DOB: Fall 2001 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XV  No. 3 Fall 2001

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

As you may know, the Department of Banking canceled plans for its annual Securities Forum conference, scheduled for October, 2001, in the aftermath of the tragic events of September 11th.

While the Department organizes the conference in conjunction with its Securities Advisory Council, the Securities Forum is, in effect, a broader cooperative venture undertaken with support from other regulatory agencies, the industry and the bar association who each graciously volunteer their time and talents to serve as panel moderators and speakers. A significant portion of the conference's faculty and audience is drawn from the New York City area, and we knew that many organizations would need to devote their full energy towards recovery and business resumption. We look forward to hosting Securities Forum 2002 next fall with their participation.

The Securities Division continues to be very responsive to firms affected by the terrorist attacks. We have accommodated firms with revised time frames for document requests or examinations, and we urge affected firms to contact us if they need filing extensions. We also stand ready to work with any firms who may need assistance in reconstructing records.

The Division has recently been in contact with individual firms regarding the use of temporary restraining orders that block customers from transferring their accounts to competing firms following an agent's departure. Our interest is not in employment disputes per se, but in their sometimes regrettable consequence of limiting the legitimate freedom of customers to choose the individuals and firms they desire to service their own accounts.

State regulations state that it is a dishonest or unethical business practice for a broker-dealer to cause any unreasonable delay in the requested delivery of securities purchased and fully paid for by any of the broker-dealer's customers. Our review of new broker-dealer account documents further found that such agreements did not disclose that firms may take action to delay or prevent customers from transferring their accounts, an omission which may also be a dishonest or unethical practice under state law. Please see the policy statement in this Bulletin issue for further clarification.

We are pleased that several major firms have agreed to delete specific provisions from temporary restraining orders which limit the ability of customers to transfer their accounts, and are gratified that some firms have never engaged in this practice. We would caution those firms that continue to restrict customers' freedom to legitimately transfer their accounts that they may face future enforcement action.

John P. Burke
Banking Commissioner


SUMMARY OF 2001 LEGISLATIVE CHANGES
IMPACTING SECURITIES AND BUSINESS OPPORTUNITY REGULATION

Public Act 01-48

Public Act 01-48, An Act Concerning the Connecticut Uniform Securities Act and Notices Issued by the Department of Banking, took effect on October 1, 2001.

The legislation amended Section 36b-3(5) of the Connecticut Uniform Securities Act to conform the definition of "broker-dealer" to the federal definitions set forth in the Securities Exchange Act of 1934 (n.b. implementation of the amendment including certain banks within the definition has been postponed in light of proposed SEC Rulemaking, see separate order, this issue.] In addition, the legislation amended Section 36b-3(10) of the securities statute to more closely track the definition of "investment adviser" in the federal Investment Advisers Act of 1940.

The bill also amended Section 36b-15(e)(1) of the Connecticut Uniform Securities Act to 1) institute a 90 day "waiting period" before a notice of intent to withdraw a pending application as a broker-dealer, agent, investment adviser or investment adviser agent would be made effective, and.2) allow for the institution of a denial proceeding within one year following the effective date of such a withdrawal.

The legislation also clarified certain enforcement powers of the Commissioner, including the ability to pursue administrative restitutionary and disgorgement remedies against control persons in the event of a regulation, rule or order violation; and to enter a written consent order following the issuance of a notice of intent to fine.

Finally, the public act amended both the Connecticut Uniform Securities Act and the Connecticut Business Opportunity Investment Act to allow the Commissioner to use an express delivery carrier providing a dated delivery receipt in lieu of registered or certified mail, return receipt requested, when sending out notices and orders.


Order Excluding Banks From the Definition of "Broker-Dealer"
Under Section 36b-3(5) of the Connecticut Uniform Securities Act Until the Effective Date of Final Rules Issued by the Securities nd Exchange Commission Providing Definition and Exemptions From the Definitions of "Broker" and "Dealer" Under the Securities Exchange Act of 1934

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

WHEREAS Section 36b-31(c) of the Act states, in pertinent part, that "[t]o encourage uniform interpretation and administration of sections 36b-2 to 36b-33, inclusive, and effective securities regulation and enforcement, the commissioner may cooperate with . . . the Securities and Exchange Commission . . . . The cooperation authorized by this subsection includes, but is not limited to, the following actions: . . . (5) executing joint agreements, memoranda of understanding and orders";

WHEREAS Section 36b-31(b) of the Act states, in pertinent part, that "[n]o . . . order may be made, amended or rescinded unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-33, inclusive. In prescribing . . . orders the commissioner may cooperate with the . . . Securities and Exchange Commission with a view to effectuating the policy of said sections to achieve maximum uniformity in the form and content of registration statements, applications and reports wherever practicable";

WHEREAS on November 12, 1999, the federal Gramm-Leach-Bliley Act ("GLBA"), Pub. L. No. 106-102, 113 Stat. 1338 (1999), was signed into law;

WHEREAS GLBA, among other things, amended Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 ("Exchange Act") to limit the exceptions from the definitions of "broker" and "dealer" for banks, as defined in Section 3(a)(6) of the Exchange Act, conducting certain securities-related activities;

WHEREAS the provisions of GLBA affecting the status of banks as "brokers" and "dealers" carried an original effective date of May 12, 2001;

WHEREAS on May 11, 2001, the Securities and Exchange Commission ("SEC") issued interim final rules under the Exchange Act (Release No. 34-44291; File No. S7-12-01), such rules being denominated as Rules 3a4-2 through 3a4-6, 3a5-1, 3b-17, 3b-18 and 15a-7 through 15a-9 ("Interim Rules");

