The Issue The issue presented is whether Respondents are guilty of the allegations contained in the Amended Administrative Complaint, and, if so, what action should be taken against them, if any.
Findings Of Fact At all times material hereto, Respondent Boca Insurance Lenders, Inc. (hereinafter "Boca"), has been a Florida corporation involved in the business of purchasing life insurance assignments. Some beneficiaries of insurance policies are unable to pay for the funeral of the friend or relative insured by that policy, and most funeral homes require payment in full for the funeral expenses at the time the funeral is scheduled. Under the arrangement that Boca has with certain funeral homes, the beneficiary of the life insurance policy of a decedent can assign the policy to the selected funeral home. The funeral home then assigns the policy to Respondent Boca, and Boca pays the funeral home the cost of the funeral. Respondent Boca's profit results from a 6 percent discount on the monies paid. Shares of preferred stock of Respondent Boca were sold for $1,000 a share. Respondent Boca ceased selling its preferred stock in March 1994, converted and/or re-acquired the outstanding shares, and began selling bonds issued by the company instead. Purchasers of preferred shares of the stock of Respondent Boca earned a return of 12 percent, 14 percent if their investment was held longer than one year. Purchasers of the bonds issued instead of the preferred shares of stock received the same return on their investment as was paid on the preferred shares. At all times material hereto, Respondent Equity Investment Club, Inc. (hereinafter "Equity"), has been a Florida corporation. The business purpose of Respondent Equity is to allow persons to deposit small amounts of money in a personal account akin to a Christmas Club, except that such persons can withdraw their money on 24-hours notice. Account owners earn a return of 6 percent on their deposits. The monies deposited in such accounts were "pooled" by Respondent Equity and used by Respondent Equity to purchase Respondent Boca's shares of preferred stock. At all times material hereto, Respondent Alec Shatz was the president and the director of both Respondent Boca and Respondent Equity. He was also the sole stockholder of Respondent Equity. Respondents admit that Respondent Shatz directed, controlled, supervised, managed, and participated in the acts, practices, and policies of Respondents Boca and Equity. In conjunction with commencing sales of its preferred shares, Respondent Boca filed with the United States Securities and Exchange Commission a Form D which is a Notice of Sale of Securities pursuant to Regulation D, Section 4(6), a Uniform Limited Offering Exemption. When Respondent Equity was formed, it also filed a Form D with the Securities and Exchange Commission under Rule 504. Filing a Form D notice that stock will be sold pursuant to an exemption from registration is not the same as registering a stock with the Securites and Exchange Commission. Respondents Boca and Shatz did not register the preferred shares of stock with the Department, and neither Respondent Boca nor Shatz is or has been registered with the Department to sell or offer for sale securities as a dealer, as an associated person, or as an issuer. One of the ways in which Respondent Boca marketed its preferred shares of stock was by advertising seminars which could be attended by members of the public. Advertisements appeared in newspapers and were aired on the radio. It was not necessary that a potential investor attend one of Respondent Boca's seminars in order to purchase Boca's preferred shares. Employees of Respondent Boca attended the seminars and gave presentations. They also answered questions from members of the public attending the seminars. Information about Respondent Boca, Respondent Equity, and Respondent Shatz' other companies was given out at the seminars. A prospectus for Respondent Boca was also given out. The seminar advertisement which appeared in The Palm Beach Post on February 22, 1993, on behalf of Respondent Boca represented that one could earn 12 percent interest on a "No Risk Return", that there was no penalty for withdrawal, that the investment was "liquid," and that interest was paid every 60 days. The advertisement also read: "Registered with S.E.C". (Part of the advertisement, which was admitted as Joint Exhibit numbered l, is illegible.) By September 27, 1993, the advertisement which appeared in The Palm Beach Post remained substantially the same except that the interest rate was 14 percent, the phrase "Your Money Guaranteed through Insurance Payments" had been added, and the ad read "Register [sic] under S.E.C. exemptions". An October 25, 1993, advertisement was the same except that the word "interest" now read "dividend". However, a February 14, 1994, advertisement used the word "interest" rather than "dividend". Respondent Boca's September 18, 1995, advertisement also used the word "interest", represented that "This is a Minimum Risk Return!", and stated that "Our Investment Involve [sic] Insurance Company". The advertisement contained no language as to any registration with either the S.E.C. or the Department. Although some persons purchasing Respondent Boca's preferred shares were "accredited investors", no purchasers were questioned by Respondents Boca or Shatz as to their financial ability or experience to determine if they were accredited investors prior to their purchase of Boca's preferred shares. At some of the seminars conducted by Respondents Boca and Shatz, attendees were also given information regarding the membership accounts offered by Respondent Equity. Between May 7, 1992, and March 14, 1994, Respondent Boca made 137 sales of its preferred shares of stock. In April 1993 Respondent Shatz announced the establishment of Respondent Equity as an investment club for the purpose of raising money for Respondent Boca by having the investment club purchase Respondent Boca's stock. In May 1993 five membership accounts in Respondent Equity were opened, and those members subsequently made additional deposits in their accounts. Once the accounts were opened, Respondent Equity became the sole manager of those funds. On July 2, 1993, Respondent Equity purchased five shares of Respondent Boca's stock with the combined monies from the membership accounts. Respondent Equity has not registered its securities with the Department, and neither Respondent Equity nor Respondent Shatz is registered with the Department to sell or offer to sell its membership accounts as an issuer, as a broker/dealer, or as an associated person. A pamphlet regarding Respondent Boca's offering, labeled "prospectus" but generally known as a private placement memorandum, was given to attendees who wanted one at each seminar. No prospectus was available regarding Respondent Equity's offering. As the advertisements placed by Respondents Boca and Shatz changed, so did the prospectus for Respondent Boca. Boca's February 1, 1993, prospectus carried a caveat on the cover page that the securities of Boca and its prospectus were neither approved or disapproved by the Securities and Exchange Commission. The September 1, 1993, prospectus carried the same caveat. However, the November 1, 1993, and the April l, 1994, prospectuses added to that caveat an additional statement that the securities of Respondent Boca were not registered with the Department but the firm was registered as an issuer/dealer to sell its own securities. Between June 15, 1993, and January 14, 1994, neither Respondent Boca nor Respondent Shatz had access to all of the corporate books and records for the time period prior to June 15, 1993, since those records were in the possession of Respondent Boca's accountant/escrow agent. Respondent Boca's September 1, 1993, prospectus, its September 1, 1993, revised prospectus, and its November 1, 1993, prospectus represented that any purchaser of Boca's preferred shares had the right of access upon reasonable notice to Boca's books and records. Further, the November 1, 1993, prospectus offered that right of access to potential purchasers. Respondent Boca's September 1, 1993, prospectus represents that Larry Rosenman was Boca's escrow agent possessing copies of all assignments of insurance policies. That information was also provided orally to those attending Respondent Boca's September 30, 1993, seminar. On October 7, 1993, Rosenman wrote a letter to Respondents Boca and Shatz denying that he had agreed to be Boca's escrow agent, demanding that Boca and Shatz cease any representations to the contrary, and demanding that Boca and Shatz notify anyone who had received the September 1, 1993, prospectus that the representation in the prospectus that Rosenman was the escrow agent was not accurate. By letter dated October 8, Respondent Shatz wrote Rosenman apologizing for the error, agreeing to remove Rosenman's name from Boca's prospectus, and agreeing to notify all persons who had received the prospectus that Rosenman's name should not have been listed. Respondents Shatz and Boca issued a revised September 1, 1993, prospectus deleting any reference to an escrow agent and, specifically, deleting Rosenman's name. They did not notify all persons who may have received the original September 1 prospectus. Thereafter, none of Respondent Boca's prospectuses represented that Boca had an escrow agent. Attorney Tina Talarchyk was Respondent Boca's "in-house counsel" from October 1, 1993, through December 1993. She denied at hearing that she was also Boca's escrow agent during that time period and that she had ever executed the temporary escrow agent agreement written on her letterhead and admitted in evidence in this cause. She offered no explanation for the other items of correspondence admitted in evidence which reflect she was the person handling the redemption of stock certificates when investors wished to withdraw their monies invested in Respondent Boca. As she appeared to be carrying out the duties of an escrow agent on her professional letterhead and as she represented herself to an investor to be Boca's escrow agent, she acted as an escrow agent on behalf of Respondent Boca during that time period. On October 7, 1994, Respondents Boca and Shatz directed a letter to all investors that incorrect statements had been made in the past. The letter specifically advised that Respondent Boca did not have an escrow agent at that time, that Respondent Boca had never been registered as an issuer/dealer to sell its own securities, and that, although any investor could examine the company's books and records, no audit had been performed at that time. The letter also offered to return any investor's money. No investor requested the return of any monies based upon the contents of that letter. No investor relied upon any misrepresentation or "incorrect statement" in investing in Respondent Boca. The investors who testified at the final hearing conducted their own "due diligence" inquiry before investing in Respondent Boca and discovered, as the Department's own investigators discovered, that there were no complaints regarding Respondents made to any local or state agency. On occasion, a former employee of Respondent Boca found that an entry in Boca's accounts receivable journal had not yet been deleted when he thought it should have been. From August 18 to August 25, 1993, one of Respondent Boca's bookkeepers gave Respondent Shatz a report that she prepared indicating that Respondent Boca had a negative bank balance. Respondent Boca never missed making timely any interest or dividend payment to any investor who purchased Boca's preferred shares and, later, Boca's bonds. Similarly, Respondent Equity never missed making timely any interest payment to any investor having a membership account. Every person who purchased preferred shares in Respondent Boca was able to redeem those certificates and receive back the money invested in Boca upon electing to do so. Similarly, every member of Respondent Equity was able to withdraw their monies upon electing to do so. The Department has never received a complaint from any investor in Respondent Boca regarding Boca's or Respondent Shatz' business practices. Similarly, the Department has never received a complaint from any member of Respondent Equity regarding Equity's or Respondent Shatz' business practices. Although the Department has examined and copied Respondents' business records at the corporate office on several occasions, and although the Department has interrogated investors in Respondent Boca and members of Respondent Equity, some of them on repeated occasions, the Department has not discovered any investor or member who has been injured by Respondents' business practices, by Respondents' failure to register with the Securities and Exchange Commission and the Department, or by any representations made by Respondent Shatz at Boca's seminars or by Respondents Shatz or Boca in any of Boca's prospectuses. Further, the Department has not discovered any investor or member who relied on any erroneous or inaccurate statement made by any Respondent in deciding to invest in Respondent Boca or open a membership account in Respondent Equity. A Department investigator attended the September 30, 1993, seminar after seeing the newspaper advertisement and ascertaining that Respondents Boca and Shatz and Boca's securities were not registered with the Department. He also attended the February 17, 1994, seminar. Fifty-five of the 137 sales made by Respondents Boca and Shatz occurred after the first seminar which he attended.