The Issue The issue is whether Respondent is guilty of a failure to discharge adequately his compliance and supervisory responsibilities, in connection with the churning of a securities account by an account representative, and, if so, what penalty should be imposed.
Findings Of Fact In February 1999, Petitioner conducted a three-day onsite examination of the activities of Allen Douglas Securities, Inc. (Allen Douglas Securities), which is a full- service brokerage firm, following the receipt of a complaint from a customer, Joseph Nellis. The examination covered, among other things, trading in Mr. Nellis’s account from May to November 1998, which is the relevant period in this case. Based on the findings of the examination, Petitioner filed an administrative complaint dated September 17, 1999, against Allen Douglas Securities; the registered representative responsible for Mr. Nellis’s account, James Singer; the president of Allen Douglas Securities, Stephen Pizzuti (Mr. Pizzuti); the vice-president of Allen Douglas Securities and brother of Mr. Pizzuti, Richard Pizzuti; and Respondent. The administrative complaint alleged that Mr. Singer churned the Nellis account and assigned responsibility for Mr. Singer’s wrongful acts to the Pizzutis and Respondent, as General Securities Principals and Mr. Singer’s supervisors, and to Respondent, as the compliance officer of Allen Douglas Securities. Mr. Singer did not defend the allegations. By Stipulation and Consent Agreement between Petitioner, on the one hand, and Allen Douglas Securities and the Pizzutis, on the other hand, the company and the Pizzutis agreed to comply with the applicable securities laws, Allen Douglas Securities paid Petitioner $10,000 in administrative costs, the three respondents agreed to develop written supervisory procedures, the three respondents agreed to pay Petitioner for the cost of the examination, the three respondents agreed not to register Respondent in any capacity with Allen Douglas Securities, Allen Douglas Securities agreed to employ an onsite compliance officer at the Altamonte Springs office, Allen Douglas Securities agreed to copy Petitioner for one year with customer complaints, Allen Douglas Securities agreed to maintain its customer files in separate folders, and Petitioner agreed to register new Allen Douglas Securities branch offices in Tampa and Sarasota. The three respondents signed the Stipulation and Consent Agreement on November 24, 1999, and Petitioner signed it on November 29, 1999. Reportedly, due to subsequent miscommunications, the administrative law judge dismissed the case then pending before the Division of Administrative Hearings, even though the issues involving Respondent had not been resolved. Petitioner later filed the Administrative Complaint commencing this case. In this case, Petitioner again seeks to discipline Respondent for his alleged failure to discharge adequately his compliance and supervision duties at Allen Douglas Securities, of which Respondent was never an officer, director, shareholder, or employee. Respondent has held a National Association of Securities Dealers (NASD) series 7 license (General Securities Representative) since 1976, a series 24 license (General Securities Principal) since 1980, a series 4 license (Registered Options Principal) since 1983, and a series 8 license (General Securities Sales Supervisor) since 1989. Except for two two- year periods, Respondent has been continuously employed in the securities industry since January 1980. From October 1995 through October 1997, Respondent was registered with an NASD brokerage firm based in Sarasota, Florida, known as Executive Securities, Inc. (later known as Executive Wealth Management; all references to Executive Securities are to Executive Securities, Inc. and Executive Wealth Management). In 1995, while providing compliance services to Executive Securities branch offices, Respondent met Mr. Pizzuti, who was the manager of the Executive Securities branch located in Altamonte Springs, Florida. Although not as experienced as Respondent in the retail securities industry, Mr. Pizzuti has had substantial experience in this business. After acquiring his series 24 license in 1987, Mr. Pizzuti has managed eight separate offices and hundreds of brokers. Respondent and Mr. Pizzuti dispute whether Respondent ever provided compliance services to Mr. Pizzuti’s branch of Executive Securities. Respondent testified that he did not, and Mr. Pizzuti testified that he did. They also dispute whether Mr. Pizzuti operated a branch office or a franchise of Executive Securities. Respondent testified that it was a branch office, and Mr. Pizzuti testified that it was a franchise. Most importantly, Respondent and Mr. Pizzuti dispute the extent to which Respondent was responsible for compliance and supervision at Allen Douglas Securities. Respondent testified that, during the relevant period, he was responsible for compliance and supervision in options trading only. Respondent testified that he sporadically provided other compliance services, on a very limited basis, when he answered questions asked of him by Mr. Pizzuti or his brother or sometimes questions asked of him by brokers who had received a customer complaint. Explaining that he happened to have been visiting the office at the time, Respondent testified that his compliance involvement intensified when Mr. Pizzuti received a letter from Mr. Nellis dated November 6, 1998, in which Mr. Nellis expressed dissatisfaction in the handling of his account and directed that all trading terminate, except to the extent necessary to cover margin calls. Respondent acknowledged that he assumed greater compliance responsibilities at the very end of the relevant period, largely to deal with Petitioner and Mr. Nellis, but that he did so as an accommodation to Mr. Pizzuti. Mr. Pizzuti testified that his brother reported to him and Respondent on all compliance matters during the relevant period. Mr. Pizzuti testified that Respondent had served as the compliance officer in all matters for Allen Douglas Securities from prior to 1998 through the relevant period. As to non- options matters, Mr. Pizzuti testified that he relied on Respondent for “macro compliance,” but not “day to day compliance.” As to supervision during the relevant period, Mr. Pizzuti testified that Respondent had input into the implementation of supervision practices and procedures to a greater extent than he had input into the design of these practices and procedures. The relationship between Respondent and Mr. Pizzuti has become strained over time. Initially closing ranks when confronted with Mr. Nellis’s complaint and Petitioner’s investigation, Respondent and Mr. Pizzuti contended that Mr. Nellis was a day trader and responsible for the losses that followed from his excessive trading. The Pizzuti brothers escaped personal discipline for an obvious failure in supervision, if not also compliance, presumably by blaming Respondent, as one of the conditions of their stipulation with Petitioner is that they not register Respondent in any capacity. Respondent now blames the Pizzutis for the failure in supervision, if not also compliance. This deterioration in relations is important in assessing certain of the evidence at various stages of the relationship between Respondent and the Pizzutis. Respondent probably provided compliance services to Mr. Pizzuti’s branch of Executive Securities. Mr. Pizzuti kept a copy of a memorandum dated March 6, 1996, and issued by Respondent, as “Compliance Officer” of “Executive Securities, Inc.” Although the recipients are merely “All Registered Representatives,” the retention of a copy of this memorandum by Mr. Pizzuti at his branch office suggests that the account representatives at this branch were the recipients of the memorandum. Announcing a “Mandatory Compliance Meeting,” the memorandum explicitly illustrates the nature of Respondent’s compliance responsibilities, in describing the topics to be discussed, and implicitly illustrates the nature of Respondent’s supervisory authority, in warning of specific consequences-- implicitly to be imposed by Respondent--for tardiness or absence. The memorandum states in its entirety: Please arrange your schedules to accommodate a mandatory compliance meeting on Friday, March 8, 1996, at 8:30 AM. No exceptions will be permitted. Please be prompt. Anyone arriving later than 5 minutes following the starting time will be considered absent. Absent representatives will risk censure or imposition of fines. The session should be approximately 30 minutes long. Subjects covered include suitability, discretion, basis for recommendation, asset turnover, margin, quality control, customer service. Call me . . . with comments or questions. The memorandum reveals the nature of Respondent’s compliance responsibilities and supervisory authority at Executive Securities, and thus Respondent’s relevant experience and capabilities. The memorandum also illustrates the relationship between compliance responsibilities and supervisory