DOB: September 1997 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XI No. 3 September 1997

Features:

Enforcement Highlights:

Contributors:

Ralph Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric Wilder, Assistant Director
Marge Kagan, Subscription Coordinator

A WORD FROM THE BANKING COMMISSIONER

Securities Forum '97, held on October 6th the Radisson Hotel and Conference Center in Cromwell, attracted a strong attendance of nearly 360 persons. The department views the Forum as a very important part of its educational program for industry. Each year, we structure the program and seek speakers to address timely and important topics. Panels at Securities Forum '97, for example, covered the effect of the National Securities Markets Improvement Act of 1996 on securities regulation and the impact of the Internet on industry and investors. We now begin the process of planning for Securities Forum '98, to be held next fall. As always, we welcome your suggestions regarding program topics or ways to increase the conference's value.

As indicative of the Forum's timeliness, industry received advance word of significant changes, officially announced the next day, to the Continuing Education Program at a panel discussion devoted to new program developments. The Council recommended that registered persons complete the continuing education computer-based training program after their second year in the industry and then every three years thereafter for the length of their careers. A second change will institute a new program to provide customized training for managers and supervisors.

The department is pleased that the Council is committed to extending a program of great benefit to industry and investors. We are proud to be an active participant in the program as a state liaison representing the North American Securities Administrators Association ("NASAA"). We look forward to approval of these important new changes by the boards of industry self-regulatory organizations and the Securities and Exchange Commission.

The Securities Division continues to focus its resources on broker-dealers engaging in very aggressive, high-pressure telephone sales of small or micro cap securities. In the past several months, the department has filed several actions and a legal review is being conducted for possible action against an additional firm that employed similar sales tactics.

Many respectable companies trade in the small cap NASDAQ and bulletin board markets. We are concerned that unscrupulous firms engaging in abusive and violative behavior may seriously undermine investor confidence in these markets and also in initial public offerings by young and promising companies. We call upon industry to explore effective means to address this problem and restore any lost investors' trust.

John P. Burke
Banking Commissioner


Interpretive Order Concerning Broker-Dealers, Investment Advisers,
Broker-Dealer Agents And Investment Adviser Agents
Using The Internet For General Dissemination Of Information On Products And Services

WHEREAS the Commissioner of Banking (the "Commissioner") is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act, (the "Act"), as amended by P.A. 97-220, and Sections 36b-31-2 et seq. of the Regulations of Connecticut State Agencies promulgated under the Act;

WHEREAS Section 36b-31(a) of the Act provides, in part, that "[t]he commissioner may from time to time make, amend and rescind such ... orders as are necessary to carry out the provisions of [the Act] ...;"

WHEREAS Section 36b-6(a) of the Act, as amended by P.A. 97-220, provides, in part that: "No person shall transact business in this state as a broker-dealer unless he is registered under ... [the Act]. No individual shall transact business as an agent in this state unless he is (1) registered as an agent of the broker-dealer ... whom he represents in transacting such business or (2) an associated person who represents a broker-dealer in effecting transactions described in subdivisions (2) and (3) of section 15(h) of the Securities Exchange Act of 1934;"

WHEREAS Section 36b-6(c) of the Act, as amended by P.A. 97-220, states, in part, that: "No person shall transact business as an investment adviser, within or from this state, unless registered as such by the commissioner as provided in sections 36b-2 to 36b-33, inclusive, or exempted pursuant to subsection (e) of this section. No individual shall transact business as an investment adviser agent, within or from this state unless he is registered as an investment adviser agent of the investment adviser for whom he acts in transacting such business."

