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ESSEX FINANCIAL SERVICES, INC. * * * * * * * * * * * * * * * * * * |
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CONSENT ORDER NO. CO-15-8158-S |
I. PRELIMINARY STATEMENT
WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies (“Regulations”) promulgated under the Act;
WHEREAS, Essex Financial Services, Inc. (“EFS”), located at 176 Westbrook Road, Essex, Connecticut 06426, has been an investment adviser registered with the Securities and Exchange Commission (SEC No. 801-62242) since August 7, 2003, and has filed the notice required by Section 36b-6(e) of the Act since August 7, 2003. EFS has also been registered as a broker-dealer under the Act since September 22, 2003;
WHEREAS, the Commissioner, through the Securities and Business Investments Division (“Division”) of the Department of Banking, conducted an examination of EFS pursuant to Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations (“Examination”) and a related investigation pursuant to Section 36b-26(a) of the Act (“Investigation”) to determine whether EFS had violated, was violating or was about to violate provisions of the Act or Regulations or any order thereunder;
WHEREAS, as a result of the Examination and Investigation, the Division obtained evidence that:
| 1. | Individual A was the founder, President and Chief Executive Officer of EFS from April 2003 through approximately June 2013 (hereinafter referred to as the “Past President”). In addition to providing investment advisory services to clients, the Past President wielded tremendous influence and control over EFS and its agents and employees. EFS’ agents and employees knew that the Past President, in all respects, was “in charge” of the firm and that they were expected to comply with what the Past President told them to do; |
| 2. | In 2010, a Connecticut attorney (the “Attorney”) referred a multimillion dollar investment advisory account (“Account”) to EFS and the Past President. The Attorney was not registered in any capacity under the Act, as was required by law. At some point after the Account was referred, the Past President agreed, on behalf of EFS, to pay the Attorney an annual referral fee of $50,000, despite the fact that the Past President knew the Attorney was not registered under the Act as an investment adviser agent of EFS; |
| 3. | During the summer of 2011, the Past President instructed EFS’ Chief Compliance Officer (the “CCO”) that EFS was going to pay the Attorney a quarterly fee of $12,500 for the referral of the Account. The CCO knew that the Attorney was not registered as an investment adviser agent of EFS and that EFS was prohibited from paying the Attorney a referral fee unless and until the Attorney became registered as such. In September of 2011 the Attorney was informed that he must become registered as an investment adviser agent of EFS before a referral fee could be paid to him. Although the CCO made arrangements for the Attorney to take the Series 65 exam, the Attorney did not take the Series 65 examination and never became a registered investment adviser agent of EFS; |
| 4. | In July of 2012, the Attorney sent EFS an invoice for $12,500 covering purported legal services rendered for EFS from January 2012 through March 2012. The invoice did not identify clients or detail the services performed. Even though the Past President knew that the Attorney had not taken the Series 65 examination, he instructed the CCO to pay this invoice, which was paid by a check on August 20, 2012. Although the CCO knew that the Attorney was not registered as an investment adviser agent of EFS, and therefore EFS was prohibited from paying him a referral fee, the CCO paid this invoice because he felt that he could not contradict or oppose the President’s instructions because of the President’s position and influence at EFS; |
| 5. | During the fall of 2012, the CCO informed the Past President that the Attorney should not receive any additional referral fees until the Attorney became registered as an investment adviser agent. In response, the Past President asked the Attorney to provide EFS with a new itemized invoice for legal services for the first quarter of 2012 that he could give to the auditors. On November 12, 2012, the Attorney sent EFS a new and more detailed invoice for the first quarter of 2012, listing various purported legal services performed for certain clients; |
| 6. | On November 14, 2012, the Attorney sent another itemized invoice to EFS for legal services purportedly performed for EFS for the second quarter of 2012 in the amount of $12,690. The Past President directed the staff of EFS to pay this invoice, which was done on November 26, 2012 despite the fact that: (a) EFS never entered into a retainer agreement for legal services with the Attorney; (b) the Attorney never performed any legal services for EFS during the time period in question; and (c) the Attorney was not properly registered under the Act. For the second time, the Past President was able to circumvent EFS’ compliance and supervisory structure and convince EFS personnel to pay this invoice despite the fact that both the CCO and the Past President knew that the Attorney was not registered as an investment adviser agent of EFS; |
