DOB: Winter 2005 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XIX  No. 4 Winter 2005

Features

Enforcement and Other Highlights

Contributors

Ralph Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric Wilder, Assistant Director
Helen Crane, Subscription Coordinator


A WORD FROM THE BANKING COMMISSIONER

Over the past year, the Department has made great strides in the development of its website and in providing up-to-the-minute information to industry and consumers alike.  It is now possible, for example, to have automatic e-alerts delivered to your electronic mailbox the moment that the agency’s website is updated.  The e-alerts supplement the listserv now in place for electronic delivery of the quarterly Securities Bulletin.  Securities Bulletin readers are also reminded that summaries of securities-related enforcement actions are published weekly in the agency’s online News Bulletin (www.ct.gov/dob), that policy statements and orders are published to the web shortly after being signed and that the Securities Bulletin is also available for online viewing, regardless of whether you become a listserv participant or subscribe to e-alerts.  As a result, effective with this issue, the agency will be discontinuing the mailing of printed versions of the Securities Bulletin.  In making this change, we acknowledge that web-based delivery is far more effective and less costly in keeping securities industry professionals up-to-speed on current developments.  To sign up for the listserv, simply 1) send an e-mail to imailsrv@list.state.ct.us 2) leave the subject line blank; 3) in the body of the message type subscribe CT-Securities (there are no spaces in the list name CT-Securities); and 4) add your name to the body of the message.  You will receive an e-mail confirmation that your subscription request has been processed successfully.  To be automatically notified of website updates, go to www.ct.gov/dob/guestaccount/registration_form.asp
and follow the easy instructions.

Plans are underway for the agency’s annual Securities Forum.  This year, the event tentatively will be held on Thursday, October 26, 2006 at the Crowne Plaza Hotel and Conference Center in Cromwell, Connecticut.  Further details concerning the program and the keynote speaker will be provided to you as soon as they become available.  Interested parties are encouraged to contact us with any suggestions they may have on ways to enhance the program, both from a topical standpoint and otherwise.

From an enforcement standpoint, the final quarter of 2005 was marked by a significant settlement with Deutsche Bank Securities, Inc. stemming from conflicts of interest that undermined the independence of firm analysts.  Also featured in this issue is an extension to June 30, 2006 of the agency’s prior no-action position granting relief to securities industry personnel and their customers affected by Hurricanes Katrina and Rita.

As always, we welcome your comments.

John P. Burke
Banking Commissioner


 
The Banking Commissioner of the State of Connecticut has determined that it is appropriate and in the public interest to extend until June 30, 2006 the agency’s October 18, 2005 No-Enforcement Action Determination Affecting Persons Displaced as a Result of Hurricane Katrina or Rita.
 
The text of the October 18, 2005 No-Enforcement Action Determination, as extended, reads as follows.
 
Pursuant to Section 36b-31(f) of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (“Act”), as amended by Public Act 05-177, the Banking Commissioner of the State of Connecticut has determined that the Securities and Business Investments Division of the State of Connecticut Department of Banking (“Division”) will not institute a proceeding or an action under the Act with respect to certain securities activities involving investors and/or financial professionals who have been displaced as a result of Hurricane Katrina or Rita (“Statement of Policy”).
 
Section 36b-6 of the Act, as amended by Public Act 05-177, prohibits broker-dealers, investment advisers, agents and investment adviser agents from transacting business in this state without being registered or exempt from registration.  In the case of an investment adviser registered or required to be registered with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940 (“Federally Covered Adviser”), Section 36b-6(e) of the Act, as amended, conditions the Federally Covered Adviser’s exempt status on the Federally Covered Adviser filing a notice with the Department.
 
The Division will not pursue enforcement action against a broker-dealer, agent, investment adviser, Federally Covered Adviser or investment adviser agent (collectively, “Financial Professionals”) for violations of the registration and notice filing requirements in Section 36b-6 of the Act, as amended, provided that the Financial Professionals comply with Connecticut law and the conditions in this Statement of Policy.
 