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a Final Order be entered: Finding Respondents Boca and Shatz not guilty of the allegations contained in counts 1-4 of the Amended Administrative Complaint filed against them; Finding Respondents Equity and Shatz guilty of the allegations against them contained in counts 5-19; Finding Respondents Boca and Shatz guilty of the allegations against them contained in counts 20-430; Ordering Respondents to cease and desist from the sale of unregistered securities by unregistered persons and entities; Imposing an administrative fine in the amount of $100 for each of the 137 transactions against Respondents Boca and Shatz, jointly and severally, for a total of $13,700; Imposing an administrative fine in the amount of $100 for each of the 5 membership accounts against Respondents Equity and Shatz, jointly and severally, for a total of $500. DONE and ENTERED this 30th day of July, 1996, at Tallahassee, Leon County, Florida. LINDA M. RIGOT, 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 30th day of July, 1996. APPENDIX TO RECOMMENDED ORDER DOAH CASE NO. 94-6671 Petitioner's proposed findings of fact numbered 2-6, 8, 11, 13, 14, 16- 18, 22, 24, 25, 28, 29, and 33 have been adopted either verbatim or in substance in this Recommended Order. Petitioner's proposed findings of fact numbered 1, 7, 9, 15, 19, and 20 have been rejected as not constituting findings of fact but rather as constituting conclusions of law, argument of counsel, or recitation of the testimony. Petitioner's proposed findings of fact numbered 10, 21, 23, 27, and 31 have been rejected as not being supported by the weight of the evidence. Petitioner's proposed findings of fact numbered 12, 26, 30, 32, and 37- 40 have been rejected as being subordinate to the issues involved herein. Petitioner's proposed findings of fact numbered 34 and 36 have been rejected since they are illegible. Petitioner's proposed finding of fact numbered 35 has been rejected as being irrelevant. Respondents' proposed findings of fact numbered 1-3, 11, 13, 18, 23, 40, and 41 have been adopted either verbatim or in substance in this Recommended Order. Respondents' proposed findings of fact numbered 4, 6-10, 12, 19-21, 24, 29, 30, 32-34, 36-39, 42, and 43 have been rejected as not constituting findings of fact but rather as constituting conclusions of law, argument of counsel, or recitation of the testimony. Respondents' proposed findings of fact numbered 5, 14-17, and 35 have been rejected as being irrelevant to the issues herein. Respondents' proposed findings of fact numbered 22, 25, 28, and 31 have been rejected as being subordinate to the issues involved herein. Respondents' proposed findings of fact numbered 26 and 27 have been rejected as not being supported by the weight of the evidence. COPIES FURNISHED: John D. O'Neill, Esquire Department of Banking and Finance Division of Securities and Investor Protection The Capitol, Suite 1302 Tallahassee, Florida 32399-0350 Alec Shatz 5850 West Atlantic Avenue Suite 103 Delray Beach, Florida 33484 Hon. Robert F. Milligan Comptroller, State of Florida The Capitol, Plaza Level Tallahassee, Florida 32399-0350
The Issue The issue is whether Mr. Cavallo is subject to administrative sanctions for violation of the Florida Securities and Investor Protection Act for conduct while he was employed with three Florida firms which dealt in securities, Bond Management Corporation, Bond Administration Service Corporation and Bond Services International Corporation.
Findings Of Fact The Department of Banking and Finance, Division of Securities, administers the provision of the Florida Securities and Investor Protection Act, Chapter 517, Florida Statutes. The Department had investigated the activities of the several respondents named in the Cease and Desist Order filed in this case, including Bond Management Corporation, Bond Administration Services Corporation, Bond Services International Corporation, Bond Premium Corporation and Mr. Cavallo. The business plan of Bond Management Corporation. Bond Management Corporation and Bond Administration Services Corporation were principally operated by Thomas Whalen, who was assisted by Mr. Cavallo. These corporations had been founded by Robert DiStefano, who had sold them to Mr. Whalen in 1985. Mr. Cavallo began working for Mr. Whalen in approximately March of 1986. The offices of these corporations were first located on State Road 7 in Plantation, Florida, but later were moved to Hollywood, Florida. The business of Bond Management Corporation and Bond Administration Services Corporation consisted of issuing, selling and administering the registration and redemption of Certificates of Beneficial Interest in pools of bonds. The two companies actually operated as an integrated entity. Bond Management was to be the trustee for the bonds which comprised the trust corpus and issue the Certificates of Beneficial Interest. These were sold to telephone marketing companies and to time-share companies. These companies then used the certificates as premiums or incentives to attract people to travel to their developments or to listen to sales presentations. Bond Administration Services Corporation handled the sales and the registration of the certificates by the ultimate purchasers. The certificates were sold from offices in Broward County, Florida, to corporations in Florida and throughout the United States. Bond Management Corporation represented in its private placement memorandum that 68% of the funds it received from the time-share developers and telemarketing companies or others who bought the Certificates of Beneficial Interest would form the trust corpus, and this money would be used to buy zero-coupon government securities. Most of the certificates had face values of $1,000; a few were sold with face values of $500. The certificates would attain these values only if kept until the maturity of the underlying government bonds, which would be from 20-45 years. The actual value of the $1,000 certificates at the time delivered as premiums to those who attended sale presentations was between $17 to $18; the $500 certificates were worth between $8.50 to $9.00. The clients of Bond Administration Services Corporation, the time-share developers or other entities which bought the certificates as premiums for consumers attending their sales presentations, would pay about $30 per $14000 certificate. Bond Management Corporation and Bond Administration Services Corporation assisted the time-share developers and telemarketing companies which purchased the Certificates of Beneficial Interest in the redistribution of those certificates to consumers. Bond Administration Service Corporation sent letters to the purchasing companies to be given as handouts to the sales prospects (members of the public) who ultimately received the certificates instructing the recipient about how to register the Certificates of Beneficial Interest with Bond Administration Services Corporation. Regulation of the Certificates of Beneficial Interest The Certificates of Beneficial Interest issued by Bond Management Corporation constitute securities under Federal law and Florida law. Bond Management Corporation made filings with the Securities and Exchange Commission of the United States under regulation D, which indicated that the securities were exempt from registration under the Federal Act. The Certificates of Beneficial Interest were not registered with the State of Florida Department of Banking and Finance, Division of Securities. Neither Bond Management Corporation, which issued the Certificates of Beneficial Interest, or the individuals in the corporation who offered them for sale or actually sold them (including Mr. Whalen and Mr. Cavallo), were registered with the State of Florida, Department of Banking and Finance, Division of Securities. In May of 1986, the owner of Bond Management Corporation, Mr. Whalen, was visited by representatives of the Florida Division of Securities. Mr. Cavallo attended that meeting. The Division's representative told Mr. Whalen and Mr. Cavallo that the enterprise being operated would require the registration of the issuer of the securities, Bond Management, that the staff members at Bond Management Corporation and Bond Administration Services Corporation who sold the securities to their customers (the time-share developers and telemarketing companies) would have to be registered, and that the persons at the time-share developer or other entrepreneurs who were "giving" the certificates to prospective clients would have to be registered. Prospective clients of the time-share developers and telemarketing companies were required to attend sales presentations in order to receive a Certificate of Beneficial Interest; consequently, the Division of Securities maintained that the consumers were providing consideration for the receipt of the certificates, and were purchasing them from the clients of Bond Management Corporation. Mr. Cava1lo's role at Bond Management Corporation Mr. Cavallo had a business card which represented that he was the Vice President of Marketing and Sales for Bond Management Corporation. In his capacity as Vice President of Sales and Marketing, Mr. Cavallo managed the day- to-day operation of Bond Management Corporation and Bond Administration Corporation. He offered to sell or actually sold Certificates of Beneficial Interest to many companies throughout the United States, at least five of which were located in Florida. Mr. Cavallo sent packages to time-share companies and other potential purchasers of blocks of Certificates of Beneficial Interest, which contained sample Certificates of Beneficial Interest, a private offering memorandum describing the securities, and instruction letters which would accompany the Certificates of Beneficial Interest when delivered to the purchasing corporation's prospective clients. The clients were told how to register those certificates with Bond Administration Services Corporation. When Mr. Cavallo first came to work at Bond Management Corporation, the registration coupons sent to the company by many consumers had not been processed, and Mr. Cavallo spent a good deal of his time in the first two months processing those registrations. The private offering memorandum which Mr. Cavallo distributed as part of the business plan of Bond Management Corporation and Bond Administration Services Corporation contained false representations about the securities, including the amount of the compensation which the trustee, Bond Management Corporation, was to receive; the use of 68% of the proceeds of the sale of the certificates to purchase the bonds which were to be the trust estate; the promise to deposit the bonds comprising the trust estate with the Federal bank or similar financial institution, and the underlying value of the certificates. No government bonds were ever purchased, so the Certificates of Beneficial Interest which Bond Management Corporation issued were worthless. Bond Management Corporation and Bond Administration Services Corporation, dealt with the money paid for the Certificates of Beneficial Interest as their own. In addition, the private offering memorandum Mr. Cavallo distributed did not disclose important facts, including the participation of Mr. Cavallo in the management of the issuer, and the identity of the founder of the company, John DiStefano, who had previously been convicted of securities violations. Shortly after Mr. Cavallo went to work for Bond Management and Bond Administration Services Corporation, he came to doubt that Thomas Whalen was competent to act as a trustee to run the business, due to Mr. Whalen's apparent addiction to cocaine. Mr. Cavallo consulted with an attorney because of his concerns, who advised him that he should say nothing unless he could actually prove that Mr. Whalen was engaged in wrongdoing. Otherwise, Mr. Cavallo would expose himself to potential liability for slander or libel. Although Mr. Cavallo was aware that bonds were not being purchased to create the trust estate that the Certificates of Beneficial Interest represented, he continued to engage in sales of the