| 7. | Payments totaling $25,190 for alleged “legal” services were improperly made to the Attorney, who was not registered as an investment adviser agent of EFS. Such payments were based on inaccurate and misleading invoices because the Attorney never provided any actual legal services to EFS. Pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”), EFS was required to preserve certain records, including its ledgers and originals of all communications relating to EFS’ business. The invoices sent by the Attorney at the request of the Past President and the corresponding ledger created by EFS based on such invoices, maintained and preserved as part of EFS’ records, were not true, accurate and current as required by the Exchange Act; |
| 8. | On April 17, 2013, the Attorney refunded EFS $25,190 for the two payments made to him; and |
| 9. | EFS failed to establish and implement a supervisory structure that was sufficient to prevent the making of inappropriate payments to unregistered individuals and the engagement of unregistered investment adviser agents, including a supervisory structure sufficient to prevent the Past President from unilaterally authorizing the above referenced payments to the Attorney. |
WHEREAS, the Commissioner has reason to believe that the foregoing conduct violates certain provisions of the Act and Regulations, and would support administrative proceedings against EFS under Sections 36b-15 and 36b-27 of the Act;
WHEREAS, the Commissioner acknowledges that EFS self-reported the alleged violations to the Department of Banking and has cooperated with the Division throughout the Division’s Examination and Investigation of EFS;
WHEREAS, EFS’ Board of Directors (“Board”), on its own initiative, instituted a series of remedial measures in response to the above facts, including but not limited to, removing the Past President as the President and CEO of EFS and restructuring the reporting structure relating to the CCO. Specifically, the Board revised its policies and procedures to reflect that the CCO reported to both the CEO and the Audit Committee (prior to this, the CCO reported only to the CEO), to ensure that the Audit Committee was timely informed of potential compliance problems;
WHEREAS, an administrative proceeding initiated under Sections 36b-15 and 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(4) of the General Statutes of Connecticut, as amended by Public Act 15-61;
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations provide that a contested case may be resolved by consent order, unless precluded by law;
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-34, inclusive”;
WHEREAS, Section 36b-31(b) of the Act provides, in relevant part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action 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 36b-34, inclusive”;
WHEREAS, without holding a hearing and without trial or adjudication of any issue of fact or law, and prior to the initiation of any formal proceeding, the Commissioner and EFS have reached an agreement, the terms of which are reflected in this Consent Order, in full and final resolution of the matters described herein;
WHEREAS, EFS, without admitting or denying any of the Commissioner’s allegations, expressly consents to the Commissioner’s jurisdiction under the Act and to the terms of this Consent Order;
WHEREAS, the Commissioner finds that the entry of this Consent 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 the Act;
AND WHEREAS, EFS, through its execution of this Consent Order, specifically assures the Commissioner that none of the violations alleged in this Consent Order shall occur in the future.
II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS
WHEREAS, EFS, through its execution of this Consent Order, voluntarily waives the following rights:
| 1. | To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f) and 36b-27 of the Act and Section 4-177(a) of the General Statutes of Connecticut; |
| 2. | To present evidence and argument and to otherwise avail itself of Sections 36b-15(f) and 36b-27 of the Act and Section 4-177c(a) of the General Statutes of Connecticut; |
| 3. | To present its position in a hearing in which it is represented by counsel; |
| 4. | To have a written record of the hearing made and a written decision issued by a hearing officer; and |
| 5. | To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order. |
III. ACKNOWLEDGEMENT OF THE COMMISSIONER'S ALLEGATIONS
WHEREAS, EFS, through its execution of this Consent Order, and without admitting or denying the Commissioner’s allegations, acknowledges the following allegations of the Commissioner:
| 1. | EFS violated Section 36b-6(c)(3) of the Act by engaging an unregistered investment adviser agent; |
| 2. | EFS violated 36b-31-14a(a) of the Regulations by failing to keep SEC required records, notably ledgers and supporting documents, true and accurate; and |
| 3) | EFS violated Section 36b-31-6f(b) of the Regulations by failing to establish, enforce and maintain a system for supervising the activities of its agents, investment adviser agents and Connecticut office operations that was reasonably designed to achieve compliance with applicable securities laws and regulations. |
WHEREAS, the Commissioner would have the authority to enter findings of fact and conclusions of law after granting EFS an opportunity for a hearing;
WHEREAS, EFS acknowledges the possible consequences of an administrative hearing and voluntarily agrees to consent to the entry of the sanctions described below;
AND WHEREAS, EFS wishes to continue to cooperate with the Commissioner and avoid the expense of a dispute hearing.
