The Issue Whether the Respondent, the Health Care Cost Containment Board, should waive the requirement that Golden Glades Regional Medical Center file its audited actual experience or was the Respondent correct in declining to review the Petitioner's fiscal year 1990 proposed budget?
Findings Of Fact On or about September 26, 1989, the Petitioner filed its proposed budget for its fiscal year beginning January 1, 1990, and ending December 31, 1990, with the Respondent. The Petitioner's proposed 1990 budget was submitted pursuant to Section 407.50(3), Florida Statutes. The Respondent determined that the Petitioner's proposed 1990 budget should not be approved. The Respondent proposed in its preliminary findings and recommendations to hold the Petitioner to its 1988 budget levels of gross revenue per adjusted admission of $8,532.00 and net revenue per adjusted admission of $5,835.00. About the same time that the Petitioner filed its proposed 1990 budget, the Petitioner filed unaudited financial statements for its fiscal year ending December 31, 1988, with the Respondent. The financial statements were not accompanied by an audit opinion letter from the Petitioner's certified public accountants. Therefore, the statements did not constitute "audited actual experience" or "audited actual data". The Respondent rejected the Petitioner's proposed 1990 budget because of the Petitioner's failure to file audited actual experience. Hospitals subject to Chapter 407, Florida Statutes, are required to file audited actual experience which is used by the Respondent in reviewing hospital budgets. In February or March, 1989, the Petitioner retained an independent, Florida licensed certified public accountant (hereinafter referred to as the "Auditors"), to prepare audited financial statements for its 1988 fiscal year. The Auditors completed all the field work they could complete in April or May, 1989. An audit opinion letter must be included with an audit report pursuant to generally accepted auditing standards. The Auditors have delayed issuing an audit opinion letter for the Petitioner's 1988 fiscal year, which is required in order to issue audited financial statements. Audit opinion letters typically contain a description of the scope of the work performed by the auditors, a description of the audit process and an opinion concerning whether the financial statements are fairly stated in all material respects in accordance with generally accepted accounting principles. The Auditors have been requested by the Petitioner to withhold issuance of their final audit report for the Petitioner's 1988 fiscal year. As of the date of the formal hearing of this case, the Auditors had not issued an audit opinion letter, and thus an audit report, because they needed to be provided by the Petitioner with information concerning the restructuring of the Petitioner's debt, updated legal letters from the Petitioner's attorneys and a management representation letter from the Petitioner. The Petitioner's source of working capital for its daily operations has been a line of credit with First American Bank. The line of credit expired during 1989. A new source of working capital has not been arranged by the Petitioner. Therefore, the Auditors could not issue an audit opinion letter concluding that the Petitioner is viable as a "going concern." Unless the Petitioner can restructure its debt or find another source of debt-financing, increase its equity capital or achieve profitable operations, the Auditors will not be able to opine that the Petitioner is a going concern. This problem has been in existence almost since the inception of the Petitioner's ownership of the hospital. The Petitioner has requested three extensions of time to file its proposed 1990 budget. It did not inform the Respondent of the debt restructuring problem in any of the extension requests. Without resolving the debt restructuring problem of the Petitioner, the Auditors cannot determine what effect a renegotiation of the Petitioner's debt may have on the Petitioner's financial statements for its 1988 fiscal year. There will be uncertainty concerning the 1988 fiscal year financial statements of the Petitioner until the Auditors issue their final audit report. If the Auditors issued an opinion letter as of the date of the formal hearing, they would have to issue a "disclaimer" letter. In issuing a disclaimer, an auditor declines to render an opinion concerning the financial statements. To avoid a disclaimer opinion letter, the Petitioner requested that the Auditors not issue their final audit report. Whether the Petitioner is a going concern does not impact on the calculation of its operational revenues and expenses as represented in the Petitioner's unaudited 1988 fiscal year financial statements. If the Petitioner is not considered a going concern the Petitioner would be considered on a liquidation basis for purposes of its financial statements. Therefore, the question of whether the Petitioner is a going concern does impact the manner in which its assets would be valued and the determination of the Petitioner's liabilities. A management representation letter, which the Auditors also need to complete their audit of the Petitioner, is a letter from the management of a business, such as a hospital, representing that management has made available all of the books and records of the hospital, that management understands generally accepted accounting principles and the financial statements of the hospital have been prepared in accordance with such principles, that all liabilities have been accrued and that proper disclosures have been made in the financial statements. A management representation letter is required by the American Institute of Certified Public Accountants before an audit opinion letter may be issued. A management representation letter should provide assurances to the auditors that management has made available all financial records and related data, and minutes of the meetings of the stockholders and directors, if a corporation, and that there are no irregularities involving management employees that could have a significant effect on the financial statements. Without a management representation letter there are no assurances that a hospital such as the Petitioner's has engaged in related-party transactions or, if so, the nature and impact on expenses of such transactions. In addition to submitting unaudited financial statements to the Respondent, the Petitioner provided the Respondent with a "comfort letter" from the Petitioner's Auditors. The Respondent needs audited actual experience in order for it to perform a full budget review of a hospital's proposed budget submitted pursuant to Section 407.50(3), Florida Statutes. The financial data contained in the audited actual reports of a hospital is used in the methodologies and formulas utilized by the Respondent in its budget review. The purpose of conducting a budget review is to determine the recommended levels of charges that a hospital may impose upon its patients in the budget year. Audited actual experience provides the starting point for determining whether a hospital's proposed budget is reasonable. A comfort letter merely indicating that the information on the financial statements should not change is not sufficient to provide the reliability the Respondent should demand of a hospital's financial statements. The Respondent's budget review includes an analysis of a hospital's ability to earn a reasonable rate of return. This analysis requires reliance upon the financial data contained in the hospital's balance sheet and income statement. The data must be reliable. Accuracy of the data can only be assured if it is part of an auditor's final report. As part of the audited actual experience of a hospital such as the Petitioner's hospital, it is reasonable for the Respondent to require that an audit opinion letter be provided. Without an audit opinion letter the Respondent cannot determine whether there are any disclaimers, qualifying statements or notes about subsequent events of the hospital. The Respondent does not have the resources necessary to perform its own audit of hospitals. Therefore, it is reasonable for it to require that hospital's provide audited actual experience to the Respondent. The rules of the Respondent allow it to waive the requirement that a hospital file audited financial statements. Rule 10N-1.006, Florida Administrative Code. The Respondent grants waivers pursuant to Rule 10N-1.006, Florida Administrative Code, if it is "impossible" for a hospital to file audited financial statements. The Petitioner did not file a request for such a waiver. The evidence failed to prove that the Respondent was prejudiced by the Petitioner's failure to file a request for a waiver. The Petitioner has failed to prove that the information necessary for it to file audited financial statements for its 1988 fiscal year was "not available at the time nor can be reasonably developed by the hospital " Unaudited financial statements may be relied upon for some purposes. The Respondent relies upon unaudited data for some purposes. But not for full budget review purposes. The weight of the evidence failed to prove that it is unreasonable for the Respondent to refuse to rely upon the Petitioner's 1988 fiscal year unaudited financial statements to complete the budget review the Respondent is required to conduct for 1990.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Respondent issue a Final Order dismissing the Petitioner's Petition for Administrative Hearing. DONE and ENTERED this 31st day of May, 1990, in Tallahassee, Florida. LARRY J. SARTIN 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 31st day of May, 1990. APPENDIX TO RECOMMENDED ORDER The parties have submitted proposed findings of fact. It has been noted below which proposed findings of fact have been generally accepted and the paragraph number(s) in the Recommended Order where they have been accepted, if any. Those proposed findings of fact which have been rejected and the reason for their rejection have also been noted. The Petitioner's Proposed Findings of Fact Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection 1 1-7 and hereby accepted. The last two sentences of proposed finding of fact 6 is not supported by the weight of the evidence. 8 2. 9 1-2. 10 3 and 10. See 29. Not relevant. Hereby accepted. The proposed finding of fact that the data on the financial statements "will not change" and the last sentence are not supported by the weight of the evidence. 11-14. The last sentence is not relevant. See 26. 16 See 27-28. The Respondent's Proposed Findings of Fact Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection 1 1. 2 2. 3 4. Hereby accepted. 2 and 4. 6 6. 7 6-7 and 9. 8 8. 9 9-11. 10 12. 11-12 15. 13 12. 14 21. 15 3, 22 and 29. 16 21-22. 17 22-23. 18 16-19. 19 25. 20 Not relevant. The Intervenor's Proposed Findings of Fact Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection 1 1. 2 3. 3 2. 4-8 Hereby accepted. 9-11 10. 12 16. 13 18. 14 16-19. 15 11-12. 16 11 and 13. 17 10, 14-15 and hereby accepted. 18 15. 19 Hereby accepted. 20 11. 21 14. 22 Hereby accepted. 23-26 8 27 20 and 22. 28 Hereby accepted. 29 9 and 14. 30 Hereby accepted. 31 8. 32 Not supported by the weight of the evidence. 33 21 and 24. 34 13. 35 12. 36 9. 37 12. 38 13. 39 29. 40 Hereby accepted. 41 26-27. 42 Hereby accepted. 43 9. 44 8 and hereby accepted. 45 21. 46 23. 47 24. 48 25. 49 22. 50 23 and hereby accepted. COPIES FURNISHED: James M. Barclay, Esquire Suite 500 315 South Calhoun Street Tallahassee, Florida 32301 Robert D. Newell, Jr., Esquire 817 North Gadsden Street Tallahassee, Florida 32303-6313 Jack Shreve Public Counsel David R. Terry Associate Public Counsel Peter Schwarz Associate Public Counsel c/o The Florida Legislature 812 Claude Pepper Building 111 West Madison Street Tallahassee, Florida 32399-1400 Stephen Presnell, General Counsel Health Care Cost Containment Board Woodcrest Office Park 325 John Knox Road Building L, Suite 101 Tallahassee, Florida 32303
The Issue Whether the proposal Petitioner submitted in response to Respondent's Invitation to Negotiate No. 03-01/02/C was non- responsive.