authority that Respondent enjoyed with Executive Securities. Lacking hiring and firing authority at Allen Douglas Securities, Respondent testified that he was unwilling to assume wider ranging compliance responsibilities. Aside from these matters, though, the memorandum is of little direct value in the present case because Mr. Singer was never employed by Executive Securities. Mr. Singer was one of about 14 registered representatives employed by Allen Douglas Securities. His employment with Allen Douglas Securities ran from March 11, 1998, through November 18, 1998. Mr. Singer’s preceding employment was with Empire Financial Group, Inc., from November 20, 1996, through February 13, 1998, and Charles Schwab & Co., Inc., from November 4, 1991, through October 15, 1996. Mr. Singer was also registered with three other brokerage firms between July 22, 1988, through December 2, 1991. Choosing to end his association with Executive Securities, Mr. Pizzuti formed or acquired American Trading and Brokerage, which, through a name change, became Douglas Allen Financial Group, Inc. (DAFG). Mr. Pizzuti was the sole shareholder of DAFG. On March 28, 1996, probably shortly after the formation of the company, the board of directors unanimously consented to its reformulation to comprise Respondent, Mr. Pizzuti, and Richard Pizzuti, all of whom had series 24 licenses. At the same time, the board of directors caused DAFG to form a subsidiary corporation to be licensed as a brokerage firm. The new company, Allen Douglas Securities, was incorporated on September 26, 1996. DAFG was never registered with the NASD or Petitioner, presumably due to its status as a mere holding company that did not serve as a broker or dealer of securities. Also at the same time, the board of directors required DAFG to set aside 9750 shares of DAFG stock for Respondent. A written agreement, incorporated into the minutes, provides that Respondent earned these shares, pursuant to a five-year vesting schedule, by serving as the “Chief Operating Officer and Compliance Officer” of Allen Douglas Securities and supplying Allen Douglas Securities with “the exclusive right to his research and financial reports.” The vesting schedule was to “commence upon Mr. Kase’s assumption of duties” with “vested ownership [to] be recognized as follows: Completion of Year 1 Service--20 [percent;] Completion of Year 2 Service--40 [percent;] Completion of Year 3 Service--60 [percent;] Completion of Year 4 Service--80 [percent; and] Completion of Year 5 Service--100 [percent.] Despite the apparent “vesting” of ownership of varying percentages of the shares designated for transfer to Respondent, the schedule cautions: The award is not transferable without the Board of Director’s consent. Mr. Kase is entitled to enjoy the benefits associated with the beneficial ownership of the Corporation but is not permitted to transfer ownership or any rights to permanent ownership without the Board of Director’s consent. The Corporation holds the right to demand repudiation of all ownership rights in the event of failure to complete the service requirements. Prominent among the items not in dispute between Respondent and Mr. Pizzuti is that Respondent did not earn any DAFG shares and never owned any shares of DAFG at anytime. By letter dated June 15, 1999, Respondent “acknowledge[d] my inability to meet the service requirements for sustaining an ownership interest in the company . . ..” As a result, Respondent acknowledged that he was “not entitled to any further claim of ownership interest in the company and am obliged to forfeit any current and future claims based upon service rendered to the company.” Registered in Florida as a broker-dealer on December 6, 1996, Allen Douglas Securities initially operated out of the location formerly used by the Executive Securities branch office managed by Mr. Pizzuti. As president and secretary of Allen Douglas Securities, Mr. Pizzuti was in charge of the new company. Serving as the branch manager (of the sole office) and vice-president of Allen Douglas Securities from early 1997, Richard Pizzuti conferred with his brother, when necessary, for guidance as to, among other things, compliance matters with which Richard Pizzuti was unfamiliar. Respondent memorialized his research responsibilities, as he entered into one-year contracts for 1997 and 1998 to provide securities research. Through these contracts, Respondent, as an independent contractor, agreed to provide investment research in return for which he was to earn, subject to a cap, the greater of $4500 monthly or three percent of the gross sales of DAFG for the month. The first contract between Respondent and DAFG is dated January 1, 1997, and provides that DAFG shall transfer to Respondent 5000 shares of its stock, if Respondent grants DAFG an exclusive right to his research. However, the contract prohibits Respondent from transfering the stock, and the parties lined out a provision that would have eliminated this prohibition after one full year of exclusive service. The first contract provides for notices to Respondent to be sent to an address in Winter Park, Florida. A second contract, substantially similar to the first contract, is dated January 1, 1998, and provides for notices to Respondent to be sent to two addresses: the same one in Winter Park, Florida, and a new one in Park City, Utah. The most significant difference between the two contracts is the omission from the latter contract of the stock-ownership provisions described in the preceding paragraph. The two contracts are primarily useful for four purposes. First, the contracts show that, between January 1997 and January 1998, Respondent had at least begun the process of relocating his residence from Winter Park, Florida to Utah. Respondent testified credibly that he moved to Utah in January 1998, after which he only visited Florida from time to time. For 1998, Respondent visited Florida three or four times, usually for a combination of business and personal purposes. The business usually involved Allen Douglas Securities. The account applications signed by Respondent and introduced into evidence generally corroborate Respondent’s claim that he was not often in Florida between May and November 1998. For instance, Petitioner Exhibit 22 is an application for an options account that is signed by Respondent on July 18, 1998; however, the client, registered representative, and manager signed the application one month earlier. This delay most likely was due to the time it took to transmit the form to Respondent in Utah or the next visit that he made to Florida from Utah. Second, the contracts show that, from January 1997 and January 1998, Respondent was an independent contractor, not an employee, of Allen Douglas Securities. The recitations of the contracts concerning Respondent’s level of control regarding his work are entirely consistent with the record regarding how and even where Respondent performed his work. Third, the contracts show that, between January 1997 and January 1998, Respondent’s role with Allen Douglas Securities had diminished, at least with respect to the likelihood that he would obtain an equity interest in the company in return for research. Fourth, the contracts are inaccurate in one revealing respect. The contracts misidentify the company as DAFG, rather than Allen Douglas Securities. Allen Douglas Securities, as a broker-dealer, required Respondent’s services; DAFG, as a holding company, did not. This awkwardness of this transparent effort to distance Respondent from Allen Douglas Securities, and thus from securities liability, was betrayed by basing Respondent’s payments on the sales of DAFG. As a holding company, DAFG had no sales; Respondent was paid based on the sales of Allen Douglas Securities. For at least one of these years, Allen Douglas Securities actually issued Respondent the Form 1099 reporting the payments to the Internal Revenue Service. Respondent’s effort to characterize his relationship with DAFG, rather than Allen Douglas Securities, underscores his sophistication, at the expense of his candor, as he structured the relationship to serve his liability needs rather than to reflect business reality. The two contracts are incomplete in one important respect: they omit any discussion of Respondent’s compliance responsibilities. In 1998, most of Respondent’s income was derived from the services that he provided Allen Douglas Securities, in return for which he earned $52,500. This sum approximates the $54,000 that Respondent was due under the 1998 contract for his research. There were no separate payments for the compliance services, which assumed greater importance by the end of 1998. This omission from the contracts may not be another attempt by Respondent to shield himself from liability. Based on the record, it is more likely than not that Respondent’s compliance responsibilities were negligible, at least through early 1998, when the second contract was signed. From the inception of Allen Douglas Securities, Mr. Pizzuti consulted with Respondent