Findings Of Fact Respondent is and at all material times has been a licensed mortgage broker in the State of Florida. He holds license number HK0008557. In 1986, he was employed by Cityfed Mortgage Company. In July, 1986, Respondent met John and Audrey-Ann Marzano, husband and wife, at a party at the home of a mutual friend, Barbara Fieste. The Marzanos and Respondent agreed that he would pre-qualify them for a mortgage in order to determine the maximum amount of a mortgage loan that they could anticipate receiving. On or about October 22, 1986, the Marzanos signed a contract to purchase a home in a subdivision known as Coventry in the Melbourne area. The contract was prepared by Ms. Feiste, who was not a licensed real estate broker or salesman. Respondent, who was a licensed real estate broker or salesman at the time, reviewed the contract to determine its sufficiency from the point of view of a mortgage lender. No counterparts or copies of the contract remain in existence. Respondent was to deliver the signed contract offer to the seller or its attorney, but never did so. On October 22, 1986, the Marzanos delivered to Respondent a check drawn on their personal checking account in the amount of $2500 and payable to "EMBY Associates." "EMBY Associates" was a corporation that Respondent had recently formed or was about to form. This payment represented the Marzanos' earnest money deposit that was to accompany the contract offer. Respondent deposited the check in his personal checking account on October 23, 1987. He endorsed the check, "EMBY Assoc" and, beneath that, "MB Reed." After receiving the check from the Marzanos, Respondent or someone at his direction added to the payee line on the check, "or MB Reed." Respondent deposited the Marzanos' check into an account that he had opened about ten days earlier. Either Respondent or Ms. Feiste could sign checks drawn on the account. In fact, the account belonged to Respondent, who signed all of the checks drawn on it during the months of October and November, 1987. Ms. Feiste was on the account only in the event that Respondent died or became disabled. The Marzanos' bank honored the check and debited their account in the amount of $2500. Between the opening of the account and the day that Respondent deposited the Marzanos's check, he had written checks in the total amount of $2570.22 against total deposits during the same period of $937.04. All of the checks drawn on the account were for personal expenses of Respondent. The single largest check was in the amount of $2025 representing rent for Respondent's personal residence. The monthly statement dated November 3, 1986, shows that one of Respondent's checks was returned for insufficient funds one week after he deposited the Marzanos' check. The monthly statement dated December 3, 1986, shows that 19 of Respondent's checks were returned for insufficient funds between November 14 and December 3, 1986. The contract signed by the Marzanos was never signed by the seller. Notwithstanding the fact that Respondent stressed to the Marzanos the importance of acting quickly on the house due to its favorable price, he allowed them to submit a contract without a deadline for the time for acceptance. After making the offer, the Marzanos applied for a mortgage with Cityfed Mortgage Company through Respondent. Weeks passed with the Marzanos hearing nothing about their offer. Finally, they demanded that Respondent return to them their money. Respondent offered different explanations as to what had happened to their money, but declined to repay them the $2500 that they had entrusted to him. Repeated demands were unsuccessful and the Marzanos never received their money back. Respondent testified that he took $2500 in cash in a sealed envelope to the receptionist of the law firm that represented the seller. He testified that he neither asked for nor received a receipt and that that was the last that he saw of the money. An attorney representing the firm testified that the firm had never accepted a cash earnest money deposit. Respondent testified that the source of the cash was the repayment by a Mr. Hamel of the final installment of a note, of which Respondent had no copy. Respondent omitted mention of this critical fact in his lengthy answer to the Administrative Complaint or in any of his statements to investigators. Respondent's testimony that he delivered $2500 cash is implausible. In fact, he used the Marzanos' money for personal expenditures and never transferred cash representing their earnest money deposit to anyone.
The Issue The issue in this case is whether Respondent, David McQuay, Jr., committed the violations alleged in a four-count Amended Administrative Complaint issued by Petitioner, Department of Business and Professional Regulation, Board of Accountancy, on February 6, 2008, and, if so, what penalty should be imposed.
Findings Of Fact Petitioner, the Department of Business and Professional Regulation, Board of Accountancy (hereinafter referred to as the "Department"), is the state agency charged with the duty to regulate the practice of certified public accountants in Florida and to prosecute administrative complaints pursuant to Section 20.165, and Chapters 120, 455, and 473, Florida Statutes. At all times relevant to the allegations of the Complaint, Respondent David McQuay, Jr., has been licensed in Florida as a certified public accountant. Mr. McQuay's license number is R 1736, and his address of record is 110 North Lincoln Avenue, Tampa, Florida 33609-2908. Thomas Reilly, an expert in public accounting and auditing, reviewed an audit that Mr. McQuay performed for the Mid-Florida Center, a non-profit organization, for the financial year ending September 30, 2002. The audit was completed on July 18, 2003. Mr. Reilly prepared a report of his findings, dated September 5, 2005. He filed a subsequent report dated June 25, 2007, to include copies of various accounting standards and reference materials that were cited in the original report. In preparing his original report, Mr. Reilly met with Mr. McQuay and reviewed Mr. McQuay's complete set of working papers. Mr. Reilly testified that he billed the Department $3,444.00 for his services. No billing statements, invoices, or other documents were entered into evidence to support the amount of Mr. Reilly's fee. No expert testimony was offered to establish the reasonableness of the fee. As indicated in the Preliminary Statement above, Mr. Reilly identified four issues relating to the financial statements. First, Mr. Reilly found that the audit did not include certain statements that are required by government auditing standards. The "Yellow Book" contains the authoritative auditing standards issued by the federal Governmental Accountability Office ("GAO"). Amendment No. 2 to the auditing standards, adopted in July 1999, requires that certain language be included in the auditor's report on the financial statement. In particular, Section 5.16.1 of Amendment No. 2 provides: When auditors report separately (including separate reports bound in the same document) on compliance with laws and regulations and internal control over financial reporting, the report on the financial statements should also state that they are issuing those additional reports. The report on the financial statements should also state that the reports on compliance with laws and regulations and internal control over financial reporting are an integral part of a GAGAS [Generally Accepted Government Accounting Principles] audit, and, in considering the results of the audit, these reports should be read along with the auditor's report on the financial statements. Mr. McQuay's report on the financial statements did not contain a statement calling the reader's attention to the fact that a separate report on internal control and compliance is included elsewhere in the audit report. Mr. Reilly stated that the quoted language from the Yellow Book is mandatory, and that the GAO felt that the issue was important enough to call for the issuance of Amendment No. 2 to emphasize the revised mandate. In response, Mr. McQuay pointed to his reliance on a commercially produced practice guide that did not include the revised language of Amendment No. 2. While conceding the error, Mr. McQuay continued to contend that the practice guide's position was reasonable: that the statement is required only when the reports on compliance with laws and regulations and internal control over financial reporting are issued separately from the report on financial statements. In Mr. McQuay's case, the reports were issued under a single cover. Given that the express language of Amendment No. 2 references "separate reports bound in the same document," Mr. McQuay's response to the charge is insufficient. The Department has demonstrated that Mr. McQuay's audit report deviated from professional standards as to its failure to include the mandatory Yellow Book language. The deviation is ameliorated by the fact that all of the reports referenced in Amendment No. 2 were in fact contained in Mr. McQuay's audit report. There was no indication that Mr. McQuay's failure to include the mandatory statement was intended to mislead a reader of the audit report, or that his failure to comply with the strict language of Amendment No. 2 had any practical effect on the soundness of the audit report. The second allegation as to the financial statements is that necessary disclosures were missing in the notes to the financial statements. Mr. Reilly stated that the notes to the financial statements did not disclose the entity's capitalization policy for capital assets. The American Institute of Certified Public Accountants ("AICPA") Audit and Accounting Guide for Not-for-Profit Organizations requires disclosure of the entity's capitalization policy. Mr. Reilly testified that it is important for a reader of the audit to understand the dollar threshold at which the entity has decided to capitalize fixed assets, and that the professional standards require the disclosure in the audit report. In response, Mr. McQuay contended that the audit report did disclose the capitalization policy, citing to the following paragraph: Property donated to the Center is stated at its estimated fair market value. Depreciation expense is computed by use of the straight-line method of the estimated economic life of the respective assets. Maintenance and repairs are expensed as incurred. Extraordinary repairs that significantly extend the useful lives of the related assets are capitalized and depreciated over the assets' remaining economic useful life. This response is insufficient because the quoted language does not address the dollar threshold for capitalizing fixed assets, which is required under the standards for audits of nonprofit organizations. Mr. Reilly