The Issue The issues in the case are whether the allegations of the Administrative Complaint are correct, and, if so, what penalty should be imposed.
Findings Of Fact At all times material to this case, Respondent Clifford Altemare (Mr. Altemare) was a licensed real estate broker, holding Florida license BK-3062479. At all times material to this case, Respondent Altema Consulting Co., LLC (ACC), was a licensed real estate brokerage, holding Florida license CQ-1024239. Clifford Altemare was the owner, qualifying broker, and officer for ACC. On August 21, 2006, Mr. Altemare signed an agreement to represent for sale hotel property owned by Sweet Hospitality, LLC. The agreement stated that Mr. Altemare would receive an unidentified commission based on the sales price. On December 12, 2006, Mr. Altemare received an escrow deposit of $25,000 from Rakesh Rathee, who signed an agreement to purchase the hotel. The $25,000 deposit was transferred by wire from Rakesh Rathee into a corporate operating account of ACC. Mr. Altemare failed to place the $25,000 escrow deposit into an ACC escrow account. Apparently, because the seller decided not to sell the property, the proposed sale did not close, and the buyer demanded the return of the $25,000 deposit. There is no credible evidence that the seller has made any claim upon the deposit. Mr. Altemare has refused to return the $25,000 deposit to Rakesh Rathee. At the hearing, Mr. Altemare asserted that the deposit has not been returned to the buyer because of uncertainty as to whom the deposit should be refunded. There was no credible evidence offered at the hearing to support the assertion that someone other than Rakesh Rathee should received a refund of the $25,000 deposit.
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 Real Estate, enter a final order, stating that the Respondents violated Subsections 475.25(1)(b), (d), and (e), Florida Statutes (2006), and Florida Administrative Code Rule 61J2-14.010 and imposing a $15,000 administrative fine and a five-year suspension of licensure. DONE AND ENTERED this 12th day of May, 2010, in Tallahassee, Leon County, Florida. S WILLIAM F. QUATTLEBAUM 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 12th day of May, 2010. COPIES FURNISHED: Patrick J. Cunningham, Esquire Department of Business and Professional Regulation 400 West Robinson Street, Suite N801 Orlando, Florida 32801 Clifford Altemare Altema Consulting Co., LLC 1047 Iroquois Street Clearwater, Florida 33755 Reginald Dixon, General Counsel Department of Business and Professional Regulation Northwood Centre 1940 North Monroe Street Tallahassee, Florida 32399-0792 Thomas W. O'Bryant, Jr., Director Division of Real Estate Department of Business and Professional Regulation 400 West Robinson Street, Suite N802 Orlando, Florida 32801
Conclusions The Office of Financial Regulation ("Office") issued a denial of Petitioner’s application to become licensed as an “associated person”. Petitioner in turn filed a Petition for Administrative Hearing, which the Office referred to the Division of Administrative Hearings ("DOAH"). The assigned Administrative Law Judge ("ALI") held a formal administrative hearing, and entered a Recommended Order thereon. That Recommended Order of November 17, 2604, is attached to this Final Order, and incorporated herein by reference.
Findings Of Fact Respondent, Department of Banking and Finance, is the state agency charged with the administration and enforcement of Chapter 517, F.S., the Florida Securities and Investor Protection Act, and the rules promulgated thereunder. On March 11, 1991, Petitioners submitted a Form BD, Uniform Application for Broker-Dealer Registration, seeking registration as a broker/dealer for Powell & Satterfield, Inc., in Florida. Petitioners' application freely disclosed that it had been the subject of at least five administrative orders issued by the National Association of Securities Dealers (NASD) for violations of the NASD Rules of Fair Practice, and one administrative order issued by the State of Arkansas Securities Department for violations of Arkansas state securities law. On or before March 14, 1991, the agency had a printout from the Central Registration Depository of NASD summarizing the corporate Petitioner's disciplinary history with it. On the basis of that printout alone, Respondent agency would have felt justified in denying P&S' application for Florida licensure. However, the agency has uniformly required certified copies of prior discipline matters before reaching its final decision when there is a possibility that an application will be denied for disciplinary history and the applicant gives no indication that the application will be withdrawn. Therefore, by letter dated April 10, 1991, Respondent requested that Powell and Satterfield, Inc. obtain certified copies of the disciplinary actions taken against the firm. On May 3, 1991, NASD notified Respondent that it does not certify documents, so the Department excused Petitioner's submitting certified copies. Therefore, all of the documentation requested by the April 10, 1991 deficiency letter was received by May 28, 1991 except a certified copy of the Arkansas order which was not submitted until June 10, 1991. On June 10, 1991, Respondent received the last certified document, the 1988 Arkansas Consent Order, as requested by the aforementioned April 10, 1991 letter. Respondent's receipt of the 1988 Arkansas Consent Order began the 90 day processing period of the application pursuant to Section 120.60, F.S., making the 90th day for action on Petitioners' application September 6, 1991. On September 6, 1991, Respondent denied Petitioners' application for registration as a broker/dealer based upon the Respondent's determination that the five regulatory actions taken by the NASD and one disciplinary action taken by the State of Arkansas against the firm and the officers, owners, and directors of the firm constituted prima facie evidence of unworthiness to transact the business of a broker/dealer. In doing so, the agency interpreted and relied on Section 517.161(1)(h) and (4) F.S. and Rule 3E-600.011(2), F.A.C. Respondent also denied Petitioner, Michael L. Tognetti's application for registration as an associated person/principal. In so doing, the agency interpreted and relied on Section 517.161(1)(h) and (3) F.S. The National Association of Securities Dealers (NASD) is a national securities association. The NASD is registered with the federal Securities and Exchange Commission (SEC) as a national securities association pursuant to Section 15A of the Securities Exchange Act of 1934. Under the Maloney Act (Section 15A of the SEC Act of 1934), the NASD is required to promulgate and enforce rules, including the Rules of Fair Practice. The NASD's Rules of Fair Practice are promulgated and adopted pursuant to the Securities and Exchange Act of 1934. The 1934 SEC Act provides that the SEC may review any disciplinary action imposed by the NASD, may abrogate any rule of the NASD, disapprove any change in the rules proposed by the NASD, and suspend or revoke its registration with the SEC if the NASD has failed to enforce compliance with its own rules. In its August 1986 Letter of Acceptance, Waiver, and Consent Number NEW-497-AWC of the District Business Conduct Committee for District 5 (NEW-497- AWC), the NASD found that Powell and Satterfield, Inc. (P&S), Satterfield, and John H. O'Donnell violated Article III, Section 1 of the Rules of Fair Practice. As a result of those findings, the NASD censured and fined P&S, Satterfield, and O'Donnell in the amount of $1,000.00, jointly and severally, in NEW-497-AWC. In NEW-497-AWC, the NASD's District Business Conduct Committee for District 5 found that for the month ending periods of December 31, 1984, P&S, acting through Satterfield and O'Donnell, in contravention of SEC Rule 15c3-1, engaged in a securities business when its net capital was below the required minimum as prescribed by said rule and that for the month ending period of July 31, 1985, P&S, acting through