|Securities and Business Investments Division|
|Vol. VIII No. 1||March 1994|
- Ralph A. Lambiase, Division Director
- Cynthia Antanaitis, Assistant Director and Bulletin Editor
- Eric J. Wilder, Assistant Director
Robert S. Rosenthal, Senior Administrative Attorney
- Louise Hanson, Subscription Coordinator
- Cynthia Antanaitis, Assistant Director and Bulletin Editor
In the past, financial companies typically achieved success by competitively providing a single product or service in a marketplace occupied with rivals pursuing similar business strategies. Once clear industry demarcations, however, are no longer as obvious as brokers, investment bankers, banks, insurers and others who provide financial services have become increasingly product and service competitive.
The mid-1990s financial services marketplace has become challenging for companies and regulators alike. The Connecticut Department of Banking is somewhat unique and fortunate to be in a position to address rising new issues from the perspective of a single regulatory agency with responsibility for supervising both the state's banking and securities industries.
In that respect, the Department of Banking is currently considering a number of related issues, involving, for example, third party broker-dealer marketers specializing in providing brokerage services to other financial institutions, investment adviser licensing, licensing of locations and referral fees. As the agency formulates its future policies, we hope to use this publication as a vehicle to articulate changes and to foster a greater industry awareness of regulatory concerns. In that educational vein, broker-dealers should be particularly alert to the need for agents who engage in financial planning activities and who derive compensation from a single fixed fee for services which includes investment advice to be licensed as investment adviser agents.
In the September 1993 issue of this Bulletin, we reported that the department's revision of the state's blue sky regulations was to be shortly published for comment. The regulations were published and this past January a public hearing was held. With the benefit of numerous comments, the department is promulgating amended regulations which are currently in the review process. I would hope that by the next publication of this quarterly early this coming summer, we will be able to announce that the revised regulations have, in fact, become final.
-- Ralph M. Shulansky, Banking Commissioner
Lloyd Newton (CRD # 2293765), Ken Oliver (CRD # 8983202) and Scott Wolfe (CRD # 2325924)
On January 6, 1994, following a Securities and Business Investments Division investigation, the Banking Commissioner issued a cease and desist order (NR-93-2527-S) against Lloyd Newton, Ken Oliver and Scott Wolfe, employees of Portfolio Asset Management/USA Financial Group Inc., a registered broker-dealer located in El Paso, Texas. The Commissioner alleged that between January 1993 and March 1993, the respondents transacted business as agents of the firm absent registration under The Connecticut Uniform Securities Act in selling limited partnership interests in Interlink Fiber Optic Partners Limited Partnership to Connecticut residents. The Order became permanent as to respondents Newton and Wolfe on January 27, 1994 and January 28, 1994, respectively, since neither one requested a hearing within the prescribed time period. Similarly, the Order became permanent as to respondent Oliver on February 4, 1994.
Michael John Sullo (CRD # 2037711)
On January 13, 1994, following a Securities and Business Investments Division investigation, the Banking Commissioner issued a cease and desist order (CD-94-2380-S) against Michael John Sullo of Milford, Connecticut. The Commissioner alleged that from at least July 1990 to November 1993, Sullo sold investments within or from Connecticut in the form of promissory notes whose rate of return he guaranteed; that he represented to purchasers of the notes that their funds would be used to finance the operation of two oil tankers or be invested in common stock and bonds of publicly traded companies; that, in actuality, investor monies were used to fund Sullo's operation of the Club Carousel, a dinner theater located in Darien, Connecticut; that the promissory notes and guarantees were not registered under Section 36-485 of The Connecticut Uniform Securities Act; and that Sullo violated the antifraud provisions in Section 36-472 of the Act by misrepresenting how investor monies would be used and failing to disclose the basis for guaranteeing a fixed interest rate, the financial risks involved in the investments, that he was only qualified by the National Association of Securities Dealers to sell investment company and variable contracts products and that the securities transactions with investors were not recorded on the records of his employing broker-dealers. Since Sullo did not request a hearing within the prescribed time period, the Order became permanent as to him on January 27, 1994.
