DOB: Spring 2007 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XXI  No. 1
Spring 2007

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

With the renewed focus on hedge funds, on March 8, 2007, I filed with the SEC a comment letter expressing concerns about Release No. 33-8766 (Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles; Accredited Investors in Certain Private Investment Vehicles) and advocating regulatory prudence.  Whether hedge funds should be precluded from selling to non-accredited investors or whether alternative investments should be available to a wider segment of the market are topics that should be further scrutinized in a collaborative manner at the federal and state levels.  I also observed that the proposal's investment holdings test was more meaningful than the net worth and income measures that currently define "accredited investor" status for Regulation D purposes because the investment holdings test considers the impact of inflation and does not include residential real estate.  However, the proposal's $2.5 million threshold may be too high.  I recommended that consideration should be given to reducing the $2.5 million investment holdings requirement to $1 million to minimize any adverse effect on existing hedge fund investors, and that the SEC should consider applying a grandfather provision to Rules 216 and 509 to allow existing hedge fund investors to continue to purchase shares in the fund.  Ultimately, while the SEC's proposal represents an incremental step in addressing hedge fund concerns, a truly effective regulatory approach would require consistency, uniformity and the input of federal, state and international regulatory bodies.

I am pleased to announce that the NASD, in conjunction with NASAA and the SEC, is putting the finishing touches on an Investment Adviser Registration Depository (IARD) system enhancement that would enable investment advisory firms to attach their completed Part II of Form ADV (in pdf) to their IARD record, and upload brochure amendments to IARD.  The deployment of the enhancement is scheduled for Spring 2007.  Further information will be provided as it becomes available.

In keeping with its educational objectives, the Department of Banking is planning consumer and industry events for the spring and fall.  See the Upcoming Events section of this issue for more information.

As always, we welcome your comments and suggestions.

Howard F. Pitkin
Banking Commissioner



May 14, 2007
 
9:00 am-11:30 am
“Safe Investing” Seminar for mature investors.  Co-sponsored by the State of Connecticut Department of Banking, AARP Connecticut and the U.S. Securities and Exchange Commission.  Admission:  FreeLocation:  Aqua Turf Club, Mulberry Street, Plantsville, Connecticut.  Duration:  9:00 a.m. to 11:30 a.m. (Registration and Continental Breakfast at 8:00 a.m.).  The event will show you how to protect yourself from investment fraud and abusive sales practices.

October 25, 2007

9:00 am - 3:00 pm
Securities Forum 2007.   Sponsored by the State of Connecticut Department of Banking and the Securities Advisory Council to the Banking Commissioner.   Tentative Location:  Crowne Plaza Hotel and Conference Center, Cromwell, Connecticut.  Duration:  9:00 a.m. to 3:00 p.m.; includes luncheon.  The event will feature a general session challenging basic assumptions on the ability of the U.S. capital markets to maintain their competitive edge.  Also in the works are panels tailor-made to the unique concerns faced by investment advisers and broker-dealers.  Details to follow as the event nears.


Great Eastern Securities, Inc. (CRD # 2061) - Broker-dealer Registration Revoked

On March 22, 2007, the Banking Commissioner entered an Order (Docket No. RSDF-2007-7309) revoking the broker-dealer registration of Great Eastern Securities, Inc.  The firm is located at 50 Broad Street, Suite 1401, New York, New York.  The action had been preceded by a January 26, 2007 Notice of Intent to Revoke Registration as Broker-dealer, Order Summarily Suspending Registration, Order Denying Withdrawal of Registration as Broker-dealer and Notice of Intent to Fine.  The matter involving the Notice of Intent to Fine remains pending.

In revoking the firm’s registration, the Commissioner found that 1) from at least September 2005 forward, the firm employed six unregistered agents in contravention of Section 36b-6(b) of the Connecticut Uniform Securities Act; 2) the firm violated Section 36b-16 of the Act by selling securities of AFV Solutions, Inc., Ad Venture Partners, Inc., Fidelis Energy, Inc., Produce Safety and Security International, Inc. and Youbet.com, Inc. when such securities were not registered under the Act or the subject of an exemptive claim or claim of covered security status; 3) the respondent violated Section 36b-31-6f(b) of the Regulations by failing to enforce and maintain adequate supervisory procedures; 4) the respondent violated Section 36b-31-14a(a) of the Regulations under the Act by failing to keep true, accurate and current records; and 5) the firm violated Section 36b-14(d) of the Act and Section 36b-31-14f(b)(3) of the Regulations by not providing copies or computer printouts of records requested by the Commissioner.  Great Eastern Securities, Inc. did not appear or contest the revocation of its registration.