For purposes of this Statement of Policy, the terms “Pre-existing Customers and Clients” and “Pre-Existing Customer or Client” refer to customers or clients with whom the Financial Professional had a bona fide, pre-existing securities brokerage or investment advisory relationship on or before August 29, 2005, and while the Financial Professional was domiciled in its home state.
 
Temporary Displacement of Pre-Existing Customers and Clients to Connecticut
 
Where Pre-Existing Customers and Clients of Financial Professionals have been displaced to Connecticut as a result of Hurricane Katrina or Rita and Financial Professionals do business with such Pre-Existing Customers and Clients temporarily located in this state, the Division will not take enforcement action for violations of the registration and notice filing requirements in Section 36b-6 of the Act, as amended, as long as the Financial Professional satisfies four conditions:

1. The Financial Professional may only effect securities transactions or render investment advisory services to persons who are Pre-Existing Customers and Clients as defined above;
2.
The Financial Professional must be registered or exempt from registration in the home state of the Pre-Existing Customer or Client;
3. The Financial Professional must be registered or exempt from registration with the SEC, a “self-regulatory organization” as defined in Section 36b-3(20) of the Act, as amended by Public Act 05-177, and the home state of the Financial Professional to the extent required by law; and
4.
The Financial Professional must disclose to Pre-Existing Customers and Clients who have been displaced and who are temporarily in this state that the Financial Professional is not registered under the Act.

Temporary Displacement of Financial Professionals to Connecticut
 
Where a Financial Professional has been temporarily displaced to Connecticut as a result of Hurricane Katrina or Rita, the Division will not take enforcement action for violations of the registration and notice filing requirements in Section 36b-6 of the Act, as amended, if such Financial Professional effects securities transactions or renders investment advisory services from Connecticut on behalf of Pre-Existing Customers and Clients, provided that:

1. The Financial Professional provides written or electronic notice to the Division that the Financial Professional has relocated to Connecticut and plans to transact securities business or render investment advisory services in reliance on this Statement of Policy;
2.
The Financial Professional discloses to such Pre-Existing Customers and Clients that it is temporarily domiciled in Connecticut and that it is not registered under the Act;
3. The Financial Professional is registered with the home state from which it was displaced or, in the case of a Federally Covered Adviser, has filed a notice with the home state from which it was displaced; and
4.
If the Financial Professional is a broker-dealer, the Financial Professional is registered with the SEC and with a “self-regulatory organization” as defined in Section 36b-3(20) of the Act, as amended.


Limitations
 
This Statement of Policy does not permit any Financial Professional that has not fulfilled the filing requirements under Section 36b-6 of the Act, as amended, to solicit any new customers or clients in Connecticut.
 
This Statement of Policy does not prohibit the Division from taking enforcement action based on any other violation of the Act, including, without limitation, violations of the antifraud provisions in Sections 36b-4 and 36b-5 of the Act.
 
A Financial Professional effecting securities transactions or rendering investment advisory services on behalf of Pre-Existing Customers and Clients may only act within the scope of this Statement of Policy.  Any activity beyond the scope of this Statement of Policy may constitute grounds for enforcement action by the Commissioner.
 
This Statement of Policy describes the enforcement position of the Division, and does not create an independent exemption from the registration and notice filing requirements in Section 36b-6 of the Act, as amended.  In addition, Section 36b-29 of the Act provides certain remedies to investors and to investment advisory clients when the Act has been violated.  These remedies are applicable notwithstanding this Statement of Policy.
 
UNLESS EXTENDED BY THE COMMISSIONER, THIS STATEMENT OF POLICY SHALL BE LIMITED TO ACTIVITIES DESCRIBED HEREIN OCCURRING ON OR BEFORE JUNE 30, 2006.


John P. Burke
Banking Commissioner
January 19, 2006



ADMINISTRATIVE ACTIONS AND SETTLEMENTS

Geek Securities, Inc. (CRD # 14834) Fined $100,000

On December 14, 2005, the Banking Commissioner entered an Order Imposing Fine (Docket No. RCF-2005-7125-S) against Geek Securities, Inc., a broker-dealer having its principal office at 999 Yamato Road, Suite 100, Boca Raton, Florida.  The firm had also been the subject of an August 4, 2005 Order to Cease and Desist, Notice of Intent to Revoke Registration as Broker-dealer and Notice of Intent to Fine (Docket No. RCF-2005-7125-S).  The Order to Cease and Desist, being uncontested, had become permanent on September 19, 2005.