WHEREAS the Commissioner acknowledges that the Internet, the World Wide Web, and similar proprietary or common carrier electronic systems (collectively, the "Internet") have facilitated greatly the ability of broker-dealers, investment advisers, broker-dealer agents and investment adviser agents to advertise and otherwise disseminate information on products and services to prospective customers and clients;

WHEREAS the Commissioner also acknowledges that certain communications made on the Internet are directed generally to anyone having access to the Internet and may be transmitted through postings on Bulletin Boards, displays on "Home Pages" or similar methods (hereinafter, "Internet Communications");

WHEREAS the Commissioner further acknowledges that in certain instances, by distributing information on available products and services through Internet Communications available to persons in this state, broker-dealers, investment advisers, their broker-dealer agents and their investment adviser agents could be construed as "transacting business" for purposes of Sections 36b-6(a) and 36b-6(c) of the Act so as to require registration in this state, since the Internet Communications would be received in this state regardless of the intent of the person originating such communication; and

WHEREAS the Commissioner finds that the issuance of this Order is necessary and appropriate in the public interest and for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act;

NOW THEREFORE, IT IS HEREBY ORDERED AS FOLLOWS:
1. Broker-dealers, investment advisers, broker-dealer agents (hereinafter "BD Agents") and investment adviser agents (hereinafter "IA Agents") who use the Internet, the World Wide Web, and similar proprietary or common carrier electronic systems (collectively, hereinafter the "Internet") to distribute information on available products and services through certain communications made on the Internet directed generally to anyone having access to the Internet, and transmitted through postings on Bulletin Boards, displays on "Home Pages" or similar methods (hereinafter, "Internet Communications") shall not be deemed to be "transacting business" in this state for purposes of Sections 36b-6(a) and 36b-6(c) of the Act based solely on that fact if the following conditions are observed:
A. The Internet Communication contains a legend in which it is clearly stated that
(1) the broker-dealer, investment adviser, BD Agent or IA Agent in question may only transact business in this state if first registered, excluded or exempted from state broker-dealer, investment adviser, BD Agent or IA Agent registration requirements, as the case may be; and
(2) follow-up, individualized responses to persons in this state by such broker-dealer, investment adviser, BD Agent or IA Agent that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state broker-dealer, investment adviser, BD Agent or IA Agent registration requirements, or an applicable exemption or exclusion;
B. The Internet Communication contains a mechanism, including and without limitation, technical "firewalls" or other implemented policies and procedures, designed reasonably to ensure that prior to any subsequent, direct communication with prospective customers or clients in this state, said broker-dealer, investment adviser, BD Agent or IA Agent is first registered in this state or qualifies for an exemption or exclusion from such requirement. Nothing in this paragraph shall be construed to relieve a state registered broker-dealer, investment adviser, BD Agent or IA Agent from any applicable securities registration requirement in this state;
C. The Internet Communication does not involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as the case may be, in this state over the Internet, but is limited to the dissemination of general information on products and services; and
D. In the case of a BD Agent or IA Agent:
(1) the affiliation with the broker-dealer or investment adviser of the BD Agent or IA Agent is prominently disclosed within the Internet Communication;
(2) the broker-dealer or investment adviser with whom the BD Agent or IA Agent is associated retains responsibility for reviewing and approving the content of any Internet Communication by a BD Agent or IA Agent;
(3) the broker-dealer or investment adviser with whom the BD Agent or IA Agent is associated first authorizes the distribution of information on the particular products and services through the Internet Communication; and
(4) in disseminating information through the Internet Communication, the BD Agent or IA Agent acts within the scope of the authority granted by the broker-dealer or investment adviser;
2. The position expressed in this Interpretive Order extends to state broker-dealer, investment adviser, BD Agent and IA Agent registration requirements only, and does not excuse compliance with applicable securities registration, antifraud or related provisions;
3. Nothing in this Order shall be construed to affect the activities of any broker-dealer, investment adviser, BD Agent and IA Agent engaged in business in this state that is not subject to the jurisdiction of the Commissioner as a result of the National Securities Markets Improvements Act of 1996, as amended; and
4. This Order shall remain in effect unless and until subsequently amended or rescinded.
So ordered at Hartford, Connecticut
this third day of October, 1997
John P. Burke
Banking Commissioner

