Findings Of Fact Respondent, Department of Banking and Finance, is the state agency charged with the administration and enforcement of Chapter 517, F.S., the Florida Securities and Investor Protection Act, and the rules promulgated thereunder. On March 11, 1991, Petitioners submitted a Form BD, Uniform Application for Broker-Dealer Registration, seeking registration as a broker/dealer for Powell & Satterfield, Inc., in Florida. Petitioners' application freely disclosed that it had been the subject of at least five administrative orders issued by the National Association of Securities Dealers (NASD) for violations of the NASD Rules of Fair Practice, and one administrative order issued by the State of Arkansas Securities Department for violations of Arkansas state securities law. On or before March 14, 1991, the agency had a printout from the Central Registration Depository of NASD summarizing the corporate Petitioner's disciplinary history with it. On the basis of that printout alone, Respondent agency would have felt justified in denying P&S' application for Florida licensure. However, the agency has uniformly required certified copies of prior discipline matters before reaching its final decision when there is a possibility that an application will be denied for disciplinary history and the applicant gives no indication that the application will be withdrawn. Therefore, by letter dated April 10, 1991, Respondent requested that Powell and Satterfield, Inc. obtain certified copies of the disciplinary actions taken against the firm. On May 3, 1991, NASD notified Respondent that it does not certify documents, so the Department excused Petitioner's submitting certified copies. Therefore, all of the documentation requested by the April 10, 1991 deficiency letter was received by May 28, 1991 except a certified copy of the Arkansas order which was not submitted until June 10, 1991. On June 10, 1991, Respondent received the last certified document, the 1988 Arkansas Consent Order, as requested by the aforementioned April 10, 1991 letter. Respondent's receipt of the 1988 Arkansas Consent Order began the 90 day processing period of the application pursuant to Section 120.60, F.S., making the 90th day for action on Petitioners' application September 6, 1991. On September 6, 1991, Respondent denied Petitioners' application for registration as a broker/dealer based upon the Respondent's determination that the five regulatory actions taken by the NASD and one disciplinary action taken by the State of Arkansas against the firm and the officers, owners, and directors of the firm constituted prima facie evidence of unworthiness to transact the business of a broker/dealer. In doing so, the agency interpreted and relied on Section 517.161(1)(h) and (4) F.S. and Rule 3E-600.011(2), F.A.C. Respondent also denied Petitioner, Michael L. Tognetti's application for registration as an associated person/principal. In so doing, the agency interpreted and relied on Section 517.161(1)(h) and (3) F.S. The National Association of Securities Dealers (NASD) is a national securities association. The NASD is registered with the federal Securities and Exchange Commission (SEC) as a national securities association pursuant to Section 15A of the Securities Exchange Act of 1934. Under the Maloney Act (Section 15A of the SEC Act of 1934), the NASD is required to promulgate and enforce rules, including the Rules of Fair Practice. The NASD's Rules of Fair Practice are promulgated and adopted pursuant to the Securities and Exchange Act of 1934. The 1934 SEC Act provides that the SEC may review any disciplinary action imposed by the NASD, may abrogate any rule of the NASD, disapprove any change in the rules proposed by the NASD, and suspend or revoke its registration with the SEC if the NASD has failed to enforce compliance with its own rules. In its August 1986 Letter of Acceptance, Waiver, and Consent Number NEW-497-AWC of the District Business Conduct Committee for District 5 (NEW-497- AWC), the NASD found that Powell and Satterfield, Inc. (P&S), Satterfield, and John H. O'Donnell violated Article III, Section 1 of the Rules of Fair Practice. As a result of those findings, the NASD censured and fined P&S, Satterfield, and O'Donnell in the amount of $1,000.00, jointly and severally, in NEW-497-AWC. In NEW-497-AWC, the NASD's District Business Conduct Committee for District 5 found that for the month ending periods of December 31, 1984, P&S, acting through Satterfield and O'Donnell, in contravention of SEC Rule 15c3-1, engaged in a securities business when its net capital was below the required minimum as prescribed by said rule and that for the month ending period of July 31, 1985, P&S, acting through Satterfield and O'Donnell, in contravention of SEC Rule 15c3-1, engaged in a securities business when its net capital was below the required minimum as prescribed by said rule. The net capital violations on those occasions were caused by the requirement that physical delivery of large quantities of mortgage backed securities be made on the same day of the month. In some cases, due to the amount of paperwork, certain certificates were not timely delivered to P&S and consequently P&S could not timely deliver them to the customers. When this happened, P&S was required to reduce the value of the securities if the market value declined and to take an arbitrary reduction in value of 5% called a "haircut." By the time P&S realized the "haircuts" were causing a net capital problem, the securities in each case had been physically delivered and the problem was solved. The actual time period for which the firm was in violation of the minimum net capital requirement was the last three to five days of December 1984 and July 1985. P&S thereafter took steps to prevent a reoccurrence of similar net capital problems by becoming an introducing broker for whom a larger clearing corporation would carry its accounts and absorb any net capital reductions due to delayed deliveries. In its 1990 Letter of Acceptance, Waiver and Consent Number NEW-750-AWC (NEW-750-AWC), the NASD's District Business Conduct Committee for District 5 found that Petitioner corporation P&S, William W. Satterfield, Joseph A. Powell and Scott A. Welch violated Article III, Section 1 of the Rules of Fair Practice because Petitioner P&S' Annual Audit Report for the fiscal year ending June 30, 1989, was due on August 31, 1989, as required by SEC Rule 17a-5(d)(5), and P&S, acting through Satterfield and Welch, had filed P&S' Annual Audit Report late, on September 28, 1989, in contravention of SEC Rule 17a-5; because during the period from June 22, 1989 to on or about August 30, 1989, P&S did not enter on its books and records certain liabilities arising from a lawsuit against the firm that had settled on June 22, 1989, in violation of SEC Rule 17a-3; because on August 30, 1989, the independent auditors, Baird, Kurtz & Dobson, opined that payables totalling $34,000.00, representing legal fees from the aforesaid lawsuit needed to be identified on the firm's books and records as liabilities incurred by the firm; and because on June 30, 1989, July 31, 1989, and August 31, 1989, P&S, acting through Satterfield, Powell, and Welch, conducted a securities business while its net capital was below the minimum prescribed by SEC Rule 15c3-1. As a result of NEW-750-AWC's findings, the NASD censured and fined P&S, Satterfield, Powell, and Welch, in the amount of $5,000, jointly and severally. By way of further explanation, part of the resolution of NEW-750-AWC amounts to P&S, acting through Satterfield, Powell, and Welch having failed and/or neglected to file the corporate Annual Audit Report due on August 31, 1989 until it was late by 28 days on September 28, 1989. P&S had settled its lawsuit on June 22, 1989 but did not add its $34,000 legal fees paid therefor (for a total of $40,161.59) to its liabilities records until told to do so by independent auditors. All of this resulted in the corporation being below its prescribed net capital minimum for a period of time. P&S had initially relied on the early July 1989 advice of the same independent auditors, Baird, Kurtz & Dodson, to the effect that P&S should record the lawsuit liabilities of June 22, 1989 on the books of P&S' parent company. On August 30, 1989, Baird, Kurtz & Dodson changed its opinion and determined that the settlement liability should have been recorded on the books and records of P&S instead. This change in the independent auditors' opinion resulted in P&S' net capital violation, the failure to record violation, and the late filing (September 28, 1989) of P&S' annual report. In its August 1988 Letter of Acceptance, Waiver, and Consent Number NEW-601-AWC the NASD District Business Conduct Committee for District 5 (NEW- 601-AWC), found that P&S, Satterfield, and Michael W. Compton, Sr. had violated Sections 1 and 27 of the Rules of Fair Practice because from December 28, 1987, to April 13, 1988, Mr. Compton had acted as the qualifying Financial and Operations Principal for P&S without first requalifying under the terms of an NASD Offer of Settlement unassociated with any of the five NASD orders at issue here. Pursuant to that negotiated settlement, Mr. Compton had been required to re-qualify as a Financial and Operations Principal by passing the Series 27 examination before serving again as Registered Financial and Operations Principal. During the period of December 28, 1987 to April 13, 1988, Mr. Compton was not registered with NASD as a Financial and Operations Principal for P&S because he had not passed the required examination during the period specified in the prior agreement/order pertaining to him. The NASD consequently, found that from December 28, 1987 to April 13, 1988, P&S had a duty to supervise the activities of Mr. Compton and failed or neglected to adequately do so, allowing him to serve in a capacity for which he was not registered. For this, NASD only censured P&S and Satterfield, jointly and severally, in NEW-601-AWC. By way of further explaining the foregoing findings of the NASD, it is here found that Michael Compton began his employment with P&S as a registered financial principal. In December 1987, P&S was notified that Mr. Compton had been sanctioned by the NASD and was required to retake the financial principal examination. There was subsequent confusion as to what the NASD letter meant when it said Compton had to requalify before serving as financial principal again since he was already currently serving as financial principal for P&S. It is unrefuted that the firm relied on representations by Mr. Compton that upon his application to take the examination, the NASD had advised him that he was already qualified and could not take the examination and that he had ninety days to retake the test. As it later turned out, Mr. Compton should have taken and passed the examination in the specified time period. P&S relied on Mr. Compton's stating that he had relied on further information from NASD. In retrospect, P&S' and Satterfield's reliance was too trusting and constituted a lack of appropriate supervision, so they consented to the NASD order and accepted the relatively light penalty of censure. Given the firm's relationship with Mr. Compton, the reliance on him in this matter was not demonstrated to be unusual, conspiratorial, or deceptive. Also, nothing in NEW-601 indicates that Michael Compton violated any other rule while he acted as financial principal for P&S. At all times material, William Satterfield also was a qualified financial principal. No P&S customer suffered and no other irregularity arose because of Mr. Compton's situation, but because he had signed the monthly financial reports for the firm, the firm had "qualified" under his auspices, and thus the firm, P&S, was technically "unqualified" during this period of time. The foregoing was an offense more in the nature of "inadvertence" than "fraud." Once fully explained, it does not reflect upon P&S or Satterfield so as to render the corporation and its principals "unworthy" to transact security business. On December 28, 1988, the State of Arkansas, P&S, Satterfield, and Jack Shults Lewis, Jr., executed a Consent Order, Number 88-26-S, whereby P&S and Lewis were required to comply with certain sanctions and undertakings. This Arkansas Consent Order resulted from an examination of the books and records of P&S conducted by the staff of the Arkansas Securities Department. That examination revealed violations of Arkansas securities law. During a period from June 30, 1988 to October 31, 1988, agents for P&S recommended to, and executed on behalf of, a building and loan association customer seven transactions involving purchases of certain securities, namely, Federal National Mortgage Association (FNMA) interest-only stripped mortgage- backed securities and also zero coupon bonds issued by the Federal Home Loan Mortgage Corporation (FHLMC), Student Loan Marketing Association (SLMA), and FNMA. The building and loan customer had an approximate net worth of $2,909,000.00. The transactions effected by the agents of P&S for the building and loan customer reached totals ranging from approximately $3,600,000.00 to approximately $4,000,000.00 during the period from September 20, 1988 to October 31, 1988. From August 10, 1988 to October 31, 1988, agents of P&S executed transactions in which the customer's average equity in the account was $3,281,900.96, which was equal to 113% of the customer's net worth. The prices paid by the customer exceeded the current market price for the relevant securities by amounts ranging from 4.956% to 8.620%. Before entering into transactions with this customer, neither P&S, nor Satterfield, nor Lewis, nor any P&S agents obtained from the customer current financial statements. Before entering into transactions with the customer, neither P&S, nor Satterfield, nor Lewis, nor any P&S agents obtained a copy of corporate resolutions authorizing the customer's agent to enter into certain transactions on its behalf or indicating the investment goals of the customer, the type of account to be created (i.e., investment, trading, etc.), or the types of products authorized to be purchased. During this period, P&S, acting through Satterfield and Lewis, had a duty to properly supervise its agents, and the Consent Order found, among other things, that P&S, acting through Satterfield and Lewis, failed to take reasonable measures to properly supervise its agents. The Arkansas Consent Order required P&S to engage an independent consultant acceptable to the Arkansas Securities Commission to perform a compliance audit and make recommendations for the revision of compliance and supervisory policies. In compliance therewith, P&S engaged the law firm of Arnold, Grolmeyer & Haley as the independent consultant, which engagement was approved by the Arkansas Securities Commission. The audit was performed and a new compliance manual was ultimately generated by the consultant. The compliance manual established more formal compliance procedures within P&S and included the Arkansas Commissioners' markup guidelines in the front. In order to mitigate the excessive markup on the purchases, P&S did not charge the customers any commission or markup on the seven transactions even though an additional commission is usually charged on the sale. Jack Lewis was a registered principal and sales manager with P&S responsible for approving the securities transactions which were found to have excessive markups. He was permitted to resign from the firm at the end of 1988. Although questioning by Respondent's counsel at formal hearing suggested that this may have been on overly lenient reaction of P&S, the record evidence does not demonstrate any obligation of P&S to prosecute or discharge Lewis. On August 7, 1989, the District Business Conduct Committee for District 5 of the NASD filed Complaint Number NEW-712 against P&S, Satterfield, Powell, and others. On August 9, 1989, the District Business Conduct Committee for District 5 of the NASD filed Complaint Number NEW-713 against P&S, Satterfield, Powell, and others. NASD Complaint Numbers NEW-712 and NEW-713 were consolidated. In its February 1991 Decision and Order of Acceptance of Offer of Settlement for Complaint Numbers NEW-712 and NEW 713, also referred to in the record as "the February 1991 Decision," the NASD found that P&S violated Article III, Sections 1 and 4 of the Rules of Fair Practice in Complaint Number NEW-712; that Satterfield and Powell violated Article III, Sections 1 and 27 of the Rules of Fair Practice in Complaint Number NEW-712; and that P&S, Satterfield, and Powell violated Article III, Section 1 and 27 of the Rules of Fair Practice in Complaint Number NEW-713. However, the allegations of violations of named federal laws in both those complaints, which included allegations of fraud, were dismissed in that February 1991 Decision (See the Conclusions of Law). As a result of these findings, the NASD censured and fined P&S, Satterfield, Powell, and others in the amount of $25,000.00, jointly and severally. This consolidated February 1991 Decision was accepted by the NASD and was final on February 20, 1991. The foregoing violations of the Rules of Fair Practice involved executing approximately twelve (12) securities purchase and sale transactions at prices that included excessive markups or markdowns and selling certain government securities to customers through Allan M. Tucker and entering into repurchase agreements with those customers without recording those agreements or the effect of those agreements on the records of P&S and resulting in confirmations which did not disclose the repurchase agreement. Further, the securities were sold at prices not reasonably related to the current market price and were unsuitable for the customers. The State of Arkansas had previously reviewed all of the same transactions but the twelve markup violations found by the NASD included the seven found by the State