Certificates of Beneficial Interest until he left the companies in July of 1986. Bond Services Corporation and Bond Administration Services Corporation sold at least 10,000 Certificates of Beneficial Interest, which produced approximately $320,000 in revenue. By May 1986 approximately 3,500 of those worthless certificates had been distributed to individuals, approximately 1,100 of whom were Florida residents. Bond Services International Corporation After Mr. Cavallo resigned from working with Bond Management Corporation and Bond Administration Services Corporation, he went to work for Bond Service International Corporation (Bond International). Bond International had the same business plan as Bond Management Corporation and Bond Administration Services Corporation, and even did business at what had been the location of Bond Management Corporation. The owner of Bond International was John Wallace. He invited Mr. Cavallo to work for him because he knew Cavallo was unhappy at Bond Management Corporation because of the improper business practices of Mr. Whalen. Mr. Whalen had been involved in a previous business enterprise with Mr. Wallace. When Mr. Cavallo came to work at Bond International, Bond International had few clients. Many of Mr. Cavallo's clients from Bond Management Corporation followed him to Bond International. Sales were carried out by Bond International in a manner essentially identical to that used at Bond Management Corporation and Bond Services Administration Corporation. The Certificates of Beneficial Interest issued by Bon Services were essentially identical to that Bond Management Corporation. As with Bond Management Corporation, Mr. Whalen also failed to purchase the bonds which were to make up the trust estate represented by the Certificates of Beneficial Interest. The operation was a little better than at Bond Management Corporation because Bond International bought $225,000 worth of bonds, but that was only about 2-1/2% of the amount required to give the stated face value to the Certificates of Beneficial Interest. Ultimately, when Mr. Wallace was arrested for violation of Florida securities laws, those bonds were surrendered to Wallace's bail bondsman rather than maintained in trust. As with the program at Bond Management Corporation, neither the Certificates of Beneficial Interest issued by Bond International, nor the individuals selling the certificates, including Mr. Cavallo, were registered with the State of Florida, Division of Securities. Sales of Bond International's certificates were made to at least 40 companies. Offers of sale were made to additional businesses. Mr. Cavallo, himself, sent Certificates of Beneficial Interest in conjunction with sales or offers to sell those securities at least 54 times to 41 separate companies, four of which were located in Florida. Bond International received at least $270,000 in revenue from the sale of approximately 10,000 Certificates of Interest. When Mr. Cavallo left the company in December of 1986 about 2,800 consumers had received the Certificates of Beneficial Interest. The private offering memorandum of Bond International was essentially identical to that of Bond Management Corporation. It contained essentially the same false statements regarding the use of proceeds from the sale of certificates to purchase bonds which were to be held in trust by a financial institution, and the compensation of the trustee. The persons actually described as the company's managers, Mitchell Rymar and Janet Himmelheber did not manage the company, John Wallace and Mr. Cavallo did. The private placement memorandum also failed to disclose ongoing state and federal prosecutions of Mr. Wallace for securities fraud and credit card fraud. Mr. Cavallo drafted and mailed letters to be used by the companies purchasing the Certificates of Beneficial Interest when distributing them to consumers. These letters from Bond International to the certificate holders misrepresented that the certificates were guaranteed by the United States Government, when they were not, and that bonds were held in escrow to support the Certificates of Beneficial Interest when they were not. Mr. Cavallo represented himself as the person in charge of Bond International, represented himself as a vice president, was a signatory on Bond International's bank accounts and established a securities account as the vice president of Bond International. He ran the day-to-day affairs of the company and had access to the books and records of the company from the time he began working there. Mr. Wallace considered Mr. Cavallo as a partner in the business. In connection with his duties at Bond International, Mr. Cavallo offered and made sales of Certificates of Beneficial Interest issued by Bond International, by Federal Express delivery, by telephone, and by hand delivery of certificates to, local companies in Broward County. When Mr. Wallace was jailed in November of 1986, Mr. Cavallo continued to operate Bond Services throughout that month. Mr. Cavallo knew that bonds were not being purchased as stated on the Certificates of Beneficial Interest and in the private placement memorandum, and that John Wallace was irresponsible and wasted funds of the company from the time Mr. Cavallo began working there. Nonetheless, Mr. Cavallo continued with the company and continued to sell Certificates of Beneficial Interest. Mr. Cavallo signed numerous checks drawn on the accounts of Bond International, which included $2,500 to pay the criminal defense attorney Mr. Wallace retained to handle the Federal credit card fraud charges filed against him in Chicago, $349 for Wallace to travel to Chicago in connection with those charges, $1,000 to Robert Trachman, the local lawyer retained by Mr. Wallace to defend him with respect to securities fraud charges in Broward County, and $8,500 paid to John Gilbert Bailbonds, Inc., for Mr. Wallace's bail in connection with the Florida securities charges. Mr. Cavallo also wrote a large number of checks to "cash" on accounts of Bond International beginning in August 1986, and ending in November 1986. These checks aggregated $34,093.66. It is by no means clear what the checks to "cash" were used for, but there is no proof that they were ever used to purchase the securities which Bond International should have purchased to back, the Certificates of Beneficial Interest. Mr. Cavallo received direct payments by check made to him of at least $3,155. Mr. Cavallo is sophisticated in financial matters. He holds a bachelors and masters degree from the University of Miami in Coral Gables, as well as a masters of foreign trade from the American Institute of Foreign Trade in Glendale, Arizona. After Mr. Cavallo severed his connection with Bond International, he took steps to establish Bond Premium Corporation, which would have followed a business plan similar to those of Bond Management Corporation and Bond International, although Mr. Cavallo maintains he would have purchased bonds to support his Certificates of Beneficial Interest. That company never did any business.
Recommendation It is recommended that a final order be entered by the Department of Banking and Finance, Division of Securities, finding Mr. Cavallo guilty of: The sale of unregistered securities in violation of Section 517.07, Florida Statutes, and that he be fined $5,000; The sale of unregistered securities by an unregistered person, in violation of Section 517.12(1), Florida Statutes, and that he be fined $5,000; and Employing schemes to defraud and making false or fraudulent statements or representations in connection with the sale of the securities of Bond Management Corporation and Bond International in violation of Sections 51- 7.301(1)(a) and (c), Florida Statutes, and that for these acts he be fined $15,000, so that a total fine of $25,000 be imposed, and requiring him to cease and desist from further participation in the sale of securities. DONE AND ENTERED in Tallahassee, Leon County, Florida, this 20th day of January, 1989. WILLIAM R. DORSEY, JR. Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1050 (904) 488-9765 Filed with the Clerk of the Division of Administrative Hearings this 20th of January, 1989. APPENDIX The following are my rulings on the proposed findings of fact submitted by the petitioners pursuant to Section 120.59(2), Florida Statutes (1987). Rulings on Petitioner's Findings of Fact Covered in finding of fact 1. Rejected as unnecessary. Covered in finding of fact 2. Covered in finding of fact 3. Covered in finding of fact 3. Covered in finding of fact 3. Covered in finding of fact 11. Covered in findings of fact 2 and 15. Covered in finding of fact 7. Covered in finding of fact 8. Covered in finding of fact 9. Covered in finding of fact 10. Covered in finding of fact 15. Covered in finding of fact 11. Covered in finding of fact 11. Covered in finding of fact 11. Covered in finding of fact 11. Covered in finding of fact 11. Covered in findings of fact 11 and 12. Covered in finding of fact 12. Covered in finding of fact 13. Covered in finding of fact 15. Rejected as cumulative. Covered in finding of fact 14. To the extent appropriate, covered in finding of fact 15. 26 To the extent appropriate, covered in finding of fact 15. Covered in finding of fact 16. Covered in finding of fact 18. Covered in finding of fact 18. Covered in finding of fact 19. Covered in finding of fact 19. Covered in findings of fact 7 and 20. Covered in finding of fact 21. Covered in finding of fact 22. Covered in findings of fact 17, 18 and 24. Covered in finding of fact 23. Covered in finding of fact 23. Covered in finding of fact 23. Covered in finding of fact 23. Rejected as unnecessary. To the extent appropriate, covered in finding of fact 25. Rejected as cumulative. Covered in finding of fact 26. Covered in finding of fact 17. Covered in finding of fact 5. It is not clear that Mr. Cavallo actually shared the profits equally with Mr. Wallace, however. Covered in finding of fact 23. Covered in finding of fact 26. Covered in finding of fact 27. Covered in finding of fact 28. Covered in finding of fact 29. Although my calculations of the amounts involved are somewhat different. Rejected as unnecessary. Covered in finding of fact 29. Covered in finding of fact 31. Covered in finding of fact 31. COPIES FURNISHED: Lawrence S. Krieger, Esquire 111 Georgia Avenue Suite 211 West Palm Beach, Florida 33401 Vincent R. Cavallo, pro se 405 S, Pine Island Road Plantation, Florida The Honorable Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0350 Charles L. Stutts, Esquire General Counsel Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0350
Findings Of Fact By Prehearing Stipulation entered into by the parties on August 30, 1990, the parties agreed, and it is so found, that: Petitioner, Edward T. Strehlau, is President and control person of Deerfield Securities, Inc. On or about February 3, 1989, Petitioners filed an application, (Form BD), for registration as a broker/dealer, which was signed by Mr. Strehlau. On or about March 15, 1989, Petitioners filed with the Division an amendment to that Form BD. On or about April 19, June 22, and July 20, 1989, Petitioners filed additional amendments to the Form BD initially signed and submitted on behalf of the Petitioners by Mr. Strehlau. All of the Forms BD and amendments filed by Petitioner, Strehlau, with the Division were represented by him as true and complete. On February 3, 1989, Petitioner, Strehlau, also filed the Articles of Incorporation of Deerfield Securities, Inc., with the Florida Secretary of State. These Articles listed Edward T. Strehlau, Patericia O'Dell, William Manger, and Patricia Strehlau as Directors. The Division of Securities requires the filing of the Articles of Incorporation along with the dorm BD. This requirement is outlined in Section 517.12, Florida Statutes. Neither William Manger nor Patricia Strehlau were listed as Directors of Deerfield Securities, Inc., on the Form BD or on any amendments thereto which were filed with the Division. Mr. Manger is the subject of a complaint relating to securities violations committed by Eiffel Securities, Inc., Mr. Manger, a Mr. Riddle, and a Mr. Ashbee, in the State of Tennessee. On or about February 23, 1989, Mr. Strehlau, as President of Deerfield, withdrew the application for registration of Deerfield Securities, Inc., as a broker dealer with the State of Tennessee, and further agreed not to reapply for registration as a broker/dealer in that State, and not to sell Deerfield Investments, Inc.'s investment units in Tennessee. Deerfield Securities, Inc. is a wholly owned subsidiary of Deerfield Investments, Inc. Edward T. Strehlau is a control person and President of Deerfield Investments, Inc. The principal place of business of Deerfield Securities, Inc. is Sarasota, Florida. William Manger, at all times pertinent hereto, was President and a