Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent be found guilty of violating Chapter 473 and rules promulgated thereunder as set forth in the Conclusions of Law portion of this Order. His license should be suspended for one year with probation thereafter for a period of two years. He should also be required to take such additional continuing education courses as the Board deems appropriate. DONE and ORDERED this 15th day of April, 1986, in Tallahassee, Florida. DONALD R. ALEXANDER, 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 15th day of April, 1986.
The Issue The issue is whether the Amended Order of Penalty Assessment issued to Respondent, Dave's Tractor, LLC, on August 27, 2018, is correct.
Findings Of Fact Respondent is a limited liability company engaged in the construction business with offices at 434 Skinner Boulevard, Suite 105, Dunedin, Florida. It uses tractors and a grading process to prepare land prior to building construction for commercial clients. Its managing member is David Richardson. The Department is the state agency responsible for enforcing the requirement of the Workers' Compensation Law that employers secure the payment of workers' compensation coverage for their employees and corporate officers. § 440.107, Fla. Stat. To enforce this requirement, the Department conducts random inspections of job sites and investigates complaints concerning potential violations of workers' compensation rules. On May 25, 2018, Christina Brigantty, a Department investigator, conducted a routine inspection of a job site at 3691 Tampa Road, Oldsmar, Florida. She observed two men working in a ditch, one man mixing cement, the other man driving a tractor. Investigator Brigantty observed four individuals at the job site, including the two working in the ditch: Dylan Richardson; Ismael Demillon; Javier Mastica; and Jorge Duran. She was informed by the individuals that they worked for Richardson Trailers, LLC. Investigator Brigantty called Mr. Ramsey, corporate officer for Respondent, who confirmed that Respondent hired Richardson Trailers, LLC, as a subcontractor. She later confirmed through discussions with Dylan Richardson and the Coverage and Compliance Automated System that Richardson Trailers, LLC, had no workers' compensation insurance on its employees. The parties have stipulated that at the time of the inspection, Respondent had not secured workers' compensation for any of the four individuals observed on the job site. Investigator Brigantty received approval from her supervisor to issue Respondent a Stop-Work Order and Request for Business Records for Penalty Calculation (BRR). These papers were served on Respondent on June 30, 2018. The BRR requested numerous types of business records for the period May 26, 2016, through May 25, 2018, including business tax receipts (occupational licenses), trade licenses or certifications, and competency cards held by Respondent or any of its principals; payroll documents (time sheets, time cards, attendance records, earnings records, check stubs, and payroll summaries for both individual employees and aggregate payrolls, and federal income tax documents reflecting the amount of remuneration paid or payable to each employee, including cash); and account documents including all business check journals and statements, which would include cleared checks for all open and/or closed business accounts established by the employer. Respondent failed to provide any business records in response to the BRR to determine Respondent's payroll for the audit review period. Therefore, the Department proceeded to compute a penalty based on imputed payroll in accordance with section 440.107(7)(e), Florida Statutes. This formula produced a penalty assessment of $165,654.10. On August 27, 2018, the Department served Respondent with an Amended Order of Penalty Assessment totaling $165,654.10. Pursuant to Florida Administrative Code Rule 69L-6.028(4), the Department also gave Respondent 20 business days in which to provide business records that would confirm Respondent's actual payroll during the two-year review period. This meant the records were due by September 25, 2018. A final hearing was scheduled initially for January 24, 2019. By agreement of the parties, on January 4, 2019, the case was rescheduled to March 15, 2019. One ground for granting a continuance was that the parties were "waiting on outstanding discovery that is being located and is necessary for an amicable resolution," presumably referring to items listed in the BRR. The final hearing was conducted on March 15, 2019, or almost seven months after the Amended Order of Penalty Assessment was issued. A week before the final hearing, Respondent began providing business records to the Department, including bank statements and checks on March 8, 2019, and a general ledger on March 13, 2019. Given the time constraints, they were not reviewed by the auditor until the day before the final hearing. The auditor conceded at hearing that these records would result in a "significantly lower" penalty, and they were sufficient to recalculate the penalty. Even so, at this late date, the Department refuses to recalculate the assessment. Respondent's principal, Mr. Richardson, testified that he has "no way to pay" the penalty, it will force him out of business, and he will be required to terminate his employees. Mr. Richardson also testified that he requested the records from the bank on "numerous occasions," but the bank refused to provide them directly to the Department or referred him to other branch offices. However, bank records are not the only way an employer can demonstrate the amount of payroll. This also can be established by business taxes or other records described in the BRR. Mr. Richardson denied knowing that business taxes are an option if bank records are unavailable.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Financial Services, Division of Workers' Compensation, enter a final order finding that Respondent violated the workers' compensation laws by failing to secure and maintain required workers' compensation insurance for its employees, and imposing a penalty of $165,654.10. DONE AND ENTERED this 3rd day of May, 2019, in Tallahassee, Leon County, Florida. S D. R. ALEXANDER Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 3rd day of May, 2019. COPIES FURNISHED: Steven R. Hart, Qualified Representative Department of Financial Services 200 East Gaines Street Tallahassee, Florida 32399-4229 (eServed) Kyle Christopher, Esquire Department of Financial Services Hartman Building 2012 Capital Circle Southeast Tallahassee, Florida 32399 (eServed) Julie Jones, CP, FRP, Agency Clerk Division of Legal Services Department of Financial Services 200 East Gaines Street Tallahassee, Florida 32399-0390 (eServed) Adrian Shawn Middleton, Esquire Middleton & Middleton, P.A. 1469 Market Street Tallahassee, Florida 32312-1726 (eServed)
The Issue The issue is whether Respondent properly denied Petitioner's application for a certificate of qualification, pursuant to Chapter 337, Florida Statutes, and Rule 14-22, Florida Administrative Code, for failure to timely file the application.
Findings Of Fact Petitioner is a family-owned construction firm located in Hattiesburg, Mississippi. It primarily acts as a contractor on pile driving projects. Petitioner is also involved in property management, oil, pre-stressed concrete, and general construction. Respondent selects its highway and bridge contractors from those who qualify under Section 337.14(1), Florida Statutes, and Rule 14-22.002(2), Florida Administrative Code. Petitioner has been a qualified bidder and construction contractor in Florida for Respondent continuously since the early 1940s. Contractors desiring to bid on state highway construction contracts in excess of $250,000 must apply annually to Respondent for a certificate of qualification. The application must be accompanied by the applicant's most recent annual financial statement, showing its financial condition no more than four months before Respondent receives the application. The application directs applicants to "mail" the completed forms to Respondent's Contracts Administration Office. Respondent sent Petitioner a Notice of Expiration of Qualification on or about February 3, 1999. The notice advised Petitioner of the following: Your qualification with this Department will expire on 04/30/99. Pursuant to Florida Statutes, your pre-qualification application must be 'filed' with the Department within four (4) months of the ending date of your financial statement. Filing is defined as receipt of the application by the Contracts Administration Office. Enclosed are two copies of the application form. Please return an original and one (1) copy of the application and all attachments. Please be advised all information must be filed in duplicate. In preparing your new application, please carefully follow the instructions on the application form and those enclosed with this notice. Additional reference material and a copy of Rule 14-22, F.A.C., are also enclosed for your convenience. Petitioner mailed its 1999 application for qualification, together with its most recent audit report dated December 31, 1998, to Respondent's Contracts Administration Office on April 27, 1999. Petitioner's fiscal year ends on December 31. An independent accounting firm begins preparing Petitioner's audit report shortly thereafter. The accounting firm's field work for Petitioner's 1998 audit was not complete until March 10, 1999, the date of the audit certification. This certification means there were no material changes in Petitioner's financial condition up to that date. There was no material change in Petitioner's financial condition over the holiday weekend from Thursday, December 31, 1998 to Monday, January 4, 1999. Changes in the amount of interest earned by Petitioner or charged against it during this brief interval would not make a difference in anyone's decision process. Any significant change up to March 10, 1999, would have been disclosed by the accounting firm in the December 31, 1998, audited financial statement. The same accounting firm has been auditing Petitioner's books for at least 15 years. Petitioner is in very sound financial condition. The Board of Governors of the United States Postal Service has set no more than three days as the standard for delivery of first class mail between Hattiesburg, Mississippi, and Tallahassee, Florida. This standard is not a guarantee. However, 90-94 percent of the time, the postal service delivers first class mail within two or three days throughout the country, as measured by an internal service measurement standard. The postal service also contracts with Price- Waterhouse to perform an independent external service measurement system called EXFC. Under that system, the postal service scored 100 percent on test mailings, delivered to Tallahassee from Mississippi within three days, over the past three years. The post office in Tallahassee, Florida, provides dedicated carrier service for the delivery of first class mail to state agencies five days a week. The postal service also delivers mail on Saturdays for the agencies that request weekend delivery. The postal service delivers Respondent's mail to its mailroom between 7:30 and 9:00 a.m. on weekdays. Respondent also receives mail on the weekends. Respondent's security guard pushes the weekend mail cart into the building on the weekends. Respondent's mailroom staff sorts incoming mail and places it in various bins for each mail station by 11:00 a.m. each week day. The mail stations send individuals down to the mailroom to pick up the mail from their assigned bin. If a station has not picked up its mail by 2:30 p.m., mailroom personnel deliver it to that station. Occasionally, first class mail is placed in the wrong bin and delivered to the wrong mail station. That mail is retrieved by the mailroom staff sometime after 2:30 p.m. and delivered to the correct office. At the end of the business day, no first class mail remains in the mailroom for delivery within the building. There is no evidence that first class mail intended for the Contracts Administration Office has ever been misdelivered. Bessie White, Administrative Assistant in the Contracts Administration Office, picks up the mail for her office from bin number 55. After she opens the mail, she stamps qualification applications and financial statements using an electric date and time clock. Ms. White saves envelope postal markings by cutting them out and attaching them to the applications. She then distributes the mail to various personnel in her office. The date and time clock that Ms. White uses to stamp incoming mail has to be reset manually when a calendar month ends in less than 31 days. April 30, 1999, was a Friday. Ms. White did not reset the date and time clock at the end of the business day. She did not work on the weekend of May 1-2, 1999. On Monday, May 3, 1999, Ms. White dated and time stamped Petitioner's application and financial statement before she reset the clock on the stamp machine. Consequently, the date and time stamp erroneously reflected that Petitioner's application and financial statement were received on Sunday, May 2, 1999, at 11:42 a.m. Ms. White distributed Petitioner's application and financial statement to the appropriate staff member in her office. Later that day, she reset the date and time clock to reflect the correct date of May 3, 1999. She did not go back to correct the erroneous stamps on mail, including Petitioner's documents, which she had already distributed. Ms. White discovered the error on Petitioner's application and financial statement seven months later, after Petitioner filed its protest in this matter. At that time, she made a handwritten notation on the documents, indicating their receipt on May 3, 1999. Petitioner mailed its 1999 application for qualification and its audited financial statements with a reasonable expectation that Respondent would receive them within three days, on or before April 30, 1999. Petitioner relied upon the postal service standard, and its own experience, in anticipating delivery of the documents within that time frame. Petitioner has an affiliate company located in Monticello, Florida. The Florida affiliate normally receives mail from Petitioner within three days. The record here contains no explanation for the delay by one business day in the receipt of Petitioner's application by Respondent's Contracts Administration Office. Petitioner mailed similar applications to Georgia, Arkansas, Missouri and Louisiana on April 27, 1999. All of these applications were approved. Respondent sent Petitioner a Notice of Intent to Deny Application for Qualification by certified mail on May 24, 1999. Respondent made this decision because the financial statements accompanying the application were dated more than four calendar months prior to the date the application was filed. Respondent counts calendar months in making its decision whether a qualification application is timely. In this case, Respondent took the position that the four-month time period ended on April 30, 1999, 120 days after December 31, 1999. 1./ If Petitioner's fiscal year had ended on June 30, 1999, Respondent would have required Petitioner to file its application within 123 days, on or before October 31, 1999. In determining whether a qualification application is timely, Respondent does not allow the five-day grace period for service by mail as set forth in Rule 28-106.403, Florida Administrative Code, and adopted by Respondent in Rule 14- 22.0011, Florida Administrative Code. Respondent approves over 400 qualification applications a year. It denies an average of 20 applications because they are late. When an application is denied as untimely, the applicant has an opportunity to furnish Respondent with an audited interim financial statement. An interim audit requires the same work and preparation as a regular annual audit. An interim audit would cost Petitioner between $25,000 and $30,000. Performing and filing an interim audit would also cause a three-month delay in the processing of Petitioner's application.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED: That Respondent enter a final order approving Petitioner's application for a certificate of qualification. DONE AND ENTERED this 23rd day of December, 1999, in Tallahassee, Leon County, Florida. SUZANNE F. HOOD Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 23rd day of December, 1999.