In fining the firm $100,000, the Commissioner found that Geek Securities, Inc. violated Section 36b-31-14e(a) of the Regulations under the Connecticut Uniform Securities Act by failing to disclose the criminal conviction of the firm’s president and control person, Kautilya Sharma, on the firm’s amendment to its Uniform Application for Broker-dealer Registration (Form BD).  The conviction, obtained in the U.S. District Court for the Southern District of Florida, followed federal felony charges that Sharma conspired to sell unregistered securities and conspired to commit securities fraud (United States v. Kautilya Sharma, Case No. 03-80146-CR-Marra).  Geek Securities, Inc. did not appear or contest the imposition of the fine.

Kautilya (“Tony”) Sharma (CRD # 2124304) Fined $100,000

On December 14, 2005, the Banking Commissioner entered an Order Imposing Fine (Docket No. RCF-2005-7125-S) against Kautilya (“Tony”) Sharma of 7363 Sedona Way, Delray Beach, Florida.  The respondent was the president and a control person of Geek Securities, Inc., a broker-dealer having its principal office at 999 Yamato Road, Suite 100, Boca Raton, Florida.  The respondent had also been the subject of an August 4, 2005 Order to Cease and Desist, Notice of Intent to Revoke Registration as Agent and Notice of Intent to Fine (Docket No. RCF-2005-7125-S).  The Order to Cease and Desist, being uncontested, had become permanent on September 19, 2005.

In fining the respondent $100,000, the Commissioner found that Kautilya Sharma violated Section 36b-31-14e(a) of the Regulations under the Connecticut Uniform Securities Act by failing to disclose his criminal conviction on his amended Uniform Application for Securities Industry Registration or Transfer (Form U-4).  The conviction, obtained in the U.S. District Court for the Southern District of Florida, followed federal felony charges that respondent Sharma conspired to sell unregistered securities and conspired to commit securities fraud (United States v. Kautilya Sharma, Case No. 03-80146-CR-Marra).  Kautilya Sharma did not appear or contest the imposition of the fine.

Deutsche Bank Securities, Inc. (CRD # 2525) Fined $301,763 for Failing to Maintain Analyst Independence

On December 7, 2005, the Banking Commissioner entered a Consent Order (Docket No. CO-2005-7083-S) with respect to Deutsche Bank Securities, Inc., a broker-dealer registered under the Connecticut Uniform Securities Act and having its principal office in New York, New York.  The agency investigation culminating in the entry of the Consent Order focused on the firm's research practices for the period 1999 through 2001, and was part of similar investigations conducted by a multi-state task force and by the SEC.  In entering the Consent Order, the Commissioner found, among other things, that the respondent had 1) violated Section 36b-4(b) of the Act by engaging in acts or practices that created or maintained inappropriate influence by the firm’s investment banking department over firm research analysts; 2) failed to establish, enforce and maintain an adequate supervisory system to detect and prevent regulatory violations; and 3) violated Section 36b-14 of the Act and Section 36b-31-14f of the Regulations thereunder by failing to timely produce all electronic mail requested by the Commissioner.

The Consent Order mandated that the respondent cease and desist from violating the Connecticut Uniform Securities Act and fined the respondent $301,763.  In addition, the Consent Order directed the respondent to abide by certain undertakings designed to separate investment banking and research functions.

PIPS Incorporated  (CRD # 76194) – Order to Cease and Desist and Notice of Intent to Fine Issued

On December 8, 2005, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2005-7193-S) against PIPS Incorporated, a Panamanian corporation located at P.T. 7323, Second Floor, Jalan BBN ½ E, Bandar Baru Nilai, Negeri Sembilan 71800, Malaysia.  The action alleged that, in 2005, the respondent violated Section 36b-16 of the Connecticut Uniform Securities Act by offering, via the Internet, unregistered, non-exempt securities in the form of private loan agreements.  Since the respondent did not request a hearing on the Order to Cease and Desist, the Order to Cease and Desist became permanent on January 19, 2006.  A hearing on the Notice of Intent to Fine is pending.