of Arkansas plus five additional violations. (See, Findings of Fact 24-29 and 35) The markups on transactions 11 and 12 are not accurately represented or excessive because they represent only a portion of the entire transactions. These transactions were purchases of call options made in conjunction with the purchase of bonds. The total markup percentage on these transactions was actually less than one half of one percent. Alan M. Tucker a/k/a Matt Tucker came to work for P&S in 1974, did a good job, and worked his way up to becoming a part owner of the firm and supervisor of the trading and sales department. However, Matt Tucker began secretly purchasing securities through the firm without the knowledge of the other owners. When he lost money, he camouflaged his losses by "parking" the securities. "Parking," under certain conditions, is acceptable in the securities trade, but Mr. Tucker did not take any of the legitimate precautions. He "parked" the securities secretly with banks where his father-in-law, a college friend, and his wife's cousin were executives. Tucker sold the bonds to these banks at the firm's original cost, which was higher than market value, and promised to buy them back at the same price. In some cases, the agreement was oral and in other cases it was set forth in a one sentence letter, but Tucker never placed copies of the letters in the P&S correspondence files, so other firm members were unaware of what was going on. Thus, Tucker hid the losses incurred on the bonds and gave his customers a pretty good short term yield on their investments. However, after awhile, repurchase was out of the question because of the quantity of "parking" involved, and Tucker began to have his agreements called. From the evidence as a whole, it may be inferred that the close personal friends and in-laws whom Tucker drew into his net were careful to keep their dealings with Tucker clandestine, at least until Tucker's losses threatened to go sour and reflect on themselves and their financial institution employers as well as on Tucker. This situation, although not identical, is analogous to buying stocks on margin. Interestingly and aptly, the securities industry nicknames a repurchase agreement a "repo". When the first wave, as it were, of Tucker's repurchase agreements came to the attention of Joesph Powell and William Satterfield, P&S required Tucker to give up his supervisory position with P&S and to execute a note evidencing his debt to the firm for all losses incurred by the firm. The original plan was for Tucker to continue with P&S as a salesman. However, there were some securities still being held by a customer pursuant to even more repurchase agreements. These securities were discovered when Tucker attempted to repurchase the bonds and sell them to another customer. By the time this last transaction was discovered by P&S' principals, Matt Tucker had already left the office of the company. He never returned or made good his indebtedness. The information concerning the repurchase agreement transactions was initially provided by P&S principals to the SEC through an SEC examiner already present in P&S' office on routine matters. The SEC examiner reviewed the information, and the SEC took no direct action on its own initiative. P&S honored the repurchase agreements at a substantial monetary loss to the firm and its principals. Since the last administrative order against it, P&S has taken on new personnnel and has reorganized its procedures along preventive lines. Richard Torti is a director, Chairman of the Board, and Chief Executive Officer (C.E.O.) of the company. He has a Bachelors of Business Administration in investment and a Masters of Business Administration in finance from Memphis State University. He holds series five, seven, eight, twenty-four, fifty-two, and fifty-three registrations with the NASD and is registered in Arkansas. Mr. Torti has never been the subject of any regulatory action. Mr. Torti purchased forty percent (40%) of P&S' stock in August, 1990. Simultaneously, a voting trust of twelve percent (12%) of P&S stock was established with Mr. Torti as trustee, so that he has the right to vote fifty- two percent (52%) of the stock of P&S. Further, he has the right to appoint three (3) of the firm's five (5) directors. William Satterfield is president, director, manager of underwriting, and compliance officer for P&S. He graduated from Princeton University in 1956 with a Bachelors degree in economics. He has been licensed to sell securities since 1961. He currently holds a registration as a commodities representative, a general securities representative, a general securities principal, and a financial principal. He is currently registered in the State of Arkansas and has never been denied registration in any state or jurisdiction. William Satterfield was elected by NASD member firms to serve a three year term on the District 5 Business Conduct Committee in 1982 and served on the nominating committee during 1987. He also chaired a committee for the Arkansas Securities Commissioner which made recommendations for guidelines for markups on government agency securities. He has had an excellent reputation in the securities business both before and after his various administrative disciplines. Mr. Satterfield, Joseph Powell, and Scott Welch appear to be the last remaining firm members whose previous discipline records causes Respondent a current concern. Mr Satterfield is now supervised by Mr. Torti, the new C.E.O. of P&S. Mr. Satterfield was not supervised by anyone before Mr. Torti came to the firm. Joseph Powell has no corporate supervisory or management duties because of serious health problems. Mr. Scott Welch was hired in August 1988, as the financial operations principal for P&S. He is a CPA. He received his B.A. degree in accounting from the University of Arkansas and was employed by Price Waterhouse for four years and Frost & Company for two years before coming to work at P&S. Part of the reason Mr. Welch was hired was to shape up the internal controls of the company. Initially, he was requested to put in place a procedure to find out if there were any more Matt Tucker repurchase agreements (repos) outstanding. He sent out a positive confirmation letter to every customer of Matt Tucker verifying that they had no repurchase agreements and none were found. After completing the positive repurchase confirmation project, Mr. Welch evaluated the internal controls of P&S and determined that they were inadequate. He then put into effect a system whereby the head trader, the sales manager, and Mr. Satterfield would sign trade tickets. He also set up a computerized blotter system so that the management of the company could compare trades at any given time. Finally, he developed a checklist for the back office to use to evaluate trade tickets. Since the internal controls were completely put in place, there have been five regulatory examinations of P&S, four by the NASD and one by the State of Arkansas. Three of the NASD audits were full audits of sales practices and financial audits. One was a financial operations audit only. The Arkansas examination included both sales and operations audits. No actions were taken as a result of these audits (See Finding of Fact 50). The monthly and annual focus reports filed with the NASD and SEC show a trend toward increase of net capital. P&S' net capital in January of 1991 was $99,000. On December 31, 1991, the net capital was $385,000. The minimum net capital requirement for P&S is $25,000. Michael Tognetti is sales manager, Chief Operating Officer, and a director of P&S. He has been registered to sell securities since 1984. He holds a series three, seven (general sales), twenty-four (principal), fifty- three (MSRB principal), and sixty-three (Blue Sky) registrations in thirty-two states. He came to work with P&S in August, 1990, after all events giving rise to any administrative disciplinary order had occurred. No evidence of Mr. Tognetti's personal unworthiness to transact securities business, separate and apart from P&S, was demonstrated. When Richard Torti and Michael Tognetti came to the firm in August, 1990, there were 8 to 10 employees at P&S, but there are currently 100-120 employees at P&S. Mr. Torti formed a management team to review and strengthen policies and procedures in the firm. The firm has one supervisor to every ten or fifteen salesmen. Every order must be approved by a supervisor. The order must then be submitted to the trading manager for approval. Mr. Tognetti then reviews and signs every trade ticket. The compliance department reviews the trade blotter once a month. Scott Welch, Chief Financial Officer, also reviews the trade blotter once a month, reviewing each trade to determine if a trade is off market or if there is an excessive markup. Every three months, pursuant to the procedures manual, the supervisor reviews each account of his salesmen for activity and cross checks it with the objectives on the new account statement to make sure that no drastic changes in the type of investing has occurred. There have been three regulatory audits of P&S since August, 1990, two by the NASD and one by the Arkansas Securities Department and the exit interviews from those audits indicated that the company was operating satisfactorily (See Finding of Fact 44). P&S, as a broker-dealer, is regulated by all the states wherein it is registered, the NASD, and the SEC. The rules in the securities industry are so numerous and complex that if a broker-dealer is in the industry for any substantial length of time, some violations are likely to occur. Considering P&S' longevity and the lack of severity of the penalties imposed, the disciplinary history of P&S is considered a good history in the industry. P&S has an excellent reputation in the securities industry. The NASD had the option to suspend or revoke the registration of P&S in the cases which resulted in its five orders at issue but did not do so. P&S remains, and has consistently been, a member in good standing of the NASD. P&S was registered in Florida from September 1987, to December 31, 1989, and there were no actions taken against it or its principals by the State of Florida. P&S is currently registered in 33 states. Fourteen of those states have granted P&S registration since March 2, 1991, the last administrative order at issue in this case. Of those recent fourteen licensures granted, the states and dates of licensure are as follows: Alabama, March 13, 1991; New Jersey, April 8, 1991; Illinois, April 16, 1991; Michigan, April 23, 1991; Kansas, June 7, 1991; Mississippi, July 22, 1991; Connecticut, September 16, 1991; Kentucky, September 17, 1991; Massachusetts, December 19, 1991; Nevada, February 5, 1992; Alaska, February 11, 1992; Arizona, February 11, 1992; Iowa, February 11, 1991; and Wyoming, February 11, 1992.
Recommendation Upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the Department of Banking and Finance enter a final order Approving P&S as worthy and granting licensure; Approving Michael L. Trognetti as worthy and granting licensure; and Imposing on the licenses/registrations any special conditions the agency, in its discretion and expertise, deems appropriate to ensure that P&S' current internal system of checks and counterchecks, as expressed in its current manual or as expressed in an up-dated equivalent internal system of checks and balances, shall continue in full force and effect as long as P&S remains licensed in the State of Florida. DONE and ENTERED this 23rd day of June, 1992, in Tallahassee, Florida. ELLA JANE P. DAVIS Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 23rd day of June, 1992. APPENDIX TO RECOMMENDED ORDER The following constitute specific rulings pursuant to Section 120.59(2) F.S. upon the parties' respective proposed findings of fact (PFOF): Petitioners' PFOF Petitioners' proposed findings of fact begin on page 7, the material before that constitutes preliminary material and legal argument for which a ruling pursuant to Section 120.59(2) F.S. is not required. 1-2, 4, 20-31, 34-37 39-62 Accepted, but not necessarily adopted verbatim 3, 5, 8 Accepted as modified to more correctly reflect the record as a whole See FOF 4-5, 8-9. 6, 18-19 Rejected as subordinate, unnecessary, and cumulative to the facts as found. 7 Accepted that this is one reason given, but not the sole reason, and not accepted because not determinative by itself of any material issue. 9-10, 12-13 Rejected as immaterial for purposes of this de novo proceeding. 11 The first sentence is rejected as a conclusion of law; the second sentence is accepted as restated in FOF 31 upon authority of law. See conclusions of law. 14 Rejected as immaterial and misleading See FOF 10-14. 15-17 Rejected upon the record as a whole and those matters of which official recognition has been taken, and upon authority of the law cited in the recommended order; also, parts are subordinate, unnecessary, or cumulative 32-33 Accepted in part and rejected in part. What is rejected is restated in FOF 31 upon authority of law. See conclusions of law. 38 Sentence one is accepted; sentence two is rejected as immaterial. 63 Accepted in principal but rejected as stated because as stated it is a conclusion of law. Respondent's PFOF: 1-32, 53, Accepted, but not necessarily adopted verbatim 33-52, 54-56 Accepted as modified to more correctly reflect the record as a whole, to eliminate legal argument, and to eliminate subordinate, unnecessary, and cumulative material. COPIES FURNISHED: Edward A. Dougherty, Jr., Esquire Mang, Rett & Collette, P.A. 660 E. Jefferson Street P. O. Box 11127 Tallahassee, Florida 32302 Ashley Peacock Assisant General Counsel Office of the Comptroller Department of Banking and Finance Suite 1302, The Capitol Tallahassee, Florida 32399-0350 Honorable Gerald Lewis Comptroller, State of Florida The Capitol, Plaza Level Tallahassee, Florida 32399-0350 William G. Reeves, General Counsel Room 1302, The Capitol Tallahassee, Florida 32399-0350
Findings Of Fact In 1981, Barry Kandel, an employee of Allied Publishing Group, Inc., solicited Petitioners to purchase stock in Allied, a Florida Corporation. On May 1, 1981, Petitioners purchased one share of stock in Allied for $13,500. By mid-1982, Allied had gone out of business. Petitioners made unsuccessful demands for the return of their money on Brian E. Walker, the Secretary of Allied; on Thomas W. Kuncl, the President of Allied; and on Kandel. On November 19, 1984, Petitioners filed suit against Kandel, Kuncl, Walker, and Allied. The Civil Complaint filed in Case No. 84-6932 in the Circuit Court of the Fifteenth Judicial Circuit of Florida, in and for Palm Beach County, contained general allegations of fraud. On February 20, 1985, Petitioners obtained a default judgment against Allied only. No evidence was offered in this cause regarding the disposition of the litigation as to the individual defendants. The default judgment contains no factual determinations and does not specify a violation of either section 517.07 or section 517.301, Florida Statutes. Kandel currently resides in Fort Lauderdale, Florida, and Kuncl currently resides in the Gainesville, Florida, area. Kuncl was the last known person to have custody of and control over Allied's books and records. Petitioners filed a claim with Respondent, seeking reimbursement for $10,000 from the Securities Guaranty Fund, pursuant to sections 517.131 and 517.141, Florida Statutes. Their claim was denied by letter dated July 8, 1987, for failure to meet the statutory conditions. Neither Allied nor any individual associated with Allied who dealt with Petitioners was registered or licensed by the State of Florida pursuant to chapter 517, Florida Statutes, in any capacity. Petitioners did not cause a writ of execution to be issued against Allied nor the individuals associated with Allied. Petitioners did not attempt a reasonable search as to whether Allied possessed real or personal property or other assets which may be set off against a proposed claim to the Securities Guarantee Fund. Don Saxon, Director of the Division of Securities and Former Assistant Director, has been the only individual responsible for administering the Securities Guaranty Fund since 1983. The Department's interpretation of section 517.131(2), Florida Statutes, is that it requires a claimant to demonstrate findings of a violation of section 517.07 and/or section 517.301, Florida Statutes, by a licensed dealer, a licensed investment adviser or a licensed associated person. The Department's interpretation of section 517.131(3)(a), Florida Statutes, is that it requires a claimant to provide the Department with a certified copy of a judgment demonstrating a violation of section 517.07 and/or section 517.301, Florida Statutes. The Department's interpretation of section 517.131(3)(b), Florida Statutes, is that it requires a claimant to submit a copy of the writ of execution to the Department. During Saxon's tenure in administering the Securities Guaranty Fund, the Department has not waived any of the statutory requirements for claiming monies from the Fund. Section 517.131 and section 517.141, Florida Statutes, were enacted in 1978 and have remained virtually intact. The legislature did substitute the term "associated person" in place of the term "salesman" in section 517.131(2), Florida Statutes, without comment, although the order of licensed entities in that section was altered. The legislative intent behind the establishment of section 517.131, Florida Statutes, was to eliminate the bonding requirement for "individuals registered to be broker/dealers or investment advisers ... substituting therefor, a 'Security Guaranty Fund' to be funded through an assessment imposed upon them." The legislative intent behind section 517.141, Florida Statutes, was that disbursement from the Securities Guaranty Fund would be made to any person suffering monetary damages as a result of "some violation by a registrant."
