|Securities and Business Investments Division|
|Vol. XVII No. 2||Summer 2003|
- A Word from the Banking Commissioner
- IARD Watch: 25% of Advisory Firms, 7% of Investment Adviser Agents Risk Renewal Problems
by Failing to Transition to Electronic Filing
- News from the Road: Examination Staff Flags Brokerage Firms, Agents
for Permitting Customers to Pre-Sign Blank Forms
- Second Quarter Statistical Summary
Ralph Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric Wilder, Assistant Director
Marge Kagan, Subscription Coordinator
As this issue goes to print, Congress is considering a measure that would restrict the remedies that state securities agencies and state courts can pursue to protect investors. The controversial provision is contained in Section 8 of The Securities Fraud Deterrence and Investor Restitution Act of 2003. Reflecting a backlash against recent state settlements involving analyst conflicts of interest, the bill prohibits states and their political subdivision from entering into settlement agreements or procuring civil or criminal judgments that impose on broker-dealers requirements that differ from, or supplement, requirements established under the federal securities laws, including SRO rules. In other words, state actions and settlements could only require broker-dealers to observe those requirements they should have complied with in the first place - a scenario akin to forbidding doctors from treating their sickest patients with anything but multi-vitamins. Remedial steps designed to help the firm correct its underlying problems would not be possible. The bill draws no distinctions between large firms and small, legitimate brokerage firms and chop houses, sizeable or nominal fines or multi-state versus individual state settlements. This is unfortunate. In addition, many times, remedial steps negotiated with broker-dealers may lessen the need for hefty penalties and prove much more beneficial for the investing public in the long run.
The bill may also have the regrettable effect of forcing regulators to pursue revocation, typically a remedy of last resort, when they can no longer work with firms on fashioning creative, flexible solutions to compliance problems. The department will continue to monitor the progress of this bill.
As we head into summer, plans are underway for this year's Securities Forum to be held on Monday, October 27, 2003. Last minute plans have prompted a change in locale to the Sheraton Hotel in Stamford, Connecticut. Details will be forthcoming in a separate mailer and on our website. This issue of the Securities Bulletin also features an article on the questionable practice of some brokerage firms and their agents to obtain pre-signed agreements and forms from their customers, thus raising suitability concerns. We have also included a reminder to those investment advisers and investment adviser agents who have not yet transitioned to electronic filing.
As always, we welcome your comments and questions.
John P. Burke
25 PERCENT OF STATE REGISTERED INVESTMENT ADVISERS,
NEARLY 7 PERCENT OF INVESTMENT ADVISER AGENTS RISK RENEWAL PROBLEMS
Failure to Transition to Electronic Filing Prompts Concerns
On January 16, 2003, the Banking Commissioner ordered that all new applicants for investment adviser and investment adviser agent registration, and all existing investment adviser and investment adviser agent registrants file electronically, and make related fee payments, through the Investment Adviser Registration Depository ("IARD") effective April 1, 2003. In three separate mailings, division staffers notified non-filers of the electronic filing requirement. To date, 25 percent of state-registered investment advisers and almost 7 percent of registered investment adviser agents have failed to transition to electronic filing.
CONNECTICUT RENEWAL FILINGS WILL ONLY BE PROCESSED FOR REGISTRANTS WHO HAVE FILED ELECTRONICALLY
When renewal season arrives in November, the department will only process renewal filings and fee payments for investment advisers and investment adviser agents who have filed electronically. Therefore, it is vital for affected advisory personnel to start the electronic filing process early.
(See www.iard.com/GetStarted.asp for More)
1. Set up an IARD User Account with the NASD, the operator of the IARD system. This procedure is called "Entitlement" and permits you to access the secure system.
2. Send funds to your firm's IARD financial account to cover registration fees for the firm and its investment adviser agents as well as initial set-up fees assessed by the NASD.
3. Existing registrants must make a Transition Filing for the firm and its investment adviser agents to capture data on the existing registration and allow regulators to enter original registration dates. If you do not make a Transition Filing, and you try to submit an electronic Form ADV, that Form ADV will be treated as a new filing and your firm will incur additional registration fees.