Crystal Sky Enterprises, LLC Fined $300,000 Following Allegations of Fraud, Unregistered Security Sales

On March 21, 2007, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2006-7137-S) against Crystal Sky Enterprises, LLC of 238 Raritan Street, Keyport, New Jersey.  The Order Imposing Fine had been preceded by a November 21, 2006 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2006-7137-S) alleging that the respondent sold unregistered securities consisting of promissory notes in violation of Section 36b-16 of the Connecticut Uniform Securities Act, and that the respondent’s managing member was not registered as an agent of issuer in violation of Section 36b-6(b) of the Act.  The note investment would finance the purchase of real property and the related redevelopment of a New Jersey former middle school building.  The November 21, 2006 action had also alleged that the respondent violated the antifraud provisions in Section 36b-4 of the Act by failing to disclose in the issuer’s prospectus risk factors, financial information on the issuer and the work histories of the issuer’s managing members.  The prospectus represented that investors would receive a guaranteed 20 percent return if the real estate project, purportedly financed by commercial lenders, did not move forward to loan settlement and a guaranteed 100 percent return if loan settlement occurred.

In  fining the respondent $300,000, the Commissioner found that the respondent had violated Sections 36b-16, 36b-6(b) and 36b-4(a) of the Act.  The respondent did not appear or contest the imposition of the fine.  The November 21, 2006 Order to Cease and Desist, also being uncontested, had became permanent on January 18, 2007.

Energy Automation Systems, Inc. Fined $25,000 for Unregistered Business Opportunity Sales

On March 21, 2007, the Banking Commissioner entered a Consent Order (No. CO-2007-829-B) with respect to Energy Automation Systems, Inc. (“EASI”) of 145 Anderson Lane, Hendersonville, Tennessee.  The Consent Order alleged that from at least 2003, the corporation, through its representatives, including Joseph C. Merlo, its CEO, and Paul B. Bleiweis, its president, 1) sold unregistered energy conservation business opportunities to Connecticut purchaser-investors in violation of Sections 36b-67(1), 36b-62(a) and 36b-65(a) of the Connecticut Business Opportunity Investment Act; 2) failed to provide Connecticut purchaser-investors with required disclosures in violation of Section 36b-63 of the Act; and 3) violated Section 36b-67(2) of the Act by making earnings claims without including documented substantiating data.  EASI maintained that it had relied upon the advice of counsel in preparing appropriate business opportunity registrations and/or disclosures for state purposes but that such counsel had never made such registration or disclosure in Connecticut.  The Consent Order acknowledged the corporation’s undertaking to file an application for business opportunity registration under the Act and not make additional sales of its energy conservation business opportunities in or from Connecticut until that registration was declared effective by the Commissioner.

The Consent Order fined EASI $25,000 and directed EASI, Bleiweis, Merlo, their agents, affiliates and successors in interest to cease and desist from regulatory violations.  In addition, the Consent Order directed EASI to extend a written rescission offer to each Connecticut purchaser-investor to whom EASI had sold a business opportunity from 2000 forward and who had not received restitution from EASI.  The amount of restitution to be paid to each purchaser-investor electing rescission would be determined via binding arbitration conducted in Connecticut under the auspices of the American Arbitration Association.  The Consent Order also required that, for three years, EASI, Bleiweis and Merlo retain counsel familiar with the regulation of business opportunities to evaluate at least twice during each calendar year their respective compliance with the Act and the terms of the Consent Order.

Moran Capital Management, Inc. (CRD # 136681) – Notice of Intent to Deny Registration as Investment Adviser Issued

On March 13, 2007, the Banking Commissioner issued a Notice of Intent to Deny Registration as Investment Adviser (Docket No. ND-2007-7293-S) with respect to Moran Capital Management, Inc. of 48 Route 6, Suite G01, Yorktown Heights, New York.   The action was based on the April 4, 1997 entry by the U.S. District Court for the Southern District of New York of a Final Judgment of Permanent Injunction and Other Equitable Relief against the firm’s president, Frederick Augustus Moran (SEC v. Frederick Augustus Moran et al., Case No. 95 Civ. 4472 (BN)).  The action also alleged that the respondent had falsely answered “no” to a Form ADV question concerning prior injunctions.  The respondent, which sought to withdraw its registration application on December 14, 2006, was afforded an opportunity to request a hearing on the Notice of Intent to Deny Registration as Investment Adviser.

