DOB: December 1995 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. IX No. 4 December 1995

Features:

Enforcement Highlights:

Contributors:

Ralph A. Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric J. Wilder, Assistant Director
Jeffrey P. Halperin, Senior Administrative Attorney
Louise Hanson, Subscription Coordinator

A WORD FROM THE BANKING COMMISSIONER

The Securities and Business Investments Division has noticed a trend in firms failing to adequately supervise outside agents. In the early 1990s as the economy worsened, some agents apparently sold additional investments to maintain sales and income, with resultant problems now surfacing. Less than diligent supervision can allow unsuitable trades or inappropriate activity to go undetected.

A number of securities professionals serving Connecticut's investing public work in small or one person offices selling mutual funds and variable annuities. Many of these registered broker-dealer agents may also provide other financial services to the public. They may be affiliated with an insurance company, for example, and sell various insurance products, possibly as their principal source of income. They may further offer investment advice and financial planning assistance. Some broker-dealer firms may decide that it is not cost effective to have a compliance official visit agents in small offices and may instead choose to rely on compliance by mail or by the "honor system." We believe such supervision is unacceptable. If a broker-dealer is associated with an agent and derives revenue from that agent's sales, it must correspondingly assume responsibility and liability for that agent's activity. Agents licensed in other capacities or conducting less securities business should not escape complete and comprehensive supervision; in fact, their lack of securities experience and unfamiliarity with regulatory requirements may call for even more heightened oversight.

Often, "independent" agents may also do business under names different than those which are registered with the Division. Agents who use DBAs are required to notify both the Securities Division and their broker-dealers of those alternative business names. We would encourage broker-dealers to stay abreast of the names their agents may be using in business.

This issue of the securities bulletin discusses various cases wherein the Securities Division alleged inadequate supervision. In certain cases, the Division sought monetary as well as restrictive sanctions against officers of the broker-dealers involved. In another case, the Commissioner issued a notice of intent to suspend a broker dealer's license as well as that of its president, predicated on allegations that both failed to adequately supervise the firm's agents. In yet two other cases involving an agent who was subsequently convicted of securities fraud and larceny, the employing broker-dealers rescinded, in the aggregate, approximately one million dollars and consented to the entry of penalties. These cases, while clearly not reflective of the industry in general, are intended to illustrate the harm that may be caused to Connecticut investors, agents and firms themselves.

Securities Forum '95, held in November, 1995, attracted a record attendance of about 350 persons in demonstration of industry's commitment to improving sales practices. A panel discussion devoted to supervision issues was well received and we hope to offer similarly useful panels in the future. We also encourage firms to embrace continuing education as a long term benefit. The regulatory element will have a positive impact in helping registered personnel become sensitive to regulatory concerns, and the firm element offers an effective opportunity to refresh representatives' knowledge of products.

-- John P. Burke, Banking Commissioner


ENFORCEMENT HIGHLIGHTS

ADMINISTRATIVE SANCTIONS

CONSENT ORDERS

S.D. Cohn & Co., Inc. (CRD # 27827)

On October 10, 1995, the Banking Commissioner entered a Consent Order (No. CO-95-2810-S) with respect to S.D. Cohn & Co., Inc. ("SDC"), a securities brokerage firm located at 17 Battery Place, Suite 626, New York, New York. The Consent Order followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act. That investigation uncovered evidence that from approximately February 1994 through April 1994, SDC employed one Marshall Joel Weberman (CRD number 1030532) as an agent at a time when Weberman was not registered as such under the Act; and that Weberman transacted business from an unregistered branch office of SDC in Connecticut.

The Consent Order required SDC to review, revise and implement supervisory and compliance procedures designed to ensure regulatory compliance. In addition, the Consent Order imposed a $7,500 administrative fine on the firm, and required that, for two years, the firm submit quarterly reports to the agency regarding any securities-related complaints received from Connecticut residents.