4. Update Forms ADV and U-4 via the IARD system.
NEWS FROM THE ROAD
Examination Staff Flags Brokerage Firms, Agents,
for Permitting Customers to Pre-Sign Blank Forms
During the course of conducting examinations, Division staff has discovered an alarming increase in the number of broker-dealer agents who are having clients pre-sign blank forms. The forms are then retained in the customer's file until they are ready to be completed. The forms are intentionally left blank and are filled in at a later date. Although the broker-dealer agent handling the account may believe this practice accommodates the client, it has, in each case, violated the employing broker-dealer's compliance policies and procedures and may be deemed an unethical business practice under the Connecticut Uniform Securities Act and its regulations. The Division wishes to notify registrants that the agency may be considering greater enforcement action against broker-dealers and agents who have their customers pre-sign forms.
Section 36b-15(a)(2)(H) of the Connecticut Uniform Securities Act provides a basis for denying suspending, revoking or conditioning a broker-dealer or agent registration where the Commissioner finds that the applicant or registrant has "engaged in dishonest or unethical practices in the securities or commodities business." Although Sections 36b-31-15a and 36b-31-15b of the Connecticut Uniform Securities Act Regulations set out several examples of practices that would be deemed dishonest or unethical, both sections of the Regulations also point out that the phrase is not limited to the practices described in the Regulations. While neither Section 36b-31-15a nor Section 36b-31-15b of the Regulations specifically mention pre-signed forms, the Division takes the position that the practice of having clients pre-sign forms that may or may not be completed in the future would be a dishonest or unethical business practice under Sections 36b-31-15a and 36b-31-15b of the Regulations. The potential and opportunity for pre-signed forms to be misused outweighs any possible benefit to the customer.
To date, the Division's has addressed this concern by issuing deficiency letters to the employing broker-dealers. Invariably, broker-dealers have stated that having customers pre-sign blank forms was against firm compliance procedures. Given the increasing number of incidents, however, the Division would call into question the adequacy of those procedures. Broker-dealers are cautioned that Section 36b-31-6f(b) of the Regulations requires that a registered firm "establish, enforce and maintain a system for supervising the activities of its agents, investment adviser agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations."
Left unabated, customer pre-signing of blank forms may lead to more significant compliance problems and more stringent enforcement action by the Division.
Karl Ramonas Fined $30,000 in Conjunction With Sale of Unregistered Partnership Interests
On June 26, 2003, the Banking Commissioner entered an Order Imposing Fine against Karl Ramonas, now or formerly of 69 Morris Street, Naugatuck, Connecticut and 23 Schroback Road, Plymouth, Connecticut (Docket No. CF-2003-6511-S). The respondent had been the subject of a March 18, 2003 Order to Cease and Desist and Notice of Intent to Fine. The Order to Cease and Desist, being uncontested, became permanent on April 9, 2003. Respondent Ramonas was the sole general partner of The Marketrack Investment Club, a partnership whose last known address is P.O. Box 11303, Waterbury, Connecticut.
The Order to Cease and Desist and Notice of Intent to Fine had alleged that from at least November 2000 forward, respondent Ramonas sold unregistered non- exempt partnership units in The Marketrack Investment Club to at least 86 investors through the issuer's Internet website in violation of Section 36b-16 of the Connecticut Uniform Securities Act. The Order to Cease and Desist and Notice of Intent to Fine had also alleged that respondent Ramonas violated Section 36b-6(a) of the Act by transacting business as an unregistered agent of issuer, and that the respondent had violated the antifraud provisions of the Act by 1) falsely representing to investors that their funds would be invested in securities for the benefit of the partners when, in reality, such funds were never so invested, and at least $94,500 in investor monies were used by respondent Ramonas to cover his personal expenses; and 2) failing to disclose that there had been a material change in the number of partnership units available to the investing public and the maximum number of partners allowable under the partnership agreements.
In fining the respondent $30,000, the Commissioner found that respondent Ramonas had violated Sections 36b-6(b) and 36b-16 of the Act as well as the antifraud provisions in Section 36b-4 of the Act.