Findings Of Fact Stipulated Facts In December of 2001, Petitioner timely responded to ITN Number 03-01/02/C issued by the Department. The ITN sought in part, proposals for the provision of advertising and related services in a category entitled "Spanish Language Hispanic Market Advertising." On March 21, 2002, Petitioner was notified that its proposal was deemed non-responsive for the following reason: "Financial information for Publicis USA Holdings, Inc. was not provided (SEC 4.9)." In determining Petitioner non-responsive to the ITN for failing to submit financial statements for Publicis USA Holdings, Inc., the Department assumed that Publicis, Sanchez & Levitan, LLC, was the product of a merger between Sanchez & Levitan, Inc., and Publicis USA Holdings, Inc., and thus was required under the second paragraph of Section 4.9 of the ITN to submit financial statements or federal income tax returns for pre-merger entities. Petitioner is a Delaware limited liability company authorized to do business in Florida. Petitioner was created on March 14, 2002, under the name Sanchez & Levitan, LLC. At the time of its creation, Petitioner was owned 100% by Sanchez & Levitan, Inc., a Florida corporation. On March 16, 2001, Publicis USA Holdings, Inc., a Delaware corporation, acquired a minority ownership of 49% of Petitioner. The ownership of the controlling majority interest of 51% was retained by Sanchez & Levitan, Inc. On June 18, 2001, Petitioner amended its name from Sanchez & Levitan, LLC, to its current name, Publicis Sanchez & Levitan, LLC. Sanchez & Levitan, Inc., continues to own the controlling majority interest of 51%, while Publicis USA Holdings, Inc., continues to own a minority interest of 49%. For the past several years, Petitioner's parent company, Sanchez & Levitan, Inc., a Florida corporation incorporated on October 10, 1985, was a contractor to the department providing Spanish language Hispanic market advertising and related services. Petitioner is a separate company created in 2001 and is not the product of a merger. Petitioner is a subsidiary of its parent company, Sanchez & Levitan, Inc. Because Petitioner was created in March of 2001, and its response to the ITN was submitted on December 5, 2001, it had neither certified financial statements nor federal income tax returns for the past two years. Similarly, Petitioner's parent company, Sanchez & Levitan, Inc., did not have consolidated financial statements for the past two years because Petitioner, the subsidiary, did not exist for 1999 and 2000. In response to Section 4.9 of the ITN, Petitioner submitted federal income tax returns for calendar years 1999 and 2000 for Petitioner's parent company, Sanchez & Levitan, Inc. Findings of Fact Based on the Evidence of the Record While Petitioner's parent company provided Spanish language Hispanic market advertising to the Department for the past several years, that contract was assigned to Petitioner in August 2001. The Department acknowledged that at the time Petitioner submitted its proposal to the ITN, Petitioner was performing essentially identical services in a successful and financially responsible manner. Section 5.2 of the ITN specifies that the evaluation of responses for each category of the ITN will be conducted in two phases. All responsive proposals will be reviewed in Phase I by an evaluation committee. Those proposers scoring 90% or more of the total possible points for Phase I will be invited to participate in Phase II as a finalist. Thus, this case only involves whether or not Petitioner's proposal should be evaluated in Phase I. Section 2.1 of the ITN specifies that the Department has established certain mandatory requirements which must be included as part of any proposal and that the use of the words "shall", "must", or "will" in the ITN indicates a mandatory requirement. The language of the ITN is clear in informing potential proposers that non-compliance with material requirements will have harsh consequences. Section 2.2 of the ITN provides in pertinent part: 2.2 NON-RESPONSIVE PROPOSALS, NON- RESPONSIBLE RESPONDENTS Proposals which do not meet all material requirements of this ITN or which fail to provide all required information, documents, or materials, or are conditional will be rejected as non-responsive. Material requirements of the ITN are those set forth as mandatory, or without which an adequate analysis and comparison of proposals is impossible, or those which affect the competitiveness of proposals or the cost to the State. The Lottery reserves the right to determine which proposals meet the material requirements of the ITN. The section of the ITN which is at issue in this controversy is Section 4.9 and is a material requirement. As amended,1/ it reads in pertinent part as follows: 4.9 Financial Statements Respondents and substantial subcontractors in all categories will be required to submit certified financial statements in conformity with generally accepted accounting principles for the last two years including an auditor's report for both years and any management letters that have been received, or Federal Income tax returns for the past two years if certified financial statements are unavailable. If financial statements are not yet completed for the most recently completed fiscal year, the entity must submit statements for the two (2) prior years and subsequently submit the most recently completed fiscal year statement immediately upon its issuance. If a Respondent does not have certified financial statements, or if applicable, Federal Income tax returns, as a result of a merger of other entities, each pre-merger entity must submit certified financial statements, or if applicable, Federal Income tax returns, for the two most recent years. Certified financial statements or, if applicable, Federal Income Tax returns for the Respondent that are available must be submitted with its proposal, and any that become available during the procurement process must be submitted immediately upon issuance. Certified financial statements must be the result of an audit of the entity's records in accordance with generally accepted auditing standards by a certified public accountant (CPA). The financial statements must include balance sheets, income statements, statements of cash flows, statements of retained earnings, and notes to the financial statements for both years. Respondents or substantial subcontractors who are CMBE's may provide for the two (2) years most recently completed, the information provided to become a certified minority business enterprise (CMBE) including the supporting documentation used to arrive at the financial information. If the CMBE has not been a CMBE for two (2) years, it must provide the information submitted with its current CMBE application and similar information for the preceding year, as well as any other documentation which may substantiate the CMBE's financial responsibility. If a Respondent submits a consolidated financial statement of its parent corporation, the parent corporation must serve as financial guarantor of Respondent. Parent corporations that serve as financial guarantors of the subsidiary firms shall be held accountable for all terms and conditions of the ITN and resulting Contract and shall execute the Contract as guarantor. The Lottery shall hold all firms jointly and severally responsible for carrying out all activities required by the Contract. * * * Financial statements must be submitted with Respondents' proposals. There is nothing in the record to indicate that Petitioner challenged the terms of Section 4.9 of the ITN as being too restrictive at a time it could have done so. David Faulkenberry, Director of Finance and Budget for the Department, was responsible for determining whether or not proposals were in compliance with Section 4.9 of the ITN. He analyzed each submittal received to determine whether the proposer achieved compliance through any of the methods set forth in Section 4.9 of the ITN. When initially reviewing Petitioner's proposal, he assumed that Petitioner had been the product of a merger and applied the language of the second paragraph of Section 4.9. Petitioner was found to be non-responsive because neither the certified financial statements or federal income tax returns of pre-merger entities had been submitted. This conclusion resulted in the Department's posting of the Notice of Responsiveness and Responsibility that Petitioner was non- responsive because, "financial information for Publicis USA Holdings, Inc. was not provided (Sec.4.9)". After the posting of the Notice of Responsiveness and Responsibility, Mr. Faulkenberry became aware that Petitioner was not the product of a merger. As a result, Mr. Faulkenberry then reviewed the financial information submitted by Petitioner to determine whether it was responsive to Section 4.9. He reviewed the submission of Petitioner in light of each avenue of compliance provided in Section 4.9 of the ITN and determined that the proposal was non-responsive: Q As a result of that understanding, did you go back and review the financial information submitted by Publicis to determine whether indeed it was responsive to Section 4.9? A Yes. I looked at what they submitted and examined each of the avenues in Section 4.9 that a respondent could take. And, again, they did not submit--if you look at route 1, the respondent could submit certified financial statements, or, if they--those aren't available, federal income tax returns. They did not do that. So they were not--they did not pass that test. The next test was the merger outlet. We now understand that it was not a merger, so that outlet was closed. We knew they weren't a CMBE contractor respondent, so that paragraph did not apply. And then the last outlet was a respondent could have their parent submit consolidated financial statements. We did not receive consolidated financial statements of the parent, so that outlet or avenue was not met. And based on those outlets they, again, were found non-responsive. The information submitted by Petitioner in response to Section 4.9 of the ITN did not meet any of the avenues specified in that section. The Department applied Section 4.9 of the ITN to all proposers in the same manner as it did to Petitioner.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law set forth herein, it is RECOMMENDED: That the Department of the Lottery enter a final order dismissing Petitioner's protest. DONE AND ENTERED this 18th day of October, 2002, in Tallahassee, Leon County, Florida. BARBARA J. STAROS Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 18th day of October, 2002.
The Issue Whether Respondent Corporation, Southern Insight, Inc., failed to secure payment of workers' compensation coverage as required by Chapter 440, Florida Statutes, and the Florida Insurance Code, and if so, whether the Department of Financial Services, Division of Workers' Compensation (Department) has lawfully assessed the penalty against Respondent in the amount of $27,805.11.
Findings Of Fact The Department is the state agency responsible for enforcing Section 440.107, Florida Statutes, which requires that employers secure the payment of workers' compensation coverage for their employees and otherwise comply with the workers' compensation coverage requirements under Chapter 440, Florida Statutes. Respondent has been a Florida corporation, actively involved in the construction industry providing framing services, during the period of February 16, 2006, through August 17, 2007 (assessed penalty period). At all times material, Respondent has been an "employer," as defined by Chapter 440, Florida Statutes. At all times material, John Cauley has been Respondent's president and sole employee. At no time material did Respondent obtain workers' compensation insurance coverage for John Cauley. On August 17, 2007, Department Investigator Lynise Beckstrom conducted a random workers' compensation compliance check of a new home construction site in Palm Coast, Florida. At that time, Ms. Beckstrom observed four men, including John Cauley, framing a new home. Utilizing the Department's Compliance and Coverage Automated System (CCAS) database, which contains all workers' compensation insurance policy information from the carrier to an insured and which further lists all the workers' compensation exemptions in the State of Florida, Ms. Beckstrom determined that for the assessed penalty period, Respondent did not have in effect either a State of Florida workers' compensation insurance policy or a valid, current exemption for its employee, John Cauley. During the assessed penalty period, Respondent paid remuneration to its employee, John Cauley. John Cauley admitted that during the assessed penalty period he was not an independent contractor, as that term is defined in Section 440.02(15)(d)(1), Florida Statutes. Section 440.05, Florida Statutes, allows a corporate officer to apply for a construction certificate of exemption from workers' compensation benefits. Only the named individual on the application is exempt from workers' compensation insurance coverage. On or about April 15, 2006, John Cauley, as Respondent's President, applied for such an exemption. That application was denied. Mr. Cauley received neither an exemption card nor a denial of exemption from the Department. During the assessed penalty period, Respondent was a subcontractor of the contractor, Mass Builders, Inc. 9. Sections 440.107(3) and 440.107(7)(a), Florida Statutes, authorize the Department to issue stop-work orders to employers unable to provide proof of workers' compensation coverage, including proof of a current, valid workers' compensation exemption. Based on the lack of workers' compensation coverage and lack of a current, valid workers' compensation exemption for Respondent corporation's employee, John Cauley, the Department served on Respondent a stop-work order on August 17, 2007. The stop-work order ordered Respondent to cease all business operation for all worksites in the State of Florida. Immediately upon notification by Investigator Beckstrom of his lack of valid exemption, Mr. Cauley submitted a new exemption application, which was granted, bringing Respondent corporation into compliance. However, in order to have the stop-work order lifted so that he can work as a corporation again, Mr. Cauley must pay a percentage of the penalty assessment and enter into a payment plan with the Agency. In the meantime, Mr. Cauley cannot pay the percentage required by the Department if he cannot find work as someone else's employee, which he had been unable to do as of the date of the hearing. Herein, it is not disputed that Respondent was inadvertently out of compliance. Mr. Cauley seeks merely to reduce the amount of the penalty assessment so that removal of the stop-work order against Respondent corporation can be negotiated. On the day the stop-work order was issued, Investigator Beckstrom also served Respondent with a "Request for Production of Business Records for Penalty Assessment Calculation," in order to determine a penalty under Section 440.107(7), Florida Statutes. Pursuant to Florida Administrative Code Rule 69L-6.015, the Department may request business records for the three years preceding the date of the stop-work order. Logically, however, Ms. Beckstrom only requested business records dating back to February 14, 2006, Respondent's date of incorporation in Florida. The requested records included payroll, bank records, check stubs, invoices, and other related business records. Ms. Beckworth testified that, "Business records requests usually consist of payroll, bank records, taxes, check stubs, invoices, anything relating to that business." This is a fair summation of a much more detailed listing of records required to be kept pursuant to Rule 69L-6.015, Florida Administrative Code, which was in effect at all times material. In response to the Request for Production, Respondent provided Southern Insight Inc.'s corporate bank statements for the assessed penalty period, detailing corporate income and expenses through deposits and bank/debit card purchases. However, Investigator Beckworth did not deem the corporate bank statements produced by Respondent to be an adequate response, and she did not base her calculations for penalty purposes thereon. Mr. Cauley expected that the Department would, and has argued herein that the Department should, have subtracted from the total deposits to Respondent's corporate account (the minuend) the total corporate business expenses (the subtrahend) in order to determine the Respondent's payroll to Mr. Cauley (the difference), upon which difference the Department should have calculated his workers' compensation penalty. In fact, the Department, through its investigator, did not utilize the total amount deposited to Respondent's corporate account, because some deposits "could" have come from a family member of Mr.Cauley. That said, there are no individual names on the account; the account is clearly in the name of the Respondent corporation; and there is no proof herein that any deposits to Respondent's corporate bank account were derived from anyone other than Mr. Cauley, as Respondent's President. Ms. Beckstrom testified that if the Agency had accepted the total of the deposits to this corporate account for the assessed penalty period as Respondent's payroll, the result would have been more than the total amount actually determined by her to constitute Mr. Cauley's