Satterfield and O'Donnell, in contravention of SEC Rule 15c3-1, engaged in a securities business when its net capital was below the required minimum as prescribed by said rule. The net capital violations on those occasions were caused by the requirement that physical delivery of large quantities of mortgage backed securities be made on the same day of the month. In some cases, due to the amount of paperwork, certain certificates were not timely delivered to P&S and consequently P&S could not timely deliver them to the customers. When this happened, P&S was required to reduce the value of the securities if the market value declined and to take an arbitrary reduction in value of 5% called a "haircut." By the time P&S realized the "haircuts" were causing a net capital problem, the securities in each case had been physically delivered and the problem was solved. The actual time period for which the firm was in violation of the minimum net capital requirement was the last three to five days of December 1984 and July 1985. P&S thereafter took steps to prevent a reoccurrence of similar net capital problems by becoming an introducing broker for whom a larger clearing corporation would carry its accounts and absorb any net capital reductions due to delayed deliveries. In its 1990 Letter of Acceptance, Waiver and Consent Number NEW-750-AWC (NEW-750-AWC), the NASD's District Business Conduct Committee for District 5 found that Petitioner corporation P&S, William W. Satterfield, Joseph A. Powell and Scott A. Welch violated Article III, Section 1 of the Rules of Fair Practice because Petitioner P&S' Annual Audit Report for the fiscal year ending June 30, 1989, was due on August 31, 1989, as required by SEC Rule 17a-5(d)(5), and P&S, acting through Satterfield and Welch, had filed P&S' Annual Audit Report late, on September 28, 1989, in contravention of SEC Rule 17a-5; because during the period from June 22, 1989 to on or about August 30, 1989, P&S did not enter on its books and records certain liabilities arising from a lawsuit against the firm that had settled on June 22, 1989, in violation of SEC Rule 17a-3; because on August 30, 1989, the independent auditors, Baird, Kurtz & Dobson, opined that payables totalling $34,000.00, representing legal fees from the aforesaid lawsuit needed to be identified on the firm's books and records as liabilities incurred by the firm; and because on June 30, 1989, July 31, 1989, and August 31, 1989, P&S, acting through Satterfield, Powell, and Welch, conducted a securities business while its net capital was below the minimum prescribed by SEC Rule 15c3-1. As a result of NEW-750-AWC's findings, the NASD censured and fined P&S, Satterfield, Powell, and Welch, in the amount of $5,000, jointly and severally. By way of further explanation, part of the resolution of NEW-750-AWC amounts to P&S, acting through Satterfield, Powell, and Welch having failed and/or neglected to file the corporate Annual Audit Report due on August 31, 1989 until it was late by 28 days on September 28, 1989. P&S had settled its lawsuit on June 22, 1989 but did not add its $34,000 legal fees paid therefor (for a total of $40,161.59) to its liabilities records until told to do so by independent auditors. All of this resulted in the corporation being below its prescribed net capital minimum for a period of time. P&S had initially relied on the early July 1989 advice of the same independent auditors, Baird, Kurtz & Dodson, to the effect that P&S should record the lawsuit liabilities of June 22, 1989 on the books of P&S' parent company. On August 30, 1989, Baird, Kurtz & Dodson changed its opinion and determined that the settlement liability should have been recorded on the books and records of P&S instead. This change in the independent auditors' opinion resulted in P&S' net capital violation, the failure to record violation, and the late filing (September 28, 1989) of P&S' annual report. In its August 1988 Letter of Acceptance, Waiver, and Consent Number NEW-601-AWC the NASD District Business Conduct Committee for District 5 (NEW- 601-AWC), found that P&S, Satterfield, and Michael W. Compton, Sr. had violated Sections 1 and 27 of the Rules of Fair Practice because from December 28, 1987, to April 13, 1988, Mr. Compton had acted as the qualifying Financial and Operations Principal for P&S without first requalifying under the terms of an NASD Offer of Settlement unassociated with any of the five NASD orders at issue here. Pursuant to that negotiated settlement, Mr. Compton had been required to re-qualify as a Financial and Operations Principal by passing the Series 27 examination before serving again as Registered Financial and Operations Principal. During the period of December 28, 1987 to April 13, 1988, Mr. Compton was not registered with NASD as a Financial and Operations Principal for P&S because he had not passed the required examination during the period specified in the prior agreement/order pertaining to him. The NASD consequently, found that from December 28, 1987 to April 13, 1988, P&S had a duty to supervise the activities of Mr. Compton and failed or neglected to adequately do so, allowing him to serve in a capacity for which he was not registered. For this, NASD only censured P&S and Satterfield, jointly and severally, in NEW-601-AWC. By way of further explaining the foregoing findings of the NASD, it is here found that Michael Compton began his employment with P&S as a registered financial principal. In December 1987, P&S was notified that Mr. Compton had been sanctioned by the NASD and was required to retake the financial principal examination. There was subsequent confusion as to what the NASD letter meant when it said Compton had to requalify before serving as financial principal again since he was already currently serving as financial principal for P&S. It is unrefuted that the firm relied on representations by Mr. Compton that upon his application to take the examination, the NASD had advised him that he was already qualified and could not take the examination and that he had ninety days to retake the test. As it later turned out, Mr. Compton should have taken and passed the examination in the specified time period. P&S relied on Mr. Compton's stating that he had relied on further information from NASD. In retrospect, P&S' and Satterfield's reliance was too trusting and constituted a lack of appropriate supervision, so they consented to the NASD order and accepted the relatively light penalty of censure. Given the firm's relationship with Mr. Compton, the reliance on him in this matter was not demonstrated to be unusual, conspiratorial, or deceptive. Also, nothing in NEW-601 indicates that Michael Compton violated any other rule while he acted as financial principal for P&S. At all times material, William Satterfield also was a qualified financial principal. No P&S customer suffered and no other irregularity arose because of Mr. Compton's situation, but because he had signed the monthly financial reports for the firm, the firm had "qualified" under his auspices, and thus the firm, P&S, was technically "unqualified" during this period of time. The foregoing was an offense more in the nature of "inadvertence" than "fraud." Once fully explained, it does not reflect upon P&S or Satterfield so as to render the corporation and its principals "unworthy" to transact security business. On December 28, 1988, the State of Arkansas, P&S, Satterfield, and Jack Shults Lewis, Jr., executed a Consent Order, Number 88-26-S, whereby P&S and Lewis were required to comply with certain sanctions and undertakings. This Arkansas Consent Order resulted from an examination of the books and records of P&S conducted by the staff of the Arkansas Securities Department. That examination revealed violations of Arkansas securities law. During a period from June 30, 1988 to October 31, 1988, agents for P&S recommended to, and executed on behalf of, a building and loan association customer seven transactions involving purchases of certain securities, namely, Federal National