control person of the aforementioned Eiffel Securities, Inc., a Tennessee corporation. Petitioner, Edward T. Strehlau, was a control person of Eiffel Securities, Inc., during the period June 1, 1988 through September 21, 1988. Eiffel Securities, Inc. was a wholly owned subsidiary of Tennessee Investments Marketing Enterprises, (TIME), and Edward T. Strehlau was vice-president of TIME between June, 1988 and September, 1988. On February 3, 1989, Petitioner Strehlau paid $200.00 in filing fees for Deerfield Securities, Inc. with the Florida Division of Securities. On February 10, 1989, The Division of Securities notified Deerfield of several deficiencies in its application for registration as a securities dealer. These deficiencies included a requirement for: the officer or partner names of the parent firm; registration as a foreign corporation or a legal opinion indicating no need therefor;+ a clearing agreement from a dealer in Florida signed by both firms; Articles of Incorporation or partnership agreement; proof of securities effectiveness and compliance with SIPC (Securities Investors Protection Corporation). Thereafter, on February 27, March 16, April 20, June 22, and July 18, 1989, Mr. Strehlau sent letters to the Division of Securities in which he attempted to convince the Division of his compliance with the requirements set forth in the February 10, 1989 deficiencies letter. The Petitioner's efforts, however, were not supported by facts in some particulars. For example, the clearing agreement with OTRA, to be signed by both parties, was signed only by Petitioner Strehlau as President of Deerfield Securities, Inc., and attested by Patericia O'Dell of the firm. No signature from any responsible party of OTRA appears on the document. By letter dated December 2, 1988, Mr. Strehlau submitted this unilaterally executed clearing agreement. By letter dated February 22, 1989, the vice- president for finance of the SIPC attested that Deerfield Securities, Inc. was, as of that date, registered with the Securities and Exchange Commission, (SEC), as a securities broker under Section 15(b), of the 1934 Securities Investor Protection Act, and by operation of that Act, the corporation would be a member of SIPC unless its business consisted exclusively of various activities which are not pertinent to this hearing. It would appear, therefore, that Deerfield Securities, Inc. was, at the time of application at least, a member of SIPC. It is also found, however, that the application for registration submitted by Mr. Strehlau on behalf of himself and Deerfield Securities, Inc. contained what appears to be a material misrepresentation of fact in that it did not list Mr. Manger and Mrs. Strehlau as Directors. Mr. Manger had a disciplinary history in the industry in Tennessee and his omission was material. Article VI of Deerfield Securities' Articles of Incorporation filed with the Florida's Secretary of State's office listed Mr. Manger as one of the original Directors of Deerfield Securities, Inc. as of February 3, 1989. However, when Mr. Strehlau submitted the application for registration for Deerfield, (Form BD), neither that form nor any of the subsequent amendments listed Manger as a Director or affiliated person even though the form required that all Directors be listed. Mr. Strehlau contends that Manger and Mrs. Strehlau were omitted because neither were to take an active part in the management of Deerfield's operations. The Division, however, considered the omission to be a false material statement since the Directors of an applicant are considered to be pertinent to its operation. In this, the Division is correct. The Division also took the position that the pending Tennessee disciplinary action against Mr. Manger was significant. It surmised that Manger, seeing he could not be licensed in Florida on his own, was attempting to achieve this end through Mr. Strehlau, and the Department was concerned there was still a relationship between Manger and Deerfield. There is no evidence, direct or otherwise, to support that suspicion. When an application form is sent to an applicant, upon the applicant's request, an instruction sheet is sent with it which outlines the basic requirements for filing. These instructions are not, however, all inclusive or controlling. The statutes and Rules of the Department, pertinent to criteria for application and registration, constitute the ultimate guidelines over who is approved for registration. When Division analysts review an application, they check it against a requirements check list to insure that all requirements are met. If required information is not included with the application, the Division must notify the applicant of the omitted information within 30 days. If the requested information is received within 60 days, the Division then has an additional 90 days in which to rule on the application. If the omitted information is not timely received, however, the Division can deny the application for incompleteness or approve it if appropriate. On the other hand, when all required information is received timely, if the Division does not act on the application within 90 days, the application is automatically approved and if a discrepancy is thereafter noted, corrective action must be through disciplinary action rather than denial. The Division's denial action here was based on two grounds. The first was the failure to list Mr. Manger as a Director on the original Form BD or any of the amendments thereto. The second was Mr. Manger's prior and pending disciplinary record. Even if the pending action were not considered, the Division would still have denied the Petitioner, Deerfield's, application based on the prior, completed disciplinary actions against Mr. Manger in Tennessee. Petitioner claims that the Division did not request a second time those items listed on the initial deficiency letter and which were not thereafter provided by him. It is the Division's policy that once the initial deficiency letter is sent, calling for additional information, if the applicant submits only a part of those items identified, it will not send out another notification reminding the applicant of the still- missing items. It is not required that such follow-up notification be sent. If, however, the applicant calls and inquires if its application is complete, the Division will advise the applicant which of the previously noted deficiencies have not yet been corrected. Here, no such inquiry by the Petitioner was made. In this case, the Division took the position that Petitioner's application was never complete since there was no clearing agreement signed by the required parties prior to approval. Further, Mr. Strehlau's application as a principal failed to include a proper copy of his personal disciplinary history regarding a dismissed charge of felonious pointing a fire arm in Oklahoma in 1981. Under Florida law, every securities dealership must have a registered principal and Mr. Strehlau was to fill that capacity for Deerfield. Since his application could not be deemed complete because of the failure to provide all the required information, neither could Deerfield's be deemed complete. The State of Florida will not approve the application of a broker/securities dealer without approval of the National Association of Securities Dealers, (NASD). It is normal practice for NASD and Florida approval to be at the same time. There is an attempt at coordination, but Florida cannot approve a dealer for registration without the approval of the SEC and NASD. As of March 8, 1989, the state had been advised that NASD was prepared to approve Deerfield Securities, Inc., though it had some reservations about the firm which were insufficient to support denial. Even had NASD granted approval, however, NASD registration and membership does not guarantee Florida registration. The standards for registration are different. No doubt Mr. Strehlau made many phone calls to the Division in an effort to get approval of these applications. Without question he submitted numerous amendments to the Form BD in an effort to provide that information that the Division asked for in a timely and proper manner. His claims that neither Mr. Manger nor Mrs. Strehlau were listed as Directors on any of the forms because they were not involved in the operation of the business, and that had it been intended for them to work in an operational capacity, they would have been listed are not persuasive, however. Notwithstanding his argument that if the Division had any questions about that, it should have inquired, clearly, that is not the Division's responsibility to do.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, therefore recommended that the application of Deerfield Securities, Inc. to be registered as a broker/dealer, and the application of Edward T. Strehlau to be registered as an associated person/principal of Deerfield Securities, Inc., in Florida be denied. RECOMMENDED this 5th day of October, 1990, in Tallahassee, Florida. ARNOLD H. POLLOCK, 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 5th day of October, 1990. COPIES FURNISHED: Edward T. Strehlau, pro se 13122 Woodington Drive Houston, Texas 77038 R. Beth Atchison, Esquire Office of the Comptroller The Capitol, Suite 1302 Tallahassee, Florida 32399-0350 The Honorable Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0350 William G. Reeves General Counsel The Capitol Plaza Level, Room 1302 Tallahassee, Florida 32399-0350
The Issue The central issue in this case is whether Respondent is guilty of the violations alleged in the administrative complaint dated January 19, 1989; and, if so, what penalty should be imposed.
Findings Of Fact Based upon the prehearing stipulation filed by the parties, the testimony of the witnesses, and the documentary evidence received at the hearing, the following findings of fact are made: The Department is the state agency charged with the responsibility of regulating and disciplining real estate licensees. The Respondent, Charles P. Grimes, is, and has been at all times material to the allegations of the administrative complaint, licensed as a real estate broker in the State of Florida, license number 0034301. In November, 1980, a contract for sale and purchase of real estate was drafted between Dorothy Langham Scott, seller, and Phillip Crawford, buyer. The contract, which was subsequently executed by both parties, provided that a deposit in the amount of $18,500 was to be held in escrow by Respondent. A separate brokerage agreement between Respondent and the seller, executed November 30, 1980, provided that Respondent would receive a brokerage fee of ten percent of the total gross sales price. The brokerage agreement specified that "should the buyer default and not close the transaction in accordance with the Contract, the Broker shall not be entitled to any commission." The agreement further provided that Respondent would "use reasonable diligence and his best efforts to see that the transaction is closed in accordance with the executed Contract." The contract described in paragraph 3 did not close. Subsequently, the seller sued Respondent in the Circuit Court in Palm Beach County, Case no. 82-1974 CA (L) 01 B. On August 13, 1985, an amended final judgment was entered which provided, in part: The facts adduced at trial indicate that Crawford and Scott entered into a contract for the purchase and sale of certain real property, located in Putnam County and that for no apparent reason Crawford defaulted on the contract. The evidence is clear and convincing and unrefuted. Crawford has admitted several letters which he says were communicated to the attorney for Scott. However, the substantial weight of the evidence will not support his repudiation of the contract. Accordingly, it is clear that as between Scott and Grimes, the real estate agent who was allegedly holding the deposit under the provisions of the deposit receipt contract, Scott is entitled to a judgment for $18,500.00, plus its costs and attorney's fees. John L. Burns, an attorney who represented the seller, Scott, during the contract negotiations in November, 1980- January, 1981, received a letter from Respondent on December 12, 1980. That letter, dated December 5, 1980, provided: "I have enclosed the signed contract and have received the deposit check from Dr. Crawford." On or about January 29, 1981, Mr. Burns received a letter from Respondent which indicated that the contract would close in March, 1981. Respondent did not advise the seller that the deposit on the Crawford/Scott contract was not in escrow. Respondent erroneously assumed that a deposit from the buyer (which had been deposited on another contract for sale and purchase) could be applied to the contract. That deposit, in the amount of $20,000.00, was not transferred and was not used to satisfy the amended judgment entered in Scott's favor.