WHEREAS the Interim Rules clarified certain terms used in Sections 3(a)(4) and 3(a)(5) of the Exchange Act, as amended by GLBA, and provided exemptions for certain banks, savings associations and savings banks pursuant to the authority granted to the SEC by Section 36 of the Exchange Act;

WHEREAS Section 36(a)(1) of the Exchange Act provides that: "[e]xcept as provided in subsection (b), but notwithstanding any other provision of this title, the Commission, by rule, regulation or order, may conditionally or unconditionally exempt any person, security, or transaction, or any . . . class or classes of persons, securities, or transactions, from any provision or provisions of this title or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interst [sic], and is consistent with the protection of investors";

WHEREAS Release No. 34-44291 provided that the Interim Rules were subject to amendment following the close of a comment period;

WHEREAS on July 18, 2001, the SEC issued an Order Extending Temporary Exemption of Banks, Savings Associations, and Savings Banks from the Definitions of "Broker" and "Dealer" Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 ("July 18, 2001 Extension Order") pursuant to Section 36 of the Exchange Act;

WHEREAS the July 18, 2001 Extension Order delayed implementation of the Interim Rules by exempting banks, savings associations and savings banks from the federal definitions of "broker" and "dealer" under the Exchange Act until May 12, 2002;

WHEREAS in entering the July 18, 2001 Extension Order, the SEC found that the July 18, 2001 Extension Order was necessary and appropriate in the public interest and consistent with the protection of investors; that postponed implementation of the Interim Rules would prevent banks from unnecessarily incurring costs to comply with the statutory scheme based on the Interim Rules rather than the rules as amended; and that delayed implementation would give the SEC time to fully consider comments received on the Interim Rules and amend the Interim Rules as necessary;

WHEREAS on May 31, 2001, the Governor signed into law Public Act 01-48 ("P.A. 01-48") which amended the definition of "broker-dealer" in Section 36b-3(5) of the Act to conform the exclusion for banks to that contained in Sections 3(a)(4) and 3(a)(5) of the Exchange Act, as amended by GLBA;

WHEREAS P.A. 01-48 takes effect October 1, 2001;

WHEREAS Section 36b-3(5) of the Act, as amended by P.A. 01-48, states, in part, that the term "broker-dealer" means "any person engaged in the business of effecting transactions in securities for the account of others or for such person's own account. 'Broker-dealer' does not include . . . (C) a bank, as defined in Section 3(a)(6) of the Securities Exchange Act of 1934, when conducting activities that would except it from the definitions of 'broker' or 'dealer' under Sections 3(a)(4) or 3(a)(5) of the Securities Exchange Act of 1934 . . .";

WHEREAS the temporary nature of the Interim Rules and the conflict in implementation dates created by the July 18, 2001 Extension Order and P.A. 01-48 would undermine the uniform treatment of banks as "broker-dealers", increase the risk of inconsistent interpretations at the state and federal levels and create an unwarranted compliance burden;

AND WHEREAS the Commissioner finds that the entry of this Order, which recognizes the need for state and federal uniformity, is necessary and appropriate in the public interest and consistent with the purposes fairly intended by the policy and provisions of the Act".

NOW THEREFORE, THE COMMISSIONER ORDERS AS FOLLOWS:

(1) Banks, as defined in Section 3(a)(6) of the Exchange Act, shall be excluded from the definition of "broker-dealer" under Section 36b-3(5) of the Act, as amended, until the effective date of any final rule or rules issued by the SEC defining the terms in, and providing specific exemptions from, the definitions of "broker" and "dealer" under Sections 3(a)(4) and 3(a)(5) of the Exchange Act;
(2) This Order shall be effective on October 1, 2001; and
(3) This Order shall remain in effect until superseded, modified, withdrawn or vacated by the Commissioner or other legal authority.
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So ordered at Hartford, Connecticut
this 26th day of September 2001.
John P. Burke
Banking Commissioner
 

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{Reminder Note}

Smart Tip for Connecticut-Registered
Broker-Dealers

Don't File Financial Statements Needlessly!

You Can Follow Customary Practice ...

Section 36b-31-14c(a) of the Regulations under the Connecticut Uniform Securities Act requires every Connecticut-registered broker-dealer to annually file a financial report on a calendar or fiscal year basis within 60 days following the close of its calendar or fiscal year. The report must be audited by an independent public accountant or independent certified public accountant and contain the information required by Securities and Exchange Commission Rule 17a-5(d).

Or Take a Compliance Shortcut If Your Firm Files Financial Statements With the NASD ...

Under Section 36b-31-14c(b) of the Regulations, a Connecticut-registered broker-dealer can choose to have its NASD filing fulfill the annual filing requirement in Connecticut if the broker-dealer meets four conditions: 1) the broker-dealer files annual audited financial reports with the NASD; 2) the broker-dealer is current in filing those reports; 3) the broker-dealer undertakes in writing to notify the Commissioner within 24 hours if its net capital does not meet the threshold in Section 36b-31-9b(a) of the Regulations; and 4) the firm undertakes in writing to provide the Commissioner with financial information within 24 hours following the Commissioner's request.

Using the Shortcut is Easier Than 1-2-3

Just complete the Waiver Eligibility Certification for Filing of Financial Reports by Connecticut-Registered Broker-dealers.

The Waiver Eligibility Certification:

  • Contains all required undertakings
  • Is indefinite in duration
  • Is valid until there has been a material change in circumstances (e.g. delinquencies in filing reports with the NASD; capitalization problems)
  • Generally, must only be filed once with the Division.