stated that the notes also failed to include a required statement as to lease commitments. Where the entity has operating leases that commit the entity for more than one year, professional standards require disclosure of the amount of the future commitments for each of the first five years subsequent to the date of the statement of financial position. Mr. McQuay's audit notes indicate that Mid-Florida Center had leases ranging as far as three years into the future, but do not disclose the amount of those lease commitments. Mr. McQuay responded that audit standards provide that immaterial items need not be disclosed, and that it was his professional judgment that the leases in question were not material. Mr. Reilly replied that the audit report gives the reader no basis for making an independent judgment as to the materiality of the leases. Mr. Reilly's view is more consistent with the specific standard regarding lease disclosure, though Mr. McQuay's exercise of independent professional judgment in this instance was not so unreasonable as to constitute a violation of professional standards. Mr. Reilly stated that the notes to the financial statements also omitted a statement of cash flows. However, Mr. McQuay's audit report properly identified this omission as a departure from generally accepted accounting principles ("GAAP"), rendering irrelevant any further discussion of the definition of cash equivalents. In summary, as to the second allegation, the evidence proved that Mr. McQuay violated the standards by failing to address the dollar threshold for capitalizing fixed assets, but did not prove any other violations of the disclosure requirements. The third allegation as to the financial statements was that the Statement of Activities and Statement of Functional Expenses should not contain captions of "Memorandum Only" for their "total" columns. Mr. Reilly contended that the "Memorandum Only" caption was inaccurate and misleading. Historically, the term "memorandum only" was used frequently on local government financial statements, where the auditor must give an opinion on different types of columns. Some of the columns were on a modified accrual basis and others on an accrual basis. Because these are two different bases of accounting, the "total" column was irrelevant. Mr. Reilly pointed out that the only time an auditor would use the "memorandum only" terminology as to a nonprofit organization's audit would be in presenting comparative financial statements, or where the prior year's audit included a summary total that was not in accordance with GAAP. In those situations, an auditor would use the "memorandum only" caption, as well as other disclosures, in the notice of the financial statements and the auditor's report. However, the Mid-Florida Center audit involved a single year's financial statement. Mr. Reilly opined that the total column on these financial statements was extremely significant, and that the "memorandum only" caption was extremely misleading. Mr. McQuay responded that the decision was made to use the "memorandum only" caption because this was the initial audit for Mid-Florida Center, and that the caption does not materially change any substantive aspect of the financial statement and is therefore not misleading. Mr. Reilly's position that the inclusion of the "memorandum only" caption was misleading and a violation of the standards cited in his report was correct, and Mr. McQuay's response was insufficient. The fourth allegation as to the financial statements was that donations of long-lived depreciable assets should not be reported as "Permanently Restricted Net Assets." Mr. Reilly conceded that this was a very complicated issue for which Mr. McQuay had "quite a bit of support." Mid-Florida Center purchased land and some equipment from the Highlands County School Board. The fair value of the property exceeded the price paid by Mid-Florida Center. Under GAAP, the difference between the price paid and the value would be recorded as a donated asset. The dollar amount recorded in the financial statement was $330,000, but there was no documentation showing how that number was arrived at, and no documentation showing the breakout between the land and the equipment. Mr. Reilly testified that when he looked at the fixed assets, he found a $280,000 item for land but could not be certain whether the item was part of this land or another piece of property referenced elsewhere in the notes. However, $330,000 was shown in a column called "permanently restricted." Mr. Reilly did not take issue with placing the land in that column. However, he thought that the equipment, i.e., the depreciable portion of that asset, should not be placed in the "permanently restricted" column. Mr. Reilly testified that an item such as an endowment fund is the only thing that should be placed in a "permanently restricted" column. Once an asset is placed in service and begins depreciating, it must be placed in the "unrestricted" column. In his response, Mr. McQuay referenced a reversionary clause in the purchase agreement, whereby if Mid-Florida Center gave up its 501(c)(3) nonprofit status, the property would revert to the School Board. Mr. Reilly testified that this is a standard clause in government contracts, and is not a reason to classify the item as permanently or temporarily restricted. While his report took issue with the placement of depreciable assets in the "permanently restricted" column, Mr. Reilly conceded that the relevant Statement of Financial Accounting Standards is not crystal clear and that he used non- authoritative practice guides to arrive at his conclusion. Mr. Reilly believed that it was misleading to label equipment in operation as "permanently restricted," but also conceded that the notes to the financial statement fully disclosed the issue. Mr. McQuay insisted that his audit did distinguish between the land and equipment in the fixed assets and depreciation schedules. While his treatment of the item was subject to dispute, Mr. McQuay cannot be found to have violated professional standards as to this issue. As indicated in the Preliminary Statement above, Mr. Reilly identified six issues relating to the working papers. The first allegation is that there was no evidence of a reporting and disclosure checklist for not-for-profit organizations. Mr. Reilly opined that it is common practice to include such a checklist, and that Mr. McQuay should have used one on this audit because nonprofits have unique disclosure requirements and Mid-Florida Center was the only nonprofit organization that Mr. McQuay was auditing at the time. Mr. Reilly noted that failure to use a checklist does not violate a particular auditing standard, but could be held to violate the more general professional standard of due care. Mr. Reilly believed that due professional care mandates that a CPA use a checklist when auditing a nonprofit organization, and that a CPA "would be a fool" not to use one. A typical checklist is 70 pages long, and an accountant needs the list to jog his memory as to the many unique requirements of nonprofits. Mr. Reilly thought that Mr. McQuay might have avoided some of the cited deficiencies if he had used a checklist. Mr. McQuay responded that professional standards do not require the use of a checklist. Moreover, he asserted that his auditing software contains the functional equivalent of a disclosure checklist. While conceding that this was the only nonprofit he audited during the year in question, Mr. McQuay testified that he has been auditing nonprofit organizations for over 36 years and that his previous firm conducted 35 to 40 such audits annually. A checklist would be of no assistance out in the field, where the auditor is examining the client's working papers. Mr. McQuay stated that he does use a checklist when he is reviewing the work of a staff auditor, but that he did not need a checklist here because he was performing the audit himself. Even after hearing Mr. McQuay's response, Mr. Reilly continued to hold that it was foolish not to complete a disclosure checklist. The fact that Mr. McQuay was the only person working on the audit provided all the more reason for the use of a checklist. Accepting Mr. McQuay's testimony that his auditing software contained the equivalent of a checklist, it is found that his failure to use a paper checklist was not a violation of auditing standards or of due professional care. The second allegation relating to the working papers was a lack of audit evidence for fraud risk factors or planning materiality. Statement on Auditing Standards No. 82 states that the auditor "should specifically assess the risk of material misstatement of the financial statements due to fraud and should consider that assessment in designing the audit procedures to be performed." The auditor should consider fraud risk factors relating to misstatements arising from fraudulent financial reporting and from misappropriation of assets. Statement on Auditing Standards No. 47 provides that the auditor should consider audit risk and materiality in planning the audit and designing auditing procedures and in evaluating whether the financial statements "taken as a whole are presented fairly, in all material respects, in conformity with generally accepted accounting principles." Mr. Reilly found nothing in Mr. McQuay's working papers documenting that an assessment in conformance with Statement on Auditing Standards No. 82 was made, or that an audit risk and materiality assessment was made in accordance with Statement on Auditing Standards No. 47. Mr. McQuay responded that a separate section in his work papers dealt with fraud risk factors and materiality. He testified that his firm is careful in selecting clients and looks carefully at management capabilities and the risks involved in the representation. Mr. Reilly reviewed Mr. McQuay's response and concluded that it did not come close to meeting professional standards. As to this issue, it is found that Mr. McQuay did violate professional standards as to documentation, though he may well have performed the assessments in question. The third allegation relating to the working papers was that the management representation letter omitted the specific representations relative to the single audit and the referenced schedule of uncorrected misstatements in the management representation letter. The "single audit" is an Office of Management and Budget ("OMB") A-133 audit of an entity that has received $500,000 or more of Federal assistance for its operations. Mr. Reilly found the omissions in the management representation letter constituted a violation of professional standards. Mr. Reilly testified that the standards require that on every audit, the auditor obtain a management representation letter signed by the appropriate levels of