Mark I. Lew (CRD # 1354400) and Leonard A. Neuhaus (CRD # 1871294)

On October 10, 1995, the Banking Commissioner entered a Consent Order (No. CO-95-2765/2370-S) with respect to Mark I. Lew and Leonard A. Neuhaus. Both had been the subject of a May 19, 1995 Notice of Intent to Suspend or Impose Conditions on Agent Registration and a summary suspension order. The effect of the Consent Order was to lift the suspensions against Lew and Neuhaus while simultaneously conditioning their agent registrations.

Specifically, the Consent Order imposed 18 month restrictions on the activities of each individual. During that period, each was limited to servicing existing Connecticut domiciled accounts of Lew Lieberbaum & Co., Inc. New account activity would only be permissible if Lew and Neuhaus distributed a disclosure document to affected Connecticut customers and observed requisite suitability standards. In addition, the Consent Order required Lew and Neuhaus to give Connecticut domiciled customers notice of the Consent Order and an opportunity to close any securities accounts handled by the two agents.

The Consent Order also mandated that Lew and Neuhaus, in their capacities as officers of Lew Lieberbaum & Co., Inc., cause the firm to syndicate 30% of all initial public offerings in which the firm acted as underwriter as required by the NASD's January 27, 1995 Letter of Acceptance, Waiver and Consent (No. CMS 940177-AWC). The Consent Order also directed Lew and Neuhaus to retain an independent consultant to conduct a review of the firm's compliance policies regarding trading, order execution and underwriting, and to submit a report, including recommendations and implementational follow-up, to the Division. Lew and Neuhaus were also required to apprise the Division on a quarterly basis of any securities-related complaints, actions or proceedings filed against them by Connecticut residents; this reporting obligation would conclude on March 31, 1997. Finally, the Consent Order assessed Lew and Neuhaus $20,000 in the aggregate; $15,000 of that amount represented a fine and the $5,000 balance constituted reimbursement for agency investigative costs.

David Henry Muschweck (CRD # 1827679)

On October 12, 1995, the Banking Commissioner entered a Consent Order (No. CO-95-2843-S) with respect to David Henry Muschweck. Muschweck had been the subject of a July 31, 1991 Order Imposing Civil Penalty which assessed a $1,500 fine against him for state securities law violations. The Consent Order alleged that Muschweck wilfully violated the July 31, 1991 order by failing to pay the civil penalty.

Pursuant to the Consent Order, Muschweck remitted $2,050 to the agency; that sum represented the past due amount plus accrued interest. In addition to precluding Muschweck from engaging in unlawful activity, the Consent Order barred him for one year from applying for registration as a broker-dealer, an investment adviser, a broker-dealer agent, an agent of issuer or an investment adviser agent. After that year elapsed, Muschweck was granted leave to apply for registration in a restricted capacity (i.e. as an agent of an issuer or, in a non-supervisory and non-proprietary capacity, as an agent of a broker-dealer or investment adviser). If Muschweck were to become registered in the restricted capacity, the restriction would last for twelve months.

Biovite, Inc.

On October 16, 1995, the Banking Commissioner entered a Consent Order (No. CO-95-626-5) with respect to Biovite, Inc of 5155 Spectrum Way, Unit 25, Mississauga, Ontario, Canada. An investigation by the Securities and Business Investments Division disclosed evidence that from 1992 through 1993, the corporation sold business opportunities in violation of Section 36b-67 of the Connecticut Business Opportunity Investment Act and failed to file required financial statements with the agency.

Without admitting or denying the allegations in the Consent Order, Biovite, Inc. agreed to file a semi-annual statement with the Division indicating whether it had offered or sold any business opportunity to Connecticut purchaser-investors. In addition, the corporation agreed to file audited financial statements in compliance with Section 36b-65(b) of the Act. Finally, Biovite, Inc. was barred from registering any business opportunity until January 1, 2002.

Global Strategic Management, Inc. (CRD # 36771)

On October 31, 1995, the Banking Commissioner entered a Consent Order (No. CO-95-2803-S) with respect to Global Strategic Management, Inc. ("GSM"), an investment adviser located at 900 Bestgate Road, Suite 405, Annapolis, Maryland. The Consent Order followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act. That investigation revealed indications that in 1994, the firm transacted business as an investment adviser in Connecticut absent registration under the Act. In furtherance of its desire to resolve the matter informally with the agency, GSM furnished proof that it had credited to advisory clients $5,676 representing the aggregate amount of fees collected during the period of unregistered activity.

