vs. ) Case No. 98-0434
Respondents. )
A formal hearing was held by the Division of Administrative Hearings (DOAH), before Daniel M. Kilbride, Administrative Law Judge, in Orlando, Florida, on June 18, 1998. The following appearances were entered:
For Petitioners: Robert K. Good, Chief Trial Counsel
400 West Robinson Street Hurston South Tower, No. S225 Orlando, Florida 32801-1799
For Respondents: C. Michael Magruder, Esquire
Whether the Respondents, George Beckham, Brian Beckham, and Pioneer Capital, Inc., violated Chapter 517, Florida Statutes, by failing to register as investment advisers, committed fraud in the rendering of investment advice, sold unsuitable investments
to an investor, or failed to advise a client of all futures market positions held by them on behalf of the client.
On November 6, 1997, Petitioner issued an Administrative Complaint and Notice of Intent to Issue Cease and Desist Order. Respondents filed a Petition for Formal Hearing on January 9, 1998, denying the charges and requesting a formal hearing before DOAH. This matter was referred to DOAH on January 23, 1998, and was set for hearing.
Following discovery, a formal hearing was held on June 18, 1998. At the hearing Petitioner called two witnesses and Respondents Brian and George Beckham, as adverse witnesses.
Petitioner offered six exhibits in evidence. Respondents testified on their own behalf and offered two exhibits in evidence.
The transcript was filed on July 13, 1998. Respondent filed a motion to extend the time for filing of proposed recommended orders on July 31, 1998. The motion was granted on August 3, 1998. Both parties timely filed their proposed orders. Both parties proposals have been given careful consideration and adopted where relevant and supported by clear and convincing evidence.
Pioneer Capital, Inc., is a retail insurance company that is owned and operated by Respondent George Beckham.
Respondents George Beckham, Brian Beckham, and Pioneer Capital, Inc., are not registered with the NASD, SEC or the
Florida Department of Banking and Finance in any capacity nor have they ever been registered.
Respondents George Beckham, Brian Beckham, and Pioneer Capital, Inc., are not registered with the Commodities Futures Trading Commission (CFTC) in any capacity nor have they ever been registered.
An investment adviser is a person who, for compensation, engages for all or part of his time, directly or indirectly, in the business of advising others as to the value of securities or to the advisability of investing in, purchasing of, or selling securities.
Respondents George and Brian Beckham claim that an individual who does not hold himself out to the general public as an investment adviser and does not have more than 15 clients within a 12-month period is not an investment adviser.
For a period of no less than two years, the Orlando edition of the Southern Bell Advertising and Publishing Directory Yellow Pages carried an ad under Investment Advisory Service for Pioneer Capital, Inc.
Respondents George and Brian Beckham were not associated with more than 15 investors during any 12-month period.
In 1995, Respondent George Beckham began trading in commodities in his personal account.
Respondent based his personal trading strategy on the book You Can't Lose Trading Commodities by Robert F. Wiest (1994 ed.)
Respondent's personal trading strategy was based on a method of trading called "scale trading."
In late 1995, Respondent switched his commodities trading account to Lind-Waldock Company, a commodities trading firm.
Respondent George Beckham made his own decisions as to what commodities to trade. Respondent George Beckham made his decisions based on the current price and the overall price of a commodity over the last 15 or 20 years.
Respondent George Beckham designed the scale that he used. The scale determined at what prices to buy and sell the commodities. After the initial decision to invest, the program became self-executing.
Respondent's son, Brian Beckham, was responsible for executing Respondent George Beckham's trades.
About the same time, a small group of friends and acquaintances began trading in commodities and adopted the same system as Respondents George and Brian Beckham. Many of the trades made by the investors mirrored those taken by Respondent George Beckham. Respondent Brian Beckham placed the trades for these investors for compensation and issued a monthly statement to them.
In late 1995, John Griswold approached Respondent George Beckham after hearing that he was doing well personally in investments. John Griswold approached Respondent George Beckham at church to inquire about duplicating Respondent George Beckham's personal success in commodities investing.
Respondent George Beckham described to John Griswold his theory of trading commodities. Mary Griswold, John Griswold's wife, was hospitalized at the time and was not present.