management. Statement on Auditing Standards No. 85 contains the basic requirements for management representations. Mr. McQuay obtained a management representation letter from Mid-Florida Center in compliance with this basic requirement. However, because this was a single audit, additional representations were required in the management representation letter over and above those found in a generic audit. AICPA's Statement of Position 98-3, "Audits of States, Local Governments, and Not-for-Profit Organizations Receiving Federal Awards," paragraph 6.68 requires the auditor conducting an OMB A-133 audit to obtain written representations from management about matters related to federal awards. Paragraph 6.69 of the same document lists 22 items for which the auditor should consider obtaining written representations in a single audit. Mr. Reilly testified that most of these items were applicable in this case, but that none of them were included in the Mid-Florida Center's management representation letter. In response, Mr. McQuay pointed to his engagement letter with the client. The engagement letter states that this would be an OMB A-133 audit, and that Mr. McQuay has explained to the client and the client has understood that management is responsible for compliance with the OMB A-133 audit requirements. Mr. McQuay did not think he needed to include the detailed representations of paragraph 6.69 when he already had an extensive engagement letter that covered these areas of management responsibility. Mr. Reilly replied that the engagement letter and the management representation letter are two entirely different things. The engagement letter spells out the scope of representation to the client at the outset of the engagement; completely different standards require the auditor to obtain written representations from management regarding elements spelled out in the standards, at the conclusion of the engagement. The engagement letter is irrelevant for purposes of the single audit's requirement that representations be obtained from management about matters related to federal awards. None of the specific statements referenced by Mr. McQuay in his engagement letter dealt with the specifics of federal awards. As to this issue, it is found that Mr. McQuay violated professional standards. The fourth allegation relating to the working papers was that no documentation was evident regarding a consideration of a going concern with the entity's financial position. Mr. Reilly testified that it was apparent from a glance at the financial statements that the entity had severe financial problems. It had an adverse current ratio, with assets of $33,000 and liabilities of $138,000, not considering the issue of liability for back pay owed to the executive director. Under Statement on Auditing Standards No. 59, an auditor has the responsibility to evaluate and document any causes for doubt about the continuing viability of the entity, and further to evaluate and document management's plans to turn around the entity. Mr. Reilly saw nothing that came close to meeting this standard. The only items of substance he found were a statement that the Mid-Florida Center was creating a new charter school and that fundraising activities were "ongoing." There were no specifics as to the charter school or the fundraising. Mr. Reilly found these statements "grossly inadequate" to comply with professional standards. Statement on Auditing Standards No. 59 includes specific items that an auditor should evaluate, such as management's specific plans to curb expenditures and increase revenue. Mr. McQuay supplied a document titled "Going Concern Evaluation," but the document provided no specifics as to the evaluation that was performed. Mr. McQuay responded that any startup organization such as the Mid-Florida Center will have poor current ratios. However, the entity had the management wherewithal to raise money and a committed, competent board of directors. The proposed charter school had already received funding for building renovation for the 2003-2004 school year. Mr. McQuay believed that his field work and evaluation of the management plans was sufficient to satisfy the standard. As to this issue, it is found that Mr. McQuay violated professional standards, at least insofar as he failed adequately to document his consideration of a going concern with the entity's financial position in accordance with Statement on Auditing Standards No. 59. The fifth allegation relating to the working papers was that the management representation letter addressed the $158,429 liability owed to the executive director, which was reversed off the books, but failed to justify the removal of the liability from the financial statements by specifically finalizing the matter. Mr. Reilly explained that, as of the balance sheet date, Mid-Florida Center owed several years' salary to its executive director, Dr. Arthur Cox, a significant liability that would make Mid-Florida's poor current ratio even worse. Mid-Florida removed the liability for Dr. Cox' salary from its books. Mr. Reilly did not have a problem with removing the salary, in the amount of $158,429 from the books, provided Mid-Florida had secured a separate, standalone confirmation from Dr. Cox that he was totally relinquishing any rights to those funds. However, the relinquishment issue was addressed in a management representation letter by way of what Mr. Reilly termed "squirrely wording." Rather than completely extinguish any rights Mr. Cox had to the salary, the Mid-Florida Center's board voted to change the liability from deferred compensation to amounts owed for future salary increases. Essentially, the board took the liability off the books at the present time, but left open the possibility of reinstating it when Mid-Florida Center's finances permitted it to pay Dr. Cox the amount he was owed. Mr. McQuay responded that the Form 990 for the year in question had been completed by another CPA and filed prior to his retention. Form 990 is the tax return for organizations exempt from income tax. The working trial balance prepared by the other CPA indicated that the liability for the back pay had been removed, and the Form 990 had been filed with the Internal Revenue Service without including the liability. In reconciling the Form 990 with the working trial balance for purposes of his audit, Mr. McQuay obtained the management representation letter referenced by Mr. Reilly. Mr. McQuay testified that he viewed the letter as firming up the matter that the previous CPA had dropped in his lap. Selvin McGahee, a member of the Mid-Florida Center's board of directors, testified that Dr. Cox founded the Mid- Florida Center, writing the initial grants that got the entity started. Dr. Cox' focus on providing services led him to forego some of the salary that was budgeted for his position, in order to spend the funds on other positions. Mr. McGahee testified that this situation persisted for a couple of years, with Dr. Cox supplementing the organization's revenues by not paying himself. The board ultimately decided to remove the back pay from its books, but had the intention of paying Dr. Cox his back salary if and when the organization generated sufficient unrestricted revenue to do so. As to this issue, it is found that that Mr. McQuay violated professional standards and departed from generally accepted accounting principles. Removing the liability for back salary payments to the executive director should have been accompanied by an unequivocal renunciation of those funds by the executive director. As matters were allowed to stand by Mr. McQuay, Mid-Florida Center's balance sheet was significantly improved in a manner that did not finalize the issue of the possible reinstatement of the back pay liability in the future. The sixth allegation as to the working papers was that, relative to compliance testing, the working papers contained evidence of testing only one monthly invoice/progress report. Mr. Reilly testified that the problem here was a lack of documentation. Though the auditor's judgment is paramount as to compliance testing, there are stated requirements that the auditor must meet. Because this was a single audit, OMB Circular A-133 Compliance Supplement was used. This Circular lists fourteen specific items of testing, each of which should be addressed by the auditor at least to the point of indicating that the auditor has determined the item to be inapplicable to the audit at hand. Mr. Reilly testified that one of the specific issues he was called to investigate involved the lack of documentation regarding a grant that the Mid-Florida Center had obtained from the City of Bartow. The grant required the submission of a monthly invoice/progress report. Mr. Reilly could find evidence that Mr. McQuay had tested only one such invoice. Mr. Reilly conceded that it was "tough to say" what professional judgment demanded in this situation because he was not there when the audit was conducted. Mr. Reilly stated that he would probably have tested more than one invoice, but he could not say how many. The usual practice is to expand the testing if a problem is found with the first invoice. Mr. McQuay found no problems with the one invoice and progress report that he tested, and made the judgment that his examination was adequate. Mr. Reilly believed that, based on the overall scope of problems with Mid- Florida Center's documentation, Mr. Reilly concluded that the entity's invoices and progress reports were "lightly tested." As to this issue, it is found that Mr. McQuay did not violate professional standards or generally accepted accounting principles. Mr. Reilly testified that he might have conducted the compliance testing more strenuously than did Mr. McQuay, but he could not state that Mr. McQuay's actions were outside the boundaries of his professional judgment. Petitioner offered the testimony of Allan Nast, an expert in accounting and auditing. Mr. Nast reviewed the audit performed by Mr. McQuay, and also reviewed the reports prepared by Mr. Reilly. Mr. Nast agreed with Mr. Reilly's opinions in every particular. Mr. Nast's opinion has been considered and is respected by the undersigned, but does not change the findings of fact made above. Mr. Nast testified that he billed Department $1,365.00 for his services. No billing statements, invoices, or other documents were entered into evidence to support the amount of Mr. Nast's fee. No expert testimony was offered to establish the reasonableness of the fee. Mr. McQuay testified that he believes he has been singled out for disciplinary action based on business reasons. Mr. McQuay pointed out that the initial complaint in this matter was filed by a competitor who was also the father of an accountant whose firm Mr. McQuay had rejected for work in his role as director