ENFORCEMENT HIGHLIGHTS

ADMINISTRATIVE SANCTIONS

CEASE AND DESIST ORDERS

James Americus Pabilonia a/k/a James A. Pabilonia, Sr. a/k/a James Leslie Pabilonia, a/k/a James L. Pabilonia a/k/a James Americas Pabilonia d/b/a World Financial Securities, Inc. (CRD # 839841)  

On September 5, 1997, the Banking Commissioner issued an Order to Cease and Desist and Notice of Right to Hearing (Docket number CD-97-4037-S) under the Connecticut Uniform Securities Act against James Americus Pabilonia of Willimantic, Connecticut. The Order to Cease and Desist alleged that in late 1996, James Pabilonia effected securities transactions on behalf of Primex Prime Electronic Execution, Inc., a Chicago-based broker-dealer, at a time when he was not registered as an agent of that firm under the Act. The Order to Cease and Desist also claimed that Pabilonia used Internet and print advertising to promote World Financial Securities, Inc., an assumed name under which he conducted business and for which no Form DBA-1 had been filed under the Connecticut Uniform Securities Act Regulations. In addition, the Commissioner alleged that Pabilonia had filed a materially false or misleading statement with the department concerning his agent and branch office registration status. James Pabilonia was afforded an opportunity to request a hearing on the allegations in the Order to Cease and Desist.

CONSENT ORDERS

Investors Associates, Inc. (CRD # 958)  

On July 23, 1997, the Banking Commissioner entered a Consent Order (No. NR-96-3034-S) under the Connecticut Uniform Securities Act with respect to Investors Associates, Inc. of 411 Hackensack Avenue, Continental Plaza, Hackensack, New Jersey. On May 28, 1997, the Commissioner had issued a Notice of Intent to Revoke the firm's broker-dealer registration based on alleged supervisory deficiencies and unregistered agent activity. In lieu of contesting the matter, and without admitting or denying the allegations in question, the firm agreed to the entry of a consent order revoking its registration in Connecticut.

Wilmington Brokerage Services Company (CRD # 14942)  

On July 23, 1997, the Banking Commissioner entered a Consent Order (No. CO-97-4071-S) under the Connecticut Uniform Securities Act with respect to Wilmington Brokerage Services Company of 1100 North Market Street, Wilmington Delaware. The Consent Order alleged that from at least 1993 through 1997, the firm transacted business as a broker-dealer absent registration under the Connecticut Uniform Securities Act and employed unregistered agents. In addition, the Consent Order cited as a basis for action the firm's disciplinary history, including a May 13, 1997 Consent Order by the State of New Hampshire (Docket No. INV97-004); a May 12, 1997 Consent Order by the State of Maryland (Docket No. 97017); an April 7, 1997 Consent Order by the State of Rhode Island (Docket No. 97-0015); a March 14, 1997 settlement agreement by the State of Illinois (Docket No. 9700169); a March 14, 1997 Consent Order by the State of Massachusetts (Docket No. R-97-11); and a December 4, 1996 censure by the State of Pennsylvania (Docket No. 9611-04LC).  

The Consent Order directed the firm to 1) implement those recommendations contained in a consultant's report dated February 27, 1997 which had been furnished to the department, and provide the agency with a copy of the 1997 report by its outside auditors, Ernst and Young LLP, certifying compliance with the firm's supervisory procedures; 2) within 30 days following the entry of the Consent Order, refund to Connecticut customers all commissions earned during the period of alleged unregistered activity; 3) cease and desist from regulatory violations; 4) submit quarterly reports to the agency for 2 years describing any securities-related complaints, actions or proceedings involving Connecticut residents; and 5) pay $13,000 to the department, $10,000 of which represented an administrative fine, $2,000 of which represented reimbursement for back registration fees and $1,000 of which constituted reimbursement for agency investigative costs.

