INTRODUCTION*

*The transcript from July 12, 2012, is designated as Transcript 1;
the transcript from September 19, 2012, at 10:00 a.m. is designated as Transcript 2;
and the transcript from September 19, 2012, at 2:30 p.m. is designated as Transcript 3.

The Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a, Sections 36b-1 to 36b-34, inclusive, of the Connecticut General Statutes, the Connecticut Uniform Securities Act (“Act”), and the regulations promulgated thereunder (Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies) (“Regulations”).

The above-referenced matter was initiated upon charges brought by the Commissioner to issue a permanent order to cease and desist against Respondents, to issue a permanent order to make restitution against Respondents, and to a impose fine upon each Respondent.  On May 29, 2012, the Commissioner issued an Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing against Respondents (“Notice”).

After due notice, a hearing was held at the Department of Banking (“Department”) on September 19, 2012.  The hearing was conducted in accordance with Chapter 54 of the Connecticut General Statutes, the “Uniform Administrative Procedure Act”, and the Department’s contested case regulations, Sections 36a-1-19 to 36a-1-57, inclusive, of the Regulations of Connecticut State Agencies.

Having read the entire record, including testimony of the witnesses and documentary evidence, I make the following findings of fact and conclusions of law based on the preponderance of evidence in the record.

FINDINGS OF FACT

CONCLUSIONS OF LAW

I.  Violation of Section 36b-16 of the Act -
Offer and Sale of Unregistered Securities

Section 36b-16 of the Act provides that:

Section 36b-3(19) of the Act defines the term “security” to mean, in pertinent part:

The record establishes that during 2007, Respondents sold CFDC Notes to three Connecticut residents.  The CFDC Notes constitute securities within the meaning of Section 36b-3(19) of the Act.  The definition provided by Section 36b-3(19) is very broad and inclusive of investment vehicles such as the CFDC Notes, including notes and evidences of indebtedness.  Moreover, while there is a dearth of Connecticut case law construing this definition, Connecticut courts have repeatedly considered promissory notes to be securities, see, e.g., Lehn v. Dailey, 77 Conn. App. 621 (Conn. App. Ct. 2003), Miller v. Inverness Corp. 2000 Conn. Super. LEXIS 2771 (Conn. Super. Ct. Oct. 18, 2000), and a recent Connecticut decision has held that notes used for investment purposes are securities, considering both “the parties’ motivation in entering the transaction” and the “reasonable expectations of the investing public.” See Desteph v. Commissioner, Connecticut Department of Banking, 2012 Conn. Super LEXIS 585 (Conn. Super.Ct. February 29, 2012) at *9-10.  In all five transactions discussed herein, the monies provided to CFDC by Connecticut residents were provided for investment purposes and investors reasonably expected a certain return on the monies within a matter of months.

In addition, the record establishes that the CFDC Notes were not registered in Connecticut under the Act and no evidence has been produced by Respondents supporting a claim of exemption or exclusion.  Section 36b-21(g) of the Act provides, in pertinent part, that “the burden of proving an exemption, preemption, exclusion or an exception from a definition is upon the person claiming it.”  Accordingly, such conduct by Respondents constitutes a violation of Section 36b-16 of the Act by each Respondent.

II.  Violation of Section 36b-4(a) of the Act -
Fraud in Connection with the Offer and Sale of any Security

Section 36b-4(a) of the Act provides that:

The record establishes that in connection with the sale of CFDC Notes, Respondents failed to disclose any risk factors related to the investment and any financial information on CFDC or Beauchamp.  Investors were promised that amounts invested would be repaid with interest within the term evidenced by the CFDC Notes, and the possibility and factors causing the amounts not to be repaid were never discussed.  In fact, two of the CFDC Notes expressly state that in “a worst-case scenario and a deal gone bad” the principal would be repaid.  Investor 2 had also thought the investment was guaranteed.  (Tr. 3 at 154.)  No additional documentation had been provided to investors, and as of the date of the hearing, no investor had been repaid the entire amount of his or her investment.  In construing Section 36b-4(a) of the Act, the Connecticut Appellate Court has stated:

Papic v. Burke, 113 Conn. App. 198, 212 n.9 (Conn. App. Ct. 2009).

Risk factors and financial information repeatedly have been held to be material facts.  See, e.g., Connecticut National Bank v. Giacomi, 242 Conn. 17, 50 (Conn. 1997); SEC v. Hasho, 784 F. Supp. 1059, 1109 (S.D.N.Y. 1992).  The failure by Respondents to provide such information concerning the CFDC Notes while making statements indicating that the investments were practically guaranteed, constitutes, in connection with the sale of a security, directly or indirectly, making an untrue statement of a material fact or omitting to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading, in violation of Section 36b-4(a) of the Act.

III.  Authority to Issue Order to Cease and Desist,
Order to Make Restitution and Impose Fine

Section 36b-27(a) of the Act provides, in pertinent part, that:

Section 36b-27(b) of the Act provides, in pertinent part, that:

Section 36b-27(d) of the Act provides, in pertinent part, that:

The record establishes that Respondents have violated Sections 36b-16 and 36b-4(a) of the Act and have obtained monies from Connecticut residents as a result of such violations, necessary to order Respondents to cease and desist pursuant to Section 36b-27(a) of the Act, to make restitution pursuant to Section 36b-27(b) of the Act and to impose a fine pursuant to Section 36b-27(d) of the Act.  However, I will not impose a fine as a result of the financial hardship that has been demonstrated by Beauchamp, the fact that CFDC is no longer in business, and the desire to direct any monies available to Respondents towards making restitution to the harmed Connecticut investors.

IV.  Notice and Public Interest

Section 4-177 of the Connecticut General Statutes provides, in pertinent part, that:

The Notice issued by the Commissioner complied with the Sections 36b-27(a), 36b-27(b) and 36b- 27(d) of the Act and Section 4-177 of the Connecticut General Statutes.

Section 36b-31(b) of the Act provides, in pertinent part, that:

Section 36b-31(b) of the Act requires that the Commissioner find that an order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 33b-34, inclusive.  In this case, Respondents’ actions in violation of the Act involved failing to register a security in violation of Section 36b-16 of the Act, and in connection with the sale of such unregistered security, directly or indirectly, making an untrue statement of material fact or omitting to state a material fact necessary in order to make the statement made, in light of the circumstances under which it was made, not misleading, in violation of Section 36b-4(a) of the Act.  Future harm to Connecticut residents will be deterred through the issuance of an order to cease and desist against Respondents and, for those Connecticut residents who have already suffered financial loss as a result of Respondents’ conduct, an order to make restitution will serve to lessen such losses.

I conclude that the issuance of an order to cease and desist and an order to make restitution are necessary and appropriate in the public interest and for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of Sections 36b-2 to 36b-34, inclusive, of the Act.

ORDER

Having read the record, I hereby ORDER, pursuant to Sections 36b-27(a) and 36b-27(b) of the Act, that:

Alfred R. Beauchamp
18 Camp Street, Basement Apt.
Meriden, CT 06451
Certified Mail No. 7011 0470 0002 2572 9656

Administrative Orders and Settlements