John Griswold was not pleased with the return he was receiving on his conservative investments with Fannie Mae bonds and other investments. Griswold hoped to earn up to 25 percent return from investing in commodities. Griswold understood that his risk would increase when he sought a higher return.
In the initial discussions between Respondent George Beckham and John Griswold, the amount of profits that could be made was the center of discussions. Respondent George Beckham cautioned Mr. Griswold to retain sufficient income and assets in case Mr. Griswold lost the money he invested in commodities.
Respondent George Beckham gave Mr. Griswold the book, You Can't Lose Trading Commodities by Robert Wiest, and advised him to read it. Respondent George Beckham informed Mr. Griswold that the book served as a general guide in his investing. The Griswolds did not read or understand the concepts in the book.
Respondent George Beckham did not tell Mr. Griswold that there was a limit to how much he could lose while investing in commodities, but did state that by using the scaled trading system the amount of losses would be limited.
John Griswold ignored the advice that in order to achieve a higher return on an investment, he had to expose his principal to greater risk.
Mr. and Mrs. Griswold acknowledged, in a written instrument, that there was the possibility of a complete loss on the investment. It is common knowledge that commodities trading is inherently a high risk investment.
John Griswold alleges that he agreed to split the profits with Respondents Brian and George Beckham. According to John Griswold, on any profits up to a 15 percent return, the Griswolds would keep the entire profit; on any profit between 15 and 25 percent, the Griswolds would keep two-thirds of the profit; and on any profit above 25 percent, the Griswolds would keep one-half of the profit. However, John Griswold did not sign a written statement or contract indicating that the Griswolds would pay a commission to or split the profits with the Beckhams.
There was no contractual agreement to split profits with either Respondents Brian Beckham or George Beckham.
At no time did Respondents George or Brian Beckham guarantee Mr. Griswold that he would receive a given return or that he could avoid losses from a simple trade.
John Griswold decided to invest after talking with Respondents George and Brian Beckham. He believed that the investment would be moderately safe and that he would be able to control his losses. He did not expect to have losses, or much loss, and he so informed his wife.
John Griswold is currently 76 years of age. John Griswold's work background includes the Armed Service, volunteer work, teaching, and work with the environmental health department in Osceola County as an inspector.
His prior investment experience was in renting houses, investing in bonds through AARP, and certificates of deposit. He had no experience in trading commodities nor did he know how to trade in commodities. He did not understand enough about scale trading to explain it to his wife.
His real estate investments include three lots, one of which has always been a loss, and three rentals (one mobile home and two houses.)
John Griswold's pension is $400 per month and his social security is $600 per month. In addition, his wife has a small pension and social security.
The Griswolds' personal residence is worth $160,000-
$170,000.
Although John Griswold checked on his Lind-Waldock Company application that his net worth, exclusive of home, was
$250,000 to $499,999 he testified at hearing that his net worth, exclusive of home, was less than $250,000 at the time of his investment.
To invest in the program, John Griswold cashed in most of his certificates of deposit. He was left with approximately
$15,000 to $20,000 liquid assets after he invested. The Griswolds had very little left in savings or their checking account after the transfer.
Griswold set up an joint account with his wife, Mary, at the Lind-Waldock Company to begin trading in commodities. He transferred $65,000 into the account and authorized Respondent Brian Beckham to place trades on their behalf.
Mr. and Mrs. Griswold received a copy of the scale Respondent George Beckham used in his personal investing. The Griswolds choose to adopt the same scale. They also chose to trade in the same commodities as Respondent George Beckham, hoping to duplicate the success Respondent George Beckham had experienced in his personal investments.
Mr. and Mrs. John Griswold were individual investors. Although the Respondents could not withdraw funds from the account, they had control over the amounts invested by the Griswolds using the Lind-Waldock Company.
The Griswolds took predetermined positions in commodities by mirroring the positions taken by Respondent George Beckham without studying the "scale trading system."
Respondent Brian Beckham placed the trades with Lind- Waldock Company on behalf of the investors, including the Griswolds, and received compensation of $25 from each investor for each trade executed.