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is, RECOMMENDED that a Final Order be entered denying Petitioners' claim for payment from the Securities Guaranty Fund. DONE and RECOMMENDED this 25th day of April, 1988, at Tallahassee, Florida. LINDA M. RIGOT, Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of April, 1988. COPIES FURNISHED: Gerald Lewis, Comptroller Department of Banking and Finance The Capitol Tallahassee, Florida 32399-0350 Charles E. Scarlett, Esquire Office of the Comptroller Suite 1302, The Capitol Tallahassee, Florida 32399-0350 Richard O. Breithart, Esquire 818 U.S. Highway One, Suite 8 North Palm Beach, Florida 33408 Charles L. Stutts, Esquire Office of the Comptroller Department of Banking and Finance The Capitol, Plaza Level Tallahassee, Florida 32399-0350
The Issue At issue in this proceeding is whether Petitioner is entitled to registration as an associated person of Brookstone Securities, Inc. ("Brookstone"), either by virtue of the default provision of Subsection 120.60(1), Florida Statutes, or by virtue of the substantive merits of his application.
Findings Of Fact Based on the oral and documentary evidence adduced at the final hearing and the entire record in this proceeding, the following findings of fact are made: The Parties The Office of Financial Regulation, a part of the Financial Services Commission, is the state agency charged with regulation of the securities industry. § 20.121(3)(a)2., Fla. Stat. Chapter 517, Florida Statutes, is the "Florida Securities and Investor Protection Act." § 517.011, Fla. Stat. Pursuant to Section 517.012, Florida Statutes, OFR is responsible for the registration of persons associated with broker-dealers. Victor Alan Lessinger is 62 years old. He has been involved in the securities industry since 1976. He was registered with the State of Florida as an associated person from April 23, 1991, until October 31, 1994. He was later registered as an associated person with the State of Florida from June 5, 1997, through April 29, 2006, with the exception of the eight-day period between January 23, 2002, and February 1, 2002. This eight-day lapse was caused by Mr. Lessinger's changing jobs, which necessitated that he re-apply for registration. An associated person must be registered through the broker-dealer that employs him. From February 2005 until April 2006, Mr. Lessinger was a broker associated with Archer Alexander Securities Corporation, and was registered as such with the State of Florida. Archer Alexander went out of business in April 2006, and Mr. Lessinger accepted an offer of employment from Brookstone, a company based in Lakeland. Mr. Lessinger was to work as an associated person in Brookstone's Coral Springs branch. The Application Process and the Notice On July 5, 2007, Mr. Lessinger submitted his application for registration as an associated person with Brookstone to OFR through Web CRD, the central licensing and registration system for the U.S. securities industry operated by the Financial Industry Regulatory Authority ("FINRA").2 Mr. Lessinger's initial application for registration as an associated person with Brookstone disclosed the following disciplinary events: a 1993 Consent Order that Mr. Lessinger entered into with the relevant authorities in the State of Maine; a 1998 "Division Order" from the State of Ohio denying Mr. Lessinger's application for a securities salesman license; a 2000 letter of acceptance, waiver and consent ("AWC") issued by the National Association of Securities Dealers ("NASD"), the predecessor to FINRA; a 2002 arbitration award issued by NASD Dispute Resolution, Inc.; and two related actions taken by the Securities and Exchange Commission ("SEC") in 2005. The 2000 AWC letter, the 2002 arbitration award, and the 2005 SEC actions all related to incidents and/or transactions that occurred in 1999. By letter dated July 18, 2007, Justin Mills, a financial analyst for OFR, notified Mr. Lessinger as follows: In order for the application to be deemed complete, it will be necessary to provide this office with a complete response to the following [sic] a copy of the complete Form U-4, as amended, and all documents pertaining to disciplinary matters, whether disclosable on the U-4 or not.[3] Documentation submitted must be certified by the issuer of such documents. Additionally, explain in detail the status of each pending action, and for each final action, summarize the action and the disposition. Specifically, but not limited to the following: * Certified copies of any regulatory actions by any state or federal regulator, or any self-regulatory organization, including but not limited to, the complaint, answer or reply, and final order or sanction. Certified documentation must be certified by the appropriate agency. Also, provide a brief narrative describing the causes that lead [sic] to the actions. Pursuant to Rule 69W-301.002(3), Florida Administrative Code, additional information shall be submitted within sixty (60) days after a request has been made by the Office. Failure to provide all the information may result in the application being denied. Mr. Lessinger responded with a package of documents and a cover letter dated July 23, 2007. OFR received the package and letter from Mr. Lessinger on July 24, 2007. On October 9, 2007, Ryan Stokes, a financial analyst supervisor for OFR, sent an e-mail to David Locy, then the executive vice president and compliance officer of Brookstone. Mr. Stokes requested the following documents in order to complete Mr. Lessinger's application: Certified copies of the complaint, Lessinger's answer/reply, and resolution for the actions taken by the SEC, State of Maine, State of Pennsylvania,[4] NASD, and State of Ohio. Certified copies of the statement of claim, Lessinger's response, settlement/arbitration panel's decision, and proof of payment of any awards/settlement for the arbitrations filed by Joseph Orlando and Muriel Hecht. Certified copy of the petition for bankruptcy and a discharge of bankruptcy. If any of the documents are unavailable due to age, a statement from the appropriate regulator/court to that effect, will suffice. At the hearing, Pamela Epting, chief of OFR's regulatory review bureau, testified that an e-mail such as that sent by Mr. Stokes is not OFR's usual method of doing business. OFR typically sends only an initial deficiency letter such as that sent by Mr. Mills on July 18, 2007. Richard White, director of OFR's division of securities, described Mr. Stokes' e-mail as a "courtesy" that provided Mr. Lessinger "with a reminder and greater detail as to what had not yet been provided." Mr. Lessinger responded with a package of documents and a cover letter dated November 5, 2007, which were received by OFR on November 6, 2007. The cover letter stated as follows, in relevant part: As requested, I am enclosing certified copies of all of the following: SEC, State of Maine (with additional prior correspondence), NASD. Joseph Orlando and Muriel Hecht (there were no payments made since Orlando was dismissed in its entirety with regard to me and Hecht was absolved as a result of my bankruptcy). Certified copy of the Petition for Bankruptcy and Discharge. I believe the State of Pennsylvania will be submitting directly to your office. I have not yet received the certification from the State of Ohio yet [sic]. I have enclosed the original Division Order which is signed and sealed by the Commissioner of Securities. If needed, I will forward the certification as soon as I receive the documents. . . . OFR did not respond in writing to Mr. Lessinger's November 5, 2007, submission. At some point in December 2007 or January 2008, Ms. Epting spoke to Mr. Locy by telephone. She told Mr. Locy that the agency intended to deny Mr. Lessinger's application and offered him an opportunity to withdraw the application in lieu of outright denial. In an e-mail to Ms. Epting dated February 4, 2008, Alan Wolper, attorney for Brookstone and Mr. Lessinger, wrote that his clients had decided not to withdraw the application, "notwithstanding the fact that you have indicated OFR's intent to deny that application." Mr. Wolper requested that Ms. Epting send a written notice of intent to deny, stating the particular grounds for the denial of Mr. Lessinger's application. At some point after writing the February 4, 2008, e-mail, Mr. Wolper wrote a letter to OFR asserting that Mr. Lessinger's registration should be deemed granted by default due to CFR's failure either to notify Mr. Lessinger of the application's incompleteness within 30 days of his November 5, 2007, submission or to act upon the completed application within 90 days of the November 5, 2007, submission, as required by Subsection 120.60(1), Florida Statutes. In a letter dated April 23, 2008, OFR assistant general counsel Jennifer Hrdlicka responded to Mr. Wolper with the assertion that the statutory default provision had not been triggered because Mr. Lessinger had yet to submit a completed application: Mr. Lessinger's application is still deficient. He has not provided to the Office the information requested in its July 18, 2007, letter to him. Still missing from his application are: Certified copies of the complaint, Lessinger's answer/reply, and resolution for the actions taken by the SEC; Certified copies of the resolution for the actions taken by the State of Ohio; and Certified copies of the statement of claim, Lessinger's response, settlement/arbitration panel's decision, and proof of payment of any awards/settlement for the arbitrations filed by Joseph Orlando. Mr. Lessinger did submit a certified copy of the Notice of Intent to Deny Application for Securities Salesman License from the State of Ohio, dated July 9, 1997. However, he did not submit any document, certified or not, regarding the resolution from that Notice of Intent of July 9, 1997, such as a Final Order. * * * Mr. Lessinger was timely notified of deficiencies in his application on July 18, 2007, thirteen days after submittal of his application and well within the thirty (30) day period set by the Administrative Procedures [sic] Act and the Office's corresponding Rule [Florida Administrative Code Rule 69W-301.002]. Your interpretation of Florida's Administrative Procedure Act and the Office's Rules contemplates an additional thirty day time period from Mr. Lessinger's November 6, 2007, submittal of additional information; this is a mistaken interpretation of Florida statutes. Mr. Lessinger's application was not considered complete on December 5, 2007. In fact, he has not yet delivered to the Office all requested information and so his application is currently not considered complete. His application will not be considered complete until such time as all requested information is received by the Office. . . . (Emphasis added.) On April 30, 2008, Mr. Lessinger submitted to Ms. Epting an affidavit attesting that the additional documents requested by Mr. Stokes on October 9, 2007, had been submitted to the agency on November 6, 2007. At the hearing, OFR continued to assert that Mr. Lessinger's November 6, 2007, submission did not contain all the information requested by Mr. Stokes. OFR submitted into evidence a sheaf of documents purporting to be Mr. Lessinger's November 6, 2007, submission. The documents had been unstapled for copying and re-stapled, and bore no consistent marks of date stamping or numbering that would allow a fact finder to conclude with confidence that the documents had been maintained in the form they were submitted by Mr. Lessinger. Ms. Epting could testify only as to OFR's general practice in maintaining its files, not as to the manner in which this particular file had been maintained. At the hearing, Mr. Lessinger stated under oath that he had provided OFR with every document it had asked for with the exception of the final order in the 1998 Ohio denial of his application. Mr. Lessinger conceded that he had only provided OFR with the notice of intent to deny in that case. Ms. Epting testified that OFR obtained the final order directly from the State of Ohio some time during the Spring of 2008. The only other item that OFR asserted was missing from the November 6, 2007, submission was a certified copy of the SEC's 2005 order barring Mr. Lessinger from association in a supervisory capacity with any broker or dealer for a period of two years. Mr. Lessinger's November 6, 2007, submission contained what appeared to be a non-certified copy of the order. The faint image of a seal is visible on the last page, with Mr. Lessinger's notation: "Raised seal unable to make darker." Ms. Epting testified that Mr. Lessinger submitted a certified copy of the order some time around May 2008. It is found that Mr. Lessinger submitted a certified copy of the SEC's 2005 order with his November 6, 2007, submission. On May 5, 2008, OFR issued the Notice to Mr. Lessinger. In the Notice, OFR identified a third "completeness" issue that Ms. Epting testified she discovered only during her inquiry to the State of Ohio regarding the final order in the 1998 denial. As to this issue, the Notice recited as follows under heading, "Statement of Facts": On October 3, 2007, the State of Ohio, Department of Commerce, Division of Securities, issued a Notice of Intent to Deny Application for Securities Salesperson License for Lessinger, Order No. 07-387. On April 7, 2008, the State of Ohio, Division of Securities issued a Final Order against Lessinger Denying the Application for a Securities Salesperson License, Order No. 08-052. The Final Order states that on October 15, 2007, Lessinger requested an adjudicative hearing of the Notice of Intent to Deny; the Final Order further states that such a hearing was held on December 18, 2007, and on January 23, 2008, the Hearing Examiners Report and Recommendation was issued, upholding the Division's Notice of Intent. The Final Order states that the Division found that Lessinger was not of "good business repute" as that term is used in Ohio Revised Code 1707.19(A)(1) and Ohio Administrative Code 1301:6-3-19(D)(2),(6),(7),(9), and (D)(11) . . ." Notice was not given to the Office of these administrative actions by the State of Ohio. Lessinger did not update his Form U-4 until April 23, 2008, and subsequent to the Office's inquiry as to this matter; further, his update to his Form U-4 is misleading in that it cites that the date of initiation of this matter was April 7, 2008. Under the heading "Conclusions of Law," the Notice states that Mr. Lessinger's failure to update his Form U-4 constitutes a violation of Florida Administrative Code Rule 69W-600.002(1)(c)5 and therefore a basis for denial pursuant to Subsection 517.161(1)(a), Florida Statutes, which provides that violation of any rule promulgated pursuant to Chapter 517 constitutes grounds for denial of registration. The parties agreed that Mr. Lessinger's application file at OFR was complete at the time of the hearing. The Notice cited additional grounds for denial based on Subsections 517.161(1)(h) and (m), Florida Statutes, which provide: (1) Registration under s. 517.12 may be denied or any registration granted may be revoked, restricted, or suspended by the office if the office determines that such applicant or registrant: * * * (h) Has demonstrated unworthiness to transact the business of dealer, investment adviser, or associated person; * * * (m) Has been the subject of any decision, finding, injunction, suspension, prohibition, revocation, denial, judgment, or administrative order by any court of competent jurisdiction, administrative law judge, or by any state or federal agency, national securities, commodities, or option exchange, or national securities, commodities, or option association, involving a violation of any federal or state securities or commodities law or any rule or regulation promulgated thereunder, or any rule or regulation of any national securities, commodities, or options exchange or national securities, commodities, or options association, or has been the subject of any injunction or adverse administrative order by a state or federal agency regulating banking, insurance, finance or small loan companies, real estate, mortgage brokers or lenders, money transmitters, or other related or similar industries. For purposes of this subsection, the office may not deny registration to any applicant who has been continuously registered with the office for 5 years from the entry of such decision, finding, injunction, suspension, prohibition, revocation, denial, judgment, or administrative order provided such decision, finding, injunction, suspension, prohibition, revocation, denial, judgment, or administrative order has been timely reported to the office pursuant to the commission's rules. . . . As the basis for OFR's conclusions that Mr. Lessinger had demonstrated "unworthiness" as described in Subsection 517.161(1)(h), Florida Statutes, and that Mr. Lessinger was the subject of decisions, findings, injunctions and/or prohibitions as set forth in Subsection 517.161(1)(m), Florida Statutes, the Notice cited the 1993 Maine consent order, the 1998 Ohio final order denying Mr. Lessinger's application