The Issue Whether there is probable cause for petitioner to bring an action against respondents, or any of them, for violation of the Florida Deceptive and Unfair Trade Practices Act?
Findings Of Fact Mark Sherwood Turner started working for Gulf Coast Motors in 1982. At the time, Charles E. Pace owned all of the inventory and other assets of the business, a used car lot at 301 Beverly Parkway in Pensacola, Florida. When Mark Turner's name was added to the fictitious name papers, it was not because he had acquired an ownership interest in the business; it was done in order to effectuate an agreement between him and Mr. Pace: They had agreed that Turner could use the lot to display his own cars and otherwise to operate his own, independent used car sales business, without incurring the expense of obtaining his own motor vehicle dealer's license. In exchange, Turner was to run Pace's business in Pace's absence. They kept separate books, and neither Turner had an ownership interest in the cars sold to Messrs. Hayes, Allen and Crutchfield, or Ms. Youmans. Later Pace sold one Richardson the accounts receivable generated by Gulf Coast Motors. Richardson subsequently assigned to Mark Turner everything he had acquired from Pace. On March 11, 1983, the corporate respondent was organized and Mark Turner acquired an interest in Gulf Coast Motors, Inc. Mark's brother David Jerry Turner began working at the used car lot a year or two before the final hearing. He came in three days a week, worked in the office and occasionally acted as a salesman. On June 25, 1984, he also acquired an interest in Gulf Coast Motors, Inc. Crutchfield On March 15, 1984, Joel Harold Crutchfield bought a Dodge Monaco for $1531 after Joe Smith told him it was in good mechanical condition. He signed a form contract that had "GULF COAST MOTORS" at the top with "Charlie Pace" and "Mark Turner," printed underneath. Respondent's Exhibit No. 1. Nobody else signed this undated form contract, which provided, among other things: Any payment late will include a late charge of $5.00 for every three days late . . . GULF COAST MOTORS has full rights to repossess any vehicle with a payment three days late. If any vehicle is repossessed the buyer has up to 10 days in which to pay the vehicle off in full and a $100.00 repossession charge to redeem the vehicle. Mr. Crutchfield also signed a form warranty disclaimer, stating "THIS USED MOTOR VEHICLE IS SOLD AS IS WITHOUT ANY WARRANTY . . .". Respondent's Exhibit No. 2. Mark Turner and Glen Padgett witnessed his signature on the warranty disclaimer. Mr. Crutchfield understood that he was buying the car "as is." Under the agreement, Mr. Crutchfield made a downpayment of $250 and undertook bi-weekly payments of $60 to retire a balance of $1281. Joe Smith signed an undated receipt for $250 on which "GULF COAST MOTORS" was stamped. David J. Turner signed a similarly stamped receipt for $60 on March 31, 1984. Mark Turner's and David Turner's names were on front of the office building at the car lot. The night following the purchase, Mr. Crutchfield had to buy a new starter for the car. When he drove the car home, he discovered that the brakes, the brake lights and the horn did not work. Only three lug nuts held each tire to its wheel. About a month after he had the car, the front end dropped and the car was "so low it looked like it would hit the road"; the frame was broken. Eventually Mr. and Mrs. Crutchfield decided to give the car back because Joe Smith and Charlie Pace refused to fix the frame. They made their last payment on or about September 17, 1984. Mrs. Crutchfield left the car on the lot and walked off ignoring calls to come back. A couple of days later the car was gone. The Crutchfields never received any correspondence in connection with the car thereafter. Youmans Frances Gayle Youmans also purchased a car on March 15, 1984, and also made a down payment of $250.00. She also dealt with Joe Smith. For a sales price of $1495.00, which with the dealer handling charge of $25.00, tag and title transfer fees, came to $1636.00, Ms. Youmans acquired a 1974 Buick that had been driven 78,482 miles. She agreed to pay the balance of $1380.00 in $25.00 weekly installments. On the vehicle registration certificate "GULF OOAST MOTORS" is shown as the "SELLER, FLORIDA DEALER, OR OTHER PREVIOUS OWNER," and as the first lienholder. Joe Smith, C. E. Pace, David J. Turner, Mark Turner and Lisa Russo signed receipts for various weekly payments she made. The day she bought the car it backfired on a test drive. Mr. Smith told her that it was the carburetor and that he would get a mechanic to fix it. Ms. Youmans is not an automobile mechanic; she works as a maid. She signed an "as is" disclaimer, which she did not understand. On March 16, 1984, she spoke to Joe Smith about fixing the car. He promised her repeatedly that he would arrange for a mechanic to fix it and told her not to take it to anybody else. She left the car parked at her home for more than two months, making weekly payments the while, on the strength of these assurances. On March 16, 1984 Ms. Youmans made application for a temporary license tag. A form application for vehicle registration was partially completed on April 19, 1984. Petitioner's Exhibit No. 4. Ms. Youmans asked Joe Smith to arrange for the car to be picked up and taken to the car lot, because she was afraid to drive it. After she had made the last in an unbroken series of weekly payments, on June 15, 1984, the car was towed. The next day Joe Smith told her to continue the weekly payments so that she could have the car back when she paid the mechanic's bill. About a week later the car "ran," and about a week after that she appeared with $155.00, enough to pay for the mechanic, for towing ($50.00) and to bring payments (with late charges) current. Mark Turner refused the money, pounded his fist on a table, and told her to leave. Still later she noticed that the car was no longer on the