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
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 Upon consideration of the oral and documentary evidence adduced at the hearing the following facts are found: On or about November 24, 1976, the Petitioner, Department of Banking and Finance, Division of Securities, filed and served a Notice of Intent to Suspend or Revoke License and accompanying Administrative Charges and Complaint on Respondent. The Notice of Intent and Administrative Charges and Complaint were received by Respondent on November 26, 1976. Thereafter, Respondent, by and through his counsel, timely requested a Section 120.57 hearing. The Petitioner referred the Respondent's request for hearing to the Division of Administrative Hearings and the undersigned Hearing Officer was assigned to conduct the hearing. On or about March 17, 1978, Petitioner filed a Motion to Amend Administrative Charges and Complaint seeking to withdraw the prior allegations contained in the complaint and substituting paragraphs eight (8) and nine (9) which respectfully alleged that Respondent was adjudicated guilty on or about March 6, 1978, to the felony charges of two (2) counts of sale of unregistered securities, and that such adjudication of guilt is prima facie evidence of unworthiness to transact a business of a securities salesman in the State of Florida. Petitioner's Motion to Amend was granted without objection by Respondent. Counsel for Petitioner introduced into evidence certain "admissions" of Respondent to certain questions propounded to Respondent by the Petitioner's Request for Admissions filed on or about March 21, 1977. The two "admissions" admitted into evidence were number 1 and number 2, which admitted that Respondent was registered as a security salesman on or about July 30, 1971 and that he held license no. 64590 as a salesman at the time the Administrative Charges and Complaint was filed. The supervisor for the licensing and registration of securities dealers and agents testified that Respondent was registered as a securities salesman on or about July 30, 1971 and that Respondent did hold license no. 64590 as a securities salesman at the time the Administrative Complaint was filed. Counsel for Petitioner introduced into evidence a certified copy of Judgment of Guilt/Order of Probation of Respondent, which had been filed with the Hearing Officer on or about March 27, 1978, pursuant to a proper Notice of Filing. The certified copy of the Judgment of Guilt of the Respondent concerned the case of State of Florida v. Jay Aten, Jr., in the Circuit Court of Lee County Florida, Case No. 76-239 CF. According to that document on or about March 6, 1978, Respondent tendered to the court a plea of nolo contendere to the offense of sale of unregistered securities. Respondent was adjudicated guilty, and the imposition of a five (5) year prison sentence was withheld and the Respondent placed on a five (5) year period of probation. Respondent was required to pay the sum of $5,000 fine within six (6) months. Counsel for Petitioner requested the Hearing Officer to take official recognition of Section 517.16(1)(h), Florida Statutes, and Rule 3E-30.10(1), Florida Administrative Code, pursuant to Rule 221-2.25 of the Model Rules. The Hearing Officer officially recognized the statute and rule cited above.
Recommendation Revoke the license no. 64590 held by the Respondent as a securities salesman. DONE AND ENTERED this 22nd day of June, 1978, in Tallahassee, Florida. DELPHENE C. STRICKLAND Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Franklyn J. Wollett, Esquire Jay Aten, Jr. Office of the Comptroller 4178 Erindale Drive The Capitol North Ft. Myers, Florida Tallahassee, Florida 32304 M. W. Schryver, Esquire 600 Fifth Avenue South, Suite 306 Naples, Florida 33940
The Issue The central issue in this case is whether Petitioner is entitled to be registered as an associated person.
Findings Of Fact Petitioner filed an uniform application for securities registration with the Department. This application sought registration as a general securities representative (5-7) and named Sheffield Securities, Inc. as the firm for whom she intended to work. The application sought information regarding Petitioner's past work experience and specifically inquired as to whether the U.S. Securities and Exchange Commission (SEC) had ever found her to have been involved in a violation of investment-related regulations or statutes. The application also asked Petitioner to disclose whether the SEC had entered an order denying, suspending or revoking her registration or disciplined here by restricting her activities. To both of these questions Petitioner answered "yes." Petitioner's association with the securities industry began in 1972 when she was employed as a secretary for a securities firm. Her work prior to that had been as a bookkeeper. Petitioner obtained her registration and purchased a securities business, Adams & Whitney Securities Corp., in late 1973 or early 1974. Adams & Whitney was registered with the SEC and operated as a broker/dealer buying and selling interests for itself and others. Petitioner was the president and sole principal for Adams & Whitney. On February 9, 1976, the SEC issued a released which claimed Adams & Whitney and Petitioner had wilfully violated and wilfully aided and abetted violations of the anti-fraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities EXCHANGE ACT of 1934, and Rule lOb-5 in connection with an offer to purchase, and sale of ITS securities and manipulation of the price of the security. The release also alleged Petitioner had violated Section 15(c)(2) of the securities EXCHANGE ACT of 1934 and Rule 15c 2-7 by submitting quotations for ITS securities to a interdealer quotation system without notification to the system of arrangements with other brokers and guarantees of profits. Without admitting or denying the allegations against her, Petitioner submitted an offer of settlement regarding the ITS charges which the SEC determined to accept. As a result, the registration as a broker-dealer of Adams & Whitney was suspended for a period of four months. Also, Petitioner was suspended from association with