WAIVER ELIGIBILITY CERTIFICATION FOR FILING OF FINANCIAL REPORTS
BY CONNECTICUT-REGISTERED BROKER-DEALERS

The undersigned broker-dealer (hereinafter, "Registrant"), being duly registered under Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the "Act"), elects to satisfy Connecticut financial reporting requirements by making its annual filing with the National Association of Securities Dealers, Inc. pursuant to Section 36b-31-14c(b) of the Regulations under the Act. Accordingly, Registrant certifies and undertakes under penalty of false statement as follows:

1. Registrant is and continues to be a member of a self-regulatory organization ("SRO") registered under laws administered by the United States Securities and Exchange Commission;
2. Registrant files annual audited financial reports with the SRO of which it is a member;
3. Registrant is current in filing with such SRO all required financial reports, including, without limitation, the annual audited financial report referenced in Section 36b-31-14c(a) of the Regulations;
4. Registrant hereby undertakes to provide immediate telegraphic notice to the Commissioner within 24 hours if at any time its net capital becomes less than the minimum prescribed in Section 36b-31-9b(a) of the Regulations under the Act. Registrant understands that it may substitute notice by fax for the telegraphic notice required under this paragraph if a hard copy of such notice is received by the Commissioner the following business day;
5. Registrant hereby undertakes to provide, upon request by the Commissioner, and within 24 hours, any financial reports, statements, supplements and amendments required by Section 36b-31-14c(a) of the Regulations under the Act;
6. Registrant hereby undertakes to immediately notify the Commissioner in writing if there is any change in circumstances supporting its reliance upon this Waiver;
7. Registrant understands that this Waiver does not relieve the Registrant from compliance with other provisions of the Act or the Regulations thereunder, including, without limitation, Section 36b-31-14c(c) of the Regulations; and
8. This election shall remain in effect indefinitely provided that the conditions in Section 36b-31-14c(b) of the Regulations continue to be met and the Registrant is otherwise in compliance with the Act and the Regulations thereunder.

Print Broker-dealer Name ____________________  CRD No. _______________

Signature of CFO or other authorized individual  ______________________

Title of Signatory ____________________        Date: __________


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BROKER-DEALERS THWARTING CUSTOMER ACCOUNT TRANSFERS
RAISE REGULATORY CONCERNS

The Securities and Business Investments Division (the "Division") of the Department of Banking is aware that some broker-dealers are seeking and obtaining temporary restraining orders to block customers from transferring their accounts to competing firms following an agent's departure. Division Director Ralph Lambiase explained that "holding a customer's account hostage is an unfortunate and unnecessary side effect of employment disputes arising between brokerage firms and their agents." The purpose of this notice is to set forth the Division's position with respect to this issue and to notify registrants that the Division intends to pursue enforcement action against broker-dealers that obtain temporary restraining orders that delay or prevent customers from transferring their accounts.

Section 36b-31-15a of the Regulations under the Connecticut Uniform Securities Act (the "Regulations") sets forth a non-exclusive description of dishonest or unethical business practices by broker-dealers. Section 36b-31-15a(a)(3), for example, states that it is a dishonest or unethical business practice for a broker-dealer to cause any unreasonable delay under the circumstances in the requested delivery of securities purchased and fully paid for by any of the broker-dealer's customers. The Division believes that broker-dealers obtaining temporary restraining orders that delay or prevent customers from transferring their accounts may engage in a dishonest or unethical business practice as set forth in Section 36b-31-15a(a)(3) of the Regulations.

The Division has also reviewed new account documents, forms and agreements from a number of broker-dealers. These documents did not disclose that the carrying broker-dealer may take action to delay or prevent customers from transferring their accounts. The Division believes that such non-disclosure, if in connection with the offer, sale or purchase of a security may involve the omission of a material fact in violation of Section 36b-4(a)(2) of the Connecticut Uniform Securities Act and/or the commission of a dishonest or unethical practice in contravention of Section 36b-4(b) of the Act.

The Division believes that the practices described above may give rise to enforcement action under Section 36b-27(a) of the Act, and cautions registered broker-dealers that it intends to take enforcement action against any broker-dealer that seeks to hamper customers from legitimately transferring their accounts to another broker-dealer.


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Enforcement Highlights

Administrative Actions

Caffe Diva Group Ltd. Fined $20,000 for Unregistered Promissory Note Sales

On September 4, 2001, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2001-6196-S) against Caffe Diva Group Ltd., a corporation having its principal office at 15688 S.W. 72nd Avenue, Portland, Oregon. Caffe Diva had been the subject of a June 13, 2001 Order to Cease and Desist and Notice of Intent to Fine. The Order to Cease and Desist, being uncontested, became permanent on July 20, 2001.

In fining the respondent $20,000, the Commissioner found that Caffe Diva Group Ltd. had sold promissory notes through at least two unregistered agents of issuer in violation of Section 36b-6(b) of the Connecticut Uniform Securities Act and had failed to register the notes as required by Section 36b-16 of the Act. The imposition of the fine was also uncontested by the respondent.

Couch & Company, Incorporated f/k/a Thomas M. Couch, Inc. (CRD # 18433) Fined $30,000 for Unregistered Activity, Alleged Filing Missstatements

On July 27, 2001, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2001-5562-S) against Couch & Company, Incorporated, a broker- dealer located at 40 Exchange Place, Suite 1601, New York, New York. In fining the firm $30,000, the Commissioner found that 1) from at least June 1999, the firm had transacted business as a broker-dealer absent registration under the Connecticut Uniform Securities Act and had employed unregistered agents; and 2) that the firm had filed a materially false or misleading document with the department concerning the scope of the firm's prior securities activities in Connecticut.

The respondent had been the subject of an April 2, 2001 Order to Cease and Desist that, being uncontested, became permanent on May 9, 2001.