Frederick Augustus Moran (CRD # 339526) – Notice of Intent to Deny Registration as Investment Adviser Agent Issued

On March 13, 2007, the Banking Commissioner issued a Notice of Intent to Deny Registration as Investment Adviser Agent (Docket No. ND-2007-7293-S) with respect to Frederick Augustus Moran, president and CEO of Moran Capital Management, Inc., a Yorktown Heights, New York-based investment advisory applicant.  The action was based on the April 4, 1997 entry by the U.S. District Court for the Southern District of New York of a Final Judgment of Permanent Injunction and Other Equitable Relief against Moran.  The injunctive action had enjoined the respondent from, among other things, violating the antifraud provisions of Section 206(2) of the Investment Advisers Act of 1940 (SEC v. Frederick Augustus Moran et al., Case No. 95 Civ. 4472 (BN)).  The respondent, who sought to withdraw his registration application on January 10, 2007, was afforded an opportunity to request a hearing on the Notice of Intent to Deny Registration as Investment Adviser Agent.

4 L.I.F.E., Inc. and Terry Mayfield – Order to Cease and Desist and Notice of Intent to Fine Issued

On March 8, 2007, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2007-7180-S) against 4 L.I.F.E., Inc. of 450 Stonewall Street, Suite 102, Atlanta, Georgia, and Terry Mayfield of 120 Potters Pond Drive, Phoenixville, Pennsylvania.  The action alleged that in 2004, the respondents sold unregistered securities in violation of Section 36b-16 of the Connecticut Uniform Securities Act.   Investment proceeds were to be invested in the L.I.F.E. Ventures Development Fund to fund the acquisition of multi-family properties in the Atlanta area by nonprofit developers.  The action also alleged that the respondents violated the antifraud provisions in Section 36b-4 of the Act by misrepresenting that investors would receive back their initial investment in three to six months and by failing to disclose pertinent risk factors or background information on 4 L.I.F.E., Inc.   The respondents were afforded an opportunity to request a hearing on the Order to Cease and Desist.   Since respondent Terry Mayfield did not request a hearing on the Order to Cease and Desist, the Order to Cease and Desist became permanent as to Terry Mayfield on March 28, 2007.  A hearing on the Notice of Intent to Fine is pending.

Royal Alliance Associates, Inc. (CRD # 23131) Assessed $750,000 for Supervisory Deficiencies

On February 26, 2007, the Banking Commissioner entered a Consent Order (No. CO-2007-7033-S) with respect to Royal Alliance Associates, Inc., a broker-dealer registered under the Connecticut Uniform Securities Act and having its principal office at 733 Third Avenue, New York, New York.  The Consent Order alleged that the firm failed to adequately supervise the activities of Kevin O. Kelley (CRD number 1183995), an ex-agent of the firm who, among other things, purportedly misappropriated client funds and prepared fraudulent statements that improperly inflated the value of client holdings.   In late 2006, Kelley had been sentenced in Manhattan federal court to 170 months in prison for defrauding senior citizen clients of approximately $4.2 million.  Kelley had been permanently barred by the department from conducting securities business in Connecticut on August 23, 2005.

The Consent Order acknowledged that Royal Alliance Associates, Inc. had compensated those individuals harmed by Kelley’s wrongdoing at the firm’s Stamford offices, and that such restitution exceeded $9.2 million to date, including interest.  The Consent Order also recited that the firm had offered to make a $250,000 contribution to the agency’s Securities Investor Education Fund to finance Connecticut investor education and regulatory efforts.

The Consent Order assessed a $750,000 administrative penalty against the firm, adding that $250,000 of this amount would be forgiven if the firm provided satisfactory documentary evidence that it had earmarked $125,000 per year for the next two years to hire additional specialized personnel to improve its supervisory and compliance systems.