lot. Allen On March 24, 1984, Donald Gene Allen purchased a 1973 Volkswagen from a salesman named Smith, making a down payment of $300.00 and agreeing to weekly payments of $35.00 to retire a balance of $2180.00. He signed a form contract that had "GULF COAST MOTORS" at the top with "Charlie Pace" and "Mark Turner" printed underneath. Respondent's Exhibit No. 4. Nobody else signed the form contract, which provided, among other things: Any payment late will include a late charge of $5.00 for every three days late . . . . GULF OOAST MOTORS has full rights to repossess any vehicle with a payment three days late. If any vehicle is repossessed the buyer has up to 10 days to pay the vehicle off in full and a $100.00 repossession charge to redeem the vehicle. Respondent's Exhibit No. 4. Mark Turner and C. E. Pace witnessed Mr. Allen's signature on a form warranty disclaimer, which stated, "THIS USED MOTOR VEHICLE IS SOLD AS IS WITHOUT ANY WARRANTY . . ." Respondent's Exhibit No. 3. A week and a half after he had acquired the Volkswagen, the transmission failed and Mr. Allen called for the car to be towed back to the used car lot. He asked that the car be repaired and the car was taken to a Volkswagen mechanic's shop. This shop refused to release the car to Mr. Allen without payment of the repair bill. He was refused, when he asked that his down payment be returned. Mr. Allen dealt only with Charlie Pace and Joe Smith and never spoke to the Turners. Hayes Willie Hayes, Jr. bought a car from Gulf Coast Motors in 1982 or 1983 for about $1200.00. He fell behind in his bi- weekly payments once in a while, but always let somebody know when he would be unable to make a payment. In May of 1984, when he was $60.00 or $70.00 behind, he told Mr. Pace that he would bring payments current in a week's time. He showed up at the used car lot with all but $20.00 of what he had intended to bring, but was told that he had to pay everything he still owed on the car, a balance of $420.00. Mark Turner asked him for the key to the car when it became clear that he could not pay. Mr. Hayes refused, got into his car and started to leave. Mark Turner got into another car and blocked his egress while another driver pulled another car in front of Mr. Hayes, penning his car. Eventually a Highway Patrolman arrived, wrote Mr. Hayes a ticket for having backed into the car Mr. Turner had placed in his way, determined that Mr. Turner had no judicial process authorizing repossession, and sent Mr. Hayes on his way. Motley Burtis O. Motley bought a 1980 Ford Granada from Gulf Coast Motors on October 11, 1984. He dealt with a Jerry Murph who signed an odometer mileage statement reciting that the odometer "now reads 131,527 miles . . . [and that] the odometer reading . . . reflects the actual mileage." Petitioner's Exhibit No. 6. In fact, however, the odometer read 131,528, understating the mileage by 99,999 miles, a point on which Mr. Motley, a retired carpenter, was confused. During negotiations he commented to the salesman, "I see the low mileage." Cataracts impair Mr. Motley's vision. He did not read the odometer mileage statement or the other documents he signed when he paid $500.00 down, traded in his old car, and undertook to retire a balance of $3206.75 with monthly payments of $70.00. He realized he was buying the car "as is," however, and signed a disclaimer to that effect. Two or three days after the purchase, Mr. Motley began having repairs done, first on the brakes: the front brakes pulled to the left and the back brakes "went haywire." Grease seals were replaced at K-Mart. New shock absorbers were needed. Mr. Motley decided that he had had enough. On the telephone he told one of the Messrs. Turner that he was going to stop making payments and that he would "turn the car in." On November 24, 1984, somebody took the car. Mr. Motley later saw it on the Gulf Coast Motors lot, but there was never any communication as to its disposition after November 24, 1984. Pugh On July 7, 1984, a Saturday, Marshall Everett Pugh bought a 1972 Toyota from David Turner purporting to act as a salesman for Gulf Coast Motors. Most of the paperwork he signed in blank but he was aware of the import of the form warranty disclaimer he signed, and acknowledged at hearing that he purchased the car "as is," after David told him that the car "ran good." At the time of the purchase he was aware that the driver's door did not open and that the ignition key was prone to stick in a way that kept the starter operating even after the engine was running. On the 9th or 10th of July, after he had taken the car to mechanics to be looked at, Mr. Pugh learned that only one cylinder was functioning properly. On July 10, 1984, he took the car back to the used car lot and asked Mark Turner where David was. Mark pointed out that Pugh had bought the car "as is," ending his remarks on an obscene note that precipitated a tussle. The fight ended with David pulling Pugh off Mark by the hair. Pugh left without the car and never heard further from the Turners or Gulf Coast Motors about the car. He had given them an erroneous address at the time of purchase and left town shortly afterward. Castello Under her then (married) name of Graves, Cathy Sheree Castello bought a 1979 Cougar from a salesman named Bill on the Gulf Coast Motors lot. He told her it was a good car. She had effected a few repairs when, two weeks after the purchase, she was told that the car needed a new engine, because the one it had was "totally blown." The car would only go about 30 miles per hour. She, too, had signed an "as is" warranty disclaimer. Ms. Castello returned the car to the lot where it was offered for sale while she and the used car lot personnel tried to reach a settlement. Without notice to her, the car was sold and somebody forged her stepfather's signature in transferring title to the new buyer. Before the final hearing in this case, she had settled her claim against respondents amicably.