Findings Of Fact At all times relevant, Respondents Wardlaw and Etue were Certified Public Accountants licensed by the State of Florida. A Complaint for Preliminary and Permanent Injunction and Other Equitable Relief was filed by the Securities and Exchange Commission (SEC) which alleged, among other charges against other codefendants, that Wardlaw and Etue had engaged and, unless enjoined, would engage directly and indirectly in aiding and abetting others (notably A.T. Bliss & Co. and some of its principals), in acts, practices and a course of business that constituted and would constitute violations of Section 17(a) of the Federal Securities Exchange Act of 1934, as amended, 15 U.S.C. 78m(a), Rules 13a-1 and 13a-13, 71 C.F.R. 240.13a-1 and 240.13a-13. Individual consents to Entry of Final Judgment of Permanent Injunction were entered by each Respondent by which they each consented to the entry of a Final Judgment of Permanent Injunction against themselves. By a Final Judgment of Permanent Injunction as to each Respondent, each Respondent was permanently restrained and enjoined in connection with the offer or sale of any securities issued by A. T. Bliss and Company, Inc. and from other certain wrongful acts. By an Order Instituting Proceedings and Accepting Resignation from Practice Before the Commission pursuant to Rule 2(e) [See 17 C.F.R. Section 2O1.2(e)] of the Commission's Rule of Practice, each Respondent was separately identified as a Certified Public Accountant who has appeared and practiced before the Securities and Exchange Commission, and based upon certain stated facts, the Commission stated in its separate Orders as to each Respondent the following: In view of the foregoing, the Commission finds that it is in the public interest to institute proceedings and to impose a remedial sanction. Accordingly, it is hereby ORDERED: Proceedings pursuant to Rule 2(e) of the Commission's Rules of Practice be and hereby are instituted against Stuart C. Wardlaw (James E. Etue). The resignation of Stuart C. Wardlaw (James E. Etue) from practicing before the Commission is hereby accepted. Stuart C. Wardlaw (James E. Etue) shall not, in his capacity as an independent public accountant, directly or indirectly perform any audit service or render any opinion concerning financial statements which he has reason to believe will be contained in any filing with the Commission or prepare financial statements which he has reason to believe will be included in filings with the Commission. (Emphasis supplied) The public accounting firm of Etue, Wardlaw, and Company, C.P.A., performed accounting services in connection with the issuance of audits of financial statements of A. T. Bliss and Company for the years 1979 and 1980. Respondents Etue and Wardlaw were each 50 percent shareholders of the certified public accounting firm, which was formed December 1, 1979. Etue was President and Wardlaw was Vice-President and Secretary-Treasurer. Neither Wardlaw nor Etue had extensive experience in the field of auditing prior to formation of the firm, having only been licensed as certified public accountants since 1976. A. T. Bliss and Company (hereafter, Bliss) only became a public corporation in 1980. However, during the latter part of the calendar year 1979, Bliss entered into the business of manufacturing and distributing solar hot water heating systems. Sales were made to various investors, who financed the purchase through 15 and 30 year notes, plus a cash downpayment, with the notes receivable consisting of both recourse and nonrecourse long-term notes. The 1979 and 1980 audited financial statements prepared by Respondents recognized revenue on the accrual basis. It is the auditor's responsibility to determine whether the company issuing those statements has chosen a method of revenue recognition that complies with generally accepted accounting principles. The accrual method of revenue recognition is the generally accepted and preferred method in public accounting, unless the collectibility of the sales price is not reasonably assured. When collection is over an extended period and because of the terms of the transactions or other conditions there is no reasonable basis for estimating the degree of collectibility, the installment sales or cost recovery methods of revenue recognition may be used and are normally preferred. Bliss' revenue recognition policy in 1979 and 1980 recognized the sale at the time of executing the contract and receiving the cash down payment, with a recording of all costs of sales and establishing an allowance for doubtful collections. Petitioner contends that there was insufficient information gathered and sufficient information could not have been gathered by Wardlaw and Etue due to the lack of history of the relatively new company's (Bliss') collections and the length of the extended collection period (15 to 30 years) by which they could reasonably use the accrual method of revenue recognition instead of either the installment method or cost recovery method of revenue recognition, preferably the latter. Respondents contend that sufficient information was collected but not documented. By either assessment, it is clear that there was a violation of generally accepted accounting principles simply in the Respondents' failure to document. The greater weight of the credible expert testimony is accepted that the information gathered or "known" or "understood" by the Respondents concerning the collectibility of a few notes was both of insufficient quantity and quality so as to further offend generally accepted accounting principles. Further, the applicable accounting publications and pronouncements, particularly Accounting Principles Board Opinion 10, (APB 10) strongly suggest that if the collection of the receivables is not reasonably assured, the cost recovery or installment method of revenue recognition should be utilized. In making this finding of fact, the undersigned specifically rejects Respondents' suggestion that both the recourse and non-recourse notes had a high collectibility factor based on the present personal wealth of a small sampling of makers of these notes and based upon the assumption from a still smaller sampling that most solar unit purchasers would stay in for the long haul because they were investing for tax advantages. Equally unpersuasive is the Respondents' argument that because solar units may be attached to buildings and financed over a long period of time Respondents were entitled to utilize real estate sales accounting principles in their financial statements and accountants' reports, all without adequate documentation in their work papers. Based upon the absence of any collection information in the work papers, the 15-30 year collection periods and the fact that none of the notes had any lengthy collection period, those expert opinions that the installment method or cost recovery method of revenue recognition would have more appropriately presented the financial condition of the company in accordance with generally accepted accounting principles and generally accepted and prevailing standards of accounting practice are accepted. Although Respondent Etue is correct that APB 10 is couched in permissive not mandatory language, it is significant that Respondents' C.P.A. expert, David Levy testified that the lack of documentation in Respondents' work papers precluded him from forming an opinion that the accrual method of revenue recognition fairly presented the financial position of Bliss and that Respondents' financial statements and accountants' reports do not comply with generally accepted accounting principles. Bliss' net income, if determined by either of the preferred methods (installment or cost recovery) rather than by the accrual method selected by Respondents would be materially lower than the amount reported in the 1979 and 1980 audited financial statements. See Finding of Fact 8, below. The significance of this variation could have been minimized or at least lessened by making a full and specific disclosure within the respective financial statements that the accrual method of revenue recognition had been utilized. This was not done by Respondents. Instead, the Summary of Significant Accounting Policies presented in the notes to the 1979 and 1980 financial statements did not disclose the revenue recognition policy utilized, except by a blanket statement that the financial statements (not necessarily the revenue recognition method of the client company) were presented on the accrual basis. Bliss' revenue recognition policy would materially affect its financial position, results of operations, and changes in financial position. Generally accepted and prevailing standards of accounting practice would require the disclosure of such a significant accounting policy in light of the doubtfulness of collectibility of the long term notes. In making this finding of fact, the undersigned specifically rejects the Respondents' basically antithetical propositions advanced at hearing that either (1) anyone reading these financial statements is so sufficiently knowledgeable that he would automatically infer from the notes thereto that the accrual method of cost recovery had been utilized or (2) most persons reading the financial statements would not have the accounting background to appreciate the information if properly disclosed. Respondent Etue maintains that the fact that there is a difference in net income using the accrual method versus a cost recovery or installment sales method is immaterial or has little meaning as there is always a difference using the different methods and because depending upon the total volume of sales, there could be differences of billions of dollars. Even accepting this proposal and Respondent Etue's additional proposition that Certified Public Accountant Reilly's demonstrative figures utilized at hearing may have been slightly distorted, it still appears that concerning the revenue recognition policy alone, Bliss' 1979 financial statement showed close to a $735,000 net income rather than a $20,000-plus loss, as reflected by subsequent audits/restatements of that year. Showing close to a 2.3 million dollar net income rather than about $77,000 in the second year (again as reflected by subsequent audits/restatements) surely reflects at least that the Respondents' accounting decisions were major enough to warrant outside consultation or substantial research and documentation of decisions. Respondents failed to consult and failed to document substantial research and decision factors. These deviations of practice by Respondents are clearly material. There is no reference whatsoever in the 1979 work papers to the determination of the reasonableness of the 60 percent allowance for doubtful collections for notes receivable. Note Two (2) to the 1980 Bliss financial statements disclosed that 50 percent of the total notes receivable in 1980 constituted the allowance for doubtful collections for notes receivable. There is no documentation in the audit work papers to substantiate any audit review to determine the reasonableness of the allowance for doubtful collections for notes receivable except the following statement: "Reserve of 50 percent is reasonable Client has now a full year of experience and knows better the collectibility. Additionally, the ratio of nonrecourse to recourse has changed dramatically in 1980, with more people taking recourse loans. Accordingly, management felt there would be less losses than the 60 percent reserve in 1979 due to the shift. Although there are no dollar statistics to support the 50 percent reserve, it seems to be a reasonable conservative estimate." Considerable testimony was heard from each Respondent as to how this note came to be created. Recitation of most would be subordinate and unnecessary and contrary to the concept of ultimate findings of fact. However, the basic facts adduced are that it arose through collaboration of Wardlaw and Etue to at least some degree. See Finding of Fact 14, below. Despite all of the foregoing the uncertainty in determining a 50 percent allowance suggests strongly that Respondents as auditors merely accepted representations from Bliss' principals without adequate empirical testing and auditing of the judgment and further demonstrates the uncertainty of collections, thereby more strongly indicating that a different approach than the accrual method of revenue recognition should have been selected, because in the accrual method of revenue recognition, the sale is recognized at the time of the entry into a long term note and here, under the circumstances of the instant case, there was inadequate data to form a conclusion as to the collectibility of all monies due under the note. Pursuant to the most credible expert accountants' testimony, this failure in the audit with regard to the 50 percent reserve was a failure to comply with generally accepted and prevailing standards of accounting practice and constituted a departure from generally accepted accounting principles and generally accepted auditing standards, but it also appears from the evidence as a whole to be at least partly attributable to Respondents' inexperience in auditing, which was alluded to earlier. The greater violation occurred by the Respondents' failure to recognize the impartiality required of them in certified public accounting practice and their willingness to impose, as it were, their C.P.A. "imprimatur" upon the Bliss financial statements by an opinion without any qualifying language (an unqualified opinion). See Finding of Fact 7, above. Pursuant to Financial Accounting Standards Board (FASB) provisions 169.105 and 165.109, receivables of the nature retained by Bliss, must be recorded at their present value. The discount resulting from the determination of the present value should be reported on the balance sheet as a direct deduction to the face amount of the note, or properly disclosed in the footnotes to the financial statements. There was no adjustment to present value for lower than prevailing interest rates in the 1979 financial statements, nor any disclosure in the footnotes to the financial statements beyond that previously discussed. The 1980 financial statement, disclosed in Note 2 that the 50 percent allowance for doubtful collections included both a provision for uncollectibility as well as a reduction in value due to a lower than prevailing interest rate. The footnote did not distinguish between the two and the total allowance was included in the operating expenses, when the greater weight of the credible expert witness testimony is that the adjustment to present value for lower than prevailing interest rates should have been made as a reduction of sales. The failure to separately disclose the discount and the reserve for doubtful accounts fails to conform with generally accepted accounting principles, specifically APB 21, which requires that the discount is to be made as a reduction of sales. The audit note disclosed that the entire 50 percent allowance was management's estimated allowance for doubtful collections and, after the fact, and without any supportable calculations, the 50 percent figure now included the adjustment in value due to a lower than prevailing interest rate. Proceeding as Respondents did resulted in a material misstatement of gross revenue and operating expenses for 1980, which fails to comply with generally accepted and prevailing standards of accounting practice and which fails to