of quality assurance for WorkNet Pinellas, Inc. Mr. McQuay, an African-American, also testified as to incidents of racism as he pursued his career in a profession dominated by white men. The undersigned has considered this testimony by Mr. McQuay, but cannot find that these matters had any bearing on the merits of the allegations lodged by the Department in the Complaint after its thorough investigation of the initial complaint. In summary, as to the four allegations regarding the financial statements recited in the Preliminary Statement above, it was found that the first allegation as to missing statements in the audit was proven, though ameliorated by the fact that all of the reports referenced by the missing statements were included in the audit report. As to the second allegation as to missing disclosures, it was found that Mr. McQuay violated professional standards as to only one of several of the alleged omissions. As to the third allegation regarding the "Memorandum Only" statement in the "total" columns, it was found that Mr. McQuay violated the relevant standards. As to the fourth allegation regarding the categorization of long-lived depreciable assets, it was found that Mr. McQuay did not violate professional standards. There were six allegations regarding the working papers recited in the Preliminary Statement above. As to the first allegation regarding the disclosure checklist, it was found that Mr. McQuay did not violate auditing standards or the duty of professional care. As to the second allegation regarding lack of evidence for fraud risk factors or planning materiality, it was found that Mr. McQuay violated professional standards as to documenting his work, though he may have performed the assessments in question. As to the third allegation regarding omissions in the management representation letter, it was found that Mr. McQuay violated professional standards. As to the fourth allegation regarding going concern considerations, it was found that Mr. McQuay violated professional standards. As to the fifth allegation regarding removal of liabilities owed to the executive director, it was found that Mr. McQuay violated professional standards. As to the sixth allegation regarding the sufficiency of compliance testing, it was found that Mr. McQuay did not violate professional standards.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that A final order be entered finding that David McQuay, Jr. committed the violations alleged in Counts One, Two, and Four of the Amended Administrative Complaint and requiring Mr. McQuay to take sixteen hours of Continuing Professional Education beyond the regular requirement, including eight hours related to nonprofit organizations, and placing Mr. McQuay on probation for a period of two years. During the first year of probation, all audits (including financial statements and working papers) will be reviewed by a consultant selected by the Board, at Mr. McQuay's expense. If any audit is deemed deficient upon review by the Board, review of all audits will continue through the second year of Mr. McQuay's probation. DONE AND ENTERED this 27th day of October, 2008, 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 27th day of October, 2008. COPIES FURNISHED: Eric R. Hurst, Esquire Department of Business and Professional Regulation 1940 North Monroe Street Tallahassee, Florida 32399-2202 David McQuay, Jr. 110 North Lincoln Avenue Tampa, Florida 33609-2908 Veloria A. Kelly, Director Department of Business and Professional Regulations, Board of Accountancy 240 NW 76th Drive, Suite A Gainesville, Florida 32607 Ned Luczynski, General Counsel Department of Business and Professional Regulations Northwood Centre 1940 North Monroe Street Tallahassee, Florida 32399-0793
Findings Of Fact Edward J. Tooze holds certificate number R-0434 as a certified public accountant in the State of Florida. Tooze's certificate is currently under suspension pursuant to order of the State Board of Accountancy entered under to authority of Section 473.111(5), Florida Statutes. Tooze, although under suspension, is subject to the authority of the Florida State Board of Accountancy for violations of Chapter 473 and the rules contained in Chapter 21A, Florida Administrative Code. Tooze undertook to provide an audited and an unaudited financial statement for Gull-Aire Corporation on September 30, 1976. Said audited and unaudited financial statements were received into evidence as Composite Exhibit #1. Financial statements are representations made by management, and the fairness of a representation of unaudited statements is solely the responsibility of management. See Section 516.01 of Statements on Auditing Standards, No. 1, (hereinafter referred to as SAS) The auditor's report dated October 4, 1976, prepared by Tooze, states as follows: In accordance with your instructions, we submit herewith the balance sheet of Gull-Aire Corporation as of September 30, 1976. This statement was prepared without audit, and accordingly we do not express an opinion thereon. Each page of the unaudited statement bears the language, "Prepared without audit from books of account and information provided by management." Paragraph 516.04 of SAS provides an example of a disclaimer of opinion as follows: The accompanying balance of x company as of December 31, l9XX, and the related statements of income and retained earnings and changes in financial position for the year then ended were not audited by us and accordingly we do not express an opinion on them. (Signature and date) The form of the disclaimer used by Tooze in the financial statement of Gull-Aire quoted in Paragraph 6 is not identical to the example given in Section 516.04, SAS, No. 1. However, Tooze's statement does reflect that the financial statement was not audited and that Tooze did not express any opinion on it. The notes to the audited financial statement of Gull-Aire Corporation do not include a summary of significant accounting policies used by Tooze in the preparation of the financial statement. While only a balance sheet is shown in both of the Gull-Aire financial statements, retained earnings were reported which were the result of the sale of a parcel of real property. No notes were made on either of the reports explaining this sale, and its treatment, although this was a major business transaction and source of income to the corporation for the period covered. Tooze did not disclose the treatment of income taxes in both the financial statements of Gull-Aire, particularly the tax treatment of the retained earnings in the amount of $45,499.64 from the sale of the real property. Although Tooze issued two financial statements for Gull-Aire Corporation as of September 30, 1976, one audited and one unaudited, he did not state on the second financial statement the reason for its preparation and explain the accounting decisions which resulted in the change of various entries on the second statement. Tooze stated to the Board's investigator that he did not obtain a representation letter from the management of Gull-Aire Corporation. Tooze further stated that he did not prepare a written audit program nor obtain and report what internal controls existed within Gull-Aire Corporation. Tooze also prepared a financial report dated April 30, 1977, for Jack Carlson Company, Inc., which was received into evidence as Exhibit 2. The disclaimer prepared by Tooze in the Jack Carlson financial statement contained in the letter to the Board of Directors of the company dated September 15, 1977, stated as follows: We submit herewith our report on the examination of the books and records of Jack Carlson Company, Inc., for the fiscal year ended April 30, 1977, and the following exhibits: (delete) The terms of our engagement did not include those standard auditing procedures instant to the rendition of an opinion by an independent Certified Public Accountant. The limited scope of our examination precludes our expression of an opinion as to the fairness of the over-all representations herein. The attached statements were made the basis for the preparation of the U.S. Corporation Income Tax Return for the fiscal year ended April 30, 1977. Essentially the same statement is contained in the statements for Albeni Corporation and Georgetown Mobile Manor, Inc. No statement of changes in financial position was contained in the financial statement prepared for Jack Carlson Company, Inc. Section 516.08, SAS, No. 1 provides in pertinent part as follows: When financial statement's are issued proporting to present fairly financial position, changes in financial position, the results of operations in accordance with generally accepted accounting procedures, a description of all significant accounting policies of the reporting entity should be reported as an integral part of the financial statement. (Emphasis supplied) Tooze prepared financial statements for Albeni Corporation which were received as Exhibit #3, and financial statements for Georgetown Mobile Manor, Inc., which were received as Exhibit #4. The financial statements of Carlson, Georgetown and Albeni were all unaudited. Tooze did not provide an explanation or note to the financial statements describing significant accounting policies which he applied in preparing the statements. In the financial statement of Albeni Corporation, Tooze indicated that "these interim financial statements are intended primarily for internal management use." The fixed assets in the financial statement of Georgetown Mobile Manor, Inc., constitute $301,642 out of $345,000 of the company's assets. Depreciation and accumulated depreciation are reported as $103,641. The method of computing depreciation was not indicated on the financial statement. In the unaudited financial statements prepared for Carlson and Albeni, the basis of stating inventories and the methods used to determine inventory costs were not disclosed, although inventories constitute a significant percentage of both companys' assets.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law the Bearing Officer recommends that the Board of Accountancy take no action on the violation of Rule 21A-4.02, Florida Administrative Code, and Section 473.251, Florida Statutes. DONE and ORDERED this 3rd day of April, 1979, in Tallahassee, Leon County, Florida. STEPHEN F. DEAN Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 COPIES FURNISHED: Douglas M. Thompson, Jr. Executive Director State Board of Accountancy Post Office Box 13475 Gainesville, Florida 32604 Samuel Hankin, Esquire Post Office Box 1090 Gainesville, Florida 32602 Mr. Edward J. Tooze 464 Patricia Avenue Dunedin, Florida 33528
The Issue The issue for determination is whether Respondent committed the offenses set forth in the Notice to Show Cause, filed on September 14, 2010, and, if so, what action should be taken.