The Consent Order required GSM to refrain from regulatory violations and precluded it from retroactively charging clients for services rendered while it was not registered as an investment adviser under the Act. In addition, the Consent Order required the firm to review, revise and implement supervisory and compliance procedures designed to ensure regulatory compliance. Finally, the Consent Order assessed the firm $490; this amount represented uncollected registration fees during the period when the firm was not registered as an investment adviser in Connecticut.

Pruco Securities Corp. (CRD # 5685)

On November 28, 1995, the Banking Commissioner entered a Consent Order (No. 95-2853-CO) with respect to Pruco Securities Corp. ("Pruco"), a broker-dealer registered under the Connecticut Uniform Securities Act. The Consent Order followed a Securities and Business Investments Division investigation into the activities of Michael John Sullo (CRD number 2037711), a former Pruco agent who purportedly sold approximately $175,000 of guaranteed promissory notes to the public while employed by Pruco and used the sales proceeds for his personal benefit. Sullo was ultimately convicted of 20 counts of securities fraud and 16 counts of first degree larceny in April 1995, and is presently serving a twenty year sentence. The Consent Order alleged that Pruco failed to adequately supervise Sullo's activities. In furtherance of its desire to resolve the matter informally, Pruco furnished proof that it had offered to affected investors the opportunity to rescind their investments which aggregated approximately $175,000.

The Consent Order required Pruco to conduct an internal review of its supervisory and compliance procedures as well as a comprehensive audit of its New Haven West branch office. The Consent Order also required that the firm implement such additional compliance procedures as were necessary given the results of the audit. In addition, the firm undertook to conduct annual audits of all Connecticut branch offices during calendar years 1996 and 1997. During 1996 and 1997, the firm was also required to file quarterly reports concerning any securities-related complaints, actions or proceedings involving Connecticut residents. Pruco was also assessed a $25,000 fine and $5,000 for the Division's investigative costs.

Bryn Mawr Investment Group, Inc. (CRD # 20892)

On November 30, 1995, the Banking Commissioner entered a Consent Order (No. CO-95-2869-S) with respect to Bryn Mawr Investment Group, Inc. ("BMIG"), a broker-dealer located at 919 Conestoga Road, Rosemont, Pennsylvania. The Consent Order followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act. That investigation uncovered evidence that from at least February 1991 through 1995, the firm transacted business as a broker-dealer in Connecticut absent registration under the Act.

The Consent Order mandated that the firm revise and implement supervisory and compliance procedures designed to achieve regulatory compliance. In addition, the Consent Order required that all officers of the firm and all agents who were or would be registered under the state's securities laws complete the NASD's continuing education program for securities industry personnel. The Consent Order also required that BMIG file a written report with the Division each quarter for two years describing any securities-related complaints, actions or proceedings involving Connecticut residents and explaining the outcome of the same. Finally, the Consent Order required that BMIG pay the agency $15,000 as an administrative fine and reimburse the department $5,000 for investigative costs.

Chubb Securities Corp. (CRD # 3870)

On December 7, 1995, the Banking Commissioner entered a Consent Order (No. 95-2854-CO) with respect to Chubb Securities Corp. ("Chubb"), a broker-dealer registered under the Connecticut Uniform Securities Act. The Consent Order followed a Securities and Business Investments Division investigation into the activities of Michael John Sullo (CRD number 2037711), a former Chubb agent who purportedly sold approximately $700,000 of guaranteed promissory notes to the public while employed by Chubb and used the sales proceeds for his personal benefit. Sullo was ultimately convicted of 20 counts of securities fraud and 16 counts of first degree larceny in April 1995, and is presently serving a twenty year sentence. The Consent Order alleged that Chubb failed to adequately supervise Sullo's activities. In furtherance of its desire to resolve the matter informally, Chubb furnished proof that it had offered to affected investors the opportunity to rescind their investments which aggregated approximately $700,000 plus interest. In addition, Chubb voluntarily contributed $15,000 to the department's Investor Education Fund.