Bayou Securities, LLC (CRD 39323) – Notice of Intent to Revoke and Cancel Registration as Broker-dealer Issued

On November 21, 2005, the Banking Commissioner issued a Notice of Intent to Revoke and Cancel Registration as Broker-dealer (Docket No. NRC-2005-7218-S) with respect to Bayou Securities, LLC of 40 Signal Road, Stamford, Connecticut.  The action was based on allegations that the firm had ceased doing business and had been the subject of a September 8, 2005 NASD suspension predicated on the firm’s failure to pay outstanding fees.  Bayou Securities, LLC was afforded an opportunity to request a hearing on the Notice of Intent to Revoke and Cancel Registration as Broker-dealer.


{ } STATISTICAL SUMMARY

 

Licensing At A Glance
at the end of the quarter

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Broker-dealers Registered 2,567 2,601 2,635 2,617
Broker-dealer Agents Registered 117,009 119,587 122,165 116,956
Broker-dealer Branch Offices Registered 2,447 2,481 2,470 2,676
Investment Advisers Registered 422 444 449 447
SEC Registered Advisers Filing Notice 1,442 1,465 1,510 1,495
Investment Adviser Agents Registered 6,673 6,922 7,154 7,119
Investment Advisory Branch Offices Registered 178 184 182 122
Agents of Issuer Registered 63 62 54 51
 
 

Securities and Business
Opportunity Filings

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Offerings Reviewed 73 68
68
63 272
Investment Company Notice Filings 348 274 
306
6,531   7,459
Exemptions and Exemptive Notices 728 765 848 810 3,151
 
 
Examinations
     
Broker-dealers 13 26
22
10 71
Investment Advisers 3 2
4
6 15
 
 
Securities Investigations
 
Opened 29 37 28 34 128
Closed 24 37 28 8 97
Ongoing as of End of Quarter 106 107 96 112    
Subpoenas issued 9 23 12 14 58
Cases referred from Attorney General 1 4 2 0 7
Cases referred from Other Agencies 4 9 1 1 15
 
 
Business Opportunity Investigations
 
Investigations Opened 2 4 1 0 7
Investigations Closed 1 7 6 0 14
Ongoing as of End of Quarter 17 15 9 9
 
 
Securities Enforcement: Remedies and Sanctions
 
Notices of Intent to Deny (Licensing)
0
2
0
0
2
Notices of Intent to Suspend (Licensing)
0
0
0
0
0
Notices of Intent to Revoke (Licensing)
1
0
2
1
4
Denial Orders (Licensing) 0 1
0
0 1
Suspension Orders (Licensing) 1 0
0
0 1
Revocation Orders (Licensing) 2 1
0
0 3
Notices of Intent to Fine 6 2
5
1 14
Orders Imposing Fine 3 0
2
2 7
Cease and Desist Orders 6 4
8
2 20
Notices of Intent to Issue Stop Order 1 1
0
0 2
Activity Restrictions/Bars 2 1 4 0 7
Stop Orders 0 1 0 0 1
Vacating/Withdrawal Orders 2 1 0 0 3
Censures 0 0
0
0 0
Restitutionary Orders 2 0
0
0 2
Cancellation Orders 0 0 0 0 0
Notices of Intent to Cancel Registration 0 0
0
1 1
 
 

Proceedings and Settlements

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Administrative Actions
12
4
7
4
27
Consent Orders
3
3
7
1
14
Stipulation and Agreements
4
3
0
0
7
 
 

Monetary Relief

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Monetary Sanctions Imposed
$512,550
$12,650
$116,700
$501,763
$1,143,663
Restitution or Other Monetary Relief
$872,225
$5,096,797
$57,000
0
$6,026,022
 
 

Securities Referrals

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Criminal (Chief State's Attorney)
2
0
3
4
9
Civil (Attorney General)
0
0
0
0
0
Other Agency Referrals
0
0
1
0
1