payroll, but that statement was not demonstrated with any specificity. The Department also did not use any of the subtracted amounts shown on the corporate bank statements, even though the bank statements listed the same information as would normally be found on a corporate check, including the transaction number, recipient of the money, the date, and the amount for each bank/debit card transaction. All that might be missing is the self-serving declaration of the check writer on the check stub as to what object or service was purchased from the recipient named on the bank statement. Ms. Beckstrom testified that if Mr. Cauley had provided separate receipts for the transactions recorded on the bank statements as bank/debit card entries, she could have deducted those amounts for business expenses from the corporation's income, to arrive at a lesser payroll for Mr. Cauley. In other words, if Mr. Cauley had provided separate receipts as back-up for the transactions memorialized on the corporate bank statements, the Department might have utilized the bank/debit card transactions itemized on Respondent's corporate bank statements as the amount deducted for Respondent corporation's business expenses, so as to obtain the payroll (difference) paid to Mr. Cauley. It is the amount paid to Mr. Cauley as payroll, upon which the Department must calculate the workers' compensation penalty. The reason Ms. Beckworth gave for not using Respondent's bank statements was that without more, the transactions thereon might not be business expenses of the corporation. However, she also suggested that if, instead of submitting bank/debit card statements, Mr. Cauley had submitted checks payable to third parties and if those corporate checks showed an expenditure for a deductible business expense, like motor vehicle fuel, she might have accepted the same expenditures in check form (rather than the statements) in calculating Respondent's payroll. Ultimately, Ms. Beckworth's only reasons for not accepting the bank statements showing recipients, such as fuel companies like Amoco, was "agency policy," and her speculation that Amoco gas could have been put into a non-company truck or car. She also speculated that a prohibition against using bank statements showing deductions might possibly be found in the basic manual of the National Council on Compensation Insurance (NCCI) or in a rule on payrolls (Rule 69L-6.035) which became effective October 10, 2007, after the assessed penalty period. However, the NCCI manual was not offered in evidence; a rule in effect after all times material cannot be utilized here; and no non-rule policy to this effect was proven-up. In addition to not using Respondent's bank statements to calculate a penalty, the Department also did not "impute" the statewide average weekly wage to Respondent for Mr. Cauley. Ms. Beckworth testified that to impute the statewide average weekly wage would have resulted in a higher penalty to Respondent. As to the amount of the statewide average weekly wage, she could only say she thought the statewide average weekly wage was "about $1,000.00". Instead of using Respondent's corporate bank statements or imputing the statewide average weekly wage, Investigator Beckstrom determined that Mass Builders, Inc., was the prime contractor on the jobsite being worked by Respondent, and that Mass Builders, Inc., had not produced proof of securing workers' compensation coverage for Respondent, its sub- contractor. Therefore, she sought, and received, Mass Builders, Inc.'s "payroll records" of amounts paid by the prime contractor, Mass Builders, Inc., to Respondent Southern Insight, Inc., via a separate site-specific stop-work order and business records request directed to Mass Builders, Inc. The only "payroll records" that Mass Builders, Inc., offered in evidence were Mass Builders, Inc.'s check stubs, which Ms. Beckstrom utilized to come up with an income/payroll amount for Respondent Southern Insight, Inc. Mr. Cauley did not know until the hearing that Mass Builders, Inc.'s check stubs had been utilized in this fashion by the Department. However, he ultimately did not dispute the accuracy of the check stubs and did not object to their admission in evidence. In calculating Respondent's total payroll for the assessed penalty period, Investigator Beckstrom considered only the total of the check stubs from Mass Builders, Inc. It is unclear whether or not she reviewed Mass Builders, Inc.'s actual cancelled checks. No one from Mass Builders, Inc., appeared to testify that the stubs represented actual cancelled checks to Respondent or Mr. Cauley. The Department also did not deduct from the total of Mass Builders, Inc.'s check stubs any of the bankcard deductions made by John Cauley from Respondent's corporate bank account, for the same reasons set out above. Mr. Cauley testified, without refutation, that some of the expenses noted on Respondent's bank statements, paid by bank/debit card, most notably expenses for gasoline for his truck, constituted legitimate business expenses of Respondent corporation, which should have been deducted from either the bank statement's total income figure or from the amounts paid by Mass Builders, Inc., to Respondent corporation, before any attempt was made by the Department to calculate the amount paid by Respondent corporation to Mr. Cauley as payroll. Utilizing the SCOPES Manual, which has been adopted by Department rule, Ms. Beckstrom assigned the appropriate class code, 5645, to the type of work (framing) performed by Respondent. In completing the penalty calculation, Ms. Beckstrom multiplied the class code's assigned approved manual rate by the payroll (as she determined it) per one hundred dollars, and then multiplied all by 1.5, arriving at an Amended Order of Penalty Assessment of $27,805.11, served on Respondent on August 22, 2007. Subsequent to the filing of its request for a disputed-fact hearing, in an effort to have the penalty reduced, Respondent provided the Department with additional business records in the form of portions of Southern Insight, Inc.'s 2006 and 2007 U.S. Income Tax Returns for an S Corporation (2006 and 2007 income tax returns). However, neither itemized deductions nor original receipts for Respondent's business expenses were provided to Ms. Beckworth at the same time, and she determined that without itemized deductions, there was no way to calculate Respondent's legitimate business deductions so that they could be deducted from the total of Mass Builders, Inc.'s, check stubs to determine a lesser payroll applicable to Mr. Cauley. Investigator Beckstrom testified that the tax returns, as she received them, did not justify reducing Respondent's payroll used in calculating the penalty. The vague basis for this refusal was to the effect that, "The Internal Revenue Service permits different business deductions than does the Department." Itemization pages (schedules) of Respondent's income tax returns were not provided until the de novo disputed-fact hearing. Confronted with these items at hearing, Ms. Beckworth testified that ordinary business income is not used by the Department to determine payroll, but that automobile and truck expense and legitimate business expenses could be deducted, and that she would probably accept some of the deductions on Respondent's 1020-S returns. Also, if Respondent's bank statement corresponded to the amount on the tax form, she could possibly deduct some items on the bank statements as business expenses before reaching a payroll amount. However, she made no such calculations at hearing. Ms. Beckworth testified that if she had Respondent's checks or "something more" she could possibly deduct the motor fuel amounts. Although Respondent's 2006, and 2007, income tax returns reflected Respondent corporation's income minus several types of business deductions, Ms. Beckstrom testified that the tax deductions were not conclusive of the workers' compensation deductions, because the Internal Revenue Service allows certain deductions not permissible for workers' compensation purposes, but she did not further elaborate upon which tax deductions were, or were not, allowable under any Department rule. She did not "prove up" which deductions were not valid for workers' compensation purposes. Respondent's 2006, tax deductions for "automobile and truck expense" were $2,898.00, and for 2007, were $4,010.00. There was no further itemization by Respondent within these categories for fuel. Other business deductions on the tax returns were also listed in categories, but without any further itemization. The only supporting documentation for the tax returns admitted in evidence was Respondent's bank statements. Respondent believed that the tax returns and possibly other documentation had been submitted before hearing by his accountant. It had not been submitted. The Department never credibly explained why it considered a third party's check stubs (not even the third party's cancelled checks) more reliable than Respondent's bank statements or federal tax returns. Even so, at hearing, the Department declined to utilize the business deductions itemized on Respondent's tax forms or any bank/debit card deductions on its bank statements so as to diminish the amount arrived-at via the Mass Builders, Inc.'s check stubs, and ultimately to arrive at a difference which would show a lesser payroll to Mr. Cauley. Although Mr. Cauley's questions to Ms. Beckstrom suggested that he would like at least all of the fuel company deductions on his bank statements to be considered as business deductions of Respondent Southern Insight, Inc., and for those fuel company expenditures to be subtracted from either the total deposits to the corporate bank account or deducted from the payroll total as calculated by Ms. Beckstrom from Mass Builders, Inc.'s check stub total, he did not testify with clarity as to which particular debits/charges on the bank statements fell in this category. Nor did he relate, with any accuracy, the debits/charges on the bank statements to the corporate tax returns. Upon review by the undersigned of Respondent's bank statements admitted in evidence, it is found that the bulk of Respondent's bank/debit card deductions during the assessed penalty period were cash withdrawals or ATM debits which cannot be identified as being paid to fuel companies or purveyors of construction material. As Investigator Beckstrom legitimately observed, "Big Al's Bait" is not a likely source of motor fuel. "Publix" and "Outback Steak House" are likewise unlikely sources of fuel or construction material, and cannot stand alone, without some other receipt to support them, as a legitimate corporate business entertainment expense. Other debits/charges on the bank statements are similarly non-complying, ambiguous, or defy categorization. However, the undersigned has been able to isolate on the corporate bank statements purchases from the known fuel distributors "Amoco" and "Chevron" on the following dates: 7/09/07, 7/10/07, 6/04/07, 6/04/07, 6/11/07, 5/03/07/ 4/09/07, 4/10/07, 4/13/07, 4/16/07, 3/02/07, 3/05/07, 3/13/07, 3/15/07, 3/20/07, 1/29/07, 5/01/06, 6/02/06, 8/02/06, 11/03/06, totaling $556.98.
Recommendation Based on the foregoing Findings of Facts and Conclusions of Law, it is RECOMMENDED that a final order be entered by the Department of Financial Services, Division of Workers' Compensation, that affirms the stop-work order and concludes that a penalty is owed; that provides for a recalculation of penalty to be completed, on the basis set out herein, within 30 days of the final order; and that guarantees the Respondent Southern Insight, Inc., a window of opportunity to request a Section 120.57 (1) disputed-fact hearing solely upon the recalculation. DONE AND ENTERED this 1st day of July, 2008, in Tallahassee, Leon County, Florida. S ELLA JANE P. DAVIS 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 1st day of July, 2008. COPIES FURNISHED: Anthony B. Miller, Esquire Department of Financial Services Division of Workers' Compensation 200 East Gaines Street Tallahassee, Florida 32399-4229 John Cauley, President Southern Insight, Inc. Post Office Box 2592 Bunnell, Florida 32110 Honorable Alex Sink Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Daniel Sumner, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
Findings Of Fact Petitioner and another podiatrist were engaged in a partnership, practicing podiatry with offices in two locations, one on Broward Boulevard (hereinafter "the Broward office"), and one in Tamarac (hereinafter "the Tamarac office") On February 2, 1977, Respondent initiated negotiations for the acquisition of Parcel No. 154, the property leased by Petitioner or his partnership for the location of the partnership's Broward office. On February 7, 1977, Respondent delivered to the Broward office its ninety-day letter of assured occupancy. Since Respondent and the owner of Parcel No. 154 were unable to agree, Respondent was required to litigate the acquisition of that parcel, and Respondent obtained an order of taking in August, 1978. The contract for constructing the segment on Broward Boulevard where the Broward office was located was let on December 31, 1978. Petitioner closed his Broward office and vacated the premises in March, 1978. No notice to vacate the premises was ever issued to Petitioner, since he had vacated the premises approximately five and one-half months prior to Respondent obtaining possession of the property pursuant to the order of taking. Petitioner's partnership kept only one set of records for both the Tamarac and Broward offices. All of the income, the expenses, and the other allowable deductions were consolidated for both offices, and it is not possible to determine from those records any specific expenses attributable to the Broward office only. In determining the amount of gross income for patients seen at the Broward office, Petitioner, through his accountant, reviewed all patient cards of Broward office patients and added together those charges for services rendered. Those patient cards, however, do not indicate whether those patients were seen by Petitioner or by Petitioner's partner and, accordingly, reflect the income generated by both members of the partnership. In order to then determine expenses generated by the Broward office in order to compute net income, Petitioner, through his accountant, selected a percentage and, using that percentage, divided all expenses between the Broward office and the Tamarac office. No evidence was presented to explain or justify the basis upon which the percentage figures were chosen. Petitioner sold both offices to his partner on April 18, 1977. Petitioner's accountant certified the following figures in support of the amount of fixed payment claimed by the Petitioner: Fee Income per Patient Cards Year Broward Office Profit Percentage per Income Tax Returns Indicated Annual Profit Broward Office 1975 $ 30,371.00 25.09 percent $ 7,620.00 1976 8,093.00 18.04 percent 1,460.00 1977 491.00 44.09 percent 216.00 The figures for expenses used in determining Petitioner's net income were taken from Petitioner's income tax returns, and those returns were also used to verify income and in computing the percentage of business attributable to the Broward office. Petitioner's tax returns, however, were computed on the accrual basis rather than on the cash basis. Books maintained using the accrual method include billed fees not actually received in that year and total expense obligations incurred that year although those expenses may not have been paid. In billing patients who were medicaid or medicare recipients, Petitioner charged the amount of fee he considered proper. If the full amount of Petitioner's bill was not paid by medicare or medicaid, he reduced his fee to the amount actually paid under those programs. Fees not collected would be written off during the following tax year. A review of the records and of the return for the year in which the fee was declared would not reveal the fact that it was subsequently written off, whether partially or fully, such as in the case of an uncollectable fee. The figures set forth in Paragraph numbered 7 above are based upon Petitioner's books and tax returns on the accrual basis and have not been adjusted to reflect income actually received rather than billed or to reflect expenses actually paid rather than incurred. Only sixteen residents were displaced as a result of the entire road- widening project along Broward Boulevard.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is, therefore, RECOMMENDED THAT: A final order be entered finding Petitioner, Mark H. Feldman, entitled to receive an additional $1,400 in relocation benefits, which represents the minimum fixed payment minus the amounts previously paid to him by the Respondent. RECOMMENDED this 16th day of June, 1982, in Tallahassee, Florida. LINDA M. RIGOT, Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 16th day of June, 1982. COPIES FURNISHED: Dr. Mark H. Feldman 7160 N.W. 45th Court Lauderhill, Florida 33319 Charles G. Gardner, Esquire Department of Transportation Haydon Burns Building Tallahassee, Florida 32301 Mr. Paul N. Pappas Secretary Department of Transportation Haydon Burns Building Tallahassee, Florida 32301
The Issue Whether or not Petitioner's application for registration as an associated person of Brauer & Associates, Inc., and as an investment adviser of G.G. Brauer & Associates, Inc. should be approved.