Findings Of Fact The Department is the state agency charged with regulating condominiums, including condominium associations, pursuant to chapter 718, Florida Statutes. At all times material hereto, Whitehall was a condominium association operating in the State of Florida. At all times material hereto, Whitehall was responsible for managing and operating Whitehall Condominium in West Palm Beach, Florida. Pertinent to the case at hand, regarding a condominium's year-end financial statement, section 718.111, Florida Statutes, provides in pertinent part: (13) Financial reporting. --Within 90 days after the end of the fiscal year, or annually on a date provided in the bylaws, the association shall prepare and complete, or contract for the preparation and completion of, a financial report for the preceding fiscal year. Within 21 days after the final financial report is completed by the association or received from the third party, but not later than 120 days after the end of the fiscal year or other date as provided in the bylaws, the association shall mail to each unit owner at the address last furnished to the association by the unit owner, or hand deliver to each unit owner, a copy of the financial report or a notice that a copy of the financial report will be mailed or hand delivered to the unit owner, without charge, upon receipt of a written request from the unit owner. The division shall adopt rules setting forth uniform accounting principles and standards to be used by all associations and addressing the financial reporting requirements for multicondominium associations. The rules must include, but not be limited to, standards for presenting a summary of association reserves, including a good faith estimate disclosing the annual amount of reserve funds that would be necessary for the association to fully fund reserves for each reserve item based on the straight-line accounting method. This disclosure is not applicable to reserves funded via the pooling method. In adopting such rules, the division shall consider the number of members and annual revenues of an association. Financial reports shall be prepared as follows: (a) An association that meets the criteria of this paragraph shall prepare a complete set of financial statements in accordance with generally accepted accounting principles. The financial statements must be based upon the association's total annual revenues, as follows: * * * An association with total annual revenues of $ 400,000 or more shall prepare audited financial statements. (emphasis added). Whitehall's annual revenue is in excess of $400,000.00. Therefore, Whitehall is required to produce audited year-end financial statements. Whitehall's fiscal year coincided with the calendar year. As a result, Whitehall's 2009 year-end financial statement was due on or before May 1, 2010. On December 11, 2009, Whitehall engaged Hafer Company, LLC (Hafer), a Certified Public Accountant (CPA) firm, to produce its audited 2009 year-end financial statement. Whitehall must rely upon a third-party vendor, such as Hafer, to produce its audited financial statement. Hafer assigned Nicole Johnson as the auditor to produce Whitehall's audited 2009 annual financial statement.4/ Ms. Johnson's process involved, among other things, preparing a draft audit; providing a draft audit to the condominium board, which reviews the draft audit with Ms. Johnson; and then preparing the final audit. Whitehall's engaging Hafer in December 2009 did not contribute to any delay in producing Whitehall's audited financial statement. Ms. Johnson wanted to begin the auditing process early and made a request to Whitehall to begin on or about January 6, 2010, but Whitehall was not prepared to go forward at that time. She was not concerned with beginning at a later date because, among other things, her suggested date was an early date for beginning the auditing process. Whitehall's day-to-day bookkeeping and accounting was performed by a third-party vendor, The Accounting Department, Inc. (Accounting). On February 3, 2010, Ms. Johnson met with Accounting's representative who was handling the day-to-day bookkeeping and accounting. Having the meeting occur in February 2010 was not late or abnormal in the ordinary course of preparing an audited year-end financial statement for a condominium; and did not contribute to any delay in Ms. Johnson's producing Whitehall's audited 2009 year-end financial statement. On February 3, 2010, Ms. Johnson began her field-work and received the primary bulk of the accounting information necessary to complete the audit. From February 3, 2010, Ms. Johnson maintained communication, whether by telephone, email, or other methods of communicating, with Whitehall's directors and officers, and its property manager, Michael Weadock, who is a licensed Community Association Manager (CAM). Ms. Johnson's communications included requesting additional information, asking questions, and obtaining clarifications regarding items for the audited year-end financial statement. One of the items needed by Ms. Johnson to complete the audited year-end financial statement was independent verification from Whitehall's banks regarding Whitehall's certificates of deposit (CDs). Ms. Johnson, as the auditor, was responsible for obtaining the independent verification of the CDs from Whitehall's banks. Due to the economic crisis, which occurred in 2009, banks nationwide were taking an unusual amount of time to respond to auditors' requests associated with the independent verification of bank account information. The banks from which Ms. Johnson was requesting independent verification were no different. She did not receive independent verification of Whitehall's CDs until after the May 1, 2010, due date for Whitehall's audited 2009 financial statement. Whitehall could do nothing to expedite the banks' response to Ms. Johnson's requests. Additionally, on May 28, 2010, Ms. Johnson sent an email to Mr. Weadock requesting additional items that were outstanding. The requested items were non-bank items and were not items that would delay the completion of a draft audit, but were required for the final audit. The next business day, Whitehall provided the requested items. Whitehall had control over these non-bank items, which delayed completion of the final audit. Subsequently, Ms. Johnson received the independent verification of Whitehall's CDs from the banks. On June 23, 2010, Ms. Johnson completed Whitehall's audited 2009 Financial Statement and forwarded a copy to the Department. Even though the final audit was not completed until June 23, 2010, on or about June 10, 2010, Whitehall posted on its bulletin board a notice indicating that copies of the audited 2009 Financial Statement were available in its office. However, subsequently, another notice was posted on the bulletin board indicating, among other things, that copies of the audited 2009 Financial Statement would be available at the Board of Directors Meeting on July 1, 2010, in order to provide for the completion of the audited year-end financial statement. Whitehall does not dispute that neither notice complies with the manner/method of delivery requirement in section 718.111(13). Additionally, Whitehall provided notice to its unit owners as to the availability of the audited 2009 Financial Statement through its community television channel, website, and email blast. This same manner/method of sending the notices to unit owners was used in the past by Whitehall. Whitehall does not dispute that this manner/method of providing notice does not comply with the manner/method of delivery requirement in section 718.111(13). At the time of hearing, Whitehall had not provided its unit owners with a copy of the audited 2009 Financial Statement by mail or hand-delivery. Whitehall has prior disciplinary history regarding its failure timely to prepare and provide its audited year-end financial statements in prior years. On April 1, 2010, Whitehall and the Department entered a Consent Order resolving several statutory violations. One of the violations in the Consent Order was Whitehall's failure timely to prepare and provide its 2005, 2006, 2007, and 2008 audited year-end financial statements. As to this violation, the Consent Order concluded that Whitehall failed timely to prepare and provide the audited year-end financial statements for the four consecutive years. The Consent Order did not include a violation of the manner/method of delivery of notices regarding the year-end financial statements for the four consecutive years. Subsequent to the Consent Order, the Department received a complaint from a one of Whitehall's unit owners regarding Whitehall's failure timely to provide a copy of the 2009 audited year-end financial statement. The Department's usual practice is that, if a repeat violation occurs within a two-year period, administrative action is taken resulting in a consent order or notice to show cause. Considering the recent Consent Order, the Department followed its usual practice and appropriately pursued the complaint. On September 14, 2010, the Department filed a Notice to Show Cause against Whitehall, which is the subject matter of the instant case. Even though the unit owner's complaint did not include the manner/method in which notice was provided, the evidence fails to demonstrate that the Department was restricted to investigate only that which was complained of. The evidence fails to demonstrate that the Department's investigation of a violation of section 718.111(13) by Whitehall was improper. Further, the evidence fails to demonstrate that the Department's enforcement of the requirements of section 718.111(13) was selective enforcement against Whitehall. The evidence demonstrates that the Department participated in this proceeding primarily due to Whitehall having previously, within a short period of time, violated section 718.111(13) regarding Whitehall's failure timely to provide its unit owners a copy of audited year-end financial statements. Additionally, the evidence fails to demonstrate that either the Department or Whitehall needlessly increased the cost of litigation in the instant case.5/ Consequently, the evidence fails to demonstrate that the Department participated in this proceeding for an improper purpose as defined by section 120.595(1)(e)1.6/
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 Florida Condominiums, Timeshares, and Mobile Homes, enter a final order: Finding that Whitehall Condominiums of the Villages of Palm Beach Lakes Association, Inc., violated section 718.111(13), Florida Statutes, by failing to deliver, in the manner authorized by statute, a copy of its audited 2009 year- end financial statement to all of its unit owners no later than 120 days after the end of the fiscal year, and by failing to make audited 2009 year-end financial statement available in the manner authorized by statute, when it became available; and Imposing a fine in the amount of $5,000.00. DONE AND ENTERED this 21st day of May, 2013, in Tallahassee, Leon County, Florida. S ERROL H. POWELL 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 21st day of May, 2013.