for a securities salesman license, the 2000 AWC letter from NASD, the 2002 arbitration award issued by NASD Dispute Resolution, Inc., the 2005 SEC actions, and the April 7, 2008, Ohio final order denying Mr. Lessinger's application for a salesperson's license. Petitioner's Disciplinary History During his career, Mr. Lessinger has been employed in various capacities: as a broker/registered representative, a supervisor, and a general securities principal. He has lived and worked in Florida since 1997. From November 1976 through October 1994, Mr. Lessinger was employed by First Investors Corporation ("First Investors") in New York, working his way up to senior vice president and director of the company. On December 20, 1993, Mr. Lessinger entered into a Consent Agreement with the Attorney General of the State of Maine, "for the sole purpose of effecting a settlement of the civil action against Lessinger," First Investors and other individual defendants commenced by the Attorney General and the Maine Securities Administrator in 1991. Mr. Lessinger did not admit or deny that his conduct violated the Revised Maine Securities Act. The Consent Agreement does not provide the details of the grounds for the civil action. Mr. Lessinger testified that First Investors sold mutual funds, one of which was a junk bond fund that lost a great deal of money for investors in the late 1980s. First Investors had an office in Maine, and the Attorney General instituted a civil action against First Investors and certain supervisory personnel, including Mr. Lessinger, for failure to disclose to investors the risk inherent in these bond funds. Mr. Lessinger had no customers in Maine and did not personally sell the junk bond fund to any of his clients. Under the Consent Agreement, Mr. Lessinger agreed not to apply for a license as a sales representative in Maine for a period of one year. Mr. Lessinger also agreed to pay the sum of $50,000 to the State of Maine; First Investors paid the money for Mr. Lessinger. He eventually reapplied and was approved as a sales representative in the State of Maine. In mid-1997, Mr. Lessinger moved from New York to Boca Raton, becoming president of Preferred Securities Group, Inc. ("Preferred"). Mr. Lessinger was obliged to seek licensure in the states in which Preferred had brokers, which included Ohio. In March 1998, the State of Ohio, Department of Commerce, Division of Securities issued a "Division Order" denying Mr. Lessinger's application for securities salesman license. The Division Order found that Mr. Lessinger was not of "good business repute" under the Ohio statutory and rule provisions named in the quotation portion of Finding of Fact 20, supra. The only factual basis stated for the Division Order's "good business repute" finding was the 1993 Consent Agreement with the State of Maine. On November 16, 2000, Mr. Lessinger entered into the NASD AWC letter along with Preferred and Kenneth Hynd, Preferred's financial operations principal ("FINOP"). The recipients of the AWC letter agreed that the letter would become part of their permanent disciplinary record and may be considered in any future actions brought by NASD against them. They also agreed to the following: We may not take any action or make or permit to be made any public statement, including in regulatory filings or otherwise, denying, directly or indirectly, any allegation in this AWC or create the impression that the AWC is without factual basis. Nothing in this provision affects our testimonial obligations or right to take legal positions in litigation in which the NASD is not a party. Only one of the allegations that prompted the AWC letter directly involved Mr. Lessinger. Without admitting or denying the alleged violation, Mr. Lessinger and Preferred consented to the entry of the following finding by NASD Regulation, Inc.: During the period from about March 22, 1999, until about April 21, 1999, Respondent [Preferred], acting through Respondent Lessinger, allowed an inactive registered representative to effect three securities transactions for customers, in violation of NASD Membership and Registration Rule 1120 and Conduct Rule 2110. Mr. Lessinger and Preferred also consented to the entry of a $3,000 fine, imposed jointly and severally. Mr. Lessinger paid the fine. Mr. Lessinger testified that the representative who effected the improper transactions was in Preferred's Pompano Beach branch office, which was open only from March to June 1999. The manager on premises had not notified Mr. Lessinger that a registered representative in the office was deemed "inactive" for failure to complete mandatory continuing education. On April 30, 2002, a NASD Dispute Resolution, Inc.6 arbitration panel issued an award against Mr. Lessinger in a case that had been filed by a former Preferred customer against Preferred, Mr. Lessinger, and three other individuals associated with the firm, including the owner, Anthony Rotonde, and two brokers. The initial statement of claim in the matter was filed in 1999. The claims included misrepresentation, unsuitability, breach of fiduciary duty, failure to supervise, violations of Section 517.301, Florida Statutes, and common law fraud and negligence. Mr. Lessinger was not the broker of record for the complaining customer and never had anything directly to do with her account. He did not know her. She had been a client of the two brokers for several years. As president of the company, Mr. Lessinger was ultimately responsible for supervision of the brokers, though he was not their direct supervisor. Preferred, Mr. Rotonde, and Mr. Lessinger were found jointly and severally liable on the claims of suitability and failure to supervise and were required to pay damages of $42,294.90, plus interest, costs, and attorneys' fees. The liability for attorneys' fees was expressly based on Sections 517.301 and 517.211, Florida Statutes. Section 517.301, Florida Statutes, generally prohibits fraud and deception in connection with the rendering of investment advice or in connection with securities transactions. Section 517.211, Florida Statutes, sets forth the remedies available for unlawful sales, including those in violation of Section 517.301, Florida Statutes. Subsection 517.211(6), Florida Statutes, provides for attorneys' fees to the prevailing party unless the court finds that the award of such fees would be unjust. After the arbitration award, Preferred went out of business. Mr. Rotonde was a non-licensed owner and simply walked away from the matter. Thus, Mr. Lessinger was left on the hook for the entire arbitration award. He was unable to pay it, and was forced to declare bankruptcy. In April 2004, Mr. Lessinger was named in a civil action filed by the SEC in the United States District Court for the Southern District of Florida. The SEC alleged that Preferred's Pompano Beach office was opened in March 1999 to operate as a boiler room for a "pump and dump" operation involving a penny stock, Orex Gold Mines Corporation ("Orex"). Orex claimed to be in the business of extracting gold from iron ore by means of an environmentally safe process. The SEC alleged that Orex was in fact a shell corporation owned by a "recidivist securities law violator and disbarred attorney." Though its promotional video, literature, and website touted Orex as an active, established company with gold mines, employees, and a revolutionary gold extraction process, Orex in fact owned no mines or mining equipment and had never commercially tested its claimed extraction process. As to Mr. Lessinger, the SEC's complaint alleged as follows: According to Preferred's written supervisory procedures, the form prohibited the solicitation of "penny stocks" as defined under Exchange Act Rule 3a51-1, and restricted the purchase of penny stocks unless it received an unsolicited letter, signed by the investor, requesting to purchase a particular penny stock. Despite the firm's prohibition against soliciting transactions in penny stocks, Lessinger authorized the Pompano Beach branch office's request to solicit transactions in Orex. Prior to authorizing the firm's solicitation of Orex, Lessinger simply reviewed the Orex brochure, the Orex private placement memo, and an Orex press release. He did not conduct any independent research or assessment regarding Orex's officers, assets, or prospects for success. Orex quickly accounted for a high percentage of the overall transactions conducted by Preferred's Pompano Beach branch. Although Lessinger retained responsibility for reviewing, authorizing, and approving customers' transactions in Orex stock, and although he was the senior official of Preferred and functioned as a compliance officer, he failed to exercise appropriate supervision and to take the necessary steps to ensure that Preferred, and the personnel operating out of Preferred's Pompano Beach branch in particular, complied with applicable procedures, securities laws and regulations in connection with transactions in Orex stock. The brokers in the Pompano Beach branch sold more than $3 million in Orex stock between March and July 1999 through fraudulent representations regarding the company, forgery of penny stock disclosure forms, bait and switch tactics, refusal to execute sell orders, or delaying sell orders until a buyer for the shares could be found. The stock ballooned to a value of $7.81 in late May 1999. By late July, it was trading for pennies per share. To his credit, Mr. Lessinger closed the Pompano Beach branch of Preferred after a site visit in June offered him a glimpse of the office's actual operations. However, had Mr. Lessinger showed more curiosity at the outset, or had he merely enforced the company policy against soliciting penny stock sales, the situation in Pompano Beach might never have developed. On September 7, 2005, the court entered final judgment as to Mr. Lessinger. He was permanently restrained and enjoined from: violating the fraud provisions of the Securities Exchange Act of 1934; violating the NASD Conduct Rule regarding supervision of the activities of registered representatives and associated persons; and participating in any offering involving penny stocks. He was also ordered to pay a civil penalty of $20,000. On September 23, 2005, the SEC also issued an Administrative Order making findings and imposing remedial sanctions in connection with the Orex matter. The order barred Mr. Lessinger from association in a supervisory capacity with any broker or dealer for two years, with a right to reapply at end of the two-year period. The SEC's Administrative Order left Mr. Lessinger free to continue to act as a registered representative. However, the two SEC actions rendered Mr. Lessinger statutorily disqualified from membership in the securities industry under FINRA rules. To remain active in the industry, Mr. Lessinger was required to go through the MC-400, or "Membership Continuance," process with FINRA. The Form MC-400 must be filed by a member firm on behalf of the disqualified person. In this case, Archer Alexander Securities, Mr. Lessinger's employer at the time of his disqualification, filed the MC-400 application on his behalf. However, Archer Alexander went out of business before the application could be considered. Mr. Lessinger was hired by Brookstone in April 2006. Brookstone filed a Form MC-400 with FINRA on Mr. Lessinger's behalf on May 15, 2006. Brookstone is owned by Antony Turbeville, a certified financial planner who has been licensed in the securities industry since 1987. Mr. Turbeville has never been the subject of disciplinary actions by the SEC, NASD, or the State of Florida. David Locy is currently the president of Brookstone. At the time Brookstone filed the MC-400 application for Mr. Lessinger, Mr. Locy was Brookstone's chief compliance officer. He has been a certified public accountant since 1974, licensed in the securities industry since 2003, and has never been the subject of regulatory or disciplinary action by any professional or licensing entity. Michael Classie is the branch manager and supervisor of Brookstone's Coral Springs office, where Mr. Lessinger works.7 He has been licensed to sell securities since 1995 and has never been the subject of disciplinary actions by the SEC, NASD, or the State of Florida. In its MC-400 application, Brookstone stated that Mr. Lessinger did not seek licensure as a supervisor or control person, and that Brookstone would not allow him to work in a supervisory capacity. Brookstone agreed that Mr. Lessinger would work only as a registered representative, and then only under highly controlled supervisory conditions. FINRA's Department of Member Regulation, which conducts the initial review of all MC-400 applications, recommended that Brookstone's application on behalf of Mr. Lessinger should be denied. By order dated December 13, 2006, following an evidentiary hearing, FINRA's National Adjudicatory Council ("NAC") disagreed with the recommendation of the Department of Member Regulation and granted the application, subject to approval by the SEC. The NAC's order provided as follows: After considering all of the facts, we approve Lessinger as a general securities representative with Brookstone, supervised by Classie and Locy, and subject to the following terms and conditions of employment: Classie and Locy will review, initial, and date all of Lessinger's order tickets on a daily basis; Classie will review all of Lessinger's incoming correspondence daily and will review all of Lessinger's outgoing correspondence prior to its being sent. Lessinger will print out a daily log of faxes from the fax machine for Classie to review; Classie and Locy will review every new account form for Lessinger and, if approved, sign such form; Classie will be in the office with Lessinger at least four times per week from 8:00 a.m. until 5:00 p.m. If Classie is not in the office, Lessinger will be prohibited from effecting trades on the computer and will, instead, call them in to Locy for approval; Locy will make random unannounced office visits to Lessinger's home office at least once during each calendar quarter; Brookstone will amend its written supervisory procedures to state that Classie is the primary responsible supervisor for Lessinger, and that Locy is the backup supervisor; Lessinger will provide a list of all sales contacts to Classie, including the nature of the contacts, on a daily basis; Classie will review Lessinger's written sales contacts and investigate any irregular activity; Locy will conduct five random telephone calls per quarter to Lessinger's customers to verify information or ascertain the customers' level of satisifaction; Lessinger will not participate in any manner, directly or indirectly, in the purchase, sale, recommendation, or solicitation of penny stocks (this is defined in the Court Judgment as "any equity security that has a price of less than five dollars, except as provided in Rule 3a5-1 under the Exchange Act [17 C.F.R. 240.3a51-1]"); Classie must certify quarterly (March 31st, June 30th, September 30th, and December 31st) to the Compliance Department that Lessinger and Classie are in compliance with all of the above conditions of heightened supervision; and For the duration of Lessinger's statutory disqualification, Brookstone must obtain prior approval from Member Regulation if it wishes to change Lessinger's responsible supervisor from Classie to another person. On June 29, 2007, the SEC issued a letter approving the NAC's decision to permit Mr. Lessinger to register with Brookstone as a registered representative under the heightened supervisory restrictions set out in the NAC's order. Brookstone and Mr. Lessinger have agreed that they will abide by the same list of heightened supervisory restrictions should the State of Florida approve the application at issue in this proceeding.8 As noted at Findings of Fact 20 and 21, supra, the Notice alleged that Mr. Lessinger failed to timely update his Form U-4 to disclose receipt of a Notice of Intent to Deny Application for Securities Salesperson from the State of Ohio, Department of Commerce, Division of Securities ("Ohio Notice") dated October 5, 2007. The Ohio Notice stated that on July 9, 2007, Mr. Lessinger had applied for a securities salesperson license via submission of his Form U-4, and that his application disclosed the September 23, 2005, SEC order, the April 2004 filing of the SEC complaint in the United States District Court for the Southern District of Florida, the 2000 NASD AWC letter, the NASD Dispute Resolution arbitration award, the 1998 Ohio application denial, and the Maine Consent Agreement. Based on these disclosures, the Ohio Division of Securities alleged that Mr. Lessinger was not of "good business repute" according to Ohio statutes and rules, and stated its intent to issue an order denying Mr. Lessinger's application for a salesperson's license. The Ohio Notice provided that Mr. Lessinger had 30 days in which to request an administrative hearing contesting the agency's intended denial of his application. Mr. Lessinger timely filed the appropriate documents contesting the Ohio Notice and requesting an evidentiary