conform to generally accepted accounting principles. Cost of sales were not presented separately in the 1979 and 1980 audited Bliss financial statements or auditors' notes thereto. Although there is expert testimony by Leo T. Hury, C.P.A., to the effect that failure to separately present cost of sales is a violation of the custom of accounting and not a violation of generally accepted accounting principles, Mr. Hury also felt it departed from generally accepted auditing standards. Moreover, APB 4 states that separate disclosure of the important components of the income statements, such as sales and other sources of revenue, including costs of sales, is presumed to make the financial statement more useful. The cost of sales as a separate item permits the reader of the financial statement to determine the gross profit on sales before other income items come into play. Under the circumstances of the instant case the best that can be said of this violation of "custom" is that it constituted only one of several components of a material misstatement of financial condition, which, if not an independent and specific departure from generally accepted and prevailing standards of public accounting practice, generally accepted accounting principles, and generally accepted auditing standards, was one component of such a departure. The 1979 and 1980 work papers associated with the Bliss audit do not document or justify Respondents' study of accounting policy issues in relation to the financial statements so as to accord with generally accepted auditing standards. In making this finding of fact, the undersigned specifically rejects Respondent Etue's proposal that sufficient competent evidential matter was obtained but not documented in the 1979 work papers while the 1980 work papers evidence compliance with generally accepted auditing standards. The proposal is rejected because the expert testimony is consistent that an accountant's "work papers" are to be a "catch all" of supporting documentation for not only the final figures reported but for his studies of accounting issues, judgment calls of accounting policies and principles, and his explanation of selected methodologies as well. Failure of the work papers to adequately reveal how these decisions were reached either indicates that the studies were not done, not documented, or the work papers were defectively maintained, any of which constitutes at least minimal noncompliance with generally accepted and prevailing standards of accounting practice. The Respondents only minimally agree upon what separate responsibilities each had with regard to Bliss' account and financial statements. As might be expected, the elements of "control," "final authority," "sign-off authority," "final say," and "ultimate authority" were used by both Respondents with some considerable variation of meaning. Where there was agreement or only minor deviation, those portions of their respective evidence has been reconciled and accepted. However, each Respondent has a high stake in the outcome of these proceedings and where each characterized their respective responsibilities with regard to the Bliss account generally, and with regard to the 1979 and 1980 Bliss financial statements specifically, in diametrically different ways, greater reliance has been placed on the testimony of Allan Karp, the independent contract accountant who performed the 1980 field work. By any and all points of view, however, and for want of better legal terminology, it would appear that this was a situation that fluctuated from both to neither of the C.P.A. Respondents "minding the store." Respondent Wardlaw was the titular "partner in charge" of both the 1979 and 1980 Bliss audits. Respondent Etue had obtained the client initially and both he and Wardlaw initially met with the client. Prior to introducing Wardlaw to the Bliss principals Etue advised them that he, Etue, was on probation with the Board of Accountancy and Wardlaw would be in charge of the audit. Etue had performed two audits prior to the formation of the public accounting corporation that came under the review of the Florida Board of Accountancy and both of which led to the imposition of the discipline of probation in 1978 and 1981. 1/ Etue's reasons for Wardlaw taking charge of the audits were the language in his prior stipulation with the Board of Accountancy and because he believed he needed improvement in auditing. Petitioner desires that the inference be drawn from portions of each Respondent's testimony taken out of context that Etue concealed from Wardlaw that he, Etue, had done previous audits and represented that he, Etue, was precluded from doing Bliss' audits, and that by these misrepresentations Etue maneuvered Wardlaw into assuming the partner-in-charge responsibilities for the express purpose of avoiding oversight by the Board of Accountancy of the Bliss audits. However, the full context of the Respondents' respective testimony, the internal contradictions of Wardlaw's testimony, and the general vagueness of both Respondents' testimony do not support Petitioner's inference and preclude its acceptance. The custom of the profession of certified public accounting is that the "partner-in-charge" bears the ultimate responsibility of the conduct of a certified audit, including supervision of subordinates, final review of the auditor's work, and recommendations for corrections and changes. That is not precisely what occurred as between these Respondents. Although Wardlaw was responsible for the field work in the 1979 audit, one Sherry Carasik in Wardlaw's office nine miles from where Etue's office was located did the bulk of the work under his supervision, including preparation of the work papers and tests of transactions involved in the field work. Etue had no supervisory responsibility for the 1979 audit and did little if any of the actual field work. Etue did, at Wardlaw's request, however, prepare a list of items to be performed in the audit. This does not support the inference that Etue deferred to Wardlaw's superior auditing experience but quite the opposite, supports the inference that Etue was instructing Wardlaw or they were jointly deciding courses of action with Wardlaw deferring to Etue. Later, Etue also drafted the confirmation letters to be mailed to all investors and edited Wardlaw's letter to Bliss recommending changes to the footnote disclosure. Respondent Wardlaw testified that all major decisions concerning accounting policies re Bliss were discussed with Respondent Etue and concurrence and "joint decisions" were reached between them. Allan Karp materially confirms this testimony with regard to the 1980 audit procedure on the few occasions he was able to view the two Respondents together. It was Karp's view that Respondent Etue was his primary employer who supervised Karp in performance of the 1980 Bliss audit with Wardlaw dropping by periodically but mostly operating out of his separate office. Wardlaw's involvement in the 1980 audit was in the nature of a review partner performing a "cold review" after audit completion but before finalization. In 1980, Etue also assisted Karp with inventory as part of the field work, discussed with Karp his concerns about related parties, and helped Karp locate materials for a portion of the audit. The joint decisions with regard to assessing collectibility have been discussed supra.
The Issue The issues are as follows: (a) whether Respondent Department of Corrections (the Department) properly determined that there were no responsive proposals to the Request for Proposals entitled Mental Healthcare Services in Region IV, RFP #08-DC-8048 (the RFP); (b) whether the Department's intended award of a contract to provide mental healthcare services to inmates in Region IV to Intervenor Correctional Medical Services, Inc. (CMS), pursuant to Section 287.057(6), Florida Statutes (2008), is unlawful; and (c) whether Petitioner MHM Correctional Services, Inc. (MHM), has standing to challenge the Department's intended award of a contract to CMS pursuant to Section 287.057(6), Florida Statutes (2008).
Findings Of Fact The RFP Process The Department issued the RFP on February 5, 2009. Two addendums were issued to the RFP, the first on February 6, 2009, and the second on March 11, 2009. The Department did not receive any protest of the RFP or addendums from MHM or any other proposer within the statutorily set time limit of 72 hours from the issuance of the RFP. At the time of issuance of the RFP, MHM was the incumbent provider of mental health services to inmates in Region IV. At that time, MHM was providing the services at a rate of $77.62 per month/per inmate. MHM's contract to provide mental health services in Region IV was the result of a prior vendor being financially unable to perform the contract at its agreed rate. The RFP sought proposals from vendors to provide comprehensive mental healthcare services for inmates located at 14 correctional institutions located in the southern part of the State beginning on July 1, 2009. The Department’s contract with MHM for those services was set to expire on June 30, 2009. The Department had previously attempted another procurement for replacement of those services in late 2008. Proposals to the RFP were received and opened in a public meeting on March 23, 2009, from CMS, MHM, the University of Miami's Department of Psychiatry and Behavioral Sciences (the University of Miami), and Wexford Health Sources, Inc. (Wexford). The Department’s Bureau of Procurement and Supply (BPS) was responsible for overseeing the RFP. The Procurement Manager for the RFP was Ana Ploch. Ms. Ploch’s duties included drafting the proposal with the assistance of the Office of Health Services, managing the procurement process by coordinating release of documents, conducting related meetings (such as proposers’ conferences, proposal opening, and price opening), conducting site visits, supervising the evaluation process, and keeping records of the process through completion of a summary report of the procurement. Once the Department received the proposals, it began the eight-phased review and evaluation process as set forth in Section 6 of the RFP. Phase 1 of the review and evaluation process began with the public opening of the proposals that took place on March 23, 2009. Phase 1 also included the review of the proposals to determine if they met mandatory responsiveness requirements. Determination of meeting mandatory responsiveness requirements was made by BPS staff. Mandatory Responsiveness Criteria or “fatal criteria” is described in Section 5.1 of the RFP as requirements that must be met by a proposer for the proposal to be considered responsive. A failure to meet any one of the three following criteria would result in an immediate finding of non- responsiveness and the rejection of the proposal: (a) the subject proposal must be received by the Department by the date and time specified in the RFP; (b) the proposal must include a signed and notarized Certification Attestation Page for Mandatory Statements; and (c) the price proposal must be received by the Department by the date and time specified in the RFP and must be in a separate envelope or package in the same box or container as the project proposal. There is no dispute that all four proposals met these mandatory responsiveness/fatal criteria. In addition to the fatal criteria, a proposal could be found to be non-responsive for failing to conform to the solicitation requirements in all material respects. The RFP, Section 1.20, clearly set forth the definition of a “material deviation” and the basis for rejecting a proposal as follows: 1.20 Material Deviations: The Department has established certain requirements with respect to proposals to be submitted by vendors. The use of shall, must or will (except to indicate simple futurity) in this RFP indicates a requirement or condition which may not be waived by the Department except where any deviation therefrom is not material. A deviation is material if, in the Department’s sole discretion, the deficient proposal is not in substantial accord with this RFP’s requirements, provides an advantage to one proposer over other proposers, or has a potentially significant effect on the quantity or quality of items or services proposed, or on the cost to the Department. Material deviations cannot be waived and shall be the basis for rejection of a proposal. (Emphasis in original.) A Responsive Proposal is defined in the RFP Section 1.29 as “[a] proposal, submitted by a responsive and responsible vendor that conforms in all material respects to the solicitation.” A minor irregularity is defined in Section 1.26 of the RFP as: 1.26 Minor Irregularity: A variation from the RFP terms and conditions which does not affect the price proposed or gives the proposer an advantage or benefit not enjoyed by the other proposers or does not adversely impact the interests of the Department. Phase 2 consisted of a review of the business/corporate qualifications and technical proposal/service delivery narratives contained in the proposals. This phase was completed individually by evaluation team members. The evaluation team, which consisted of 5 employees from the Department’s Office of Health Services, met with Ms. Ploch on March 24, 2009, for instruction on how to proceed with the evaluation. The team members were given the evaluation materials on that date. Evaluation and scoring of the proposals was done separately by each individual without discussion among the members. At the March 31, 2009, bid tabulation meeting, which occurred after the team members scored the proposals, Ms. Ploch told the team members that MHM and the University of Miami were non-responsive to the RFP. Then the scores for the different categories were recorded as announced by each member of the evaluation team. All four proposals were scored for the three categories listed in RFP Section 5.3 (business/corporate experience), Section 5.5 (project staff) and Section 5.6 (technical proposal and service delivery narrative). There is no allegation that the scores assigned to the proposals were done in error or that they were not in compliance with Department rules or procedures. Phase 3 of the review and evaluation process was completed at the same time as Phase 2 and 4, by Ms. Ploch and the BPS staff. That review of the proposals included a determination as to whether the proposers were in compliance with Section 5.3 “Business/Corporate Qualifications.” At that point in the review process, BPS determined that the University of Miami’s proposal was non-responsive in that the proposer did not have the necessary business experience. This finding has not been disputed by any party. An independent Certified Public Accountant (CPA) completed Phase 4 of the review and evaluation process. The Department hired the CPA to review the financial requirements of Section 5.4 of the RFP. The CPA, Richard Law, was given all the proposals, including the financial documentation, on March 24, 2009. He conducted his review separately from the Department's reviews in Phases 2 and 3. Mr. Law has been a licensed CPA for over 30 years. His major practice area is conducting audits for state governments, as well as private businesses. With more than 10 years of experience reviewing financial documentation for the Department and assisting on the setting of financial benchmarks for numerous procurements, he is highly qualified to perform the evaluation and assessment of