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 =================================================================
Findings Of Fact By Prehearing Stipulation entered into by the parties on August 30, 1990, the parties agreed, and it is so found, that: Petitioner, Edward T. Strehlau, is President and control person of Deerfield Securities, Inc. On or about February 3, 1989, Petitioners filed an application, (Form BD), for registration as a broker/dealer, which was signed by Mr. Strehlau. On or about March 15, 1989, Petitioners filed with the Division an amendment to that Form BD. On or about April 19, June 22, and July 20, 1989, Petitioners filed additional amendments to the Form BD initially signed and submitted on behalf of the Petitioners by Mr. Strehlau. All of the Forms BD and amendments filed by Petitioner, Strehlau, with the Division were represented by him as true and complete. On February 3, 1989, Petitioner, Strehlau, also filed the Articles of Incorporation of Deerfield Securities, Inc., with the Florida Secretary of State. These Articles listed Edward T. Strehlau, Patericia O'Dell, William Manger, and Patricia Strehlau as Directors. The Division of Securities requires the filing of the Articles of Incorporation along with the dorm BD. This requirement is outlined in Section 517.12, Florida Statutes. Neither William Manger nor Patricia Strehlau were listed as Directors of Deerfield Securities, Inc., on the Form BD or on any amendments thereto which were filed with the Division. Mr. Manger is the subject of a complaint relating to securities violations committed by Eiffel Securities, Inc., Mr. Manger, a Mr. Riddle, and a Mr. Ashbee, in the State of Tennessee. On or about February 23, 1989, Mr. Strehlau, as President of Deerfield, withdrew the application for registration of Deerfield Securities, Inc., as a broker dealer with the State of Tennessee, and further agreed not to reapply for registration as a broker/dealer in that State, and not to sell Deerfield Investments, Inc.'s investment units in Tennessee. Deerfield Securities, Inc. is a wholly owned subsidiary of Deerfield Investments, Inc. Edward T. Strehlau is a control person and President of Deerfield Investments, Inc. The principal place of business of Deerfield Securities, Inc. is Sarasota, Florida. William Manger, at all times pertinent hereto, was President and a control person of the aforementioned Eiffel Securities, Inc., a Tennessee corporation. Petitioner, Edward T. Strehlau, was a control person of Eiffel Securities, Inc., during the period June 1, 1988 through September 21, 1988. Eiffel Securities, Inc. was a wholly owned subsidiary of Tennessee Investments Marketing Enterprises, (TIME), and Edward T. Strehlau was vice-president of TIME between June, 1988 and September, 1988. On February 3, 1989, Petitioner Strehlau paid $200.00 in filing fees for Deerfield Securities, Inc. with the Florida Division of Securities. On February 10, 1989, The Division of Securities notified Deerfield of several deficiencies in its application for registration as a securities dealer. These deficiencies included a requirement for: the officer or partner names of the parent firm; registration as a foreign corporation or a legal opinion indicating no need therefor;+ a clearing agreement from a dealer in Florida signed by both firms; Articles of Incorporation or partnership agreement; proof of securities effectiveness and compliance with SIPC (Securities Investors Protection Corporation). Thereafter, on February 27, March 16, April 20, June 22, and July 18, 1989, Mr. Strehlau sent letters to the Division of Securities in which he attempted to convince the Division of his compliance with the requirements set forth in the February 10, 1989 deficiencies letter. The Petitioner's efforts, however, were not supported by facts in some particulars. For example, the clearing agreement with OTRA, to be signed by both parties, was signed only by Petitioner Strehlau as President of Deerfield Securities, Inc., and attested by Patericia O'Dell of the firm. No signature from any responsible party of OTRA appears on the document. By letter dated December 2, 1988, Mr. Strehlau submitted this unilaterally executed clearing agreement. By letter dated February 22, 1989, the vice- president for finance of the SIPC attested that Deerfield Securities, Inc. was, as of that date, registered with the Securities and Exchange Commission, (SEC), as a securities broker under Section 15(b), of the 1934 Securities Investor Protection Act, and by operation of that Act, the corporation would be a member of SIPC unless its business consisted exclusively of various activities which are not pertinent to this hearing. It would appear, therefore, that Deerfield Securities, Inc. was, at the time of application at least, a member of SIPC. It is also found, however, that the application for registration submitted by Mr. Strehlau on behalf of himself and Deerfield Securities, Inc. contained what appears to be a material misrepresentation of fact in that it did not list Mr. Manger and Mrs. Strehlau as Directors. Mr. Manger had a disciplinary history in the industry in Tennessee and his omission was material. Article VI of Deerfield Securities' Articles of Incorporation filed with the Florida's Secretary of State's office listed Mr. Manger as one of the original Directors of Deerfield Securities, Inc. as of February 3, 1989. However, when Mr. Strehlau submitted the application for registration for Deerfield, (Form BD), neither that form nor any