Respondent George Beckham told Respondent Brian Beckham which commodities he wished to trade. After Respondent George Beckham decided which commodities to trade, Respondent Brian Beckham then executed the trade for Respondent George Beckham and the corresponding trade for the Griswolds. The Griswolds would be notified that a trade had been made when a representative of Lind-Waldock Company called to tell him of the trade, usually on the same day the trade was made. The verbal notice would be followed by a written statement.
Respondent Brian Beckham executed the trades in a given commodity based solely on the scale that the Griswolds had authorized. In order to do so, Respondent Brian Beckham had to watch the computer information and call in the trades at the appropriate time. Respondent Brian Beckham received $25 to execute the trades. He did not provide any advice as to the value of a commodity.
Respondent Brian Beckham did not engage in advising others as to the value of the commodities for compensation.
When a trade was made with Lind-Waldock Company on behalf of an investor, a confirmation statement was sent by Lind- Waldock Company to the customer, showing the trade made on the customer's behalf.
Each month, Lind-Waldock Company set an account summary directly to each investor with a copy to Respondent Brian Beckham.
At the end of each month, Respondent Brian Beckham created a billing summary for the trades he executed on behalf of each investor and sent the statement to the investor.
The Griswolds received two difference types of account statements. The first was a monthly account statement generated by Respondent Brian Beckham which was a simple statement. The second type of statement was received from Lind-Waldock Company after each trade was made and also on a monthly basis. The Lind- Waldock Company statements were difficult to read. However, they reflected all account activity, including gains and losses.
The Lind-Waldock Company statements were not clear to the Griswolds. The Griswolds did not review most of the account statements and they were not careful in reviewing the others.
Respondent Brian Beckham sent a monthly bill for the amount the Griswolds owed to him for executing trades. The purpose of the bill was to show the justification for the fees owed to Respondent Brian Beckham.
The Griswolds incurred a $25 charge when Respondent Brian Beckham initiated a position.
Billing at the time a position is initially taken is referred to as a round turn.
No additional charge was incurred when Respondent Brian Beckham closed or rolled-over an account, so these transactions were not listed.
Losses were not listed on the bill prepared by Respondent Brian Beckham.
The Griswolds did not make any inquiry about the status of their investments until four days before they closed their account with Lind-Waldock Company.
Respondent Brian Beckham told the Griswolds to pay attention to the statements he sent them, not to Lind-Waldock Company statements.
All of the statements to the Griswolds from Respondent Brian Beckham show profits or projected profits.
No losses were ever reported by Respondent Brian Beckham to the Griswolds.
Over a period of five months the Griswolds lost approximately 70 percent of their capital.
At the suggestion of Respondent George Beckham, Mr. and Mrs. Griswold invested an additional $25,000 into Lind-Waldock Company account on April 1, 1996.
After the losses in the commodities market, the Griswolds salvaged $20,000 of their original investment.
Most of the other investors in the market at that time lost between 70 percent and 100 percent of their initial investment.
A short sale is a transaction where a commodities contract is sold in the hope of later being able to buy back identical and offsetting contracts at a lower price. If the investor is wrong and the price of the commodity goes up, the investor will lose money. If the price of the commodity does go down, the investor will make money.
In the first four paragraphs of the chapter entitled, "Scaling From the Short Side," in the book You Can't Lose Trading Commodities, the author proffers a strong argument against scale trading from the short side. In spite of this, the author goes on to provide a thorough explanation on how to scale trade from the short side.
Although the Griswolds did not read the book, Respondent George Beckham stated to the Griswolds that he generally followed the advice in the book. The Griswolds had a reasonable expectation that short sales would not be made, or, at least, they would be limited.
Although approximately 60 percent of the trades were short sales, approximately 40 percent of the trades were not short sales. However, losses occurred in both categories.
The large volume of short trades indicated that Respondent George Beckham disregarded the advice in the book.
On January 26, 1996, a transaction in wheat was made on behalf of the Griswolds. It was a short sale. The purchase was made at $5.05 cents per bushel.
On February 8, 1996, Lind-Waldock Company reported that they had covered that short sale with a purchase of March wheat at $5.07. Therefore, the customer lost $200 on the trade.