Findings Of Fact Respondent, Department of Banking and Finance, is the state agency charged with the administration and enforcement of Chapter 517, Florida Statutes, The Florida Securities and Investor Protection Act and the administrative rules promulgated thereunder. On or about October 30, 1990, Petitioner submitted a Form U-4, Uniform Application for Securities Industry Registration or Transfer, seeking transfer as an associated person of Brauer & Associates, Inc., and as an investment adviser of G.G. Brauer, Inc. On or about January 25, 1991, Respondent denied Petitioner's application for registration based upon its determination that Petitioner had filed a form U-4, which contained material misstatements and had demonstrated prima facie evidence of unworthiness by engaging in prohibited business practices. Petitioner was previously registered as an associated person with the St. Petersburg, Florida branch office of Smith Barney from March 1987 until July 25, 1990, when he was permitted to resign from the firm for ordering securities from the "over the counter" desk without prior client orders. Petitioner was also registered with the NASD and is charged with knowledge of their Rules of Fair Practice. On or about May 9 1990, Ronald Padgett filed a written complaint with Respondent alleging that Petitioner was engaging in unauthorized trading in his account and that the account was trading on margin without a signed margin agreement. Mr. Padgett also alleged that the signed margin agreement on file with Smith Barney was a forgery. After receiving Mr. Padgett's complaint, Respondent commenced its investigation in Petitioner's activities and requested that Smith Barney provide it with information regarding Padgett's complaint. Respondent also requested and was provided with copies of all other customer complaints that had been filed against Petitioner with Smith Barney. Smith Barney provided Respondent with copies of customer complaints that had been filed against Petitioner by Dorothy Juranko, Wayne Schmidt, Mark Madison, Michael Russo, Gloria Fallon, Patricia Schoenberg and William & Verna Bankhead. All of these individuals were investor clients of Petitioner. Prior to his employment with Smith Barney, Petitioner had not been the subject of a customer complaint or industry disciplinary proceeding or licensure revocation, suspension, or denial. Wayne Schmidt Sr. the owner of Suncoast Chrysler-Plymouth (Suncoast) opened his account at Smith Barney in 1985. Initially, the account executive assigned to Schmidt's account at Smith Barney was Steve Ellis. Schmidt maintained two accounts with Smith Barney and Steve Ellis, namely, a profit- sharing account for Suncoast Chrysler-Plymouth and a joint account with his wife. Schmidt exercised no control of the Suncoast account, but rather allowed his associate, Gloria Fallon to initially monitor the transactions in that account. Afterwards, Schmidt started overseeing the trading activities in the Suncoast account. Schmidt had no knowledge of any unauthorized transactions in the Suncoast account after he began monitoring it. Gloria Fallon did not testify at the proceeding. In connection with the maintenance of his joint account at Smith Barney, Schmidt executed a "Securities Account Agreement." During the time Schmidt maintained his account at Smith Barney, the Securities Account Agreement was utilized by Smith Barney as a margin contract. The Securities Account Agreement qualifies as a margin account agreement/margin contract as to form, and is consistent with industry standards, custom and usage. Although Florida Statutes proscribes certain procedures relative to margin agreements, neither the Florida Securities Act nor the rules promulgated thereunder require a broker/dealer to characterize a margin contract as a "margin agreement." The gravamen of Schmidt's complaint against Petitioner was that certain shares of stock were not liquidated from the joint account maintained by him in contravention of his directions to Petitioner. There was no proof submitted to support any conclusion that Petitioner failed to place an order for the liquidation of such securities for Schmidt's account. Likewise, there was no evidence of any unauthorized trading in the Schmidt's joint account. While Petitioner was assigned as account executive to the Schmidts joint account, a profit of approximately $10,000.00 was generated for that account in 1988 and in 1989, a net gain of approximately $15,000.00 was generated. Schmidt conceded at hearing that Petitioner probably did a better job handling his account than his prior broker, Steve Ellis. During the year 1988, Smith Barney generated and sent to Schmidt, monthly statements and confirmation statements regarding every transaction in his joint account. The monthly statements sent to Schmidt for the joint account contained entries regarding margin interest being charged to the account. For the year 1989, Smith Barney also generated and sent to Schmidt, monthly statements and confirms regarding every transaction in his joint account. The 1989 monthly statements sent to Schmidt also showed margin interest. For the years 1988 and 1989, Schmidt deducted from his individual tax returns, the margin interest charged to his account. Also, during 1988 and 1989, Schmidt did not complain to Petitioner or Smith Barney that the use of margin account was unauthorized. During his tenure at Smith Barney, Petitioner was the account executive assigned to the account of Michael Russo (Russo). Petitioner was assigned to the Russo account in approximately May of 1990, an account which was formerly serviced by an account executive whose last name is Dudenhaver. Michael Russo matriculated at City College of New York where he received a Bachelor of Business Administration degree and was a certified public accountant for approximately 30 years. Russo has been in the accounting business for approximately 40 years and during this time period, he operated his own accounting practice. Russo maintained three (3) accounts at Smith Barney which included an account with his wife, an individual account and an IRA account. Russo opened his first brokerage account in the early 1980s with Merrill Lynch, Pierce, Fenner & Smith. Russo has a history is investing in real estate and by mid 1990, he had accumulated a net worth of approximately $750,000.00. On or about July 13, 1990, Russo presented Petitioner a check in the amount of $26,000.00 which was to be deposited into Russo's accounts. The $26,000.00 check was deposited by Petitioner into Russo's accounts but were returned for non-sufficient funds (NSF). Russo then replaced the NSF check with a $22,000.00 check. The funds derived from the $26,000.00 of Russo originated from an interest-bearing money market account from the Fidelity- Spartan Mutual Funds Family. During the period July 13-20, 1990, Russo was on vacation and was away from his home visiting relatives in the Melbourne, Florida area. During that week, Russo spoke by telephone with Petitioner regarding his account on more than one occasion. Russo specifically recalls speaking with Petitioner on July 15, 1990, regarding his account. During that week, Russo spoke with Respondent about selling certain shares of stock in his account and his specific recall is that one of those conversations occurred on July 15, 1990. The shares were to be sold "at market." Russo again spoke with Petitioner on July 21, 1990, regarding transactions in his account. On July 24, 1990, Russo told Larry Youhn, the branch manager at Smith Barney, that he was very happy with Petitioner as his broker. The July 1990 month-end statement for the Russo account indicate that funds were deposited into the Russo accounts in an amount sufficient to satisfy security purchases made in his account during July 1990. Although these transactions appear at month-end in a type-2 margin account, a review of such statements indicate that the transactions initially occurred in a cash account and were mistakenly journaled to the margin account by Smith Barney as a result of an NSF check presented by Russo as payment for the purchase transactions. The individual account of Russo reflects the purchase of 500 shares of Wiley Laboratories on July 16, 1990, for $7,702.00. On that same day, $10,500.00 from the $26,000.00 NSF check was received into the account. The July 1990 monthly statement for Russo's individual account reflected that there would have been a $2,800.00 net credit in the account if Russo had not presented the NSF check. During his tenure at Smith Barney, Petitioner also served as the registered representative for an account maintained by Nicholas and Dorothy Juranko (Juranko). The Jurankos have a substantial history of business experience, having currently owned a service station in the Ohio area and Mrs. Juranko currently owns her own drapery shop and manages eight (8) apartment/rental units that they jointly own. The Jurankos opened their first securities brokerage account in approximately 1962. They have held accounts at several brokerage firms including Merrill Lynch, Blinder-Robinson and First Jersey Securities prior to opening their account at Smith Barney. At Blinder-Robinson, the Jurankos engaged in the purchase of several "Penny" stocks and fully realized that they were speculating. The Blinder- Robinson account was opened by the Jurankos so that Mr. Juranko would "have something to do." The Jurankos maintained a securities brokerage account at First Jersey Securities prior to Petitioner's employment with First Jersey. Petitioner was assigned as account executive for the Juranko account at First Jersey in approximately 1985. When the Jurankos opened their account at Smith Barney, their net worth was approximately $220,250.00. Although Mrs. Juranko maintains that unauthorized trades occurred in her account during the month of December 1987, when asked to identify which trade which unauthorized, she could not do so. This was so, despite an effort to refresh her recollection by presenting her the December 1987 monthly account statement which depicted all securities holdings and transactions generated in their account. Mrs. Juranko also alleged that she was losing money and did not want to deposit any additional funds into her account. However, Mrs. Juranko wanted to have profits generated from the funds that were then existing into her account as of year-end December, 1987. Respecting the December 1987 trades, the Jurankos received confirms for every transaction that occurred during the month. Through December 1987, while Petitioner was assigned to manage the Juranko account, the account generated a net profit. Also, continuing through January 1988, Petitioner had effected trades which produced a net profit for the Juranko account. As testified by Mrs. Juranko, "All I could see...greed, all I could see was $14,200.00 some dollars and $9,900.00 some dollars, and I thought, wow... I thought "wow", he's making me money." Although Mrs. Juranko complained that she was losing money, an analysis of the account revealed that during the two years that Petitioner was assigned her account, it made a net profit. Notwithstanding the documentary evidence to the contrary, Mrs. Juranko admitted that she was upset and complained to Smith Barney's compliance officer, a Mr. Singer, because of her unfounded belief that she had lost money. Mrs. Juranko identified anger as the basis for her inability to understand a letter which was sent by Larry Youhn, Smith Barney's branch manager, which show the activity that had been generated into her account. Notwithstanding the clear language of that letter, Mrs. Juranko maintained that she did not understand it. This is so, despite the fact that Mrs. Juranko did not telephone Smith Barney to complain because she "didn't want to get [Petitioner] in trouble." 1/ The use of margin in the Jurankos account was discussed because Mrs. Juranko believed the account was losing money; she wanted to do whatever was necessary over a period of time to make up for the losses and she refused to deposit additional funds into the account to generate profits in trading the account. In connection with the maintenance of the Juranko account at Smith Barney, Petitioner instructed his sales assistant to send a margin agreement to Mr. and Mrs. Juranko for execution. The use of margin was discussed with the Jurankos in approximately November 1987. Petitioner relied upon the Smith Barney infrastructure to maintain the necessary paperwork for margin accounts, including the Jurankos. This is a customary practice in the securities industry and is utilized by most large brokerage houses. Juranko first complained to Petitioner about the use of margin in January 1988, when she received her monthly account statement which contained an entry for margin interest. Mrs. Juranko explained that she thought the margin charges were too much and that she wanted to reduce the margin charges by liquidating securities from the account. Mrs. Juranko thereafter became uncooperative and it became difficult for Petitioner to transact business in the account consistent with Mrs. Juranko's desired objectives. As a result, in March 1988, Petitioner determined that the only thing he could do for the account was to liquidate positions at or near break-even points. Thereafter, Petitioner never made any other purchase recommendations to the Jurankos. Petitioner also serviced the account of Mark D. Madison while employed at Smith Barney. Madison is a marketing, advertising and management consultant who owns his own business. Madison maintained two (2) accounts at Smith Barney's St. Petersburg branch office, including an individual account and an account in the name of his mother, Mary Jean Madison. Mark Madison was a fiduciary for and conducted all transactions in his mother's account. Prior to Petitioner's assignment as broker to Madison's fiduciary account, it was assigned to broker Steve Ellis. The fiduciary account was maintained as a margin account since its opening in 1984. Commencing on February 13, 1986, broker Ellis and Madison executed several margin transactions in the fiduciary account. Through the period ending October 31, 1987, roughly 95% of the transactions in the fiduciary account were executed on margin. As of year-end 1987, the Madison fiduciary account and Mark Madison's personal account historically traded over-the-counter securities. During this period while Ellis was the broker, margin transactions were executed in both Madison accounts. During this period, broker Ellis actively traded both accounts and generated both profits and losses in the accounts. Mark Madison was familiar with the active trading in both accounts as well as the profit/loss picture. Madison estimated losses in the fiduciary account to be over $20,000.00 while the account was handled by Ellis. These losses all occurred while he was the fiduciary on the account and was in charge of approving trading in the account. When the fiduciary account was transferred from Ellis to Petitioner, Madison expressed his concern about the losses that his mother's fiduciary account had sustained as well as his responsibility for such losses. During his initial conversations with Petitioner, Madison explained his mother's displeasure at the approximately $30,000.00 in losses that had been generated while Ellis was assigned as broker. Madison also explained to Petitioner that his brother had made references to conversations with his mother about suing him as the fiduciary because of the losses generated. During the time that the fiduciary account was handled by Ellis, there were differences in the execution prices of transactions in the same securities which occurred in both the fiduciary account and his (Mark Madison's) personal account. When Petitioner was assigned the account, it became apparent to him that Madison consistently obtained higher prices on liquidating transactions than his mother was obtaining in the fiduciary account for the same securities. Petitioner was concerned with the type of trading in which Madison wanted to engage in for the fiduciary account and brought this trading strategy to the attention of branch manager, Youhn, who explained to Petitioner that it was the fiduciary who had ultimate responsibility for trading the account. In addition to discussing the trading strategy with Youhn, a review of the account history was conducted by Petitioner. Petitioner's review revealed that the account had lost approximately 40% in equity during the time it was handled by account executive Ellis and Mark Madison as fiduciary. As a result of the losses generated, Madison expressed his desire to Petitioner to recoup losses in the account by taking advantage of 2-3 point swings in certain over-the-counter securities. During the months of January through March 1988, Madison, despite his allegations to the contrary, authorized the purchase of a specified number of shares of certain securities and later maintained that certain additional shares of those securities were purchased without his authorization. Throughout this period, Madison maintained continuous telephone conversations with Petitioner regarding such securities. Throughout the period, Madison did not instruct Petitioner to cancel the trades, but rather instructed him that he wanted out of those positions as near as possible to "break even." The Department conducted an investigation of the allegations made by Petitioner's former clients in connection with the denial of his registrations as an associated person an investment advisor. In connection with the investigation, the Department, through its investigative employee, Carol Irizarry (Irizarry), spoke with individuals who had submitted written complaints against Petitioner. In furtherance of her investigation, Irizarry visited the office of William Lyman, Esquire, who represented several of the former customer/complainants, and reviewed the information that Lyman had relative to such complaints. Ms. Irizarry did not testify during the formal hearing herein. Dennis Farrar (Farrar), area financial manager, Division of Securities, Department of Banking and Finance, supervised the writing of the report completed by Irizarry. Farrar's first direct contact with the investors/complainants in this case occurred approximately one (1) week prior to the commencement of the hearing herein. Following Ellis' separation from employment with Smith Barney, several Smith Barney brokers and clients of Petitioner advised him that broker Ellis was out to get him and urged them to file complaints against Petitioner. Specifically, Petitioner received a telephone call from Gloria Fallon, an associate of Wayne Schmidt, who warned Petitioner that Ellis was "trying to stir up trouble for him." In connection with the initial customer complaint received by the Department, a request for information responsive to the complaint was sent to Smith Barney. Among the documents received by the Department was a securities account agreement which contained language normally contained in a margin contract. The securities account agreement is the document utilized by Smith Barney as its margin contract at all time material hereto. A Form U-4, Uniform Application for Securities Industry Registration for Transfer, is a document generated by the National Association of Securities Dealers (NASD) and the North American Securities Administrators Association (NASAA). The Form U-5, Uniform Termination Notice, also is generated by the above entities. The disclosure section of a Form U-4 requires an applicant to respond to the best of his ability. An intentional falsification of information on a Form U-4 will give rise to a violation of Section 517.161, Florida Statutes. It is customary in the securities industry for a registered representative to rely upon his current broker/dealer employer to determine which complaints, if any, are disclosable on the Form U-4. It is customary in the industry for a representative to rely on the Form U-5, termination notice for completion of his U-4 and usually the information on both forms track each other. Also, the prospective applicant filling out his U-4 usually consults with the firm that he separated from to ensure that both Forms U-4 and U-5 are consistent. Petitioner's completion of the Form U-4 on August 30, 1990 in connection with his employment at Brauer & Associates contained a disclosure of customer complaints consistent with the disclosures made by Smith Barney on its amended Form U-5 Termination Notice dated August 17, 1990. Petitioner's reliance on the information contained in his files and that provided by his employers was reasonable and there was no evidence that Petitioner intentionally falsified his Form U-4 application.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that Respondent enter a Final Order granting Petitioner's application for registrations as an associated person or broker/dealer of Brauer & Associates, Inc. and investment adviser to G.G. Brauer, Inc. RECOMMENDED this 13TH day of August, 1991, in Tallahassee, Leon County, Florida. JAMES E. BRADWELL 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 13th day of August, 1991.
The Issue Whether Respondent has incurred and failed to pay Petitioner's surcharge tax in the amount of $12,746.97, including statutory interest and statutory penalty, in violation of Section 561.501, Florida Statutes (2005), and Florida Administrative Code Rule 61A-4.063(8).