of the subsequent amendments listed Manger as a Director or affiliated person even though the form required that all Directors be listed. Mr. Strehlau contends that Manger and Mrs. Strehlau were omitted because neither were to take an active part in the management of Deerfield's operations. The Division, however, considered the omission to be a false material statement since the Directors of an applicant are considered to be pertinent to its operation. In this, the Division is correct. The Division also took the position that the pending Tennessee disciplinary action against Mr. Manger was significant. It surmised that Manger, seeing he could not be licensed in Florida on his own, was attempting to achieve this end through Mr. Strehlau, and the Department was concerned there was still a relationship between Manger and Deerfield. There is no evidence, direct or otherwise, to support that suspicion. When an application form is sent to an applicant, upon the applicant's request, an instruction sheet is sent with it which outlines the basic requirements for filing. These instructions are not, however, all inclusive or controlling. The statutes and Rules of the Department, pertinent to criteria for application and registration, constitute the ultimate guidelines over who is approved for registration. When Division analysts review an application, they check it against a requirements check list to insure that all requirements are met. If required information is not included with the application, the Division must notify the applicant of the omitted information within 30 days. If the requested information is received within 60 days, the Division then has an additional 90 days in which to rule on the application. If the omitted information is not timely received, however, the Division can deny the application for incompleteness or approve it if appropriate. On the other hand, when all required information is received timely, if the Division does not act on the application within 90 days, the application is automatically approved and if a discrepancy is thereafter noted, corrective action must be through disciplinary action rather than denial. The Division's denial action here was based on two grounds. The first was the failure to list Mr. Manger as a Director on the original Form BD or any of the amendments thereto. The second was Mr. Manger's prior and pending disciplinary record. Even if the pending action were not considered, the Division would still have denied the Petitioner, Deerfield's, application based on the prior, completed disciplinary actions against Mr. Manger in Tennessee. Petitioner claims that the Division did not request a second time those items listed on the initial deficiency letter and which were not thereafter provided by him. It is the Division's policy that once the initial deficiency letter is sent, calling for additional information, if the applicant submits only a part of those items identified, it will not send out another notification reminding the applicant of the still- missing items. It is not required that such follow-up notification be sent. If, however, the applicant calls and inquires if its application is complete, the Division will advise the applicant which of the previously noted deficiencies have not yet been corrected. Here, no such inquiry by the Petitioner was made. In this case, the Division took the position that Petitioner's application was never complete since there was no clearing agreement signed by the required parties prior to approval. Further, Mr. Strehlau's application as a principal failed to include a proper copy of his personal disciplinary history regarding a dismissed charge of felonious pointing a fire arm in Oklahoma in 1981. Under Florida law, every securities dealership must have a registered principal and Mr. Strehlau was to fill that capacity for Deerfield. Since his application could not be deemed complete because of the failure to provide all the required information, neither could Deerfield's be deemed complete. The State of Florida will not approve the application of a broker/securities dealer without approval of the National Association of Securities Dealers, (NASD). It is normal practice for NASD and Florida approval to be at the same time. There is an attempt at coordination, but Florida cannot approve a dealer for registration without the approval of the SEC and NASD. As of March 8, 1989, the state had been advised that NASD was prepared to approve Deerfield Securities, Inc., though it had some reservations about the firm which were insufficient to support denial. Even had NASD granted approval, however, NASD registration and membership does not guarantee Florida registration. The standards for registration are different. No doubt Mr. Strehlau made many phone calls to the Division in an effort to get approval of these applications. Without question he submitted numerous amendments to the Form BD in an effort to provide that information that the Division asked for in a timely and proper manner. His claims that neither Mr. Manger nor Mrs. Strehlau were listed as Directors on any of the forms because they were not involved in the operation of the business, and that had it been intended for them to work in an operational capacity, they would have been listed are not persuasive, however. Notwithstanding his argument that if the Division had any questions about that, it should have inquired, clearly, that is not the Division's responsibility to do.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, therefore recommended that the application of Deerfield Securities, Inc. to be registered as a broker/dealer, and the application of Edward T. Strehlau to be registered as an associated person/principal of Deerfield Securities, Inc., in Florida be denied. RECOMMENDED this 5th day of October, 1990, in Tallahassee, Florida. ARNOLD H. POLLOCK, Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 5th day of October, 1990. COPIES FURNISHED: Edward T. Strehlau, pro se 13122 Woodington Drive Houston, Texas 77038 R. Beth Atchison, Esquire Office of the Comptroller The Capitol, Suite 1302 Tallahassee, Florida 32399-0350 The Honorable Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0350 William G. Reeves General Counsel The Capitol Plaza Level, Room 1302 Tallahassee, Florida 32399-0350