Mortgage Association (FNMA) interest-only stripped mortgage- backed securities and also zero coupon bonds issued by the Federal Home Loan Mortgage Corporation (FHLMC), Student Loan Marketing Association (SLMA), and FNMA. The building and loan customer had an approximate net worth of $2,909,000.00. The transactions effected by the agents of P&S for the building and loan customer reached totals ranging from approximately $3,600,000.00 to approximately $4,000,000.00 during the period from September 20, 1988 to October 31, 1988. From August 10, 1988 to October 31, 1988, agents of P&S executed transactions in which the customer's average equity in the account was $3,281,900.96, which was equal to 113% of the customer's net worth. The prices paid by the customer exceeded the current market price for the relevant securities by amounts ranging from 4.956% to 8.620%. Before entering into transactions with this customer, neither P&S, nor Satterfield, nor Lewis, nor any P&S agents obtained from the customer current financial statements. Before entering into transactions with the customer, neither P&S, nor Satterfield, nor Lewis, nor any P&S agents obtained a copy of corporate resolutions authorizing the customer's agent to enter into certain transactions on its behalf or indicating the investment goals of the customer, the type of account to be created (i.e., investment, trading, etc.), or the types of products authorized to be purchased. During this period, P&S, acting through Satterfield and Lewis, had a duty to properly supervise its agents, and the Consent Order found, among other things, that P&S, acting through Satterfield and Lewis, failed to take reasonable measures to properly supervise its agents. The Arkansas Consent Order required P&S to engage an independent consultant acceptable to the Arkansas Securities Commission to perform a compliance audit and make recommendations for the revision of compliance and supervisory policies. In compliance therewith, P&S engaged the law firm of Arnold, Grolmeyer & Haley as the independent consultant, which engagement was approved by the Arkansas Securities Commission. The audit was performed and a new compliance manual was ultimately generated by the consultant. The compliance manual established more formal compliance procedures within P&S and included the Arkansas Commissioners' markup guidelines in the front. In order to mitigate the excessive markup on the purchases, P&S did not charge the customers any commission or markup on the seven transactions even though an additional commission is usually charged on the sale. Jack Lewis was a registered principal and sales manager with P&S responsible for approving the securities transactions which were found to have excessive markups. He was permitted to resign from the firm at the end of 1988. Although questioning by Respondent's counsel at formal hearing suggested that this may have been on overly lenient reaction of P&S, the record evidence does not demonstrate any obligation of P&S to prosecute or discharge Lewis. On August 7, 1989, the District Business Conduct Committee for District 5 of the NASD filed Complaint Number NEW-712 against P&S, Satterfield, Powell, and others. On August 9, 1989, the District Business Conduct Committee for District 5 of the NASD filed Complaint Number NEW-713 against P&S, Satterfield, Powell, and others. NASD Complaint Numbers NEW-712 and NEW-713 were consolidated. In its February 1991 Decision and Order of Acceptance of Offer of Settlement for Complaint Numbers NEW-712 and NEW 713, also referred to in the record as "the February 1991 Decision," the NASD found that P&S violated Article III, Sections 1 and 4 of the Rules of Fair Practice in Complaint Number NEW-712; that Satterfield and Powell violated Article III, Sections 1 and 27 of the Rules of Fair Practice in Complaint Number NEW-712; and that P&S, Satterfield, and Powell violated Article III, Section 1 and 27 of the Rules of Fair Practice in Complaint Number NEW-713. However, the allegations of violations of named federal laws in both those complaints, which included allegations of fraud, were dismissed in that February 1991 Decision (See the Conclusions of Law). As a result of these findings, the NASD censured and fined P&S, Satterfield, Powell, and others in the amount of $25,000.00, jointly and severally. This consolidated February 1991 Decision was accepted by the NASD and was final on February 20, 1991. The foregoing violations of the Rules of Fair Practice involved executing approximately twelve (12) securities purchase and sale transactions at prices that included excessive markups or markdowns and selling certain government securities to customers through Allan M. Tucker and entering into repurchase agreements with those customers without recording those agreements or the effect of those agreements on the records of P&S and resulting in confirmations which did not disclose the repurchase agreement. Further, the securities were sold at prices not reasonably related to the current market price and were unsuitable for the customers. The State of Arkansas had previously reviewed all of the same transactions but the twelve markup violations found by the NASD included the seven found by the State of Arkansas plus five additional violations. (See, Findings of Fact 24-29 and 35) The markups on transactions 11 and 12 are not accurately represented or excessive because they represent only a portion of the entire transactions. These transactions were purchases of call options made in conjunction with the purchase of bonds. The total markup percentage on these transactions was actually less than one half of one percent. Alan M. Tucker a/k/a Matt Tucker came to work for P&S in 1974, did a good job, and worked his way up to becoming a part owner of the firm and supervisor of the trading and sales department. However, Matt Tucker began secretly purchasing securities through the firm without the knowledge of the other owners. When he lost money, he camouflaged his losses by "parking" the securities. "Parking," under certain conditions, is acceptable in the securities trade, but Mr. Tucker did not take any of the legitimate precautions. He "parked" the securities secretly with banks where his father-in-law, a college friend, and his wife's cousin were executives. Tucker sold the bonds to these banks at the firm's original cost, which was higher than market value, and promised to buy them back at the same price. In some cases, the agreement was oral and in other cases it was set forth in a one sentence letter, but Tucker never placed copies of the letters in the P&S correspondence files, so other firm members were unaware of what was going on. Thus, Tucker hid the losses incurred on the bonds and gave his customers a pretty good short term yield on their investments. However, after awhile, repurchase was out of the question because of the quantity of "parking" involved, and Tucker began to have his agreements called. From the evidence as a whole, it may be inferred that the close personal friends and in-laws whom Tucker drew into his net were careful to keep their dealings with Tucker clandestine, at least until Tucker's losses threatened to go sour and reflect on themselves and their financial institution employers as well as on Tucker. This situation, although not identical, is analogous to buying stocks on margin. Interestingly and aptly, the securities industry nicknames a repurchase agreement a "repo". When the first wave, as it were, of Tucker's repurchase agreements came to the attention of Joesph Powell and William Satterfield, P&S required Tucker to give up his supervisory position with P&S and to execute a note evidencing his debt to the firm for all losses incurred by the firm. The original plan was for Tucker to continue with P&S as a salesman. However, there were some securities still being held by a customer pursuant to even more repurchase agreements. These securities were discovered when Tucker attempted to repurchase the bonds and sell them to another customer. By the time