over compliance issues with which Mr. Pizzuti was unfamiliar. However, nothing in the record suggests that Mr. Pizzuti needed to, or did, consult with Respondent over every compliance issue. Relying on his substantial experience in the retail securities industry, Mr. Pizzuti handled the many common compliance issues without soliciting the advice of Respondent. Analysis of Respondent’s precise responsibilities at Allen Douglas Securities requires careful consideration of two facts. First, compliance and supervision are largely distinct tasks. Compliance requires the development of policy, and supervision requires the execution of policy by ensuring that subordinates behave within certain acceptable parameters. Compliance and supervision overlap when a superior must determine if certain behavior of a subordinate constitutes a violation of policy. Thus, a superior’s determination of whether a registered representative’s trading activity is excessive for a particular account requires the collection of data concerning the trading activity and account holder, analysis of this data in light of prevailing standards for assessing excessive activity, and communicating to and enforcing upon the registered representative any determinations arising out of this analysis. This potentially complex process necessarily involves both compliance and supervision tasks. Second, Respondent’s compliance and supervision responsibilities were evolved over time. This case requires a determination of Respondent’s compliance and supervision responsibilities from May to November 1998. Evidence of Respondent’s responsibilities before and after the relevant period is useful in inferring the exact extent of these responsibilities during the relevant period. Contemporaneous documentation is helpful in identifying the allocation of compliance and supervision responsibilities at Allen Douglas Securities at various times. One valuable source of information is the Form BD, which is a Uniform Application for Broker-Dealer Registration. This is a form used by a broker-dealer for initial registration and amendments to registration. The first Form BD, which is dated December 4, 1996, represents the initial application of Allen Douglas Securities. Prepared by Mr. Pizzuti, as are all the Forms BD, the December 4, 1996, Form BD seeks registration with the Securities Exchange Commission and NASD. In response to a question asking for the names of each chief executive officer, chief financial officer, chief operations officer, chief legal officer, chief compliance officer, direction, any other person with similar functions, or shareholder, the December 4, 1996, Form BD identifies Mr. Pizzuti as president, Mark Thomes as chief financial officer, and DAFG as the sole shareholder. The record contains several Forms BD for 1997. Nearly all of these amendments sought to add different states to the registration of Allen Douglas Securities. However, two of the Forms BD in 1997 mention Respondent. By Form BD dated May 5, 1997, Allen Douglas Securities named Respondent, as of May 1997, as its senior registered options principal and compliance registered options principal, as well as municipal bond principal. This Form BD names Mr. Pizzuti as the person in charge of compliance. A Form BD dated November 5, 1997, assigns these responsibilities exactly as did the May 5, 1997, Form BD. A Form BD dated March 3, 1998, only changes a state registration. A Form BD dated May 11, 1998, changes a state registration, names a new clearing house, and names two new municipal bond principals, Mr. Thomes and another person whose name is illegible. A Form BD dated May 26, 1998, restates the previously supplied information concerning DAFG as the shareholder, Mr. Pizzuti as the president, Mr. Thomes as the chief financial officer and municipal bond principal, and Respondent as the registered options principal. A Form BD dated June 16, 1998, changes a state registration. The last available Form BD is dated September 25, 1998, and again restates the previously supplied information set forth in the first sentence of this paragraph. During this period, Respondent issued some documents reflecting his activities with Allen Douglas Securities. On December 29, 1997, on letterhead entitled, “Allen Douglas Compliance Memo,” Respondent provided advice to all registered representatives, with a copy to Mr. Pizzuti, concerning “Options Trading--Basis for Recommendations and Suitability.” This memorandum, which is limited to options trading, warns the registered representatives to be careful with options trading, which Respondent described generically as “drifting toward increased speculation bordering on gambling.” Noting that options trading generates a disproportionate share of customer complaints and is not especially profitable for a broker-dealer, the memorandum states: “We tend to maintain higher standards and stricter discipline regarding options trading than most firms in our industry. We intend to continue maintaining higher standards than the industry requires.” At the bottom of the memorandum is Respondent’s typewritten name and “Compliance Registered Options Principal,” below which is “Fax.” On February 6, 1998, Respondent sent a short e-mail to an employee of Allen Douglas Securities asking for help in assembling a research file on a particular bulletin-board stock. At the bottom of the memorandum is “Compliance.” Two more e-mails dated June 29, 1998, to Mr. Pizzuti concern options accounts and compliance. In one of these e-mails, dealing with options accounts, Respondent responded to an options account application that Mr. Singer sought to open for a customer otherwise unrelated to this case. Respondent stated: “This is a weak qualifier. I am willing to approve it but it requires close supervision. . . . Place a special emphasis on monitoring activity in this account.” In the other e-mail, dealing with options compliance, Respondent restricted a particular broker, identified only by number, to closing already-open options positions. Respondent conditioned reinstatement of full options trading privileges upon a review of account activity and demonstration of suitability. By e-mail dated July 7, 1998, Mr. Singer responded to Respondent’s e-mail and noted that the customer had followed Mr. Singer from firm to firm and had directed the trading in his account. By e-mail dated July 8, 1998, Respondent did not yield, instead warning Mr. Singer: . . . When a firm qualifies and accepts an account as suitable for options trading, we must monitor the activity and assess the suitability of transactions. We are not permitted to accept a trade simply because it was the client’s idea. If it is remotely reasonable to assume that the firm should have considered a particular trade or series of trades to be unsuitable, whether solicited or unsolicited, then the firm must assume it can and will likely be held accountable for adverse results and financial loss. The only documents that assign Respondent a broader role in compliance and supervision are the Written Supervisory Procedures of Allen Douglas Securities and a Designated Responsibility matrix, both of which appear to have been prepared by Mr. Pizzuti. The date of origin of the Written Supervisory Procedures is undeterminable. The matrix is dated September 11, 1998, although Mr. Pizzuti insists that earlier, unproduced matrices exist and characterize Respondent identically. The September 11, 1998, matrix assigns a broad range of compliance and supervision responsibilities to Respondent, reserving for Mr. Pizzuti only the tasks of hiring and reviewing correspondence. The Written Supervisory Procedure and Designated Responsibility matrix are self-serving documents obviously prepared by Mr. Pizzuti. Through these entirely internal documents, Mr. Pizzuti appears to have attempted to have assigned broad compliance and supervision responsibilities to Respondent. Mr. Pizzuti’s effort to make a broad, internal assignment of responsibilities contradicts his earlier, public acceptance of compliance responsibilities by the Form BD dated May 5, 1997. The credibility of the Written Supervisory Procedure and Designated Responsibility matrix is further undermined by the failure of Mr. Pizzuti to prepare new Forms BD at the times of these changes in compliance responsibility, despite his obvious incentive to do so, as Respondent was purportedly relieving Mr. Pizzuti of potential liability in this area. Also, given Respondent’s knowledge of compliance issues and previously noted sophistication in the preparation of the two contracts, he unlikely would have bothered to try to shield himself from liability in the two contracts, and then waste this effort by allowing Mr. Pizzuti to name him as the compliance officer in internal documents. Filed documents and documents prepared by Respondent reveal that he had comprehensive compliance and supervision responsibilities in the area of options only during the relevant period. Respondent provided compliance assistance, but not supervisory assistance, on an as-needed