Findings Of Fact Based upon observation of the witnesses' demeanor while testifying, character of the testimony, internal consistency, and recall ability; documentary materials received in evidence; stipulations by the parties; and evidentiary rulings during the proceedings, the following relevant and material facts are determined: Petitioner, Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco (Division), is the state agency charged with the responsibility of administering and enforcing the beverage law in Florida. Chapters 561 through 568, Florida Statutes (2005). In this disciplinary action, the Division seeks to impose sanctions on the license of Respondent, Beer: 30 Grill & Pub, Inc., d/b/a Beer: 30 Grill & Pub, on the grounds that Respondent failed to pay to the State of Florida the surcharge tax owed for on- premise sales of alcoholic beverages made during the period February 2000 through March 2003. Respondent denied the charge and requested a final hearing to contest this allegation. Respondent is subject to the regulatory jurisdiction of the Division, having been issued beverage license number 69- 02225, 4-COP, by the Division. That license allows Respondent to make sales of beer, wine, and liquor for consumption on premises at the restaurant located at 1602 West Airport Boulevard, Sanford, Florida 32771. At all times material to this proceeding, Respondent, by its corporate officer John Aitcheson, applied for and was holding license number 69-02225, 4-COP. In Florida, a licensee must keep records of all purchases and other acquisitions and sales of alcoholic beverages for a period of three years to comply with Section 561.501, Florida Statutes (2005). This requirement applies to any beverage license holder in Florida. In addition to selling alcoholic beverages for on- premise consumption, Respondent also sells packaged alcoholic beverage for off-site consumption. Surcharge tax in the amount of $0.14 per gallon of beer, $1.07 per gallon of wine, and $4.28 per gallon of liquor is assessed for each and every drink sold by Respondent for on- premise consumption, but no such surcharge tax is owed for off- premise package sales. The surcharge tax is paid by the on-premise consumers (patrons) to the state, and the vendor only collects and remits this surcharge to the state. As a reward for their effort to timely report and remit the surcharge to the state, the vendors are allowed to keep monthly, as an allowance, one percent of the total surcharge owed for the alcoholic beverages sold during that month. Respondent testified that he has a very simple method of keeping sales records. He makes handwritten records of each and every off-premise sale and also collects and keeps the distributors' invoices for the purchase of his alcohol supplies. Every month, Respondent subtracts the off-premise sold alcoholic beverages from the total quantity bought as reflected by the invoices from distributors, obtaining through this indirect method the total on-premise sales. Then Respondent multiplies the resulting quantity of alcohol sold on-premise that month with the applicable tax rate, obtaining thus his surcharge liability for that particular month. Respondent provided the Division with handwritten off- premise sales records. With the exception of the records mentioned above, the Division does not have in the file any other records submitted by Respondent. As well, Respondent did not offer any evidence to substantiate his claim that he indeed provided the Division with any additional records. However, Respondent testified that he neither maintained on-premise sales records, as required by Section 561.501, Florida Statutes (2005), nor was he able at the hearing to offer any proof whatsoever that would corroborate his claim that during the audited period he actually made more off-premise sales than reflected in his handwritten records. To enforce the surcharge tax provisions, the Division performs periodic audits of all licensees who sell alcoholic beverages for on-premise consumption. As part of the audit process, the Auditing Bureau of the Division requests and receives monthly reports from alcohol distributors detailing all the sales made by each distributor to each particular licensee. An exception to the automatic monthly distributor reporting procedure is made for the Schenk Company, a beer distributor, which reports its sales to different vendors only when expressly requested by the Division. After receiving all the sales data concerning a particular vendor from the distributors, the Auditing Bureau uses a computer program to calculate the gross surcharge liability of that particular licensee. Special deductions are then allowed for off-premise sales, employee drinks, etc. The burden is on the holder of the license to demonstrate that such person qualifies for a deduction by providing accurate records of off-premise sales, giving employee drinks, etc. Fla. Admin. Code R. 61A-4.063(4) - 61A-4.063(9). It is each licensee’s obligation to accurately report all on-premise monthly sales and to pay the tax collected from customers. There is a penalty and interest surcharge for late reporting and late paying. In addition to the penalty and interest mentioned above, the Division is statutorily required to assess interest and penalties for any underreporting and/or underpayment of the tax due for the period of the audit. If underreporting/underpayment penalties and interest are assessed, they are applied only to the period of the audit. No penalty or interest is applied to any period over the end of the audit. In the present case, the Auditing Bureau calculated Respondent’s surcharge liability based on the data provided by the distributors. The audit allowed Respondent deductions for all off-premise sales recorded in Respondent's handwritten off- premise sales records. At no material time did Respondent request any other deductions nor did he provide any evidence that he would be entitled to any other deductions. It is incumbent to Respondent to carefully keep records of all sales that would entitle him to receive deductions. The Division cannot allow surcharge tax deductions that are not corroborated by any records. Fla. Admin. Code R. 61A-4.063(9). Moreover, Respondent did not even advance any amount of any additional deduction; his position being only that he should have been allowed more deductions because he made more off-premise sales. Absent evidence that more alcoholic beverages were sold off-premise than recorded in the records already taken into consideration by the audit, no additional deductions may be allowed to Respondent. Fla. Admin. Code R. 61A-4.063(9). The audit found that Respondent understated his tax reports and underpaid $7,433.66 in surcharge tax. For the failure to timely report and remit the entire surcharge tax due for the period February 1, 2000, through February 28, 2003, the Division assessed statutory interest of $1,693.85 and a statutory penalty of $3,619.46 for a total surcharge liability of $12,746.97.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco, enter a final order finding Respondent liable and ordering payment for the surcharge tax principal of $7,433.66, plus interest of $1,693.85 and a statutory penalty of $3,619.46 for a total surcharge liability of $12,746.97. DONE AND ENTERED this 24th day of January, 2006, in Tallahassee, Leon County, Florida. S FRED L. BUCKINE 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 24th day of January, 2006.
Findings Of Fact The Petitioner, Ecker Enterprises, is a corporation licensed to do business in Florida with home offices in Chicago, Illinois. It has, in the past, and up until the approximate time of this proceeding, properly authenticated its ability to provide its own insurance or funds to cover any worker's compensation exposure emanating from its operations within the State of Florida in a manner sufficient to comply with Chapter 440, Florida Statutes, and Chapter 35-5, Florida Administrative Code. The corporation, however, failed to file required financial statements and other financial information with the Bureau of Self-Insurance of the Department for 1980. On August 18, 1980 the Chief of the Bureau of Worker's Compensation, Self-Insurance issued a revocation of the corporation's privilege to be self- insured in the State of Florida pursuant to Rule 38-5.12(5) Florida Administrative Code. The financial statements involved were filed at a later time, although not timely, but did not comport with the subject rules on self-insurers in that they were not certified and did not contain the required information as to financial disclosure. The Department stipulated that it would forebear from revoking the privilege for forty-five days and allow the self-insurance privilege to remain in force provided the corporation filed the necessary documentation pursuant to Section 440.51(12) Florida Statutes, and the above-cited rule, within that period of time, to which the Petitioner agreed. The time stipulated by which the filings were to be made has elapsed and the Petitioner has failed to comply with the stipulation.
Recommendation Having considered the evidence in the record the candor and demeanor of the witnesses, the foregoing Findings of Fact and Conclusions of Law, and arguments of counsel, it is therefore RECOMMENDED that the revocation of privilege of self-insurance in the State of Florida previously imposed against the Petitioner herein was proper and should therefore stand unchanged. DONE and ENTERED this 6th day of January, 1981, in Tallahassee, Florida. P. MICHAEL RUFF Hearing Officer Division of Administrative Hearings Room 101 Collins Building Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 6th day of January, 1981. COPIES FURNISHED: Jack C. Inman, Esquire Post Office Box 1294 Orlando, Florida 32302 Douglas P. Chance, Esquire Dept. of Labor and Employment Security 2562 Executive Center Circle, East Tallahassee, Florida 32301 Mr. Wallace E. Orr Secretary Department of Labor and Employment Security Suite 206 Berkley Building 2690 Executive Center Circle, East Tallahassee, Florida 32301
The Issue The issue in this case is whether StorageTek or Memorex was the lowest responsive and responsible bidder for the BOR's Invitation to Bid No. K-1178-3, issued as agent for the Northwest Regional Data Center for the purchase of certain data processing equipment.
Findings Of Fact Based on the stipulations of the parties, the testimony of the witnesses, and the exhibits admitted into evidence, I make the following findings of fact: The Florida State University Purchasing Department, acting as agent for the Northwest Regional Data Center ("NWRDC") issued an Invitation to Bid for a contract to supply and service certain computer memory storage equipment to NWRDC. NWRDC is a data processing center under the direct jurisdiction of the BOR. StorageTek and Memorex are both vendors of data processing equipment such as that specified in the BOR's Invitation to Bid No. K-1178-3 ("the ITB"). StorageTek is presently operating --its business as a going concern and a debtor- in-possession under Chapter 11 of the Bankruptcy Code. Memorex is a wholly owned subsidiary of the Burroughs Corporation. In addition to the specification of certain data processing equipment, the ITB required 5 years of maintenance for the equipment to be supplied by the vendor. StorageTek and Memorex both filed timely responses to the ITB which were responsive to the technical portions of the ITB. Both bids contained a warranty of the bidder's ability to perform. The total prices of the StorageTek and Memorex bids were $892,293.00 and $1,026,919.00, respectively. The BOR preliminarily disqualified the StorageTek bid for failure to satisfy the financial capability requirements of the ITB and proposed to award the contract to Memorex. StorageTek timely filed its Notice of Protest and Formal Written Protest, asserting it met the financial capability requirements of the ITB and challenging the responsiveness of the Memorex bid to those same requirements. Section II, Paragraph B, of the ITB provides with regard to financial capability: Financial Capability of Prospective Vendors: The successful vendor must be financially sound and well managed, in accordance with Paragraph I. of this section. Prospective vendors are required to supply certified annual report(s) or statement(s) of their financial position for the last two years as part of their bids. These statements must be certified by an independent auditor's report as to their completeness and accuracy. Any other relevant references or documentation may also be supplied. Paragraph I, which is incorporated by reference in this financial capability provision of the ITB, provides: Vendor Warranty of Ability to Perform: Vendor warrants that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, pending or, to the best of vendor's knowledge, threatened which would in any way prohibit, restrain or enjoin the execution or delivery of the vendor's obligations or diminish the vendor's financial ability to perform the terms of the proposed contract. In addition, the ITB makes it the responsibility of each vendor to "provide adequate documentation to substantiate all claims for . . . compliance" with the specifications and requirements of the ITB. In response to the request for statements of their financial position in the financial capability portion of the ITB, StorageTek supplied the Form 10- K Annual Reports filed with the Securities and Exchange Commission for the fiscal years ended December 28, 1984, and December 27, 1985, ("the 1984 and 1985 10 K Reports"). Although StorageTek had more current information than that contained in the 1984 and 1985 10-K Reports regarding the status of its Chapter 11 proceeding and other pending legal actions at the time it submitted its bid to the BOR, StorageTek chose not to supply that information in its bid even though such information could have been included pursuant to Section II, B.1, of the ITB. The 1984 and 1985 10-K Reports were prepared by StorageTek management and included consolidated financial statements of StorageTek and its subsidiaries. These financial statements, which were certified by the Denver, Colorado, office of Price Waterhouse, indicate: StorageTek has incurred net losses over the last three fiscal years aggregating $603,758,000. As of December 27, 1985, StorageTek had an accumulated deficit of $318,413,000. StorageTek is presently operating its business as a going concern and a debtor in possession under Chapter 11 of the Bankruptcy Act. StorageTek is involved in a number of legal proceedings, several of which "could have a material adverse effect on the Company's financial position and operations" if the plaintiffs' claims are sustained. The Securities and Exchange Commission is conducting a private investigation to determine whether StorageTek or any of its officers, directors or agents engaged in fraudulent or deceptive acts, practices or courses of business in connection with the issuance of any of its securities, the filing or publication of any of its periodic reports to stockholders or reports filed with the Securities and Exchange Commission or the keeping and maintaining of its books and records. The Internal Revenue Service ("IRS") is examining StorageTek's federal income tax returns for the years 1979 through 1984. If all issues presently under discussion between the IRS and StorageTek were to result in assessments, and if such assessments were ultimately sustained, the resulting liability for additional tax and interest would be substantially higher than the recorded liabilities. Also, any IRS claims that are ultimately sustained would be priority claims pursuant to Section 507 of the Bankruptcy Code. As a result of StorageTek's "financial diffi- culties" and its Chapter 11 proceedings, StorageTek may be subject to additional lawsuits or governmental proceedings, the effect of which cannot be determined at this time. The consolidated financial statements were prepared on the basis of generally accepted accounting principles applicable to a going concern, which assume realization of assets and payment of liabilities in the normal course of business. There are a number of "significant uncertainties" that threaten StorageTek's continued existence and, therefore, its ability to realize its assets and to discharge its liabilities in the ordinary course of business. Using generally accepted auditing standards, Price Waterhouse rendered an opinion on February 28, 1986, which provides in pertinent part: As shown in the consolidated financial state- ments, during the three years ended December 27, 1985 the Company incurred net losses aggregating $603,758,000 and at December 27, 1985 had an accumulated deficit of $318,413,000. These factors, among others including those discussed in the preceding paragraph, indicate that the Company may be unable to continue in existence. In rendering the above-quoted opinion, Price Waterhouse considered all of the information contained in the 1985 10-K Report, including the fact that the information in that report did not reflect the effects of the Chapter 11 proceedings. Price Waterhouse also considered other factors made known to it, such as: Certain financial information regarding StorageTek from its operations in early 1986; StorageTek's 1985 fourth quarter profits; StorageTek's unencumbered cash balance of $202 million at the end of 1985; StorageTek's ability to generate cash from its various operations; The lack of a formulated and confirmed plan for StorageTek's reorganization in its Chapter 11 bankruptcy proceedings; and The fact that it would be fairly difficult for StorageTek to obtain long-term financing given its present financial condition. Although the directors' and officers' liability insurance and partnership liability insurance may diminish the impact on StorageTek of several of the pending legal actions, the existence of those insurance policies is reflected in the 1985 10-K Report and was considered by Price Waterhouse when rendering its opinion that the company may be unable to continue in existence. Also, StorageTek admits that it cannot give an assurance that the pending litigation will not have a material adverse effect on its financial position and operations. The most significant uncertainty which formed a basis for the opinion of Price Waterhouse quoted in paragraph 12 above is that StorageTek's historical information results in uncertainty as to whether StorageTek will be able to return to profitable operations. If StorageTek did not continue to exist, the 5 years of maintenance required by the ITB could not be performed by StorageTek and spare parts for the data processing equipment may not be available. In response to the request for statements of its financial position in the financial capability portion of the ITB, Memorex supplied annual reports of its parent, the Burroughs Corporation, for 1984 and 1985 (the "1984 and 1985 Annual Reports"). The 1984 and 1985 Annual Reports contain consolidated financial statements of Burroughs Corporation, and its subsidiaries, including Memorex. These financial statements, which were certified by the Detroit, Michigan, office of Price Waterhouse, indicate: Burroughs and its subsidiaries have earned net income over the last three fiscal years aggregating $690,000,000. As of December 31, 1985, Burroughs and its subsidiaries had accumulated retained earnings of $1,872,400,000. There are no outstanding legal actions or claims that are material to the consolidated financial position of Burroughs and its subsidiaries. Using generally accepted auditing standards, Price Waterhouse rendered the following opinion on January 20, 1986: In our opinion, the accompanying consolidated financial statements [in the 1985 Annual Report] present fairly the financial position of Burroughs Corporation and subsidiary companies . . . in conformity with generally accepted accounting principles consistently applied. Memorex is a substantial subsidiary of the Burroughs Corporation. If there were any pending or threatened legal actions or claims against Memorex, the outcome of which would threaten Memorex's ability to perform under the contract described in the BOR's Invitation to Bid No. K-1178- 3, Price Waterhouse would have been required by generally accepted auditing standards to ensure that appropriate disclosure was made of that contingency in the consolidated financial statements of the Burroughs Corporation and its subsidiaries, unless the auditors were satisfied that the contingency was provided for otherwise, such as through a guaranty by the parent corporation. Financial statements for Memorex, other than in consolidated form with Burroughs Corporation and its subsidiaries, are usually confidential and not available to the public. The ITB expressly instructs vendors not to submit confidential information since bid responses become public documents after the bid opening. It is a common practice in the industry for a wholly owned subsidiary to submit the consolidated financial statements of its parent when an invitation to bid requests the subsidiary vendor to provide financial information.