hearing. Immediately after receiving the Ohio Notice, Mr. Lessinger brought it to the attention of Mr. Locy, then Brookstone's chief compliance officer, in order to determine whether his Form U-4 should be amended. Only Brookstone, as the broker/dealer employing Mr. Lessinger, had authority to amend his Form U-4. Mr. Lessinger did not have independent access to the Web CRD database and thus had no ability to amend the document on his own. Mr. Locy considered the situation and decided that the Ohio Notice did not require an amendment to Mr. Lessinger's Form U-4. Because Mr. Lessinger had appealed the intended denial of his Ohio application, Mr. Locy concluded that that matter was not reportable until the Ohio action ripened into a final order. Mr. Lessinger deferred to Mr. Locy's greater expertise regarding compliance issues. Though Mr. Lessinger could not amend his Form U-4, there was no obstacle to Mr. Lessinger's directly informing OFR of the Ohio Notice. However, there was also no evidence that Mr. Lessinger attempted to conceal the existence of the Ohio Notice, or was anything other than forthright in his dealings with employers and regulatory authorities. The credible evidence established that he simply relied on the opinion of Mr. Locy. The State of Ohio issued a final order denying Mr. Lessinger's application on April 7, 2008. Upon receipt of the final order, Mr. Lessinger promptly notified his employer, and Brookstone updated Mr. Lessinger's Form U-4 on April 23, 2008, to reflect the actions of the Ohio regulators. At the hearing, Mr. Lessinger emphasized that he seeks only to act as a registered representative. Most of his clients are retirees invested in fixed-income mutual funds. They are conservative to moderate in their risk tolerance. Mr. Lessinger does not trade in their accounts on margin, and does not have discretion to make trades without express client authorization. Mr. Lessinger gets new customers through referrals. He makes no cold calls to prospective customers. Mr. Lessinger has never been the subject of a complaint by one of his own customers, and had never been disciplined for any actions he has taken as a registered representative. All of the disciplinary proceedings involving Mr. Lessinger concerned his actions in a supervisory capacity. Mr. Lessinger has forsworn any intention to ever again act in a supervisory capacity in the securities industry. Mr. Turbeville and Mr. Locy were emphatic that Mr. Lessinger would not be permitted to act in a supervisory capacity at Brookstone. Mr. Classie convincingly testified that he would closely monitor Mr. Lessinger's actions in accordance with the NAC order, and understood that failure to do so could place his own registration in jeopardy.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Office of Financial Regulation enter a final order granting Petitioner's application for registration as an associated person with Brookstone Securities, subject to such heightened supervisory restrictions as the Office of Financial Regulation shall deem prudent. DONE AND ENTERED this 15th day of December, in Tallahassee, Leon County, Florida. S LAWRENCE P. STEVENSON 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 15th day of December, 2008.
The Issue The issues for determination in this proceeding are whether Respondent, by and through his employees: (a) sold unregistered securities in the secondary market which were marked up in excess of 10 percent of the prevailing market price and which were not exempt from registration; (b) permitted an agent to service accounts prior to the agent's effective date of registration in the State and concealed such action; and (c) failed to maintain minimum net capital requirements for his corporation; and (d) failed to properly supervise the activities of his employees and agents.
Findings Of Fact Respondent owned the stock of a holding company and was an officer in a wholly owned subsidiary of the holding company. Respondent and another individual owned the stock of Dean, Johnson and Burke Holding Company ("Holding"). Holding owned the stock of Dean, Johnson and Burke Securities, Inc. ("Securities"). Respondent was the Secretary of Securities. Respondent had ultimate responsibility for disbursements and profits for Holding and Securities. Respondent monitored the checkbooks and daily expenses for Securities. Respondent's accountant provided financial information to Respondent concerning the daily operations of both companies. The information was provided on forms supplied by Respondent. Respondent kept a daily record of how much each company made or lost, how much was owed, and other accounting information. Respondent made sure that the bills were paid and that the credit of each company remained good. Respondent also controlled the hiring of key personnel. Brent A. Peterson was a manager and principal for Securities. 2/ Mr. Peterson set prices for the firm. Mr. Peterson engaged in transactions in which prices were set for securities to be sold to customers in excess of 10 percent above and below the prevailing market price. Out of 457 trades, approximately 38 were sold at prices that exceeded a 10 percent markup (the "marked up securities"). The marked up securities were sold at prices in excess of 10 percent of the prevailing market rate. The National Association of Securities Dealers, Inc., ("NASD") determined that the securities were marked up in excess of 10 percent of the prevailing market price based upon Securities' contemporaneous costs. When a dealer is simultaneously making a market in a security (a "market maker"), the NASD looks to the prevailing market price for the purpose of determining if a markup exceeds 10 percent. The prevailing market price is the price at which dealers trade with one another, i.e., the "current inter-dealer market." 3/ When a dealer is not simultaneously making a market in a security (a "non-market maker"), the contemporaneous costs of the dealer are used for the purpose of determining if the securities have been marked up in excess of 10 percent. The contemporaneous costs reflect the prices paid for a security by a dealer in actual transactions closely related in time to the dealer's retail sales of that security. Such a standard is normally a reliable indication of prevailing market price in the absence of evidence to the contrary. Securities was not a market maker in the marked up securities. Even though securities may be sold at the same market price by one firm that is a market maker and one that is not a market maker, the latter may be deemed by the NASD to have marked up the security by more than 10 percent depending on the firm's contemporaneous costs. Many of the marked up securities were sold to customers at the same market price as that the customers would have paid other brokerage houses. 4/ Since Securities was not a market maker in the marked up securities, the standard used by the NASD to determine the amount of markup was the contemporaneous costs paid by Securities. The securities involved in the 38 trades were marked up more than 10 percent over Securities' contemporaneous costs. Respondent sold unregistered securities that were not exempt from registration. Unregistered securities may be sold if they are reasonably related to the current market price. The marked up securities were not reasonably related to the prevailing market price because they were marked up more than 10 percent over Securities' contemporaneous costs. Robert M. Long sold securities to customers as an employee of Securities prior to the effective date of his registration with Petitioner. Mr. Long was registered with Petitioner as a registered representative on May 18, 1988. Mr. Long was employed by Securities, from April 19, 1988, through September 20, 1989. Mr. Peterson advised Mr. Long that Mr. Long was authorized to trade securities. Pursuant to Mr. Paterson's advice, Mr. Long sold securities in Tel-optics prior to the effective date of his registration with Petitioner on May 18, 1988. Respondent concealed the sale of securities by Mr. Long prior to the effective date of his registration with Petitioner. Mr. Long's registered representative number was 34. Relevant order tickets showed Mr. Long as the person engaged in the sale of securities prior to May 18, 1988. Registered representative number 30 had been used on the order tickets at the time of the trades. After Mr. Long was registered with Petitioner, Mr. Long's number 34 was added to the order tickets and number 30 was crossed out. Securities operated with a net capital deficiency of approximately $30,000. The net capital deficiency resulted from the failure to accrue liabilities. The net capital deficiency was discovered by Mr. Long and Jeff Clark, an examiner for the NASD. The invoices for bills for the unaccrued liabilities were not filed where bills and invoices were normally filed and were found by Mr. Long concealed in drawers and other remote locations in the office. The net capital deficiency was discovered by Mr. Long on August 28, 1989, but not reported to Petitioner until September 19, 1989. Mr. Long did not notify Petitioner of the net capital deficiency at Securities until the deficiency could be verified by Mr. Clark.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner enter a final order finding that Respondent is guilty of committing the acts alleged in the Administrative Complaint, requiring Respondent to cease and desist from all violations of Florida statutes and rules, and imposing a fine in the aggregate amount of $9,000. The fine should be imposed in the amount of $2,000 for selling securities in excess of a 10 percent markup and $3,500 for each of the other two acts that constituted violations of applicable statutes and rules. DONE AND ENTERED in Tallahassee, Leon County, Florida, this 25th day of July, 1991. DANIEL MANRY Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of July, 1991.
The Issue The issue is whether Respondent is guilty of a failure to discharge adequately his compliance and supervisory responsibilities, in connection with the churning of a securities account by an account representative, and, if so, what penalty should be imposed.
Findings Of Fact In February 1999, Petitioner conducted a three-day onsite examination of the activities of Allen Douglas Securities, Inc. (Allen Douglas Securities), which is a full- service brokerage firm, following the receipt of a complaint from a customer, Joseph Nellis. The examination covered, among other things, trading in Mr. Nellis’s account from May to November 1998, which is the relevant period in this case. Based on the findings of the examination, Petitioner filed an administrative complaint dated September 17, 1999, against Allen Douglas Securities; the registered representative responsible for Mr. Nellis’s account, James Singer; the president of Allen Douglas Securities, Stephen Pizzuti (Mr. Pizzuti); the vice-president of Allen Douglas Securities and brother of Mr. Pizzuti, Richard Pizzuti; and Respondent. The administrative complaint alleged that Mr. Singer churned the Nellis account and assigned responsibility for Mr. Singer’s wrongful acts to the Pizzutis and Respondent, as General Securities Principals and Mr. Singer’s supervisors, and to Respondent, as the compliance officer of Allen Douglas Securities. Mr. Singer did not defend the allegations. By Stipulation and Consent Agreement between Petitioner, on the one hand, and Allen Douglas Securities and the Pizzutis, on the other hand, the company and the Pizzutis agreed to comply with the applicable securities laws, Allen Douglas Securities paid Petitioner $10,000 in administrative costs, the three respondents agreed to develop written supervisory procedures, the three respondents agreed to pay Petitioner for the cost of the examination, the three respondents agreed not to register Respondent in any capacity with Allen Douglas Securities, Allen Douglas Securities agreed to employ an onsite compliance officer at the Altamonte Springs office, Allen Douglas Securities agreed to copy Petitioner for one year with customer complaints, Allen Douglas Securities agreed to maintain its customer files in separate folders, and Petitioner agreed to register new Allen Douglas Securities branch offices in Tampa and Sarasota. The three respondents signed the Stipulation and Consent Agreement on November 24, 1999, and Petitioner signed it on November 29, 1999. Reportedly, due to subsequent miscommunications, the administrative law judge dismissed the case then pending before the Division of Administrative Hearings, even though the issues involving Respondent had not been resolved. Petitioner later filed the Administrative Complaint commencing this case. In this case, Petitioner again seeks to discipline Respondent for his alleged failure to discharge adequately his compliance and supervision duties at Allen Douglas Securities, of which Respondent was never an officer, director, shareholder, or employee. Respondent has held a National Association of Securities Dealers (NASD) series 7 license (General Securities Representative) since 1976, a series 24 license (General Securities Principal) since 1980, a series 4 license (Registered Options Principal) since 1983, and a series 8 license (General Securities Sales Supervisor) since 1989. Except for two two- year periods, Respondent has been continuously employed in the securities industry since January 1980. From October 1995 through October 1997, Respondent was registered with an NASD brokerage firm based in Sarasota, Florida, known as Executive Securities, Inc. (later known as Executive Wealth Management; all references to Executive Securities are to Executive Securities, Inc. and Executive Wealth Management). In 1995, while providing compliance services to Executive Securities branch offices, Respondent met Mr. Pizzuti, who was the manager of the Executive Securities branch located in Altamonte Springs, Florida. Although not as experienced as Respondent in the retail securities industry, Mr. Pizzuti has had substantial experience in this business. After acquiring his series 24 license in 1987, Mr. Pizzuti has managed eight separate offices and hundreds of brokers. Respondent and Mr. Pizzuti dispute whether Respondent ever provided compliance services to Mr. Pizzuti’s branch of Executive Securities. Respondent testified that he did not, and Mr. Pizzuti testified that he did. They also dispute whether Mr. Pizzuti operated a branch office or a franchise of Executive Securities. Respondent testified that it was a branch office, and Mr. Pizzuti testified that it was a franchise. Most importantly, Respondent and Mr. Pizzuti dispute the extent to which Respondent was responsible for compliance and supervision at Allen Douglas Securities. Respondent testified that, during the relevant period, he was responsible for compliance and supervision in options trading only. Respondent testified that he sporadically provided other compliance services, on a very limited basis, when he answered questions asked of him by Mr. Pizzuti or his brother or sometimes questions asked of him by brokers who had received a customer complaint. Explaining that he happened to have been visiting the office at the time, Respondent testified that his compliance involvement intensified when Mr. Pizzuti received a letter from Mr. Nellis dated November 6, 1998, in which Mr. Nellis expressed dissatisfaction in the handling of his account and directed that all trading terminate, except to the extent necessary to cover margin calls. Respondent acknowledged that he assumed greater compliance responsibilities at the very end of the relevant period, largely to deal with Petitioner and Mr. Nellis, but that he did so as an accommodation to Mr. Pizzuti. Mr. Pizzuti testified that his brother reported to him and Respondent on all compliance matters during the relevant period. Mr. Pizzuti testified that Respondent had served as the compliance officer in all matters for Allen Douglas Securities from prior to 1998 through the relevant period. As to non- options matters, Mr. Pizzuti testified that he relied on Respondent for “macro compliance,” but not “day to day compliance.” As to supervision during the relevant period, Mr. Pizzuti testified that Respondent had input into the implementation of supervision practices and procedures to a greater extent than he had input into the design of these practices and procedures. The relationship between Respondent and Mr. Pizzuti has become strained over time. Initially closing ranks when confronted with Mr. Nellis’s complaint and Petitioner’s investigation, Respondent and Mr. Pizzuti contended that Mr. Nellis was a day trader and responsible for the losses that followed from his excessive trading. The Pizzuti brothers escaped personal discipline for an obvious failure in supervision, if not also compliance, presumably by blaming Respondent, as one of the conditions of their stipulation with Petitioner is that they not register Respondent in any capacity. Respondent now blames the Pizzutis for the failure in supervision, if not also compliance. This deterioration in relations is important in