This loss, reported by Lind-Waldock Company in the Griswolds account, was never reported to the Griswolds by Respondent Brian Beckham.
The December 21, 1995, Lind-Waldock Company statement showed a short sale of March corn at 51 3/4. The February 27, 1996, Lind-Waldock Company statement shows a purchase of March corn to cover the prior short sale. There was an actual loss on that contract of $5,100 reported on the Lind-Waldock Company statement.
This loss of $5,100 reported by Lind-Waldock Company was not reported by the Respondents Beckham to the Griswolds on the statement sent by Respondent Brian Beckham to the Griswolds. In fact, the December statement that Respondent Brian Beckham showed to the Griswolds projected a profit of $1,000 to the Griswolds on the same sale of March corn.
Even after the loss reported by Lind-Waldock of $5,100, the Respondent Beckhams never went back and corrected the statements they sent to the Griswolds to show that the $1,000 projected profit was actually a $5,100 loss, as reported by Lind- Waldock Company.
Had the Beckhams reported this loss to the Griswolds, the Griswolds would have been on notice that there were problems in the account and therefore, could have avoided making the April 1, 1996, additional investment of $25,000.
The Griswolds thought they were making money based on Respondent Brian Beckham's reports and therefore put in more money. They did not realize they were suffering losses until the last statement.
By definition, fraud in the rendering of investment advice includes the omission to tell an investor something the investor should have been told. Although the Respondents Beckham presented an argument that the losses were not really losses, the fact that they were reported as losses by Lind-Waldock Company, should have at least been reported by the Respondents Beckham to the Griswolds.
Brian Beckham failed to report numerous trades made on behalf of the Griswolds in the monthly statements he sent to the Griswolds. Specifically, he failed to report the following trades made on behalf of the Griswolds:
The purchase of March 1996, wheat at
$5.07.
The purchase of March 1996, wheat to cover a previous short sale.
The purchase of March 1996, corn to cover a previous short sale which actually resulted in a $5,100 loss to the Griswolds. Of significance, the December 1995, statement sent to the Griswolds by Respondent Brian Beckham showed a projected profit of $1,000 on this transaction. He never reported to the Griswolds the actual $5,100 loss reported by Lind-Waldock Company.
A February 15, 1996, sale of May 1996, cocoa.
Respondent George Beckham transferred title to a house which he owned, subject to a first mortgage, to the Griswolds as partial compensation for their losses.
There was insufficient evidence to show that the corporation was involved in the Griswolds' scaled trading.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this cause, pursuant to Section 120.57(1), Florida Statutes.
The Petitioner is the state agency charged with the administration and enforcement of Chapter 517, Florida Statutes, the Securities and Investor Protection Act, pursuant to Section 517.03, Florida Statutes.
The Petitioner bears the burden of proving the allegations in the Administrative Complaint by clear and convincing evidence. The Department of Banking and Finance v. Osborne Stern and Company, 670 So. 2d 932 (Fla. 1996).
The Respondents bear the burden of showing their entitlement to the exemption which they claim under Section 517.021(11)(b)7., Florida Statutes.
Section 517.221, Florida Statutes, provides:
Cease and Desist Orders
The Department may issue and serve upon a person a Cease and Desist Order when the Department has reason to believe that such person is violating, has violated, or is about to violate any provision of this chapter, any rule, or order, promulgated by the Department, or any written agreement entered into with the Department.
The Department may impose and collect an administrative fine against any person found to have violated any provision of this chapter, any rule or order promulgated by the Department, or any written agreement entered into with the Department in an amount not to exceed $5,000 for each such violation. All fines collected hereunder shall be deposited as received in the Anti-Fraud Fund.
Section 517.021(11)(a), Florida Statutes, provides in part:
"Investment adviser" includes any person who for compensation engaged for all or part of his time, directly or indirectly or through publications or writings, in the business of advising others as to the value of securities or as to the advisability of investments in, purchasing of, or selling of securities, except a dealer whose performance of these services is solely incidental to the conduct of her or his business as a dealer or who receives no special compensation for such services.