Findings Of Fact At all times relevant hereto, Best Value Used Cars was licensed as am independent motor vehicle dealer holding License No. 6V1-5457. Best Value Used Cars is owned by David Stroud. Wendy Stroud, daughter of David Stroud, was employed by Bell Chevrolet as a title clerk before and during August 1986. Employees of Bell Chevrolet are allowed to purchase two cars per year from Bell without paying sales commissions. David Stroud had a 1984 Nissan he intended to trade in on a car for his daughter, He took this Nissan to Bell for an appraisal and to see if he could work out a deal. The title to the Nissan was in the name of Best Value Used Cars and showed the Nissan as a rebuilt car. Rebuilt cars have a lower sale value than do cars that have not been wrecked. Initially, Stroud attempted to trade the Nissan on a Corvette. John Barton, who was in charge of new car sales, drove the Nissan around the block while Stroud drove the Corvette. Since the Nissan lien was not paid off, no deal was consummated. Each of the three employees of Bell who testified was qualified to appraise the Nissan and a fair appraisal value for a 1984 Nissan 4-door sedan was $4,000 in August 1986. None of these witnesses recall appraising the Nissan. It is not a normal practice to take in a rebuilt vehicle for wholesale. Gary Sears, Bell general manager, testified his only involvement was to fill out the sales document (Exhibit 1) using the figures supplied him by others. John Lindberg, Bell truck manager, sold Stroud the 1982 Ford pickup he purchased (Exhibit 1) by trading in the Nissan and paying the $2,000 difference in the value of each vehicle. All of these witnesses denied seeing the title to the Nissan until after the deal was closed and denied that Stroud had ever told them the Nissan had a rebuilt title. Normally the person doing the appraisal would at least look at the title before reducing the appraisal to writing. When a transaction closes, the general manager at Bell normally clips all of the papers together and presents them to the title clerk who processes the titles involved. The same day Stroud left the Nissan in exchange for the Ford, the Nissan was moved for wholesale. John Lindberg learned from another dealer that the Nissan had a rebuilt title and he testified he first saw the vehicle title the following week. He told Wendy Stroud the deal was held up, but gave her no specific instructions regarding the title. Wendy Stroud received the Nissan title and when the Ford title reached her desk, she processed the titles routinely. Shortly after the Nissan's title was changed to Bell Chevrolet, Wendy Stroud was fired from her job as title clerk at Bell Chevrolet. David Stroud signed Exhibit 1 and four other documents when he traded the Nissan in on the Ford, but the only document he received was Exhibit 1, which he offered into evidence. This exhibit does not bear the seller's signature and is entitled Buyer's Worksheet. These other documents included notification that the vehicle had been wrecked, that the odometer reading was accurate, and something about a $100 payment for maintenance insurance for 30 days. None of these documents was offered into evidence. No one challenged Stroud's testimony that he signed four other documents, but Petitioner offered none of these documents into evidence to corroborate or rebut any testimony. When Stroud returned from the bank with the check for the $2,000 balance, the Nissan was already gone from Bell's lot. Bell's employees all denied ever seeing the Nissan title before the transaction was completed, or that Stroud told them the Nissan had been rebuilt. Nor did they receive written notice from Stroud that the Nissan had been rebuilt. Stroud testified that when he first took the Nissan for an appraisal and made the attempt to purchase the Corvette, he gave the keys and title to Barton, who, after driving the Nissan, gave the keys and title to Sears. Both Strouds testified that David Stroud received back the title and keys from Sears.
The Issue The issues in this case are whether Respondents violated Sections 517.07, 517.12, 517.301(1)(a)1-3 and (c), and 517.311(1), Florida Statutes (1995): by selling unregistered securities; by selling securities without being registered as a dealer; and by employing a scheme to defraud, obtaining money by untrue statements of material fact, engaging in transactions which operated as a fraud upon persons, and knowingly and willfully making false and fraudulent statements in connection with sales of commercial notes to Florida residents; and, if so, what, if any, penalty should be imposed against Respondents. (All references to chapters and sections are to Florida Statutes (1995) unless otherwise stated.)
Findings Of Fact Petitioner is the state agency responsible for regulating the sale of securities in Florida in accordance with the provisions of Chapter 517. Respondent, First American Capital Trust, Inc. ("FACT"), is a Florida corporation with its principal place of business at 2650 McCormick Drive, Suite 185, Clearwater, Florida 34619. Respondent, David A. Johnston ("Johnston"), is a director and vice-president and runs the daily operations of FACT. FACT is a specialized consumer finance company engaged in the business of acquiring and servicing installment contracts for the purchase of used cars and light trucks ("cars") by individuals. The individuals who purchase the cars have less than prime credit and have limited access to traditional financing sources. FACT facilitates the extension of credit to a variety of people, including lower income and minority individuals for whom a car is frequently essential to obtain or maintain employment. FACT purchases discounted car loans from used car dealerships in pools of not less than $25,000. The dealerships discount the car loans below their face value in consideration for a lump sum payment. FACT funds the purchase of the car loans by selling commercial notes to investors. The purchase of car loans and the sale of commercial notes to fund the purchases is a genus of arbitrage. The arbitrage, and the major element of gross profit in the business conducted by FACT, is the difference between the interest earned on car loan portfolios and the interest paid by FACT on notes sold to investors. The interest yield on car loan portfolios ranges from 18 to 22 percent. FACT pays 9.75 percent interest on the notes it sells to investors in lump sum at the time of maturity. FACT is not a passive investment company that limits its business activity to investment arbitrage. FACT engages in the active conduct of a trade or business through business activities that include loan servicing, investigation of dealerships and the suitability of investors, and regulatory compliance. FACT also incurs expenses in addition to the interest paid on FACT notes, including payroll and other operating expenses. These other expenses, as well as the interest paid on FACT notes, are among the factors that enter into the computation of profits. The Administrative Complaint (the "complaint"), in relevant part, alleges that the FACT notes sold to investors (the "FACT notes") are securities within the meaning of Section 