Recommendation Based on all of the foregoing, I recommend the entry of a Final Order awarding the contract for BOR Invitation to Bid No. K-1178-3 to Memorex. APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-2229BID The following are my specific rulings on each of the proposed findings of fact submitted by each of the parties. Rulings on findings proposed by Petitioner Paragraphs 1, 2, 3, 4, 5, 6, 11, and 16: The findings proposed in these paragraphs have all been accepted. Paragraph 7: Accepted in part and rejected in part. Rejected portions are irrelevant and subordinate details that are unnecessary to the disposition of this case. Paragraph 8: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case. Unnumbered paragraph between paragraphs 8 and 9: Accepted. Paragraph 9 and the two unnumbered paragraphs between paragraphs 9 and 10: The majority of the findings proposed in this paragraph are rejected as irrelevant and subordinate to the extent they deal with matters not incorporated into Petitioner's bid response. Paragraph 10: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case. Paragraph 12: Accepted in substance. Paragraph 13: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case. Paragraphs 14 and 15 and intervening unnumbered paragraph: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case. Also rejected in large part because it incorporates inferences not warranted by the greater weight of the evidence. Paragraph 17: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case. Also rejected in large part because it incorporates inferences not warranted by the greater weight of the evidence. Paragraph 18: Rejected as irrelevant and unnecessary. Rulings on findings proposed by Respondent The Respondent adopted the proposed findings of fact submitted by the Intervenor and did not propose any additional findings. Rulings on findings proposed by Intervenor All of the proposed findings of fact submitted by the Intervenor have been accepted with a few minor editorial modifications. DONE AND ORDERED this 4th day of September, 1986, at Tallahassee, Florida. MICHAEL 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 4th day of September, 1986. COPIES FURNISHED: F. Perry Odom, Esquire ERVIN, VARN, JACOBS, ODOM & KITCHEN P. O. Drawer 1170 Tallahassee, Florida 32302 Patti A. Jackson, Esquire Assistant General Counsel Board of Regents 107 West Gaines Street Tallahassee, Florida 32301-8033 Carolyn S. Raepple, Esquire HOPPING BOYD GREEN & SAMS Post Office Box 6526 Tallahassee, Florida 32314-6526 Mr. Charles Reed, Chancellor Board of Regents 107 West Gaines Street Tallahassee, Florida 32301-8033 Mr. George Bedell Executive Vice-Chancellor Board of Regents 107 West Gaines Street Tallahassee, Florida 32301-8033 ================================================================= AGENCY FINAL ORDER =================================================================
The Issue The issues in this case are whether Respondents violated various provisions in Sections 626.611, 626.621, and 626.9541, Florida Statutes (2006),1 as charged in the Administrative Complaints, and, if so, what discipline should be imposed.
Findings Of Fact At all times relevant to this proceeding, Respondents have been licensed in Florida as annuity and insurance agents in the following categories: life and variable annuity agent; life and variable annuity and health agent; life and health insurance agent; health insurance agent; and life insurance agent. Ms. Cleary has been licensed since 2000, and Mr. Houck has been licensed since 1999. According to Petitioner's certified licensure records, Respondents' licensure histories are clear of any prior discipline and clear of any active or inactive investigations or administrative complaints, with the exception of those pending here. Petitioner is the state agency with the responsibility for licensing and regulating agents, such as Respondents, and for taking disciplinary action for violations of the laws in its charge. Sometime before January 2007, Phyllis Nagle completed and mailed in a card to request information on investments for seniors. The card included the home address for Mrs. Nagle and her husband, Joseph Leo Nagle, and their ages, then 82 and 87, respectively. Respondents worked together as a team in the Nagles' area of Ellenton, Florida. Respondents' practice, upon receiving a card requesting information, was to go to the person's address identified on the card, show the card they received, and ask to set up an appointment at a later time, unless the person wanted to meet with them then and there. In early January 2007, in accordance with their practice, Respondents went to the Nagles' home to follow up on the card Mrs. Nagle had submitted to ask if they could set up an appointment. When Respondents showed Mrs. Nagle the card that she had filled out, she recognized it and invited Respondents into the Nagles' home. For the first 20 minutes, Mrs. Nagle took Respondents on a tour through the home to show off the Nagles' many collections, including figurines, clocks, brass items that Mr. Nagle made in his workshop and music that Mrs. Nagle collected to use when teaching line dancing in the clubhouse of the mobile home park where they lived. After the tour, Mrs. Nagle introduced Respondents to Mr. Nagle, explaining to him that Respondents were there because of a card she sent to request information. They all sat down at a round table in the Nagles' Florida room. For more than an hour, Respondents and the Nagles discussed the Nagles' financial situation, their age, their investment objectives, and their concerns. The Nagles told Respondents that they were concerned about the yield they were making on their money in different accounts at the bank. One of these "bank" accounts was a fixed-rate annuity issued by an insurance company, and the Nagles were not happy with its yield. Respondents talked about the annuity investment product they were selling, but only in general terms at that meeting because the Nagles said that they did not make their financial decisions; instead, they allowed their son to make their financial decisions. The Nagles asked Respondents to call their son, Robert Nagle, and gave his phone number to Respondents.2 Another issue the Nagles talked about at that first meeting was their concern about qualifying for Medicaid. Having observed other seniors who had gone through a spend-down of their assets to qualify for Medicaid, the Nagles learned that while they would be allowed to keep one vehicle, there was an issue regarding whether their mobile home would be considered a vehicle. The Nagles had been told there was a document they could use to designate their mobile home as their domicile and not a vehicle, so they could keep both the home and a vehicle during Medicaid spend-down. Ms. Cleary had heard of the same document, and in the days following the meeting, Ms. Cleary took it upon herself to research and find the appropriate document for the Nagles called a Declaration of Domicile. Meanwhile, on the day after meeting the Nagles, Respondents called Robert Nagle, who knew that Respondents had met with his parents and was expecting their call. Respondents made an appointment to meet Robert Nagle at his residence in Indian Rocks Beach. That meeting took place a few days later. At their first meeting with Robert Nagle, Respondents introduced themselves and discussed Robert's parents' financial status and investment objectives. They discussed Robert's parents' investments held in IRAs, CDs, and annuities and the Nagles' investment concern of making a better yield. Robert added his concern that he thought it was time for all of his parents' investments to be changed over to just his mother's name because of his father's age. They also talked about Robert's investments in CDs and an IRA, for which he had the statement out to review with Respondents. Respondents told Robert about the company, Allianz, whose products they were offering, and Respondents went through an Allianz product brochure with Robert, which they left with him for his further review. Respondents also gave Robert Nagle a financial disclosure from Allianz for the previous year. In addition, since Robert was very computer-savvy, Respondents gave him Allianz' website address so he could check out the company for himself. Respondents reviewed with Robert Nagle the features of the MasterDex 5 annuity product, which was the product they suggested. This product allowed the purchaser to allocate their investment among three different choices: a Standard & Poor's (S&P) 500 index, a Nasdaq-100 index, and/or a fixed interest investment. The two stock market-based components had a greater potential upside return, but, also, a greater risk if the stock market did not perform well. One benefit of this annuity product, as Respondents explained, was that if the stock market went down, the initial investment would not lose value (as it would for direct stock purchases). Robert Nagle had invested in stocks and mutual funds, and so he understood the concept of greater-risk, greater-reward potential inherent in stock investments, versus fixed interest investments. To show the actual recent performance of MasterDex 5 annuity investments, Respondents showed Robert Nagle actual annual statements recently received by clients whose names were blacked out. The actual yields shown on these statements ranged from a low of around five percent to a high of around 14 percent. Respondents also reviewed the terms of the annuity, which was considered a long-term investment of over ten years. Respondents reviewed the various options for withdrawals before the end of the annuity's term. Up to ten percent of the initial investment could be withdrawn annually without penalty or surrender charge. Alternatively, after the first year, a five-year payout option could be invoked, allowing withdrawal of the entire initial investment, with interest, payable in six installments (one immediately, and then one each year for five years). Respondents also reviewed the surrender charges that would apply for early withdrawal of the whole investment, set forth in a schedule of decreasing surrender charges shown in the product brochure. Respondents' first meeting with Robert Nagle lasted approximately 90 minutes. At the end of the meeting, they agreed that since Robert Nagle was looking for a job and was about to leave town for an interview, Respondents would initiate the next contact by calling Robert in a few days to see if he had any questions about the Allianz material. Respondents' next encounter with any of the Nagles was a few days later, after Ms. Cleary had found the Declaration of Domicile form that had been of such concern to the senior Nagles. Respondents had another appointment in the area, and so they volunteered to drop off the form at the Nagles' home. Respondents did not discuss annuities with the Nagles that day; they simply dropped off the form. A few days after they dropped off the form, Respondents called Robert Nagle back, as agreed. Robert said that he had gone over the Allianz product brochure and had also reviewed the company's website. Robert added that he had contacted his parents to give them his recommendation that they should fill out paperwork to purchase an annuity contract. Robert then said he was leaving town again, and when he got back, he wanted to set up another meeting with Respondents because he was probably going to purchase a contract of his own. Respondents then called the Nagles to schedule the next appointment. The Nagles had spoken with their son and knew his recommendation, so they set up the appointment for January 11, 2007. Respondents received a warm reception when they returned to the home of the Nagles for their appointment. Mrs. Nagle expressed excitement that Robert Nagle had given the go-ahead, and they were ready to go through the paperwork. Respondents went over, in detail, all of the paperwork to be filled out, going through each question and answer on each form and filling them out side-by-side with the Nagles. The paperwork included a five-page application, a statement of understanding, and a suitability form. Respondents also showed the Nagles the same actual recent annual statements showing yields earned in MasterDex 5 annuity investments, with client names blacked out, that they had shown the Nagles' son, Robert. The application was completed for the MasterDex 5 annuity in the name of Phyllis Nagle alone, based on Robert's recommendation that his parents should transition all of their accounts to Phyllis Nagle's name alone. The application also included the beneficiary designation, and Joseph Nagle was named the sole primary beneficiary. Even though the Nagles have three children, with Robert being the youngest, for some reason that was not explained, their son Robert Nagle was named the sole contingent beneficiary. Finally, the application included the Nagles' investment allocation among the three options, and they chose 50 percent in the S&P 500 index, 25 percent in the Nasdaq 100 index, and 25 percent in the lower-risk fixed- interest category. The completed application form was signed by Phyllis Nagle on January 11, 2007, immediately below a statement of agreement that included the following: It is agreed that (1) All statements and answers given above are true and complete to the best of my knowledge, . . . (5) I understand that I may return my policy within the free look period (shown on the first page of my policy) if I am dissatisfied for any reason, and (6) I believe this annuity is suitable for my financial goals. Although the policy was not introduced in evidence, the undisputed testimony was that the "free look period" referred to in Mrs. Nagle's acknowledgement was 30 days. The second document that was completed to submit with the annuity application was the statement of understanding. This document, reviewed with the Nagles, is a five-page detailed summary of the terms of the MasterDex 5 annuity contract. The summary sets forth the investment allocation options, guarantees, withdrawals, contract cancellation, and surrender charges. The last page included a chart illustrating how the terms would work for a hypothetical investment, with a column showing the decreasing surrender charges over the years from issuance of the annuity through the tenth contract anniversary. This chart is on the same page as, and immediately above, Mrs. Nagle's signature as the annuity owner, who acknowledged the following by signing the document: I have received a copy of this Statement of Understanding. The agent has answered my questions. I have also received the MasterDex 5 Annuity consumer brochure. I understand that any values shown, other than Guaranteed Minimum Values, are not guarantees, promises, or warranties. I understand that I may return my policy within the free-look period (shown on the first page of the contract) if I am dissatisfied for any reason. The third document that was completed for submission with the annuity application was the product suitability form. This document calls for information about the financial status of the annuity purchaser, including annual income and net worth (defined on the form as total assets, not including home and automobile, minus total debts). In addition, the form asks the purchaser to identify the financial objectives in purchasing the annuity. Finally, in a section called "Accessing your money," the form asks the purchasers how and when they expect to take money out of the annuity. The product suitability form was reviewed by reading the questions and answer options aloud, with Ms. Cleary and Mrs. Nagle reading the form together sitting side-by-side. Mrs. Nagle would discuss the answer with Mr. Nagle, and they agreed on the correct response for Ms. Cleary to check on the form. For annual income, the Nagles agreed that the correct response was $25,000 to $49,999. For net worth excluding home and automobile, the Nagles discussed the answer option categories and agreed that the category $150,000 to $199,999 was the correct response. Respondents did not ask for back-up documentation to prove that the Nagles' income and net worth answers were accurate, as neither Allianz, nor Petitioner requires proof of the purchasers' answers. The Nagles identified the following as their financial objectives in purchasing the annuity: first, to pass on to beneficiaries; and second, for the guarantees provided. With respect to the guarantees, the Nagles considered that for the stock-market-indexed portion of their investment (75 percent of the total investment), the