Roll-A-Cover, LLC and Michael P. Morris Each Fined $5,000 in Connection With Prior Business Opportunity Sale; Cease and Desist Order Rendered Permanent

On February 16, 2007, the Banking Commissioner entered a Consent Order (Docket No. CF-2006-820-B) resolving allegations in an October 18, 2006 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing against Roll-A-Cover, LLC of 674 Amity Road, Bethany, Connecticut and 36 Sargent Drive, Bethany, Connecticut and its managing partner, Michael P. Morris.  The October 28, 2006 action had alleged that in January 2004, the respondents offered and sold one unregistered business opportunity from Connecticut in contravention of the Connecticut Business Opportunity Investment Act.  Roll-A-Cover, LLC is in the business of marketing retractable pool covers and other outdoor enclosures.  The action also alleged that the respondents failed to provide prospective purchaser-investors with a disclosure document in violation of Section 36b-63(a) of the Act.

The Consent Order rendered the earlier Order to Cease and Desist permanent, and fined each of the respondents $5,000 for a total of $10,000.

WMD Task Force, Inc. and John A. Bucciarelli Directed to Refrain from Regulatory Violations Following Claims of Unregistered Stock Sales

On February 6, 2007, the Banking Commissioner entered a Consent Order (No. CO-2007-6918-S) with respect to WMD Task Force, Inc. of 340 Main Street North, Southbury, Connecticut and its president John A. Bucciarelli.  The Consent Order alleged that, between May 2002 and 2005, WMD Task Force Inc. and John A. Bucciarelli violated Section 36b-16 of the Connecticut Uniform Securities Act by selling unregistered common stock to one or more investors.  In entering the Consent Order, the Commissioner acknowledged that the corporation and its president had supplied documents indicating that they did not have the financial wherewithal to pay the fine that otherwise would have been imposed by law.  The Consent Order directed WMD Task Force, Inc. and John A. Bucciarelli to cease and desist from regulatory violations.  In addition, the Consent Order required WMD Task Force, Inc. to retain legal counsel and provide advance notice to the agency prior to offering or selling securities in the future, and to only engage a registered broker-dealer or registered agent of issuer in connection with such offers and sales.   The Consent Order also directed John A. Bucciarelli to refrain for five years from 1) transacting business in or from Connecticut as an agent of issuer, broker-dealer agent, broker-dealer, investment adviser or investment adviser agent; and 2) acting as a finder for compensation, splitting commissions or receiving referral fees, directly or indirectly, in connection with any recommendation, sale or purchase of securities.

Millenco, L.L.C. (CRD # 33726) Agrees to Tighten Supervisory Controls, Pay $25,000 Following Claims of Unregistered Activity

On January 29, 2007, the Commissioner entered into a Stipulation and Agreement (No. ST-07-7346-S) with Millenco, L.L.C., an applicant for broker-dealer registration having its principal office at 666 Fifth Avenue, 86th Floor, New York, New York.   The Stipulation and Agreement alleged that at various times in 2005 and 2006, the firm had been transacting business from a location in Greenwich, Connecticut at a time when neither the firm nor its affected agents were registered under the Connecticut Uniform Securities Act.  The Stipulation and Agreement added that such conduct, combined with a December 1, 2005 cease and desist order entered against certain control persons of the firm by the Securities and Exchange Commission (Administrative Proceeding File No. 3-12116), would support the initiation of administrative proceedings under Sections 36-15 and 36b-27 of the Act.

Pursuant to the Stipulation and Agreement, the firm agreed to 1) engage a Connecticut Compliance Supervisor to focus on the firm’s Connecticut operations for a two year period; 2) retain an independent consultant to review the firm’s internal procedures for regulatory compliance; and 3) pay $25,000 to the department.  Of the $25,000 remitted, $20,000 constituted an administrative fine and $5,000 represented reimbursement for agency investigative costs.

Millenco, L.L.C. became registered as a broker-dealer under the Act on January 29, 2007.

Condor Investment Advisors, LLC and Richard W. Wiegand (CRD # 2105619) Directed to Refrain from Unregistered Investment Advisory Activity

On January 11, 2007, the Commissioner entered a Consent Order (No. CO-06-7267-S) with respect to Richard W. Wiegand and Condor Investment Advisors, LLC.  The Consent Order alleged that Condor Investment Advisors, LLC and Richard W. Wiegand transacted business as an investment adviser and as an investment adviser agent, respectively, absent registration under the Connecticut Uniform Securities Act.  In mitigation, Richard W. Wiegand and Condor Investment Advisors, LLC maintained that:  1) Wiegand inadvertently failed to register, believing that his prior registrations as a broker-dealer agent and investment adviser agent with an unrelated firm covered his activities with Condor Investment Advisors, LLC; 2) Wiegand and Condor Investment Advisors, LLC did not receive any compensation for their investment advisory activities; and 3) their only clients were members of Wiegand’s family and a longtime acquaintance of Wiegand.  The Consent Order acknowledged that Wiegand and Condor Investment Advisors, LLC had provided documentation evidencing that their income was insufficient to pay the fine that otherwise would have been levied for their alleged unregistered activity.

