STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

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

)

Petitioner, )

)

vs. ) Case No. 99-0634

) GREAT AMERICAN FINANCIAL NETWORK, )

INC., and EDWARD BATES, individually ) and as President, Owner, and ) Registered Representative of Great ) American Financial Network, Inc., )

)

Respondents. )

)

RECOMMENDED ORDER

Pursuant to Notice, this cause was heard by Linda M. Rigot, the assigned Administrative Law Judge of the Division of Administrative Hearings, on September 20, 1999, in West Palm Beach, Florida.

APPEARANCES

For Petitioner: Diane E. Leeds, Esquire

Office of the Comptroller

111 South Sapodilla Avenue, Suite 211 West Palm Beach, Florida 33401

For Respondents: Did not appear and were not represented STATEMENT OF THE ISSUE

The issue presented is whether Respondents Great American Financial Network, Inc., and Edward Bates are guilty of the

allegations in the Administrative Complaint filed against them, and, if so, what disciplinary action should be taken, if any.

PRELIMINARY STATEMENT

On December 31, 1998, the Department of Banking and Finance (Department), issued an Administrative Complaint for Entry of Cease and Desist Order Imposing Sanctions and Notice of Rights against Respondents Great American Financial Network, Inc., and Edward Bates, seeking to discipline their registrations, and Respondents timely requested an evidentiary hearing regarding those allegations. This cause was thereafter transferred to the Division of Administrative Hearings to conduct the proceeding.

The Department presented the testimony of John H. Willard, Stephen R. Harrison, Chad Leininger, Christine Oliver,

Tomi Hare, Dorothy D. Anderson, James B. Shields, and John Antonucci. Additionally, the Department's Exhibits

numbered 1-7 were admitted in evidence. Respondent offered no evidence.

The Department filed a proposed recommended order after the conclusion of the final hearing. That document has been considered in the entry of this Recommended Order.

FINDINGS OF FACT

1. From November 1, 1983, through December 31, 1998, Respondent Great American Financial Network, Inc. (hereinafter

   "Great American"), was registered with the Department as a licensed securities broker/dealer.

2. Between May 24, 1994, and June 18, 1999, Respondent Edward Bates was registered with the Department as an associated person of Great American.

3. Between May 1994 and December 31, 1998, Bates was a control person, president, treasurer, and secretary of Great American. Between May 1997 and December 31, 1998, Bates was the owner of at least 75 percent of Great American.

4. At all times material hereto, Bates was also president and control person of Great American Resorts of Florida (hereinafter "Resorts"). Resorts and Great American were owned by Great American Resorts and Hotels (hereinafter "Resorts and Hotels"). Bates was also president and chief executive officer of Resorts and Hotels. Great American, Resorts, and Resorts and Hotels were affiliated at the time the promissory notes in question were offered and sold to investors.

5. Resorts issued unsecured promissory notes that were sold to investors by Great American and by Bates personally. The unsecured notes were not registered with the Department and were not exempt from registration.

6. The Department received consumer complaints from investors that there had been a default in payment of interest and principal on the unsecured promissory notes sold by Great

   American and Bates. The Department initiated an investigation and obtained a search warrant in April 1998.

7. The records gathered revealed that there were at least

   
   

   58 non-accredited investors who had invested in the unsecured promissory notes sold by Great American and Bates. The Department interviewed 25 of them.

8. The age of the investors ranged from 50 to 80, with the majority of them in their 60s and 70s.

9. The investors were induced to participate in the unsecured note program by representations that the notes were a sound investment. Great American and Bates specifically told the investors that the notes were as safe as annuities or certificates of deposit. Great American and Bates specifically told the investors that the notes were guaranteed.

10. The investors believed they were investing in notes backed by a company that owned properties, specifically hotels. However, the company had no assets and no revenue except from the sale of the unsecured promissory notes. Further, the money invested by new investors was used to make some payments to complaining investors and to pay the company's bills.

11. A private placement memorandum is the equivalent of a prospectus. The investors were not provided with any disclosure documents. Specifically, they were not provided with a private placement memorandum, even though one was available. Bates

    instructed other employees of Great American not to provide any investor with the private placement memorandum because it contained disclosures which reflected that the investment was "highly speculative" and that investors should not purchase the notes unless they could "afford to lose all the money invested." Bates personally prepared a packet that was given to investors. It only contained the first page of the private placement memorandum and the signature page.

12. The investors were not told of any risks from investing in the notes. Had they been told, they would not have invested because safety of principal was their primary concern.

13. The investors were not suitable for Great American's note program because the risk of loss was too great. The majority of the investors were retirees, and they had used their retirement savings to purchase the notes from Great American and Bates. The unsecured notes sold by Great American and Bates were a very risky investment and were not, therefore, suitable for retirees wanting to preserve their capital.

14. Bates pressured the other brokers at Great American to place their investors into the notes. He told them they would not receive a paycheck unless they did. As a result, investors were switched from other extremely safe, secure investments with guaranteed returns into the risky unsecured notes.

15. Great American and Bates conducted seminars that were advertised in the newspaper to find new investors and induce them to purchase the unsecured notes. The advertisements misrepresented that the investment carried a high interest rate and was guaranteed and insured. Bates personally made the presentation and personally sold the unsecured notes to attendees from the seminars.