Transamerica Special Series, Inc. and Transamerica Fund Distributors, Inc. (CRD # 3554)
On March 18, 1994, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-94-2557-S) with Transamerica Special Series, Inc. ("TSS") and Transamerica Fund Distributors, Inc. ("TFD"), both of 1000 Louisiana Street, Houston, Texas. The Stipulation and Agreement followed a Securities and Business Investments Division investigation into the activities of TSS, an open-end management investment company; Transamerica Special Emerging Growth Fund, Transamerica Special Blue Chip Fund, Transamerica Special High Yield Bond Fund, Transamerica Special Natural Resources Fund and Transamerica Special Money Market Fund (collectively, the "Funds"); and TFD, distributor for Fund shares. That investigation uncovered indications that, from October 6, 1993 to February 1994, TSS, through TFD, offered and sold unregistered non-exempt shares of the Funds to Connecticut residents at a time when no registration was in effect in violation of Section 36-485 of The Connecticut Uniform Securities Act.
Pursuant to the Stipulation and Agreement, TSS and TFD agreed to 1) refrain from regulatory violations; and 2) implement a revised system of procedures designed to ensure compliance with blue sky registration requirements. In addition, TFD agreed to remit $2,500 to the agency as reimbursement for investigative costs and as an administrative fine.
L.C. Wegard & Co., Inc. (CRD # 3722)
On January 11, 1994, the Banking Commissioner entered a Consent Order with respect to L.C. Wegard & Co., Inc. (Case No. SS-93-2526-S) of 17 Battery Place, Suite 2232, New York, New York. The firm had been the subject of a December 27, 1993 Notice of Intent to Suspend its broker-dealer registration and a summary suspension order issued on the same day. Both actions had been predicated on the firm's alleged refusal to furnish material information to the agency in connection with an investigation and an examination of the respondent's Providence, Rhode Island branch office and New York City main office. Such refusal allegedly constituted a basis for administrative action under Section 36-484(a)(2)(L) of The Connecticut Uniform Securities Act. On January 5, 1994, the Respondent filed in the United States District Court for the District of Connecticut a request for a temporary restraining order and preliminary injunction seeking to, among other things, stay the summary suspension order. A temporary restraining order was issued by the District Court on January 6, 1994 staying the summary suspension order until January 14, 1994. On January 10, 1994, however, the District Court dissolved the temporary restraining order and scheduled a hearing on the Respondent's request for a preliminary injunction.
In the Consent Order, the respondent acknowledged that the Division had the authority to conduct both on-site and off-site examinations and investigations and represented that it had complied in all respects with the agency's summary suspension order. Pursuant to the Consent Order, the Respondent agreed to 1) produce and provide to Division staff a complete list of all records and reports which it generated, maintained and/or received and which related to its business as a broker-dealer; 2) provide Division staff with complete and immediate access to all records generated, maintained or received by the Respondent which related to the Respondent's securities business and which were maintained at any of its locations; 3) reimburse the department $9,435 for costs incurred to date in the conduct of the agency's investigation and examination; 4) reimburse the agency up to $7,500 for additional costs incurred during the completion of the examination; 5) refrain, until the close of business on January 12, 1994, from directly or indirectly soliciting any Connecticut resident to purchase securities; and 6) withdraw, without cost to the parties, all actions which it had filed in federal court relating to the Notice of Intent to Suspend Registration and the summary suspension order. The Consent Order also withdrew the Notice of Intent to Suspend Registration and the summary suspension order dated December 27, 1993.