The Issue The 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
Findings Of Fact At all times relevant hereto, respondent, Pioneer Diversified Investments, Inc.(PDI), was registered as a broker-dealer of securities with petitioner, Department of Banking and Finance, Division of Securities (Division). PDI's registration became effective on June 25, 1985 and it commenced operations on that date at 4651 Sheridan Street, Suite 270, Hollywood, Florida. Respondent, Steven J. Hurtig (Hurtig), was also registered with petitioner as an associated person of PDI. In addition, he is registered as a financial/operations principal, full registration/general securities representative, general securities principal and a municipal securities principal. On June 25, 1986 the firm ceased doing business and is now inactive but both respondents are still registered with the Division. As a condition to licensure, Hurtig agreed to the entry by the Division of a Stipulation and Consent Agreement and Final Order on June 25, 1985 wherein the following pertinent conditions were imposed: Hurtig agrees that on the effective date of the applications as aforesaid, and for sixty (60) days thereafter he shall not have, assume, or perform any management responsibilities for or on behalf of Pioneer Diversified Investments, Inc., and his activities during said period shall be limited to those of a salesman. Hurtig further agrees that Ellen Kracoff shall assume and discharge all management responsibilities for and on behalf of Pioneer during said period. Therefore, under the terms of this order, Hurtig was not allowed to assume any managerial responsibilities with PDI or act in any capacity other than as a salesman during the firm's first sixty days of operation. As a registered broker-dealer, PDI was subject to certain recordkeeping requirements. By rule (3E-600.14, FAC) the Division has established a requirement that registered broker-dealers maintain their books and records in a manner described in Rules G-7 and G-8 adopted by the Municipal Securities Rulemaking Board (MSRB), a national rulemaking authority for municipal security dealers and brokers. Copies of Rules G-7 and G-8 have been received in evidence as petitioner's exhibits 8 and 11, respectively. In addition, Rule 3E-600.14, Florida Administrative Code, imposes certain broad recordkeeping requirements upon dealers. On May 22, 1986, two Division financial specialists, Jerome Jordon and Zayre Espraza, conducted a routine audit of PDI's books and records. Jordon and Espraza had held those positions for approximately two months and their experience was limited to three or four prior audits and attendance at a two- week seminar in Tallahassee. The audit continued on May 23 and 28 and June 2 and 10. When the audit occurred, PDI was in the process of going out of business, and shut its doors about two weeks after the last visit by the auditors. During the course of the audit, Jordon requested various documents from Hurtig. These documents were retrieved by Hurtig, initially reviewed by him, and then given to the auditors for their review, Among other things, Jordon requested a copy of PDI's complaint file, associated person's file, general ledger, cash receipts and disbursement journal, purchase and sales blotter, and records of receipts and deliveries of securities. In response to Jordon's request for a complaint file, Hurtig advised him PDI had received no consumer complaints since the business had opened approximately eleven months earlier. Although Jordon did not see such a file during his audit, the firm did maintain a complaint folder (albeit empty) during that time as required by MSRD Rule G-8(a)(xii). The folder has been received in evidence as respondents' exhibit 2. PDI was required to maintain in its office files a Form U-4 for all associated persons. These records are commonly referred to as "associated person's files". When the audit occurred, Ellen K. Kracoff was an associated person with PDI and her U-4 form should have been maintained in the associated person's file. When Jordan reviewed the file on June 2, he did not see Kracoff's U-4 form. However, on his return visit on June 10, Jordan found the U-4 form in the file. At hearing he acknowledged it was "possible" that he simply overlooked the form during his earlier review. The form has been received in evidence as respondents' exhibit 1. According to MSRB Rule G-8(a)(i), which has been adopted by reference by the agency and a copy thereof received in evidence as petitioner's exhibit 8, a broker-dealer of municipal securities must maintain a "blotter or other records of original entry" containing the following information relative to the trading of municipal securities: ...an itemized daily