basis throughout his tenure with Allen Douglas Securities. Undoubtedly, Respondent’s contributions in compliance matters not involving options became more substantial at the end of 1998 and start of 1999, but Respondent never replaced Mr. Pizzuti in this area. Eventually, well after the conclusion of the relevant period, Respondent assumed substantial compliance responsibilities. For instance, by letter on Allen Douglas Securities letterhead to Petitioner’s auditor dated April 13, 1999, Respondent designated himself as “Senior Compliance Officer.” Focusing on Respondent’s compliance and supervision responsibilities during the relevant period, he appears to have discharged commendably his acknowledged responsibilities in options trading. From May to November 1998, only five options trades took place in the Nellis account. Consistent with his original claim assigning substantial responsibility to Mr. Nellis, Respondent testified that the system worked as to options trading: Mr. Nellis tried trading options, found that he was not comfortable trading options, and chose not to trade options after a few minor trades. However, Mr. Nellis denied any knowledge of the options trading. More likely, given Mr. Nellis’s past trading experience, his education, and his receipt of monthly statements from Allen Douglas Securities, Mr. Nellis more or less condoned months of very, very heavy trading by Mr. Singer in Mr. Nellis’s account, as discussed below, in the expectation of big profits. When the heavy trading produced significant losses, Mr. Nellis complained. Under this more likely scenario, Mr. Nellis did not intervene at all until early November 1998, and, prior to that, he would no more likely have stopped Mr. Singer from trading options than he not have stopped Mr. Singer from trading excessively in non-options. Under the more likely scenario, in which Mr. Nellis did not stop the options trading, Respondent’s close supervision of Mr. Singer’s options trading was probably why Mr. Singer was unable to damage the Nellis account through options trading, as he did through non-options trading. Reading Respondent’s unyielding e-mail of July 8, 1998, Mr. Singer necessarily must have realized that, if he were to assume the role of rogue broker, he would have to do it in an area unsupervised by the watchful Respondent. It is difficult to harmonize the evident level of supervision that Respondent provided over Mr. Singer’s options trading with the non-supervision that Mr. Singer received over his non-options trading, if Respondent in fact was responsible for the latter during the relevant period. The trading activity in the Nellis account from May to November 1998 was, under all relevant circumstances, wildly excessive, or, as Respondent described it, “breathtaking.” Churning arises when a broker in control of an account trades too often, so as to support the inference (in the absence of direct evidence of intent) that the broker’s intent was primarily to generate commissions for the broker rather than to generate profits for the client. Relevant factors include the client’s sophistication, the client’s objectives, the extent to which the client actually relied on the broker, the party initiating the trades, the extent to which the client approved of broker-initiated trades, and the effect of the commissions on the potential for profitability. Mr. Nellis is a 1985 graduate of the University of Tennessee. At the time in question, he was working in real estate sales. His annual earnings, largely in the form of commissions, were $35,000 to $63,000, and his net worth was $75,000 to $100,000. Before transferring his account to Allen Douglas Securities in May 1998, Mr. Nellis had traded at Dean Witter and Empire Financial. At Empire Financial, Mr. Singer had been Mr. Nellis’s registered representative for the first four months of 1998. During Mr. Singer’s assignment to the Nellis account for the seven months from May to November 1998, the average account equity was $41,620; the total purchases were $4,987,559, the total commissions were $17,289, and the total margin interest was $20,286. Over seven months, commissions and interest equaled half of the account balance. Conventional turnover analysis requires the calculation, over a single year, of the total purchases divided by the account equity. This ratio expresses the annual frequency of annual turnover of an account. Although current trading volumes and reduced commission costs have necessitated reconsideration of acceptable ranges for these turnover ratios, historically a ratio of 6:1 was excessive, even for an especially active account. The annual turnover ratio in Mr. Nellis’s account was over 200:1. In August 1998, the turnover ratio for one month was 75:1, as the $20,000 account, in that month alone, purchased $1.5 million in securities. A better measure of activity is the commission to equity ratio, which measures the rate of return that an account would have to generate to cover the commissions. In other words, an account paying 20 percent of its average balance in commissions must earn 20 percent of its average balance to break even. A good measure of a reasonable expected return is that, over the long run, the securities market has produced an annual rate of return of 10-12 percent. Again annualized, the commission to equity ratio of Mr. Nellis’s account was 71.2 percent, meaning that he would have had to earn 71.2 percent over the year just to pay the commissions. An even better measure of activity is the total cost to equity ratio, which measures the rate of return that an account would have to generate to cover the commissions and margin interest. Adding Mr. Nellis’s margin interest results in an annualized ratio of 83.6 percent, meaning that he would have had to earn 83.6 percent over the year just to pay the commissions and interest. Over seven months, Mr. Singer executed about 240 trades in the Nellis account, or about 34 per month. Mr. Nellis claims to have approved less than five percent of these trades. During the preceding 13 months at Empire Financial, Mr. Nellis executed only six trades and held his securities an average of 127 days. During the relevant period, about one-third of the trades in the Nellis account were day trades. The financial impact of the excessive trading was exacerbated by the leveraging of Mr. Nellis’s account. Thus, when the market declined during the summer of 1998, his account, which averaged 50 percent leverage and reached 90 percent leverage, responded dramatically. There is no question that Mr. Singer churned this account. Mr. Singer was in control of the Nellis account, Mr. Singer excessively traded the Nellis account, and Mr. Singer excessively traded the account to advance his own interests, rather than the interests of Mr. Nellis. The gaps in the record concerning the finer points in the extent to which Respondent assisted the Pizzutis with compliance issues during the seven months in question ultimately prove irrelevant. In identifying the compliance and supervision issues presented by Mr. Singer’s egregious behavior in this case, Mr. Pizzuti and his brother had absolutely no need for the compliance expertise (or any supervisory authority, of which Respondent none outside of options trading) of Respondent. The compliance issue was that Mr. Singer was churning Mr. Nellis’s account, and the supervisory issue was that the Pizzutis needed to fire Mr. Singer. As the Pizzuti brothers presumably do not need a weatherman to know which way the wind blows, neither do they need Respondent to know that supervisors need to examine daily trading tickets, that Mr. Singer was churning Mr. Nellis’s account, that churning is bad, and that Mr. Singer had to be stopped immediately. Petitioner has failed to prove by clear and convincing evidence that Respondent had any role whatsoever in the compliance and supervision issues present in Mr. Singer’s churning of the Nellis account. The customer abuse in this case happened on the watch of the Pizzutis, not Respondent.
Recommendation It is RECOMMENDED that the Department of Banking and Finance enter a final order dismissing the Administrative Complaint against Respondent. DONE AND ENTERED this 26th day of December, 2000, in Tallahassee, Leon County, Florida. ROBERT E. MEALE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 26th day of December, 2000. COPIES FURNISHED: Honorable Robert F. Milligan Office of the Comptroller Department of Banking and Finance The Capitol, Plaza Level 09 Tallahassee, Florida 32399-0350 Robert Beitler, Acting General Counsel Office of the Comptroller Department of Banking and Finance Fletcher Building, Suite 526 101 East Gaines Street Tallahassee, Florida 32399-0350 Chris Lindamood Assistant General Counsel Department of Banking and Finance 400 West Robinson Street, Suite S-225 Orlando, Florida 32801 David S. Wood Sarah A. Long Baker & Hostetler, LLP Post Office Box 112 Orlando, Florida 32802-0112
The Issue The central issue in this case is whether Petitioner is entitled to be registered as an associated person.