Prudential Securities Incorporated (CRD # 18353) - Sales Practice Abuses Addressed
On January 27, 1994, the Banking Commissioner entered a Consent Order with respect to Prudential Securities Incorporated, a registered broker-dealer and investment adviser. The Consent Order followed an investigation into the firm's underwriting and sale of limited partnerships investors from January 1, 1980 through December 31, 1990 by or in conjunction with its Direct Investment Group. That investigation uncovered indications that the firm had violated Section 36-472 of The Connecticut Uniform Securities Act by misrepresenting speculative, illiquid limited partnerships as safe, income-producing investments suitable for safety-conscious investors; issuing misleading promotional materials which, in many cases, contradicted prospectus disclosures and failed to disclose the many conditions attendant to product guarantees; misusing terms such as "income", "return on investment" and "yield" without an adequate explanation of their meaning; reflecting limited partnerships on account statements at cost which gave investors a misleading impression as to the current market value of the partnership interests; and failing to disclose significant risks such as the absence of a reliable secondary market for the partnership interests. In addition, the investigation suggested that the firm had failed to make required suitability determinations and, in so doing, engaged in dishonest and unethical business practices. The firm also purportedly failed to supervise its sales force in connection with the sales of limited partnership interests.
The Consent Order acknowledged that the firm had consented to the entry of a court order by the U.S. District Court, Securities and Exchange Commission v. Prudential Securities Incorporated, 93 Civ. 2164, Final Order (D.D.C. Oct. 21, 1993) and an administrative order by the Securities and Exchange Commission In the Matter of Prudential Securities Incorporated, Exchange Act Rel. No. 34-33082 (October 21, 1993) in connection with the same matter.
Pursuant to the Connecticut Consent Order, the firm agreed to establish and maintain a database containing information on settled and arbitrable claims and to make such data available to the agency upon request. In addition, the Consent Order required that, within the time period required by the SEC orders, the firm establish and maintain for at least five years a Compliance Committee of its board of directors, the purpose of which would be to oversee the firm's compliance with federal and state securities laws and to report thereon at least quarterly to the board. The Consent Order also required that Prudential Securities Incorporated establish and maintain for 5 years the position of Regional Compliance Officer for each of its operating regions. Review and modification of the firm's supervisory, sales and marketing procedures were other conditions of the Consent Order. In addition, the Consent Order also contemplated that the firm 1) review, modify where appropriate, implement and maintain procedures to accomplish routine distribution of periodic branch office audit reports or compliance visitation reports to the Director of Compliance and to achieve timely correction of identified deficiencies; 2) cause its outside auditor to conduct annually for three years a statistically valid survey of customers designed to test the effectiveness of the firm's sales practice supervisory procedures; 3) cease and desist from regulatory violations; 4) fully comply with the Securities and Exchange Commission orders; 5) pay a $500,000 civil penalty to the agency; and 6) fully comply with the provisions of the Claims Fund established in the SEC orders. Finally, the Consent Order provided that it would not be construed as forming a basis for disqualifying the firm from relying on the private placement exemption under the Act.
Prudential Securities Incorporated (CRD # 18353) - Unregistered Investment Adviser Agent Activity Prompts Consent Order
On January 27, 1994, the Banking Commissioner entered a Consent Order with respect to Prudential Securities Incorporated, a registered broker-dealer and investment adviser. The Consent Order followed a Securities and Business Investments Division investigation which revealed indications that, from January 1992 through at least July 1993, the firm employed and paid compensation to unregistered investment adviser agents in contravention of The Connecticut Uniform Securities Act and a Stipulation and Agreement executed between the agency and the firm on February 20, 1992.
Pursuant to the Consent Order, the firm agreed to 1) cease and desist from regulatory violations; 2) receive a censure from the agency; 3) pay a $150,000 civil penalty; 4) be placed on administrative probation until its supervisory and oversight procedures were strengthened and reporting requirements were fulfilled as more fully set forth in the Consent Order; and 5) reimburse the agency for the cost, not to exceed $10,000 in the aggregate, of two or more examinations of any of its offices by the Division to be conducted within 48 months following the Commissioner's execution of the Consent Order. The Consent Order also provided that it would not be construed as forming a basis for disqualifying the firm from relying on the private placement exemption under the Act.