these basic financial criteria. The financial requirements and the financial documentation and information that the proposers had to submit are set out in Section 5.4 of the RFP. That section is entitled “Financial Documentation,” and provides as follows in pertinent part: Tab 4-Financial Documentation The Proposer shall provide financial documentation that is sufficient to demonstrate its financial viability to perform the Contract resulting from this RFP. Three of the following five minimum acceptable standards shall be met, one of which must be either item d, or item e, below. The Proposer shall insert the required information under Tab 4 of the Proposal. Current ratio: = .9:1 or (.9) Computation: Total current assets ÷ total current liabilities Debt to tangible net worth: = 5:1 Computation: Total liabilities ÷ net worth Dun and Bradstreet credit worthiness (credit score): = 3 (on a scale of 1-5) Minimum existing sales: = $50 million Total equity: = $5 million NOTE: The Department acknowledges that privately held corporations and other business entities are not required by law to have audited financial statements. In the event the Proposer is a privately held corporation or other business entity whose financial statements ARE audited, such audited statements shall be provided. If the privately held corporation or other business entity does not have audited financial statements, then unaudited statements or other financial documentation sufficient to provide the same information as is generally contained in an audited statement, and as required below, shall be provided. The Department also acknowledges that a Proposer may be a wholly-owned subsidiary of another corporation or exist in other business relationships where financial data is consolidated. Financial documentation is requested to assist the Department in determining whether the Proposer has the financial capability of performing the contract to be issued pursuant to this RFP. The Proposer MUST provide financial documentation sufficient to demonstrate such capability including wherever possible, financial information specific to the Proposer itself. All documentation provided will be reviewed by an independent CPA and should, therefore, be of the type and detail regularly relied upon by the certified public accounting industry in making a determination or statement of financial capability. To determine the above ratios, the most recent available and applicable financial documentation for the Proposer shall be provided. This financial documentation shall include: The most recently issued audited financial statement (or if unaudited, reviewed in accordance with standards issued by the American Institute of Certified Public Accountant). All statements shall include the following for the most recently audited (immediate past) year. auditors’ reports for financial statements; balance sheet; statement of income; statement of retained earnings; statement of cash flows; notes to financial statements; any written management letter issued by the auditor to the Proposer’s management, its board of directors or the audit committee, or, if no management letter was written, a letter from the auditor, stating that no management letter was issued and that there were no material weaknesses in internal control or other reportable conditions; and a copy of the Dun & Bradstreet creditworthiness report dated on or after February 5, 2009. (Emphasis in original) The RFP provided as follows in Section 5.4.2: If the year end of the most recent completed audit (or review) is earlier than nine (9) months prior to the issuance date of this RFP, then the most recent unaudited financial statement (consisting of items b, c, d and e above) shall also be provided by the Proposer in addition to the audited statement required in Section 5.4.1. The unaudited financial data will be averaged with the most recent fiscal year audited (or reviewed) financial statement to arrive at the given ratios. Throughout Section 5.4 of the RFP, the emphasis is on the need for audited financial statements. The use of unaudited financial statements alone does not apply to MHM pursuant to the terms of the RFP, but they did apply to other proposers. Both audited and unaudited financial statements were averaged to determine ratios for CMS and Wexford, where their audited financial statements were older than 9 months. This was clearly permissible under Section 5.4.2. MHM’s proposal included audited financial statements dated September 30, 2008, and also additional information, including unaudited financial statements and a financial narrative in which it admitted that its current ratio as of September 30, 2008, was 0.82 and that it had a negative equity of $24.8 million dollars. MHM was fully aware that it could have difficulty meeting the financial ratios before the Department issued the RFP. As early as January 2008, MHM was considering a stock repurchase. MHM knew its existing contract would come up for rebid. MHM also knew that the Department sometimes used financial criteria and financial ratios as pass/fail ratios. MHM was concerned that the stock repurchase would trigger one of those ratios, causing them to lose the contract. In January 2008, Susan Ritchey, MHM's Chief Financial Officer, and Steve Wheeler, MHM's President and Chief Operating Officer, contacted Mr. Law. Ms. Ritchey and Mr. Wheeler wanted to discuss their concerns regarding financial ratios that the Department might require in the future. During the hearing, Mr. Wheeler denied that the contact with Mr. Law had anything to do with the instant RFP. There is no persuasive evidence that Mr. Law gave Ms. Ritchey and Mr. Wheeler inappropriate advice. The independent review by Mr. Law of MHM’s financial documentation resulted in the finding that MHM only met two of the minimum acceptable standards required by Section 5.4 of the RFP. Mr. Law set out his conclusions on a Department form entitled “Phase IV, Financial Documentation Review to Be Completed by Independent CPA.” That sheet reflected that MHM had failed the current ratio with a score of .819, when a ratio of = 9:1 or (.9) was required (item a). Likewise, MHM failed the “Debt to tangible net worth” and the “total equity” criteria (items b and e, respectively), since MHM had a negative equity of $22 million dollars. MHM passed the two remaining criteria. First, it met the minimum existing sales (item d) with sales at $217 million (greater than or equal to $50 million). Second, it met the requirement of the Dun & Bradstreet creditworthiness score (item c), which needed to be less than or equal to 3, with a score of The Dun & Bradstreet score was not noted on the Department review form because MHM had already failed three of the financial minimum acceptable financial standards. MHM disputes the finding that it failed the “Debt to tangible net worth” requirement (item b) which was a ratio of = 5:1 or “less than or equal to 5 to 1, a whole number.” Net worth is the same as equity. Following proper accounting practices and a commonsense reading of this mathematical phrase required that both numbers be whole numbers, neither could be a negative. Put simply, a proposer could only have a maximum of five dollars in debt for every one dollar in net worth to pass this minimum acceptable standard. So, for purposes of evaluating this ratio, once it was determined that MHM had a negative equity of $22 million dollars, there was no way for MHM to pass this critical requirement. The “Debt to tangible net worth” criteria, was meant to be “Debt to net worth.” The computation set out below the criteria reflects the proper calculation needed to find debt to net worth, not debt to tangible net worth. Mr. Law performed the computation for debt to net worth as set out in the description of the computation, which was more advantageous to proposers than debt to “tangible net worth,” and resulted in a more favorable ratio. The ratio of “-1.77,” reflected on MHM's financial documentation review sheet is a mistake because Mr. Law used the number he reached averaging the audited and unaudited financial statements. The correct number is “-2.16,” which is based only on MHM's audited financial statement of September 30, 2008. That is, it was a greater negative number, but still negative. Either way, MHM fails this criteria. MHM had no dollars in net worth as of the issuance date of the RFP. Instead, MHM had a negative net worth of $24,785,000.00 as of the end of its fiscal year on September 30, 2008, as reflected in its audited financial statement. As to item “a”, “Current ratio,” a finding of .819 was reached by taking the total current assets ($23,493) and dividing into that number the total current liabilities ($28,692), both reflected on the MHM’s audited financial statement of September 30, 2008. These numbers taken from MHM’s audited financial statements for total current liabilities; total current assets and total equity represent millions, rounded for accounting purposes. MHM reached a similar finding of .82 using its September 30, 2008, audited financial statements. On the date the RFP was issued, February 5, 2009, MHM’s audited financial statement of September 30, 2009, was indisputably less than 9 months old and was the only financial statement under Section 5.4.2 of the RFP that could be used to compute the ratios in Section 5.4.2. Even if the unaudited financial statement submitted by MHM were averaged with the most recent audited financial statement, as demonstrated by Mr. Law’s attempts to do so, MHM would still not have met the current ratio. Nowhere in the RFP does it allow for the use of unaudited financial statements alone when there are existing audited financial statements. Mr. Law’s completed Phase 4 review of the financial documentation. He returned it to the Department on March 30, 2009. The Department conducted Phase 5 of the review and evaluation process, the Public Opening of the price proposals, on April 2, 2009, in a properly noticed meeting. At that time, the Department knew that there were only two responsive proposals (CMS and Wexford). No public announcement regarding the status of the other proposals had been made at that time. The RFP contained a price cap of $70.00 per inmate per month as reflected in Section 5.11.2 of the RFP and the Price Information Sheet. The intent of the price cap of $70 per month was to achieve a price savings for the Department over what it was then paying for mental healthcare services in Region IV, which was nearly $78.00. The goal of $70 was considered to be possibly unrealistic, but the true intent was to keep from exceeding the current rate of $78.00. At the price opening, the following prices were announced: (a) MHM’s price was $70.00 per inmate per month; (b) the University of Miami’s price was $69.49 per inmate per month; (c) CMS’s price was $74.49 per inmate per month; and (d) Wexford’s price was $95.00 per inmate per month. It was later determined that CMS had also submitted an alternative price sheet. However, the alternative price sheet did not affect the responsiveness of CMS's proposal or the Department's subsequent decision. Based on the fact that CMS’s and Wexford’s proposed prices exceeded the amount set by the RFP, their proposals were deemed non-responsive to the RFP. Consequently, as of April 2, 2009, there were no responsive proposers to the RFP. BPS staff prepared a final score and ranking sheet as required by Section 6.2.7 of the RFP. The scoring and ranking included just the two proposals, CMS and Wexford, that were responsive going into the Phase 5 Price Opening. BPS staff did not perform further scoring and ranking of the two proposals that were non-responsive prior to the Price Opening. Department of Corrections’ Procedure 205.002, entitled “Formal Service Contracts,” addresses the Department’s procedures, terms, and conditions for soliciting competitive offers for certain types of services. The Procedure has separate sections for Invitations to Bid, Requests for Proposals, Invitations to Negotiate and general sections that address all three. There is no requirement in the procedure that addresses the specific situation facing the Department in the mental healthcare procurement. The section of Procedure 205.002 that Petitioner points to, Section (5)(r)3., applies only to instances when the Department is seeking to single source a procurement or negotiate with a single responsive bidder. The section reads as follows in pertinent part: (r) Receipt of One or Fewer Responsive Bids, Proposals or Responses: * * * 3. If the department determines that services are available only from a single source or that conditions and circumstances warrant negotiation with the single responsive bidder, proposer, or respondent on the best terms and conditions, the department’s intended decision will be posted in accordance with section 120.57(3), F.S., before it may proceed with procurement. This section of the procedure is clearly inapplicable in the instant case since there were no responsive proposals. Section 287.057(6), Florida Statutes (2008) Faced with no responsive proposers, the Department considered its options. The Department then decided to negotiate for a contract on best terms and conditions pursuant to Section 287.057(6), Florida Statutes (2008), in lieu of going through a third competitive solicitation. The Department’s decision to negotiate was ultimately made by the Assistant Secretary for Health Services in the Department's Office of Health Services. The BPS staff and legal counsel advised Assistant Secretary Dr. Sandeep Rahangdale about the options available to the Department. Dr. Rahangdale had the following three options: (1) to reject all proposals and begin what would be the third competitive procurement for mental healthcare services in less than 8 months; (2) to negotiate a contract on best terms and conditions under Section 287.057(6), Florida Statutes (2008), since there were less than two responsive proposals to the RFP; or (3) to use the statutory exemption for health services under Section 287.057(5)(f), Florida Statutes (2008), and enter into a contract with any vendor the Department selected. Option 1, to begin a new procurement was time-barred because the Department needed a new contract in place by July 1, 2009. Dr. Rahangdale’s primary concern was to insure that the Department provided constitutionally mandated health care, including mental healthcare to all inmates in its custody. In making the decision to negotiate, Dr. Rahangdale reasonably chose to begin negotiations with CMS. He made this decision because, of the two proposers who were responsive except for exceeding the price cap, CMS’s price was closest to the $70.00 per inmate per month goal. Wexford, the other proposer that was responsive except for price, had submitted a price of $95.00 per inmate per month. Thus, the Department had a reasonable belief there was a better chance of reaching its $70 goal through negotiations with CMS. Additionally, CMS was the highest scored technical proposal of the only two responsive proposals prior to the Price Opening. Thus, CMS was a better choice for the Department from a delivery of services standpoint. The Department made a reasoned decision to not abandon all the criteria of the RFP that had to do with qualifications, such as business experience (failed by University of Miami) or financial viability (failed by MHM). Dr. Rahangdale considered and determined that the nature of MHM’s and the University of Miami’s