Findings Of Fact Petitioner filed an uniform application for securities registration with the Department. This application sought registration as a general securities representative (5-7) and named Sheffield Securities, Inc. as the firm for whom she intended to work. The application sought information regarding Petitioner's past work experience and specifically inquired as to whether the U.S. Securities and Exchange Commission (SEC) had ever found her to have been involved in a violation of investment-related regulations or statutes. The application also asked Petitioner to disclose whether the SEC had entered an order denying, suspending or revoking her registration or disciplined here by restricting her activities. To both of these questions Petitioner answered "yes." Petitioner's association with the securities industry began in 1972 when she was employed as a secretary for a securities firm. Her work prior to that had been as a bookkeeper. Petitioner obtained her registration and purchased a securities business, Adams & Whitney Securities Corp., in late 1973 or early 1974. Adams & Whitney was registered with the SEC and operated as a broker/dealer buying and selling interests for itself and others. Petitioner was the president and sole principal for Adams & Whitney. On February 9, 1976, the SEC issued a released which claimed Adams & Whitney and Petitioner had wilfully violated and wilfully aided and abetted violations of the anti-fraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities EXCHANGE ACT of 1934, and Rule lOb-5 in connection with an offer to purchase, and sale of ITS securities and manipulation of the price of the security. The release also alleged Petitioner had violated Section 15(c)(2) of the securities EXCHANGE ACT of 1934 and Rule 15c 2-7 by submitting quotations for ITS securities to a interdealer quotation system without notification to the system of arrangements with other brokers and guarantees of profits. Without admitting or denying the allegations against her, Petitioner submitted an offer of settlement regarding the ITS charges which the SEC determined to accept. As a result, the registration as a broker-dealer of Adams & Whitney was suspended for a period of four months. Also, Petitioner was suspended from association with any broker-dealer for a period of four months. On June 27, 2977, the SEC issued a release which charged that Petitioner had wilfully violated and wilfully aided and abetted violations of the registration provisions of the Securities Act of 1933, and had willfully violated an wilfully aided and abetted violations of the anti-fraud provisions of the Securities Act of 1933 and the Securities EXCHANGE Act of 1934 in connection with the offer and sale of the common stock of Tucker Drilling Company, Inc. Without admitting or denying the allegations against her, Petitioner submitted an offer of settlement regarding the Tucker Drilling charges which the SEC decided to accept. As a result, the SEC found that Petitioner wilfully violated and wilfully aided and abetted violations of Sections 5(a) and 5(c) of the Securities Act of 1933. Further, it was found Petitioner willfully violated and willfully aided and abetted violations of Section 10(b) of the EXCHANGE act and Rule 10b-6. Based on its findings the SEC suspended Petitioner from association with any brokers, dealer or investment company for a period of twelve months and barred her from association with any broker, dealer or investment company in a supervisory or proprietary capacity. Prior to the entry of the administrative penalties imposed against Petitioner in connection with the Tucker Drilling charges, the SEC had obtained a civil injunction against Petitioner which permanently enjoined her from violating the federal securities laws in connection with the offer and sale of Tucker securities or any other securities. Petitioner maintained at hearing that the submitted of settlement were offered as an expedient means of resolving the charges since she did not have the financial resources needed to oppose the allegations. In connection with the ITS charges, Petitioner stated she did not improperly scheme to manipulate the stock prices, that she neither bought nor sold shares of ITS, and that she was charged with other broker-dealers who had "made a market" for ITS simply because of her association with them. Further, Petitioner denied she had ever received compensation for deals made with the ITS sales In connection with the Tucker Drilling charges, Petitioner admitted she actively participated in the purchase and sale of the Tucker stock but that she had not known of the improprieties of others involved in the trading. Petitioner denied she had knowingly violated the laws and alleged that by the time she determined something was improper, the investigations had begun. Petitioner found the Tucker incident a "stupid mistake. In 1976, Adams & Whitney went out of business. Petitioner subsequently devoted her energy to her own and family health problems and became a housewife. In 1985, Petitioner's family moved to Florida and she worked as a secretary for a brokerage firm called Brown & Hawk, Inc. From September, 1986 until the time of her application, Petitioner worked as a secretary for Sheffield Securities, Inc. During her employment with Sheffield, Petitioner studied for an successfully passed the examination for S-7 registration. According to Dennis Dixon, who was a financial principal and general securities associated person at Sheffield Securities, Petitioner is a very trustworthy person who is also very capable. According to Don Saxon, the determination that Petitioner had violated the anti-fraud provisions was a great concern to the Department since those violations are the most serious types perpetrated by an individual in the industry.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: Department of Banking and Finance, Office of the Comptroller, Division of Securities and Investor Protection enter a Final Order approving Petitioner's application for registration with restrictions as may be deemed appropriate by the Department. DONE and RECOMMENDED this 25th day of July, 1988, in Tallahassee, Florida. JOYOUS D. PARRISH Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 25th day of July, 1988. APPENDIX TO RECOMMENDED ORDER, CASE NO. 88-0531 Rulings on Petitioner's proposed Findings of Fact: Paragraph 1 is accepted. Paragraph 2 is accepted. Paragraph 3 is rejected as argument. Paragraph 4 is rejected as argument or unsupported by the evidence. To the extent relevant see findings made in paragraphs 11 & 12. Paragraph 5 is rejected as argument. Paragraph 6 is accepted to the extent addressed in findings made in paragraphs 10, 11, 12 otherwise rejected as argument unsupported by the record, or irrelevant. The first sentence in paragraph 7 is accepted. The balance of paragraph 7 is rejected as argument. Paragraph 8 is accepted. Paragraph 9 is rejected as argument. The first 4 sentences of paragraph 10 are accepted. The balance of paragraph 10 is rejected as argument. Paragraph 11 is rejected as argument. COPIES FURNISHED: Charles E. Scarlett Assistant General Counsel Office of the Comptroller Suite 1302, The Capitol Tallahassee, Florida 32399 Michael J. Cohen, Esquire 517 S. W. First Avenue Fort Lauderdale, Florida 33301 Honorable Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, Florida 32399-0350
The Issue Whether the Certificate of Authority held by Respondent should be subject to discipline for Respondent's failure to timely return build-up funds to a licensed bail bond agent, Willie David, pursuant to the terms of Section 648.29(3), Florida Statutes (2003).