record of all purchases and sales of municipal securities, all receipts and deliveries of municipal securities (including certificate numbers and, if the securities are in registered form, an indication to such effect), all receipts and disbursement of cash with respect to transactions in municipal securities, all other debits and credits pertaining to transactions in municipal securities, and in the case of municipal securities brokers and municipal securities dealers other than bank dealers, all other cash receipts and disbursements if not contained in the records required by other provision of this rule. The records of original entry shall show the name or other designation of the account for each such transaction effected (whether effected for the account of such municipal securities broker or municipal securities dealer, the account of a customer, or otherwise), the description of the securities, the aggregate par value of the securities, the dollar price or yield and aggregate purchase or sale price of the securities, accrued interest, the trade date, and the name or other designation of the person from whom purchased or received or to whom sold or delivered. With respect to accrued interest and information relating to "when issued" transactions which may not be available at the time a transaction is effected, entries setting forth such information shall be made promptly as such information becomes available. During his office visits, Jordan requested the general ledger of PDI. His purpose was to review all receipts and disbursements of cash. Jordon found no entries in the general ledger pertaining to commissions received by PDI on sales of municipal securities. This had the effect of understanding the net capital computation of the firm, which is a measuring tool for gauging the financial soundness of the firm. 2/ By having no then-current record of commissions received, PDI failed to adhere to the requirement in the foregoing rule that a municipal securities dealer keep an itemized daily record of "all receipts and disbursements of cash with respect to transactions in municipal securities" to the extent the firm engaged in that type of business during the period in question. Another recordkeeping rule [rule 17a-3(a)(1)] promulgated by the Securities and Exchange Commission (SEC) which governs other types of dealer transactions and which was relied upon in the amended administrative complaint was not addressed at final hearing, made an exhibit, or officially noticed. Accordingly, it has been disregarded. Jordon also requested that PDI produce its "purchase and sales blotter" so that he could review a daily record of customer trades. Although PDI had no "blotter", it did have copies of the firm's daily trading report furnished once a month by its clearing broker, Mesirow and Company, which reflected all daily sales during that period (respondents' exhibit 3). In addition, PDI retained copies of tickets reflecting sales of securities as well as confirmations furnished by Mesirow approximately four days after each transaction was executed (respondents' exhibit 4). Since respondents' exhibits 3 and 4 constituted "other records of original entry", PDI was in compliance with MSRB Rule G- 8(a)(i). Moreover, since PDI did not take in any funds, no cash receipts journal relating to municipal securities was maintained. The amended administrative complaint alleges that between July 1, 1985 and August 21, 1985 "Pioneer through Hurtig had engaged in at least ten (10) securities trades involving municipal securities in Hurtig's capacity as a municipal securities principal... in violation of the Stipulation... dated June 25, 1985". Records produced at hearing indicated that Hurtig (identified as salesman 014) executed three purchases of municipal securities for each of two accounts which were maintained by long time family friends (the estate of Harry Bender and his widow, Mina Bender) between June and August, 1985. Hurtig asserted that he was acting as a salesman (and not as a principal) at that time, and did not intend to violate the Stipulation. However, since no other person in the firm except Hurtig was registered as a municipal securities principal, the trades would have to have been executed under his supervision. When the above transactions occurred, PDI had not paid the MSRB an initial $100 fee and $100 annual fee required by MSRB Rules A-12 and A-14, respectively. These fees are required for municipal securities brokers and dealers who conduct any business during the MSRB's fiscal year. Since no fees were paid, PDI was not a member of that organization. Even so, the failure to pay these assessments was an oversight, and there was no intent by PDI or its personnel to circumvent the law. The amended administrative complaint also charges PDI with having failed to conspicuously display its Division broker-dealer license in its office. However, no testimony or documentation was offered to substantiate this charge. There is no evidence that any customer or member of the public was injured economically or otherwise by the actions of PDI and Hurtig.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that PDI and Hurtig be found guilty of the violations set forth in the conclusions of law, and that all other charges be DISMISSED. It is further recommended that their registrations be placed on probation for one year. DONE AND ORDERED this 25th day of February, 1987 in Tallahassee, Leon County, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of February, 1987.