failure to be responsive could not be changed or cured in the negotiation process unless the Department lowered its expectations regarding performance and corporate viability. Negotiations were conducted between April 7, 2009, and April 9, 2009, by Jimmie Smith of the Office of Health Services. Dr. Rahangdale instructed Mr. Smith to undertake negotiations with CMS on best terms and conditions, and to strive to get as close as possible to a price of $70.00 per inmate per month in the negotiations. Mr. Smith is a Registered Nurse working in the Department’s Office of Health Services. His working job title is Assistant Program Administrator/Contracting. He has the responsibility to contact potential vendors for health-related services and commodities and to ensure that formal contracts or purchase orders are issued for the required health-related services and commodities. Mr. Smith typically is charged with making initial contact with vendors, handling negotiations for exempt health service contracts, and coordinating the procurement of the services with BPS. He is also a contract manager for healthcare services and advises other contract managers. Mr. Smith was eminently well qualified to negotiate this contract for mental healthcare services on behalf of the Department. Prior to beginning his negotiations, Mr. Smith obtained a complete copy of CMS’s proposal, including the price proposal. He contacted CMS'S Senior Director of Business Development, Frank Fletcher, by telephone to conduct the negotiations. Emails dated April 9, 2009, between the Department and CMS’s representative reflect an offer by CMS to perform the scope of work described in the RFP at a capitated rate of $70.00 for the first year of service, with a $2.50 escalator per year for a five-year non-renewal contract term. CMS also proposed adding a 30-day period for correction of performance measures, prior to the imposition of liquidated damages. The Department counter-offered with a requirement that any failure to correct the performance measure violation within the 30-day period would result in retroactive imposition of liquidated damages to the day of the violation. These terms and conditions were presented to Dr. Rahangdale who approved them. Dr. Rahangdale considered the $2.50 escalator, but decided he was satisfied with the initial year price of $70, a 10% savings for the Department over its current contract and a savings of three million over the life of the contract. On April 10, 2009, Mr. Smith confirmed the tentative agreement to Mr. Fletcher by email. CMS understood that the agreement was tentative until the Department posted a notice of agency decision. The BPS staff prepared an Agency Action Memo, the Summary Report, and the Notice of Intent to Award. The Agency Action Memo contained a recommendation for award and an option of non-award. The Agency Action Memo stated as follows in part: The Department made the determination that it was in the best interest of the State to proceed with negotiations as authorized by Section 287.057(6), Florida Statutes. The Department negotiated with the highest- ranked Proposer on the best terms and conditions for the resulting Contract. Based upon the results of the negotiation conducted, it is recommended that the Department awards a Contract to Correctional Medical Services, Inc. A Summary Report was attached to the Agency Action Memo. The report explained the RFP process in detail. It explained the reasons for finding MHM and the University of Miami non-responsive. It explained that CMS and Wexford were non-responsive because they exceeded the price cap. 55.. The report charted the results of the Phase 5--Public Opening of Price Proposals as follows in abbreviated form: PROPOSER UNIT PRICE ANNUAL COST FINANCIAL EXPERIENCE CMS $74.59 $16,536,780 Passed Passed Wexford $95.00 $21,090,000 Passed Passed U. of M. $69.49 $15,426,780 Passed Failed MHM $70.00 $15,540,000 Failed Passed The report set forth the Department's reasons for negotiating on best terms and conditions pursuant to Section 287.057(6), Florida Statutes (2008), in pertinent part as follows: Phase 8--Notice of Agency Decision The procurement of Mental Healthcare Services in Region IV was under competitive solicitation for over eight (8) months, via two (2) different solicitations (ITN and RFP). The companies that submitted proposals in response to this RFP also submitted responses to the previous ITN. Pursuant to Section 287.057(6), Florida Statutes, the Department negotiated with the highest-ranking proposer on the best terms and condition and in the best interest of the state, in lieu of resoliciting competitive proposals for a third time. The last page of the report charted the Final Score and Ranking for CMS and Wexford. The first chart showed the actual points received by the proposers, the highest points received by any proposal, and the awarded points. The second chart showed the proposed unit price, the lowest verified price, and the awarded points. The third chart showed the total response points, with CMS having 500 and Wexford having 454.64. MHM and the University of Miami were non-responsive as to RFP requirements that the Department, in its sole discretion, determined were non-negotiable. Therefore, the Department properly determined that CMS was the highest-ranking proposer after the Price Opening. As Bureau Chief, Mr. Staney was ultimately responsible for verifying that the four proposals were non-responsive. He and Dr. Rahangdale signed the Agency Action Memo, recommending an award to CMS. On April 15, 2009, Mr. Staney sent the documents to his supervisor, Director of Administration Millie J. Seay. The BPS staff briefed Ms. Seay regarding the Agency Action Memo. Ms. Seay questioned whether the Department should negotiate with Wexford. The BPS staff explained that Dr. Rahangdale had considered negotiating with Wexford but that he was satisfied with the negotiated rate and the higher technically-scored proposal from CMS. On Monday, April 20, 2009, Ms. Seay signed the Agency Action Memo. The next day the Department posted its intent to award a contract to CMS. The Department's Notice of Agency Decision announced the intent to award a contract for Mental Healthcare Services in Region IV to CMS as follows: DEPARTMENT OF CORRECTIONS NOTICE OF AGENCY DECISION RFP #08-DC-8048 MENTAL HEALTHCARE SERVICES IN REGION IV Pursuant to the provisions of Chapter 287.057(6), Florida Statutes, the Department of Corrections announces its intent to award a contract for MENTAL HEALTHCARE SERVICES IN REGION IV to the following vendor: Correctional Medical Services, Inc. This announcement gave all interested parties notice that the Department was taking some action with regard to the referenced RFP. The Notice also contained the statutorily required language giving all interested parties a point of entry to challenge the Department’s intent to award. Accordingly, no proposers were denied an opportunity to inquire into the details of the process that led to an award under the referenced statute, including the evaluation of the proposals and the Department’s decision to wait until it had completed Section 287.057(6), Florida Statutes (2008), negotiations to post the intended agency decision. 63 MHM timely filed its Formal Bid Protest Petition with the Department on May 4, 2009.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is Recommended: That the Department enter a final order awarding the contract for Mental Healthcare Services in Region IV to CMS and dismissing the protest of MHM. DONE AND ENTERED this 27th day of July, 2009, in Tallahassee, Leon County, Florida. S SUZANNE F. HOOD Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 27th day of July, 2009.
The Issue Whether Gary Savage committed the statutory violations alleged in the Amended Administrative Complaint and, if so, what penalty is authorized for such violations.
Findings Of Fact The Parties and Principle Allegations The Department is the state agency charged with the licensing of insurance agents in Florida, pursuant to authority granted in chapter 626, parts I and IX, Florida Statutes, and Florida Administrative Code Chapter 69B-231. Mr. Savage is a 75-year-old registered investment advisor and financial planner who also is licensed to sell life insurance in Florida. The Department’s Complaint seeks to revoke Mr. Savage’s license as an insurance agent. Counts I through III and V through VIII concern eight clients, whereby Mr. Savage earned commissions for selling them annuities and, based on agreements they signed, charged them annual one-percent financial planning service fees tied to the value of their portfolios, including the annuities. Each of these counts alleged the following statutory violations: Engaging in unfair insurance trade practices for knowingly collecting an excessive premium or charge. § 626.9541(1)(o)2., Fla. Stat.; Demonstrating a lack of fitness or trustworthiness to conduct insurance business. § 626.611(1)(g), Fla. Stat.; Demonstrating a lack of reasonably adequate knowledge and technical competence to engage in insurance transactions. § 626.611(1)(h), Fla. Stat.; Engaging in fraudulent or dishonest insurance practices. § 626.611(1)(i), Fla. Stat.; and Misappropriating, converting, or unlawfully withholding moneys belonging to others in conducting insurance transactions. § 626.611(1)(j), Fla. Stat. Count IX charged Mr. Savage with two violations concerning adverse administrative action taken by the Financial Industry Regulatory Authority (“FINRA”) against his securities license: Failing to timely report final administrative action taken by FINRA against his securities license. § 626.536, Fla. Stat.; and Being suspended and fined for violating FINRA’s rules. § 626.621(12), Fla. Stat. At the time of the hearing, Mr. Savage was not working in the financial services industry because FINRA suspended him for several months. During his suspension, Mr. Savage continued to meet with his insurance clients, though he currently has no appointments with life insurers to sell their products. Wearing Two Hats - An Investment Advisor and Insurance Agent Mr. Savage has worked in the investment industry for over 50 years, initially focusing on securities but evolving into financial advising and estate planning work. He has taken numerous courses and examinations relevant to securities law, financial planning, and tax law. Mr. Savage owns two investment advisor businesses: Wall Street Strategies, Inc. (“Wall Street”), is a stock brokerage firm that handles securities transactions; and Advanced Strategies, Inc. (“Advanced Strategies”), is a registered investment advisor firm, offering clients financial planning, tax management, and estate planning advice. In order to provide a wide variety of products to his financial planning clients, Mr. Savage also is licensed as a nonresident agent in Florida to sell life insurance, including annuities.2/ Annuities provide a guaranteed income stream over a term of years, but also come with substantial penalties if they are surrendered or cancelled before the term expires. Fixed index annuities, like those Mr. Savage sold to the clients at issue here, offer portfolios of funds tracking stock market indexes. Owners choose from around six portfolios and can then reallocate by choosing different portfolios each year. Mr. Savage considers himself an investment advisor who is licensed to sell insurance, which is what he tells new clients. Indeed, his businesses are securities and investment advisor firms, not insurance agencies. Mr. Savage’s client base is diverse. Many have portfolios with annuities and other investment products. Some have portfolios with no annuities. Others have portfolios with only annuities, like most of the clients at issue. In order to procure new clients, Mr. Savage held financial planning seminars where diverse speakers discussed financial and estate planning, and tax management. Mr. Savage discussed the types of insurance products he preferred, including fixed index annuities. Other speakers discussed real estate, oil, and investment trusts, which were beneficial from a tax perspective. Most of the clients at issue attended such a seminar and later met with Mr. Savage to discuss their financial plans. When Mr. Savage first met with the clients at issue, he asked them to bring tax returns, investment statements, wills and/or trusts, and other documents relevant for a financial planning discussion. They completed a new client form with information about their assets, investments, and objectives. He often met several times with new clients to develop a plan for them to reach their financial, estate, and tax management goals. To provide financial planning services, Mr. Savage—— like most investment advisors——charged an annual one-percent fee based on the total value of the portfolio. He has reduced or waived his fee if the clients’ situation warranted it or if they continued to purchase products for which he received commissions to compensate him for providing financial planning services. Before that are charged an annual fee, Mr. Savage’s clients signed a “Service Fee Agreement” (“Fee Agreement”), which was on “Advanced Strategies, Inc., Registered Investment Advisor” letterhead and provided as follows: Advanced Strategies charges a 1% (one percent) financial planning retention fee annually. This fee is based upon the total combined value of accounts including annuities, indexed life, mutual funds, income products and brokerage accounts that we manage or provide service for. This amount is tax deductible as a professional fee. The Fee Agreement offered to provide several financial planning services3/: Address, ownership, and beneficiary changes; Duplicate statements and tax returns; Required minimum distribution and withdrawal requests, and deposits; General account questions; One printed analysis per year; Annual review; Asset rebalancing when applicable; Informing client of new tax laws, changes in estate planning, and new exciting products and concepts. The Fee Agreement noted that the non-refundable fee was due on the service anniversary date and that non-payment would result in discontinuation of the planning services until paid in full. Mr. Savage confirmed that the Fee Agreement was voluntary. If clients wanted to purchase a product, but did not want him to manage their portfolio or provide the outlined services, they did not have to sign the agreement. In that event, Mr. Savage would procure the product and not provide financial planning services. All of the clients at issue here purchased annuities from Mr. Savage. He helped them complete the applications with the insurance companies and, if necessary, assisted them with transferring or closing out other investments used to pay the premiums. He ensured that the insurers received the paperwork and the premiums. Once the annuities were procured, he received commissions from the insurers. The Complaint did not allege that he acted unlawfully in recommending annuities to the clients or receiving commissions from the insurers. All of the clients at issue also signed the Fee Agreement and Mr. Savage provided them with services every year.4/ Some of the services were things an insurance agent technically could handle, such as answering client calls, making address and beneficiary changes, providing duplicate statements, assisting with the paperwork for required minimum distributions, withdrawals, and deposits, and asset reallocation. Other services were