(b) the term investment adviser does not include the following:
* * *
7. Any person who does not hold herself or himself out to the general public as an investment adviser and who has at least six but no more than fifteen clients within twelve consecutive months in this state;
Section 517.12(4), Florida Statutes, provides, in part:
* * *
(4) No investment adviser or associated person of an investment adviser shall engage in business from offices in this state, or render investment advice to persons of this state, by mail or otherwise, unless the investment adviser and associated persons have been registered with the department pursuant to this section. A dealer or associated person who is registered pursuant to this section may render investment advice upon notification to and approval from the department.
Although Respondent George Beckham did not have more than fifteen clients within twelve consecutive months in Florida, he did hold himself out to the public as an investment adviser by advertising under Pioneer Capital, Inc., for at least two years in the Real Yellow Pages under the title Investment Advisory Service. Therefore, his statement that he did not ask to be listed under that heading is not credible because he was listed there for at least two years. Therefore, he has not met his burden of showing an entitlement to the exemption. Although Respondent George Beckham testified that he did not place the advertisement, he failed to provide any testimony from the publishers of the Real Yellow Pages, nor did he present any other proof such as his initial ad order showing the placement of the advertisement. All he presented were two letters from the provider, neither of which acknowledged responsibility for the alleged mistake. Respondent George Beckham received compensation for advising others as to the value of securities because Respondent Brian Beckham was his employee and he was paid for
trading in commodities.
Respondent Brian Beckham qualifies as an associated person of an investment adviser because he took his father's recommendations and passed them on to the investors he was dealing with. He then collected a $25 commission for each transaction. It is clear that the Griswolds could not, based on their investing experience, know how to invest in commodities and that they relied entirely on both Respondents Brian Beckham and George Beckham for advice, albeit indirect. Respondent Brian Beckham has failed to meet his burden showing entitlement to the exemption.
There was insufficient evidence to demonstrate that Pioneer Capital, Inc. qualifies as an investment adviser.
Respondents George Beckham and Brian Beckham acted as investment advisers without first being registered, in violation of Section 517.12(4), Florida Statutes.
Section 517.301(1), Florida Statutes, provides in relevant part:
It is unlawful and a violation of the provisions of this chapter for a person:
in connection with the rendering of any investment advice or in connection with the offer, sale, or purchase of any investment or security. . . . directly or indirectly:
To employ any device, scheme, or artifice to defraud;
To obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
To engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a person.
This section applies whether or not a person is registered as an Investment Adviser.
The evidence is insufficient to prove that Respondents George Beckham and Brian Beckham represented to the Griswolds that they could control any losses to a minor loss or that they could reassure the customer that the trades would be safe and would not result in any significant loss. The evidence is not clear and convincing that this is a misstatement of a material fact and a violation of Section 517.301(1)(a)2, Florida Statutes.
Respondents George Beckham and Brian Beckham, represented to the Griswolds that they would, in general, follow the advice given in the book You Can't Lose Trading Commodities. The author Weist was insistent in his book that short trading should not take place. But the Respondents made 33 trades on behalf of the Griswolds, of which twenty were short trades. Therefore, they have made a misstatement of a material fact and violated Section 517.301(1)(a)2, Florida Statutes.
Two types of account statements were given to the Griswolds. One was a relatively easy to read statement generated by Respondent Brian Beckham and given to the Griswolds on a monthly basis. Mr. Griswold was encouraged by Respondent Brian Beckham to pay attention only to that statement, not the Lind- Waldock Company statement. The second type of statement came from Lind-Waldock Company. These were sent after each trade made on behalf of the Griswolds and on a monthly basis. These are
complex statements and difficult to read. Both of the Griswolds obviously had difficulty in understanding the Lind-Waldock Company statement. Based on the reassurances of Brian Beckham, the Griswolds relied heavily on the statements generated by Respondent Brian Beckham.
Although the Lind-Waldock Company statements apparently showed all of the trades made on behalf of the Griswolds, many of the trades, including some with losses, were not reported to the Griswolds in the statements by Respondent Brian Beckham. It is significant to note here that Respondent Beckham only reported profits or projected profits and never reported any losses, even though the Lind-Waldock Company statement showed losses. Even when there was a substantial $5,100 loss to the Griswolds, after Respondent Brian Beckham had projected a profit of $1,000, the Beckhams did not go back and inform the Griswolds of the actual loss.