Recommendation Based on the foregoing, it is RECOMMENDED: That the Department of Professional Regulation, Florida Real Estate Commission, enter a final order finding the Respondent guilty of the violation of Section 475.25(1)(b), Florida Statutes, imposing an administrative fine in the amount of $1000.00, suspending his license for a period of 60 days, and placing the Respondent on probation for a period of two years. It is recommended that the Respondent be found not guilty of the other alleged violations. DONE and ENTERED this 18th day of December, 1989, in Tallahassee, Leon County, Florida. JOYOUS D. PARRISH Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32301 (904)488-9675 Filed with the Clerk of the Division of Administrative Hearings this 18th day of December, 1989. APPENDIX TO CASE NO. 89-2517 RULINGS ON THE PROPOSED FINDINGS OF FACT SUBMITTED BY THE DEPARTMENT: Paragraphs 1 through 4 are accepted. With regard to paragraph 5, it is accepted that on or about November 30, 1980, Respondent was attempting to procure the contract described; however, the exact date the parties executed the contract is not known. The contract was ultimately executed by both parties but did not close. Consequently, the proposed fact, as written, is not supported by the record. Paragraphs 6 and 7 are accepted. With regard to paragraph 8, it is accepted that the contract did not close and that a court of competent jurisdiction determined that the deposit should be awarded the seller; otherwise, the paragraph is rejected as outside the scope of this record. Paragraph 9 is accepted but is irrelevant. Paragraph 10 is accepted. Paragraph 11 is rejected as irrelevant. Paragraph 12 is accepted. RULINGS ON THE PROPOSED FINDINGS OF FACT SUBMITTED BY THE RESPONDENT: None submitted. COPIES FURNISHED: James H. Gillis Senior Attorney Department of Professional Regulation, Division of Real Estate 400 West Robinson Street Post Office Box 1900 Orlando, Florida 32802 Glenn M. Blake Blake & Torres, P.A. 200 South Indian River Drive Suite 101 Fort Pierce, Florida 34950 Darlene F. Keller Division Director Department of Professional Regulation, Division of Real Estate 400 West Robinson Street Post Office Box 1900 Orlando, Florida 32802 Kenneth E. Easley General Counsel Department of Professional Regulation 1940 North Monroe Street Tallahassee, Florida 32399-0792 =================================================================
Findings Of Fact Forbes, Walsh & Kelly is a New York corporation licensed to deal in securities under the laws of New York. The company through its secretary, Mr. Robert E. Kelly, contacted the Division of Securities on March 2 and 21, 1979 concerning the procedure for registering to be a securities dealer in Florida. After receiving the appropriate application forms and a copy of the relevant Florida Statutes, Forbes, Walsh & Kelly filed its application on March 26, 1979, to be licensed in Florida as a securities dealer. On April 2, 1979, FWK was notified that its application as a dealer was being held in abeyance, pending receipt of the corporate by-laws, a branch office application, and other materials. Subsequently, on April 20, 1979, FWK applied for a branch office license with Respondent, Carl F. Bailey, Jr. to be the company's "principal" and branch manager in Florida. Between March 26, 1979 and June 26, 1979, while Mr. Carl F. Bailey was not licensed as a securities salesman and while FWK was not registered as a securities dealer, FWK through Bailey executed approximately 774 security sales transactions on behalf of their customers. On June 27, 1979, the Division told FWK that its registration as a security broker-dealer had been approved. At the same time notice was also given that the application for a branch office in Orlando was approved as was the transfer of Carl F. Bailey's registration as a salesman for FWK. Between March 26, 1979 and August 14, 1979, in the course of its business, FWK through Carl F. Bailey "introduced" approximately 263 security transactions on a fully disclosed basis to Robb, Peck, McCooey & company, Inc., which though registered as a securities dealer in New York was not at that time so registered in Florida. Aside from the instant order of suspension, neither Carl F. Bailey, Jr. nor FWK has ever been charged with previously violating the Florida Securities Act. FWK and Carl F. Bailey, Jr., have at least two very satisfied customers, Mr. A.J. Rusterholtz and Mr. Richard W. Baker. They testified in support of Respondents at the final hearing. No evidence was presented to show that either Carl F. Bailey or FWK ever made any inquiry with the Division about when they would be eligible to engage in securities transactions in Florida after submitting their applications for registration. FWK through its Orlando branch office serves approximately 500 securities customers, many of whom are in direct daily contact with the office.
Recommendation In light of the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED: That the registration of Forbes, Walsh, Kelly & Company, Inc., as a dealer and to operate a branch office and the registration of Carl F. Bailey, Jr., as an associated salesman, with Forbes, Walsh, Kelly & Company, Inc. be suspended for a period of 65 business days from the effective date of the Department's final order. DONE AND ORDERED in Tallahassee, Leon County, Florida, this 5th day of October, 1980, in Tallahassee, Florida. MICHAEL P. DODSON Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675 COPIES FURNISHED: Philip J. Snyderburn, Esquire Director, Division of Securities Office of Comptroller The Capitol, Suite 1402 Tallahassee, Florida 32301 Patrick T. Christiansen, Esquire AKERMAN SENTERFITT & EIDSON 17th Floor, CNA Building Post Office Box 231 Orlando, Florida 32802
Findings Of Fact 1. Adopted in Finding of Fact 10. 2-4. Rejected as Conclusions of Law and not Finding of Facts. Adopted in Finding of Fact 4. Adopted in Findings of Fact 4 and 6. Rejected as contra to the weight of the evidence in that Hardage, for Respondent Benchmark, arranged the joint venture which culminated in the sale. Rejected as contra to the weight of the evidence. 9-10. Adopted in Finding of Fact 6. Adopted in Findings of Fact 6 and 7. Rejected as contra to the weight of the evidence. Rejected as a Conclusion of Law and not a Finding of Fact.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, therefore RECOMMENDED that the allegations against the Respondent, David W. Stuart, and the allegations of a violation of Section 475.25(1)(b), Florida Statutes, against Respondent, Benchmark Brokers of Destin, Inc., be dismissed, but that the license of Benchmark Brokers of Destin, Inc., be suspended for a period of 90 days for the violation of Section 475.25(1)(d), Florida Statutes. RECOMMENDED this 3rd day of March, 1986, in Tallahassee, Florida. ARNOLD H. POLLOCK, Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 3rd day of March, 1986. COPIES FURNISHED: Arthur Shell, Jr., Esquire Division of Real Estate Department of Professional Regulation P.O. Box 1900 Orlando, Florida 32802 David L. Selty, Esquirer Executive Park, Building H, Suite 3 11 Racetrack Road, NE Ft. Walton Beach, Florida 32548 Harold Huff, Exec. Director Division of Real Estate Department of Professional Regulation P.O. Box 1900 Orlando, Florida 32802 Fred Roche, Secretary Department of Professional Regulation 130 N. Monroe Street Tallahassee, Florida 32301 APPENDIX The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all Proposed Findings Of Fact submitted by the parties to this case.
The Issue The central issue in this case is whether Petitioner is entitled to be registered as an associated person.