The Issue Whether Gary Savage committed the statutory violations alleged in the Amended Administrative Complaint and, if so, what penalty is authorized for such violations.
Findings Of Fact The Parties and Principle Allegations The Department is the state agency charged with the licensing of insurance agents in Florida, pursuant to authority granted in chapter 626, parts I and IX, Florida Statutes, and Florida Administrative Code Chapter 69B-231. Mr. Savage is a 75-year-old registered investment advisor and financial planner who also is licensed to sell life insurance in Florida. The Department’s Complaint seeks to revoke Mr. Savage’s license as an insurance agent. Counts I through III and V through VIII concern eight clients, whereby Mr. Savage earned commissions for selling them annuities and, based on agreements they signed, charged them annual one-percent financial planning service fees tied to the value of their portfolios, including the annuities. Each of these counts alleged the following statutory violations: Engaging in unfair insurance trade practices for knowingly collecting an excessive premium or charge. § 626.9541(1)(o)2., Fla. Stat.; Demonstrating a lack of fitness or trustworthiness to conduct insurance business. § 626.611(1)(g), Fla. Stat.; Demonstrating a lack of reasonably adequate knowledge and technical competence to engage in insurance transactions. § 626.611(1)(h), Fla. Stat.; Engaging in fraudulent or dishonest insurance practices. § 626.611(1)(i), Fla. Stat.; and Misappropriating, converting, or unlawfully withholding moneys belonging to others in conducting insurance transactions. § 626.611(1)(j), Fla. Stat. Count IX charged Mr. Savage with two violations concerning adverse administrative action taken by the Financial Industry Regulatory Authority (“FINRA”) against his securities license: Failing to timely report final administrative action taken by FINRA against his securities license. § 626.536, Fla. Stat.; and Being suspended and fined for violating FINRA’s rules. § 626.621(12), Fla. Stat. At the time of the hearing, Mr. Savage was not working in the financial services industry because FINRA suspended him for several months. During his suspension, Mr. Savage continued to meet with his insurance clients, though he currently has no appointments with life insurers to sell their products. Wearing Two Hats - An Investment Advisor and Insurance Agent Mr. Savage has worked in the investment industry for over 50 years, initially focusing on securities but evolving into financial advising and estate planning work. He has taken numerous courses and examinations relevant to securities law, financial planning, and tax law. Mr. Savage owns two investment advisor businesses: Wall Street Strategies, Inc. (“Wall Street”), is a stock brokerage firm that handles securities transactions; and Advanced Strategies, Inc. (“Advanced Strategies”), is a registered investment advisor firm, offering clients financial planning, tax management, and estate planning advice. In order to provide a wide variety of products to his financial planning clients, Mr. Savage also is licensed as a nonresident agent in Florida to sell life insurance, including annuities.2/ Annuities provide a guaranteed income stream over a term of years, but also come with substantial penalties if they are surrendered or cancelled before the term expires. Fixed index annuities, like those Mr. Savage sold to the clients at issue here, offer portfolios of funds tracking stock market indexes. Owners choose from around six portfolios and can then reallocate by choosing different portfolios each year. Mr. Savage considers himself an investment advisor who is licensed to sell insurance, which is what he tells new clients. Indeed, his businesses are securities and investment advisor firms, not insurance agencies. Mr. Savage’s client base is diverse. Many have portfolios with annuities and other investment products. Some have portfolios with no annuities. Others have portfolios with only annuities, like most of the clients at issue. In order to procure new clients, Mr. Savage held financial planning seminars where diverse speakers discussed financial and estate planning, and tax management. Mr. Savage discussed the types of insurance products he preferred, including fixed index annuities. Other speakers discussed real estate, oil, and investment trusts, which were beneficial from a tax perspective. Most of the clients at issue attended such a seminar and later met with Mr. Savage to discuss their financial plans. When Mr. Savage first met with the clients at issue, he asked them to bring tax returns, investment statements, wills and/or trusts, and other documents relevant for a financial planning discussion. They completed a new client form with information about their assets, investments, and objectives. He often met several times with new clients to develop a plan for them to reach their financial, estate, and tax management goals. To provide financial planning services, Mr. Savage—— like most investment advisors——charged an annual one-percent fee based on the total value of the portfolio. He has reduced or waived his fee if the clients’ situation warranted it or if they continued to purchase products for which he received commissions to compensate him for providing financial planning services. Before that are charged an annual fee, Mr. Savage’s clients signed a “Service Fee Agreement” (“Fee Agreement”), which was on “Advanced Strategies, Inc., Registered Investment Advisor” letterhead and provided as follows: Advanced Strategies charges a 1% (one percent) financial planning retention fee annually. This fee is based upon the total combined value of accounts including annuities, indexed life, mutual funds, income products and brokerage accounts that we manage or provide service for. This amount is tax deductible as a professional fee. The Fee Agreement offered to provide several financial planning services3/: Address, ownership, and beneficiary changes; Duplicate statements and tax returns; Required minimum distribution and withdrawal requests, and deposits; General account questions; One printed analysis per year; Annual review; Asset rebalancing when applicable; Informing client of new tax laws, changes in estate planning, and new exciting products and concepts. The Fee Agreement noted that the non-refundable fee was due on the service anniversary date and that non-payment would result in discontinuation of the planning services until paid in full. Mr. Savage confirmed that the Fee Agreement was voluntary. If clients wanted to purchase a product, but did not want him to manage their portfolio or provide the outlined services, they did not have to sign the agreement. In that event, Mr. Savage would procure the product and not provide financial planning services. All of the clients at issue here purchased annuities from Mr. Savage. He helped them complete the applications with the insurance companies and, if necessary, assisted them with transferring or closing out other investments used to pay the premiums. He ensured that the insurers received the paperwork and the premiums. Once the annuities were procured, he received commissions from the insurers. The Complaint did not allege that he acted unlawfully in recommending annuities to the clients or receiving commissions from the insurers. All of the clients at issue also signed the Fee Agreement and Mr. Savage provided them with services every year.4/ Some of the services were things an insurance agent technically could handle, such as answering client calls, making address and beneficiary changes, providing duplicate statements, assisting with the paperwork for required minimum distributions, withdrawals, and deposits, and asset reallocation. Other services were things that an agent could not provide, such as tax management/credits, duplicate tax forms, assistance with estates, trusts, and wills, and financial planning advice. But, even as to the services an agent technically could provide, Mr. Savage used his financial planning expertise to advise these clients as to a number of decisions relating to their annuities. For instance, although agents can assist with reallocation, required minimum distributions, and withdrawals, Mr. Savage’s securities and financial planning expertise allowed him to make recommendations that took into account an analysis of the stock market, the economy, and the clients’ financial circumstances and overall goals. An agent is not required to have that expertise, which is one reason he charged the clients an annual service fee. Many of these clients did not recall Mr. Savage providing most of the services listed in the Fee Agreement, but the weight of the credible evidence reflects otherwise. He analyzed asset reallocations for these clients every year and, when he believed reallocation was appropriate, he undisputedly made it happen. He provided annual account analyses consolidating the clients’ investment statements. He met with some of them every year to conduct an annual review and, for those he did not meet, he offered to do so in their annual invoice letter. Whenever the clients asked for assistance with questions, address, beneficiary, or ownership changes, withdrawals or required minimum distributions, or deposits, among others, he performed the task. And, as he confirmed and some of the clients acknowledged, the Fee Agreement made it clear that the services were available, even if they did not need all of them in a particular year or did not think to ask. Although some of the clients testified that Mr. Savage failed to tell them that his fee was optional, all of them had a chance to review the Fee Agreement before voluntarily signing it. The agreement noted that the fee was a “financial planning retention fee” based on the value of the accounts “that we manage or provide service for,” and that non-payment “will result in the discontinuation of my/our planning services.” These clients believed they hired Mr. Savage as an investment advisor and many understood that such advisors do charge fees for providing services. More