Findings Of Fact Based on the oral and documentary evidence adduced at the final hearing and the entire record in this proceeding, the following findings of fact are made: Roche Surety holds a Certificate of Authority as a Florida domestic property and casualty insurer authorized to transact insurance business in the State of Florida, subject to the jurisdiction and regulation of the Department pursuant to the Florida Insurance Code. Roche Surety, Inc. ("Roche-MGA") is a managing general agent licensed by the Department. Armando Roche is an officer and director of Roche Surety and an officer and director of Roche-MGA. He is licensed by the Department as a limited surety (bail bond) agent. Willie David is licensed by the Department as a limited surety (bail bond) agent. On or about April 18, 1995, Mr. David entered into an Agency Agreement with Roche-MGA. "Build-up fund," or "BUF," accounts are held by the insurer in trust for the agent in order to protect the insurer against any liability that the agent does not directly satisfy. The insurer places a portion of the premium due to the agent on each bond into the BUF account. Should there be a forfeiture on the bond, the insurer is allowed to take that amount out of the BUF account. In this case, Roche Surety was the insurer holding Mr. David's BUF account, pursuant to his Agency Agreement with Roche-MGA. Section 648.29(3), Florida Statutes (2003), provides: Build-up funds are maintained as a trust fund created on behalf of a bail bond agent or agency, held by the insurer in a fiduciary capacity to be used to indemnify the insurer for losses and any other agreed- upon costs related to a bail bond executed by the agent. The build-up funds are the sole property of the agent or agency. Upon termination of the bail bond agency or agent's contract and discharge of open bond liabilities on the bonds written, build-up funds are due and payable to the bail bond agent or agency not later than 6 months after final discharge of the open bond liabilities. (Emphasis added) On or about June 23, 2000, the Agency Agreement between Willie David and Roche-MGA was terminated. In July 2001, Mr. David made a complaint to the Department that Roche Surety had not returned funds that it held in his BUF account, as required, pursuant to Section 648.29, Florida Statutes (2003). Mr. David did not provide the Department with documentation sufficient to demonstrate that all of his open bond liabilities had been discharged. The Department provided Mr. David with a list of what was needed to prove discharge of the liabilities. Over a period of months, Mr. David continued to submit letters to the Department. Matters between Mr. David and Roche Surety became increasingly acrimonious. Roche Surety made repeated attempts to schedule an audit of Mr. David's records. Mr. David made allegations against Roche Surety that the company's principal, Armando Roche, considered defamatory. On or about January 7, 2002, Roche Surety filed a civil complaint in the Thirteenth Judicial Circuit in and for Hillsborough County against Willie David for defamation and civil extortion. The case was styled Roche Surety, Inc. v. Willie David, Case No. 02000151. Mr. David ultimately submitted information sufficient to satisfy the Department that all of his outstanding bond liabilities had been discharged as of August 23, 2002. Thus, the Department's position was that Roche Surety should have returned the BUF account funds to Mr. David on or before February 23, 2003. The Department sent Roche Surety a letter, dated March 3, 2003, advising Roche Surety that all of Mr. David's outstanding liabilities had been discharged as of August 23, 2002, and placing Roche Surety on notice that it was required to return the funds held in the BUF account, pursuant to Section 648.29(3), Florida Statutes (2003). On March 7, 2003, Roche Surety filed a motion in the circuit court case requesting "an order allowing [Roche Surety] to hold funds as security or, in the alternative, for a pre- judgment writ of attachment." The motion asserted Roche Surety's belief that Mr. David was judgment proof and that the BUF account represented the only asset available to satisfy any potential judgment in Roche Surety's favor. Roche Surety requested a court order permitting it to transfer the BUF account funds into the registry of the court or some other secure account or, in the alternative, for a pre-judgment writ of attachment of the BUF account. Paragraph 4 of Roche Surety's motion states, in full: Defendant [Willie David] has satisfied his open bond liabilities and said bonds have been discharged. As such, pursuant to Section 648.29, Florida Statutes, defendant is entitled to a return of the BUF account and defendant has made demand for its return. Also on March 7, 2003, counsel for Roche Surety wrote a letter in response to the Department's letter of March 3, 2003, attaching a copy of Roche Surety's circuit court motion. In the letter, counsel asserted, "By transferring the BUF account pursuant to Court Order, Roche Surety would fully comply with Florida law, including Section 648.29, Florida Statutes." The Department made no effort to intervene in the circuit court case. On August 15, 2003, Circuit Judge James D. Arnold entered an order granting Roche Surety's motion, allowing Roche Surety "to hold the proceeds of defendant's BUF Account in the same account as it now exists until this matter is resolved or until further Order of Court." The judge's order noted that Mr. David did not object to entry of an order "based on the facts stated in plaintiff's Motion and the facts stated in defendant's response to the Motion." Among the facts recited in Roche Surety's motion and repeated in the judge's order, was the statement that Mr. David had satisfied his open bond liabilities and was entitled to return of the BUF account. At the hearing in the instant case, Roche Surety offered testimony and some documentation to demonstrate that Mr. David has, in fact, not satisfied all of his open bond liabilities. This evidence directly contradicted Roche Surety's representation to the circuit court that Mr. David had satisfied all open bond liabilities. In particular, Roche Surety offered testimony that Mr. David had taken cash collateral upon the issuance of several bonds and had failed to document or account for that collateral in such a way as to assure Roche Surety that it had been returned. At most, the evidence established that Roche Surety had suspicions regarding Mr. David's handling of collateral, but no actual proof that he had not returned collateral to any of his clients. Roche Surety also offered testimony that Mr. David has not returned, provided proof of discharge, resolved, or otherwise accounted for two outstanding powers of attorney. Evidence presented by the Department demonstrated that Mr. David had reported the two powers of attorney as lost and, pursuant to the Agency Agreement, had paid the premiums on them. No evidence was presented that the powers of attorney were ever used to write bail bonds. Roche Surety's initial representation to the circuit court that Mr. David had satisfied all open bond liabilities is supported by the facts, as well as by the equitable consideration that Roche Surety should not benefit by taking diametrically opposed positions before different tribunals. The evidence established that the amount of money held in the BUF account is $30,792.08, plus any interest that has accrued since December 2002, the date of the last statement presented at hearing.
Recommendation Based on all the evidence of record, it is RECOMMENDED that the Department of Financial Services enter a final order holding that the evidence is not clear and convincing that Roche Surety has willfully violated Section 648.29, Florida Statutes (2003), and that the First Amended Notice and Order to Show Cause be dismissed. DONE AND ENTERED this 28th day of January, 2004, in Tallahassee, Leon County, Florida. S LAWRENCE P. STEVENSON 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 28th day of January, 2004. COPIES FURNISHED: Douglas S. Gregory, Esquire Preston & Cowan, LLP 100 North Tampa Street, Suite 1975 Tampa, Florida 33602 Richard J. Santurri, Esquire Department of Financial Services 200 East Gaines Street Tallahassee, Florida 32399-0333 Honorable Tom Gallagher Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Mark Casteel, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
The Issue The issue for determination is whether Respondent committed the offenses set forth in the Administrative Complaint and, if so, what penalty should be imposed.