things that an agent could not provide, such as tax management/credits, duplicate tax forms, assistance with estates, trusts, and wills, and financial planning advice. But, even as to the services an agent technically could provide, Mr. Savage used his financial planning expertise to advise these clients as to a number of decisions relating to their annuities. For instance, although agents can assist with reallocation, required minimum distributions, and withdrawals, Mr. Savage’s securities and financial planning expertise allowed him to make recommendations that took into account an analysis of the stock market, the economy, and the clients’ financial circumstances and overall goals. An agent is not required to have that expertise, which is one reason he charged the clients an annual service fee. Many of these clients did not recall Mr. Savage providing most of the services listed in the Fee Agreement, but the weight of the credible evidence reflects otherwise. He analyzed asset reallocations for these clients every year and, when he believed reallocation was appropriate, he undisputedly made it happen. He provided annual account analyses consolidating the clients’ investment statements. He met with some of them every year to conduct an annual review and, for those he did not meet, he offered to do so in their annual invoice letter. Whenever the clients asked for assistance with questions, address, beneficiary, or ownership changes, withdrawals or required minimum distributions, or deposits, among others, he performed the task. And, as he confirmed and some of the clients acknowledged, the Fee Agreement made it clear that the services were available, even if they did not need all of them in a particular year or did not think to ask. Although some of the clients testified that Mr. Savage failed to tell them that his fee was optional, all of them had a chance to review the Fee Agreement before voluntarily signing it. The agreement noted that the fee was a “financial planning retention fee” based on the value of the accounts “that we manage or provide service for,” and that non-payment “will result in the discontinuation of my/our planning services.” These clients believed they hired Mr. Savage as an investment advisor and many understood that such advisors do charge fees for providing services. More importantly, no client testified that Mr. Savage said his annual fee was required to procure the annuities or was a charge for insurance. Nothing in the Fee Agreement gave that indication either. Mr. Savage credibly confirmed that he did not charge a fee for insurance; rather, the client paid the fees for financial planning services. And, if they decided they no longer wanted Mr. Savage’s services and stopped paying his fee, they took over management of their annuities without losing access to them or the money in them. The Department concedes that Mr. Savage may wear two hats, as both the agent selling an annuity and the financial advisor managing his client’s portfolio. It contends, however, that Mr. Savage violated the insurance code by selling annuities to these clients and thereafter charging them annual fees——tied to the value of the annuities——to provide services that he should have provided for free after earning commissions on the sale of those annuities. The Department’s investigator, Ms. Midgett, testified about annuities, commissions, and insurance agent services based on her experience in the industry as both a former agent and certified chartered life underwriter.5/ Ms. Midgett confirmed that the Department approves both the premiums and commissions applicable to annuities. Once the premium or deposit is paid, the commission is earned; if an additional deposit is made into the annuity, the agent would earn another commission. Ms. Midgett testified that it is improper for an agent to receive a commission and knowingly charge a client any fees with respect to that annuity under section 626.9541(1)(o). However, she admitted that a financial advisor may charge service fees on annuities if they did not receive a commission on the sale. And, if the annuity is ever rolled into a non- insurance product, that agent could charge service fees on that asset because they are no longer tied to the annuity. Ms. Midgett also testified about the services agents are expected to provide. Once an agent sells a product, he or she becomes the agent of record and does “things such as answer questions, beneficiary changes, address changes, yearly reviews, anything to keep that client and to help them in any way they can.” According to her, “it’s basic 101 insurance that an agent services their clients,” which is “extremely important if you want to build your book of business and to keep a client happy.” Importantly, however, Ms. Midgett conceded that no statute or rule specified what services agents were required to provide once they sold an annuity. “It’s just understood when you’re an insurance agent that you’re going to service your clients. It’s part of the sale of the product.” She believed agents learned this in the course study to obtain a license. Although Ms. Midgett testified that Mr. Savage should have provided most of the services listed in the Fee Agreement for free once he earned commissions on the sale of the annuities, she conceded that at least two of them——duplicate tax forms and informing the client of new tax laws——were not services agents would do. She also agreed that agents could not advise clients as to taking money from an annuity and investing in stocks, mutual funds, real estate trusts, or other investment-related options as “those are all investment advisor functions.” Ms. Midgett initially admitted having no knowledge of whether insurance agents were trained in asset reallocation, though she “would assume so” because “[i]f you have a license to sell the product, then obviously you have to have the knowledge of how to be able to service that product and make the allocations.” When she testified several months later in the Department’s rebuttal case, she stated that the manual used to obtain a license in Florida had a chapter on annuities that “touched on” reallocation. But, she admitted she was not an expert on reallocation or analyzing market conditions, and she had only previously worked with one agent who sold annuities, though he did advise his annuity clients on reallocation. In sum, the Department conceded that no statute or rule articulated the services an agent is required to provide upon receiving a commission. The appointment contracts between the agents and the insurance companies, two of which are in the record, apparently do not specify the services agents are expected to provide. At best, the evidence established what a good agent should do to build a book of business; the evidence did not establish what services an agent, like Mr. Savage, was legally required to provide for receiving a commission. Count I – Kathy Butler Ms. Butler met Mr. Savage while working at a yacht club. In February 2011, they met at his office and she filled out a new client form with financial information. In March 2011, Mr. Savage assisted Ms. Butler with the application for a fixed index annuity for $50,000. On that same day, she signed the Fee Agreement, which she understood to be paying for his services as an investment advisor to manage the annuity and ensure it was being invested correctly; she believed he received income from the insurance company. In January 2012, she purchased another fixed index annuity for $8,000. Mr. Savage procured both annuities. Between 2012 and 2015, Ms. Butler received annual invoices from Mr. Savage and paid about $3,265 in service fees. At this point, Ms. Butler deals directly with the insurance companies, though Mr. Savage is still listed as her agent. The weight of the credible evidence shows that Mr. Savage answered general account questions, made a beneficiary change, conducted annual reviews when requested, sent annual account statements, analyzed reallocation each year and, when he recommended reallocation in 2014 and 2015, he handled the paperwork. Ms. Butler knew she could avail herself of the services in the Fee Agreement, even though she chose not to request many of them. Count II – Beverly Wilcox Ms. Wilcox met Mr. Savage at a seminar in early 2009. In February 2009, they met at his office, she completed a new client form, and she signed the Fee Agreement. She believed he was a financial advisor and that she would owe him money, but she did not read the Fee Agreement before signing it. In March 2009, Mr. Savage assisted Ms. Wilcox with the application to purchase a fixed index annuity for $120,000. He procured the annuity, as requested. Between 2010 and 2016, Ms. Wilcox received yearly invoices from Mr. Savage and paid about $6,500 in fees, after which she decided to deal with the annuity company directly. The weight of the credible evidence shows that Mr. Savage answered questions when asked, offered to conduct annual reviews each year, sent annual account statements, analyzed reallocation each year and, when he recommended reallocation in 2010 and 2012, he handled the paperwork. Count III – Joseph Cerny Mr. Cerny met Mr. Savage while working at a yacht club and knew he was a financial advisor. Mr. Cerny purchased several fixed index annuities and other investments from Mr. Savage, who helped him complete the paperwork and procured the policies. Between 2003 and 2004, he bought two annuities for $100,000 each and two mutual funds for about $30,000 each. In 2008, he bought an annuity for $10,000. In 2010, he bought another annuity for $119,400. Mr. Savage did not charge fees for the first few years. Mr. Cerny believed he received compensation from the companies. However, in March 2010, Mr. Cerny signed the Fee Agreement. Between 2011 and 2012, he received two invoices, paying the first for $1,266.84 but refusing to pay the second. Mr. Cerny and Mr. Savage ended their relationship at that point. The weight of the credible evidence shows that Mr. Savage answered questions, provided annual statements, assisted with making withdrawals when requested, met with Mr. Cerny yearly, analyzed reallocation each year and, when he recommended reallocation in 2010 and 2011, he handled the paperwork. Count V – Marion Albano Ms. Albano met Mr. Savage at a retirement seminar in early 2007. In February 2007, they met at his office to go over her investments, including several annuities. Based on his recommendation, she surrendered her old annuities and purchased a fixed index annuity for about $1.6 million. He assisted her with the application and procured the annuity. In February 2007, Ms. Albano also signed the Fee Agreement. Mr. Savage told her there was a service charge to manage the annuity and she agreed because her brother pays the same rate on his managed brokerage account. She was never worried about losing the annuity if she failed to pay the fee. Ms. Albano received invoices from Mr. Savage every year from 2008 through 2015 and testified that she had paid between $110,000 and $120,000 in fees during that time. She had to pay some of the fees out of her distributions. The weight of the credible evidence shows that Mr. Savage answered account questions, corresponded with her daughter about his recommendations, provided her with an account analysis each year, met with her annually to review her account, and assisted her with required minimum distributions and withdrawals. He analyzed reallocation each year and, when he recommended reallocation in 2010 and 2011, he handled the paperwork. Count VI – Jane D’Angelo Ms. D’Angelo and her late husband, whose son-in-law was an insurance agent, met Mr. Savage at an estate planning seminar in early 2003; they believed he was an investment advisor. In March 2003, he came to their home and they completed a new client form, indicating they had several types of investments, including annuities. Between 2003 and 2016, the D’Angelos invested with Mr. Savage. In 2003, they purchased a tax credit investment for $10,000. In 2005, they purchased a similar investment for $19,000, which resulted in tax credits totaling $17,174. Between 2005 and 2011, they purchased eight fixed index annuities from Mr. Savage. He assisted them with the applications, informing them that the companies paid him directly. He procured the following annuities, some of which were purchased by transferring money from their existing annuities: In April 2005, they bought an annuity for $250,000; in May 2007, they bought an annuity for $32,789.78; in May 2008, they bought an annuity for $29,510; in March 2009, they bought three annuities for $337,554, $550,000, and $6,000; in May 2011, they bought two annuities, one for $40,715 and another for $150,889; and, in June 2011, they bought an annuity for $24,667. Prior to 2010, they paid no service fees. However, in April 2010, they signed the Fee Agreement. Although they were surprised and felt like they had to sign, Ms. D’Angelo agreed they were not coerced or told the annuities would lapse if they failed to do so. Indeed, she never lost access to the annuities even after she stopped paying Mr. Savage’s fees in 2015. Mr. Savage sent them annual invoices from 2010 through 2015, totaling $54,000 in fees. Mr. Savage agreed to waive the 2010 fee and, ultimately, they only paid about $14,511 total. In 2016, Ms. D’Angelo informed Mr. Savage that she no longer needed his services. She had been dealing directly with the insurance companies herself, though they have provided her with names of individuals if she wanted someone to advise her. The weight of the credible evidence shows that Mr. Savage provided numerous services to the D’Angelos on the investments he managed for them.6/ He had discussions with them, sent them annual statements, and assisted them with deposits and transfers between annuities, required minimum distributions and withdrawals, income riders, and beneficiary and ownership changes. He analyzed reallocation every year and handled the paperwork when he felt it was appropriate. He also offered to meet annually and held those meetings in years in which they were requested. Count VII – Ernest Blougouras Rev. Ernest Blougouras, a Greek Orthodox priest, attended several financial planning seminars with Mr. Savage. They met privately in February 2005, at which he completed a new client form listing his investments, which included fixed annuities, CDs, mutual funds, bonds, and stocks. Rev. Blougouras purchased fixed index annuities and other investments from Mr. Savage. He told Rev. Blougouras that he received commissions for selling the annuities. Mr. Savage assisted with the applications and procured the policies. Over the last 14 years, Rev. Blougouras purchased nine fixed index annuities. In March 2005, he bought an annuity for $347,003; in April 2005, he bought an annuity for $229,458; in August 2005, he bought an annuity for $102,227; in June 2006, he bought an annuity for $8,300; in May 2007, he bought an annuity for $41,143; in June 2009, he bought an annuity for $50,000; in July 2009, he bought an annuity for $14,308; and, though the record is unclear as to the date, he bought another annuity that was worth $40,572 in 2010. Since 2011, he bought an additional annuity and several non-insurance investments, such as real estate trusts and energy funds. Prior to 2010, Mr. Savage did not charge Rev. Blougouras service fees because he continued to purchase annuities. However, in 2010, Mr. Savage decided to start