The Consent Order 1) directed Wiegand and Condor Investment Advisors, LLC to cease and desist from violative conduct; 2) required that Wiegand and Condor Investment Advisors, LLC consult with legal counsel prior to rendering investment advisory services or holding themselves out as performing such services; and 3) assessed a $250 administrative penalty against Wiegand.

HCH Cypress, LLC and Bradley W. Kabbash (CRD # 2562409) – Order to Cease and Desist, Notice of Intent to Fine Issued

On January 11, 2007, the Commissioner entered an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2007-7134-S) against HCH Cypress, LLC, whose last known address is c/o Five Mile Group, 694 Boston Post Road, Darien, Connecticut and its managing member, Bradley W. Kabbash of Greenwich, Connecticut.  The action alleged that, in 2002, the respondents violated Section 36b-16 of the Connecticut Uniform Securities Act by offering and selling unregistered limited liability company interests and promissory notes.   In addition, the action alleged that the respondents violated the antifraud provisions in Section 36b-4 of the Act by providing inadequate disclosures to investors.  The action claimed that respondent Kabbash falsely represented to investors that the investment proceeds would be used to finance the acquisition of hospitals and ambulatory surgical centers when, in fact, the funds were used to pay respondent Kabbash’s personal expenses.   The respondents were afforded an opportunity to request a hearing on the Order to Cease and Desist.  A hearing on the Notice of Intent to Fine is pending.


STATISTICAL SUMMARY

Licensing At A Glance
at the end of the quarter

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Broker-dealers Registered 2,596      
Broker-dealer Agents Registered 129,648      
Broker-dealer Branch Offices Registered  3,001      
Investment Advisers Registered  442      
SEC Registered Advisers Filing Notice  1,736      
Investment Adviser Agents Registered  8,370      
Investment Advisory Branch Offices Registered  140      
Agents of Issuer Registered  45      
 
 

Securities and Business
Opportunity Filings

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Offerings Reviewed  53  
 
  53
Investment Company Notice Filings 478   
 
  478
Exemptions and Exemptive Notices 842        842
 
 
Examinations
     
Broker-dealers 23   
 
  23
Investment Advisers  
 
  3
 
 
Securities Investigations
 
Opened 22       22
Closed 28       28
Ongoing as of End of Quarter 76      
Subpoenas issued 12       12
Matters referred from Attorney General 1       1
Matters referred from Other Agencies 0       0
 
 
Business Opportunity Investigations
 
Investigations Opened 5       5
Investigations Closed 2       2
Ongoing as of End of Quarter 8       8
 
 
Securities Enforcement: Remedies and Sanctions
 
Notices of Intent to Deny (Licensing)
2
 
 
 
2
Notices of Intent to Suspend (Licensing)
0
 
 
 
0
Notices of Intent to Revoke (Licensing)
1
 
 
 
1
Denial Orders (Licensing) 0  
 
  0
Suspension Orders (Licensing) 1  
 
  1
Revocation Orders (Licensing) 1  
 
  1
Notices of Intent to Fine 3  
 
  3
Orders Imposing Fine 1  
 
  1
Cease and Desist Orders 5  
 
  5
Notices of Intent to Issue Stop Order 0  
 
  0
Activity Restrictions/Bars 1       1
Stop Orders 0       0
Vacating/Withdrawal Orders 0       0
Censures 0  
 
  0
Restitutionary Orders 0  
 
  0
Cancellation Orders 0       0
Notices of Intent to Cancel Registration 0  
 
  0
 
 

Proceedings and Settlements

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Administrative Actions
6
 
 
 
6
Consent Orders
5
 
 
 
5
Stipulation and Agreements
1
 
 
 
1
 
 

Monetary Relief

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Monetary Sanctions Imposed
$1,110,250
 
 
 
$1,110,250
Other (Financial Literacy)
$250,000
 
 
 
$250,000
Restitution or Other Monetary Relief (includes rescission offer amounts) $490,513
 
 
 
$490,513
 
 

Securities Referrals

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



Securities Division