Findings Of Fact Petitioner filed an uniform application for securities registration with the Department. This application sought registration as a general securities representative (5-7) and named Sheffield Securities, Inc. as the firm for whom she intended to work. The application sought information regarding Petitioner's past work experience and specifically inquired as to whether the U.S. Securities and Exchange Commission (SEC) had ever found her to have been involved in a violation of investment-related regulations or statutes. The application also asked Petitioner to disclose whether the SEC had entered an order denying, suspending or revoking her registration or disciplined here by restricting her activities. To both of these questions Petitioner answered "yes." Petitioner's association with the securities industry began in 1972 when she was employed as a secretary for a securities firm. Her work prior to that had been as a bookkeeper. Petitioner obtained her registration and purchased a securities business, Adams & Whitney Securities Corp., in late 1973 or early 1974. Adams & Whitney was registered with the SEC and operated as a broker/dealer buying and selling interests for itself and others. Petitioner was the president and sole principal for Adams & Whitney. On February 9, 1976, the SEC issued a released which claimed Adams & Whitney and Petitioner had wilfully violated and wilfully aided and abetted violations of the anti-fraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities EXCHANGE ACT of 1934, and Rule lOb-5 in connection with an offer to purchase, and sale of ITS securities and manipulation of the price of the security. The release also alleged Petitioner had violated Section 15(c)(2) of the securities EXCHANGE ACT of 1934 and Rule 15c 2-7 by submitting quotations for ITS securities to a interdealer quotation system without notification to the system of arrangements with other brokers and guarantees of profits. Without admitting or denying the allegations against her, Petitioner submitted an offer of settlement regarding the ITS charges which the SEC determined to accept. As a result, the registration as a broker-dealer of Adams & Whitney was suspended for a period of four months. Also, Petitioner was suspended from association with any broker-dealer for a period of four months. On June 27, 2977, the SEC issued a release which charged that Petitioner had wilfully violated and wilfully aided and abetted violations of the registration provisions of the Securities Act of 1933, and had willfully violated an wilfully aided and abetted violations of the anti-fraud provisions of the Securities Act of 1933 and the Securities EXCHANGE Act of 1934 in connection with the offer and sale of the common stock of Tucker Drilling Company, Inc. Without admitting or denying the allegations against her, Petitioner submitted an offer of settlement regarding the Tucker Drilling charges which the SEC decided to accept. As a result, the SEC found that Petitioner wilfully violated and wilfully aided and abetted violations of Sections 5(a) and 5(c) of the Securities Act of 1933. Further, it was found Petitioner willfully violated and willfully aided and abetted violations of Section 10(b) of the EXCHANGE act and Rule 10b-6. Based on its findings the SEC suspended Petitioner from association with any brokers, dealer or investment company for a period of twelve months and barred her from association with any broker, dealer or investment company in a supervisory or proprietary capacity. Prior to the entry of the administrative penalties imposed against Petitioner in connection with the Tucker Drilling charges, the SEC had obtained a civil injunction against Petitioner which permanently enjoined her from violating the federal securities laws in connection with the offer and sale of Tucker securities or any other securities. Petitioner maintained at hearing that the submitted of settlement were offered as an expedient means of resolving the charges since she did not have the financial resources needed to oppose the allegations. In connection with the ITS charges, Petitioner stated she did not improperly scheme to manipulate the stock prices, that she neither bought nor sold shares of ITS, and that she was charged with other broker-dealers who had "made a market" for ITS simply because of her association with them. Further, Petitioner denied she had ever received compensation for deals made with the ITS sales In connection with the Tucker Drilling charges, Petitioner admitted she actively participated in the purchase and sale of the Tucker stock but that she had not known of the improprieties of others involved in the trading. Petitioner denied she had knowingly violated the laws and alleged that by the time she determined something was improper, the investigations had begun. Petitioner found the Tucker incident a "stupid mistake. In 1976, Adams & Whitney went out of business. Petitioner subsequently devoted her energy to her own and family health problems and became a housewife. In 1985, Petitioner's family moved to Florida and she worked as a secretary for a brokerage firm called Brown & Hawk, Inc. From September, 1986 until the time of her application, Petitioner worked as a secretary for Sheffield Securities, Inc. During her employment with Sheffield, Petitioner studied for an successfully passed the examination for S-7 registration. According to Dennis Dixon, who was a financial principal and general securities associated person at Sheffield Securities, Petitioner is a very trustworthy person who is also very capable. According to Don Saxon, the determination that Petitioner had violated the anti-fraud provisions was a great concern to the Department since those violations are the most serious types perpetrated by an individual in the industry.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: Department of Banking and Finance, Office of the Comptroller, Division of Securities and Investor Protection enter a Final Order approving Petitioner's application for registration with restrictions as may be deemed appropriate by the Department. DONE and RECOMMENDED this 25th day of July, 1988, in Tallahassee, Florida. JOYOUS D. PARRISH Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of July, 1988. APPENDIX TO RECOMMENDED ORDER, CASE NO. 88-0531 Rulings on Petitioner's proposed Findings of Fact: Paragraph 1 is accepted. Paragraph 2 is accepted. Paragraph 3 is rejected as argument. Paragraph 4 is rejected as argument or unsupported by the evidence. To the extent relevant see findings made in paragraphs 11 & 12. Paragraph 5 is rejected as argument. Paragraph 6 is accepted to the extent addressed in findings made in paragraphs 10, 11, 12 otherwise rejected as argument unsupported by the record, or irrelevant. The first sentence in paragraph 7 is accepted. The balance of paragraph 7 is rejected as argument. Paragraph 8 is accepted. Paragraph 9 is rejected as argument. The first 4 sentences of paragraph 10 are accepted. The balance of paragraph 10 is rejected as argument. Paragraph 11 is rejected as argument. COPIES FURNISHED: Charles E. Scarlett Assistant General Counsel Office of the Comptroller Suite 1302, The Capitol Tallahassee, Florida 32399 Michael J. Cohen, Esquire 517 S. W. First Avenue Fort Lauderdale, Florida 33301 Honorable Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0350
Findings Of Fact At all times relevant hereto, respondent, Pioneer Diversified Investments, Inc.(PDI), was registered as a broker-dealer of securities with petitioner, Department of Banking and Finance, Division of Securities (Division). PDI's registration became effective on June 25, 1985 and it commenced operations on that date at 4651 Sheridan Street, Suite 270, Hollywood, Florida. Respondent, Steven J. Hurtig (Hurtig), was also registered with petitioner as an associated person of PDI. In addition, he is registered as a financial/operations principal, full registration/general securities representative, general securities principal and a municipal securities principal. On June 25, 1986 the firm ceased doing business and is now inactive but both respondents are still registered with the Division. As a condition to licensure, Hurtig agreed to the entry by the Division of a Stipulation and Consent Agreement and Final Order on June 25, 1985 wherein the following pertinent conditions were imposed: Hurtig agrees that on the effective date of the applications as aforesaid, and for sixty (60) days thereafter he shall not have, assume, or perform any management responsibilities for or on behalf of Pioneer Diversified Investments, Inc., and his activities during said period shall be limited to those of a salesman. Hurtig further agrees that Ellen Kracoff shall assume and discharge all management responsibilities for and on behalf of Pioneer during said period. Therefore, under the terms of this order, Hurtig was not allowed to assume any managerial responsibilities with PDI or act in any capacity other than as a salesman during the firm's first sixty days of operation. As a registered broker-dealer, PDI was subject to certain recordkeeping requirements. By rule (3E-600.14, FAC) the Division has established a requirement that registered broker-dealers maintain their books and records in a manner described in Rules G-7 and G-8 adopted by the Municipal Securities Rulemaking Board (MSRB), a national rulemaking authority for municipal security dealers and brokers. Copies of Rules G-7 and G-8 have been received in evidence as petitioner's exhibits 8 and 11, respectively. In addition, Rule 3E-600.14, Florida Administrative Code, imposes certain broad recordkeeping requirements upon dealers. On May 22, 1986, two Division financial specialists, Jerome Jordon and Zayre Espraza, conducted a routine audit of PDI's books and records. Jordon and Espraza had held those positions for approximately two months and their experience was limited to three or four prior audits and attendance at a two- week seminar in Tallahassee. The audit continued on May 23 and 28 and June 2 and 10. When the audit occurred, PDI was in the process of going out of business, and shut its doors about two weeks after the last visit by the auditors. During the course of the audit, Jordon requested various documents from Hurtig. These documents were retrieved by Hurtig, initially reviewed by him, and then given to the auditors for their review, Among other things, Jordon requested a copy of PDI's complaint file, associated person's file, general ledger, cash receipts and disbursement journal, purchase and sales blotter, and records of receipts and deliveries of securities. In response to Jordon's request for a complaint file, Hurtig advised him PDI had received no consumer complaints since the business had opened approximately eleven months earlier. Although Jordon did not see such a file during his audit, the firm did maintain a complaint folder (albeit empty) during that time as required by MSRD Rule G-8(a)(xii). The folder has been received in evidence as respondents' exhibit 2. PDI was required to maintain in its office files a Form U-4 for all associated persons. These records are commonly referred to as "associated person's files". When the audit occurred, Ellen K. Kracoff was an associated person with PDI and her U-4 form should have been maintained in the associated person's file. When Jordan reviewed the file on June 2, he did not see Kracoff's U-4 form. However, on his return visit on June 10, Jordan found the U-4 form in the file. At hearing he acknowledged it was "possible" that he simply overlooked the form during his earlier review. The form has been received in evidence as respondents' exhibit 1. According to MSRB Rule G-8(a)(i), which has been adopted by reference by the agency and a copy thereof received in evidence as petitioner's exhibit 8, a broker-dealer of municipal securities must maintain a "blotter or other records of original entry" containing the following information relative to the trading of municipal securities: ...an itemized daily record of all purchases and sales of municipal securities, all receipts and deliveries of municipal securities (including certificate numbers and, if the securities are in registered form, an indication to such effect), all receipts and disbursement of cash with respect to transactions in municipal securities, all other debits and credits pertaining to transactions in municipal securities, and in the case of municipal securities brokers and municipal securities dealers other than bank dealers, all other cash receipts and disbursements if not contained in the records required by other provision of this rule. The records of original entry shall show the name or other designation of the account for each such transaction effected (whether effected for the account of such municipal securities broker or municipal securities dealer, the account of a customer, or otherwise), the description of the securities, the aggregate par value of the securities, the dollar price or yield and aggregate purchase or sale price of the securities, accrued interest, the trade date, and the name or other designation of the person from whom purchased or received or to whom sold or delivered. With respect to accrued interest and information relating to "when issued" transactions which may not be available at the time a transaction is effected, entries setting forth such information shall be made promptly as such information becomes available. During his office visits, Jordan requested the general ledger of PDI. His purpose was to review all receipts and disbursements of cash. Jordon found no entries in the general ledger pertaining to commissions received by PDI on sales of municipal securities. This had the effect of understanding the net capital computation of the firm, which is a measuring tool for gauging the financial soundness of the firm. 2/ By having no then-current record of commissions received, PDI failed to adhere to the requirement in the foregoing rule that a municipal securities dealer keep an itemized daily record of "all receipts and disbursements of cash with respect to transactions in municipal securities" to the extent the firm engaged in that type of business during the period in question. Another recordkeeping rule [rule 17a-3(a)(1)] promulgated by the Securities and Exchange Commission (SEC) which governs other types of dealer transactions and which was relied upon in the amended administrative complaint was not addressed at final hearing, made an exhibit, or officially noticed. Accordingly, it has been disregarded. Jordon also requested that PDI produce its "purchase and sales blotter" so that he could review a daily record of customer trades. Although PDI had no "blotter", it did have copies of the firm's daily trading report furnished once a month by its clearing broker, Mesirow and Company, which reflected all daily sales during that period (respondents' exhibit 3). In addition, PDI retained copies of tickets reflecting sales of securities as well as confirmations furnished by Mesirow approximately four days after each transaction was executed (respondents' exhibit 4). Since respondents' exhibits 3 and 4 constituted "other records of original entry", PDI was in compliance with MSRB Rule G- 8(a)(i). Moreover, since PDI did not take in any funds, no cash receipts journal relating to municipal securities was maintained. The amended administrative complaint alleges that between July 1, 1985 and August 21, 1985 "Pioneer through Hurtig had engaged in at least ten (10) securities trades involving municipal securities in Hurtig's capacity as a municipal securities principal... in violation of the Stipulation... dated June 25, 1985". Records produced at hearing indicated that Hurtig (identified as salesman 014) executed three purchases of municipal securities for each of two accounts which were maintained by long time family friends (the estate of Harry Bender and his widow, Mina Bender) between June and August, 1985. Hurtig asserted that he was acting as a salesman (and not as a principal) at that time, and did not intend to violate the Stipulation. However, since no other person in the firm except Hurtig was registered as a municipal securities principal, the trades would have to have been executed under his supervision. When the above transactions occurred, PDI had not paid the MSRB an initial $100 fee and $100 annual fee required by MSRB Rules A-12 and A-14, respectively. These fees are required for municipal securities brokers and dealers who conduct any business during the MSRB's fiscal year. Since no fees were paid, PDI was not a member of that organization. Even so, the failure to pay these assessments was an oversight, and there was no intent by PDI or its personnel to circumvent the law. The amended administrative complaint also charges PDI with having failed to conspicuously display its Division broker-dealer license in its office. However, no testimony or documentation was offered to substantiate this charge. There is no evidence that any customer or member of the public was injured economically or otherwise by the actions of PDI and Hurtig.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that PDI and Hurtig be found guilty of the violations set forth in the conclusions of law, and that all other charges be DISMISSED. It is further recommended that their registrations be placed on probation for one year. DONE AND ORDERED this 25th day of February, 1987 in Tallahassee, Leon County, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of February, 1987.