Herman Epstein (CRD # 201696)  

On August 21, 1997, the Banking Commissioner entered a Consent Order (No. NR-96-2961-S) under the Connecticut Uniform Securities Act with respect to Herman Epstein, chairman of Investors Associates, Inc., a broker-dealer located at 411 Hackensack Avenue, Continental Plaza, Hackensack, New Jersey. Epstein had been the subject of a May 28, 1997 Notice of Intent to Revoke Registration as an Agent which claimed that Epstein, while in charge of compliance and supervision for Investors Associates, 1) failed to prevent certain firm employees from engaging in unregistered activity in Connecticut; 2) failed to review or reasonably supervise commission, bonus, override and advance payments made by the firm to its Valley Stream, New York agents and employees; 3) failed to prevent a large number of canceled trades; and 4) failed to address inadequate audit procedures  

As a condition to resolving the matter informally with the department, Epstein agreed to withdraw his agent registration in Connecticut. The Consent Order barred Epstein from acting as an agent of any broker-dealer or issuer for three years, with leave to reapply for registration at the conclusion of that period.

LICENSING ACTIONS

Jefferson Gersch, Inc. (CRD # 41893) - Consent Order Conditioning Registration as a Broker-dealer Issued  

On September 10, 1997, the Banking Commissioner entered a Consent Order (No. CO-97-4099-S) conditioning the broker-dealer registration of Jefferson Gersch, Inc. of 261 Old York Road, Suite 911, Jenkintown, Pennsylvania. The Commissioner based his action on claims that the firm did not satisfy regulatory qualification standards for broker-dealer applicants under the Connecticut Uniform Securities Act and its regulations, including pertinent experience requirements. Without admitting or denying the Commissioner's allegations, the firm agreed to the entry of a Consent Order restricting the firm's registration for three years. Specifically, for three years from the date of registration, the firm agreed to 1) limit its securities business to the purchase, sale and redemption of mutual fund shares; securities underwritten by the United States government or any state or municipality thereof; and, on an unsolicited basis only, shares listed on the New York Stock Exchange, the American Stock Exchange and the National Market System of NASDAQ; 2) submit to the Director of the Securities and Business Investments Division a report each calendar quarter describing any complaints, actions or proceedings involving the firm; 3)refrain from transacting business from any Connecticut branch office as defined in Section 36b-3(4) of the Act, as amended by P.A. 97-220; and 4) refrain from opening any discretionary accounts for Connecticut clients. Simultaneously with the entry of the Consent Order, the firm became registered as a broker-dealer in Connecticut subject to the foregoing conditions.

Mark Stephen Buciak (CRD # 1394350) d/b/a MB Financial Services (CRD # 42542) - Notice of Intent to Condition Registration as a Broker-dealer Issued  

On September 15, 1997, the Banking Commissioner issued a Notice of Intent to Condition the broker-dealer registration application of Mark Stephen Buciak, a sole proprietor located at 87 Secret Lake Road, Avon, Connecticut (Docket No. NC-97-4070-S). The Commissioner based his action on allegations that Mark Stephen Buciak did not satisfy regulatory qualification standards for broker-dealer applicants under the Connecticut Uniform Securities Act and its regulations, including pertinent experience requirements. Mark Stephen Buciak was afforded an opportunity for a hearing on the matter.

CRIMINAL PROCEEDINGS

George Clark Bryant, II (CRD # 33977) Charged With First Degree Larceny and Second Degree Forgery  

On August 4, 1997, George Clark Bryant of Southport, Connecticut was charged with one count of first degree larceny and seventeen counts of second degree forgery resulting from conduct occurring between August 1992 and March 1995. Bryant had had his application for registration as an agent of Merit Capital Associates, Inc. (CRD number 30576) denied by the department on February 28, 1997. The department's action had been based on findings that, while employed as an agent of Merrill Lynch, Bryant 1) repeatedly caused Merrill Lynch to issue checks drawn on various clients' accounts without obtaining permission from the clients; 2) borrowed $291,300 from a client without the client's prior consent and without notice to his employing broker-dealer; and 3) misrepresented to Merrill Lynch the nature and extent of his borrowings from clients.  