any broker-dealer for a period of four months. On June 27, 2977, the SEC issued a release which charged that Petitioner had wilfully violated and wilfully aided and abetted violations of the registration provisions of the Securities Act of 1933, and had willfully violated an wilfully aided and abetted violations of the anti-fraud provisions of the Securities Act of 1933 and the Securities EXCHANGE Act of 1934 in connection with the offer and sale of the common stock of Tucker Drilling Company, Inc. Without admitting or denying the allegations against her, Petitioner submitted an offer of settlement regarding the Tucker Drilling charges which the SEC decided to accept. As a result, the SEC found that Petitioner wilfully violated and wilfully aided and abetted violations of Sections 5(a) and 5(c) of the Securities Act of 1933. Further, it was found Petitioner willfully violated and willfully aided and abetted violations of Section 10(b) of the EXCHANGE act and Rule 10b-6. Based on its findings the SEC suspended Petitioner from association with any brokers, dealer or investment company for a period of twelve months and barred her from association with any broker, dealer or investment company in a supervisory or proprietary capacity. Prior to the entry of the administrative penalties imposed against Petitioner in connection with the Tucker Drilling charges, the SEC had obtained a civil injunction against Petitioner which permanently enjoined her from violating the federal securities laws in connection with the offer and sale of Tucker securities or any other securities. Petitioner maintained at hearing that the submitted of settlement were offered as an expedient means of resolving the charges since she did not have the financial resources needed to oppose the allegations. In connection with the ITS charges, Petitioner stated she did not improperly scheme to manipulate the stock prices, that she neither bought nor sold shares of ITS, and that she was charged with other broker-dealers who had "made a market" for ITS simply because of her association with them. Further, Petitioner denied she had ever received compensation for deals made with the ITS sales In connection with the Tucker Drilling charges, Petitioner admitted she actively participated in the purchase and sale of the Tucker stock but that she had not known of the improprieties of others involved in the trading. Petitioner denied she had knowingly violated the laws and alleged that by the time she determined something was improper, the investigations had begun. Petitioner found the Tucker incident a "stupid mistake. In 1976, Adams & Whitney went out of business. Petitioner subsequently devoted her energy to her own and family health problems and became a housewife. In 1985, Petitioner's family moved to Florida and she worked as a secretary for a brokerage firm called Brown & Hawk, Inc. From September, 1986 until the time of her application, Petitioner worked as a secretary for Sheffield Securities, Inc. During her employment with Sheffield, Petitioner studied for an successfully passed the examination for S-7 registration. According to Dennis Dixon, who was a financial principal and general securities associated person at Sheffield Securities, Petitioner is a very trustworthy person who is also very capable. According to Don Saxon, the determination that Petitioner had violated the anti-fraud provisions was a great concern to the Department since those violations are the most serious types perpetrated by an individual in the industry.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: Department of Banking and Finance, Office of the Comptroller, Division of Securities and Investor Protection enter a Final Order approving Petitioner's application for registration with restrictions as may be deemed appropriate by the Department. DONE and RECOMMENDED this 25th day of July, 1988, in Tallahassee, Florida. JOYOUS D. PARRISH Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of July, 1988. APPENDIX TO RECOMMENDED ORDER, CASE NO. 88-0531 Rulings on Petitioner's proposed Findings of Fact: Paragraph 1 is accepted. Paragraph 2 is accepted. Paragraph 3 is rejected as argument. Paragraph 4 is rejected as argument or unsupported by the evidence. To the extent relevant see findings made in paragraphs 11 & 12. Paragraph 5 is rejected as argument. Paragraph 6 is accepted to the extent addressed in findings made in paragraphs 10, 11, 12 otherwise rejected as argument unsupported by the record, or irrelevant. The first sentence in paragraph 7 is accepted. The balance of paragraph 7 is rejected as argument. Paragraph 8 is accepted. Paragraph 9 is rejected as argument. The first 4 sentences of paragraph 10 are accepted. The balance of paragraph 10 is rejected as argument. Paragraph 11 is rejected as argument. COPIES FURNISHED: Charles E. Scarlett Assistant General Counsel Office of the Comptroller Suite 1302, The Capitol Tallahassee, Florida 32399 Michael J. Cohen, Esquire 517 S. W. First Avenue Fort Lauderdale, Florida 33301 Honorable Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0350
Findings Of Fact Seaton made application to the Division under the provisions of Section 517.12, Florida Statutes, for registration as a salesman of securities. Subsequently, the Division issued its intent to refuse or deny license or registration along with administrative charges and complaint alleging that Seaton was unworthy to transact the business of a salesman. On February 22, 1977, the Securities Commissioner of the State of South Carolina issued his order to cease and desist directed to Seaton on the dual grounds that Seaton engaged in conduct inconsistent with just and equitable principles of trade in that he offered for sale limited partnerships constituting securities while failing to register them as required and that Seaton failed to register as a broker, dealer or agent in South Carolina. On June 7, 1977, the District Business Conduct Committee for District number 4 of the National Association of Securities Dealers, Inc., issued its complaint against Seaton for violations of Article III, Sections 1, 18 and 27 of the Rules of Fair Practice of the National Association of Securities Dealers, Inc.