ALumaLex, Inc. f/k/a Auto Shutter, Inc. Fined $20,000 for Unregistered Promissory Note Sales

On July 27, 2001, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2001-6193-S) against ALumaLex, Inc. of 2900 S.W. 60th Avenue, Ocala, Florida. In fining the respondent $20,000, the Commissioner found that from at least April 1997, the respondent sold unregistered, non-exempt promissory notes to the Connecticut investing public through at least two unregistered agents of issuer in violation of Sections 36b-16 and 36b-6(b) of the Connecticut Uniform Securities Act. The respondent did not contest the imposition of the fine.

The respondent had been the subject of an April 20, 2001 Order to Cease and Desist which, being uncontested, became permanent on May 11, 2001.

Anthony Brooks (CRD # 2254104) Ordered to Cease and Desist from Selling Bogus Investments; Notice of Intent to Fine Issued

On July 25, 2001, the Banking Commissioner entered an Order to Cease and Desist and Notice of Intent to Fine (Docket No. CF-2001-6173-S) against Anthony Brooks of Stamford, Connecticut. The action alleged that, from at least 1998 forward, respondent Brooks, acting on behalf of Integrated Financial Solutions, solicited investors to purchase non-existent shares of Venture Investments - Aggressive Growth A and of Decatur Daniels Investments. The action also claimed that respondent Brooks used investor funds to benefit himself and his spouse, and that he misrepresented to investors on their individual account summaries that their funds were invested in Venture Investments - Aggressive Growth A and Decatur Daniels Investments. In addition to conduct giving rise to a violation of the antifraud provisions of the Connecticut Uniform Securities Act, the Order to Cease and Desist and Notice of Intent to Fine alleged that respondent Brooks transacted business as an unregistered broker-dealer agent of Integrated Financial Solutions, and that the bogus investments were not registered under the Connecticut Uniform Securities Act.

Since the respondent did not request a hearing on the Order to Cease and Desist, that order became permanent on September 6, 2001. The matter involving the Notice of Intent to Fine remains pending.

Integrated Financial Solutions Ordered to Cease and Desist from Selling Bogus Investments

On July 25, 2001, the Banking Commissioner entered an Order to Cease and Desist and Notice of Intent to Fine (Docket No. CF-2001-6173-S) against Integrated Financial Solutions of 1450 Washington Boulevard, Stamford, Connecticut. The action alleged that, from at least 1998 forward, the respondent, acting through one or more unregistered agents, solicited investors to purchase non-existent shares of Venture Investments - Aggressive Growth A and of Decatur Daniels Investments. The action also alleged that the respondent participated in a scheme whereby its agent used investor funds to benefit himself and his spouse, and that the respondent misrepresented to investors on their individual account summaries that their funds were invested in Venture Investments - Aggressive Growth A and Decatur Daniels Investments. In addition to conduct giving rise to a violation of the antifraud provisions of the Connecticut Uniform Securities Act, the Order to Cease and Desist and Notice of Intent to Fine alleged that the respondent transacted business as an unregistered broker-dealer, and that the bogus investments were not registered under the Connecticut Uniform Securities Act.

Since the respondent did not request a hearing on the Order to Cease and Desist, that order became permanent on September 6, 2001. The matter involving the Notice of Intent to Fine remains pending.

Montgomery Sterling Corporation Fined $10,000 for Unregistered Stock Sales

On July 25, 2001, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2001-6144-S) against Montgomery Sterling Corporation of 651 Willowbrook Road, Staten Island, New York. The Order, which fined the corporation $10,000, was based on findings that, on or about June 12, 2000, the respondent sold unregistered non-exempt units of its common stock to at least one Connecticut resident in violation of Section 36b-16 of the Connecticut Uniform Securities Act. The respondent did not contest the imposition of the fine.

Montgomery Sterling Corporation had also been the subject of a March 27, 2001 Order to Cease and Desist based upon the same conduct. That order was uncontested by the respondent and became permanent on April 12, 2001. The Order to Cease and Desist had also claimed that the respondent could not rely on the exemption for Rule 504 offerings under Connecticut law since Ernest Cappone, an executive officer, director and beneficial owner of the respondent, had been the subject of an April 9, 1999 Consent Order issued by the State of Delaware prohibiting Cappone from pursuing registration as a broker-dealer agent in that state for three years.

John A. Thompson (CRD # 727168) Fined $20,000 for Unregistered Promissory Note Sales

On July 24, 2001, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2001-5572-S) against John A. Thompson of Brooklyn, Connecticut. In imposing a $20,000 fine on the respondent, the Commissioner found that, from at least July 1998 forward, John A. Thompson sold unregistered non-exempt promissory notes of Pacific Air Transport, Inc., Redbank Petroleum, Inc., Taormina Omne SRL, Tri-National Development Corp. and Caffe Diva Group, Ltd. to Connecticut investors in violation of Section 36b-16 of the Connecticut Uniform Securities Act. The Commissioner also found that, in selling the promissory notes, the respondent acted as an unregistered agent of issuer in violation of Section 36b-6(a) of the Act. Respondent Thompson did not contest the imposition of the $20,000 fine.

John A. Thompson had also been the subject of an April 17, 2001 Order to Cease and Desist based upon the same conduct. The Order to Cease and Desist, being uncontested by the respondent, became permanent on June 29, 2001.

Tri-National Development Corp. Ordered to Make Restitution for Unregistered Promissory Note Sales

On July 16, 2001, the Banking Commissioner entered an Order to Make Restitution and Notice of Right to Hearing (Docket No. CF-2001-6197-S) against Tri-National Development Corp. of 480 Camino Del Rio South, Suite 140, San Diego, California. On the same day, the Commissioner issued a Restated Order to Cease and Desist and a Restated Notice of Intent to Fine that superseded an April 17, 2001 Order to Cease and Desist and Notice of Intent to Fine based upon the same conduct. The Commissioner's action alleged that, from at least April 1999 forward, the respondent sold unregistered non-exempt promissory notes to at least seventeen Connecticut investors through at least four unregistered agents of issuer in violation of Sections 36b-16 and 36b-6(b) of the Connecticut Uniform Securities Act.