517.021(17). The complaint then charges Respondents with three statutory violations. The first alleged violation is that Respondents sell unregistered securities to investors in violation of Section 517.07. The second alleged violation is that FACT sells securities to investors without being registered as a dealer in violation of Section 517.12. The third alleged violation is that Respondents violated Sections 517.301(1)(a)1-3 and (c), and 517.311(1) (hereinafter "Sections 517.301 and 517.311") by employing a scheme to defraud; obtaining money by untrue statements of material fact; engaging in transactions which operate as a fraud upon persons; and knowingly and willfully making false and fraudulent statements in connection with sales of commercial notes to Florida residents. Respondents admit that the FACT notes are securities within the meaning of Section 517.021(17). Respondents further admit the securities are unregistered, within the meaning of Section 517.07, and that Respondents are not registered as dealers within the meaning of Section 517.12. Respondents assert that the FACT notes are exempt from registration pursuant to Section 517.051(8) and that Respondents are exempt from registration as dealers pursuant to Section 517.12(2). Respondents deny that they have ever violated Sections 517. 301 and 517.311. The complaint does not identify the time period in which Respondents allegedly committed the statutory violations. However, the parties agree that the law applicable to this proceeding is the law in effect prior to the amendment of Section 517.051(8) on October 1, 1996. The amendment is discussed later in this Recommended Order. Petitioner filed its complaint on January 10, 1996. FACT began start-up operations in May 1993. Because Respondents began doing business in May 1993 and Petitioner filed its complaint on January 10, 1996, the charges against Respondents in the complaint concern alleged violations between May 1993 and January 10, 1996. Respondents did not violate Section 517.07. The FACT notes are securities that are not registered in accordance with Section 517.07. However, the FACT notes are securities that are exempt from registration pursuant to Section 517.051(8). In relevant part, Section 517.051 provides: The exemptions provided herein from the registration requirements of s. 517.07 are self-executing and do not require any filing with the department prior to claiming the exemption. . . . The registration provisions of s. 517.07 do not apply to any of the following securities: * * * (8) A note . . . having a unit amount of $25,000 or more which arises out of a current transaction, or the proceeds of which have been or are to be used for current transactions, and which has a maturity period at the time of issuance not exceeding 9 months exclusive of days of grace, or any renewal thereof which has a maturity period likewise limited. Petitioner admits that the FACT notes satisfy the express requirements of Section 517.051(8). The securities have a unit amount of $25,000 or more, arise out of a current transaction, and have a maturity period of 9 months or less. Petitioner argues that the provisions of Section 517.051(8) are ambiguous. Petitioner claims that Section 517.051(8) should be construed to incorporate by reference interpretations of federal law by the Securities and Exchange Commission ("SEC"). The relevant requirements of federal law are found in Section 3(a)(3) of the Securities Act of 1933, as amended, ("Section 3(a)(3)"). SEC Interpretative Release Number 33-4412, issued on September 20, 1961, and found at 17 CFR 231.4412 ("SEC Release 4412"), interprets Section 3(a)(3). The language of Section 3(a)(3) is virtually identical to the language in Section 517.051(8). Section 3(a)(3) exempts from the registration requirements of federal law: Any note . . . which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. SEC Release 4412 interprets the exemption in Section 3(a)(3) in a manner that limits the exemption to: . . . prime quality negotiable commercial paper of a type not ordinarily purchased by the general public, that is, paper issued to facilitate recognized types of current operational business requirements and of a type eligible for discounting by Federal Reserve banks. . . . Petitioner seeks to construe Section 517.051(8) to include the quoted language from SEC Release 4412. Petitioner cites a 1996 amendment to Section 517.051(8), Florida Statutes (Supp. 1996), in support of its argument. Effective October 1, 1996, the exemption in Section 517.051(8), Florida Statutes (Supp. 1996), applies only to: . . . prime quality negotiable commercial paper of a type not ordinarily purchased by the general public; that is, paper issued to facilitate well-recognized types of current operational business requirements and of a type eligible for discounting by Federal Reserve banks. . . . In effect, Petitioner seeks to use a later statute to interpret the earlier statute. The provisions of Section 517.051(8) which were in effect prior to October 1, 1996, and which are applicable to the time period covered by the complaint, are clear and unambiguous. When the language of a statute is clear and unambiguous, the terms of the statute must be given their plain and ordinary meaning. Relevant terms in Section 517.051(8) are not assigned a statutory definition in Section 517.021. Petitioner presented no evidence that relevant terms of the statute are the province of special expertise possessed by the regulating agency. The context of Section 517.051(8) should not yield to the legislative intent arguably evidenced by subsequent amendments to the statute. Subsequent amendments should not be addressed due to the finding that Section 517.051(8) has a plain and discernible meaning. Even if the terms of Section 517.051(8) were not clear and unambiguous, Petitioner failed to show that subsequent amendments to Section 517.051(8) should be considered as evidence of legislative intent for prior versions of the statute. The 1996 amendments to Section 517.051(8) could evidence legislative intent to add requirements not included in the preceding statute, or they could evidence legislative intent to clarify intent for the preceding statute. Petitioner provided bill analyses for the 1996 amendments to Section 517.051 from the Appropriations Committee and the Commerce Committee of the Florida House of Representatives. The historical analyses of Section 517.051 by the two committees do not state, or even suggest, that the preceding version of Section 517.051(8) was intended to include either the 1996 amendments or the substance of SEC Release 4412. The section-by-section discussions in the committee analyses provided by Petitioner do not state that the 1996 amendment to Section 517.051(8) is intended to clarify the language in the preceding statute. Rather, the section-by- section discussions state that the 1996 amendment to Section 517.051(8) is intended to qualify the existing exemption. The evidence submitted by Petitioner provides an equally plausible basis for interpreting the 1996 amendment to Section 517.051(8) as a legislative effort to preempt an unsettled issue in the federal law. SEC Release 4412 