charging an annual service fee and sent Rev. Blougouras the Fee Agreement. Rev. Blougouras believed that Mr. Savage’s services would be cancelled if he failed to pay the fee and he would have to hire another advisor. He signed the Fee Agreement and continues to use Mr. Savage’s services. Mr. Savage has sent annual invoices to Rev. Blougouras every year since 2010. The record only contains the 2010 invoice for $9,883 and Rev. Blougouras could not recall how much he paid overall. However, he confirmed that he has paid every invoice he has received either himself or with distribution checks he received from the annuities. The weight of the credible evidence shows that Mr. Savage provided numerous services to Rev. Blougouras. He prepared paperwork and documents for required minimum distributions and withdrawals, held meetings to review and organize his tax paperwork, copied documents requested, and made address changes when requested. He analyzed asset reallocation every year and, when he recommended reallocation in 2010 and 2011, he completed the necessary paperwork. Count VIII – George Flate Mr. Flate and his wife met Mr. Savage at a financial planning seminar in 2010. In February 2010, they met Mr. Savage and completed their new client form listing their investments, including fixed annuities, CDs, mutual funds, and stocks. They also signed the Fee Agreement, which Mr. Flate believed was a standard service agreement. They thought they hired Mr. Savage as an investment advisor and never believed they would lose access to the annuities if they stopped paying his fees. Based on Mr. Savage’s recommendation, the Flates purchased two fixed index annuities: one annuity was issued in April 2010 for approximately $22,000, and the other annuity was issued in May 2010 for approximately $22,500. Mr. Savage assisted them with filling out the applications and handled the paperwork to ensure the annuities were issued. Between 2012 and 2015, Mr. Savage sent the Flates invoices for his annual service fees every year. In total, they paid approximately $1,506 in service fees. In 2015, the Flates terminated their relationship with Mr. Savage. They have worked with two financial advisors since then, neither of whom charged them service fees relating to the annuities. The weight of the credible evidence shows that Mr. Savage provided numerous services to the Flates. Each year, he met with them to go over their account, provided them with account analyses, analyzed reallocation and, the two to three times they agreed with his recommendations, he handled the paperwork. He handled withdrawals and address changes for them when requested, and he provided them with information as to changes in tax law and estate planning, though they did not believe that was necessary since they had tax and estate lawyers. The Flates understood that Mr. Savage was available to answer their questions and provide the services if they asked. Count IX – FINRA Disciplinary Proceeding On July 14, 2016, two former clients of Mr. Savage’s filed a Statement of Claim with FINRA alleging that he had recommended investments that were not suitable for them. Over Mr. Savage’s objections to proceeding with the hearing as scheduled, the arbitration panel awarded the clients over $725,000 in damages, fees, and costs. The clients filed a petition in Florida circuit court to approve the arbitration award. Mr. Savage responded in opposition and moved to vacate the arbitration award on grounds that it violated his due process rights. On November 9, 2017, the circuit court issued a final judgment awarding over $769,000. On December 4, 2017, Mr. Savage appealed the circuit court’s order to the Second District Court of Appeal. On June 12, 2018, while the appeal was pending, Mr. Savage signed a Letter of Acceptance, Waiver and Consent (“AWC”) with FINRA. The AWC stated that Mr. Savage accepted and consented, without admitting or denying, the following findings: Wall Street failed to apply for a material change in its business operations, i.e., to sell oil and gas interests, private placements, and non-traded real estate investment trusts, before engaging in more than 50 such transactions, many of which were consummated by Mr. Savage; Mr. Savage failed to timely update his FINRA Form U4 within 30 days of the Statement of Claim being filed against him in July 2016; Mr. Savage failed to timely respond to FINRA’s requests for information relating to an upcoming examination of Wall Street; and Wall Street failed to maintain the minimum net capital requirements of $5,000 while engaging in securities transactions. Mr. Savage agreed to three sanctions: (1) a five- month suspension from associating with any FINRA registered firm; (2) a three-month suspension from association with any FINRA registered firm in a principal capacity, to be served following the five-month suspension; and (3) a $30,000 fine. The AWC confirmed that Mr. Savage waived his procedural rights relating to these alleged violations and made clear that it would become part of his permanent disciplinary record that could be considered in future actions brought by FINRA or other regulators. He was precluded from taking positions inconsistent with the AWC in proceedings in which FINRA was a party, but was not precluded from taking inconsistent positions in litigation if FINRA was not a party. The five-month suspension began on June 13, 2018, and ended on November 17, 2018. The three-month suspension began on November 18, 2018, and ended on February 17, 2019. In the interim, on August 16, 2018, FINRA notified Mr. Savage by letter that it was suspending his securities license indefinitely for his “failure to comply with an arbitration award or settlement agreement or to satisfactorily respond to a FINRA request to provide information concerning the status of compliance.” This letter is not in the record and, as such, it is unclear whether Mr. Savage had an avenue to challenge that suspension directly. Mr. Savage had challenged the underlying arbitration award, which remained pending on appeal in the Second District Court of Appeal. On November 7, 2018, the Second District affirmed the circuit court’s arbitration order. On November 20, 2018, Mr. Savage put the Department on notice of the FINRA disciplinary actions, including the AWC from June 2018 and the decision of the Second District affirming the arbitration award.
Conclusions For Petitioner: David J. Busch, Esquire Department of Financial Services Room 612, Larson Building 200 East Gaines Street Tallahassee, Florida 32399-0333 For Respondent: Michael Buchholtz, Esquire The Law Office of Michael Buchholtz Post Office Box 13015 St. Petersburg, Florida 33777
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Financial Services issue a final order suspending Mr. Savage’s license as an insurance agent for twelve months. DONE AND ENTERED this 30th day of September, 2019, in Tallahassee, Leon County, Florida. S ANDREW D. MANKO Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 30th day of September, 2019.
The Issue The issue in this case is whether Petitioner's application for self-insurance for workers' compensation should be approved.
Findings Of Fact Based upon the observation of the witnesses' testimony and the documentary evidence received into evidence, the following relevant and material facts that follow are determined. The Florida Self-Insurers Guaranty Association, Inc. (Association), is established by Section 440.385, Florida Statutes (2003), and is an organization that provides a guarantee for workers' compensation benefits for companies that are self-insured. The Association pays injured workers their benefits, if the self-insurer becomes insolvent. An insolvency fund is established and managed by the Association, which funds the workers' compensation benefits for insolvent members. The insolvency fund is funded by assessments from members of the Association. Pursuant to Florida Administrative Code Rule 69L-5.102 (formerly Florida Administrative Code Rule 4L-5.102), in order for an employer to qualify for self-insurance under the relevant provisions of law, the applicant must meet the following requirements: (1) have and maintain a minimum net worth of $1,000,000; (2) have at least three years of financial statements or summaries; (3) if the name of the business has changed in the last three years, provide a copy of the Amended Articles of Incorporation; and (4) have the financial strength to ensure the payment of current and estimated future compensation claims when due, as determined through review of their financial statement or summary by the Department. Of the general requirements noted in paragraph 3, above, the only issue in this proceeding regards N.C.M.'s financial strength. An applicant for self-insurance is required to submit in its application audited financial statements for its three most recent years. All financial statements, audits, and other financial information must be prepared in accordance with Generally Accepted Accounting Principles. The Association is required to review each application and the financial documents which are submitted as part of that application to determine if the applicant has the financial strength to ensure the timely payment of all current and future workers' compensation claims. After the Association reviews the application, it makes a recommendation to the Department as to whether the application for self-insurance should be approved or denied. The Department is required by law to accept the Association's recommendations unless it finds that the recommendations are clearly and convincingly erroneous. N.C.M. submitted its application for self-insurance on or about May 6, 2003, and included in its application audited financial statements for its three most recent fiscal years. The statement contained an unqualified opinion from N.C.M.'s accountant. N.C.M. provided information in its application regarding the number of employees, the worker classifications of these employees, and a payroll classification rating that has been established by the National Council on Compensation Insurance. The application made it clear that the Department could use this information to calculate a manual annual rate premium for each worker classification to determine an overall workers' compensation premium based on statewide manual rates. The Association calculated a standard premium of $507,088.75 for N.C.M., after giving credit for its experience modification of .71. N.C.M. confirmed in its application that it was a corporation duly organized and existing in the State of Florida. N.C.M. also supplied information on its corporate officers and copies of its Articles of Incorporation confirming its corporate existence. In its application and at the hearing, N.C.M. agreed that, if accepted for membership, it will maintain security deposits and excess insurance as required by the Department's administrative rules. Upon receipt of N.C.M.'s application, the Association thoroughly reviewed the application and financial statements for the three most recent years. The Association examined the balance sheets to analyze the Company's assets, liabilities, working capital, and equity structure. Additionally, the Association examined N.C.M.'s income statements to analyze the Company's revenues, profits and/or losses, and expenses. The Company's cash flows were examined. The Association calculated various financial ratios for N.C.M. in order to examine, among other things, the company's asset structure, liquidity, total debt to equity structure, and net income or loss as it relates to the company's equity. The analysis and review performed by the Association, as described in paragraph 12, is the same type of analysis the Association performs on every applicant for self-insurance. Because applicants for self-insurance come from various types of industries, it is not useful to establish specific threshold values for various financial ratios in determining financial strength. However, the Association reviews and analyzes the financial statements of each applicant to determine the financial condition of that applicant. The Association's review of N.C.M.'s audited financial statements revealed that the Company had a net loss of $60,937 in the year ending December 31, 2002. The Company also had a loss from operations in its most recent year in the amount of $74,897, or negative .62 of its revenues. This was a significant factor to the Association because it revealed N.C.M.'s lack of profitability for its most recent year. Petitioner's tax return of 2002 showed a profit for the Company. However, the tax returns are not meant to reflect the economic profit of a business and are not prepared in accordance with Generally Accepted Accounting Principles. Rather, the audited financial statements provide more accurate information about the Company’s financial health. N.C.M.'s 2002 net worth was $1,218,895, which exceeded the $1,000,000 minimum net worth requirement established in the applicable rule cited in paragraph 3 above. However, the Association was concerned about N.C.M.'s net worth when taken as a percentage of its workers' compensation premiums, calculated by using the payroll classification information in N.C.M.'s application. The analysis of N.C.M.'s net worth as a percentage of workers' compensation premiums is important because workers' compensation claims can accrue each year and be paid out over a long period of time by the self-insurer. A company with equity that is relatively low in comparison to its workers' compensation exposure might, over time, owe its injured workers as much as, or more than, the equity in the company. This would increase the risk for the injured worker. Upon completing its financial analysis, the Association recommended that N.C.M.'s application for self- insurance be denied. Brian Gee, the executive director of the Association, conveyed the recommendation of denial to the Department in two letters, one dated May 12, 2003, and the other one dated June 19, 2003. The letters were virtually identical, except that the June 19, 2003, letter referred to the specific statute at issue and statutory language that N.C.M. did not have the financial strength necessary to ensure timely payment of all current and future claims. Attached to both the May 12, 2003, and June 19, 2003, letters was a copy of the Association's summary of N.C.M.'s audited financial statements for the years ended December 31, 2002, 2001, and 2000. Based on the review of the financial data, the Association made the following four findings, which it listed in both letters: The Company received unqualified audit opinions on its December 31, 2002, 2001, and 2000 financial statements from Rust & Christopher, P.A. Liquidity - The current ratio has decreased from 1.34 at December 31, 2000 to 1.13 at December 31, 2002. Capital Structure - The total liabilities to book equity ratio has increased since December 31, 2000 from 1.39 to 1.99 at December 31, 2002. Results of Operations - The Company's gross profit margin has negative 0.62 for the year ended December 31, 2002. The Company reported a net loss of $60,937 for the year ended December 31, 2002. Although the above-referenced letters listed findings relative to the Company's liquidity and capital structure, Mr. Gee did not believe that those findings were of "major significance." The Association's letters and accompanying financial data were submitted to the Department for a final decision to be made by the