The respondent did not contest the Restated Order to Cease and Desist, the Restated Notice of Intent to Fine or the Order to Make Restitution. Consequently, both the Restated Order to Cease and Desist and the Order to Make Restitution became permanent on October 9, 2001. According to the terms of the Order to Make Restitution, the respondent was obligated to repay affected Connecticut investors within 90 days after the restitutionary order became permanent.

Drexel Aqua Technologies, Inc. Ordered to Cease and Desist from Regulatory Violations; Notice of Intent to Fine Issued

On July 9, 2001, the Banking Commissioner entered an Order to Cease and Desist and Notice of Intent to Fine (Docket No. CF-2001-6228-S) against Drexel Aqua Technologies, Inc. of 47 Florida Street, Farmingdale, New York. The action alleged that, from at least March 1999 forward, the respondent sold shares of its unregistered non-exempt common stock through at least one unregistered agent of issuer in violation of Sections 36b-16 and 36b-6(b) of the Connecticut Uniform Securities Act.

Since the respondent did not request a hearing on the Order to Cease and Desist, that order became permanent on September 13, 2001. The matter involving the Notice of Intent to Fine remains pending.

Settlements

W. Peter Massman a/k/a W. Peter Massmann (CRD # 1486969) Fined $10,000; Ordered to Make Restitution; Order to Cease and Desist Made Permanent

On September 25, 2001, the Banking Commissioner entered a consent order (Docket No. CF-2001-6158-S) with respect to W. Peter Massmann of Westport, Connecticut. The respondent had been the subject of a May 10, 2001 Order to Cease and Desist and Notice of Intent to Fine alleging that respondent, formerly a broker-dealer agent of Nutmeg Securities, Ltd. from June 30, 1994 to March 31, 1997, sold unregistered promissory notes of Lighthouse Two Corporation, Prime Time Investments, Inc. and Prime Time Leasing & Financial Services Corporation during and after his association with the Nutmeg Securities, Ltd.

The Consent Order contained findings that the respondent violated 1) Section 36b-31-6e of the Regulations under the Connecticut Uniform Securities Act by engaging in private securities transactions absent notice to his employing broker-dealer; 2) Section 36b-6(a) of the Act by transacting business as an unregistered agent of issuer in making the note sales; and 3) Section 36b-16 of the Act by selling unregistered non-exempt securities to Connecticut customers.

The Consent Order fined the respondent $10,000 and rendered the May 10, 2001 Order to Cease and Desist permanent as of September 25, 2001. In addition, the Consent Order required that, within 30 days, the respondent provide the department with detailed information concerning note sales made from July 18, 1996 forward, including an itemized accounting of consideration paid, amounts received to date by each Connecticut investor and interest due, such amounts being used to calculate a restitutionary figure for each investor. The Consent Order also mandated that the respondent make restitution to affected Connecticut investors no later than 180 days following entry of the consent order.

Vernes Asset Management, LLC (CRD # 112872) Assessed $2,500 for Investment Advisory Notice Filing Delinquency

On September 17, 2001, the Banking Commissioner executed a Stipulation and Agreement (No. ST-01-6307-S) with respect to Vernes Asset Management, LLC, an SEC-regulated investment adviser located at 993 Farmington Avenue, Suite 205, West Hartford, Connecticut. The Stipulation and Agreement alleged that from June 30, 2000, when Vernes Asset Management, LLC became registered with the Securities and Exchange Commission, until July 5, 2001, when a notice filing was made, the firm failed to make the investment advisory notice filing required by Section 36b-6(e) of the Connecticut Uniform Securities Act.

In entering into the Stipulation and Agreement, the Commissioner acknowledged that the firm had brought the filing delinquency to the department's attention, and that the firm had retained legal counsel to advise it concerning establishing a compliance system to facilitate adherence to state notice filing requirements.

Pursuant to the Stipulation and Agreement, Vernes Asset Management, LLC agreed to 1) review, revise and implement such supervisory and compliance procedures as were necessary to ensure compliance with state notice filing requirements; and 2) remit $2,500 to the department, $2,000 of which constituted an administrative fine and $500 of which represented reimbursement for Division investigative costs.

Landmark Advisers Inc. (CRD # 107278), Landmark Equity Advisors LLC (CRD # 108543) and Landmark Realty Advisors LLC (CRD # 107304) Assessed $15,000 Jointly and Severally for Investment Advisory Notice Filing Violations

On August 31, 2001, the Banking Commissioner executed a Stipulation and Agreement (No. ST-01-6293-S) with respect to Landmark Advisers Inc., Landmark Equity Advisors LLC and Landmark Realty Advisors LLC, all of 10 Mill Pond Lane, Simsbury, Connecticut. The entities, which are affiliated, are registered as investment advisers with the Securities and Exchange Commission. The Stipulation and Agreement alleged that at various times between October 1, 1997 and March 2001, when appropriate notice filings were made, the entities failed to make the investment advisory notice filing required by Section 36b-6(e) of the Connecticut Uniform Securities Act and pay the annual fees.

Without admitting or denying the Commissioner's allegations, the respondents agreed to 1) refrain from violating the notice filing and fee payment provisions of Section 36b-6(e) of the Act; 2) implement such supervisory and compliance procedures as were necessary to ensure compliance with state investment advisory notice filing requirements; and 3) remit $15,000 to the department, jointly and severally. Of the $15,000 imposed, $10,000 constituted an administrative fine, $2,500 represented past due notice filing fees; $1,500 constituted reimbursement for Division investigative costs; and $1,000 would be applied to cover the cost of a written notice distributed by the department to SEC-registered investment advisers notifying such advisers of their statutory obligation to make a notice filing under the Act before transacting business in Connecticut.

