a Zuma
promissory note to Leila Smith.
Based on the evidence, the Carlson Final Order applies directly to the facts of the $10,000 Zuma promissory note purchased by Mary Clem and precludes charges under Sections 626.611(9), 626.621(2), and 626.621(6), Florida Statutes (1993). In both, the Zuma note transaction was the only transaction at issue.
On the other hand, the Carlson Final Order does not apply to the other two Zuma notes purchased by Mary Clem. In Carlson, there was no surrender of an insurance product to provide the source of funds for the Zuma investment. In this case, the surrender of Mary Clem's annuity policies provided the funds she invested in the Zuma promissory notes. It is concluded that, under the circumstances of this case, the participation of Mary Clem's insurance agents in the sale of the $20,000 and
$30,000 Zuma notes was "in the conduct of business under the [insurance] license" and "in the course of dealing under the [insurance] license."
While both annuity/promissory note transactions were "in the conduct of business under the [insurance] license" and "in the course of dealing under the [insurance] license," the evidence only connected the Respondent to one of them--the surrender of the $20,000 annuity and the purchase of the $20,000 promissory note. The evidence as to his participation in the surrender of the $30,000 annuity and the purchase of the $30,000
promissory note was less than clear and convincing.
Although it has been concluded that both the surrender of the $20,000 annuity and the purchase of the $20,000 promissory note were "in the conduct of business under the [Respondent's insurance] license," the evidence did not prove that the Respondent was guilty of fraud or dishonest practices under Section 626.611(9), Florida Statutes (1993). Even if it had proven those things, it recently was held: "[T]he statutory term "practices" used in section 626.611(9), Florida Statutes (1989), contemplates more than a solitary lapse." Werner vs. Dept. of Ins., 689 So. 2d 1211, 1214 (Fla. 1st DCA 1997). As in Werner, Section 626.611(9) would not apply to the solitary $20,000 annuity/promissory note transaction.
The Administrative Complaint alleged violations of both Section 626.621(6) and Section 626.9541(1)(e)1, Florida Statutes (1993). The Respondent argued that Section 626.9541(1)(e)1 did not state a violation. In support of his argument, the Respondent cited Werner vs. Dept. of Ins., supra, at 1214, which held that Section 626.9541 "provisions are merely definitional and do not themselves authorize any disciplinary action." But Section 626.621(6) prohibited "engaging in unfair methods of competition or in unfair or deceptive acts or practices, as prohibited under part X of this chapter . . . ." In combination, Sections 626.621(6) and 626.9541(1)(e)1 properly alleged statutory violations.
Nonetheless, in this case, no violation of Sections 626.621(6) and 626.9541(1)(e)1 was proven. Section 626.9541(1)(e)1, Florida Statutes (1993), prohibited knowingly making false material statements. It was not proven that the Respondent knowingly made any false material statements.
Section 626.621(6), Florida Statutes, also prohibited an insurance agent from "having otherwise shown himself to be a source of injury or loss to the public . . . ." In this case, the evidence proved that the Respondent has shown himself to be such a source of injury or loss to the public, in the person of Mary Clem in particular. He was a source of injury or loss to Mary Clem by inappropriately attempting to act in multiple roles as her insurance agent, as corporate director and verifier for Zuma, and as an owner, investor, and salesman for Zuma. In the process, he failed to fully and clearly disclose the true nature of the Zuma investment, and Mary Clem was sold an investment that was entirely inappropriate for her.
The Respondent similarly violated Section 626.621(3), Florida Statutes (1993), which prohibited violation of "any lawful order or rule of the department," and Florida Administrative Code Rule 4-215.210. Rule 4-215.210 stated in pertinent part:
The Business of Life Insurance is hereby declared to be a public trust in which service all agents of all companies have a common obligation to work together in serving the best interest of the insuring public, . . . by presenting accurately and completely every fact essential to a client's decision, and by . . . always
placing the policyholder's interests first.
In this case, the Respondent neither presented completely every fact essential to Mary Clem's decision nor placed her interests first.
Section 626.611(7) and (13), Florida Statutes (1993), did not define the violation as being "in the conduct of business under the license" or "in the course of dealing under the license." Subsection (7) prohibited "[d]emonstrated lack of fitness or trustworthiness to engage in the business of insurance." Subsection (13) prohibited "[w]illful failure to comply with, or willful violation of any proper order or rule of the department or willful violation of any provision of this code."
As to Section 626.611(13), it was not proven that the Respondent's violations were "willful."
As to Section 626.611(7), the Respondent did not exercise good judgment in inappropriately attempting to act in multiple roles as Mary Clem's insurance agent, as corporate director and verifier for Zuma, and as an owner, investor, and salesman for Zuma. In the process, he failed to fully and clearly disclose the true nature of the Zuma investment, and Mary Clem was sold an investment that was entirely inappropriate for her. This evidence was sufficient to demonstrate a lack of fitness or trustworthiness to engage in the business of insurance under Section 626.611(7). See Natelson vs. Dept. of Insurance,
454 So. 2d 31, 32 (Fla. 1st DCA 1984)( See also Final Order, Dept. of Insurance vs. Robert Darren Carlson, DOAH Case No. 95- 4947, entered April 23, 1996.
Under Florida Administrative Code Rule 4-231.080(7), the stated penalty for the Respondent's violation of Section 626.611(7) is a six-month suspension. Under Florida Administrative Code Rules 4-231.090(3) and 4-231.131, the stated penalty for the Respondent's violation of Section 626.626(3) is a three-month suspension. Under Florida Administrative Code Rule
4-231.090(6), the stated penalty for the Respondent's violation of Section 626.626(6) is a six-month suspension. Since all of the violations were charged in a single-count Administrative Complaint, the total stated penalty under Florida Administrative Code Rule 4-231.040(1)(a) is a six-month suspension (the highest individual stated penalty supported by the proven allegations of the Administrative Complaint.)
Florida Administrative Code Rule 4-231.160 sets out factors that aggravate and mitigate the total stated penalty under Rules 4-231.040, 4-231.080 and 4-231.090. The impact of consideration of those factors is mixed, and it is concluded that the six-month total stated penalty should be neither aggravated nor mitigated in consideration of those factors.
RECOMMENDED that the Department of Insurance enter a final order: (1) finding the Respondent, Michael Crudele, guilty of violating Sections 626.611(7), 626.621(3), and 626.621(6), Florida Statutes (1993); and (2) suspending his license and eligibility for licensure as a life insurance agent and as a life and health insurance agent for six months.
J. LAWRENCE JOHNSTON Administrative Law Judge
Dennis S. Silverman, Esquire James A. Bossart, Esquire
Cynthia S. Tunnicliff, Esquire Pennington, Culpepper, Moore,
Daniel Y. Sumner, General Counsel Department of Insurance and Treasurer The Capitol, Lower Level 26 Tallahassee, Florida 32399-0300
All parties have the right to submit written exceptions within 15 days from the date of this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.