is an unsettled interpretation of federal law. Although the Supreme Court has never ruled on the issue, four justices have stated, by dicta, that Section 3(a)(3) is not limited in the manner suggested by SEC Release 4412. The evidence of legislative history provided by Petitioner provides an equally plausible basis for concluding that the 1996 amendment to Section 517.051(8) was a legislative attempt to prophylactically resolve at the state level an issue of law that remains unsettled at the federal level. Even if Section 517.051(8) were properly construed to include the requirements of SEC Release 4412, Respondents satisfy those requirements. The FACT notes are prime quality negotiable commercial paper of a type not ordinarily purchased by the general public. FACT notes are issued to facilitate well- recognized types of current operational requirements. They are of a type eligible for discount by Federal Reserve banks. FACT notes are unrated but are prime quality commercial paper. Unrated commercial paper has been determined, in numerous no-action letters issued by the SEC, to be prime quality regardless of whether the paper has received a favorable rating from a recognized rating agency. Rather than the rating given the paper by a rating agency, the SEC generally considers two other factors. The SEC considers the nature of the issuer, including the issuer's ability to repay the notes, and the extent of governmental regulation to which the issuer is subject. The nature of the business conducted by FACT satisfies the requirements for prime quality. FACT notes are secured by a perfected first lien on the pool of car loans purchased by FACT. Unlike many companies, FACT requires full recourse on all car loans that it purchases. Full recourse requires a dealer either to buy back a loan if a consumer defaults on the car loan or to provide additional loans to make up for any losses to FACT caused by consumer defaults. If a dealer is a corporation, FACT requires an individual guarantee from the principal of the corporation. In addition, FACT requires all dealers to maintain adequate cash reserve accounts to cover expenses attributable to defaults. The financial and business history of the car dealer is a significant factor that must be taken into account in assessing the quality of car loans which provide the collateral for FACT notes. FACT purchases car loans only from those dealers FACT has investigated. FACT has one of the most extensive and aggressive investigation procedures in the country. FACT purchases only seasoned car loans. Seasoned car loans are those car loans on which the consumer has made a down payment of 10-20 percent and has been making timely payments for at least three months. The default rate on seasoned car loans is lower than the default rate on car loans for which there is little or no down payment or for which there is no payment history. FACT maintains insurance on the pool of car loans that secure the FACT notes. FACT maintains all risk physical damage loan insurance, instrument non-filing insurance, confiscation and skip insurance, and repossessed vehicle insurance. Petitioner argues that FACT notes are not prime quality because FACT does not have the ability to repay the FACT notes. However, Petitioner relies only on federal income tax returns for FACT through 1996. Petitioner disregards the books and records maintained by FACT, balance sheets that show FACT's assets and liabilities, the quality of the car loan portfolio that secures FACT notes, and the business history of FACT. Petitioner relies on tax returns that state losses in accordance with tax accounting principles. Tax accounting principles allow deductions for so-called paper expenses that may not reflect actual expenses recognized by financial accounting principles. The cash reserves in FACT income tax returns are stated conservatively in an amount that exceeds FACT's actual experience. FACT states reserves at 12 percent but actually experiences write-offs of only 7-8 percent. The Internal Revenue Service has taken the position that FACT overstates its cash reserve write-offs. Assessing the financial ability to repay FACT notes on the date of an income tax return distorts the independent economic reality of business activities engaged in by FACT for legitimate business purposes. FACT incurs all of the acquisition costs for car loans, including prepaid insurance premiums and compliance costs, immediately upon purchase of the portfolios. However, FACT collects principal and interest from car loan portfolios over a period of 24-48 months. During the 24 to 48-month term of the car loans, FACT pays interest and principal on the notes it sells to investors because the FACT notes have a maturity of not more than nine months. FACT must continually obtain new notes to continue operations and expansion. Petitioner and its witnesses admit that the financial ability to repay FACT notes is best determined by the books and records maintained by FACT and the assets and liabilities evidenced in the company's balance sheets. FACT maintains its books and records and balance sheets in accordance with Generally Accepted Accounting Principles ("GAAP"). FACT has the financial ability to repay FACT notes. FACT maintains cash on hand of approximately $4 million. FACT assets exceed the company's liabilities. FACT's net worth is approximately $1.6 million. FACT calculates its net worth by assuming that FACT will not collect any of the $11 million due on the discounted car loans purchased by FACT. If FACT assumes that it will collect all of the interest due on the car loans, FACT's net worth exceeds $12 million. The financial ability to repay FACT notes is further evidenced by the business history of the company. FACT has never missed a principal or interest payment on any of the FACT notes sold to investors, has never failed to honor a rescission request, and has never received a complaint from any investor. FACT's gross finance receivables have increased from approximately $7.3 million in 1994 to approximately $39 million on December 31, 1997. FACT is subject to extensive governmental regulation that provides ample protection and control. The regulatory scheme includes the Truth and Lending Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Federal Reserve Board's Regulations "B" and "Z", various adaptations of the National Consumer Act and Uniform Commercial Code, Chapters 517 and 520, and the Securities Act of 1933. FACT operates in compliance with all relevant provisions in this regulatory scheme. FACT notes are negotiable commercial paper. FACT notes are accepted by banks and eligible for discounting by Federal Reserve banks. FACT notes are of a type not ordinarily purchased by the general public. FACT does not use general advertisement or solicitation to obtain investors. FACT imposes specific suitability requirements for its investors and obtains suitability questionnaires completed by each investor. The completed questionnaires provide prima facie evidence of the suitability of investors. FACT has rejected numerous investors for failure to meet suitability requirements. Investors are generally sophisticated and wealthier individuals. FACT