The Marketrack Investment Club Fined $30,000
On June 26, 2003, the Banking Commissioner entered an Order Imposing Fine against The Marketrack Investment Club, a partnership whose last known address is P.O. Box 11303, Waterbury, Connecticut (Docket No. CF-2003- 6511-S. The respondent had been the subject of a March 18, 2003 Order to Cease and Desist and Notice of Intent to Fine. The Order to Cease and Desist, being uncontested, had become permanent on April, 9, 2003.
The Order to Cease and Desist and Notice of Intent to Fine had alleged that from at least November 2000 forward, The Marketrack Investment Club sold unregistered, non-exempt partnership units to at least 86 investors through its Internet website in violation of Section 36b-16 of the Connecticut Uniform Securities Act. The action had also alleged that The Marketrack Investment Club violated Section 36b-6(b) of the Act by employing one Karl Ramonas, its general partner, as an unregistered agent of issuer. The action had also claimed that the respondent violated the antifraud provisions of the Act by 1) falsely representing to investors that their funds would be invested in securities for the benefit of the partners when, in reality, such funds were never so invested, and at least $94,500 in investor monies were used by Karl Ramonas to cover his personal expenses; and 2) failing to disclose that there had been a material change in the number of partnership units available to the investing public and the maximum number of partners allowable under the partnership agreements.
In fining the respondent $30,000, the Commissioner found that the respondent had violated Sections 36b-6(b) and 36b-16 of the Act as well as the antifraud provisions in Section 36b-4 of the Act.
eNexus Corporation Ordered to Cease and Desist from Selling Unregistered Securities; Notice of Intent to Fine Issued
On May 15, 2003, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2003-6468-S) against eNexus Corporation of 7 Gaston Farm Road, Greenwich, Connecticut. In initiating administrative proceedings, the Commissioner alleged that, from at least January 1992 forward, the respondent, through its president and chief executive officer Barbara E. Williams, sold unregistered non-exempt common shares and promissory notes of eNexus Corporation in violation of Section 36b-16 of the Connecticut Uniform Securities Act.
The respondent was afforded an opportunity to request a hearing on the Order to Cease and Desist. A hearing on the Notice of Intent to Fine is pending.
Barbara E. Williams Ordered to Cease and Desist from Unregistered Security Sales; Notice of Intent to Fine Issued
On May 15, 2003, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2003-6468-S) against Barbara E. Williams, president and chief executive officer of eNexus Corporation. The Order to Cease and Desist and Notice of Intent to Fine claimed that, from at least January 1992 forward, the respondent sold unregistered non-exempt common shares and promissory notes of eNexus Corporation to at least 39 investors in contravention of Section 36b-16 of the Connecticut Uniform Securities Act.
The respondent was afforded an opportunity to request a hearing on the Order to Cease and Desist. A hearing on the Notice of Intent to Fine is pending.
Tri-West Investment Club Fined $20,000 for Fraudulent Sales of Membership Units
On May 7, 2003, the Banking Commissioner entered an Order Imposing Fine against Tri-West Investment Club of 160 North Front Street, P.O. Box 354, Belize City, Belize (Docket No. 2003-6319-S). The Commissioner's action followed a January 23, 2003 Order to Cease and Desist against the respondent which, being uncontested, became permanent on April 1, 2003, and a January 23, 2003 Notice of Intent to Fine.
In fining the respondent $20,000, the Commissioner found that from at least June 2000 to December 2001, the firm violated Section 36b-16 of the Connecticut Uniform Securities Act by selling unregistered membership units through its Internet website at www.triwestinvest.com. The Commissioner also found that, in connection with the offering, the respondent violated Section 36b-4 of the Act by making false statements and omissions in connection with the offering. Specifically, the respondent purportedly stated that it was selling memberships in a club that invested membership money in Prime Bank Notes, Prime Bank Debenture Forfeitures, Leveraged Bond Purchases and Bank Debentures when, in reality, 1) the respondent made no such investments; and 2) Prime Banks did not exist and, accordingly, could not issue any type of note, debenture or bond. The Commissioner also found that the respondent represented that 1) membership investments were of minimal risk, when such investments were highly risky; and 2) respondent would pay a ten percent rate of return per month, when, in actuality, the respondent never paid such returns to investors.