this last transaction was discovered by P&S' principals, Matt Tucker had already left the office of the company. He never returned or made good his indebtedness. The information concerning the repurchase agreement transactions was initially provided by P&S principals to the SEC through an SEC examiner already present in P&S' office on routine matters. The SEC examiner reviewed the information, and the SEC took no direct action on its own initiative. P&S honored the repurchase agreements at a substantial monetary loss to the firm and its principals. Since the last administrative order against it, P&S has taken on new personnnel and has reorganized its procedures along preventive lines. Richard Torti is a director, Chairman of the Board, and Chief Executive Officer (C.E.O.) of the company. He has a Bachelors of Business Administration in investment and a Masters of Business Administration in finance from Memphis State University. He holds series five, seven, eight, twenty-four, fifty-two, and fifty-three registrations with the NASD and is registered in Arkansas. Mr. Torti has never been the subject of any regulatory action. Mr. Torti purchased forty percent (40%) of P&S' stock in August, 1990. Simultaneously, a voting trust of twelve percent (12%) of P&S stock was established with Mr. Torti as trustee, so that he has the right to vote fifty- two percent (52%) of the stock of P&S. Further, he has the right to appoint three (3) of the firm's five (5) directors. William Satterfield is president, director, manager of underwriting, and compliance officer for P&S. He graduated from Princeton University in 1956 with a Bachelors degree in economics. He has been licensed to sell securities since 1961. He currently holds a registration as a commodities representative, a general securities representative, a general securities principal, and a financial principal. He is currently registered in the State of Arkansas and has never been denied registration in any state or jurisdiction. William Satterfield was elected by NASD member firms to serve a three year term on the District 5 Business Conduct Committee in 1982 and served on the nominating committee during 1987. He also chaired a committee for the Arkansas Securities Commissioner which made recommendations for guidelines for markups on government agency securities. He has had an excellent reputation in the securities business both before and after his various administrative disciplines. Mr. Satterfield, Joseph Powell, and Scott Welch appear to be the last remaining firm members whose previous discipline records causes Respondent a current concern. Mr Satterfield is now supervised by Mr. Torti, the new C.E.O. of P&S. Mr. Satterfield was not supervised by anyone before Mr. Torti came to the firm. Joseph Powell has no corporate supervisory or management duties because of serious health problems. Mr. Scott Welch was hired in August 1988, as the financial operations principal for P&S. He is a CPA. He received his B.A. degree in accounting from the University of Arkansas and was employed by Price Waterhouse for four years and Frost & Company for two years before coming to work at P&S. Part of the reason Mr. Welch was hired was to shape up the internal controls of the company. Initially, he was requested to put in place a procedure to find out if there were any more Matt Tucker repurchase agreements (repos) outstanding. He sent out a positive confirmation letter to every customer of Matt Tucker verifying that they had no repurchase agreements and none were found. After completing the positive repurchase confirmation project, Mr. Welch evaluated the internal controls of P&S and determined that they were inadequate. He then put into effect a system whereby the head trader, the sales manager, and Mr. Satterfield would sign trade tickets. He also set up a computerized blotter system so that the management of the company could compare trades at any given time. Finally, he developed a checklist for the back office to use to evaluate trade tickets. Since the internal controls were completely put in place, there have been five regulatory examinations of P&S, four by the NASD and one by the State of Arkansas. Three of the NASD audits were full audits of sales practices and financial audits. One was a financial operations audit only. The Arkansas examination included both sales and operations audits. No actions were taken as a result of these audits (See Finding of Fact 50). The monthly and annual focus reports filed with the NASD and SEC show a trend toward increase of net capital. P&S' net capital in January of 1991 was $99,000. On December 31, 1991, the net capital was $385,000. The minimum net capital requirement for P&S is $25,000. Michael Tognetti is sales manager, Chief Operating Officer, and a director of P&S. He has been registered to sell securities since 1984. He holds a series three, seven (general sales), twenty-four (principal), fifty- three (MSRB principal), and sixty-three (Blue Sky) registrations in thirty-two states. He came to work with P&S in August, 1990, after all events giving rise to any administrative disciplinary order had occurred. No evidence of Mr. Tognetti's personal unworthiness to transact securities business, separate and apart from P&S, was demonstrated. When Richard Torti and Michael Tognetti came to the firm in August, 1990, there were 8 to 10 employees at P&S, but there are currently 100-120 employees at P&S. Mr. Torti formed a management team to review and strengthen policies and procedures in the firm. The firm has one supervisor to every ten or fifteen salesmen. Every order must be approved by a supervisor. The order must then be submitted to the trading manager for approval. Mr. Tognetti then reviews and signs every trade ticket. The compliance department reviews the trade blotter once a month. Scott Welch, Chief Financial Officer, also reviews the trade blotter once a month, reviewing each trade to determine if a trade is off market or if there is an excessive markup. Every three months, pursuant to the procedures manual, the supervisor reviews each account of his salesmen for activity and cross checks it with the objectives on the new account statement to make sure that no drastic changes in the type of investing has occurred. There have been three regulatory audits of P&S since August, 1990, two by the NASD and one by the Arkansas Securities Department and the exit interviews from those audits indicated that the company was operating satisfactorily (See Finding of Fact 44). P&S, as a broker-dealer, is regulated by all the states wherein it is registered, the NASD, and the SEC. The rules in the securities industry are so numerous and complex that if a broker-dealer is in the industry for any substantial length of time, some violations are likely to occur. Considering P&S' longevity and the lack of severity of the penalties imposed, the disciplinary history of P&S is considered a good history in the industry. P&S has an excellent reputation in the securities industry. The NASD had the option to suspend or revoke the registration of P&S in the cases which resulted in its five orders at issue but did not do so. P&S remains, and has consistently been, a member in good standing of the NASD. P&S was registered in Florida from September 1987, to December 31, 1989, and there were no actions taken against it or its principals by the State of Florida. P&S is currently registered in 33 states. Fourteen of those states have granted P&S registration since March 2, 1991, the last administrative order at issue in this case. Of those recent fourteen licensures granted, the states and dates of licensure are as follows: Alabama, March 13, 1991; New Jersey, April 8, 1991; Illinois, April 16, 1991; Michigan, April 23, 1991; Kansas, June 7, 1991; Mississippi, July 22, 1991; Connecticut, September 16, 1991; Kentucky, September 17, 1991; Massachusetts, December 19, 1991; Nevada, February 5, 1992; Alaska, February 11, 1992; Arizona, February 11, 1992; Iowa, February 11, 1991; and Wyoming, February 11, 1992.
