|Securities and Business Investments Division|
|Vol. XXI No. 3||
- A Word from the Banking Commissioner
- FTC Rule Change Affects Franchisors Filing Under Connecticut
Business Opportunity Law
Financial Statement Filing Waiver Underutilized
- Quarterly Statistical Summaries
Ralph Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric Wilder, Assistant Director
Helen Crane, Subscription Coordinator
Mortgage lending issues continued to command center stage. This quarter, Governor M. Jodi Rell and I announced the establishment of a Mortgage Foreclosure Assistance Hotline to help Connecticut residents facing home foreclosure. The free hotline (877-472-8313) is available Monday through Friday from 8:00 a.m. to 5:00 p.m. The hotline is a natural outgrowth of a recently created task force formed by Governor Rell and staffed by leading banking and mortgage experts to make recommendations concerning sub-prime lending in our state.
Securities Forum 2007 will be held on Thursday, October 25, 2007 at the Crowne Plaza Hotel in Cromwell, Connecticut. I hope to see you there. This year's event will feature four workshops organized into broker-dealer and investment advisory tracks as well as an opening general session designed to keep you up-to-speed on critical regulatory developments. The program fee is a modest $65 per person ($60 per person for attendees from the same firm) and includes a luncheon and course materials. The Certified Financial Planner Board of Standards has granted up to 4.5 continuing education credits for the conference. This year, we are fortunate to have as our keynote speaker Karl J. Krapek, former President and Chief Operating Officer of United Technologies Corporation. Mr. Krapek brings with him a wealth of corporate and community service and promises to be an exceptional speaker. Additional panel presentations include: Surviving a Broker-dealer Examination; Conflict of Interest Management for Investment Advisers; Broker-dealer Enforcement Clinic; and Compliance Tools for Investment Advisers. Further details, including registration information, are available on our website.
We have been monitoring with interest the Securities and Exchange Commission's proposals affecting securities registration and exemptions, including electronic filing of Form D which would greatly facilitate private offering filings at the federal and state levels. Along these lines, I recently submitted a comment letter to the Commission expressing my support for e-filing and providing additional observations on File Number S7-12-07.
As always, we welcome your feedback and suggestions.
Howard F. Pitkin
FILING UNDER THE CONNECTICUT BUSINESS OPPORTUNITY INVESTMENT ACT
On January 23, 2007, the Federal Trade Commission (the “FTC”) announced that it had adopted a final amended Franchise Rule, with a Statement of Basis and Purpose and Regulatory Analysis (the “2007 Franchise Rule”). The 2007 Franchise Rule represents the first time the FTC has amended its Franchise Rule (the “Original Franchise Rule”) since 1978, when it was originally promulgated. The 2007 Franchise Rule adopts new requirements for franchisors preparing franchise disclosure documents. The amended Rule separates the requirements applicable to franchises from those applicable to business opportunity ventures, as federally defined. Part 436 of the amended rule covers only franchises, while a newly-numbered Part 437 preserves the text of the original rule relating to business opportunity ventures. The FTC is conducting a separate proceeding to consider amendments to what is now designated Part 437, the Business Opportunity Rule.
- The Commissioner requests on a case-by-case basis that financial statements be submitted
- The broker-dealer registrant’s financial statements are subject to special review by FINRA or the SEC
- The broker-dealer registrant’s liabilities exceed its assets, or its most recent audited financial statements reflect that it has failed at any time covered by the audited financial statements, to maintain the minimum net capital required by SEC Rule15c3-1, 17 C.F.R. § 240.15c3-1
- The broker-dealer registrant is not in compliance with FINRA and SEC filing requirements
- A trustee has been appointed for the broker-dealer under the Securities Investor Protection Act of 1970, 15 U.S.C. §§ 78aaa et seq.