The Issue The central issue in this case is whether Petitioners' applications for registration should be approved or denied.
Findings Of Fact Based upon the testimony of the witnesses and the documentary evidence received at the hearing, I make the following findings of fact: On January 26, 1988, KC Securities, Inc. (KC) filed an application for broker-dealer registration. Ted Casey Kata was identified as the president and principal owner of KC. Question 7E. of the application asked: Has any self-regulatory organization or commodities exchange ever: * * * (2) found the applicant or a control affiliate to have been involved in a violation of its rules? The answer KC gave to question 7E.(2) was "yes". Question 7G. of the KC application asked: Is the applicant or a control affiliate now the subject of any proceeding that could result in a "yes" answer to parts A-F of this item? The answer KC gave to question 7G. was "yes." The "control affiliates" whose conduct caused KC to answer in the affirmative to the questions noted above are Ted C. Kata and Mary S. Kata. KC has not previously been registered as a broker-dealer. Petitioner, Mary S. Kata, filed an application for securities industry registration and requested registration as a general securities principal, financial and operations principal, and municipal securities principal. According to the application, Mary S. Kata has been unemployed since October, 1985. Previously, Mary S. Kata was the financial principal for TK Securities. Prior to working for TK, Mrs. Kata worked for Cooper Investments, Inc. and Southeast Securities of Florida, Inc. Mrs. Kata later amended her request to seek registration as an associate with KC. Petitioner, Ted C. Kata, filed an application requesting registration as a general securities principal and a municipal securities principal. According to the application, Ted C. Kata has been unemployed since October, 1985. Previously, Mr. Kata had owned and been the principal for TK Securities, he had managed Cooper Investments, Inc., and had owned and managed Southeast Securities of Florida, Inc. The National Association of Securities Dealers, Inc. (NASD) is a self- regulatory organization comprised of securities dealers of which Ted C. Kata and Mary S. Kata were members. Ted C. Kata, entered the securities business as a registered associate in 1965. In 1973, he purchased a general securities business known as First Broward Securities, Inc. Later, Mr. Kata changed the name of First Broward to Southeast Securities of Florida, Inc. (Southeast). On March 3, 1976, Ted C. Kata, as registered principal of Southeast, and Southeast were censured and fined by NASD based upon a violation of Article III, Sections 1 and 32 of the NASD Rules of Fair Practice. This violation was based upon Southeast's failure to obtain and maintain a blanket fidelity bond as prescribed by NASD requirements. The amount of the fine assessed against Mr. Kata was $400 plus costs in the amount of $20. Mr. Kata considered this a minor infraction but took steps to correct the situation and did obtain the required bond. On November 17, 1978, the NASD filed a complaint against Southeast and Ted C. Kata, the registered principal. This complaint alleged Southeast and Kata had violated several provisions of Article III of the Rules of Fair Practice which were set forth in six separate causes. After hearing on the issues, NASD entered findings which determined Kata had operated in a deceptive manner, had presented a false accounting of the firm's income and capital, and had taken excessive mark-ups. As a result, Mr. Kata was censured and fined $500 and was required to pay costs totaling $1,636. Mr. Kata paid this fine but felt that the investigators had not understood the true facts of the case. On October 9, 1986, the NASD filed a complaint against TK Securities, In., Ted C. Kata and Ruth Elaine Berry. Mr. Kata was charged as the sole general securities principal for TK. This complaint alleged violations related to a failure to maintain sufficient net capital, failure to make and keep current records, and failure to file a correct FOCUS report. In accepting an offer of settlement, the NASD censured Mr. Kata and fined him in the amount of $1000. Again, Mr. Kata paid the fine as required. In the latter part of 1985, James Stibal sued Ted C. Kata and alleged, among other complaints, that Mr. Kata had represented the Stibals in their stock transactions and that Mr. Kata had made numerous false or misleading statements to induce the Stibals to invest. According to Mr. Kata this case was settled when he agreed to pay approximately $22,000 to the Stibals. On December 14, 1987, the Securities and EXCHANGE Commission (SEC) took action against Mary S. Kata. The SEC had charged that Mrs. Kata had willfully aided and abetted violations of the Securities EXCHANGE Act by failing to make and keep current books and records for a company for which she served as the financial principal. The settlement, offered by Mrs. Kata and accepted by the SEC, suspended Mrs. Kata for a period of six months from association in a proprietary or supervisory capacity with any broker, dealer, municipal securities dealer, investment company or investment advisor. It should be noted that the acts complained of against Mrs. Kata in the SEC action and the acts complained of by the NASD against Mr. Kata and Berry resulted from errors allegedly committed at TK. According to Mr. and Mrs. Kata, TK was sold two months prior to the incidents which gave rise to these complaints. The Katas maintained that the acts complained of occurred while Mrs. Berry was operating TK. However, the record is clear that Mr. Kata remained as the principal for TK and Mrs. Kata remained as the financial principal for TK during all periods in question. In fact, the Katas remained employed at TK despite the change in ownership. Further, Mr. Kata continued to advise Mrs. Berry and the staff from time to time on matters regarding the business. Approximately two months after the sale of TK, the company went into liquidation by the Securities and Investor Protection Corporation (SIPC). During the liquidation period, Mrs. Kata assisted the trustee to locate and process records. Leonard Simons has known Ted C. Kata since 1968. Mr. Kata handled Mr. Simons' investment account for a number of years. Mr. Simons found that his sales and purchases were promptly confirmed, that he was always paid correctly, and that Mr. Kata's brokerage rates were competitive. If given the opportunity, Mr. Simons would trade with Mr. Kata again. Mr. Simons was unaware of the NASD actions against Mr. Kata. George Brown has known Ted C. Kata since 1964. Mr. Brown and Mr. Kata studied to become NASD members at the same time, and Mr. Brown subsequently worked both with and for Mr. Kata. Mr. Brown stated that Mr. Kata has always confirmed trades accurately and promptly, has always been fair and considerate, and brought to the attention of salesmen in his employ the applicable rules and regulations. Mr. Brown intends to register with Mr. Kata again if the applicant is approved and considers Mr. Kata worthy to be in the securities business. Christopher Constable has known Ted C. Kata since 1972. Mr. Constable worked for Mr. Kata as an associate of all of the brokerage firms for which Kata served as principal for the period 1973-1985. Mr. Kata required that Mr. Constable and the other sales associates review all new rules and regulations. Mr. Constable knows of no complaints from customers while he was associated with Mr. Kata. Mr. Constable believes Mrs. Kata to be an excellent bookkeeper and believes both Katas to be worthy to engage in the securities business. Mr. Constable was not aware of the NASD actions against Mr. Kata. Don Saxon is the director of the Division of Securities and Investor Protection. According to Mr. Saxon, the NASD actions against Mr. Kata are the type which would result in revocation of registration since the violations were related to failures in books and records keeping, illegal markups, and since the Katas were principals of the company which went into SIPC liquidation.