Findings Of Fact At all times material hereto, Respondent was licensed by the State of Florida as a real estate broker, having been issued license number 0521991. Respondent's last license issued was as a broker c/o Stellings Realty, Inc., 2368 Saratoga Bay Drive, West Palm Beach, Florida. Beginning on or about March 1, 1998, until August 31, 1998, Respondent had an Exclusive Right of Sale Listing Agreement (Agreement) with Judy Cominse (Seller) for real property, owned by the Seller, located at 4397-B Woodstock Drive, West Palm Beach, Florida. Respondent represented the Seller as a transaction broker and owed her certain duties pursuant thereto. A Brokerage Relationship Disclosure statement was provided to the Seller by Respondent. Another broker, Robert Berman, was the referring agent and was personally known by the Seller. Respondent was of the opinion that Berman was to receive a referral fee of 25 per cent in the event of a sale. The listing was problematic for Respondent. Respondent encountered problems due to restrictions placed on the showing of the property by the Seller and her tenants, who were the Seller's son and daughter-in-law. Respondent contemplated not continuing with the listing. He even mentioned discontinuing the listing with the Seller, but he did not discontinue it. A contract for sale of the Seller's property was entered into by the Seller and Evelyn Swinton (Buyer Swinton). Buyer Swinton signed the contract on June 1, 1998, and the Seller signed it on June 3, 1998. The contract provided, among other things, for an escrow deposit of $1,500 to be held by Sun Title, located in Lake Worth, Florida. The $1,500 was paid and held in escrow by Sun Title. The transaction for the sale of Seller's property failed to close. By a Release and Cancellation of Contract for Sale and Purchase form (Release and Cancellation) dated July 28, 1998,1 both the Seller and Buyer Swinton agreed, among other things, that the $1,500 escrow deposit would be disbursed to the Seller. On July 30, 1998, Sun Title prepared an escrow check in the amount of $1,500, made payable solely to the Seller. The check was forwarded to Respondent sometime after July 30, 1998; the evidence presented was insufficient to show when Sun Title forwarded the check to Respondent.2 On August 6, 1998, Respondent prepared an addendum (Respondent's Addendum) to the Agreement that he had with the Seller. Respondent's Addendum was dated and signed by Respondent on this same date. Respondent's Addendum provided, among other things, the following: This contract [Agreement] will be extended from August 31, 1998 until March 1, 1999; if necessary.3 * * * Stellings Realty, Inc. will receive 7% of the total purchase price. In addition 25% commission of the listing side will be given to Berman Realty as a referral fee. If the Seller should cancel this listing the cancelation fee would be $1000.00. Judy Cominse [Seller] will receive $1500.00 by mail upon acceptance. Paragraph numbered 5 of Respondent's Addendum indicates that, upon the Seller accepting Respondent's Addendum, the Seller will receive $1,500, which was the escrow deposit, by mail. The Seller did not accept Respondent's Addendum although the Seller was of the opinion that the only way for her to obtain the $1,500 was to agree to an addendum to the contract that she had with Respondent. With the assistance of her sister, who was a licensee, licensed by Petitioner,4 the Seller negotiated a change of terms to Respondent's Addendum. The seller prepared and executed an addendum (Seller's Addendum) on August 6, 1998, and forwarded it to Respondent. The Seller's Addendum provided, among other things, the following: This listing agreement [Agreement] will be extended six months (i.e., from August 31, 1998 until February 28, 1999). * * * Stellings Realty, Inc. will receive 7% of the total selling price (if sold at full listing price), otherwise negotiable; however, no lower than 6%. Additionally, $533.75 to the listing agency (Stellings Realty), which amount will not be subject to the referral fee due and payable to Robert A. Berman Real Estate, the referring broker to the listing agency. If the seller should cancel this listing, the cancellation fee would be $788.75 ($250.00 cancellation fee, plus $533.75). Judy Cominse [Seller] will receive $1,500.00 (100% of the escrow deposit relinquished by the buyer [Buyer Swinton]) by mail upon acceptance. Paragraph 5 of Seller's Addendum indicates that, upon Respondent's accepting the Seller's Addendum, the Seller will receive $1,500, which was the escrow deposit, by mail. Respondent executed the Seller's Addendum on August 11, 1998, and faxed it to her on this same date. Respondent accepted the Seller's Addendum on August 11, 1998. Prior to August 11, 1998, Berman had contacted Respondent on behalf of the Seller. Berman was requested by the Seller to make an attempt to obtain the escrow deposit of $1,500 for her. Berman contacted Respondent who indicated to Berman that, as soon as the escrow check was received, he would contact Berman. Sometime after July 30, 1998, Berman contacted Sun Title and was informed that the escrow check had been prepared and forwarded to Respondent. On or about August 11, 1998, Respondent contacted the Seller and informed her that the escrow check had been received by him. On or about August 11, 1998, Respondent also contacted Berman regarding the receipt of the escrow check. At the request of the Seller, Berman went to Respondent's office, obtained the escrow check, and forwarded it to the Seller via express delivery. Based upon the required proof, the evidence fails to demonstrate that Respondent refused to relinquish the $1,500 escrow deposit to the Seller in order to force or pressure the Seller to agree to an addendum to their Agreement. Respondent continued to represent the Seller. The Seller's property was sold on November 3, 1998. Subsequently, Respondent sued the Seller in the County Court of West Palm Beach, Florida for $533.75, based on the Seller's Addendum. The Seller had refused to pay Respondent the $533.75, pursuant to the Seller's Addendum, and Respondent sued the Seller to recoup the monies. On or about January 4, 1999, the court suit was settled. Before the end of 1998, Respondent paid Berman the referral fee.
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 and therein dismiss the Administrative Complaint filed against Leon Stellings. DONE AND ENTERED this 31st day of July, 2000, in Tallahassee, Leon County, Florida. ERROL H. POWELL 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 31st day of July, 2000.
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 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 Whether petitioner's application for registration as a principal with Monvest Securities, Inc., should be granted by the Department of Banking and Finance, Division of Securities (Department).