- The firm is submitting an initial registration application under the Connecticut Uniform Securities Act
- The firm is not registered with FINRA
Cauzae McCall (CRD # 3005713) and The McCall Business Group, LLC d/b/a MBG Private Trading Each Fined $220,000 Following a Hearing
On September 21, 2007, the Banking Commissioner issued Findings of Fact, Conclusions of Law and an Order Imposing Fine in the matter of The McCall Business Group, LLC d/b/a MBG Private Trading of 3047 Pinewood Hills Drive, Matthews, North Carolina, and Cauzae McCall, principal of the company. The respondents previously maintained a place of business at 23 Schoolhouse Road, Old Saybrook, Connecticut and 222 Stonehouse Lane, Guilford, Connecticut. The respondents had been the subject of an April 19, 2007 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2007-7225-S) alleging that from at least September 2003 forward, the respondents offered and sold unregistered promissory notes in violation of Section 36b-16 of the Connecticut Uniform Securities Act. In addition, the action had claimed that the respondents violated the antifraud provisions of the Act by 1) not disclosing to investors the risk factors underlying the investment as well as financial information on the respondents and the work history of The McCall Business Group, LLC’s managing member; and 2) guaranteeing a 100% return on the investment. Since neither respondent had requested a hearing on the Order to Cease and Desist, the Order to Cease and Desist had became permanent as to each on May 17, 2007.
The September 21, 2007 action fined The McCall Business Group $220,000 and levied a $220,000 fine against Cauzae McCall. The Commissioner found, after a hearing, that the respondents had violated Section 36b-16 of the Act as well as the antifraud provisions in Section 36b-4(a) of the Act. Specifically, the action found that at least one Connecticut investor had been guaranteed a 100% return on her investment, and that the respondents failed to disclose any risk factors related to the note investment, any financial information on the respondents or any relevant information on Cauzae McCall’s work history. In light of respondent Cauzae McCall’s prior experience in the securities industry, the Commissioner found unpersuasive respondents’ argument that their violations of the Act were the result of ignorance of securities registration requirements.
Gregory J. Duffy (CRD # 5145614) Barred from Securities Business for Ten Years for Alleged Unregistered Activity, Use of Misleading Sales Scripts
On September 18, 2007, the Banking Commissioner entered a Consent Order (No. CO-07-7425-S) with respect to Gregory J. Duffy, a former representative of New Castle Financial Services LLC (CRD number 102380). The Consent Order alleged that, from October 2006 through February 2007, Gregory J. Duffy violated Section 36b-6(a) of the Connecticut Uniform Securities Act by transacting business as a broker-dealer agent of New Castle Financial Services LLC while unregistered. Duffy purportedly worked from an unregistered branch office of the firm located at 4 Old Mill Plain Road, Danbury, Connecticut. The Consent Order also alleged that Gregory J. Duffy violated Section 36b-4(b) of the Act by using scripted sales presentations that contained false and misleading statements and that had not been reviewed or approved by the management of New Castle Financial Services LLC.
The Consent Order barred Gregory J. Duffy for ten years from transacting business in Connecticut as a broker-dealer, agent, investment adviser, investment adviser agent or agent of issuer, with leave to reapply for registration after seven years had elapsed from the entry of the Consent Order. The Consent Order also directed Gregory J. Duffy to cease and desist from regulatory violations.
HCH Cypress, LLC Fined $200,000; Bradley W. Kabbash (CRD # 2562409) Fined $400,000 for Antifraud and Registration Violations
On September 18, 2007, the Banking Commissioner entered an Order imposing a $200,000 fine against HCH Cypress, LLC, whose last known address is c/o Five Mile Group, 694 Boston Post Road, Darien, Connecticut, and a $400,000 fine against HCH Cypress, LLC’s managing member, Bradley W. Kabbash of Greenwich, Connecticut (Docket No. CF-2007-7134-S). The respondents did not appear at the hearing preceding the imposition of the fine. In assessing the penalty, the Commissioner found that the respondents had violated Sections 36b-16 and 36b-4 of the Connecticut Uniform Securities Act.
The September 18, 2007 Order had been preceded by a January 11, 2007 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2007-7134-S) alleging that, in 2002, the respondents violated Section 36b-16 of the Act by offering and selling unregistered limited liability company interests and promissory notes. In addition, the action had alleged that the respondents violated the antifraud provisions in Section 36b-4 of the Act by providing inadequate disclosures to investors. The action had claimed that respondent Kabbash falsely represented to investors that the investment proceeds would be used to finance the acquisition of hospitals and ambulatory surgical centers when, in fact, the funds were used to pay respondent Kabbash’s personal expenses.