Portfolio Advisors LLC (CRD # 105981) Assessed $6,000 for Investment Advisory Notice Filing Violations

On August 31, 2001, the Banking Commissioner executed a Stipulation and Agreement (No. ST-01-6322-S) with respect to Portfolio Advisors LLC, an SEC-regulated investment adviser located at 9 Old Kings Highway South, Darien, Connecticut. The Stipulation and Agreement alleged that from July 1, 1997 until July 10, 2001, the respondent violated Section 36b-6(e) of the Connecticut Uniform Securities Act by failing to make the investment advisory notice filing and pay the annual fees required by that section. The Stipulation and Agreement noted that on July 10, 2001, the respondent did file the notice and remit the fee required for calendar year 2001.

Without admitting or denying the Commissioner's allegations, the respondent agreed to 1) refrain from violating the notice filing and fee payment provisions of Section 36b-6(e) of the Act; 2) implement such supervisory and compliance procedures as were necessary to ensure compliance with state investment advisory notice filing requirements; and 3) remit $6,000 to the department, $5,000 of which constituted an administrative fine and $1,000 of which represented reimbursement for past due notice filing fees covering the period from 1997 to 2000, inclusive.

Pond Securities Corp. d/b/a Pond Equities (CRD # 30934) Prohibited from Seeking Connecticut Broker-dealer or Investment Adviser Registration for Seven Years; Assessed $17,500; Cease and Desist Order Made Permanent

On August 31, 2001, the Banking Commissioner entered a Consent Order (Docket No. NDCDF-2001-6130-S) with respect to Pond Securities Corp. of 4522 Fort Hamilton Parkway, Brooklyn, New York. The firm had been the subject of an April 2, 2001 Notice of Intent to Deny Registration as Broker-dealer, Order to Cease and Desist and Notice of Intent to Fine.

The Consent Order asserted that, following the initiation of administrative proceedings, the department had conducted an investigation to determine if the firm was complying with the April 2, 2001 Order to Cease and Desist. The Consent Order averred that, in conjunction with that investigation, the firm failed to produce relevant documents and records when requested to do so by Division staff during an on-site investigation of the firm's offices.

In consenting to the entry of the order, the firm agreed to findings by the Commissioner that 1) three sanctions by the NASD and a March 4, 1999 revocation action by the State of Maryland would support the denial of the firm's registration under Sections 36b-15(a)(2)(F)(iii) and 36b-15(a)(2)(F)(i) of the Connecticut Uniform Securities Act; 2) the firm had wilfully violated Sections 36b-6(a) and 36b-6(b) of the Act by transacting business as a broker-dealer while unregistered and employing unregistered agents; 3) the firm had wilfully violated Section 36b-23 of the Act by filing a materially false or misleading document with the Commissioner concerning the extent of its prior brokerage activity in the state; and 4) the firm wilfully violated Section 36b-26(b) of the Act by failing to produce relevant documents and records to Division staff when requested during the course of an investigation.

The Consent Order required that the firm withdraw its broker-dealer application and not reapply for registration as a broker-dealer or investment adviser in the state for seven years. The Consent Order also directed the firm to pay $17,500 to the department, $15,000 of which constituted an administrative fine and $2,500 of which represented reimbursement for Division investigative costs. In addition, the Consent Order rendered the April 2, 2001 Order to Cease and Desist permanent, effective August 31, 2001. Finally, the Consent Order provided that, if the firm violated the April 2, 2001 Order to Cease and Desist, an additional fine of $10,000 would be imposed, and the firm would be responsible for paying for all administrative costs associated with the related investigation, examination and hearing. The Consent Order also withdrew the April 2, 2001 Notice of Intent to Deny Registration as Broker-dealer and the April 2, 2001 Notice of Intent to Fine.

Bruce I. Harlan (CRD # 237147) Barred for 5 Years From Securities-Related Activity; Assessed $3,500

On August 31, 2001, the Banking Commissioner issued a Consent Order (No. CO-01-5466-S) with respect to Bruce I. Harlan of Sharon, Connecticut. The Consent Order alleged that from July 1998 to October 1999, the respondent sold unregistered non-exempt promissory notes of Sebastian International Enterprises, Inc. and World Vision Entertainment, Inc. to Connecticut residents, and, in so doing, transacted business as an unregistered agent of issuer in contravention of Section 36b-6(a) of the Connecticut Uniform Securities Act.

The Consent Order barred the respondent for five years from transacting business in or from Connecticut as a broker-dealer, investment adviser, agent of issuer, broker-dealer agent, investment adviser agent or seller of business opportunities. In addition, the Consent Order directed the respondent to cease and desist from regulatory violations, and mandated that he pay $3,500 to the department, $3,000 of which constituted an administrative fine and $500 of which represented reimbursement for agency investigative costs.

Dennis William Ryan (CRD # 1390854) Ordered to Cease and Desist from Regulatory Violations; Fined $500; Securities Activities Restricted

On August 26, 2001, the Banking Commissioner entered a Consent Order (Docket No. CO-01-6169) with respect to Dennis William Ryan, a broker-dealer agent of Delta Asset Management Company, Inc. (CRD # 39923). The Consent Order alleged that Ryan violated Section 36b-6(a) of the Connecticut Uniform Securities Act by attempting to effect transactions in Connecticut while his registration as an agent was pending. The Consent Order fined Ryan $500 and directed him to cease and desist from regulatory violations. In addition, the Consent Order required that respondent Ryan complete the Regulatory Element of the Securities Industry Continuing Education Program, a computer-based securities training session administered by the NASD, within 90 days. Respondent Ryan's securities business was also restricted to transactions in the securities of investment companies regulated under the Investment Company Act of 1940; governmental securities; exchange-listed options; and securities listed on the New York Stock Exchange, the American Stock Exchange and the National Market System of NASDAQ. The Consent Order also prohibited respondent Ryan from selling limited partnership interests or real estate investment trusts unless those investments were exchange listed or traded on the National Market System of NASDAQ.