The Consent Order required Chubb to conduct an internal review of its supervisory and compliance procedures and to conduct annual audits of its Connecticut branch offices for two years. In addition, the Consent Order imposed a $25,000 fine on the firm and required that it reimburse the agency $5,000 for investigative costs. For two years, the firm would also be required to file quarterly reports concerning any securities related complaints, actions or proceedings involving Connecticut residents.

STIPULATION AND AGREEMENTS

Prentiss Smith & Company, Inc.

On October 16, 1995, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-95-2846-S) with respect to Prentiss Smith & Company, Inc. ("PSC") of 103 Main Street, Brattleboro, Vermont. The Stipulation and Agreement followed an investigation by the Securities and Business Investments Division under the Connecticut Uniform Securities Act. That investigation suggested that commencing in 1994, PSC transacted business as an investment adviser absent registration under Section 36b-6(c) of the Act.

The Stipulation and Agreement required that PSC refrain from regulatory violations and that it review, revise and implement supervisory and compliance procedures designed to achieve regulatory compliance. In addition, the Stipulation and Agreement called for PSC to pay $350 to the department; $200 of that amount represented uncollected registration fees during the period of unregistered activity and $150 constituted reimbursement for the Division's investigative costs.

Coryo Securities America, Inc. (CRD # 39655)

On December 20, 1995, the Banking Commissioner entered into a Stipulation and Agreement (No. 95-08-2827 BC) with respect to Coryo Securities America, Inc. of 152 West 57th Street, 36th Floor, New York, New York. The Stipulation and Agreement followed an investigation by the Securities and Business Investments Division under the Connecticut Uniform Securities Act. That investigation revealed that from approximately January 1993 to May 1994, the firm transacted business as a broker-dealer absent registration in alleged violation of Section 36b-6(a) of the Act and allegedly employed an unregistered agent in contravention of Section 36b-6(b) of the Act. In furtherance of its desire to resolve the matter informally with the Division, the firm furnished proof that it had offered rescission to one Connecticut resident for whom securities transactions were effected.

The Stipulation and Agreement required that the firm cease and desist from regulatory violations and that it review, revise and implement supervisory and compliance procedures designed to achieve regulatory compliance. In addition, the Stipulation and Agreement required that the firm pay the department $1,380; of that amount, $700 represented reimbursement for investigative costs and $680 represented uncollected registration fees during the period of unregistered activity.

LICENSING ACTIONS

Hart Securities, Inc. (CRD # 28389) - Notice of Intent to Revoke Registration as a Broker-dealer Issued

On December 6, 1995, the Banking Commissioner issued a Notice of Intent to Revoke the broker-dealer registration of Hart Securities, Inc. (Docket No. NR-95-2832-S). The corporation is located at 5851 San Felipe, Suite 950, Houston, Texas. The Commissioner's action was predicated on the firm's alleged insolvency and on a June 21, 1995 revocation order issued by the State of Texas. The respondent was provided with an opportunity for a hearing on the allegations in the Notice of Intent to Revoke.

Kinlaw Securities Corp. (CRD # 18448) - Notice of Intent to Revoke Registration as a Broker-dealer Issued

On December 6, 1995, the Banking Commissioner issued a Notice of Intent to Revoke the broker-dealer registration of Kinlaw Securities Corp. (Docket No. NR-95-2838-S). The firm is located at 13155 Noel Road, 11th Floor, Dallas, Texas. The Commissioner's action was based on a July 1995 permanent injunction entered by the United States District Court for the Northern District of Texas finding, among other things, that the firm violated the antifraud provisions of the federal securities laws. The Notice was also predicated on a September 11, 1995 revocation order issued by the Securities and Exchange Commission. The firm was afforded an opportunity to request a hearing on the allegations in the Notice.