Recommendation Based on the foregoing, it is RECOMMENDED: That the Department of Banking and Finance, Division of Securities and Investor Protection, Office of the Comptroller enter a final order denying the registration applications of the Petitioners. DONE and RECOMMENDED this 22nd day of December, 1988, in Tallahassee, Leon County, Florida. JOYOUS D. PARRISH Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 22nd day of December, 1988. APPENDIX TO RECOMMENDED ORDER, CASE NO. 88-2493 RULINGS ON THE PROPOSED FINDINGS OF FACT SUBMITTED BY PETITIONERS: Paragraphs 1 through 9 are accepted. With regard to paragraph 10, the first sentence is accepted. The remainder of paragraph 10 is rejected as contrary to the weight of the evidence, irrelevant or immaterial to the findings made herein. No conclusion is reached as to whether Mrs. Berry exercised control over TK after the sale since the Katas remained as principals with the company. With regard to paragraph 11, that TK went into liquidation approximately two months after the sale is accepted. All other conclusions reached in paragraph 11 are rejected as contrary to the weight of the evidence, irrelevant or immaterial to the findings made herein. Paragraphs 12 and 13 are accepted. Paragraph 14 is rejected as contrary to the weight of the evidence, irrelevant or immaterial to the findings made herein. The evidence established that at all periods in question, before the sale of TK and until its liquidation, that Mrs. Kata was the financial principal for the company. Paragraph 15 is accepted. Paragraph 16 is accepted. The first two sentences of paragraph 17 are accepted. The third sentence is rejected as contrary to the weight of the evidence. Mr. Kata remained as principal for TK after its sale, he continued to work there, and he advised staff regarding business matters. Whether he or Mrs. Berry exercised final control over the business is immaterial since Mr. Kata was the sole registered principal. There is no conclusion that the shortcomings were committed after the sale. Paragraphs 18-20 are accented. Paragraphs 21-22 are rejected as hearsay or not supported by the record. Paragraphs 23 and 24 are accepted. Paragraphs 25 and 26 are rejected as a recitation of testimony not findings of fact. Mr. Kata may not have agreed with the ultimate findings reached by the NASD; however, the censure was issued as found in the findings of fact. With regard to paragraph 27, see the findings of fact, otherwise rejected as contrary to the weight of the evidence. Paragraphs 28-33 are accepted but are irrelevant or immaterial to the conclusions reached herein. Paragraph 34 is accepted to the extent that it describes the NASD action taken against Kata. Those portions of the paragraph which suggest Kata did not have control over the company after its sale are rejected as contrary to the weight of the evidence, irrelevant or immaterial. Kata remained as principal for the company after the sale and continued to advise the staff. That he might have allowed the new owner to exercise poor judgment does not excuse Kata of all liability. Paragraph 35 is rejected as contrary to the weight of the evidence, irrelevant or immaterial. Paragraph 36 is accepted only to the extent that it describes the penalty Kata agreed to accept. The action was resolved without hearing. Paragraph 37 is rejected as immaterial and irrelevant. The first sentence of paragraph 38 is accepted. The second sentence is rejected since the record is clear that the total of the fines and costs associated with the NASD actions exceeded the amount of the fines alone, consequently, it would be erroneous to consider only the fine portion. To his credit, Mr. Kata paid all amounts owed by him for the various violations. Paragraph 39 is accepted only to the extent that it finds that TK went into liquidation two months after the sale. The rest of the paragraph is rejected as speculation, unsupported by the record, or contrary to the weight of credible evidence presented. Paragraph 40 is accepted. Paragraph 41 is accepted but is irrelevant and immaterial to the conclusions reached herein. Mr. Kata's self-serving testimony both as to the denials of all wrongdoing and the reasons for either agreeing to pay fines or settlements has not been credited. Paragraph 42 is accepted. Paragraph 43 is accepted. Paragraphs 44 and 45 are rejected as self-serving comment, Mr. Kata's testimony having not been credited. Paragraph 46 is accepted but is irrelevant to the conclusions reached herein. Paragraph 47 is accepted to the extent it relates charges against Mrs. Kata; however, it should be noted that Mrs. Kata was the financial principal for her husband during the periods in which he was censured for problems relating to bookkeeping. Paragraph 48 is accepted but is irrelevant and immaterial to the conclusions reached herein; Mrs. Kata's self-serving comments have not been credited. Paragraph 49 is accepted. Paragraph 50 is accepted. Paragraph 51 is accepted. Paragraph 52 is rejected; Mrs. Kata remained as financial principal for the company after its sale. Whether she should have discovered the errors or whether she could have discovered the errors is immaterial. The sale does not excuse the responsibility for the errors of the company. Thus, paragraph 52 is immaterial, irrelevant or contrary to the weight of credible evidence submitted. Paragraph 53 is rejected as speculation but in any event, if true, would be irrelevant or immaterial to the conclusions reached. Paragraph 54 is accepted but, again, is irrelevant or immaterial to the conclusions reached. Paragraph 55 is rejected; see comment to p. 53. Paragraph 56 is rejected as contrary to the weight of the evidence; Mrs. Kata remained as a principal throughout all periods. Paragraphs 57-68 are accepted. Paragraph 69 is accepted to the extent that it expresses one witness' perception. However, that witness' testimony conflicted with another's and was given little weight in light of the self-interest and long-term friendship involved. Paragraphs 70-80 are accepted. Paragraph 81 is rejected as argumentative, irrelevant or immaterial to the issues in this case. Paragraph 82 is rejected as contrary to the record. Paragraph 83, the first sentence is accepted. The remainder of paragraph 83 is rejected as contrary to the record. Paragraphs 84-86 are rejected as contrary to the record. Paragraph 87 is rejected as argumentative, irrelevant or immaterial. Paragraph 88 is rejected as argumentative, irrelevant or immaterial. Paragraph 89 is rejected as contrary to the record in its entirety. Paragraph 90 is rejected as argumentative. Paragraph 91 is rejected as a recitation of testimony, argument, or irrelevant. Paragraphs 92-93 are rejected as argument, irrelevant, or immaterial. Whether the Division may properly rely on a rule which establishes prima facie evidence of unworthiness for registration has not been challenged. Such a challenge would have been pursuant to Section 120.56, Florida Statutes. These Petitioners have challenged the denial of their registration pursuant to 120.57, Florida Statutes, and the rule by which they are governed is presumed valid for purposes of this review. RULINGS ON RESPONDENT'S PROPOSED FINDINGS OF FACT: 1. Paragraphs 1-26 are accepted. COPIES FURNISHED: Thomas N. Holloway 2101 W. Commercial Boulevard Suite 5300 Fort Lauderdale, Florida 33306 Charles E. Scarlett Assistant General Counsel Office of the Comptroller Department of Banking and Finance Legal Section, The Capitol Tallahassee, Florida 32399 Hon. Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0350 Charles L. Stutts General Counsel Plaza Level The Capitol Tallahassee, Florida 32399-0350
The Issue Whether Rules 3E-600.013(1)(f), 3E-(300.013(1)(p) and 3E-600.013(2)(g), Florida Administrative Code are invalid exercises of delegated legislative authority.
Findings Of Fact Respondent is the state agency charged with the administration and enforcement of Chapter 517 Florida Statutes, which is referred to as the Florida Securities and Investor Protection Act. Rulemaking authority is conferred on Respondent by the provisions of Section 517.03, Florida Statutes. Pursuant to its rulemaking authority, Respondent filed documents on November 15, 1979, with the Florida Secretary of State to adopt the challenged paragraphs as part of Rule 3E- 600.13, Florida Administrative Code. This rule became effective on December 5, 1979, and was subsequently renumbered as 3E- 600.013, Florida Administrative Code. The summary of the public hearing held by the Respondent on November 7, 1979, as part of the rulemaking process makes no mention of the specific provisions at issue here. Section 517.l61(1)(h), Florida Statutes, provides, in pertinent part, as follows: Registration under S. 517.12 may be denied or any registration granted may be revoked, restricted, or suspended by the department if the department determines that such applicant or registrant: * * * (h) Has demonstrated his unworthiness to transact the business of dealer, investment adviser, or associated person; Rule 3E-600.013, Florida Administrative Code, provides, in pertinent part, as follows: The following are deemed demonstrations of unworthiness by a dealer under Section 517.161(1)(h), Florida Statutes, without limiting that term to the practices specified herein: * * * (f) Extending, arranging for, or participating in arranging for credit to a customer in violation of the Securities Exchange Act of 1934 or the regulations of the Federal Reserve Board; * * * Violating any rule of a national securities exchange or national securities association of which it is a member with respect to any customer, transaction or business in this state: * * * The following are deemed demonstrations of unworthiness by an agent under Section 517.161(1)(h), Florida Statutes, without limiting that term to the practices specified herein: * * * Engaging in any of the practices specified in subsections (1) ... (f)... (p) ... Thomas James Associates, Inc. is a securities dealer as defined in Section 517.021(9)(a)1., Florida Statutes, and is registered with Respondent. Section 517.12(16), Florida Statutes, requires securities dealers to be registered as a broker or dealer with the Securities and Exchange Commission. The other Petitioners are or were associated persons of Thomas James Associates, Inc. within the meaning of Section 517.021(4), Florida Statutes. Each Petitioner has been charged in a pending disciplinary proceeding with having demonstrated his unworthiness to transact business in the State of Florida by having committed one or more violations of the foregoing rules either as a dealer or as an agent. More specifically, Respondent's charge of unworthiness to transact business in the State of Florida is based on the allegations that Petitioners have violated certain Rules of Fair Practice of the National Association of Securities Dealers (NASD), the rules of the Securities and Exchange Commission (SEC), the Securities and Exchange Act of 1934, and the rules of the Federal Reserve Board. Section 517.161(6), Florida Statutes, gives the Respondent the authority to deny an application for registration or to suspend or restrict any registration granted pursuant to Section 517.12, Florida Statutes, if the applicant or registrant is charged in a pending enforcement action, including any proceeding brought by the SEC or NASD, with any conduct that would authorize denial or revocation under Section 517.161(1), Florida Statutes. None of the challenged provisions of Rule 3E-600.013, Florida Administrative Code, have been amended since originally adopted in 1979. None of the statutes, regulations or rules referred to in Rules 3E-600.013(1)(f),(p), Florida Administrative Code, have been filed with the Department of State, with the following exception. On August 30, 1982, Respondent filed with the Department of State certain rules of the Securities and Exchange Commission and of the Municipal Securities Rulemaking Board. Respondent has not prepared or filed with the Department of State any other certification describing this referenced material and specifying other rules to which the referenced material applies. Some of the rules which are incorporated by reference by Rule 3E- 600.013(1)(p), Florida Administrative Code, have been changed since its adoption in 1979 by Respondent. Respondent does not maintain a copy of all rules that are incorporated by reference either in the form as they existed in 1979 or as subsequently amended. Respondent has taken no action to amend its rules to reflect changes that may be made from time to time in rules that have been incorporated by reference. Petitioners are members of NASD who have voluntarily agreed to comply with the rules of NASD as they are or may from time to time be adopted, changed, or amended by NASD. Petitioners are likewise required to comply with the rules of the SEC, the Securities and Exchange Act of 1934, and the rules of the Federal Reserve Board as those rules or laws are or may from time to time be adopted, changed or amended. Respondent makes its own factual determination as to whether an applicant or registrant has demonstrated its unworthiness by violating rules proscribed by Rules 3E-600.013(1)(f) and (p) and 3E600.0l3(2)(q), Florida Administrative Code. Respondent does not wait to bring disciplinary action against a registrant or applicant until there has been a formal and final determination by a national securities exchange or by a national securities association that a violation of its rules has occurred. For example, Respondent does not wait for NASD to bring disciplinary action against an applicant or a registrant if Respondent has determined on its own that the applicant or registrant has violated NASD rules.