Recommendation Upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the Department of Banking and Finance enter a final order Approving P&S as worthy and granting licensure; Approving Michael L. Trognetti as worthy and granting licensure; and Imposing on the licenses/registrations any special conditions the agency, in its discretion and expertise, deems appropriate to ensure that P&S' current internal system of checks and counterchecks, as expressed in its current manual or as expressed in an up-dated equivalent internal system of checks and balances, shall continue in full force and effect as long as P&S remains licensed in the State of Florida. DONE and ENTERED this 23rd day of June, 1992, in Tallahassee, Florida. ELLA JANE P. DAVIS Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 23rd day of June, 1992. APPENDIX TO RECOMMENDED ORDER The following constitute specific rulings pursuant to Section 120.59(2) F.S. upon the parties' respective proposed findings of fact (PFOF): Petitioners' PFOF Petitioners' proposed findings of fact begin on page 7, the material before that constitutes preliminary material and legal argument for which a ruling pursuant to Section 120.59(2) F.S. is not required. 1-2, 4, 20-31, 34-37 39-62 Accepted, but not necessarily adopted verbatim 3, 5, 8 Accepted as modified to more correctly reflect the record as a whole See FOF 4-5, 8-9. 6, 18-19 Rejected as subordinate, unnecessary, and cumulative to the facts as found. 7 Accepted that this is one reason given, but not the sole reason, and not accepted because not determinative by itself of any material issue. 9-10, 12-13 Rejected as immaterial for purposes of this de novo proceeding. 11 The first sentence is rejected as a conclusion of law; the second sentence is accepted as restated in FOF 31 upon authority of law. See conclusions of law. 14 Rejected as immaterial and misleading See FOF 10-14. 15-17 Rejected upon the record as a whole and those matters of which official recognition has been taken, and upon authority of the law cited in the recommended order; also, parts are subordinate, unnecessary, or cumulative 32-33 Accepted in part and rejected in part. What is rejected is restated in FOF 31 upon authority of law. See conclusions of law. 38 Sentence one is accepted; sentence two is rejected as immaterial. 63 Accepted in principal but rejected as stated because as stated it is a conclusion of law. Respondent's PFOF: 1-32, 53, Accepted, but not necessarily adopted verbatim 33-52, 54-56 Accepted as modified to more correctly reflect the record as a whole, to eliminate legal argument, and to eliminate subordinate, unnecessary, and cumulative material. COPIES FURNISHED: Edward A. Dougherty, Jr., Esquire Mang, Rett & Collette, P.A. 660 E. Jefferson Street P. O. Box 11127 Tallahassee, Florida 32302 Ashley Peacock Assisant General Counsel Office of the Comptroller Department of Banking and Finance Suite 1302, The Capitol Tallahassee, Florida 32399-0350 Honorable Gerald Lewis Comptroller, State of Florida The Capitol, Plaza Level Tallahassee, Florida 32399-0350 William G. Reeves, General Counsel Room 1302, The Capitol Tallahassee, Florida 32399-0350
The Issue The issue for consideration in this case is whether Petitioner should be granted registration as an associated person by the Department of Banking and Finance, or whether his application should be denied because of alleged misconduct outlined in the letter of denial.
Findings Of Fact At all times pertinent to the issues herein, the Petitioner, Richard Graibus, was either a registered associated person associated with a security firm or an applicant for registration as an associated person in Florida, and the Respondent, Department of Banking and Finance, Division of Securities and Investor Protection, (Department), was and is the state agency charged with the responsibility of regulating the sale of securities in this state. On August 19, 1988, Mr. Graibus filed an application to be an associated person of Finnet Securities, Inc., (Finnet), with the Department. On March 3, 1989, by letter, the Department notified Mr. Graibus of its intent to deny his application on the basis that prior disciplinary action taken against him by other states was prima facie evidence of his unworthiness to act as a securities dealer in Florida. Specifically, the bases for denial were: A Minnesota Cease and Desist Order in December, 1977. A Securities and Exchange commission suspension order in May, 1983. The denial of Petitioner's application for registration as an associated person with J. W. Gant and Associates by 10 states. Three judgements against Petitioner. His termination for cause from employment with American Western Securities. Petitioner was employed by American Western Securities in Denver, Colorado from November, 1977 to July 1980 when he left feeling a change would be beneficial to his career. No evidence was presented to support the Department's allegation that Petitioner was terminated for cause from that period of employment and that allegation is found to be unsupported. In December, 1977, the State of Minnesota issued a Cease and Desist Order against Petitioner alleging that he offered to sell, and did sell, unregistered securities while neither he, the firm, nor the securities were registered in that state as required by state law. Petitioner did not dispute the allegations of fact outlined in the Minnesota Order. The actual sale was made to a father and son who Petitioner had inherited as customers from his stepfather. The trades were unsolicited and were approved by petitioner's supervison who had many years experience in the securities trade. On May 23, 1983, the Securities and Exchange Commission, (SEC), found that Mr. Graibus had, at an unspecified time, wilfully violated and aided and abetted in violations of the anti-fraud and anti-manipulation provisions of the United States security law, and had failed to reasonably supervise others under his control to prevent violations of the same law. Petitioner engaged in cross trading, manipulation of stock prices, and fraudulent representations to customers regarding two stocks. These findings were incorporated in a Findings and Order Imposing Remedial Sanctions which were drafted and adopted from an offer of settlement submitted by Mr. Graibus. In its Order, the SEC took the following disciplinary action: It suspended Petitioner from association with any broker/dealer for 60 days; It barred Petitioner from acting in a supervisory capacity as a principal, officer, director or employee for 12 months; and It stipulated that Petitioner was not to act in a supervisory position without prior approval from the Commission, after the expiration of the previously mentioned 12 month period. Mr. Graibus has twice previously been granted registration as an associated person in Florida. Specifically, on May 9, 1984, he was approved as an associated person with Chesley and Dunn; and on January 28, 1985, he was approved as an associated person with J. W. Gant and Associates. In both cases, the Department had knowledge of the Minnesota Order and the SEC action since Petitioner disclosed both on each application. In 1984, while Petitioner was a principle of the brokerage firm of Chesley and Dunn, Inc., the Securities and Exchange Commission revoked the firm's registration for violations of various net capital and financial reporting regulations. There was no charge against the Petitioner. As a result of his association with this firm, and his having signed notes on behalf of the firm in his personal capacity, Mr. Graibus incurred a substantial liability for obligations of the firm, which are memorialized by three default judgements against him. The initial loan totaled $150,000.00. While manager of the firm's Sarasota office, Petitioner also invested approximately $175,000.00 of his own money which was lost. All his private obligations were fully disclosed to prospective creditors when he borrowed the money for the firm. In 1985, Mr. Graibus submitted applications to several states for registration as an associated person with J. W. Gant and Associates. These applications fully disclosed the entry of the Minnesota Order and the results of the SEC action. His applications were approved in twenty-two states, but as a result of the aforementioned SEC action, were denied by the states of Pennsylvania, Nebraska, Ohio, and Tennessee. He protested the denial by Tennessee and on November 22, 1985, that state entered a Final Order confirming its denial of his application for registration, finding that he had failed to disclose the adverse finality of the Minnesota Cease and Desist Order claiming Instead that the order had been resolved by corporate counsel. This comment is also made- in Mr. Graibus's Gant application in Florida which granted his application. Mr. Graibus did not protest the entry of the Final Order In Tennessee. Mr. Peter Maftieu is a registered securities dealer in four separate classifications. He has worked for J. W. Gant and Chesley and Dunn since January, 1983. Petitioner trained him when he first started in the industry. Incorporated as a fundamental part of Petitioner's training [pg was the insistence on full disclosure of material facts to clients and the need to insure that he, as a salesman, educated himself as to his client's situation by a full and detailed questioning to insure the securities recommended were suitable for and consistent with the client's needs. As a part of his training, Petitioner showed Mr. Maftieu the SEC and Minnesota orders as examples of what can happen if there is not full compliance with the rules. Due to increasing instances of misconduct within the securities industry in this state, none of which was shown to relate to Petitioner, in 1985 the Florida Comptroller created a task force to study the problem and come up with recommendations for efforts to combat fraud in the securities industry in Florida. In March, 1986, the task force submitted its report which, in part, recommended that the Department tighten up its review of applications for registration as securities dealers to eliminate or disqualify applicants with a disciplinary record within the industry. As a result of this recommendation, the Department altered its policy in exercising its discretionary approval authority. Petitioner has, for many years now, practiced full disclosure in the conduct of his business and it has been in excess of six years since the last findings of any violations of securities laws, rules or regulations by Petitioner. Nonetheless, in this case, the Department's denial of Mr. Graibus' application, which was based on his disciplinary history in other states, was consistent with its policy against granting registration to "unworthy" persons, as outlined in the Department's rules, and the intent of the Legislature as outlined in Section 517.1205, Florida Statutes.