The Respondent Brian Beckham never reported any losses on his monthly statements to the Griswolds.
The Petitioner is not alleging the Lind-Waldock Company statements were misleading, but only that the statements generated by Respondent Brian Beckham were misleading. Because the Griswolds were unsophisticated investors and were unable to understand the Lind-Waldock Company statements, it is understandable that they would place heavy reliance on the statements generated by Respondent Brian Beckham. Although Lind- Waldock Company reported the correct information, the Respondent
failed to report it. By doing so, the statement to the Griswolds was misleading.
The largest loss was in February 1996. John Griswold testified that had he known of the losses, he would have not invested the additional $25,000 on April 1, 1996. Therefore, Respondents Brian Beckham and George Beckham, are in violation of Section 517.301(1)(a)1, 2, and 3, Florida Statutes.
Fraud under the securities law includes the failure to tell the investor material information. The Respondents only reported good news to the Griswolds. They should also have reported the bad news in their monthly statements.
Rule 3E-600.013(2)(g), Florida Administrative Code provides:
Rule 3D-600.013(2)(g) and concomitantly Rule 3E-600.013(1)(c)-Suitability.
An associated person is prohibited from: recommending to a customer the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the customer on the basis of information furnished by the customer after reasonable inquiry concerning the customer's investment objectives, financial situation, and needs, and any other information known by the dealer.
Unsuitability is defined as "whether the dealer fulfilled the obligation he assumed when he undertook to counsel the customer, of making only such recommendations as would be consistent with the customer's financial situation and needs." Erdos v. S.E.C., 742 F.2d 507 (C.A.9 1984). The Erdos case dealt with the situation where the executed trades were highly risky in light of the customer's particular situation.
The Griswolds were investing almost all of their liquid assets in an investment which the promoters acknowledged was highly risky. After their investment, they had only $15,000 to $20,000 in liquid assets. Their investment was a total of
$93,000. They were in their mid-seventies, retired, and had very little investment experience. That investment experience was in traditional investments of certificates of deposits, bonds, and some real estate rentals. The riskiness of the investment is evidenced by the fact that the Griswolds lost approximately
$70,000 of their $93,000 investment in approximately five months. Clearly, the investment was unsuitable for the customers financial situation and needs.
Section 517.275, Florida Statutes, provides:
517.275 Commodities; Prohibited Practices.
It is unlawful and a violation of this chapter for any person to engage in any act or practice in or from this state, which act or practice constitutes a violation of any provision of the Commodity Exchange Act, 7 USC. Ss. 1 ct seq., or the Rules and Regulations of the Commodity Future Trading Commission under that act upon the effective date of this act.
Section 4n(3)(B) of the Commodity Exchange Act states: Section 4n(3)(B) Books and Records.-
Disclosure of Principals positions.
Unless otherwise authorized by the commission by Rule or Regulation, all commodity trading advisors and commodity pool operators shall make full and complete disclosure to their subscribers, clients, or participants of all
future's market positions taken or held by the individual principals of their organization.
The Respondents Beckham, have violated 517.275, Florida Statutes, and Section 4n(3)(B) of the Commodity Exchange Act by failing to advise the Griswolds of all positions taken by the Respondents on behalf of the Griswolds.
The Respondents George and Brian Beckham have mitigated their injury to their clients by transferring real estate into their name, with equity of approximately $25,000.
RECOMMENDED that the Department of Banking and Finance, Division of Securities and Investor Protection enter a final order which
DONE AND ENTERED this 31st day of August, 1998, at Tallahassee, Leon County, Florida.
DANIEL M. KILBRIDE
Filed with the Clerk of the Division of Administrative Hearings this 31st day of August, 1998.
Robert K. Good, Chief Trial Counsel Department of Banking & Finance Hurston South Tower, No. S225
C. Michael Magruder, Esquire Waterfront Square
Harry Hooper, General Counsel Department of Banking & Finance The Capitol, Room 1302 Tallahassee, Florida 32399-0350
Honorable Robert F. Milligan Comptroller
Department of Banking & Finance The Capitol, Plaza Level Tallahassee, Florida 32399-0350
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.