James P. Dooley (CRD # 4523294) Barred for Two Years From Conducting Securities Business in Connecticut; Ordered to Cease and Desist From Regulatory Violations; Assessed $1,000
On June 10, 2003, the Banking Commissioner entered a Consent Order (File No. CO-03-6446-S) with respect to James P. Dooley of Enfield, Connecticut. The Consent Order alleged that, from September 1999 through November 1999, respondent Dooley offered and sold unregistered non-exempt securities in the form of payphones and payphone service contracts of American Tele- communications Company, Inc. f/k/a ATC, Inc. and Alpha Telcom, Inc. a/k/a Alpha Tel-Com, Inc., respectively, in violation of Section 36b-16 of the Connecticut Uniform Securities Act. The Consent Order also alleged that, in so doing, respondent Dooley transacted business as an unregistered agent of issuer in contravention of Section 36b-6(a) of the Act.
The Consent Order barred respondent Dooley for two years from transacting business in or from Connecticut as a broker-dealer, investment adviser, agent of issuer, broker-dealer agent or investment adviser agent. In addition, the Consent Order mandated that respondent Dooley pay $1,000 to the department, $500 of which constituted an administrative fine and $500 of which represented reimbursement for agency investigative costs. The Consent Order also directed the respondent to cease and desist from regulatory violations.
optionsXpress, Inc. (CRD # 103849) Fined $5,000 for Unregistered Agent Activity
On June 2, 2003, the Banking Commissioner entered a Consent Order (File No. CO-02-6569-S) with respect to optionsXpress, Inc., a Connecticut-registered broker-dealer having its principal office at 39 South LaSalle Street, Suite 220, Chicago, Illinois. The Consent Order alleged that optionsXpress, Inc. had employed Ronald C. Galvin as an agent at a time when Galvin was not registered as such under the Connecticut Uniform Securities Act, and that the firm had failed to establish, enforce and maintain an adequate supervisory system. Ronald C. Galvin is no longer associated with the firm.
The Consent Order fined the firm $5,000 and required that it provide the department with quarterly reports for two years concerning any securities-related complaints, actions or proceedings involving Connecticut residents. The Consent Order also required that the firm reimburse the agency up to $2,500 for the cost of one or more examinations to be conducted by the department within 24 months.
William P. Fauzio (CRD # 2193834) Assessed $1,000 for Borrowing Money From Securities Brokerage Clients Without Notice to Employing Firm
On June 2, 2003, the Banking Commissioner entered a Consent Order with respect to William P. Fauzio of Branford, Connecticut (File No. CO-03-6716-S). The Consent Order alleged that, between August 1995 and June 1997, while associated with the securities brokerage firm of Royal Alliance Associates, Inc., William Fauzio borrowed money from securities brokerage clients without notice to his employing broker- dealer. If proven, such conduct would constitute a dishonest or unethical business practice under Section 36b-31-15b(a)(1) of the Connecticut Uniform Securities Act Regulations. William Fauzio represented in writing to the Commissioner that all of the clients from whom he had borrowed money had consented to the loans; that he had repaid each of the lenders; and that there were no related claims against him outstanding.
The Consent Order prohibited William Fauzio from borrowing monies from clients absent notice to any broker-dealer with whom he became associated in the future. In addition, the Consent Order mandated that William Fauzio provide a copy of the Consent Order to any future employing broker-dealer, abide by any special supervisory requirements that broker-dealer imposed; and remit $1,000 to the department as reimbursement for agency investigative costs.
Seaboard Securities, Inc. (CRD # 755) Fined $10,000; Connecticut Activities Restricted
On April 7, 2003, the Banking Commissioner entered a Consent Order with respect to Seaboard Securities, Inc. of 25B Vreeland Road, Suite 305, Florham Park, New Jersey (File No. CO-02-6650-S). The Consent Order alleged that the firm engaged in dishonest or unethical practices in the securities business by employing individuals who were not registered with the NASD; guaranteeing customer accounts against loss; and engaging in unauthorized trading. The conduct allegedly occurred at the firm's Islandia, New York branch office which has since been closed. In addition, the Consent Order alleged that the firm failed to establish, enforce and maintain an adequate supervisory system.