The criminal information, which was an outgrowth of the department's investigation, alleged that Bryant had removed over $250,000 from the Merrill Lynch account of a Greenwich client without her authorization and without apprising Merrill Lynch; that Bryant made false statements to Merrill Lynch in order to have checks issued from the account, and that Bryant then forged the client's signature on the back of the checks and deposited them to his personal bank account at Union Trust in Trumbull. Proceedings in the matter are pending, with arraignment scheduled for August 28, 1997 in New Haven Superior Court.


QUARTERLY STATISTICAL SUMMARY

July 1, 1997 through September 30, 1997

Registration &
Notice Filings

Securities

Business
Opportunities

YTD

Coordination Registrations (initial) 77 n/a 253
Coordination Registrations (renewal) 14    34
Qualification Registrations (initial) 9    16
Qualification Registrations (renewal) 0    0
         
Investment Company Notices (initial) 164     738
Investment Company Notices (renewal) 902     3,430
         
Regulation D and Section 4(2) Filings 406 n/a 1,196
Other Exemption or Exclusion Notices 20 19 104 (SE)
44 (B0)
Business Opportunity Registrations (initial) n/a 9 28
Business Opportunity Registrations (renewal) n/a 2 23
 
 
Licensing & Branch Office
Registration

Broker-Dealers

Investment Advisers

Issuers

YTD

Firm Initial Registrations Processed 83 17 n/a 281 (BD)
73 (IA)
Firm Notice Filings Processed n/a 20 n/a 20 (IA)
Firms Registered as of 9/30/97 2,264 857 n/a n/a
Agent Initial Registrations Processed 8,353 931 8 28,749 (BD)
1,671 (IA)
61 (IS)
Agents Registered as of 9/30/97 87,404 11,203 201 n/a
Branch Offices Registered as of 9/30/97 1,232 435 n/a n/a
Examinations Conducted 35 15 n/a 88 (BD)
63 (IA)
 
 
Investigations

Securities

Business
Opportunities

YTD

Investigations Opened 38 1 155 (SE)
2 (BO)
Investigations Closed 47 1 147 (SE)
2 (BO)
Investigations in Progress as of 9/30/97 88 2 n/a
Referrals from Attorney General 1 0 3 (SE)
0 (BO)
Referrals from Other Agencies 2 0 7 (SE)
1 (BO)
Subpoenas Issued 15 2 27 (SE)
4 (BO)
 
 
Administrative Enforcement
Actions

Number

Parties

YTD (#/Parties)

Securities         
Consent Orders 3 3 7/7
Stipulation and Agreements 0 0 3/3
Cease and Desist Orders 1 1 4/4
Denial, Suspension & Revocation Orders 0 0 6/6
Conditional Licensing Orders 1 1 1/1
Other Notices and Orders 1 1 5/5
Referrals (Civil) 0 0 0/0
Referrals (Criminal) 0 0 0/0
Business Opportunities      
Consent Orders 0 0 0/0
Stipulation and Agreements 0 0 0/0
Cease and Desist Orders 0 0 0/0
Other Notices and Orders 0 0 0/0
Referrals (Civil) 0 0 0/0
Referrals (Criminal) 0 0 0/0
 
 
Monetary Sanctions

$ Assessed

YTD

Consent Orders and
Stipulation and Agreements (Securities)
$ 13,000 $ 74,532
Formal Administrative Fines (Securities) $ 0 $ 160,000
  ______ ______
Totals $13,000 $234,532
 
 
Reimbursement to the
Investing Public
Voluntary Restitution Offers;
Other Monetary Relief
YTD
Securities $ 114,629 $ 1,129,870
Business Opportunities 0 0
  ________ ________
Totals $ 114,629 $ 1,129,870

Securities Division