In addition, to fining the respondents, the September 18, 2007 Order rendered the January 11, 2007 Order to Cease and Desist permanent as to both HCH Cypress, LLC and Bradley W. Kabbash.
Kuhns Brothers Capital Management, Inc. (CRD # 126727) Assessed $5,100 Following Claims of Unregistered Investment Advisory Activity
On August 28, 2007, the Banking Commissioner entered a Consent Order (No. CO-07-7386-S) with respect to Kuhns Brothers Capital Management, Inc. of 558 Lime Rock Road, Lakeville, Connecticut. The firm had applied for investment adviser registration under the Connecticut Uniform Securities Act in August 2006. The Securities and Exchange Commission had canceled the firm’s federal registration on August 20, 2004. The Consent Order alleged that from August 2004 forward, the firm transacted business as an investment adviser while unregistered and employed an unregistered investment adviser agent, all in contravention of Section 36b-6(c) of the Act. The Consent Order directed the firm to implement revised supervisory procedures to improve regulatory compliance. In addition, the Consent Order required that the firm remit $5,100 to the department. Of that amount, $3,000 constituted an administrative fine, $600 represented past due registration fees; and $1,500 would be applied to defray the agency’s investigative costs.
Kuhns Brothers Capital Management, Inc. became registered as an investment adviser in Connecticut on August 28, 2007.
Pennaluna & Company, Inc. (CRD # 11604) – Consent Order Conditioning Effectiveness of Withdrawal of Application for Registration as a Broker-Dealer Entered
On August 27, 2007, the Banking Commissioner entered a Consent Order (No. CO-07-7362-S) conditioning the withdrawal of Pennaluna & Company, Inc.’s broker-dealer application under the Connecticut Uniform Securities Act. The firm, which maintains its principal office at 421 Sherman Avenue, Suite 203, Coeur D’Alene, Idaho, had filed for broker-dealer registration in 2006 and filed to withdraw that application in July 2007. The Consent Order alleged that 1) from at least October, 2001 through August, 2004, the firm had transacted business in Connecticut as a broker-dealer absent registration and had employed two unregistered agents; and 2) the firm’s application was materially incomplete with respect to disclosures concerning the firm’s prior securities activities in Connecticut. The Consent Order precluded the firm and its successors in interest from reapplying for registration as a broker-dealer for three years, and directed the firm to refrain from engaging in violative conduct. In addition, the Consent Order required that the firm remit $7,500 to the department. Of that amount, $5,000 constituted an administrative fine and $2,500 would be applied to defray the agency’s investigative costs. The firm’s withdrawal of its broker-dealer application was made effective on August 27, 2007.
Strand, Atkinson, Williams & York, Inc. (CRD # 1254) Assessed $4,750 Following Claims of Unregistered Activity
On August 8, 2007, the Banking Commissioner issued a Consent Order (No. CO-07-7400-S) with respect to Strand, Atkinson, Williams & York, Inc., an applicant for broker-dealer registration located at 200 SW Market Street, Suite 1900, Portland, Oregon. The Consent Order alleged that, from at least November 2004 through August 2006, the firm had transacted business as a broker-dealer while unregistered and had employed unregistered agents. The Consent Order required that the firm remit $4,750 to the department. Of that amount, $3,000 constituted an administrative fine; $750 represented past due broker-dealer and agent registration fees; and $1,000 would be applied to defray agency investigative costs. In addition, the Consent Order directed the firm to cease and desist from regulatory violations; implement revised supervisory and compliance procedures; and file quarterly reports for two years describing any securities-related complaints, actions or proceedings involving Connecticut residents.
Strand, Atkins, Williams & York, Inc. became registered as a broker-dealer under the Connecticut Uniform Securities Act on August 8, 2007.