solicits investors discreetly through attorneys, accountants, and insurance agents. No individual can purchase a FACT note if the note exceeds 20 percent of the individual's net worth. The 20 percent requirement is more stringent than the standards recommended by national and state blue sky agencies. FACT notes are commercial paper issued to facilitate recognized types of current operational business requirements. FACT uses the proceeds from the sale of FACT notes to facilitate such current operational business requirements as purchasing car loans, the cost of daily operational requirements, and the cost of insurance to further secure the car loans. The automobile finance business is a clear and long-standing use of proceeds which satisfy the current operational business requirement. Respondents are exempt from registering as a dealer pursuant to Section 517.12(2). Section 517.12(1) prohibits the sale of securities by any person who is not registered as a dealer. Section 517.12(2), in relevant part, provides that the registration requirements for dealers do not apply to issuers of securities exempted by Section 517.051(8). Because the FACT notes are exempt from registration pursuant to Section 517.051(8), Respondents are exempt from registration as dealers pursuant to Section 517.12(2). Respondents did not violate Sections 517.301(1) and 517.311. Respondents neither employed a scheme to defraud; obtained money by untrue statements of material fact; engaged in transactions which operated as a fraud upon persons; nor knowingly and willfully made false and fraudulent statements in connection with sales of commercial notes to Florida residents. The complaint includes seven factual allegations that Respondents violated Sections 517.301 and 517.311. The seven allegations are in paragraphs 10(A)-(G) of the complaint. Paragraph 10(G) in the complaint charges that Respondents, "Represented to investors that they are selling commercial notes that are exempt from securities registration." Respondents admit this factual allegation in the complaint. However, FACT notes sold to investors are exempt from registration pursuant to Section 517.051(8). The factual allegations in paragraph 10(G) do not constitute a violation of either Sections 517.301 or 517.311. Paragraph 10(A) in the complaint charges that Respondents, "Represented to investors that FACT is licensed by the State of Florida to sell securities." FACT is licensed to sell securities pursuant to license number SF597004293. FACT has been continuously licensed to sell securities in accordance with the requirements of Chapter 520. Petitioner has audited FACT on a regular basis pursuant to Chapter 520 and has never found any exceptions in any audit. Petitioner failed to prove that the factual allegations in paragraph 10(A) violate any statute. Paragraph 10(B) in the complaint charges that Respondents, "Represented to investors that the Certificate of Commercial Notes are licensed by the State of Florida." It is unclear what Petitioner means when it refers to licensed securities. If Petitioner uses the term "licensed" to mean something different from "registered" securities, Petitioner fails to explicate the distinction. The record in this proceeding does not shed much light on the distinction contemplated in the complaint between "licensed" and "registered" securities. For example, Petitioner's response to Respondents' opposition to Petitioner's "Motion for Summary Recommended Final Order" states: Lastly, Respondents say they will prove that FACT has held a sales finance license, under the provisions of Chapter 520, Florida Statutes, since 1993. Petitioner is unclear as to why. That has never been a contested fact. Neither is it a contested fact that FACT has never been licensed under Chapter 517, Florida Statutes, to sell securities, which is what this proceeding is about. . . . Petitioner's Response To Respondents' Memorandum of Fact and Law In Opposition to Petitioner's Motion For Summary Recommended Final Order, at unnumbered page 8. The quoted discussion in the previous paragraph is revealing. First, Petitioner could have cured its lack of clarity over why Respondents intended to prove that FACT held a sales finance license by reviewing the complaint Petitioner filed against Respondents. Paragraph 10(A) charges that the representation by FACT that it is licensed by the state is an act of fraud or misrepresentation of a material fact within the meaning of Sections 517.301(1) and 517.311. Yet Petitioner claims that this matter was never at issue. Petitioner goes on to say that what the case is about is whether FACT was "licensed" to sell securities. Petitioner may use the terms "licensed" and "registered" synonymously for purposes of Chapter 517. Section 517.021 defines a dealer by reference to registration, rather than by reference to licensing, and is devoid of any definition of the term "license." If Petitioner is using the term "license" synonymously with "registration", then Petitioner failed to show the allegations in Paragraphs 10(B). Respondents did not represent that the FACT notes were "licensed" or "registered" securities. Rather, Respondents represented that the FACT notes were securities exempt from registration. The first line of the Disclosure Statement clearly states: This memorandum does not constitute an offer or solicitation of exempt securities in any jurisdiction in which such an offer or solicitation would be unlawful. Petitioner's Exhibit F. The Disclosure Statement further states at page 15: The Notes are being sold as exempt securities pursuant to Section 3(a)(3) of the Securities Act of 1933, as amended. Id. Petitioner argues that a paragraph in the Disclosure Statement which immediately precedes the statement quoted in the preceding paragraph results in a misrepresentation. The paragraph at issue states: FACT is currently accepting applications only from the State of Florida, working under the Department of Banking and Finance License #SF 597004293-000 unless the noteholder is an institutional purchaser, or otherwise approved in writing. (emphasis not supplied) Id. The quoted language represents that FACT is working under a state license to accept applications. The quoted language does not represent that the securities which will be sold upon acceptance of the applications are registered or "licensed." Even if the language that is of concern to Petitioner were construed as a misrepresentation, Petitioner failed to show that it violated Sections 517.301 or 517.311. Petitioner failed to show that the misrepresentation was material, was the result of a scheme to defraud investors, was an untrue statement of a material fact, operated as a fraud upon persons, or was committed knowingly or willfully by Respondents. It is unlikely that sophisticated investors, with advice of their attorneys or accountants, would be misled by the statement that is of concern to Petitioner. That improbability is underscored by the lack of evidence that any investor relied on the statement, the lack of evidence of any investor complaints, and the absence of any complaining witness at the hearing. Paragraph 10(C) in the complaint charges that Respondents, "Represented