    CONCLUSIONS OF LAW

    
    

16. The Division of Administrative Hearings has jurisdiction over the subject matter hereof and the parties hereto. Sections 120.569 and 120.57(1), Florida Statutes.

17. The Administrative Complaint filed against Respondents Great American and Bates alleges that they violated Section 517.07, Florida Statutes, by selling or offering for sale unregistered securities within the State of Florida. The Department has proven this allegation by uncontroverted and substantial evidence.

18. The Administrative Complaint further alleges that Respondents Great American and Bates violated Rule 3E- 600.013(1)(c), Florida Administrative Code, and, therefore, Section 517.161(1)(a), Florida Statutes, by recommending to customers the purchase of securities without reasonable grounds to believe that the recommendation was suitable for the customers, based upon information furnished by the customers

    after reasonable inquiry concerning the customers' investment objectives, financial situation, and needs. The Department has proven by substantial and uncontroverted evidence that Respondents violated this statutory section and rule requirement. The investment was not suitable for the customers who invested their retirement funds and income in highly- speculative unsecured notes when their investment objective was preservation of capital and guaranteed income instead.

19. Respondents also violated Rule 3E-600.013(1)(q), Florida Administrative Code, as alleged in the Administrative Complaint, by failing to provide the investors a prospectus or private placement memorandum.

20. Respondents Great American and Bates also violated Section 517.301(1)(a) and (c), Florida Statutes. In connection with their investment advice and in connection with their sale of the unsecured notes, they employed a scheme to defraud investors, obtained money by the use of untrue statements of material fact and omissions of necessary material facts, and knowingly and willfully concealed material facts and made false representations. They intentionally misrepresented their risky investment to be safe. They intentionally misrepresented their risky investment to be secure when, in fact, the notes were unsecured. They intentionally withheld the private placement memorandum because it advised investors that the investment was

    highly-speculative and should not be made by anyone who was not willing to lose all of their investment.

21. Section 517.161(4), Florida Statutes, provides for revocation of the registration of a corporation if an officer or owner commits acts or omits acts which would be grounds for the revocation of that person's registration. Bates' egregious conduct in defrauding many investors of their retirement monies requires revocation of his registration and, therefore, the registration of Great American.

22. It is also appropriate that a cease and desist order be entered against Great American and Bates and that they be assessed the maximum fine of $5,000 per violation for the 58

    non-accredited investors they defrauded. Section 517.221(1) and (3), Florida Statutes. The record in this cause contains no mitigating evidence.

23. Prior to the final hearing in this cause, the Department filed a motion for sanctions against Respondents Great American and Bates due to their failure to comply with the Department's discovery requests and an Order directing them to do so. That motion requested entry of a judgment by default and was denied by Order entered August 26, 1999. On September 7, 1999, the Department filed its Renewed Motion for Discovery Sanctions, requesting attorney's fees for Respondents' failure

    to comply with the Department's discovery requests and the Order directing them to do so.

24. After the final hearing the Department's attorney filed an affidavit in support of her request, alleging that a reasonable fee is the rate of $250 per hour and that she spent one hour drafting the original motion, one hour drafting the renewed motion, and 3.5 hours doing research related to the motions. The Department also submitted a supporting affidavit from an assistant attorney general opining that the Department's request is reasonable. While the claimed amount of time drafting motions is reasonable, spending 3.5 hours in research on such a basic issue is not reasonable and does not comport with the level of expertise assumed by a fee of $250 per hour. Accordingly, the Department is entitled to a fee of $500, not the unreasonable fee of $1,375 requested.

RECOMMENDATION

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

RECOMMENDED that a final order be entered:

1. Finding Respondents Great American and Bates guilty of the allegations contained in the Administrative Complaint filed against them;

2. Revoking all registrations held by Respondents Great American and Bates;

3. Ordering Respondents Great American and Bates to cease and desist from their violations of Chapter 517, Florida Statutes, and the rules promulgated pursuant to that chapter;

4. Ordering Respondents Great American and Bates jointly and severally to pay to the Department an administrative fine in the amount of $290,000; and

5. Ordering Respondents Great American and Bates jointly and severally to pay to the Department the additional amount of

$500 as attorney's fees attendant to the Department's motions for sanction.

DONE AND ENTERED this 10th day of December, 1999, in Tallahassee, Leon County, Florida.

LINDA M. RIGOT

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847 www.doah.state.fl.us

Filed with the Clerk of the Division of Administrative Hearings this 10th day of December, 1999.

COPIES FURNISHED:

Honorable Robert F. Milligan Comptroller, State of Florida The Capitol, Plaza Level Tallahassee, Florida 32399-0350

Harry Hooper, General Counsel Department of Banking and Finance Fletcher Building, Suite 526

101 East Gaines Street Tallahassee, Florida 32399-0350

Diane E. Leeds, Esquire Office of the Comptroller

111 South Sapodilla Avenue, Suite 211 West Palm Beach, Florida 33401

Great American Financial Network, Inc. c/o Great American Casino, Inc.

5805 State Bridge Road, Suite G-286 Duluth, Georgia 30097

Edward Bates

c/o Great American Casino, Inc. 5805 State Bridge Road, Suite G-286 Duluth, Georgia 30097

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

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.

Docket for Case No: 99-000634

Orders for Case No: 99-000634