The Consent Order fined the firm $10,000 and restricted its Connecticut securities activity for two years to investment company securities, government securities, exchange-listed options, exchange-listed securities and NASDAQ-NMS securities. In addition, the Consent Order directed the firm to file reports with the department for two years covering any securities-related complaints, actions or proceedings involving Connecticut residents. The Consent Order also mandated that the firm reimburse the agency up to $2,500 to cover the costs of one or more examinations of the firm's offices to be conducted within 24 months.
Hornor, Townsend & Kent, Inc. (CRD # 4031) Fined $7,500 for Unregistered Branch Office Activity
On June 25, 2003, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-03-6804-S) with Hornor, Townsend & Kent, Inc., a broker- dealer having its principal office at 600 Dresher Road, Suite C1C, Horsham, Pennsylvania. The Stipulation and Agreement alleged that the firm transacted business from five Connecticut locations at a time when those sites were not registered as branch offices under the Connecticut Uniform Securities Act.
Pursuant to the Stipulation and Agreement, the firm agreed to revise and implement supervisory and compliance procedures reasonably designed to prevent and detect violations of Connecticut law governing branch office registration. In addition, the firm agreed to pay a $7,500 fine to the agency.
Todd R. Scully (CRD # 2139448) Pleads Guilty to Fraud
On May 23, 2003, Todd R. Scully of 4 East Trail, Darien, Connecticut pled guilty in Stamford Superior Court to one count of securities fraud, one count of second degree forgery and two counts of first degree larceny. In a press release announcing the plea, the Office of the Chief State's Attorney stated that defendant Scully had defrauded an elderly client of $1million by closing the victim's account without the victim's knowledge and transferring the proceeds to accounts that Scully controlled. At the time of the misconduct, Scully was employed by Merrill Lynch, Pierce, Fenner & Smith Incorporated. The firm reimbursed the victim for the victim's losses, and initiated the criminal complaint leading to Scully's arrest. Defendant Scully is no longer employed in the securities industry.
Sentencing is scheduled for July 25, 2003. Under the terms of the plea, defendant Scully will receive a prison term of 5 years, suspended after 18 months incarceration, and will pay $1,008,732 in restitution.
|Licensing At A Glance|
June 30, 2003
|Broker-dealer Agents Registered||112,726|
|Broker-dealer Branch Offices Registered||2,019|
|Investment Advisers Registered||415|
|SEC Registered Advisers Filing Notice||1,264|
|Investment Adviser Agents Registered||5,961|
|Investment Advisory Branch Offices Registered||166|
|Agents of Issuer Registered||93|
|Securities and Business Opportunity Filings|
|Investment Company Notice Filings||292||228||520|
|Exemptions and Exemptive Notices||511||500||1,011|
|Ongoing as of June 30, 2003||76||86|
|Cases referred from Attorney General||2||3||5|
|Cases referred from Other Agencies||3||4||7|
|Business Opportunity Investigations|
|Ongoing as of June 30, 2003||5||3|
|Securities Enforcement: Remedies and Sanctions|
|Notices of Intent to Deny (Licensing)||0||0||0|
|Notices of Intent to Suspend (Licensing)||0||0||0|
|Notices of Intent to Revoke (Licensing)||0||0||0|
|Denial Orders (Licensing)||0||0||0|
|Suspension Orders (Licensing)||0||0||0|
|Revocation Orders (Licensing)||3||0||3|
|Notices of Intent to Fine||3||2||5|
|Orders Imposing Fine||0||3||3|
|Cease and Desist Orders||4||3||7|
|Notices of Intent to Issue Stop Order||0||0||0|
|Formal Orders of Restitution||0||0||0|
|Proceedings and Settlements|
|Carryover from 2002||1|
|Carryover from Q1||1|
|Stipulation and Agreements||4||1||5|
|Monetary Sanctions Imposed||$ 9,500||$104,500||$ 943,748|
|Carryover from 2002||$567,346|
| Reported in Q1
|Restitution or Other Monetary Relief||$ 67,865||$1,148,415||$ 1,216,280|
|Criminal (Chief State's Attorney)||0||2||2|
|Civil (Attorney General)||0||0||0|
|Other Agency Referrals||0||0||0|