to investors that the Certificate of Commercial Notes were insured by major, high rated insurance companies." Respondents did not make the representations. The Disclosure Statement, at pages 3 and 12, clearly states that the car loan portfolios are: . . . insured by lender's single interest policies issued by insurance carriers with a minimum AM Best rating of A or a Duff & Phelps rating of A+. . . . * * * In the event [FACT] is unable to service the Notes on a current basis . . . then, the Noteholders would be entitled to foreclose on the vehicle installment sales contracts. . . Petitioner failed to prove that Respondents made the factual representations alleged in paragraph 10(C). Paragraph 10(D) in the complaint charges that Respondents, "Represented to investors that they would earn interest of 9.75% per annum on Certificates of Commercial Notes." Respondents admit that FACT made the alleged representations, but deny that the representations violated either Sections 517.301 or 517.311. FACT made the representations described in Paragraph 10(D) of the complaint. However, those representations do not violate Sections 517.301 or 517.311. In its Disclosure Statement to investors, FACT states: The Notes will bear simple interest at the rate of 9.75% per annum (APR). The Notes will be secured by collateral consisting of insured or recoursed automobile loan portfolios and cash reserves. * * * [FACT] may not earn enough interest income and profit on its vehicle loan portfolio to pay operating costs and the debt service on the Notes. In the event it is unable to service the Notes on a current basis (i.e. within the 21 business day cure period) because of unforeseen operating expenses, then, the Noteholders would be entitled to foreclose on the vehicle installment sales contracts . . . . (emphasis supplied) First American Capital Trust, Disclosure February 1995 as revised March 1995, at pages 4 and 12 (Petitioner's Exhibit F). Paragraph 10(E) in the complaint charges that Respondents, "Represented to investors that collateral portfolios are geographically balanced." Respondents admit that FACT made such representations. Petitioner failed to show that the collateral portfolios are not geographically balanced or that the representations violate Sections 517.301 or 517.311. Paragraph 10(F) in the complaint charges that Respondents, "Represented to investors that collateral portfolios consist of loans on new and used automobiles." Respondents admit that FACT made such representations. The collateral portfolios consist of only used car loans. However, Petitioner presented no evidence that the discrepancy was a material misrepresentation, that the misrepresentation was the result of a scheme to defraud investors, was an untrue statement of a material fact, operated as a fraud upon persons, or was committed knowingly or willfully by Respondents. The evidence submitted by Petitioner consists of the testimony of two witnesses and eight exhibits. The testimony of one of the witnesses addressed FACT's income tax returns and assessed FACT's financial condition solely on the basis of those income tax returns. The testimony of the other witness essentially addressed the appropriate test for prime quality commercial paper not ordinarily purchased by the general public and the interpretation by that witness of specific court cases. Petitioner's exhibits A-H, respectively, consist of: Respondents' responses to Petitioner's request for admissions, absent the requests for admissions; two certifications that Respondents have never been registered in accordance with Chapter 517; Petitioner's interrogatories and Respondents' responses; Respondents' responses to Petitioner's second request to produce; copies of the disclosure statements and a brochure distributed by FACT; FACT's application for a sales license under Chapter 120; and FACT's income tax returns. In addition to the witnesses and exhibits submitted by Petitioner, Petitioner cross-examined Respondents' witnesses. Neither Petitioner's witnesses, its exhibits, nor its cross- examination of Respondents' witnesses provided any evidence that Respondents, intentionally or negligently, employed a scheme to defraud, obtained money by untrue statements of material fact and omissions of material fact, engaged in transactions which operated as a fraud upon persons, or knowingly and willfully made false and fraudulent statements in connection with sales of FACT notes to Florida residents within the meaning of Sections 517.301 or 517.311. Petitioner admits that it presented no evidence that Respondents intentionally or negligently engaged in the activities described in Sections 517.301 and 517.311. Rather, Petitioner argued at the hearing that Petitioner is not required to show either intent or negligence on the part of Respondents in order to show that Respondents employed a scheme to defraud, obtained money by untrue statements of material fact and omissions of material fact, engaged in transactions which operated as a fraud upon persons, or knowingly and willfully made false and fraudulent statements in connection with sales of FACT notes. At the administrative hearing, Respondents made an ore tenus motion on the record to dismiss the allegations that Respondents violated Sections 517.301 and 517.311. After extensive discussion on the record and a review of case law cited by the parties, the motion to dismiss was granted with leave to file a motion for reconsideration with Petitioner's PRO. The parties agreed that Respondents would be allowed to present additional evidence if, on reconsideration, the motion to dismiss was denied. Petitioner timely filed a motion for reconsideration. Respondents timely filed a memorandum of law in response to the motion for reconsideration. Petitioner's motion for reconsideration is denied for the reasons stated in Respondents' memorandum of law. During the hearing and in its PRO, Petitioner attempted to show that Respondents committed acts not alleged in the complaint. Petitioner seeks to prove that Respondents misrepresented the financial condition of FACT and that Respondents omitted a disclosure that FACT was a party to material litigation, i.e., this proceeding. Requirements for adequate notice, due process, and fairness prohibit a finding of guilt for acts not alleged in the complaint. Moreover, the undersigned is without jurisdiction over matters not included in the complaint when it was referred to DOAH. Even if Respondents could be "tried" for acts not alleged in the complaint, it would not affect the outcome of this proceeding. Petitioner failed to prove that Respondents misrepresented the financial condition of FACT or that Respondents failed to disclose that FACT was a party to material litigation. For reasons previously stated and not repeated here, Petitioner failed to show that Respondents misrepresented the financial condition of FACT. Petitioner relied solely on Respondents' income tax returns. The books and records of FACT, its balance sheets, and Respondents' business history show that the financial condition of FACT is sound and that FACT has the financial ability to repay the FACT notes sold to investors. Respondents