assessing certain of the evidence at various stages of the relationship between Respondent and the Pizzutis. Respondent probably provided compliance services to Mr. Pizzuti’s branch of Executive Securities. Mr. Pizzuti kept a copy of a memorandum dated March 6, 1996, and issued by Respondent, as “Compliance Officer” of “Executive Securities, Inc.” Although the recipients are merely “All Registered Representatives,” the retention of a copy of this memorandum by Mr. Pizzuti at his branch office suggests that the account representatives at this branch were the recipients of the memorandum. Announcing a “Mandatory Compliance Meeting,” the memorandum explicitly illustrates the nature of Respondent’s compliance responsibilities, in describing the topics to be discussed, and implicitly illustrates the nature of Respondent’s supervisory authority, in warning of specific consequences-- implicitly to be imposed by Respondent--for tardiness or absence. The memorandum states in its entirety: Please arrange your schedules to accommodate a mandatory compliance meeting on Friday, March 8, 1996, at 8:30 AM. No exceptions will be permitted. Please be prompt. Anyone arriving later than 5 minutes following the starting time will be considered absent. Absent representatives will risk censure or imposition of fines. The session should be approximately 30 minutes long. Subjects covered include suitability, discretion, basis for recommendation, asset turnover, margin, quality control, customer service. Call me . . . with comments or questions. The memorandum reveals the nature of Respondent’s compliance responsibilities and supervisory authority at Executive Securities, and thus Respondent’s relevant experience and capabilities. The memorandum also illustrates the relationship between compliance responsibilities and supervisory authority that Respondent enjoyed with Executive Securities. Lacking hiring and firing authority at Allen Douglas Securities, Respondent testified that he was unwilling to assume wider ranging compliance responsibilities. Aside from these matters, though, the memorandum is of little direct value in the present case because Mr. Singer was never employed by Executive Securities. Mr. Singer was one of about 14 registered representatives employed by Allen Douglas Securities. His employment with Allen Douglas Securities ran from March 11, 1998, through November 18, 1998. Mr. Singer’s preceding employment was with Empire Financial Group, Inc., from November 20, 1996, through February 13, 1998, and Charles Schwab & Co., Inc., from November 4, 1991, through October 15, 1996. Mr. Singer was also registered with three other brokerage firms between July 22, 1988, through December 2, 1991. Choosing to end his association with Executive Securities, Mr. Pizzuti formed or acquired American Trading and Brokerage, which, through a name change, became Douglas Allen Financial Group, Inc. (DAFG). Mr. Pizzuti was the sole shareholder of DAFG. On March 28, 1996, probably shortly after the formation of the company, the board of directors unanimously consented to its reformulation to comprise Respondent, Mr. Pizzuti, and Richard Pizzuti, all of whom had series 24 licenses. At the same time, the board of directors caused DAFG to form a subsidiary corporation to be licensed as a brokerage firm. The new company, Allen Douglas Securities, was incorporated on September 26, 1996. DAFG was never registered with the NASD or Petitioner, presumably due to its status as a mere holding company that did not serve as a broker or dealer of securities. Also at the same time, the board of directors required DAFG to set aside 9750 shares of DAFG stock for Respondent. A written agreement, incorporated into the minutes, provides that Respondent earned these shares, pursuant to a five-year vesting schedule, by serving as the “Chief Operating Officer and Compliance Officer” of Allen Douglas Securities and supplying Allen Douglas Securities with “the exclusive right to his research and financial reports.” The vesting schedule was to “commence upon Mr. Kase’s assumption of duties” with “vested ownership [to] be recognized as follows: Completion of Year 1 Service--20 [percent;] Completion of Year 2 Service--40 [percent;] Completion of Year 3 Service--60 [percent;] Completion of Year 4 Service--80 [percent; and] Completion of Year 5 Service--100 [percent.] Despite the apparent “vesting” of ownership of varying percentages of the shares designated for transfer to Respondent, the schedule cautions: The award is not transferable without the Board of Director’s consent. Mr. Kase is entitled to enjoy the benefits associated with the beneficial ownership of the Corporation but is not permitted to transfer ownership or any rights to permanent ownership without the Board of Director’s consent. The Corporation holds the right to demand repudiation of all ownership rights in the event of failure to complete the service requirements. Prominent among the items not in dispute between Respondent and Mr. Pizzuti is that Respondent did not earn any DAFG shares and never owned any shares of DAFG at anytime. By letter dated June 15, 1999, Respondent “acknowledge[d] my inability to meet the service requirements for sustaining an ownership interest in the company . . ..” As a result, Respondent acknowledged that he was “not entitled to any further claim of ownership interest in the company and am obliged to forfeit any current and future claims based upon service rendered to the company.” Registered in Florida as a broker-dealer on December 6, 1996, Allen Douglas Securities initially operated out of the location formerly used by the Executive Securities branch office managed by Mr. Pizzuti. As president and secretary of Allen Douglas Securities, Mr. Pizzuti was in charge of the new company. Serving as the branch manager (of the sole office) and vice-president of Allen Douglas Securities from early 1997, Richard Pizzuti conferred with his brother, when necessary, for guidance as to, among other things, compliance matters with which Richard Pizzuti was unfamiliar. Respondent memorialized his research responsibilities, as he entered into one-year contracts for 1997 and 1998 to provide securities research. Through these contracts, Respondent, as an independent contractor, agreed to provide investment research in return for which he was to earn, subject to a cap, the greater of $4500 monthly or three percent of the gross sales of DAFG for the month. The first contract between Respondent and DAFG is dated January 1, 1997, and provides that DAFG shall transfer to Respondent 5000 shares of its stock, if Respondent grants DAFG an exclusive right to his research. However, the contract prohibits Respondent from transfering the stock, and the parties lined out a provision that would have eliminated this prohibition after one full year of exclusive service. The first contract provides for notices to Respondent to be sent to an address in Winter Park, Florida. A second contract, substantially similar to the first contract, is dated January 1, 1998, and provides for notices to Respondent to be sent to two addresses: the same one in Winter Park, Florida, and a new one in Park City, Utah. The most significant difference between the two contracts is the omission from the latter contract of the stock-ownership provisions described in the preceding paragraph. The two contracts are primarily useful for four purposes. First, the contracts show that, between January 1997 and January 1998, Respondent had at least begun the process of relocating his residence from Winter Park, Florida to Utah. Respondent testified credibly that he moved to Utah in January 1998, after which he only visited Florida from time to time. For 1998, Respondent visited Florida three or four times, usually for a combination of business and personal purposes. The business usually involved Allen Douglas Securities. The account applications signed by Respondent and introduced into evidence generally corroborate Respondent’s claim that he was not often in Florida between May and November 1998. For instance, Petitioner Exhibit 22 is an application for an options account that is signed by Respondent on July 18, 1998; however, the client, registered representative, and manager signed the application one month earlier. This delay most likely was due to the time it took to transmit the form to Respondent in Utah or the next visit that he made to Florida from Utah. Second, the contracts show that, from January 1997 and January 1998, Respondent was an independent contractor, not an employee, of Allen Douglas Securities. The recitations of the contracts concerning Respondent’s level of control regarding his work are entirely consistent with the record regarding how and even where Respondent performed his work. Third, the contracts show that, between January 1997 and January 1998, Respondent’s role with Allen Douglas Securities had diminished, at least with respect to the likelihood that he would obtain an equity interest in the company in return for research. Fourth, the contracts are inaccurate in one revealing respect. The contracts misidentify the company as DAFG, rather than Allen Douglas Securities. Allen Douglas Securities, as a broker-dealer, required Respondent’s services; DAFG, as a holding company, did not. This awkwardness of this transparent effort to distance Respondent from Allen Douglas Securities, and thus from securities liability, was betrayed by basing Respondent’s payments on the sales of DAFG. As a holding company, DAFG had no sales; Respondent was paid based on the sales of Allen Douglas Securities. For at least one of these years, Allen Douglas Securities actually issued Respondent the Form 1099 reporting the payments to the Internal Revenue Service. Respondent’s effort to characterize his relationship with DAFG, rather than Allen Douglas Securities, underscores his sophistication, at the expense of his candor, as he structured the relationship to serve his liability needs rather than to reflect business reality. The two contracts are incomplete in one important respect: they omit any discussion of Respondent’s compliance responsibilities. In 1998, most of Respondent’s income was derived from the services that he provided Allen Douglas Securities, in return for which he earned $52,500. This sum approximates the $54,000 that Respondent was due under the 1998 contract for his research. There were no separate payments for the compliance services, which assumed greater importance by the end of 1998. This omission from the contracts may not be another attempt by Respondent to shield himself from liability. Based on the record, it is more likely than not that Respondent’s compliance responsibilities were negligible, at least through early 1998, when the second contract was signed. From the inception of Allen Douglas Securities, Mr. Pizzuti consulted with Respondent over compliance issues with which Mr. Pizzuti was unfamiliar. However, nothing in the record suggests that Mr. Pizzuti needed to, or did, consult with Respondent over every compliance issue. Relying on his substantial experience in the retail securities industry, Mr. Pizzuti handled the many common compliance issues without soliciting the advice of Respondent. Analysis of Respondent’s precise responsibilities at Allen Douglas Securities requires careful consideration of two facts. First, compliance and supervision are largely distinct tasks. Compliance requires the development of policy, and supervision requires the execution of policy by ensuring that subordinates behave within certain acceptable parameters. Compliance and supervision overlap when a superior must determine if certain behavior of a subordinate constitutes a violation of policy. Thus, a superior’s determination of whether a registered representative’s trading activity is excessive for a particular account requires the collection of data concerning the trading activity and account holder, analysis of this data in light of prevailing standards for assessing excessive activity, and communicating to and enforcing upon the registered representative any determinations arising out of this analysis. This potentially complex process necessarily involves both compliance and supervision tasks. Second, Respondent’s compliance and supervision responsibilities were evolved over time. This case requires a determination of Respondent’s compliance and supervision responsibilities from May to November 1998. Evidence of Respondent’s responsibilities before and after the relevant period is useful in inferring the exact extent of these responsibilities during the relevant period. Contemporaneous documentation is helpful in identifying the allocation of compliance and supervision responsibilities at Allen Douglas Securities at various times. One valuable source of information is the Form BD, which is a Uniform Application for Broker-Dealer Registration. This is a form used by a broker-dealer for initial registration and amendments to registration. The first Form BD, which is dated December 4, 1996, represents the initial application of Allen Douglas Securities. Prepared by Mr. Pizzuti, as are all the Forms BD, the December 4, 1996, Form BD seeks registration with the Securities Exchange Commission and NASD. In response to a question asking for the names of each chief executive officer, chief financial officer, chief operations officer, chief legal officer, chief compliance officer, direction, any other person with similar functions, or shareholder, the December 4, 1996, Form BD identifies Mr. Pizzuti as president, Mark Thomes as chief financial officer, and DAFG as the sole shareholder. The record contains several Forms BD for 1997. Nearly all of these amendments sought to add different states to the registration of Allen Douglas Securities. However, two of the Forms BD in 1997 mention Respondent. By Form BD dated May 5, 1997, Allen Douglas Securities named Respondent, as of May 1997, as its senior registered options principal and compliance registered options principal, as well as municipal bond principal. This Form BD names Mr. Pizzuti as the person in charge of compliance. A Form BD dated November 5, 1997, assigns these responsibilities exactly as did the May 5, 1997, Form BD. A Form BD dated March 3, 1998, only changes a state registration. A Form BD dated May 11, 1998, changes a state registration, names a new clearing house, and names two new municipal bond principals, Mr. Thomes and another person whose name is illegible. A Form BD dated May 26, 1998, restates the previously supplied information concerning DAFG as the shareholder, Mr. Pizzuti as the president, Mr. Thomes as the chief financial officer and municipal bond principal, and Respondent as the registered options principal. A Form BD dated June 16, 1998, changes a state registration. The last available Form BD is dated September 25, 1998, and again restates the previously supplied information set forth in the first sentence of this paragraph. During this period, Respondent issued some documents reflecting his activities with Allen Douglas Securities. On December 29, 1997, on letterhead entitled, “Allen Douglas Compliance Memo,” Respondent provided advice to all registered representatives, with a copy to Mr. Pizzuti, concerning “Options Trading--Basis for Recommendations and Suitability.” This memorandum, which is limited to options trading, warns the registered representatives to be careful with options trading, which Respondent described generically as “drifting toward increased speculation bordering on gambling.” Noting that options trading generates a disproportionate share of customer complaints and is not especially profitable for a broker-dealer, the memorandum states: “We tend to maintain higher standards and stricter discipline regarding options trading than most firms in our industry. We intend to continue maintaining higher standards than the industry requires.” At the bottom of the memorandum is Respondent’s typewritten name and “Compliance Registered Options Principal,” below which is “Fax.” On February 6, 1998, Respondent sent a short e-mail to an employee of Allen Douglas Securities asking for help in assembling a research file on a particular bulletin-board stock. At the bottom of the memorandum is “Compliance.” Two more e-mails dated June 29, 1998, to Mr. Pizzuti concern options accounts and compliance. In one of these e-mails, dealing with options accounts, Respondent responded to an options account application that Mr. Singer sought to open for a customer otherwise unrelated to this case. Respondent stated: “This is a weak qualifier. I am willing to approve it but it requires close supervision. . . . Place a special emphasis on monitoring activity in this account.” In the other e-mail, dealing with options compliance, Respondent restricted a particular broker, identified only by number, to closing already-open options positions. Respondent conditioned reinstatement of full options trading privileges upon a review of account activity and demonstration of suitability. By e-mail dated July 7, 1998, Mr. Singer responded to Respondent’s e-mail and noted that the customer