M & I Brokerage Services, Inc. (CRD # 16517) – Consent Order Conditioning Broker-dealer Registration Issued
On July 30, 2007, the Banking Commissioner issued a Consent Order (No. CO-07-7394-S) conditioning the broker-dealer registration of M & I Brokerage Services, Inc. of 770 North Water Street, Milwaukee, Wisconsin. The Consent Order alleged that at various times between December 1995 and January 2006, the firm transacted business as a broker-dealer absent registration under the Connecticut Uniform Securities Act and employed unregistered agents. The Consent Order required the firm to file quarterly reports for three years describing any securities-related complaints, actions or proceedings involving Connecticut residents; implement revised supervisory and compliance procedures; and refrain from engaging in violative conduct. In addition, the Consent Order required the firm to pay $7,550 to the department. Of that amount, $5,000 constituted an administrative fine, $1,050 constituted reimbursement for past due registration fees and $1,500 would be allocated to defray agency investigative costs.
M & I Brokerage Services, Inc. became registered as a broker-dealer in Connecticut on July 30, 2007.
Moran Capital Management, Inc. (CRD # 136681) – Investment Adviser Registration Denied
Frederick Augustus Moran (CRD # 339526) – Investment Adviser Agent Registration Denied
On July 27, 2007, following a hearing, the Banking Commissioner issued Findings of Fact, Conclusions of Law and Order (Docket No. ND-2007-7293-S) in the matter of Moran Capital Management, Inc. of 48 Route 6, Suite G01, Yorktown Heights, New York, and Frederick Augustus Moran, the firm’s president and CEO. The action had been preceded by a March 13, 2007 Notice of Intent to Deny Registration as Investment Adviser with respect to the firm, and a March 13, 2007 Notice of Intent to Deny Registration as Investment Adviser Agent with respect to Frederick Augustus Moran.
In denying the firm’s investment advisory registration, the Commissioner found that 1) on April 4, 1997, the U.S. District Court for the Southern District of New York entered a Final Judgment of Permanent Injunction and Other Equitable Relief against Frederick Augustus Moran (SEC v. Frederick Augustus Moran et al., Case No. 95 Civ. 4472 (BN)); and 2) the firm falsely answered “no” to a Form ADV question concerning prior injunctions involving advisory affiliates, which would have included Frederick Moran. In denying Frederick Augustus Moran’s registration as an investment adviser agent, the Commissioner found that Frederick Augustus Moran had been enjoined from, among other things, violating the antifraud provisions of Section 206(2) of the Investment Advisers Act of 1940 (SEC v. Frederick Augustus Moran et al., Case No. 95 Civ. 4472 (BN)).
Tower Square Securities, Inc. (CRD # 833), USAllianz Securities, Inc. (CRD # 40875) n/k/a Questar Capital Corporation (CRD # 43100) and Advantage Capital Corp. (CRD # 146) Fined $400,000 in the Aggregate for Failing to Supervise Agent Convicted of Misappropriating Client Funds
On July 23, 2007, the Banking Commissioner entered a Consent Order (No. CO-07-7159-S) with respect to Tower Square Securities, Inc. (“TSSI”), a registered broker-dealer located at One Cityplace, 18th Floor, Hartford, Connecticut; USAllianz Securities, Inc. (“USAS”) of 5701 Golden Hills Drive, Minneapolis, Minnesota; and Advantage Capital Corporation (“ACC”), a registered broker-dealer located at 2300 Windy Ridge Parkway, Suite 1100, Atlanta, Georgia. In December, 2006, USAS merged with and assumed the name of Questar Capital Corporation, a Connecticut-registered broker-dealer and affiliate of USAS. The Consent Order alleged that, at various times from 1994 through 2005, the firms engaged David M. Faubert (CRD number 2150188) (“Faubert”) as a broker-dealer agent; that the firms failed to discover that Faubert had been preparing fraudulent monthly statements that improperly inflated the value of client holdings and had been forwarding those statements to clients; that Faubert was depositing client funds into the account of Faubert Financial Group, Inc. and misappropriating those funds for his personal use; and that the firms, as a result, had failed to establish, enforce and maintain an adequate supervisory system. On May 3, 2007, Faubert had been sentenced in New Haven federal court to 7 years in prison for stealing client funds. Faubert's broker-dealer agent registration had been revoked by the Commissioner on May 19, 2005 (Docket No. SS-2005-7159-S).
In furtherance of their desire to resolve the matter informally with the department, the firms represented to the Commissioner that they had either monetarily settled the claims of affected investors or offered restitution of the net losses allegedly incurred. Investor losses in the matter were estimated to exceed $5 million.