Recommendation Based, on the foregoing Findings of Fact and Conclusions of Law, it is, therefore: RECOMMENDED that Petitioner's application for registration as an associated person with Finnet Securities, Inc., be granted. RECOMMENDED this 5th day of January, 1990, in Tallahassee, Florida. ARNOLD H. POLLOCK Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 5th day of January, 1990. COPIES FURNISHED: Edward W. Dougherty, Jr., Esquire Mang, Rett & Collette, P.A. 660 D. Jefferson St. Post Office Box 11127 Tallahassee, Florida 32301-3127 M. Catherine Green, Esquire Paul C. Stadler, Esquire Department of Banking and Finance Suite 1302 The Capitol Tallahassee, Florida 32399-0350 Hon. Gerald Lewis Comptroller State of Florida The Capitol Tallahassee, Florida 32399-0350 Charles L. Stutts General Counsel Department of Banking and Finance Suite 1302 The Capitol Tallahassee, Florida 32399-0350
Findings Of Fact Petitioner is the governmental agency responsible for issuing real estate licenses and regulating licensees on behalf of the state. Respondent, Gregory T. Franklin ("Franklin"), is licensed in the state as a real estate broker; license number 0314387. The last license issued was as a real estate broker, c/o Equity Realty of South Florida, Inc., t/a Equity Realty, 5809 Southeast Federal Highway #200, Stuart, Florida 34997. Respondent, Equity Realty of South Florida, Inc. ("Equity"), is a corporation registered as a real estate broker; license number 0229264. Respondent, Franklin, is the qualifying broker for Respondent, Equity. On or about January 26, 1990, Mr. Robert Warren (the "buyer") entered into a contract to purchase real estate from Ms. J. Zola Miller and Ms. Adrianne Miller Hill (the "sellers"). The buyer gave Respondent an earnest money deposit in the amount of $1,000. On or about April 17, 1990, a second contract was executed by the buyer and sellers. The buyer gave Respondents a second earnest money deposit in the amount of $24,000. Both earnest money deposits were timely deposited to Respondents' escrow account, number 0194101404, Florida Bank, Stuart, Florida. The buyer and sellers had difficulty in closing the contract due to disagreements concerning conditions in the contract. At the buyer's request, Respondents used the earnest money in the amount of $25,606.04 to purchase a certificate of deposit ("CD") in the name Robert Warren Century 21 Equity Realty Escrow Account #050-215-76, located at the First Marine Bank of Florida, Palm City, Florida ("First Marine"). Respondents received the sellers' verbal approval, but not written approval, for the purchase of the CD. Respondents notified the Florida Real Estate Commission (the "Commission") on August 28, 1990, that there were conflicting demands for the $25,000 earnest money deposit. Respondents stated their intent to claim a portion of the earnest money as an earned commission and stated that they were preparing to file an interpleader action to resolve the parties' dispute over the earnest money deposit. The Commission acknowledged Respondents' notification. Negotiations between the buyer and sellers continued until December 12, 1990. At that time, the parties reached an impasse, and each made written requests for the escrow deposit. Respondents maintained the earnest money in the CD until February 8, 1991. On February 8, 1991, Respondents were notified by First Marine that the buyer was attempting to obtain the escrow monies directly from First Marine. Respondents opened a CD in the name of Robert Warren Escrow Account for Equity Realty by Gregory Franklin, Account #200-517-7320, First Union Bank of Florida, Stuart, Florida. When the CD matured on May 15, 1991, the amount of the deposit was $25,989.57. On May 15, 1991, Respondents removed the earnest moneys and invested them in CD #10696954 at Community Savings Bank. On June 19, 1991, Respondents withdrew $500, paid a penalty of $6.21, and closed the CD. The remaining balance was used to open CD #10707413 at Community Savings Bank. On June 21, 1991, Respondents withdrew $600 and paid a penalty in the amount of $8.67. Respondents used half of the $600 withdrawal to pay an attorney to initiate a civil interpleader action without the knowledge or consent of either the buyer or seller. On August 23, 1991, Respondents closed the CD and withdrew the balance. On August 23, 1991, Respondents opened CD 310725647 in the name of Equity Realty, Inc., with the balance at Community Savings Bank. On October 30, 1991, Respondents made a withdrawal in the amount of $175. On November 23, 1991, the CD was renewed. The account was closed on November 27, 1991, with a balance of $25,456.94, and deposited into the court registry. The interpleader action was ultimately resolved pursuant to a settlement agreement between the parties. Respondents obtained the consent of both parties, though not the written consent of both parties, before placing the escrowed funds into an interest bearing account on August 15, 1990. The uncontroverted testimony of Respondent, Franklin, concerning this issue was credible and persuasive. Neither the sellers nor the buyer ever revoked their consent. Respondents deposited the earnest moneys into an interest bearing account without designating who was to receive the interest from such an account without the consent of both parties. Respondents took appropriate action to resolve the conflicting demands made upon the earnest moneys deposited with Respondents but failed to take such action in a timely manner.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner enter a Final Order finding Respondents guilty of placing escrow funds in an interest bearing account without designating who is to receive the interest in violation of Florida Administrative Rule 21V- 14.014. It is further recommended that Petitioner should issue a written reprimand to Respondents and require Respondent, Franklin, during the next 12 months, to document to the satisfaction of Petitioner that he has completed 14 hours of the Brokerage Management Course. RECOMMENDED this 22nd day of January, 1993, in Tallahassee, Florida. DANIEL MANRY Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 22nd day of January, 1993. APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-3323 Petitioner's Proposed Findings Of Fact. 1.-6. Accepted in Finding 1. 7.-8. Accepted in Finding 2. 9.-11. Accepted in Finding 3. Accepted in Finding 4. Accepted in Finding 5. Accepted in Finding 3. Accepted in Finding 6. Accepted in Finding 7. 17.-20. Accepted in Finding 8. 21.-22. Accepted in Finding 9. 1.-6. Accepted in Finding 1. 7.-8. Accepted in Finding 2. 9.-11. Accepted in Finding 3. 12. Accepted in Finding 4 13. Accepted in Finding 5. 14. Accepted in Finding 3. 15. Accepted in Finding 6. 16. Accepted in Finding 7 17.-20. Accepted in Finding 8. 21.-22. Accepted in Finding 9. 23.-24. Accepted in Findings 10.-11. Respondents' Proposed Findings Of Fact. 23.-24. Accepted in Findings 10.-11. COPIES FURNISHED: Darlene F. Keller, Director Division of Real Estate Department of Professional Regulation 400 West Robinson Street Post Office Box 1900 Orlando, Florida 32801 Jack McRay, Esquire General Counsel Department of Professional Regulation 1940 North Monroe Street Tallahassee, Florida 32399-0792 James H. Gillis, Esquire Department of Professional Regulation, Division of Real Estate Legal Section - Suite N 308 Hurston Building North Tower 400 West Robinson Street Orlando, Florida 32801-1772 Gregory T. Franklin, pro se %Equity Realty of South Fla., Inc. 5809 S.E. Federal Highway, #200 Stuart, Florida 34997 APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-3323 All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.