product guaranteed that they would not lose any of their principal, even if the stock market dropped. That was important to the Nagles, who liked the prospect for a higher return than fixed-interest investments allow, but without risking losing their principal if the stock market dropped (as it did in the year following their investment). The product suitability form represented that the Nagles currently, or previously owned, financial products that included certificates of deposit and fixed annuities, but that the source of the premium for this annuity purchase would not be an annuity, certificate of deposit, or other investment; instead, it would be "other." That category was selected, because the premium was going to be paid by check from funds on deposit in a regular bank account.3 The product suitability form also represented that the Nagles had sufficient available cash, liquid assets, or other sources of income for monthly living expenses and emergencies other than the money they planned to use to purchase the annuity contract. Both Phyllis and Joseph Nagle were in agreement that they considered this to be a long-term investment, meaning ten years or more. That is because their goal was not to use the funds, but, rather, to have the investment to pass on to their beneficiaries. Therefore, the Nagles answered the questions about accessing their money by stating that they intended the money to be taken out of the annuity in a lump sum, in ten or more years. After the form was filled out, Ms. Cleary read aloud the questions and the answers she marked down to confirm that she had marked the correct responses. The Nagles confirmed that the answers were completed correctly. Phyllis Nagle signed the completed product suitability form, acknowledging as follows by her signature: I acknowledge that I have read the Statement of Understanding for the product listed and believe it meets my needs at this time. To the best of my knowledge and belief, the information above is true and complete. When Robert Nagle returned to town, he met with Respondents and completed the same set of paperwork to apply for his own MasterDex 5 annuity contract. On his application, he designated his two sisters as primary beneficiaries (33 percent each), and a friend, Cheri Davis, as the third primary beneficiary (34 percent). He allocated 75 percent of his annuity investment to the S&P 500 index choice and the remaining 25 percent to the Nasdaq-100 index choice, thus, taking the higher-risk, higher-potential reward avenue. Robert Nagle signed his application on January 22, 2007, agreeing to the same statements that his mother agreed to by signing her application. Robert Nagle did not complete all the paperwork or fund his annuity that day. Instead, he wanted to read through the statement of understanding again before signing it, while deciding what source he was going to use to fund the annuity. He ultimately decided to cash in a certificate of deposit earning 1.5 percent interest. He met again with Respondents one week later, when he signed the same five-page statement of understanding that Phyllis Nagle had signed, summarizing the terms of the MasterDex 5 annuity. Just as on the form signed by Mrs. Nagle, Robert Nagle's signature appears immediately below a chart that illustrates how the terms would apply to a hypothetical investment over the years, with a column showing the decreasing surrender charges that would apply if the entire initial investment were withdrawn before the tenth anniversary. By his signature on January 29, 2007, Robert Nagle acknowledged: I have received a copy of this Statement of Understanding. The agent has answered my questions. I have also received the MasterDex 5 Annuity consumer brochure. I understand that any values shown, other than the Guaranteed Minimum Values, are not guarantees, promises, or warranties. I understand that I may return my policy within the free-look period (shown on the first page of the contract) if I am dissatisfied for any reason. Robert Nagle wrote a check to Allianz for $30,000 for his MasterDex 5 annuity contract on January 29, 2007. Respondents delivered Robert Nagle's policy to him on February 15, 2007, and he signed a receipt acknowledging its delivery. After a delay, because of some minor surgery Mrs. Nagle had on March 6, 2007, Mrs. Nagle wrote a check to Allianz for $35,000 for her MasterDex 5 annuity contract. As they had done for Robert Nagle, Respondents personally delivered Phyllis Nagle's policy to her shortly thereafter in March 2007, as the Nagles acknowledged. On April 7, 2007, Phyllis Nagle responded to an Allianz request that she complete a questionnaire about her recent annuity purchase. Mrs. Nagle's responses indicated that she found the service provided by Respondents to be "extremely" helpful and that she found the Allianz product descriptions and sales material to be "extremely" helpful. The questionnaire also sought to establish Mrs. Nagle's understanding of the terms of the product she purchased. In this regard, Mrs. Nagle's responses showed that she knew the annuity would provide tax-deferred savings, that surrender charges are imposed on premature full withdrawal, that the investment options she chose include a guaranteed minimum interest rate, and that she "consider[s] this annuity to be a long-term investment and do[es] not intend to use these funds to meet current expenses." Mrs. Nagle also responded that the source of funds used to purchase her annuity was savings, either savings account or certificates of deposit. Finally, Mrs. Nagle acknowledged that Respondents reviewed her financial status, tax status, investment objectives, and other pertinent information to determine whether the annuity purchase was suitable for her and that Respondents personally delivered her policy to her. Mrs. Nagle's only additional comment or suggestion was that she would like statements more than once a year. Neither Robert, nor Phyllis Nagle raised any questions or concerns or voiced dissatisfaction with their annuity contracts within the 30-day free look period during which they could have cancelled their contracts without penalty or surrender charges. Robert Nagle received his annual statement shortly after his one-year contract anniversary. The annual statement showed a yield of 5.00 percent for the policy year beginning January 28, 2007, and ending January 27, 2008. Mr. Nagle had no complaints and voiced no concerns about this annual statement in the month following his receipt of the statement. Phyllis Nagle received her annual statement shortly after her one-year contract anniversary. The annual statement shows a yield of 5.66 percent for the policy year beginning March 7, 2007, and ending March 6, 2008. Inexplicably, Phyllis Nagle believed that her statement showed a yield of only one percent or 1.5 percent. Joseph Nagle also was under the impression that they had received an annual statement that reflected a yield of only one percent or 1.5 percent. But the only annual statement for Phyllis Nagle offered in evidence--part of Petitioner's certified investigation file--plainly shows a yield of 5.66 percent, and nowhere shows a yield of one percent or 1.5 percent. The Nagles were shown the annual statement in evidence and agreed that it shows rather clearly a yield of 5.66 percent. They did not have any explanation for their misunderstanding of what the statement plainly showed. The Nagles seemed to think there was a different statement or some other paper out there that showed a different yield of one percent or 1.5 percent, but the Nagles acknowledged that they only received one annual statement, which they did not have because they said that they turned over all of their papers, presumably to Petitioner. The Nagles were very upset because of their misimpression that the Allianz annuity had only yielded one percent or 1.5 percent in its first year. Mr. Nagle testified that he did not expect the performance to be as high as what he had seen in 2007 on the other recent annual statements and that "I figured at worst it wouldn't be any more than four or five [percent]." Instead, "[i]t was either one or one-and-a-half percent, and I was shocked." Based on their misimpression, the Nagles took action to complain to the state, after talking to their son. But, Mr. Nagle made it clear that they would not have complained or taken any action if they had realized the annual statement showed a yield of 5.66 percent: "I would not have done anything if it was [five] point or whatever percent. . . I wouldn't have cancelled everything out. But when I saw the figures that they showed me, [the yield was] one to one-and-a-half." When asked who showed him those figures, he said he got the information in the mail, and it was not five percent. When asked if it was on another statement, Mr. Nagle said no, but then he said he was not sure where the information came from. As to the 5.66 percent yield he saw clearly on the annual statement in evidence, Mr. Nagle said, "that does not ring a bell at all. I don't understand it. Because that was average money at the time for investments." The Nagles immediately complained to Respondents. Ms. Cleary spoke with Mrs. Nagle, who was very irate about her misimpression of the yield shown on the annual statement and started demanding complete return of the entire investment. Ms. Cleary attempted to remind Mrs. Nagle of the annuity terms that allowed limited withdrawals without surrender charges, and Mrs. Nagle got angrier and ended the conversation. Apparently upon consultation with Robert Nagle's and, possibly, attorneys, the Nagles agreed to complain to Petitioner. The Nagles complained to Allianz and to Petitioner. Robert Nagle complained to Respondents' agency and to Petitioner. These complaints asserted that the Nagles were told by Respondents that their investments were entirely liquid after the first year and could be completely withdrawn without penalty or surrender charge. The statement of understanding that Phyllis Nagle and Robert Nagle each signed plainly says otherwise. When he was asked at the final hearing about the numerous references in the papers he signed and in the brochure he reviewed to surrender charges for premature full withdrawal, with limited options for penalty-free partial withdrawals, Robert Nagle had no response other than to suggest that he was assured by Respondents that the written terms in the documents he signed would not apply. Robert Nagle's testimony, in this regard, was not credible. Instead, he apparently had a change of heart about his intent to make a long-term investment.4 The Administrative Complaints charge that Respondents misrepresented the yields that the MasterDex 5 annuity would earn for the Nagles. The more credible testimony on this subject was that Respondents did not make any such misrepresentations. Instead, Respondents showed the Nagles' actual client annual statements for investments in the same MasterDex 5 annuity, with the client names blacked out, to demonstrate actual yields that others had obtained recently, and those yields ranged from approximately five percent to 14 percent.5 The Nagles testified that their review of these statements led them to expect they could make the same yields. But Respondents credibly testified that they never represented to any of the Nagles what their yields would be and never represented that their yields would be as high as the yields shown on any of the actual statements. Instead, Respondents represented the statements as what they were--actual statements showing yields recently earned by actual clients who purchased the same annuity product. The most credible evidence establishes only that the three Nagles optimistically inferred what they hoped would be true--that the recent past performance would repeat itself. Instead, they experienced the "higher- risk" part of the "higher-risk, higher reward potential" of investments tied to stock market performance. But as promised, they did not lose any part of their initial investment, unlike those who directly invested in a dropping stock market. The Administrative Complaints also charged Respondents with misrepresenting to the Nagles that they could withdraw their entire investment after one year with no penalty or surrender charges. But, Respondents credibly testified that they never made any such representation to any of the Nagles. Instead, Respondents reviewed the annuity's terms summarized in the consumer brochure and the statement of understanding multiple times with the Nagles, and with Robert Nagle. Indeed, the signature page of the statement of understanding shows, right above the signatures, a chart detailing the surrender charges by year, decreasing according to the schedule shown, for complete withdrawal before the end of the annuity's term. The Nagles' complaint of not being able to withdraw their entire investment after one year without penalty was not based on any misrepresentation by Respondents. Instead, the complaint appears contrived after-the-fact, after the Nagles apparently misread their first annual statement as reporting a one percent or 1.5 percent yield, when, in fact, the annual statement reports a 5.66 percent yield. Mr. Nagle testified unequivocally that if he understood the yield was really 5.66 percent and not 1.5 percent, they would not have complained and would have been satisfied to keep the annuity product (consistent with their original long-term intent). It was only when they attempted cancellation upon being dissatisfied with an imagined 1.5 percent yield that they first decided the goal of liquidity, with immediate access to their funds, was an objective that was important to them. That the senior Nagles' complaints are contrived and based solely on their misreading of their annual statement, is clear from the consumer survey completed by Mrs. Nagle on April 7, 2007, after the annuity purchase, but before the first anniversary. This completed survey, in evidence as part of Petitioner's certified investigation file for Respondents, was provided by Allianz upon Petitioner's request. Mrs. Nagle's survey responses show she knew that "Surrender charges are imposed on premature full withdrawal"; and "I consider this annuity to be a long-term investment and do not intend to use these funds to meet current expenses." Further, she confirmed that Respondents reviewed her "financial status, tax status, investment objectives, and other pertinent information to determine whether this annuity purchase" was suitable for the Nagles. Finally, the Administrative Complaints charge Respondents with misrepresenting the Nagles' net worth on the product suitability form. Petitioner presented absolutely no evidence to substantiate the charge that Respondents made any such misrepresentation. Petitioner elicited from Mrs. Nagle the testimony that the product suitability form falsely indicated the Nagles' net worth as in the range of $150,000 to $199,000; Mr. Nagle was more equivocal, saying only that the report range was "[u]ntrue, I think." However, the only evidence in the record as to the source of the net-worth information was Ms. Cleary's detailed description of how the forms were completed, when she clearly and credibly testified that the Nagles discussed and determined what the correct answer was to the net worth question. Moreover, Petitioner failed to establish that, in fact, the information on the product suitability form was a misrepresentation (by the Nagles) at the time it was made. Perhaps the net worth information was accurate in January 2007 when Mrs. Nagle signed the form and acknowledged that the information on it was accurate. Mr. Nagle testified that they probably had certificates of deposit at that time, and Mrs. Nagle could not remember. There was also testimony that the Nagles were working on a spend-down of assets for Medicaid qualification, so their net worth may well have been intentionally reduced after January 2007. In any event, if the net worth information on the form signed by Mrs. Nagle was inaccurate, that inaccuracy was the fault of the Nagles and was not, as charged, a misrepresentation made by Respondents.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is hereby: RECOMMENDED that a final order be entered by Petitioner, Department of Financial Services, dismissing all charges in the Administrative Complaints against Respondents, Judith C. Cleary and Charles B. Houck. DONE AND ENTERED this 22nd day of December, 2010, in Tallahassee, Leon County, Florida. S ELIZABETH W. MCARTHUR Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 22nd day of December, 2010.