The Consent Order imposed fines of $300,000 against TSSI, $75,000 against USAS and $25,000 against ACC. The Consent Order also directed the firms to conduct branch office audits within 24 months following the entry of the Consent Order and report their findings to the agency.
ICG Financial, LLC f/k/a ICG Investment Consulting Group, LLC Assessed $7,500 for Unregistered Investment Adviser Activity
On July 17, 2007, the Banking Commissioner entered a Consent Order (No. CO-07-7230-S) with respect to ICG Financial, LLC of 6729 North Palm Avenue, Fresno, California. The Consent Order alleged that from at least January 1, 2005 to September 30, 2005, the firm transacted business as an investment adviser while unregistered in violation of Section 36b-6(c)(1) of the Connecticut Uniform Securities Act. The Consent Order directed ICG Financial, LLC to cease and desist from regulatory violations and required that the firm remit $7,500 to the department. Of that amount, $5,000 constituted an administrative fine and $2,500 would be applied to defray agency investigative costs.
Steven Gray (CRD # 2665911) – Agent Registration Revoked; $300,000 Fine Imposed
On July 13, 2007, the Banking Commissioner issued Findings of Fact, Conclusions of Law and an Order in the matter of Steven Gray, a former registered broker-dealer agent of Independent Securities Investors Corporation (CRD number 43598). The action had been preceded by a March 2, 2006 Notice of Intent to Revoke Registration as Agent and Notice of Intent to Fine (Docket No. RF-2006-7155-S). The Notice of Intent to Revoke Registration as Agent and Notice of Intent to Fine had alleged that 1) respondent Gray violated Section 36b-16 of the Connecticut Uniform Securities Act by selling unregistered, non-exempt notes issued by Charter One Capital Holding, Inc., an entity of which he was president and that owned and operated a branch of Independent Securities Investors Corporation in New York, New York; 2) Gray violated Section 36b-4 of the Act by engaging in fraudulent practices with respect to sales of the Charter One Capital Holdings, Inc. notes; 3) Gray failed to supervise one or more Independent Securities Investors Corporation agents who engaged in unauthorized trading, effected securities transactions while unregistered, and violated Section 36b-16 of the Act by selling unregistered securities of Bio-Solutions Manufacturing and Stake Technology; 4) Gray violated Section 36b-31-6e of the Regulations by engaging in private securities transactions; 5) Gray engaged in dishonest or unethical practices; and 6) Gray withheld material information from the Commissioner by failing to provide agency staff with requested documents. A hearing on the matters alleged in the Notice of Intent to Revoke Registration as Agent and Notice of Intent to Fine was held on September 25, 2006, October 16, 2006, November 28, 2006, November 29, 2006 and April 11, 2007.
In revoking respondent Gray’s agent registration and fining respondent Gray $300,000, the Commissioner found that 1) grounds existed under Section 36b-15(a)(2)(K) of the Connecticut Uniform Securities Act to revoke the respondent’s registration based upon the respondent’s failure to supervise agents subject to his oversight; 2) the respondent violated Section 36b-16 of the Act by selling unregistered, non-exempt notes issued by Charter One Capital Holding, Inc.; and 3) the respondent violated the antifraud provisions in Section 36b-4 of the Act by failing to pay interest on the Charter One Capital Holding, Inc. notes in accordance with the notes’ terms, failing to provide risk disclosure or sufficient financial information on the issuer, and providing investors with false information on the affiliation between Charter One Capital Holding, Inc. and various individuals. In addition, the Commissioner found that the respondent 1) violated Section 36b-31-6e of the Regulations under the Act by engaging in private securities transactions in connection with the Charter One Capital Holding, Inc. note offerings; 2) engaged in dishonest and unethical practices in the securities business within the meaning of Section 36b-31-15a(b) of the Regulations under the Act; and 3) withheld material information from the Commissioner.
Chief State's Attorney Announces Arrest of Ernest P. Lamonica (CRD # 1277052) for Selling Unregistered Securities, Theft from Westport, Connecticut Resident
Ernest P. Lamonica, who was completing his sentence in an Alabama prison, was arrested by Inspectors from the Chief State's Attorney's Office in August 2007 and charged with similar securities violations for allegedly selling non-existent investments to a Westport, Connecticut resident. Lamonica was arrested in Shelby County, Alabama.