importantly, no client testified that Mr. Savage said his annual fee was required to procure the annuities or was a charge for insurance. Nothing in the Fee Agreement gave that indication either. Mr. Savage credibly confirmed that he did not charge a fee for insurance; rather, the client paid the fees for financial planning services. And, if they decided they no longer wanted Mr. Savage’s services and stopped paying his fee, they took over management of their annuities without losing access to them or the money in them. The Department concedes that Mr. Savage may wear two hats, as both the agent selling an annuity and the financial advisor managing his client’s portfolio. It contends, however, that Mr. Savage violated the insurance code by selling annuities to these clients and thereafter charging them annual fees——tied to the value of the annuities——to provide services that he should have provided for free after earning commissions on the sale of those annuities. The Department’s investigator, Ms. Midgett, testified about annuities, commissions, and insurance agent services based on her experience in the industry as both a former agent and certified chartered life underwriter.5/ Ms. Midgett confirmed that the Department approves both the premiums and commissions applicable to annuities. Once the premium or deposit is paid, the commission is earned; if an additional deposit is made into the annuity, the agent would earn another commission. Ms. Midgett testified that it is improper for an agent to receive a commission and knowingly charge a client any fees with respect to that annuity under section 626.9541(1)(o). However, she admitted that a financial advisor may charge service fees on annuities if they did not receive a commission on the sale. And, if the annuity is ever rolled into a non- insurance product, that agent could charge service fees on that asset because they are no longer tied to the annuity. Ms. Midgett also testified about the services agents are expected to provide. Once an agent sells a product, he or she becomes the agent of record and does “things such as answer questions, beneficiary changes, address changes, yearly reviews, anything to keep that client and to help them in any way they can.” According to her, “it’s basic 101 insurance that an agent services their clients,” which is “extremely important if you want to build your book of business and to keep a client happy.” Importantly, however, Ms. Midgett conceded that no statute or rule specified what services agents were required to provide once they sold an annuity. “It’s just understood when you’re an insurance agent that you’re going to service your clients. It’s part of the sale of the product.” She believed agents learned this in the course study to obtain a license. Although Ms. Midgett testified that Mr. Savage should have provided most of the services listed in the Fee Agreement for free once he earned commissions on the sale of the annuities, she conceded that at least two of them——duplicate tax forms and informing the client of new tax laws——were not services agents would do. She also agreed that agents could not advise clients as to taking money from an annuity and investing in stocks, mutual funds, real estate trusts, or other investment-related options as “those are all investment advisor functions.” Ms. Midgett initially admitted having no knowledge of whether insurance agents were trained in asset reallocation, though she “would assume so” because “[i]f you have a license to sell the product, then obviously you have to have the knowledge of how to be able to service that product and make the allocations.” When she testified several months later in the Department’s rebuttal case, she stated that the manual used to obtain a license in Florida had a chapter on annuities that “touched on” reallocation. But, she admitted she was not an expert on reallocation or analyzing market conditions, and she had only previously worked with one agent who sold annuities, though he did advise his annuity clients on reallocation. In sum, the Department conceded that no statute or rule articulated the services an agent is required to provide upon receiving a commission. The appointment contracts between the agents and the insurance companies, two of which are in the record, apparently do not specify the services agents are expected to provide. At best, the evidence established what a good agent should do to build a book of business; the evidence did not establish what services an agent, like Mr. Savage, was legally required to provide for receiving a commission. Count I – Kathy Butler Ms. Butler met Mr. Savage while working at a yacht club. In February 2011, they met at his office and she filled out a new client form with financial information. In March 2011, Mr. Savage assisted Ms. Butler with the application for a fixed index annuity for $50,000. On that same day, she signed the Fee Agreement, which she understood to be paying for his services as an investment advisor to manage the annuity and ensure it was being invested correctly; she believed he received income from the insurance company. In January 2012, she purchased another fixed index annuity for $8,000. Mr. Savage procured both annuities. Between 2012 and 2015, Ms. Butler received annual invoices from Mr. Savage and paid about $3,265 in service fees. At this point, Ms. Butler deals directly with the insurance companies, though Mr. Savage is still listed as her agent. The weight of the credible evidence shows that Mr. Savage answered general account questions, made a beneficiary change, conducted annual reviews when requested, sent annual account statements, analyzed reallocation each year and, when he recommended reallocation in 2014 and 2015, he handled the paperwork. Ms. Butler knew she could avail herself of the services in the Fee Agreement, even though she chose not to request many of them. Count II – Beverly Wilcox Ms. Wilcox met Mr. Savage at a seminar in early 2009. In February 2009, they met at his office, she completed a new client form, and she signed the Fee Agreement. She believed he was a financial advisor and that she would owe him money, but she did not read the Fee Agreement before signing it. In March 2009, Mr. Savage assisted Ms. Wilcox with the application to purchase a fixed index annuity for $120,000. He procured the annuity, as requested. Between 2010 and 2016, Ms. Wilcox received yearly invoices from Mr. Savage and paid about $6,500 in fees, after which she decided to deal with the annuity company directly. The weight of the credible evidence shows that Mr. Savage answered questions when asked, offered to conduct annual reviews each year, sent annual account statements, analyzed reallocation each year and, when he recommended reallocation in 2010 and 2012, he handled the paperwork. Count III – Joseph Cerny Mr. Cerny met Mr. Savage while working at a yacht club and knew he was a financial advisor. Mr. Cerny purchased several fixed index annuities and other investments from Mr. Savage, who helped him complete the paperwork and procured the policies. Between 2003 and 2004, he bought two annuities for $100,000 each and two mutual funds for about $30,000 each. In 2008, he bought an annuity for $10,000. In 2010, he bought another annuity for $119,400. Mr. Savage did not charge fees for the first few years. Mr. Cerny believed he received compensation from the companies. However, in March 2010, Mr. Cerny signed the Fee Agreement. Between 2011 and 2012, he received two invoices, paying the first for $1,266.84 but refusing to pay the second. Mr. Cerny and Mr. Savage ended their relationship at that point. The weight of the credible evidence shows that Mr. Savage answered questions, provided annual statements, assisted with making withdrawals when requested, met with Mr. Cerny yearly, analyzed reallocation each year and, when he recommended reallocation in 2010 and 2011, he handled the paperwork. Count V – Marion Albano Ms. Albano met Mr. Savage at a retirement seminar in early 2007. In February 2007, they met at his office to go over her investments, including several annuities. Based on his recommendation, she surrendered her old annuities and purchased a fixed index annuity for about $1.6 million. He assisted her with the application and procured the annuity. In February 2007, Ms. Albano also signed the Fee Agreement. Mr. Savage told her there was a service charge to manage the annuity and she agreed because her brother pays the same rate on his managed brokerage account. She was never worried about losing the annuity if she failed to pay the fee. Ms. Albano received invoices from Mr. Savage every year from 2008 through 2015 and testified that she had paid between $110,000 and $120,000 in fees during that time. She had to pay some of the fees out of her distributions. The weight of the credible evidence shows that Mr. Savage answered account questions, corresponded with her daughter about his recommendations, provided her with an account analysis each year, met with her annually to review her account, and assisted her with required minimum distributions and withdrawals. He analyzed reallocation each year and, when he recommended reallocation in 2010 and 2011, he handled the paperwork. Count VI – Jane D’Angelo Ms. D’Angelo and her late husband, whose son-in-law was an insurance agent, met Mr. Savage at an estate planning seminar in early 2003; they believed he was an investment advisor. In March 2003, he came to their home and they completed a new client form, indicating they had several types of investments, including annuities. Between 2003 and 2016, the D’Angelos invested with Mr. Savage. In 2003, they purchased a tax credit investment for $10,000. In 2005, they purchased a similar investment for $19,000, which resulted in tax credits totaling $17,174. Between 2005 and 2011, they purchased eight fixed index annuities from Mr. Savage. He assisted them with the applications, informing them that the companies paid him directly. He procured the following annuities, some of which were purchased by transferring money from their existing