Arthur L. Bisson (CRD # 1355774) Barred for 5 Years From Securities-Related Activity; Fined $500

On July 9, 2001, the Banking Commissioner issued a Consent Order (No. CF-2001-5574-S) with respect to Arthur L. Bisson of Meriden, Connecticut. Bisson had been the subject of an April 20, 2001 Order to Cease and Desist and Notice of Intent to Fine (Docket No. CF-2001-5574-S) alleging that from at least February 1997, the respondent sold unregistered non-exempt promissory notes and preferred stock to Connecticut investors in violation of Section 36b-16 of the Connecticut Uniform Securities Act. The promissory notes had been issued by World Vision Entertainment, Inc., Lifeblood Biomedical, Inc., Canko Environmental Technologies, Inc., Redbank Petroleum, Inc., Tri-National Development Corp., ALumaLex, Inc. and Technical Support Services, Inc. The preferred stock had been issued by Palm Beach Investment Group. The April 20, 2001 action had also alleged that, in selling the securities, the respondent transacted business as an unregistered agent of issuer in violation of Section 36b-6(a) of the Connecticut Uniform Securities Act.

The Consent Order barred Bisson for five years from acting as a broker-dealer agent, investment adviser agent or investment adviser in Connecticut. In addition, the Consent Order, acknowledging the respondent's demonstrated inability to pay the maximum fine sought, fined Bisson $500. The Consent Order also rendered the April 20, 2001 Order to Cease and Desist permanent as of July 9, 2001.

Lighthouse Securities, Ltd. (CRD # 16241) Assessed $10,000 for Supervisory Lapse in Conjunction With Agent's Private Securities Transactions

On July 6, 2001, the Banking Commissioner issued a Consent Order (No. CO-01-6201-S) with respect to Lighthouse Securities, Ltd., a broker-dealer registered under the Connecticut Uniform Securities Act and having its principal office at 241 Main Street, Hartford, Connecticut. The Consent Order was based on claims that, from at least April 1997 through December 1, 1997, the firm violated Section 36b-31-6f(b) of the Regulations under the Act by not properly supervising the activities of its former agent, Paul Golub, who purportedly engaged in private securities transactions. The Consent Order directed Lighthouse Securities, Ltd. to cease and desist from regulatory violations and to pay $10,000 to the department. Of that amount, $5,000 constituted an administrative fine, $2,500 represented reimbursement for Division investigative costs and $2,500 was to be allocated to the Division's Investor Education Program. The Consent Order also required that the firm file quarterly reports for two years concerning any securities complaints, actions or proceedings involving Connecticut residents.

Salomon Smith Barney Inc. (CRD # 7059) Assessed $1,750 for Unregistered Branch Activity

On July 6, 2001, the Banking Commissioner entered a Consent Order (File No. CO-01-6251-S) with respect to Salomon Smith Barney Inc. of 388 Greenwich Street, New York, New York. Salomon Smith Barney Inc. is a registered broker- dealer under the Connecticut Uniform Securities Act. The Consent Order alleged that the firm had transacted business from an unregistered branch office located at 19 Halls Road in Old Lyme in violation of Section 36b-6(d) of the Act.

Noting that the Old Lyme operations had ceased, the agency directed the firm to revise and implement supervisory and compliance procedures reasonably designed to prevent and detect violations of state branch office registration provisions. The Consent Order also required that the firm pay $1,750 to the agency, $1,500 of which constituted an administrative fine, $100 of which represented past due branch office registration fees and $150 of which constituted reimbursement for Division investigative costs.

Kevin Brian Barry (CRD # 2316014) Sanctioned for Unregistered Agent Activity

On July 3, 2001, the Banking Commissioner executed a Stipulation and Agreement (No. ST-01-6280-S) with respect to Kevin Brian Barry, currently a registered broker-dealer agent of Bengal Partners, LLC. The Stipulation and Agreement alleged that between January 1996 and approximately April 2001, respondent Barry transacted business as an agent of Southport Securities, LLC absent registration under Section 36b-6 of the Connecticut Uniform Securities Act. The Stipulation and Agreement acknowledged the respondent's representation that he had submitted all required registration paperwork to the firm, and had relied upon the firm to ensure that the registration process had been completed. The respondent had also provided the Division with a copy of the Form U-4 previously submitted to the firm.

Pursuant to the Stipulation and Agreement, respondent Barry agreed to pay a $500 fine and to complete the Regulatory Element of the Securities Industry Continuing Education Program within ninety days.

Conditional Registrations

SFS Capital, LLC (CRD # 104363) - Consent Order Conditioning Registration as a Broker-dealer Issued

On August 31, 2001, the Banking Commissioner issued a Consent Order (No. CO-01-6326-S) under the Connecticut Uniform Securities Act conditioning the registration of SFS Capital, LLC as a broker-dealer. SFS Capital, LLC maintains an office at 303 Strawberry Hill Avenue, Norwalk, Connecticut. The Consent Order was predicated on deficiencies in securities-related experience.

Pursuant to the Consent Order, SFS Capital, LLC agreed to 1) restrict its business for thirty months to the purchase, sale and redemption of investment company securities, government securities, exchange-listed options, securities listed on the New York Stock Exchange, the American Stock Exchange and NASDAQ-NMS; corporate debt for which there was an established trading market; and annuities and non-securities insurance products; 2) retain an independent consultant to conduct a compliance audit of the firm's operations one year following the entry of the Consent Order; 3) for thirty months, provide the department with quarterly reports concerning any securities-related complaints, actions or proceedings; and 4) for thirty months, notify the Division in writing within five business days following any change in the firm's officers, control persons or individuals identified in the firm's supervisory procedures manual as having responsibility for regulatory compliance.