The Issue The issue for consideration in this case is whether Petitioner should be granted registration as an associated person by the Department of Banking and Finance, or whether his application should be denied because of alleged misconduct outlined in the letter of denial.
Findings Of Fact At all times pertinent to the issues herein, the Petitioner, Richard Graibus, was either a registered associated person associated with a security firm or an applicant for registration as an associated person in Florida, and the Respondent, Department of Banking and Finance, Division of Securities and Investor Protection, (Department), was and is the state agency charged with the responsibility of regulating the sale of securities in this state. On August 19, 1988, Mr. Graibus filed an application to be an associated person of Finnet Securities, Inc., (Finnet), with the Department. On March 3, 1989, by letter, the Department notified Mr. Graibus of its intent to deny his application on the basis that prior disciplinary action taken against him by other states was prima facie evidence of his unworthiness to act as a securities dealer in Florida. Specifically, the bases for denial were: A Minnesota Cease and Desist Order in December, 1977. A Securities and Exchange commission suspension order in May, 1983. The denial of Petitioner's application for registration as an associated person with J. W. Gant and Associates by 10 states. Three judgements against Petitioner. His termination for cause from employment with American Western Securities. Petitioner was employed by American Western Securities in Denver, Colorado from November, 1977 to July 1980 when he left feeling a change would be beneficial to his career. No evidence was presented to support the Department's allegation that Petitioner was terminated for cause from that period of employment and that allegation is found to be unsupported. In December, 1977, the State of Minnesota issued a Cease and Desist Order against Petitioner alleging that he offered to sell, and did sell, unregistered securities while neither he, the firm, nor the securities were registered in that state as required by state law. Petitioner did not dispute the allegations of fact outlined in the Minnesota Order. The actual sale was made to a father and son who Petitioner had inherited as customers from his stepfather. The trades were unsolicited and were approved by petitioner's supervison who had many years experience in the securities trade. On May 23, 1983, the Securities and Exchange Commission, (SEC), found that Mr. Graibus had, at an unspecified time, wilfully violated and aided and abetted in violations of the anti-fraud and anti-manipulation provisions of the United States security law, and had failed to reasonably supervise others under his control to prevent violations of the same law. Petitioner engaged in cross trading, manipulation of stock prices, and fraudulent representations to customers regarding two stocks. These findings were incorporated in a Findings and Order Imposing Remedial Sanctions which were drafted and adopted from an offer of settlement submitted by Mr. Graibus. In its Order, the SEC took the following disciplinary action: It suspended Petitioner from association with any broker/dealer for 60 days; It barred Petitioner from acting in a supervisory capacity as a principal, officer, director or employee for 12 months; and It stipulated that Petitioner was not to act in a supervisory position without prior approval from the Commission, after the expiration of the previously mentioned 12 month period. Mr. Graibus has twice previously been granted registration as an associated person in Florida. Specifically, on May 9, 1984, he was approved as an associated person with Chesley and Dunn; and on January 28, 1985, he was approved as an associated person with J. W. Gant and Associates. In both cases, the Department had knowledge of the Minnesota Order and the SEC action since Petitioner disclosed both on each application. In 1984, while Petitioner was a principle of the brokerage firm of Chesley and Dunn, Inc., the Securities and Exchange Commission revoked the firm's registration for violations of various net capital and financial reporting regulations. There was no charge against the Petitioner. As a result of his association with this firm, and his having signed notes on behalf of the firm in his personal capacity, Mr. Graibus incurred a substantial liability for obligations of the firm, which are memorialized by three default judgements against him. The initial loan totaled $150,000.00. While manager of the firm's Sarasota office, Petitioner also invested approximately $175,000.00 of his own money which was lost. All his private obligations were fully disclosed to prospective creditors when he borrowed the money for the firm. In 1985, Mr. Graibus submitted applications to several states for registration as an associated person with J. W. Gant and Associates. These applications fully disclosed the entry