Department. The Department received and reviewed the Association's letters of recommendation and the accompanying documentation. Based on its review of the letter, the Department noted that the Association appeared to have concerns about the Company's liquidity, liabilities, and profitability. However, there was nothing in the letters which indicated that the Association did not consider the findings related to the Company's liquidity and liabilities (capital structure) to be of major significance. The Department sent N.C.M.'s application, which included the financial statements, to an outside CPA firm for review. The outside CPA performed a financial analysis, calculated various financial ratios on N.C.M., and provided a report to the Department. The outside CPA correctly noted in her report that N.C.M.'s gross profit margin for the year ended December 31, 2002, was 15.4 percent. In Finding No. 4 of its letters of recommendation to the Department, the Association had mistakenly mislabeled the Company's net profit margin as the gross profit margin. As a result of that mislabeling in the letters, the finding incorrectly stated that N.C.M.'s gross profit margin was a negative 0.62 percent for the year ending December 31, 2002. In fact, it was the Company's net profit margin for the year ending December 31, 2001, that was negative 0.62 percent. Notwithstanding the incorrect mislabeling of this item in the letters, the financial summary attached to the letters accurately reflected the Company's gross profits and revenue. The financial statement of N.C.M. also reflected that for the year ending 2002, the Company had a gross profit of $1,877,076, and for that same period had a loss from operations of $74,897, or negative .62 percent. The outside CPA also compared various financial information on N.C.M. to an industry average and concluded that "some of the Company's ratios are below the industry ratios." In making these comparisons, the outside CPA researched two companies she believed were in a business similar to N.C.M. The research on these companies provided an industry average for various financial information on companies in the same industry as the two reference companies. In this case, the two reference companies were primarily producers or sellers of concrete products, as opposed to construction companies like N.C.M. Accordingly, the industry ratios contained in the outside CPA's report may be different than the construction industry and not an appropriate basis with which to compare N.C.M. The report of the outside CPA stated that N.C.M. pays approximately $1,000,000 a year in workers' compensation insurance. That figure is higher than the premiums calculated by the Association using statewide manual rates. Instead of using those rates, the outside CPA based her figure on a newspaper article, which stated that Mr. DelDuca, president of N.C.M., pays $1,000,000 for workers' compensation insurance. In her report, the outside CPA cited N.C.M.'s lack of profitability for the year ending 2002 and correctly noted that for that year, the Company reported a net loss of $60,937. The outside CPA notified the Department that she concurred with the Association's recommendation to deny N.C.M.'s application to become self-insured because the Company had not demonstrated it has the financial strength to ensure timely payment of workers' compensation claims. The Department reviewed the outside CPA's report and noted the concerns about the company's debt equity and lack of profitability. Based on the outside CPA's report, the Department correctly determined that the report contained no information that the Association's recommendation was clearly and convincingly erroneous. As a result of its determination that the Association's recommendation to deny N.C.M.'s application for self-insurance was not clearly or convincingly erroneous, the Department denied the application.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department issue a final order denying N.C.M. of Collier County, Inc.'s application for self-insurance. DONE AND ENTERED this 26th day of February, 2004, in Tallahassee, Leon County, Florida. S CAROLYN S. HOLIFIELD Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 26th day of February, 2004. COPIES FURNISHED: John M. Alford, Esquire 542 East Park Avenue Tallahassee, Florida 32301 Cynthia A. Shaw, Esquire Department of Financial Services 200 East Gaines Street Tallahassee, Florida 32399-4229 Mark B. Cohn, Esquire McCarthy, Lebit, Crystal & Liffman Co., L.P.A. 1800 Midland Building 101 West Prospect Avenue Cleveland, Ohio 44115-1088 Honorable Tom Gallagher Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Mark Casteel, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
The Issue Whether the proposal Petitioner submitted in response to Respondent's Invitation to Negotiate No. 03-01/02/C was non- responsive.
Findings Of Fact Stipulated Facts In December of 2001, Petitioner timely responded to ITN Number 03-01/02/C issued by the Department. The ITN sought in part, proposals for the provision of advertising and related services in a category entitled "Spanish Language Hispanic Market Advertising." On March 21, 2002, Petitioner was notified that its proposal was deemed non-responsive for the following reason: "Financial information for Publicis USA Holdings, Inc. was not provided (SEC 4.9)." In determining Petitioner non-responsive to the ITN for failing to submit financial statements for Publicis USA Holdings, Inc., the Department assumed that Publicis, Sanchez & Levitan, LLC, was the product of a merger between Sanchez & Levitan, Inc., and Publicis USA Holdings, Inc., and thus was required under the second paragraph of Section 4.9 of the ITN to submit financial statements or federal income tax returns for pre-merger entities. Petitioner is a Delaware limited liability company authorized to do business in Florida. Petitioner was created on March 14, 2002, under the name Sanchez & Levitan, LLC. At the time of its creation, Petitioner was owned 100% by Sanchez & Levitan, Inc., a Florida corporation. On March 16, 2001, Publicis USA Holdings, Inc., a Delaware corporation, acquired a minority ownership of 49% of Petitioner. The ownership of the controlling majority interest of 51% was retained by Sanchez & Levitan, Inc. On June 18, 2001, Petitioner amended its name from Sanchez & Levitan, LLC, to its current name, Publicis Sanchez & Levitan, LLC. Sanchez & Levitan, Inc., continues to own the controlling majority interest of 51%, while Publicis USA Holdings, Inc., continues to own a minority interest of 49%. For the past several years, Petitioner's parent company, Sanchez & Levitan, Inc., a Florida corporation incorporated on October 10, 1985, was a contractor to the department providing Spanish language Hispanic market advertising and related services. Petitioner is a separate company created in 2001 and is not the product of a merger. Petitioner is a subsidiary of its parent company, Sanchez & Levitan, Inc. Because Petitioner was created in March of 2001, and its response to the ITN was submitted on December 5, 2001, it had neither certified financial statements nor federal income tax returns for the past two years. Similarly, Petitioner's parent company, Sanchez & Levitan, Inc., did not have consolidated financial statements for the past two years because Petitioner, the subsidiary, did not exist for 1999 and 2000. In response to Section 4.9 of the ITN, Petitioner submitted federal income tax returns for calendar years 1999 and 2000 for Petitioner's parent company, Sanchez & Levitan, Inc. Findings of Fact Based on the Evidence of the Record While Petitioner's parent company provided Spanish language Hispanic market advertising to the Department for the past several years, that contract was assigned to Petitioner in August 2001. The Department acknowledged that at the time Petitioner submitted its proposal to the ITN, Petitioner was performing essentially identical services in a successful and financially responsible manner. Section 5.2 of the ITN specifies that the evaluation of responses for each category of the ITN will be conducted in two phases. All responsive proposals will be reviewed in Phase I by an evaluation committee. Those proposers scoring 90% or more of the total possible points for Phase I will be invited to participate in Phase II as a finalist. Thus, this case only involves whether or not Petitioner's proposal should be evaluated in Phase I. Section 2.1 of the ITN specifies that the Department has established certain mandatory requirements which must be included as part of any proposal and that the use of the words "shall", "must", or "will" in the ITN indicates a mandatory requirement. The language of the ITN is clear in informing potential proposers that non-compliance with material requirements will have harsh consequences. Section 2.2 of the ITN provides in pertinent part: 2.2 NON-RESPONSIVE PROPOSALS, NON- RESPONSIBLE RESPONDENTS Proposals which do not meet all material requirements of this ITN or which fail to provide all required information, documents, or materials, or are conditional will be rejected as non-responsive. Material requirements of the ITN are those set forth as mandatory, or without which an adequate analysis and comparison of proposals is impossible, or those which affect the competitiveness of proposals or the cost to the State. The Lottery reserves the right to determine which proposals meet the material requirements of the ITN. The section of the ITN which is at issue in this controversy is Section 4.9 and is a material requirement. As amended,1/ it reads in pertinent part as follows: 4.9 Financial Statements Respondents and substantial subcontractors in all categories will be required to submit certified financial statements in conformity with generally accepted accounting principles for the last two years including an auditor's report for both years and any management letters that have been received, or Federal Income tax returns for the past two years if certified financial statements are unavailable. If financial statements are not yet completed for the most recently completed fiscal year, the entity must submit statements for the two (2) prior years and subsequently submit the most recently completed fiscal year statement immediately upon its issuance. If a Respondent does not have certified financial statements, or if applicable, Federal Income tax returns, as a result of a merger of other entities, each pre-merger entity must submit certified financial statements, or if applicable, Federal Income tax returns, for the two most recent years. Certified financial statements or, if applicable, Federal Income Tax returns for the Respondent that are available must be submitted with its proposal, and any that become available during the procurement process must be submitted immediately upon issuance. Certified financial statements must be the result of an audit of the entity's records in accordance with generally accepted auditing standards by a certified public accountant (CPA). The financial statements must include balance sheets, income statements, statements of cash flows, statements of retained earnings, and notes to the financial statements for both years. Respondents or substantial subcontractors who are CMBE's may provide for the two (2) years most recently completed, the information provided to become a certified minority business enterprise (CMBE) including the supporting documentation used to arrive at the financial information. If the CMBE has not been a CMBE for two (2) years, it must provide the information submitted with its current CMBE application and similar information for the preceding year, as well as any other documentation which may substantiate the CMBE's financial responsibility. If a Respondent submits a consolidated financial statement of its parent corporation, the parent corporation must serve as financial guarantor of Respondent. Parent corporations that serve as financial guarantors of the subsidiary firms shall be held accountable for all terms and conditions of the ITN and resulting Contract and shall execute the Contract as guarantor. The Lottery shall hold all firms jointly and severally responsible for carrying out all activities required by the Contract. * * * Financial statements must be submitted with Respondents' proposals. There is nothing in the record to indicate that Petitioner challenged the terms of Section 4.9 of the ITN as being too restrictive at a time it could have done so. David Faulkenberry, Director of Finance and Budget for the Department, was responsible for determining whether or not proposals were in compliance with Section 4.9 of the ITN. He analyzed each submittal received to determine whether the proposer achieved compliance through any of the methods set forth in Section 4.9 of the ITN. When initially reviewing Petitioner's proposal, he assumed that Petitioner had been the product of a merger and applied the language of the second paragraph of Section 4.9. Petitioner was found to be non-responsive because neither the certified financial statements or federal income tax returns of pre-merger entities had been submitted. This conclusion resulted in the Department's posting of the Notice of Responsiveness and Responsibility that Petitioner was non- responsive because, "financial information for Publicis USA Holdings, Inc. was not provided (Sec.4.9)". After the posting of the Notice of Responsiveness and Responsibility, Mr. Faulkenberry became aware that Petitioner was not the product of a merger. As a result, Mr. Faulkenberry then reviewed the financial information submitted by Petitioner to determine whether it was responsive to Section 4.9. He reviewed the submission of Petitioner in light of each avenue of compliance provided in Section 4.9 of the ITN and determined that the proposal was non-responsive: Q As a result of that understanding, did you go back and review the financial information submitted by Publicis to determine whether indeed it was responsive to Section 4.9? A Yes. I looked at what they submitted and examined each of the avenues in Section 4.9 that a respondent could take. And, again, they did not submit--if you look at route 1, the respondent could submit certified financial statements, or, if they--those aren't available, federal income tax returns. They did not do that. So they were not--they did not pass that test. The next test was the merger outlet. We now understand that it was not a merger, so that outlet was closed. We knew they weren't a CMBE contractor respondent, so that paragraph did not apply. And then the last outlet was a respondent could have their parent submit consolidated financial statements. We did not receive consolidated financial statements of the parent, so that outlet or avenue was not met. And based on those outlets they, again, were found non-responsive. The information submitted by Petitioner in response to Section 4.9 of the ITN did not meet any of the avenues specified in that section. The Department applied Section 4.9 of the ITN to all proposers in the same manner as it did to Petitioner.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law set forth herein, it is RECOMMENDED: That the Department of the Lottery enter a final order dismissing Petitioner's protest. DONE AND ENTERED this 18th day of October, 2002, in Tallahassee, Leon County, Florida. BARBARA J. STAROS Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 18th day of October, 2002.