IV. CONSENT TO ENTRY OF SANCTIONS
WHEREAS, EFS, through its execution of this Consent Order, consents to the Commissioner’s entry of an order imposing on it the following sanctions:
| 1. | EFS, its representatives, agents, and employees shall cease and desist from engaging in conduct constituting or which would constitute a violation of the Act or any regulation, rule or order adopted or issued under the Act, either directly or through any person, organization or other device, including without limitation engaging in any activity in or from Connecticut that violates Section 36b-6(c)(3) of the Act or Sections 36b-31-14a(a) and 36b-31-6f(b) of the Regulations; and |
| 2. | No later than the date this Consent Order is entered by the Commissioner, EFS shall remit to the Department, by cashier’s check, certified check or money order made payable to “Treasurer, State of Connecticut”, the sum of twenty five thousand dollars ($25,000), which shall constitute an administrative fine; |
V. CONSENT ORDER
NOW THEREFORE,
the Commissioner enters the following:| 1. | The Sanctions set forth above be and are hereby entered; |
| 2. | Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against EFS and/or its affiliates and successors in interest based upon a violation of this Consent Order or the matters underlying its entry if the Commissioner determines that compliance with the terms herein is not being observed; |
| 3. | Nothing in this Consent Order shall be construed as limiting the Commissioner’s ability to take enforcement action against EFS and/or its affiliates and successors in interest based upon evidence of which the Division was unaware on the date hereof relating to a violation of the Act or any regulation or order under the Act; |
| 4. | EFS shall not take any action or make or permit to be made any public statement, including in regulatory filings, any proceeding in any forum or otherwise, denying, directly or indirectly, any allegation referenced in this Consent Order or create the impression that this Consent Order is without factual basis. However, nothing is this Consent Order affects EFS’ (or its employees’) testimonial obligations or right to take any legal or factual position in litigation, arbitration, or other legal proceedings in which the Commissioner is not a party; |
| 5. | EFS shall not take any position in any proceeding brought by or on behalf of the Commissioner, or to which the Commissioner is a party, that is inconsistent with any part of this Consent Order. Nothing in this provision affects EFS’ (i) testimonial obligations; or (ii) right to take a legal or factual position in litigation or other legal proceeding in which the Commissioner is not a party; and |
| 6. | This Consent Order shall become final when entered. |
| So ordered at Hartford, Connecticut | , | _____/s/____________ |
| this 23rd day of November 2015. | Jorge L. Perez | |
| Banking Commissioner |
CONSENT TO ENTRY OF ORDER
I, Charles R. Cumello Jr., state on behalf of Essex Financial Services, Inc. (“EFS”), that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of EFS; that EFS agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that EFS consents to the entry of this Consent Order.
| Essex Financial Services, Inc. | |
| By: | __________/s/_____________ |
| Title President & CEO |
State of: Connecticut
County of: Middlesex ss: Essex
On this the 23 day of November 2015, before me, Melissa Lieberman, the undersigned officer, personally appeared Charles Cumello, who acknowledged himself to be the President & CEO of Essex Financial Services, Inc., and that he, as such President & CEO, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of Essex Financial Services, Inc. by himself as President & CEO.
In witness whereof I hereunto set my hand.
_______/s/__________________________
Notary Public
Date Commission Expires: Feb. 28, 2019