Findings Of Fact The petitioner was registered with the Department as an associated person pursuant to Chapter 517, as follows: DATE COMPANY 9/22/82 to 9/19/83 Blinder, Robinson & Co. 11/23/83 to 6/26/84 First Interwest Securities Co. 9/4/84 to 12/27/84 Wall Street West, Inc. 3/11/85 to 10/3/85 R. H. Stewart & Co., Inc. 9/25/85 to 12/3/85 Allied Capital Group, Inc. Petitioner has not been registered with the Department in any capacity since December 3, 1985. The Department uses the forms adopted and approved by the National Association of Securities Dealers (N.A.S.D.) and filed with the Central Registration Depository (C.R.D.). Customarily, the registration application, Form U-4, is filled out by the applicant and given to the Broker-Dealer with whom the applicant is to be licensed. The Broker-Dealer then completes the form with the information concerning that Broker-Dealer and sends the completed form to the C.R.D. After Form U-4 has been filed with the C.R.D., the information is transmitted to the Department. The Broker-Dealer is advised when the applicant has been approved, and the Broker-Dealer informs the applicant that he can begin selling securities. It generally takes between one and two weeks for an applicant to be approved. No license or other paper is transmitted to the applicant from the Department to inform the applicant of his registration. However, the applicant can telephone the Department and determine his status. When an individual leaves the employ of a Broker-Dealer, the Broker- Dealer is required to send a Form U-5 to the C.R.D. within 30 days of termination. The individual never receives a copy of this form from either the C.R.D. or the Department or knows when it has been sent or received. Again, the associated person relies on the Broker-Dealer to advise him of his status. There is a procedure whereby an individual registered with one Broker- Dealer can transfer to another Broker-Dealer. This procedure, known as T.A.T., allows the individual to sell securities for 30 days while his application for registration with the new Broker-Dealer is pending. However, this procedure applies only to individuals who transfer their affiliation. It does not apply to individuals who terminate their affiliation with one company and then apply for registration with another company. Petitioner's registration as an associated person with Allied Capital terminated on December 3, 1985, and petitioner was advised by Allied Capital of his termination around December 1, 1985. Petitioner was terminated by Allied Capital due to insufficient business. On or about December 16, 1985, petitioner traveled to New York and spoke with representatives of Monvest Securities, Inc. (Monvest), regarding his registration through that company to open a branch office in Apopka, Florida. The same day he filled out a portion of a Form U-4 and gave it to the company for them to complete and send on to the C.R.D. Monvest also agreed to prepare the necessary documents to register the branch office in Apopka. Generally, the Broker-Dealer submits the application for the branch office. The application was submitted by Monvest on January 8, 1986. According to the application, petitioner was to be employed with Monvest in their office at 116-C East 5th Street, Apopka, Florida. There is no branch office of Monvest registered with the Department at that address. Petitioner stated in the employment history section of the application that from September of 1984 through November of 1984 he was unemployed. However, from September 4, 1984, until December 27, 1984, petitioner was registered as an associated person with Wall Street West. Petitioner made this error because he merely copied the employment history section from the previous application submitted for registration with Allied Capital. However, there was not a satisfactory explanation given as to why Wall Street West was omitted from the employment history listed on the Allied Capital application. Petitioner also stated in his employment history that he worked for R. H. Stewart & Company as a branch manager from December 1984 until August 1984. Petitioner was actually registered with R. H. Stewart from March 11, 1985 until October 3, 1985. However, because of the way the registration and termination systems work, it is not surprising that an individual's employment dates might be somewhat different from the dates of his official registration. When petitioner filled out the application form and left it with Monvest, he though that the application would be routinely processed, as all his others had been, and that approval would be forthcoming. In the meantime, petitioner had been involved in another business venture known as Global 2000 along with two other individuals. The group retained a law firm in Miami versed in securities regulations which prepared a document called "Confidential Private Placement Memorandum, Global 2000, Inc., and Global 2000 Securities Company" and a "Supplement to Private Offering". Petitioner is a principal in Global 2000, Inc., and Global 2000 Securities Company (collectively known as the Global 2000 Group). The number of investors in the Global 2000 Group is limited to no more than thirty-five, and the total offering is less than $500,000.00. Petitioner testified that the offering was a "Regulation D" offering, and therefore formal registration was not required. At the time of the hearing, petitioner was unaware of any sale of Global 2000 Group stock. On January 1, 1986, the Global 2000 Group published a "Supplement to Private Offering Memorandum, Global 2000, Inc., and Global 2000 Securities Corporation." The supplement had been sent to the printers on or about December 1, 1986, but was dated January 1, 1986. The last page of this supplement contains a picture of Woerz and the following: Melvin W. Woerz President Global 2000 Securities Company (Age 55) Licensed General Securities Principal and Registered Representative with the Division of Securities, Department of Banking and Finance, State of Florida; Securities and Exchange Commission, Washington, D.C.; NASD (National Association of Securities Dealers . . . In the bottom right corner of this page was the following: Global 2000 Securities Company 116-C East Fifth Street Apopka, Florida 32708 1-800-782-7710 This supplement was sent to all individuals who received the Private Placement Memorandum for Global 2000, Inc., and ten or fifteen other individuals. The Private Placement Memorandum and supplement were mailed shortly after January 1, 1986. At the time the supplement was mailed, petitioner was not registered with the Department nor was Global 2000 Securities Company. On or about January 22, 1986, petitioner mailed to forty or fifty individuals copies of a three page publication entitled "Our Recommendations." This publication advocates the purchase of various over the counter securities. The bottom of page three of this publication reads as follows: WE ARE WAITING TO HEAR FROM YOU!!! TAKE CARE MEL WOERZ AND ART BESCH SECURITIES BROKERS 116-C East Fifth Street Apopka, Florida 32703 PHONE: (305) 886-2288 COLLECT (800) 782-7710 IN FLORIDA (800) 423-0219 OUTSIDE FLORIDA There was no Broker-Dealer registered with the Department by the name of Mel Woerz and Art Besch. When "Our Recommendations" was mailed, petitioner was not sure whether his application for registration with Monvest had been approved in Florida. However, since Monvest had notified petitioner of his approval in six states, but not Florida, petitioner should have known that his application had not yet been approved in Florida. "Our Recommendations" was sent to prior clients of petitioner and Art Besch. Both Besch and petitioner stated that the intent of the communication was merely to keep in touch with their customers while awaiting approval. Petitioner has not sold any securities since leaving Allied Capital. On the application filed with the Department, petitioner agreed "to abide by, comply with, and adhere to all the provisions, conditions, and covenants of the statutes . . . and rules and regulationns of the states. "
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that a final order be entered denying petitioner's application for registration pursuant to Section 517.161(1)(a), Florida Statutes, in that petitioner has violated Sections 517.12(1) and 517.311(2), Florida Statutes, and pursuant to Section 517.161(1)(b), Florida Statutes, in that petitioner's application contains a material false statement. It is also recommended that petitioner's application be denied because it designates as petitioner's place of employment a branch office that has not been registered. DONE and ORDERED this 15th day of October 1986 in Tallahassee, Florida. DIANE A. GRUBBS Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 FILED with the Clerk of the Division of Administrative Hearings this 15th day of October 1988. APPENDIX TO RECOMMENDED ORDER IN CASE No. 86-1785 Petitoner's Proposed Findings of Fact and Conclusions of Law 1 & 2. Accepted in Paragraph 3. Accepted in Paragraph 7. Accepted in Paragraph 3. Accepted in Paragraph 4. Accepted in Paragraph 3. Accepted in Paragraph 5. 8 & 9. Accepted that petitioner's employment history did not correlate with his registration in Paragraph 10. Remainder rejected as unnecessary. 10-12. Rejected as unnecessary. Accepted as stated in Paragraph 6. Accepted in Paragraph 1. Accepted, Paragraph 7. 16-18. Accepted in Paragraph 8. 19. Accepted in Paragraph 11. 20-22. Accepted generally in Paragraphs 12 and 13, last sentence and date of mailing rejected as not supported by competent evidence. Accepted generally in Paragraph 14. Accepted generally in Paragraph 17'. Accepted in Paragraph 15. Accepted in Paragraph 1. First sentence accepted in Paragraph 9, second sentence rejected for reason stated in Paragraph 9, last sentence rejected as irrelevant and not supported by credible evidence. Respondent's Proposed Findings of Fact and Conclusions of Law 1-3. Accepted in Paragraph 8, except date changed to January 8th because that is when Monvest signed application. Accepted in Paragraph 1. Accepted generally in Paragraph 13. 6 & 7. Accepted in Paragraph 1. 8. Accepted generally in Paragraphs 14 and 16. 9. Accepted in Paragraph 15. 10. Accepted in Paragraph 1. 11. Accepted in Paragraphs 9 and 10. 12. Accepted in Paragraph 1. 13. Accepted in Paragraph 3. 14. Accepted in Paragraph 5. 15. Accepted generally in Paragraphs 1 and 3. COPIES FURNISHED: Robert W. Kieffer, Esquire Post Office Box 2021 Orlando, Florida 32801 Robert K. Good, Esquire Office of the Comptroller 400 W. Robinson Street Suite 501 Orlando, Florida 32801 Honorable Gerald Lewis, Comptroller Department of Banking and Finance The Capitol Tallahassee, Florida 32301 Charles Stutts, Esquire General Counsel Department of Banking and Finance The Capitol Tallahassee, Florida 32301