Connecticut Inspectors charged him with one count each of Larceny in the First Degree, Fraudulent Sale of Securities, Offering of Sale of Unregistered Securities, Conducting Securities Business as an Unregistered Agent, and Dishonest or Unethical Practice in the Securities Business, all felonies. According to the arrest warrant affidavit, Mr. Lamonica contacted a Westport resident in 1996 and claimed to be the President and CEO of Digital Entertainment Corporation (DEC), a business venture involving the purchase of television stations to convert them into digital broadcasting stations. Later, the warrant states, he purported to head a second venture entitled Pacific Rim Investment Partners (PRIP) and claimed that he was raising funds for the discovery and organization of a theme park in China. According to the warrant, between 1996 and 2005, after receiving paperwork detailing the businesses, the victim paid $51,500 to Mr. Lamonica to invest in these ventures. After repeated attempts to contact Mr. Lamonica, the victim filed a complaint with the Connecticut Department of Banking. An investigation revealed that both DEC and PRIP were non-existent companies and there were no legitimate investments affiliated with either venture, according to the warrant. The investigation by inspectors from the Office of the Chief State's Attorney further revealed that Mr. Lamonica had been charged with felony larceny and sale of unregistered securities in Alabama in 2003 and authorities in that state had been unable to locate Mr. Lamonica for several years, the warrant states. In March 2006, according to the warrant, Mr. Lamonica was taken into custody as a fugitive from justice in the Netherlands where he was found to be in possession of a fraudulent passport. Mr. Lamonica was then returned to the state of Alabama and was convicted of Theft in the First Degree and Sale of Unregistered Securities. Mr. Lamonica was arraigned in Hartford Superior Court, G.A. No. 14, and held on $250,000 bond. The case was transferred to Norwalk Superior Court, G.A. No. 20 where it remains pending. The case is being prosecuted by the Statewide Prosecution Bureau in the Chief State's Attorney's Office. The charges against Mr. Lamonica are merely accusations, and he is presumed innocent until proven guilty beyond a reasonable doubt.
On May 19, 2006, the Banking Commissioner had fined Mr. Lamonica $230,000 after finding that respondent Lamonica engaged in fraudulent conduct; acted in an unregistered capacity and sold unregistered securities (Docket Nos. CF-2006-7111-S; CF-2006-7186-S). Lamonica was also the subject of a February 9, 2006 Order to Cease and Desist which, being uncontested, had become permanent on March 28, 2006.
Licensing At A Glance Securities and Business Proceedings and Settlements Monetary Relief Securities Referrals
at the end of the quarter
Broker-dealer Agents Registered
Broker-dealer Branch Offices Registered
Investment Advisers Registered
SEC Registered Advisers Filing Notice
Investment Adviser Agents Registered
Investment Advisory Branch Offices Registered
Agents of Issuer Registered
155 Investment Company Notice Filings
1,290 Exemptions and Exemptive Notices
66 Investment Advisers
94 Ongoing as of End of Quarter
33 Matters referred from Attorney General
6 Matters referred from Other Agencies
8 Investigations Opened
9 Investigations Closed
6 Ongoing as of End of Quarter
Notices of Intent to Deny (Licensing)
Notices of Intent to Suspend (Licensing)
Notices of Intent to Revoke (Licensing)
Denial Orders (Licensing)
2 Suspension Orders (Licensing)
1 Revocation Orders (Licensing)
2 Notices of Intent to Fine
7 Orders Imposing Fine
6 Cease and Desist Orders
15 Notices of Intent to Issue Stop Order
1 Activity Restrictions/Bars
6 Stop Orders
0 Vacating/Withdrawal Orders
0 Restitutionary Orders
0 Cancellation Orders
0 Notices of Intent to Cancel Registration
16 Consent Orders
17 Stipulation and Agreements
Monetary Sanctions Imposed
Other (Financial Literacy)
Restitution or Other Monetary Relief (includes rescission offer amounts)
Criminal (Chief State's Attorney)
Civil (Attorney General)
Other Agency Referrals
Licensing At A Glance
Securities and Business
Proceedings and Settlements