had followed Mr. Singer from firm to firm and had directed the trading in his account. By e-mail dated July 8, 1998, Respondent did not yield, instead warning Mr. Singer: . . . When a firm qualifies and accepts an account as suitable for options trading, we must monitor the activity and assess the suitability of transactions. We are not permitted to accept a trade simply because it was the client’s idea. If it is remotely reasonable to assume that the firm should have considered a particular trade or series of trades to be unsuitable, whether solicited or unsolicited, then the firm must assume it can and will likely be held accountable for adverse results and financial loss. The only documents that assign Respondent a broader role in compliance and supervision are the Written Supervisory Procedures of Allen Douglas Securities and a Designated Responsibility matrix, both of which appear to have been prepared by Mr. Pizzuti. The date of origin of the Written Supervisory Procedures is undeterminable. The matrix is dated September 11, 1998, although Mr. Pizzuti insists that earlier, unproduced matrices exist and characterize Respondent identically. The September 11, 1998, matrix assigns a broad range of compliance and supervision responsibilities to Respondent, reserving for Mr. Pizzuti only the tasks of hiring and reviewing correspondence. The Written Supervisory Procedure and Designated Responsibility matrix are self-serving documents obviously prepared by Mr. Pizzuti. Through these entirely internal documents, Mr. Pizzuti appears to have attempted to have assigned broad compliance and supervision responsibilities to Respondent. Mr. Pizzuti’s effort to make a broad, internal assignment of responsibilities contradicts his earlier, public acceptance of compliance responsibilities by the Form BD dated May 5, 1997. The credibility of the Written Supervisory Procedure and Designated Responsibility matrix is further undermined by the failure of Mr. Pizzuti to prepare new Forms BD at the times of these changes in compliance responsibility, despite his obvious incentive to do so, as Respondent was purportedly relieving Mr. Pizzuti of potential liability in this area. Also, given Respondent’s knowledge of compliance issues and previously noted sophistication in the preparation of the two contracts, he unlikely would have bothered to try to shield himself from liability in the two contracts, and then waste this effort by allowing Mr. Pizzuti to name him as the compliance officer in internal documents. Filed documents and documents prepared by Respondent reveal that he had comprehensive compliance and supervision responsibilities in the area of options only during the relevant period. Respondent provided compliance assistance, but not supervisory assistance, on an as-needed basis throughout his tenure with Allen Douglas Securities. Undoubtedly, Respondent’s contributions in compliance matters not involving options became more substantial at the end of 1998 and start of 1999, but Respondent never replaced Mr. Pizzuti in this area. Eventually, well after the conclusion of the relevant period, Respondent assumed substantial compliance responsibilities. For instance, by letter on Allen Douglas Securities letterhead to Petitioner’s auditor dated April 13, 1999, Respondent designated himself as “Senior Compliance Officer.” Focusing on Respondent’s compliance and supervision responsibilities during the relevant period, he appears to have discharged commendably his acknowledged responsibilities in options trading. From May to November 1998, only five options trades took place in the Nellis account. Consistent with his original claim assigning substantial responsibility to Mr. Nellis, Respondent testified that the system worked as to options trading: Mr. Nellis tried trading options, found that he was not comfortable trading options, and chose not to trade options after a few minor trades. However, Mr. Nellis denied any knowledge of the options trading. More likely, given Mr. Nellis’s past trading experience, his education, and his receipt of monthly statements from Allen Douglas Securities, Mr. Nellis more or less condoned months of very, very heavy trading by Mr. Singer in Mr. Nellis’s account, as discussed below, in the expectation of big profits. When the heavy trading produced significant losses, Mr. Nellis complained. Under this more likely scenario, Mr. Nellis did not intervene at all until early November 1998, and, prior to that, he would no more likely have stopped Mr. Singer from trading options than he not have stopped Mr. Singer from trading excessively in non-options. Under the more likely scenario, in which Mr. Nellis did not stop the options trading, Respondent’s close supervision of Mr. Singer’s options trading was probably why Mr. Singer was unable to damage the Nellis account through options trading, as he did through non-options trading. Reading Respondent’s unyielding e-mail of July 8, 1998, Mr. Singer necessarily must have realized that, if he were to assume the role of rogue broker, he would have to do it in an area unsupervised by the watchful Respondent. It is difficult to harmonize the evident level of supervision that Respondent provided over Mr. Singer’s options trading with the non-supervision that Mr. Singer received over his non-options trading, if Respondent in fact was responsible for the latter during the relevant period. The trading activity in the Nellis account from May to November 1998 was, under all relevant circumstances, wildly excessive, or, as Respondent described it, “breathtaking.” Churning arises when a broker in control of an account trades too often, so as to support the inference (in the absence of direct evidence of intent) that the broker’s intent was primarily to generate commissions for the broker rather than to generate profits for the client. Relevant factors include the client’s sophistication, the client’s objectives, the extent to which the client actually relied on the broker, the party initiating the trades, the extent to which the client approved of broker-initiated trades, and the effect of the commissions on the potential for profitability. Mr. Nellis is a 1985 graduate of the University of Tennessee. At the time in question, he was working in real estate sales. His annual earnings, largely in the form of commissions, were $35,000 to $63,000, and his net worth was $75,000 to $100,000. Before transferring his account to Allen Douglas Securities in May 1998, Mr. Nellis had traded at Dean Witter and Empire Financial. At Empire Financial, Mr. Singer had been Mr. Nellis’s registered representative for the first four months of 1998. During Mr. Singer’s assignment to the Nellis account for the seven months from May to November 1998, the average account equity was $41,620; the total purchases were $4,987,559, the total commissions were $17,289, and the total margin interest was $20,286. Over seven months, commissions and interest equaled half of the account balance. Conventional turnover analysis requires the calculation, over a single year, of the total purchases divided by the account equity. This ratio expresses the annual frequency of annual turnover of an account. Although current trading volumes and reduced commission costs have necessitated reconsideration of acceptable ranges for these turnover ratios, historically a ratio of 6:1 was excessive, even for an especially active account. The annual turnover ratio in Mr. Nellis’s account was over 200:1. In August 1998, the turnover ratio for one month was 75:1, as the $20,000 account, in that month alone, purchased $1.5 million in securities. A better measure of activity is the commission to equity ratio, which measures the rate of return that an account would have to generate to cover the commissions. In other words, an account paying 20 percent of its average balance in commissions must earn 20 percent of its average balance to break even. A good measure of a reasonable expected return is that, over the long run, the securities market has produced an annual rate of return of 10-12 percent. Again annualized, the commission to equity ratio of Mr. Nellis’s account was 71.2 percent, meaning that he would have had to earn 71.2 percent over the year just to pay the commissions. An even better measure of activity is the total cost to equity ratio, which measures the rate of return that an account would have to generate to cover the commissions and margin interest. Adding Mr. Nellis’s margin interest results in an annualized ratio of 83.6 percent, meaning that he would have had to earn 83.6 percent over the year just to pay the commissions and interest. Over seven months, Mr. Singer executed about 240 trades in the Nellis account, or about 34 per month. Mr. Nellis claims to have approved less than five percent of these trades. During the preceding 13 months at Empire Financial, Mr. Nellis executed only six trades and held his securities an average of 127 days. During the relevant period, about one-third of the trades in the Nellis account were day trades. The financial impact of the excessive trading was exacerbated by the leveraging of Mr. Nellis’s account. Thus, when the market declined during the summer of 1998, his account, which averaged 50 percent leverage and reached 90 percent leverage, responded dramatically. There is no question that Mr. Singer churned this account. Mr. Singer was in control of the Nellis account, Mr. Singer excessively traded the Nellis account, and Mr. Singer excessively traded the account to advance his own interests, rather than the interests of Mr. Nellis. The gaps in the record concerning the finer points in the extent to which Respondent assisted the Pizzutis with compliance issues during the seven months in question ultimately prove irrelevant. In identifying the compliance and supervision issues presented by Mr. Singer’s egregious behavior in this case, Mr. Pizzuti and his brother had absolutely no need for the compliance expertise (or any supervisory authority, of which Respondent none outside of options trading) of Respondent. The compliance issue was that Mr. Singer was churning Mr. Nellis’s account, and the supervisory issue was that the Pizzutis needed to fire Mr. Singer. As the Pizzuti brothers presumably do not need a weatherman to know which way the wind blows, neither do they need Respondent to know that supervisors need to examine daily trading tickets, that Mr. Singer was churning Mr. Nellis’s account, that churning is bad, and that Mr. Singer had to be stopped immediately. Petitioner has failed to prove by clear and convincing evidence that Respondent had any role whatsoever in the compliance and supervision issues present in Mr. Singer’s churning of the Nellis account. The customer abuse in this case happened on the watch of the Pizzutis, not Respondent.
Recommendation It is RECOMMENDED that the Department of Banking and Finance enter a final order dismissing the Administrative Complaint against Respondent. DONE AND ENTERED this 26th day of December, 2000, in Tallahassee, Leon County, Florida. ROBERT E. MEALE 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 December, 2000. COPIES FURNISHED: Honorable Robert F. Milligan Office of the Comptroller Department of Banking and Finance The Capitol, Plaza Level 09 Tallahassee, Florida 32399-0350 Robert Beitler, Acting General Counsel Office of the Comptroller Department of Banking and Finance Fletcher Building, Suite 526 101 East Gaines Street Tallahassee, Florida 32399-0350 Chris Lindamood Assistant General Counsel Department of Banking and Finance 400 West Robinson Street, Suite S-225 Orlando, Florida 32801 David S. Wood Sarah A. Long Baker & Hostetler, LLP Post Office Box 112 Orlando, Florida 32802-0112
The Issue The issue is whether the Petitioner's application for registration as an associated person of Koch Capital, Inc. should be denied.
Findings Of Fact Petitioner, Glenn D. Whaley submitted a Form U-4, Uniform Application for Securities Industry Registration, seeking registration as an associated person of Koch Capital, Inc. One of the states in which Petitioner sought registration was the State of Florida. The Department of Banking and Finance (Department) is the Florida agency charged with the administration and enforcement of Chapter 517, Florida Statutes, the Florida Securities and Investor Protection Act (the Act), and its implementing rules. The Department denied Mr. Whaley's application for registration as an associated person in a letter dated August 27, 1990, based upon its determination that he had violated the Act, that he had filed an application for registration which contained a material false statement; and that his disciplinary history within the securities industry constituted prima facie evidence of his unworthiness to transact the business of an associated person. Mr. Whaley has been employed in the securities industry since approximately 1984, and has been employed with several different securities dealers, including Rothschild Equity Management Group, Inc. (Rothschild), Fitzgerald Talman, Inc., and H. T. Fletcher Securities, Inc. The effective date for Mr. Whaley's registration as an associated person of Rothschild in the State of Florida was April 18, 1985. In October 1985, Department examiner Michael Blaker, conducted an examination of the books and records of Rothschild. The examination revealed violations of the provisions of the Act, including the sale of securities by unlicensed representatives. The commission reports and sales journals prepared by Rothschild revealed that Mr. Whaley, while unregistered with the Department, had effectuated approximately sixteen (16) sales of securities during the period of April 1 through 17, 1985. On May 15, 1989, the State of Missouri Commissioner of Securities issued a cease and desist order against Fitzgerald Talman, Inc. and Glenn D. Whaley. The order found that Mr. Whaley had offered for sale and sold securities on behalf of Fitzgerald Talman, Inc. in the State of Missouri without benefit of registration for himself or the securities. On or about November 8, 1989, the Department issued an Administrative Charges and Complaint against Mr. Whaley seeking revocation of his registration as an associated person of H. T. Fletcher Securities, Inc. based on his failed to timely notify the Department of the Missouri Cease and Desist Order, as required by Rule 3E-600.010(1)(a), Florida Administrative Code. The Administrative Charges and Complaint were served on November 13, 1989. On or about December 12, 1989, the Department issued a Default Final Order revoking Mr. Whaley's registration with H. T. Fletcher Securities, Inc., based upon his failure to request a hearing regarding the Administrative Charges and Complaint. The Form U-4 requires the applicant to swear and affirm that the information on the application is true and complete to the best of his knowledge and that false or misleading answers will subject him to administrative penalties. The Form U-4 application contains no disclosure of the Department's December 1989, revocation of Petitioner's registration with H. T. Fletcher Securities, Inc., as required by Question 22E.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is recommended that the Department of Banking and Finance enter a Final Order denying the application of Mr. Whaley for registration as an associated person of Koch Capital, Inc., in the State of Florida. RECOMMENDED this 25th day of January, 1991, at Tallahassee, Florida. WILLIAM R. DORSEY, JR. Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of January, 1991. COPIES FURNISHED: Margaret Karniewicz, Esquire Department of Banking and Finance The Capitol, Legal Section Tallahassee, Florida 32399-0350 Glenn D. Whaley 5400 Northwest Fifth Avenue Boca Raton, Florida 33487 Honorable Gerald Lewis, Comptroller Department of Banking and Finance The Capitol Tallahassee, Florida 32399-0350 William G. Reeves, General Counsel Department of Banking and Finance The Capitol Plaza Level, Room 1302 Tallahassee, Florida 32399-0350
The Issue The basic issue in this case is whether the Petitioner's application for registration as an associated person in the state of Florida with Value Equities Corporation should be granted or denied. The Department proposes to deny the application on the basis of Section 517.161(1)(h) and (k), Florida Statutes, contending that the Petitioner has demonstrated his unworthiness to transact the business of an associated person and is of bad business repute. The Petitioner has little, if any dispute with the facts relied upon by the Department, but offered evidence in mitigation and asserts that, on the facts in this case, he is entitled to registration. Subsequent to the hearing in this case, a transcript was filed on March 4, 1987, and, pursuant to ruling at the close of the hearing, the parties were allowed until March 16, 1987, within which to file their proposed recommended orders. Both parties filed timely post-hearing documents, containing proposed findings of fact. A specific ruling on all proposed findings of fact is contained in the Appendix attached to and incorporated into this recommended order.