did not fail to disclose that FACT was a party to this proceeding. Prior to the filing of the complaint on January 10, 1996, there was no litigation of any type against FACT. Disclosures or omissions alleged at the hearing to have occurred after the filing of the complaint cannot form the basis for charges against FACT in the complaint. Respondents did not act either intentionally or negligently to misrepresent any material fact at issue in this proceeding. Respondents acted in a manner consistent with a reasonably prudent company under the same or similar circumstances. Before FACT began its business in May 1993, FACT obtained an opinion letter from out-of-state counsel to assure its compliance with federal securities law. FACT obtained a second opinion from independent counsel in Florida. The independent counsel also reviewed FACT's compliance with state law. The independent counsel concluded that FACT complied with all applicable state laws and that the securities and Respondents were exempt from registration requirements pursuant to Sections 517.05(8) and 517.12(2). The independent counsel met with Petitioner's representatives, provided them with a detailed description of the company's proposed business activity, and provided copies of the materials to be used by FACT. At various times in 1993, Petitioner requested additional information from FACT concerning its business, and FACT promptly provided the information. In 1993, Petitioner's representatives requested information or met with FACT on June 24, November 4, November 17, and December 19. In November 1993, Petitioner's representatives visited the offices of FACT. Throughout 1994, FACT continued to discuss its operations with Petitioner and continued to provide Petitioner with any and all information. Petitioner never advised Respondents or their legal representatives that Petitioner interpreted Section 517.051(8) to include requirements not specifically included in the statute, such as SEC Release 4412. Petitioner's representatives generally instructed Respondents and their legal representatives to look at the statute and to comply with its terms. After Petitioner filed its complaint, FACT had the independent counsel review the matter again, and counsel confirmed his original opinion. FACT has made every reasonable effort to comply with state and federal law. Respondents have never received any investor complaints and have never failed to timely pay the principal and interest on any FACT note. Petitioner did not call any complaining investor as a witness during the administrative hearing.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner enter a Final Order finding Respondents not guilty of violating Sections 517.07, 517.12, 517.301(1)(a)1-3 and (c), and 517.311(1). DONE AND ENTERED this 3rd day of February, 1999, in Tallahassee, Leon County, Florida. DANIEL MANRY 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 3rd day of February, 1999. COPIES FURNISHED: Honorable Robert F. Milligan Comptroller The Capitol, Plaza Level Tallahassee, Florida 32399-0350 Harry Hooper, General Counsel Department of Banking and Finance Fletcher Building, Suite 526 101 East Gaines Street Tallahassee, Florida 32399-0350 Bruce V. O'Donnell, Esquire Office of Comptroller 1313 Tampa Street, Suite 615 Tampa, Florida 33602-3394 David A. Bacon, Esquire Bacon, Bacon, Johnson and Goddard 2959 First Avenue, North St. Petersburg, Florida 33713 Darryl R. Richards, Esquire Johnson, Blakely, Pope, Bokor, Rupple and Burns, P.A. 100 North Tampa Street, Suite 1800 Tampa, Florida 33602
The Issue At issue is whether Respondent represented to Ms. Renee Benton that she had to purchase an auto club in order to buy automobile insurance, which is not true, contrary to the law, and a violation of various statutes.
Findings Of Fact 1 On February 1, 1991, Renee Benton went to Mid County Insurance Agency in Jacksonville, Florida for the purpose of obtaining automobile insurance. At all times material hereto, Mid County Insurance Agency was a general lines insurance agency licensed by the State of Florida. Respondent, Eric Thomas Fromme, was the President and owner of Mid County Insurance Company. On February 1, 1991, Complainant, Renee Benton, purchased an automobile insurance policy from Mid County, more specifically from its owner, Eric Thomas Fromme. Complainant, Renee Benton, testified that the Petitioner told her that he could not sell her automobile insurance unless she purchased a membership in a motor club. Respondent, Eric Thomas Fromme, testified that he personally dealt with Complainant, Renee Benton, and that he did not tell Renee Benton that he could not sell her insurance without Motor Club Coverage. Complainant, Renee Benton, was in a hurry on the day and time she went to Mid County to purchase automobile insurance and as a result did not read any of the documents she signed on February 1, 1991. Renee Benton did not complain about the contract and was unaware of the matter until approached by agents of the Department. Until she reviewed the policy documents, she was unaware that she paid $100 to join the auto club. At the time of the purchase the automobile insurance policy from Respondent, Renee Benton paid Respondent $153.00 and entered into a premium finance agreement to finance a portion of the policy premium. That agreement stated that Renee Benton had paid a $53.00 down payment. (Pet. No. 4.) A fee of $100.00 for the motor club was deducted from her payment at the time she purchased the insurance and motor club. (Testimony of Renee Benton.) At the time that she purchased the automobile insurance, Renee Benton executed a form which stated that a motor club purchase was voluntary and that she was not required to purchase a motor club in order to purchase that insurance. (Pet. No. 7.) Renee Benton testified she would not have financed any of premium, had she been able to purchase the automobile insurance without purchasing a motor club. (Testimony of Renee Benton.)
Recommendation Based upon the foregoing proposed Findings of Fact and Conclusions of Law, it is, recommended that the Administrative Complaint be dismissed. RECOMMENDED this 8th day of June, 1992, in Tallahassee, Florida. STEPHEN F. DEAN Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 8th day of June, 1992. APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-0019 The parties presented proposed findings of fact which were read and considered. The following findings, as indicated, were adopted, or rejected for the reason stated: Petitioner's Findings of Fact: Paragraph 1-3 Rejected in favor of Respondent's statement of these facts. Paragraph 4,5 Rejected as conflicting with more credible evidence. Paragraph 6-9 Adopted, but reordered. Respondent's Findings of Fact: Paragraphs 1-8 Adopted. COPIES FURNISHED: David D. Hershel, Esquire Department of Insurance Division of Legal Services 412 Larson Building Tallahassee, FL 32399-0300 Shane C. Maddox, Esquire 337-C East Bay Street Jacksonville, FL 32202 Bill O'Neil, General Counsel Department of Legal Affairs The Capitol, Plaza Level 11 Tallahassee, FL 32399-0300 Tom Gallagher, State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, FL 32399-0300