The Issue Whether the application of Lexington for registration as an investment adviser and the application for registration of John B. Waymire should be approved?
Findings Of Fact The Department's Division of Securities and Investor Protection is charged with the administration and enforcement of Chapter 517, Florida Statutes, the Florida Securities and Investor Protection Act. Lexington filed an application for registration as an investment adviser in the State of Florida. The application was filed on May 30, 1985. At the time the application was filed Lexington was known as Amvest Capital Management, Inc. The application was accompanied by an application for registration of John B. Waymire, as principal. By letter dated June 7, 1985, the Department notified Lexington that its application was deficient in 3 ways: The application did not indicate that Lexington was a Foreign Corporation or include a legal opinion stating why such registration was not required under Florida law; The application did not include financial reports as required by Rule 3E-300.02(2)(d), Florida Administrative Code; and Lexington did not meet the net capital/net worth requirements of Rule 3E-600.16, Florida Administrative Code. By letter dated June 17, 1985, Lexington corrected the first 2 deficiencies and requested that the Department waive the net capital requirements of Rule 3E-600.016(3)(b), Florida Administrative Code (hereinafter referred to as the "Net Capital Requirement"). By letter dated August 23, 1985, the Department denied Lexington's request for a waiver of the Net Capital Requirement. By letter dated November 11, 1985, Lexington requested that the Department reconsider its request for a waiver of the Net Capital Requirement. In the letter of November 11, 1985, Lexington also informed the Department that its name had been changed from Amvest Capital Management, Inc., to Lexington Capital Management, Inc. By letter dated February 7, 1986, the Department informed Lexington that it would reconsider its request for a waiver of the Net Capital Requirement and requested audited financial statements of Lexington and Piedmont Management Company, Inc., and information concerning the acquisition of a surety bond by Lexington. On May 7, 1986, Lexington provided the Department with documentation, including an audited financial statement for Lexington as of December 31, 1985, which indicated that Lexington had a negative net worth of $1,248,595.00, a general undertaking from Safeco Insurance Company to issue a surety bond for $100,000.00, and a proposed "Continuing Guaranty" agreement from Piedmont Management Company, Inc., guaranteeing all debt of Lexington. The Financial Administrator of the Department was requested to review the Continuing Guaranty agreement submitted by Lexington. She raised questions which led the Department to conclude that it had no authority to waive the Net Capital Requirement as requested by Lexington. The Financial Administrator of the Department orally informed Lexington of its position and indicated that a Declaratory Statement on the issue could be requested. In September of 1986, Lexington filed a Petition for Declaratory Statement on the issue of whether the Department had the authority to waive the Net Capital Requirement. The request was withdrawn by Lexington by letter on March 13, 1987. On April 29, 1987, the Department issued a letter denying Lexington's application for registration as an investment adviser in the State of Florida for failure to meet the Net Capital Requirement. The Department also denied the application of Mr. Waymire for registration as the principal of Lexington because Lexington's application had been denied. The Department's denial was based upon its determination that it did not have the authority to waive the Net Capital Requirement. The information that the Department had requested that Lexington provide was not considered or analyzed by the Department. The following facts concerning the following investment advisers currently licensed in the State of Florida were proved: FSC Advisory Corporation has filed financial statements with the Department for 1978, 1979, 1980 and 1981 which indicate that the Corporation had a negative net capital of $46,278.00, $79,127.00, $101,024.00 and $90,141.00, respectively, in each of those years. FSC Advisory Corporation has been licensed as an investment adviser in the State of Florida since at least 1977. [The Department has taken no action against FSC Advisory Corporation for failing to maintain the net capital required of licensed investment advisers.] Richard W. Whitehead, Inc., was licensed as an investment adviser on February 5, 1981. Its application included a December, 1980, financial statement which indicated that the company had a negative capital of $589.00. The evidence did not prove that the Department "waived" the Net Capital Requirement. Subsequently filed financial statements for 1981, 1983, 1984, 1985 and 1986 indicate that the company had a negative net capital of $1,071.00, $3,838.00, $4,978.00, $46,582.00 and $33,989.00, respectively, in each of those years. FCA Corporation filed financial statements with the Department for 1984 and 1985 indicating a negative net capital of $115,325.00 for 1984 and $40,136.00 for 1985. The 1985 financial statement was filed in response to a letter of August 13, 1986 from the Department notifying FCA Corporation that it had failed to file a financial statement. Coordinated Financial Services Advisors, Inc., filed a financial statement indicating that it had a negative net capital of $9,019.00 as of March 31, 1987. This statement was filed in response to a letter from the Department dated April 29, 1987, notifying the company that it had failed to file a financial statement. Stratfield Investment Management, Inc., filed a financial statement with the Department indicating that it had a negative net capital of $12,149.00 as of December 31, 1986. Consortium Group, Inc., filed a financial with the Department indicating a negative net capital of $19,947.00 as of October 31, 1986. TFG Consulting, Inc., was registered as an investment adviser by the Department on February 24, 1987. Its application included a July 31, 1986, financial statement indicating a negative net capital of $281.72. The Department informed TFG Consulting, Inc., of this deficiency by letter dated June 13, 1986. Market Metrics, Inc., filed a financial statement with the Department indicating it had a negative net capital of $38,357.00 as of June 30, 1984. Investment Management included a document with its application for registration which indicated that it had a negative net capital of $94,979.00. The Department, however, notified Investment Management of its failure to meet the Net Capital Requirement. By letter dated September 16, 1981, Investment Management notified the Department that it complied with the Net Capital Requirement; it had a net capital of $36,132.00. Generally, the Department took no action against the companies discussed in paragraphs 13a through 13i for failing to maintain the net capital required of licensed investment advisers except to the extent specifically noted in those paragraphs. The evidence did not, however, prove that the Department had waived the Net Capital Requirement for any entity filing an initial application for registration as an investment adviser. The Division of Securities and Investor Protection of the Department has a total staff of approximately 74 persons. The Division's Bureau which processes registrations consists of only 8 professional employees and several clerical positions. The 8 professional employees of the Bureau processed approximately 500 new broker-dealer and investment adviser applications which were approved during the past fiscal year. They also processed applications which were not approved and approximately 3,200 renewals. There are approximately 3,200 broker-dealers and investment advisers, 1,500 branch offices and 120,000 associated persons registered with the Department. Except for bank holding companies, which are discussed, infra, companies which received and/or retained registrations with the Department despite their failure to meet the Net Capital Requirement did so because of Department employee error. From March 6, 1979 until March 20, 1986, the Department issued thirty- three letters in response to requests for waivers of the net capital requirements. In each case the Department indicated that it interpreted Rule 3E-300.02(7)(a), Florida Administrative Code, to allow the Department to waive the Net Capital Requirement if the waiver would not be contrary to the interest of the investing public. Of the thirty-three cases where a waiver was granted, thirty of those cases involved bank holding companies. It is a common practice in bank mergers or reorganizations for a bank to form a bank holding company. Stock of the existing bank is then exchanged for stock of the bank holding company. The bank holding company is required to register as an issuer-dealer and must meet a $5,000.00 net capital requirement. Often, the bank holding company does not meet this requirement until after the transaction has occurred. Therefore, bank holding companies request a conditional waiver from the net capital requirement. Each request is reviewed on a case-by-case basis to be sure the public is adequately protected. The waivers that have been granted were conditioned on the bank holding company complying with the Net Capital Requirement after the exchange of stock occurs. Of the thirty-three waivers proved in this proceeding, thirty were bank holding companies. The evidence failed to prove what type of transaction was involved in the other three cases. The Department's position with regard to waiving the Net Capital Requirement of bank holding companies applied to investment advisers as well as broker-dealers or issuer-dealers. The Department's interpretation of Rule 3E-300.02(7)(a), Florida Administrative Code, with regard to its authority to waive the Net Capital Requirement for bank holding companies set out in the letter to the thirty-three companies referred to above was the same as set out in the Department's letter of February 7, 1986, indicating that the Department would reconsider Lexington's request for a waiver. The Department has stopped granting waivers from the Net Capital Requirement to bank holding companies based upon its present interpretation of the law. The $2,500.00 Net Capital Requirement for investment advisers does not guarantee that customers will not sustain losses or that the adviser will remain solvent. Lexington is an investment adviser doing business in 46 states. The State of Arkansas has taken action to revoke the registration of Lexington in that State. This action is based, in part, on the refusal of the State of Florida to approve Lexington's application. As of the date of its application Lexington had a negative net capital of $1,248,955.00. The negative net capital is due in part to $1,650,000.00 in long-term debt owed to Piedmont Management Company, Inc., and Lexington Management Corporation of New Jersey. Piedmont Management Company, Inc., owns 100 percent of the stock of Lexington Management Corporation of New Jersey, which in turn owns 50 percent of the stock of Lexington. The other 50 percent of the stock of Lexington is owned by "senior management" in Lexington. Lexington's $1,650,000.00 of long-term debt to Piedmont Management Company, Inc., and Lexington Management Corporation of New Jersey is subordinated; all other debts of Lexington would have priority over the long- term dept. Piedmont Management Company, Inc., had net capital of $78,394,000.00 as of December 31, 1985. Lexington does not take physical possession of its clients' assets. Clients' assets are kept with a broker-dealer. Lexington only has the authority to trade a client's account; it does not authority to transfer assets in or out of a client's account. The Continuing Guaranty agreement submitted to the Department by Lexington is not effective indefinitely. The agreement does place the asset and net worth of Piedmont Management Company, Inc., behind the liabilities of Lexington, except subordinated debt. The surety bond commitment was to be in a form specified by the Department. The parties stipulated that Lexington has never met the Net Capital Requirement. If the Net Capital Requirement were waived the investing public would be adequately protected if the actions which the Department and Lexington have discussed are taken. This protection will only be for the effective period of the Continuing Guaranty agreement, however.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the requested waiver of the Net Capital Requirement be DENIED. It is further, RECOMMENDED that the application of Lexington for registration as an investment adviser in the State of Florida and the application of John B. Waymire as principal be DENIED. DONE and ENTERED this 16th day of February, 1988, in Tallahassee, Florida. LARRY J. SARTIN 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 16th day of February, 1988. APPENDIX TO RECOMMENDED ORDER, CASE NO. 87-2289 The parties have submitted proposed findings of fact. It has been noted below which proposed findings of fact have been generally accepted and the paragraph number(s) in the Recommended Order where they have been accepted, if any. Those proposed findings of fact which have been rejected and the reason for their rejection have also been noted. The Petitioner's Proposed Findings of Fact Proposed Finding Paragraph Number in Recommended Order of Fact of Acceptance or Reason for Rejection 1 2. 2 7. 3 3. 4-5 4. 6 5. 7 6. 8 8. 9 9. The "unconditional guarantee" is for a limited period of time, however. 10 30. 11 31. 12-13 12. 14 23. 15 18. 19. The evidence failed to prove that there was a "substantial minority" or that the 3 applicants which were not bank holding companies were broker- dealers or investment advisers. The evidence failed to prove that there is such a "policy." See 21. 18 22. 19-20 12. The evidence failed to prove that the Department's discontinuance of its treatment of waiver request was "abrupt" or a discontinuance of a policy applicable to the Petitioners. 21 Hereby accepted. 22 24. 23 25. 24 29. The first sentence is irrelevant. The last sentence was not proved by the weight of the evidence. 26. The evidence failed to prove that Lexington has a "parent" company. 27 27. 20 Not a proposed finding of fact. 21 18-20. 22 19. 23 14. 24 15 and 16. 25 17. 26 12 and 23. 27 25. 28 32. The last sentence is a statement of law and not a proposed finding of fact. Not supported by the weight of the evidence. 29 26. 30 28. 31 See 33. 32 13a and 13j. 33 13b and 13j. 34 Not supported by the weight of evidence. 35 13c and 13j. 36 13d and 13j. 37 13e and 13j. 38 13f and 13j. 39 13g. 40 13h and 13j. 41 13i. 42 Not supported by the weight of the evidence. One Department employee testified that he believed that the rationale for waiving the Net Capital Requirement for bank holding companies (that the investing public was adequately protected) would apply to investment advisers also. This testimony does not prove, however, that the Department has implemented a policy with regard to permanent waivers of the Net Capital Requirement for initial applications of investment advisers. 43 Not supported by the weight of the evidence. The Department's Proposed Findings of Fact 1 1. 2 2. 3 3. 4 4. 5 5. 6 6 and 7. 7 8. 8 9. 9 10 and 11. 10 12. 11 13a and 13j. 12 13b and 13j. 13 13c and 13j. 14 13d and 13j. 15 13e. 16 13f. 17 13g. 18 13h. 19 13i. COPIES FURNISHED: Edward W. Dougherty, Esquire and Charles T. Collette, Esquire Mang, Rett & Collettee Post Office Box 11127 Tallahassee, Florida 32302-3127 Walter W. Wood Deputy General Counsel and Margaret S. Karniewicz Assistant General Counsel and Charles E. Scarlett Office of the Comptroller Suite 1302, The Capitol Tallahassee, Florida 32399-0350 Honorable Gerald Lewis Comptroller, State of Florida Banking & Finance Department The Capitol Tallahassee, Florida 32399-0350