Also on August 31, 2001, SFS Capital, LLC became registered as a broker-dealer under the Connecticut Uniform Securities Act.

Benchmark Asset Management, LLC and John Andrew Kinney (CRD # 1918369) - Consent Order Conditioning Registration as an Investment Adviser and as an Investment Adviser Agent Issued

On July 25, 2001, the Banking Commissioner issued a Consent Order (File No. CO-01-6321-S) under the Connecticut Uniform Securities Act conditioning the registration of Benchmark Asset Management, LLC as an investment adviser, and the registration of John Andrew Kinney as an investment adviser agent of that firm. Benchmark Asset Management, LLC is wholly owned by John Andrew Kinney and maintains an office at 2614 Boston Post Road, Carriage House, Suite 3812 in Guilford, Connecticut. In conditioning the registrations, the Commissioner observed that Kinney had been the subject of a prior six-week bar imposed by the New York Stock Exchange in conjunction with allegations that Kinney had inequitably reallocated securities executions among customers.

Pursuant to the Consent Order, Benchmark Asset Management, LLC and John Andrew Kinney agreed to 1) refrain from having custody of client funds or securities for two years; 2) refrain for two years from exercising discretionary trading authority or control over client funds or securities unless prior written approval from the Division Director were obtained; 3) for two years, limit the investment advice rendered to securities listed on the New York Stock Exchange, the American Stock Exchange and/or the National Market System of NASDAQ; covered options and warrants relating to exchange-listed or NASDAQ-NMS securities; commercial paper; certificates of deposit; corporate debt securities; municipal securities; securities issued by investment companies subject to regulation under the Investment Company Act of 1940; United States government securities and insurance products subject to regulation by the Connecticut Insurance Commissioner; and 4) for two years, report to the division on a quarterly basis concerning any securities-related complaints, actions or proceedings involving either Benchmark Asset Management, LLC or John Andrew Kinney.

On July 25, 2001, Benchmark Asset Management, LLC became registered as an investment adviser under the Connecticut Uniform Securities Act, and the registration of John Andrew Kinney as an investment adviser agent of Benchmark Asset Management, LLC was made effective.


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STATISTICAL SUMMARY

Licensing At A Glance
September 30, 2001
Broker-dealers Registered 2,625
Broker-dealer Agents Registered 120,384
Broker-dealer Branch Offices Registered 1,635
Investment Advisers Registered 382
SEC Registered Advisers Filing Notice 1,099
Investment Adviser Agents Registered 4,851
Investment Advisory Branch Offices Registered 214
Agents of Issuer Registered 155

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  1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Securities Investigations  
Opened 88 54 61   203
Closed 63 78 81   222
Ongoing as of September 30, 2001 135 110 92    
Subpoenas issued 9 4 11   24
Cases referred from Attorney General 3 4 0   7
Cases referred from Other Agencies 5 5 2   12
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Securities Enforcement:
Remedies and Sanctions
 
Notices of Intent to Deny (Licensing) 0 1 0   1
Notices of Intent to Suspend (Licensing) 0 0 0   0
Notices of Intent to Revoke (Licensing) 3 0 0   3
Denial Orders (Licensing) 0 0 0   0
Suspension Orders (Licensing) 0 1 0   1
Revocation Orders (Licensing) 0 0 0    0
Notices of Intent to Fine 4 12 4   20
Orders Imposing Fine 9 4 5   18
Cease and Desist Orders 9 16 7   32
Notices of Intent to Issue Stop Order 0 0 0   0
Activity Restrictions/Bars 3 6 4   13
Stop Orders 0 0 0   0
Vacating/Withdrawal Orders 2 3 1   6
Censures 0 1 0   1
Formal Orders of Restitution 0 0 2   2
{ }   
Proceedings and Settlements  
Administrative Actions 13 12 9   34
Consent Orders 7 9 7   23
Stipulation and Agreements 1 4 4   9
{ }   
Monetary Relief  
Monetary Sanctions Imposed $231,100 $86,750 $167,750   $485,600
Restitution or Other Monetary Relief $4,117,847 $332,154 $112,241   $4,562,242
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Securities Referrals  
Criminal (Chief State's Attorney) 0 0 2   2
Criminal (Other) 0 0 0   0
Civil (Attorney General) 0 0 0   0
Other Agency Referrals 0 12 0   12
{ }   
Examinations  
Broker-dealers 11 10 10   31
Investment Advisers 19 2 5   26

The Securities and Business Investments Division is also charged with
administering the Connecticut Business Opportunity Investment Act.

    1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Business Opportunities  
Investigations Opened 2 1 1   4
Investigations Closed 5 0 3   8
Investigations ongoing as of September 30, 2001 4 5 3    
Cases referred by Attorney General 0 0 0   0
Cases referred by Other Agencies 0 0 0   0
Subpoenas issued 0 0 0   0
Cease and Desist Orders 0 1 0   1
Notices of Intent to Issue Stop Order 0 0 0   0
Stop Orders 1 0 0   1
Notices of Intent to Fine 0 1 0   1
Orders Imposing Fine 0 0 0   0
Monetary Sanctions Imposed 0 0 0   0
Restitution or Other Monetary Relief $6,000 0 0   $6,000
Criminal Referrals (Chief State's Attorney) 0 0 0   0
Civil Referrals (Attorney General) 0 0 0   0
Other Agency Referrals 0 0 0   0

Securities Division