Peter Earle Butler d/b/a Glen Hill Investment Research (CRD # 37247)
On January 31, 1994, the Banking Commissioner entered a Consent Order with respect to Peter Earle Butler d/b/a Glen Hill Investment Research (File No. CO-94-2536-S) of 6 Glen Hill Lane, Wilton, Connecticut. The Consent Order followed an investigation by the Commissioner pursuant to Section 36-476 of The Connecticut Uniform Securities Act in connection with Butler's application for investment adviser registration. That investigation revealed that in 1992, Butler was permanently enjoined by the United States District Court for the Southern District of New York from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder (Securities and Exchange Commission v. Peter E. Butler, S.D.N.Y., SEC Litigation Release No. 13264, June 8, 1992); and that, in related administrative proceedings, the Securities and Exchange Commission suspended Butler from association with any securities broker or dealer, investment company, investment adviser or municipal securities dealer for a period of six months (Securities Exchange Act of 1934 Release No. 30788, June 8, 1992). If proven, such sanctions would have constituted a basis for denying Butler's application for investment adviser registration under Sections 36-484(a)(2)(D) and 36-484(a)(2)(F)(i) of the Act.
The Consent Order required that Butler comply with certain undertakings, to wit: that he would limit his investment advisory activities to institutional clients and would have no retail clients; his advisory research would be limited to securities which were exchange listed or traded on NASDAQ; he would refrain from taking a position in any security being recommended to clients; and he would refrain from advertising or other general solicitation in connection with his investment advisory business. In addition, the Consent Order 1) prohibited Butler from engaging in regulatory violations; 2) required him to refrain from having custody of client assets, funds and securities absent express written consent from the Division Director which consent would have to be obtained within forty five days prior to the acquisition of custody; 3) prohibited him from exercising investment discretion over client accounts absent express written consent from the Division Director which consent would have to be obtained within forty five days prior to any exercise of investment discretion; 4) for five years, prohibited him from engaging in personal securities transactions unless, prior to the execution of any such transaction, he obtained a written opinion of counsel to the effect that such transaction or transactions did not raise actual or potential conflicts of interest between him and his clients; and 5) prohibited him from a) sharing in commissions or other remuneration earned by any broker-dealer who executed securities transactions as a result of recommendations made by Butler and b) receiving a referral fee or other direct or indirect remuneration for referring clients to one or more broker-dealers.
Wachovia Securities, Incorporated (CRD # 17503)
On March 8, 1994, the Banking Commissioner entered a Consent Order (No. CO-94-2534-S) with respect to Wachovia Securities, Incorporated ("WSI") of 301 North Main Street, Winston-Salem, North Carolina. The Consent Order followed an investigation by the Commissioner pursuant to Sections 36-476 and 36-495 of The Connecticut Uniform Securities Act in connection with WSI's application for broker-dealer registration. That investigation revealed indications that from approximately 1990 through 1993, WSI transacted business as a broker-dealer absent registration under Section 36-474(a) of the Act and employed unregistered agents in contravention of Section 36-474(b) of the Act.
The Consent Order required that WSI cease and desist from regulatory violations and that the firm review, revise and implement supervisory and compliance procedures designed to prevent and detect violations of the Act and the Regulations thereunder. In addition, the Consent Order required that the firm pay $4,500 to the agency; $4,000 of that amount represented a civil penalty, uncollected registration fees during the period of unregistered activity and the disgorgement of commissions earned while the firm was not registered as a broker-dealer under the Act. The remaining $500 represented reimbursement for the division's investigative costs.