Findings Of Fact Based upon all of the evidence, the following findings of fact are determined: At all times relevant hereto, respondent, Columbus Equities International, Inc. (Columbus Equities), was registered as a broker/dealer with petitioner, Department of Banking and Finance, Division of Securities and Investor Protection (Division), having been issued broker/dealer registration number 30936. The business address of the firm was 6321 East Livingston Avenue, Reynoldsburg, Ohio. Respondent, Roger L. Parsons, was registered with the Division as an agent with Columbus Equities. He was also registered with the National Association of Securities Dealers (NASD) as the financial and operations principal, general principal and representative of Columbus Equities. As such, Parsons was responsible for supervising the employees of Columbus Equities. Similarly, under the terms of Rule 3E-600.002(4), Florida Administrative Code, Columbus Equities was also responsible for the acts of its employees. Prior to June 1990, Columbus Equities was known as Parsons Securities, Inc. The business was originally formed in 1978 by Parsons, who is majority stockholder and serves as its president, secretary and director. In June 1990, the firm's name was changed to Columbus Equities International, Inc. In January 1991, Columbus Equities filed for protection under Chapter 7 of the Federal Bankruptcy Law. When the events herein occurred, Vincent C. Lombardi was registered with the NASD as general securities principal, representative and registered options principal of Columbus Equities. Lombardi's business address was 450 Tuscarora Road, Crystal Bay, Nevada, where he managed the Nevada branch office of Columbus Equities. Except for Ohio, Lombardi was not registered to sell securities in any other state, including Florida. In the fall of 1990, a Division financial analyst, Joanne Kraynek, received a letter from the Nevada Securities Commission. Based upon that letter, Kraynek wrote a letter on November 21, 1990, to "Parsons Securities/Columbus Equities International, Inc." regarding that firm's alleged sale of unregistered securities to a Florida resident. The letter requested various items of information. On December 6, 1990, Lombardi replied to Kraynek's letter on behalf of Columbus Equities and enclosed a number of documents in response to her request. Based upon this information and a subsequent investigation by the Division, the following facts were determined. On May 31, 1990, Charles D. Flynn conducted a transaction on behalf of his wife, Susan, for the purchase of 4,933 shares of World Videophone, an unregistered security. On June 22, 1990, Flynn purchased 2,500 shares of White Knight Resources Limited on behalf of his wife. That security was also not registered in the State of Florida. On July 9, 1990, Flynn purchased an additional 2,000 shares of White Knight Resources Limited on behalf of his wife. In each transaction, the trade was executed by Lombardi from the Nevada branch office of Columbus Equities. When the sales occurred, Flynn and his wife resided at 2045 Parkside Circle South, Boca Raton, Florida. In finding that the Flynns were Florida residents at the time of the trades, the undersigned has rejected a contention by Parsons that Flynn purchased the stocks while residing in Canada and thus the transactions were not subject to the Division's jurisdiction. Evidence of these transactions and the Flynns' Florida domicile is confirmed by the deposition testimony of Mr. Flynn, admissions by Lombardi, and copies of the order tickets from the Nevada branch office. The order tickets reflect the code "MM" (market maker), which means that Columbus Equities held the securities in its own inventory and did not have to go to an outside source to obtain the stocks. Thus, Parsons (on behalf of Columbus Equities) should have been familiar with these securities. However, at hearing he acknowledged that he was not. This in itself is an indication that Parsons was not properly supervising his employees. Finally, there was no evidence that the three transactions were exempt within the meaning of Sections 517.051 and 517.061, Florida Statutes, and thus were beyond the Division's jurisdiction. As the principal for Columbus Equities, Parsons was responsible for supervising the activities of both Lombardi and the Nevada branch office. Indeed, section 27, article III of the NASD Rules of Fair Practice requires that a NASD member such as Parsons supervise the activities of all associated persons to insure that those persons are complying with all securities laws and regulations. In order to fulfill this duty, Parsons should have reviewed on a timely basis the monthly statements generated by the Nevada office as well as that office's new account applications. For the reasons stated hereinafter, Parsons' review of Lombardi's activities was neither complete nor timely. The Flynn account was opened by Lombardi in April 1990 and Lombardi was the only employee who dealt with the Flynns. Parsons had no knowledge that the Flynn account had been opened because he did not review new account applications. This failure to review new account applications prevented Parsons from detecting whether Lombardi was selling securities in states such as Florida where he was not registered. Lombardi was required to send Parsons a monthly statement reflecting the activity of the branch office. During his review of the May statement in the second or third week of June 1990, Parsons became aware of the first Flynn transaction. Just prior to that, Parsons had learned that Lombardi had also engaged in another illicit trade. In addition, Parsons subsequently became aware of at least four other transactions (including two more with the Flynns) involving the sale of securities by Lombardi in states where he was not registered. However, except for a verbal warning given to Lombardi to discontinue that type of trade, Parsons took no disciplinary action against Lombardi until September 13, 1990, when Lombardi was terminated as an employee and the Nevada branch office closed. By failing to review the new account applications and to take prompt action against Lombardi after having learned of his indiscretions, Parsons failed to properly supervise his employees. Rule 3E-600.014(6), Florida Administrative Code, requires that each member establish, maintain and enforce written procedures governing the conduct of its employees to ensure compliance with all security laws and regulations. To this end, Parsons developed a policy (compliance) manual which was to serve as a guide in the conduct of all employees of Parsons Securities, Inc. and its successor, Columbus Equities. A copy of this manual should have been given to each employee, including Lombardi, for his or her review. However, Parsons did not know if Lombardi ever received and reviewed the manual. In addition, the manual itself was deficient in that it failed to indicate whether employees were to be given a copy for review, and it contained no provisions for taking disciplinary action against an agent if he violated a manual proscription. By failing to develop and utilize an appropriate manual, respondents violated the above cited rule.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that a final order be entered by petitioner finding respondents guilty of all violations alleged in the administrative complaint, ordering respondents to cease and desist all unlawful activities, and imposing a $5,000 fine, jointly and severally, against them. DONE and ENTERED this 26th day of May, 1992, in Tallahassee, Florida. DONALD R. ALEXANDER 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 26th day of May, 1992.