of the Minnesota Order and the results of the SEC action. His applications were approved in twenty-two states, but as a result of the aforementioned SEC action, were denied by the states of Pennsylvania, Nebraska, Ohio, and Tennessee. He protested the denial by Tennessee and on November 22, 1985, that state entered a Final Order confirming its denial of his application for registration, finding that he had failed to disclose the adverse finality of the Minnesota Cease and Desist Order claiming Instead that the order had been resolved by corporate counsel. This comment is also made- in Mr. Graibus's Gant application in Florida which granted his application. Mr. Graibus did not protest the entry of the Final Order In Tennessee. Mr. Peter Maftieu is a registered securities dealer in four separate classifications. He has worked for J. W. Gant and Chesley and Dunn since January, 1983. Petitioner trained him when he first started in the industry. Incorporated as a fundamental part of Petitioner's training [pg was the insistence on full disclosure of material facts to clients and the need to insure that he, as a salesman, educated himself as to his client's situation by a full and detailed questioning to insure the securities recommended were suitable for and consistent with the client's needs. As a part of his training, Petitioner showed Mr. Maftieu the SEC and Minnesota orders as examples of what can happen if there is not full compliance with the rules. Due to increasing instances of misconduct within the securities industry in this state, none of which was shown to relate to Petitioner, in 1985 the Florida Comptroller created a task force to study the problem and come up with recommendations for efforts to combat fraud in the securities industry in Florida. In March, 1986, the task force submitted its report which, in part, recommended that the Department tighten up its review of applications for registration as securities dealers to eliminate or disqualify applicants with a disciplinary record within the industry. As a result of this recommendation, the Department altered its policy in exercising its discretionary approval authority. Petitioner has, for many years now, practiced full disclosure in the conduct of his business and it has been in excess of six years since the last findings of any violations of securities laws, rules or regulations by Petitioner. Nonetheless, in this case, the Department's denial of Mr. Graibus' application, which was based on his disciplinary history in other states, was consistent with its policy against granting registration to "unworthy" persons, as outlined in the Department's rules, and the intent of the Legislature as outlined in Section 517.1205, Florida Statutes.
Recommendation Based, on the foregoing Findings of Fact and Conclusions of Law, it is, therefore: RECOMMENDED that Petitioner's application for registration as an associated person with Finnet Securities, Inc., be granted. RECOMMENDED this 5th day of January, 1990, in Tallahassee, Florida. ARNOLD H. POLLOCK Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 5th day of January, 1990. COPIES FURNISHED: Edward W. Dougherty, Jr., Esquire Mang, Rett & Collette, P.A. 660 D. Jefferson St. Post Office Box 11127 Tallahassee, Florida 32301-3127 M. Catherine Green, Esquire Paul C. Stadler, Esquire Department of Banking and Finance Suite 1302 The Capitol Tallahassee, Florida 32399-0350 Hon. Gerald Lewis Comptroller State of Florida The Capitol Tallahassee, Florida 32399-0350 Charles L. Stutts General Counsel Department of Banking and Finance Suite 1302 The Capitol Tallahassee, Florida 32399-0350
Findings Of Fact On November 20, 1985, petitioners, Richard Schulze and Constable Atlantic, Inc., made application with respondent, Department of Banking and Finance, Division of Securities (Divi- sion), for licensure as a principal and broker-dealer, respec- tively. In response to a Division request, petitioners submitted amended applications containing additional information on January 31, 1986. After conducting an investigation of petitioners' backgrounds, the agency issued a proposed final order on February 18, 1986, denying the application on the grounds (a) Schulze had violated the federal Commodity Exchange Act and had been the subject of a final administrative order in the State of Minnesota involving a violation of that state's security laws, and (b) an officer or director of Constable Atlantic, Inc. (Schulze) had been guilty of an act which would be cause for denying or revoking the registration of an individual dealer. The agency action prompted the instant proceeding. Schulze is president of Wyndwood Merchantile Corporation (Wyndwood) and various affiliated organizations. Wyndwood is involved in the sale of precious metals and is currently doing business in the State of Florida and other states. Constable Atlantic, Inc. is a Delaware corporation authorized to do business in the State of Florida. Schulze is Constable's president, his wife Theodora