Crestar Securities Corporation (CRD # 17464)
On March 9, 1994, the Banking Commissioner entered a Consent Order (No. CO-94-2535-S) with respect to Crestar Securities Corporation ("CSC") of 11 South Tenth Street, Richmond, Virginia. The Consent Order followed an investigation by the Commissioner pursuant to Sections 36-476 and 36-495 of The Connecticut Uniform Securities Act in connection with CSC's application for broker-dealer registration. That investigation revealed indications that from approximately 1986 through 1993, CSC transacted business as a broker-dealer absent registration under Section 36-474(a) of the Act and employed unregistered agents in contravention of Section 36-474(b) of the Act.
The Consent Order required that CSC cease and desist from regulatory violations and that the firm review, revise and implement supervisory and compliance procedures designed to prevent and detect violations of the Act and the Regulations thereunder. In addition, the Consent Order required that the firm pay $8,000 to the agency; $7,500 of that amount represented a civil penalty, uncollected registration fees during the period of unregistered activity and the disgorgement of commissions earned while the firm was not registered as a broker-dealer under the Act. The remaining $500 represented reimbursement for the division's investigative costs.
Louis Cattaruzza (CRD # 724491) - Agent Registration Denied
On January 20, 1994, the Banking Commissioner ordered that the application of Louis Cattaruzza to register as an agent of G.R. Stuart & Company, Inc., a broker-dealer, be denied (Docket No. ND-93-2432-S). The Commissioner based the denial on Cattaruzza's filing of false or misleading statements in connection with his current and former applications for registration as an agent of G.R. Stuart & Company, Inc., Financial Services Network, Inc. and First Affiliated Securities. Specifically, the Commissioner found that Cattaruzza failed to disclose or amend his application to disclose that a judgment of $161,484.50 had been entered against him and against Douglas Bremen and Company, Inc. in the matter of Thomas D. Lefevre, et al. v. Douglas Bremen and Company, Inc. and Louis Cattaruzza, Docket No. CV89-0102919 (Connecticut Superior Ct., 10/18/92). The Commissioner also found that Cattaruzza's failure to pay the civil judgment constituted a basis for the denial of his registration pursuant to Section 52-400e of the Connecticut General Statutes. Cattaruzza did not contest the December 10, 1993 Notice of Intent to Deny registration which preceded the denial order.
January 1, 1994 through March 31, 1994
|Total Coordination (Initial & Renewal)||1,704||n/a||1,704|
|-- (Investment Co. Renewals 1,002)|
|-- (All Other Coordinations 702)|
|Regulation D Filings||436||n/a||436|
|Other Exemption or Exclusion Notices||73||17||73 (SE)|
|Business Opportunity (Initial)||n/a||7||7|
|Business Opportunity (Renewal)||n/a||5||5|
Branch Office Registration
|Firm Initial Registrations Processed||63||43||n/a||63 (BD)|
|Firms Registered as of 3/31/94||1,722||903||n/a||n/a|
|Agent Initial Registrations Processed||8,648||702||20||8,648 (BD)|
|Agents Registered as of 3/31/94||65,560||7,227||167||n/a|
|Branch Offices Registrations
|Branch Offices Registered
as of 3/31/94
|Examinations Conducted||7||2||0||7 BD)|
|Investigations Opened||50||29||50 (SE)|
|Referrals from Attorney General||1||0||1 (SE)|
|Referrals from Other Agencies||0||0||0 (SE)|
|Investigations Closed||45||25||45 (SE)|
|Investigations in Progress
as of 3/31/94
|Subpoenas Issued||6||0||6 (SE)|
|Stipulation and Agreements||1||2||1/2|
|Cease and Desist Orders||2||2||2/4|
|Denial, Suspension & Revocation Orders||1||1||1/1|
|Other Notices and Orders||0||0||0/0|
|Cease and Desist Orders||0||0||0/0|
|Other Notices and Orders||0||0||0/0|
|Stipulation and Agreements||0||0||0/0|
|Stipulation and Agreements and Consent Orders|
|- Business Opportunities||0||0|
|Public Reimbursement Following
Voluntary Restitution Offers;