The Issue The issues for determination in this proceeding are whether Respondent, by and through his employees: (a) sold unregistered securities in the secondary market which were marked up in excess of 10 percent of the prevailing market price and which were not exempt from registration; (b) permitted an agent to service accounts prior to the agent's effective date of registration in the State and concealed such action; and (c) failed to maintain minimum net capital requirements for his corporation; and (d) failed to properly supervise the activities of his employees and agents.
Findings Of Fact Respondent owned the stock of a holding company and was an officer in a wholly owned subsidiary of the holding company. Respondent and another individual owned the stock of Dean, Johnson and Burke Holding Company ("Holding"). Holding owned the stock of Dean, Johnson and Burke Securities, Inc. ("Securities"). Respondent was the Secretary of Securities. Respondent had ultimate responsibility for disbursements and profits for Holding and Securities. Respondent monitored the checkbooks and daily expenses for Securities. Respondent's accountant provided financial information to Respondent concerning the daily operations of both companies. The information was provided on forms supplied by Respondent. Respondent kept a daily record of how much each company made or lost, how much was owed, and other accounting information. Respondent made sure that the bills were paid and that the credit of each company remained good. Respondent also controlled the hiring of key personnel. Brent A. Peterson was a manager and principal for Securities. 2/ Mr. Peterson set prices for the firm. Mr. Peterson engaged in transactions in which prices were set for securities to be sold to customers in excess of 10 percent above and below the prevailing market price. Out of 457 trades, approximately 38 were sold at prices that exceeded a 10 percent markup (the "marked up securities"). The marked up securities were sold at prices in excess of 10 percent of the prevailing market rate. The National Association of Securities Dealers, Inc., ("NASD") determined that the securities were marked up in excess of 10 percent of the prevailing market price based upon Securities' contemporaneous costs. When a dealer is simultaneously making a market in a security (a "market maker"), the NASD looks to the prevailing market price for the purpose of determining if a markup exceeds 10 percent. The prevailing market price is the price at which dealers trade with one another, i.e., the "current inter-dealer market." 3/ When a dealer is not simultaneously making a market in a security (a "non-market maker"), the contemporaneous costs of the dealer are used for the purpose of determining if the securities have been marked up in excess of 10 percent. The contemporaneous costs reflect the prices paid for a security by a dealer in actual transactions closely related in time to the dealer's retail sales of that security. Such a standard is normally a reliable indication of prevailing market price in the absence of evidence to the contrary. Securities was not a market maker in the marked up securities. Even though securities may be sold at the same market price by one firm that is a market maker and one that is not a market maker, the latter may be deemed by the NASD to have marked up the security by more than 10 percent depending on the firm's contemporaneous costs. Many of the marked up securities were sold to customers at the same market price as that the customers would have paid other brokerage houses. 4/ Since Securities was not a market maker in the marked up securities, the standard used by the NASD to determine the amount of markup was the contemporaneous costs paid by Securities. The securities involved in the 38 trades were marked up more than 10 percent over Securities' contemporaneous costs. Respondent sold unregistered securities that were not exempt from registration. Unregistered securities may be sold if they are reasonably related to the current market price. The marked up securities were not reasonably related to the prevailing market price because they were marked up more than 10 percent over Securities' contemporaneous costs. Robert M. Long sold securities to customers as an employee of Securities prior to the effective date of his registration with Petitioner. Mr. Long was registered with Petitioner as a registered representative on May 18, 1988. Mr. Long was employed by Securities, from April 19, 1988, through September 20, 1989. Mr. Peterson advised Mr. Long that Mr. Long was authorized to trade securities. Pursuant to Mr. Paterson's advice, Mr. Long sold securities in Tel-optics prior to the effective date of his registration with Petitioner on May 18, 1988. Respondent concealed the sale of securities by Mr. Long prior to the effective date of his registration with Petitioner. Mr. Long's registered representative number was 34. Relevant order tickets showed Mr. Long as the person engaged in the sale of securities prior to May 18, 1988. Registered representative number 30 had been used on the order tickets at the time of the trades. After Mr. Long was registered with Petitioner, Mr. Long's number 34 was added to the order tickets and number 30 was crossed out. Securities operated with a net capital deficiency of approximately $30,000. The net capital deficiency resulted from the failure to accrue liabilities. The net capital deficiency was discovered by Mr. Long and Jeff Clark, an examiner for the NASD. The invoices for bills for the unaccrued liabilities were not filed where bills and invoices were normally filed and were found by Mr. Long concealed in drawers and other remote locations in the office. The net capital deficiency was discovered by Mr. Long on August 28, 1989, but not reported to Petitioner until September 19, 1989. Mr. Long did not notify Petitioner of the net capital deficiency at Securities until the deficiency could be verified by Mr. Clark.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner enter a final order finding that Respondent is guilty of committing the acts alleged in the Administrative Complaint, requiring Respondent to cease and desist from all violations of Florida statutes and rules, and imposing a fine in the aggregate amount of $9,000. The fine should be imposed in the amount of $2,000 for selling securities in excess of a 10 percent markup and $3,500 for each of the other two acts that constituted violations of applicable statutes and rules. DONE AND ENTERED in Tallahassee, Leon County, Florida, this 25th day of July, 1991. DANIEL MANRY Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of July, 1991.