Cadaret Grant & Co., Inc. (CRD # 10641) - Notice of Intent to Suspend Registration as a Broker-dealer and Notice of Intent to Fine Issued

On December 19, 1995, the Banking Commissioner issued a Notice of Intent to Suspend the broker-dealer registration of Cadaret Grant & Co., Inc. (Docket No. NR-95-2624-S). On the same day, the Commissioner issued a Notice of Intent to fine the firm. The firm's principal place of business is at 700 Loews Landmark Office Building, 108 West Jefferson Street, Syracuse, New York. The Commissioner's action was predicated on allegations that the firm failed to adequately supervise its agents, particularly in conjunction with agent sales of real estate limited partnership interests and interests in the QCI Pay Telephone Sale and Lease Back Program. The Commissioner also claimed that the firm transacted business from three unregistered branch offices in Connecticut for whom no on-site manager had been designated. The respondent was given an opportunity to contest the allegations in the Notices.

Arthur F. Grant (CRD # 227458) - Notice of Intent to Suspend Registration as an Agent Issued

On December 21, 1995, the Banking Commissioner issued a Notice of Intent to Suspend the registration of Arthur F. Grant as an agent of Cadaret Grant & Co., Inc. (Docket No. NR-95-2624-S). Arthur Grant is also president of the brokerage firm. The Commissioner's action was based on allegations that the respondent failed to exercise adequate supervision over the firm's securities activities, including private securities transactions effected by agents. The Notice of Intent to Suspend afforded the respondent an opportunity for a hearing on the Division's claims.


QUARTERLY STATISTICAL SUMMARY

October 1, 1995 through December 31, 1995

Registration

Securities

Business
Opportunities

YTD

Total Coordination (Initial & Renewal) 2,198 n/a 7,420
-- (Investment Co. Renewals 1,585)
-- (All Other Coordinations 613)
Qualification (Initial) 5 n/a 19
Qualification (Renewal) 2 n/a 2
Regulation D Filings 475 n/a 1,662
Other Exemption or Exclusion Notices 52 10 213 (SE)
53 (BO)
Business Opportunity (Initial) n/a 8 50
Business Opportunity (Renewal) n/a 1 35
 
 
Licensing

Broker-Dealers

Investment Advisers

Issuers

YTD

Firm Initial Registrations Processed 80 44 n/a 312 (BD)
171 (IA)
Agent Initial Registrations Processed 6,243 556 108 28,940 (BD)
2,279 (IA)
204 (IS)
Firms Registered as of 12/31/95 1,794 1,071 n/a n/a
Agents Registered as of 12/31/95 67,445 9,294 182 n/a
Branch Offices Registered
as of 12/31/95
1,006 320 n/a n/a
 
 
Investigations/Exams

Securities

Business
Opportunities

YTD

Investigations Opened 39 5 180 (SE)
10 (BO)
Referrals from Attorney General 0 0 4 (SE)
0 (BO)
Referrals from Other Agencies 4 0 10 (SE)
0 (BO)
Investigations Closed 32 2 176 (SE)
7 (BO)
Investigations in Progress
as of 12/31/95
79 9 n/a
Subpoenas Issued 4 0 32 (SE)
4 (BO)
Examinations Conducted 19 12 106 (BD)
54 (IA)
0 (IS)
 
 
Administrative Enforcement
Actions

Number

Parties

YTD
(#/Parties)

Securities
Consent Orders 7 8 23/25
Stipulation and Agreements 2 2 10/11
Cease and Desist Orders 0 0 5/7
Denial, Suspension & Revocation Orders 0 0 6/8
Conditional Licensing Orders 0 0 1/1
Other Notices and Orders 5 5 15/14
Referrals (Civil) 0 0 1/1
Referrals (Criminal) 0 0 0/0
Business Opportunities
Consent Orders 1 1 1/1
Cease and Desist Orders 0 0 2/3
Other Notices and Orders 0 0 1/1
Referrals (Civil) 0 0 1/1
Referrals (Criminal) 0 0 0/0
 
 
Monetary Sanctions

$ Assessed

YTD

Consent Orders and Stipulation and
Agreements (Securities)
$ 111,770 $ 300,027
 
 
Reimbursement to the
Investing Public

Voluntary Restitution Offers;
Other Monetary Relief

YTD

Securities $ 1,535,789 $ 2,877,720
Business Opportunities 202 202
_____ _____
Totals $ 647,901 $ 647,901

Securities Division