annuities: In April 2005, they bought an annuity for $250,000; in May 2007, they bought an annuity for $32,789.78; in May 2008, they bought an annuity for $29,510; in March 2009, they bought three annuities for $337,554, $550,000, and $6,000; in May 2011, they bought two annuities, one for $40,715 and another for $150,889; and, in June 2011, they bought an annuity for $24,667. Prior to 2010, they paid no service fees. However, in April 2010, they signed the Fee Agreement. Although they were surprised and felt like they had to sign, Ms. D’Angelo agreed they were not coerced or told the annuities would lapse if they failed to do so. Indeed, she never lost access to the annuities even after she stopped paying Mr. Savage’s fees in 2015. Mr. Savage sent them annual invoices from 2010 through 2015, totaling $54,000 in fees. Mr. Savage agreed to waive the 2010 fee and, ultimately, they only paid about $14,511 total. In 2016, Ms. D’Angelo informed Mr. Savage that she no longer needed his services. She had been dealing directly with the insurance companies herself, though they have provided her with names of individuals if she wanted someone to advise her. The weight of the credible evidence shows that Mr. Savage provided numerous services to the D’Angelos on the investments he managed for them.6/ He had discussions with them, sent them annual statements, and assisted them with deposits and transfers between annuities, required minimum distributions and withdrawals, income riders, and beneficiary and ownership changes. He analyzed reallocation every year and handled the paperwork when he felt it was appropriate. He also offered to meet annually and held those meetings in years in which they were requested. Count VII – Ernest Blougouras Rev. Ernest Blougouras, a Greek Orthodox priest, attended several financial planning seminars with Mr. Savage. They met privately in February 2005, at which he completed a new client form listing his investments, which included fixed annuities, CDs, mutual funds, bonds, and stocks. Rev. Blougouras purchased fixed index annuities and other investments from Mr. Savage. He told Rev. Blougouras that he received commissions for selling the annuities. Mr. Savage assisted with the applications and procured the policies. Over the last 14 years, Rev. Blougouras purchased nine fixed index annuities. In March 2005, he bought an annuity for $347,003; in April 2005, he bought an annuity for $229,458; in August 2005, he bought an annuity for $102,227; in June 2006, he bought an annuity for $8,300; in May 2007, he bought an annuity for $41,143; in June 2009, he bought an annuity for $50,000; in July 2009, he bought an annuity for $14,308; and, though the record is unclear as to the date, he bought another annuity that was worth $40,572 in 2010. Since 2011, he bought an additional annuity and several non-insurance investments, such as real estate trusts and energy funds. Prior to 2010, Mr. Savage did not charge Rev. Blougouras service fees because he continued to purchase annuities. However, in 2010, Mr. Savage decided to start charging an annual service fee and sent Rev. Blougouras the Fee Agreement. Rev. Blougouras believed that Mr. Savage’s services would be cancelled if he failed to pay the fee and he would have to hire another advisor. He signed the Fee Agreement and continues to use Mr. Savage’s services. Mr. Savage has sent annual invoices to Rev. Blougouras every year since 2010. The record only contains the 2010 invoice for $9,883 and Rev. Blougouras could not recall how much he paid overall. However, he confirmed that he has paid every invoice he has received either himself or with distribution checks he received from the annuities. The weight of the credible evidence shows that Mr. Savage provided numerous services to Rev. Blougouras. He prepared paperwork and documents for required minimum distributions and withdrawals, held meetings to review and organize his tax paperwork, copied documents requested, and made address changes when requested. He analyzed asset reallocation every year and, when he recommended reallocation in 2010 and 2011, he completed the necessary paperwork. Count VIII – George Flate Mr. Flate and his wife met Mr. Savage at a financial planning seminar in 2010. In February 2010, they met Mr. Savage and completed their new client form listing their investments, including fixed annuities, CDs, mutual funds, and stocks. They also signed the Fee Agreement, which Mr. Flate believed was a standard service agreement. They thought they hired Mr. Savage as an investment advisor and never believed they would lose access to the annuities if they stopped paying his fees. Based on Mr. Savage’s recommendation, the Flates purchased two fixed index annuities: one annuity was issued in April 2010 for approximately $22,000, and the other annuity was issued in May 2010 for approximately $22,500. Mr. Savage assisted them with filling out the applications and handled the paperwork to ensure the annuities were issued. Between 2012 and 2015, Mr. Savage sent the Flates invoices for his annual service fees every year. In total, they paid approximately $1,506 in service fees. In 2015, the Flates terminated their relationship with Mr. Savage. They have worked with two financial advisors since then, neither of whom charged them service fees relating to the annuities. The weight of the credible evidence shows that Mr. Savage provided numerous services to the Flates. Each year, he met with them to go over their account, provided them with account analyses, analyzed reallocation and, the two to three times they agreed with his recommendations, he handled the paperwork. He handled withdrawals and address changes for them when requested, and he provided them with information as to changes in tax law and estate planning, though they did not believe that was necessary since they had tax and estate lawyers. The Flates understood that Mr. Savage was available to answer their questions and provide the services if they asked. Count IX – FINRA Disciplinary Proceeding On July 14, 2016, two former clients of Mr. Savage’s filed a Statement of Claim with FINRA alleging that he had recommended investments that were not suitable for them. Over Mr. Savage’s objections to proceeding with the hearing as scheduled, the arbitration panel awarded the clients over $725,000 in damages, fees, and costs. The clients filed a petition in Florida circuit court to approve the arbitration award. Mr. Savage responded in opposition and moved to vacate the arbitration award on grounds that it violated his due process rights. On November 9, 2017, the circuit court issued a final judgment awarding over $769,000. On December 4, 2017, Mr. Savage appealed the circuit court’s order to the Second District Court of Appeal. On June 12, 2018, while the appeal was pending, Mr. Savage signed a Letter of Acceptance, Waiver and Consent (“AWC”) with FINRA. The AWC stated that Mr. Savage accepted and consented, without admitting or denying, the following findings: Wall Street failed to apply for a material change in its business operations, i.e., to sell oil and gas interests, private placements, and non-traded real estate investment trusts, before engaging in more than 50 such transactions, many of which were consummated by Mr. Savage; Mr. Savage failed to timely update his FINRA Form U4 within 30 days of the Statement of Claim being filed against him in July 2016; Mr. Savage failed to timely respond to FINRA’s requests for information relating to an upcoming examination of Wall Street; and Wall Street failed to maintain the minimum net capital requirements of $5,000 while engaging in securities transactions. Mr. Savage agreed to three sanctions: (1) a five- month suspension from associating with any FINRA registered firm; (2) a three-month suspension from association with any FINRA registered firm in a principal capacity, to be served following the five-month suspension; and (3) a $30,000 fine. The AWC confirmed that Mr. Savage waived his procedural rights relating to these alleged violations and made clear that it would become part of his permanent disciplinary record that could be considered in future actions brought by FINRA or other regulators. He was precluded from taking positions inconsistent with the AWC in proceedings in which FINRA was a party, but was not precluded from taking inconsistent positions in litigation if FINRA was not a party. The five-month suspension began on June 13, 2018, and ended on November 17, 2018. The three-month suspension began on November 18, 2018, and ended on February 17, 2019. In the interim, on August 16, 2018, FINRA notified Mr. Savage by letter that it was suspending his securities license indefinitely for his “failure to comply with an arbitration award or settlement agreement or to satisfactorily respond to a FINRA request to provide information concerning the status of compliance.” This letter is not in the record and, as such, it is unclear whether Mr. Savage had an avenue to challenge that suspension directly. Mr. Savage had challenged the underlying arbitration award, which remained pending on appeal in the Second District Court of Appeal. On November 7, 2018, the Second District affirmed the circuit court’s arbitration order. On November 20, 2018, Mr. Savage put the Department on notice of the FINRA disciplinary actions, including the AWC from June 2018 and the decision of the Second District affirming the arbitration award.
Conclusions For Petitioner: David J. Busch, Esquire Department of Financial Services Room 612, Larson Building 200 East Gaines Street Tallahassee, Florida 32399-0333 For Respondent: Michael Buchholtz, Esquire The Law Office of Michael Buchholtz Post Office Box 13015 St. Petersburg, Florida 33777
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Financial Services issue a final order suspending Mr. Savage’s license as an insurance agent for twelve months. DONE AND ENTERED this 30th day of September, 2019, in Tallahassee, Leon County, Florida. S ANDREW D. MANKO 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 30th day of September, 2019.