treasurer, and his son Otto secretary. The three are also the directors and shareholders of the corporation. Constable is now registered as a broker and dealer with the federal Securities and Exchange Commission. Just recently, Schulze was licensed as an associated person and a commodity pool operator by the National Futures Association, which is the licensing arm of the Commodities Futures Trading Commission (CFTC), a federal agency in Washington, D.C. Schulze has been involved in selling securities for the last six or seven years. At one time he was also a principal with Atlantic Futures, Inc. (AFI), which was then licensed as a commodity pool operator and trading advisor with the CFTC. AFI and Schulze were both under the regulatory jurisdiction of that agency. On October 2, 1984 the CFTC issued a complaint and notice of hearing alleging that AFI and Schulze had violated various provisions of the federal Commodity Exchange Act and CFTC regulations. More specifically, it alleged that: ...AFI and Schulze, aided and abetted by each other,...cheated and defrauded or attempted to cheat and defraud AFI's pool participants in violation of Section 46(A) of the Commodity Exchange Act, as amended...; that AFI, aided and abetted by Schulze, violated Section 40(1) of the Act and Sections 4.41(a) and 166.3 of the Commission's regulations; and that AFI violated Sections 4.21(a) and 4.21(a)(3) of the Commission's regulations. Thereafter, Schulze and AFI submitted an offer of settlement to the CFTC which was accepted and formalized in a consent decree entered by the CFTC on April 23, 1985. The consent decree made no adjudication of law or fact, or an adjudication on the merits of the case. Rather, it was entered solely for the purposes of accepting the offer of settlement and terminating the proceeding. Under the terms of that decree, which has been received in evidence as respondent's exhibit 2, Schulze and Atlantic paid a $100,000 fine and agreed to cease and desist from any violations. In addition, AFI agreed to a suspension of its registrations for six months and to never apply for any other registrations with the CFTC. Finally, for purposes of the settlement only, the CFTC found Schulze had violated certain portions of the Act and regulations and noted that "these findings may be used only in any other proceedings brought by the Commission." Schulze later made application with the CFTC for licensure as a dealer, and this application was approved on September 11, 1986. On or about July 26, 1984 the State of Minnesota issued an ex parte cease and desist order against Wyndwood, Schulze and others requiring them to stop selling securities in that state without being registered. The order, which has been received in evidence as respondent's exhibit 1, required Schulze to request a hearing within a prescribed time, or the order would become final. Schulze did not timely request a hearing. However, after the prescribed time to request a hearing had expired, he filed a request with the State Commissioner and the order of July 26 was subsequently vacated on September 18, 1986. The outcome of the proceeding is not known. Constable Atlantic, Inc. is a member firm of the National Association of Security Dealers (NASD) and is registered as a broker and dealer with the Securities and Exchange Commission (SEC). In obtaining their registrations, Constable and Schulze furnished the SEC and NASD the same information that was submitted to respondent.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the applications of Constable Atlantic, Inc. and Richard Schulze for registration as a broker- dealer and principal, respectively, be APPROVED. DONE and ORDERED this 26th day of November, 1986, in Tallahassee, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 26th day of November, 1986. APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-1065 Petitioners: 1. Covered in finding of fact 4. 2. Covered in finding of fact 4. 3. Covered in finding of fact 4. 4. Covered in finding of fact 3. 5. Covered in finding of fact 3. 6. Covered in finding of fact 3. 7. Covered in finding of fact 3. 8. Covered in finding of fact 3. 9. Covered in finding of fact 3. Covered in finding of fact 3. Covered in finding of fact 2. Covered in finding of fact 2. Rejected as being irrelevant. Covered in finding of fact 5. Respondent: Covered in finding of fact 1. Covered in finding of fact 1. Covered in finding of fact 1. Covered in finding of fact 4. Covered in finding of fact 4. Covered in finding of fact 3. Rejected as being irrelevant. Rejected as being irrelevant. COPIES FURNISHED: Edward Brodsky, Esquire Sarah S. Gold, Esquire SPENGLER, CARSON, OUBAR, BRODSKY and FRISCHLING 280 Park Avenue New York, New York 10017 Calianne P. Lantz, Esquire Office of the Comptroller 401 Northwest 2nd Avenue Suite 870 Miami, Florida 33128 Honorable Gerald Lewis, Comptroller The Capitol Tallahassee, Florida 32301-8054 Charles E. Scarlett, Esquire Room 1302, The Capitol Tallahassee, Florida 32301-8054