Findings Of Fact Based on the stipulations of the parties, on the testimony of the witnesses at the hearing, and on the exhibits received in evidence, I make the following findings of fact. Petitioner, Kenneth Joseph Whitehead, ("Whitehead") filed a Form U-4 application to be registered as an associated person in the state of Florida with Value Equities Corporation, located at 216 South Fairway Drive, Belleview, Illinois. Said application was received at the Department of Banking and Finance ("Department") in due course on June 21, 1986. By letter dated September 3, 1986, the Department advised the Petitioner that it intended to deny his application for registration for the reasons set forth at length in the letter. Thereafter, the Petitioner filed a timely request for hearing. The National Association of Securities Dealers ("NASD") District Business Conduct Committee, District #4, on July 11, 1978, accepted a "Letter of Admission, Waiver and Consent" against Weinrich, Zitzman & Whitehead, Inc., Kenneth J. Whitehead and others. In said agreement, Whitehead personally consented to a censure, a fine in the amount of $2000, and a ten day suspension from NASD membership. The sanctions imposed by the NASD resulted from violations of Regulation T imposed against Whitehead individually. The State of Missouri issued an order entitled "ORDER TO CEASE AND DESIST" in the matter of: Weinrich, Zitzman and Whitehead, Inc., Kenneth Whitehead, et al., on February 24, 1982, and found Whitehead to have personally made sales of unregistered securities, to have effected Unauthorized transactions, to have distributed promotional materials while not providing a prospectus and to have omitted to purchasers the fact that said securities were unregistered. Further, all respondents in that proceeding, including Whitehead, were found by the State of Missouri to have omitted the fact that unsuccessful attempts were made to register certain stocks, the fact that certain stocks could not justify their offering price, and the fact that the promoter's equity position could not be justified with respect to certain stock. All of the aforementioned were found to have constituted violations of Missouri law. As a result, Whitehead and others were ordered to cease and desist from violating Missouri law. Petitioner was afforded his due process rights to contest said order which was subsequently upheld. On May 31, 1983, the NASD District Business Conduct Committee #4 ("Committee"), entered a "Decision in Complaint No. KC-261" as to Whitehead and others. The Committee found that Whitehead failed to maintain minimum margin equity on certain accounts and failed to deliver securities as required by Article III, Sections 1 and 30, of the NASD Rules of Fair Practice. As a result of said violations, Whitehead was censured, fined $2500 and suspended by the NASD for three days. On September 19, 1985, the Committee issued a second complaint (KC-339) against Whitehead and others alleging violations of Article III of the NASD Rules of Fair Practice by failing to maintain required net capital, proper books, and records. As a result of an offer of settlement, Whitehead was censured and fined $1500. On December 20, 1985, the Committee issued a third Complaint (KC-343) against Whitehead and others for failure to maintain required net capital in violation of SEC Rule 15C3-1 and Article III, Section 1, of the NASD Rules of Fair Practice. The complaint remains pending. In 1982, eleven suits were filed by individual plaintiffs against WZW Financial Services, Inc., Whitehead, and others in the Circuit Court of the City of St. Louis to effect rescission of the sale of unregistered securities in the state of Missouri. The suits were settled for an aggregate of $240,000. The Petitioner was not directly involved in the sales that led to these suits, but he was vicariously liable as an officer of the corporation. In 1984, a suit was filed in the U.S. District Court for the Southern District of Illinois by certain individual plaintiffs against WZW, Inc., Kenneth Whitehead, and others in the sale of limited partnership interests wherein the allegations included violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C 78j(b), Rule 10b-5, involving securities fraud; violations of Section 1964c of the Racketeer Influence and Corrupt Organizations Act ("RICO") of 18 U.S.C. 1962C, 1964c, involving racketeering activity; and violations of 18 U.S.C. 1341, involving mail fraud. The case is currently pending. On January 30, 1986, O. R. Securities, Inc., filed a Form U-5 termination notice in which Whitehead was terminated for violating the firm's policy concerning margin accounts. The termination was investigated by the NASD. Following the investigation, the NASD determined that no further action was warranted.
Recommendation Based on all of the foregoing, it is recommended that the Department of Banking and Finance issue a final order in this case which denies the Petitioner's application for registration as an associated person with Value Equities Corporation. DONE AND ENTERED this 19th day of March 1987, at Tallahassee, Florida. M. M. PARRISH Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 19th day of March, 1987. APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-4055 The following are my specific rulings on each of the proposed findings of fact submitted by both parties. Findings submitted by Petitioner First unnumbered paragraph: Accepted in substance with unnecessary details omitted. Second unnumbered paragraph: First sentence accepted in substance. Second sentence covered in introductory portion of this recommended order. Paragraph 1: All but last sentence is accepted in substance. Last sentence is rejected as irrelevant because there is no persuasive competent substantial evidence that customers were not hurt or jeopardized. Paragraph 2: First sentence accepted. Second sentence rejected as incomplete. Third sentence rejected as irrelevant in light of other evidence. Fourth and fifth sentences rejected as contrary to the greater weight of the evidence. Sixth sentence accepted. Seventh sentence rejected as contrary to the greater weight of the evidence and as not supported by persuasive competent substantial evidence. Paragraph 3: Accepted in substance. Unnumbered paragraph following paragraph 3: First sentence is rejected as irrelevant in light of other evidence. Second and third sentences are rejected as in part contrary to the greater weight of the evidence and in part not supported by persuasive competent substantial evidence. Paragraph 4: Accepted in substance. Paragraph 5: Accepted in substance. Paragraph 6: The first four sentences are rejected as constituting irrelevant and unnecessary details. The fifth sixth, and seventh sentences are rejected as contrary to the greater weight of the evidence and as not supported by credible competent substantial evidence. Paragraph 7: Accepted in substance with unnecessary details omitted. Findings submitted by Respondent Paragraph 1: Accepted. Paragraph 2: Accepted in substance. Paragraph 3: Accepted. Paragraph 4: Accepted. Paragraph 5: Accepted. Paragraph 6: Accepted. Paragraph 7: Accepted. Paragraph 8: Accepted. Paragraph 9: Accepted. Paragraph 10: Accepted with additional facts for clarity and accuracy. Paragraph 11: Rejected as constituting proposed conclusions of law or legal argument regarding what was not proved, and not constituting findings of fact based on evidence. COPIES FURNISHED: James S. McClellan, Esquire 314 North Broadway, Suite 1930 St. Louis, Missouri 63102 Charles E Scarlett, Esquire Assistant General Counsel Office of the Comptroller Suite 1302, The Capitol Tallahassee, Florida 32399 Honorable Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0305
Findings Of Fact Based on the stipulation of the parties, on the exhibits received in evidence and on the testimony of the witnesses at the hearing, I make the following findings of fact. Petitioner H. A. Kenning, Jr. ("Kenning"), a Georgia resident, has been in the securities business since May 1, 1972, serving in various capacities including that of registered representative and vice president of sales. Kenning was first registered in Florida in 1972. Kenning has an extensive history of registration in the state of Florida as a registered representative. Kenning was last registered in the state of Florida as an associated person from February of 1982 to June of 1983. Petitioner H. A. Kenning Investments, Inc., ("Company"), a Georgia corporation, is registered as a securities broker/dealer in the states of Georgia, Louisiana, and Illinois, as well as with the National Association of Securities Dealers, Inc., the U.S. Securities and Exchange Commission, and the Securities Investor Protection Corporation. Such registrations were effective prior to Petitioners' submission of their applications for registration as a broker/dealer and principal thereof. In an effort to pursue his chosen profession in the state of Florida and to service clients now residing in Florida, on October 29, 1985, Kenning filed an application and supporting documentation for registration as a securities principal. On that same date, the Company filed its application and supporting documentation for registration as a broker/dealer. The Respondent received Petitioners' applications on October 30, 1985. The applications took the form of Form BD for the broker/dealer and Form U-4 for the principal, H. A. Kenning, Jr. Following various exchanges of correspondence between the Department and the Petitioners, by letter dated August 8, 1986, the Department notified the Petitioners that it intended to deny their applications. The first paragraph of the letter included the following: These denials are based upon the Depart- ment's determination that you have demon- strated your unworthiness to transact the business of a dealer and principal. The denial letter of August 8, 1986, went on to state at length the specific factual and legal bases for the denials and concluded with a statement advising the Petitioners of their right to request a hearing. In an Exchange Hearing Panel decision 80-70, entered November 12, 1980, the New York Stock Exchange found that H. A. Kenning, Jr.: engaged in conduct inconsistent with just and equitable principles of trade in that he failed to follow customer instructions; and violated Exchange Rule 408(a) in that he exercised discretionary power in a customer's account without first obtaining the written authorization of the customer. The Hearing Panel found Kenning guilty of the above-stated charges and as a penalty, imposed a bar on him from employment in any capacity with any member or member organization for a four (4) month period. In Exchange Hearing Panel decision 82-72, entered July 6, 1982, the New York Stock Exchange found that H. A. Kenning, Jr., violated Exchange Rule 408(a) in that he accepted orders for the account of a customer of his member organization employer from a person other, than the customer without first obtaining the written authorization of the customer. The Exchange Hearing Panel found Kenning guilty of the aforesaid charge and, as a penalty, in a consent order censured Kenning, imposed a fine of $10,000 against him, and suspended him from employment or association in any capacity with any member or member organization for a period of two (2) months. In June 1983, Kenning's employment with J. C. Bradford & Co. was terminated for depositing checks into his personal securities account which were later returned for insufficient funds. The New York Stock Exchange admonished Kenning's conduct and cautioned him with respect to any further misconduct. The events described in paragraphs 4 and 5, above, took place while Kenning was registered in the state of Florida. The Department did not revoke his registration or take any action against him. After the first disciplinary action against Kenning, the Department allowed Kenning to transfer brokerage firms two times without revoking, or in any manner restricting, his registration. Except for the reasons stated in the Department's denial letter dated August 8, 1986, (which are the incidents described in paragraphs 4, 5, and 6, above,) the Petitioners are otherwise eligible for registration. Moreover, Petitioners were registered in the states of California and Texas subsequent to the Department's denial on August 8, 1986. Since the last disciplinary action entered July 1982, no federal, state, or self-regulatory organization has found Kenning to be in violation of any disciplinary rule. The Company has never had a disciplinary action filed against it by any federal, state, or self-regulatory agency. During 1985, the staff of the Department's Division of Securities was almost tripled in size. Shortly after the increase in staff size, a Task Force recommended that the Division devote more time and energy to the review of applicants with disciplinary history in order to more carefully screen such applicants. As a result of the increase in staff size and the increased emphasis on review of applicants with disciplinary history, the Department is now rejecting applications that previously might have gotten through a cursory review.
Recommendation Based on all of the foregoing, it is recommended that the Department of Banking and Finance issue a final order in this case which denies the application of both Petitioners. DONE AND ENTERED this 31st day of March, 1987, at Tallahassee, Florida. M. M. PARRISH Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 31st day of March, 1987. APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-3569 The following are my specific rulings on all of the findings of fact proposed by the parties. Findings proposed by Petitioner's The findings of fact proposed by the Petitioners are found in a series of eleven unnumbered paragraphs. The ordinal numbers which follow correspond to the sequence of those eleven unnumbered paragraphs. I have treated as the beginning of a paragraph each indented unnumbered line. First paragraph: Accepted. Second paragraph: First ten lines accepted. The remainder of this paragraph is rejected as irrelevant or as constituting subordinate and unnecessary details. Third paragraph: Rejected as irrelevant or as constituting subordinate and unnecessary details. Fourth paragraph: Rejected as irrelevant or as constituting subordinate and unnecessary details. Fifth paragraph: Rejected as irrelevant or as constituting subordinate and unnecessary details. Sixth paragraph: Accepted in substance with modifications in the interest of clarity and accuracy. Seventh paragraph: Rejected as constituting procedural details that are not in dispute. (These details are covered in the introductory material and not in the findings of fact.) Eighth paragraph: Rejected as constituting procedural details that are not in dispute. (These details are covered in the introductory material and not in the findings of fact.) Ninth paragraph: Accepted in substance (with some modifications) except for the sequence of events. Sequence of events is only partially consistent with the evidence. Tenth paragraph: Rejected as irrelevant or as constituting subordinate and unnecessary details. Eleventh paragraph: Accepted. Findings proposed by Respondent The numbers which follow correspond to the numbers of the paragraphs in the findings of fact portion of the Respondent's proposed recommended order. Paragraph 1: Rejected as constituting a conclusion of law rather than a finding of fact. Paragraph 2: First two and a half lines accepted. Portion beginning "...and is therefore" is rejected as Paragraph 3: First three and a half lines accepted. Portion beginning"...and is therefore" is rejected as constituting a conclusion of law rather than a finding of fact. Paragraph 4: Accepted. Paragraph 5: Accepted. Paragraph 6: Accepted. Paragraph 7: First sentence accepted in substance along with additional findings about Mr. Kenning's Florida registration history. Second sentence rejected as subordinate or unnecessary details in light of other evidence. Paragraph 8: Rejected as subordinate commentary rather than proposed findings. (This paragraph might make good footnote material for the findings proposed in paragraphs 4, 5, and 6.) Paragraph 9: Rejected as constituting argument or legal conclusions rather than proposed findings of fact. Paragraph 10: Rejected as constituting argument or legal conclusions rather than proposed findings of fact. COPIES FURNISHED: H. Richard Bisbee, Esquire Assistant General Counsel Office of the Comptroller The Capitol, Suite 1302 Tallahassee, Florida 32399-0350 A. Keith Logue, Esquire 900 Rhodes-Haverty Building 134 Peachtree Street Atlanta, Georgia 30303 Honorable Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0305 =================================================================
