DOB: Summer 2008 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XXII  No. 2
Summer 2008

Features

Enforcement and Other Highlights
Contributors

Ralph Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric Wilder, Assistant Director


A WORD FROM THE BANKING COMMISSIONER

Securities Forum 2008 will be held on Thursday, October 23, 2008 at the Sheraton Hotel in Stamford, Connecticut.  I hope to see you there.  This year’s program highlights the dramatic changes sweeping the economy and the securities markets over the past twelve months, and also features practical compliance tips for broker-dealers, investment advisers and securities law practitioners.  Setting the stage is an Opening General Session analyzing the causes of the economic downturn and offering a prognosis for recovery.  Six diverse panel presentations follow.  The panels are offered during morning and afternoon sessions to give you maximum choice and flexibility in planning your day.  Each panel includes an ample opportunity for you to pose questions directly to regulators.  The program cost, which includes materials as well as a luncheon, is a very affordable $70 per person.  If you register by the Early Bird deadline of September 26, 2008, the discounted rate is $60 per person.  As in prior years, a discount is also available for two or more attendees from the same organization.  For more information, visit our website.

This year’s program features a luncheon keynote address by Stephen A. Ross, Franco Modigliani Professor of Financial Economics at the Massachusetts Institute of Technology (“MIT”).  With more than 35 years of research and teaching to his credit, Dr. Ross has had a major impact on the field of finance, and has authored more than 100 related articles.  Among other things, he invented the Arbitrage Pricing Theory and conducted cutting edge studies in the areas of financial derivatives and interest rate models.  Models developed by Dr. Ross and his coworkers are now standards for pricing in major securities trading firms. Dr. Ross is also the Chief Investment Officer and Principal of Ross Institutional Investors, LLC, a firm managing portfolios of alternative investments, and the Chairman of Compensation Valuation, Inc., a leading provider of option valuation services. Dr. Ross is on the board of directors of Freddie Mac where he chairs the Finance and Capital Deployment Committee. In addition, Dr. Ross is Chairman of the Investment Advisory Board of IVC International, Ltd., a director of IV Capital, Ltd. (a London-based fund of hedge funds), and a trustee of CalTech where he chairs the investment committee. A Fellow of the Econometric Society and a member of the American Academy of Arts and Sciences, he also serves as an Associate Editor of several economics and finance journals.  Previously, Dr. Ross was Sterling Professor of Economics and Finance at Yale University and prior to that was Professor of Economics and Finance at the Wharton School of the University of Pennsylvania.  He has also served as an advisor to the U.S. Treasury, the Commerce Department, the Internal Revenue Service and the EXIM Bank.  Dr. Ross received a Ph.D. in economics from Harvard University in 1970 and a B.S. with honors from the California Institute of Technology where he majored in physics.

As always, we welcome your feedback and suggestions.

Howard F. Pitkin
Banking Commissioner


Michael M. Reilly (CRD # 4841098) Barred from Connecticut Securities Business for Seven Years, Fined $7,500 For Allegedly Refusing to Produce Documents in Response to Department Subpoena

On June 27, 2008, the Banking Commissioner entered a Consent Order (No. CO-2008-7427-S) with respect to Michael M. Reilly, a former broker-dealer agent of New Castle Financial Services LLC (CRD number 102380).  The Consent Order alleged that, on May 15, 2007, Michael Reilly violated Section 36b-26(d) of the Connecticut Uniform Securities Act by refusing to produce documents in response to a department issued subpoena.  The Consent Order fined Reilly $7,500; barred him for seven years from transacting business in Connecticut as a broker-dealer, agent, investment adviser, investment adviser agent or agent of issuer; and directed him to cease and desist from regulatory violations.

Jeffrey Alan Cohan (CRD # 872568) Fined $5,000 Following Allegations of Unregistered Security Sales, Improper Private Securities Transactions

On June 3, 2008, the Banking Commissioner entered a Consent Order (No. CO-2008-7308-S) with respect to Jeffrey Alan Cohan, a registered broker-dealer agent.  The Consent Order alleged that, while associated with his former broker-dealer, Buell Securities Corp., Jeffrey Cohan 1) violated Section 36b-16 of the Connecticut Uniform Securities Act by executing seventeen transactions in the unregistered securities of Lakota Resources, Inc.; and 2) violated Section 36b-31-6e of the Regulations under the Act by engaging in a private securities transaction without notice to his employing firm.   The Consent Order directed Jeffrey Cohan to 1) refrain from exercising discretionary trading authority over client funds, securities or accounts for three years; 2) limit his securities sales activity to investment company securities and exchange-listed securities for a three year period; 3) comply in all respects with Section 36b-31-6e of the Regulations; and 4) pay a $5,000 fine to the department.

Java’s Brewin Development, Inc. Ordered to Cease and Desist from Violating Business Opportunity Statute; Notice of Intent to Fine Issued

On May 30, 2008, the Banking Commissioner entered an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2008-845-B) against Java’s Brewin Development, Inc.  of 290 Turnpike Road, Suite 6, #367, Westborough, Massachusetts.  The action alleged that, from at least October 16, 2006 to January 26, 2007, the respondent sold unregistered coffee shop business opportunities to at least three Connecticut purchaser-investors in contravention of Section 36b-67 of the Connecticut Business Opportunity Investment Act.   Since the respondent did not request a hearing on the Order to Cease and Desist within the prescribed time period, the Order to Cease and Desist became permanent on June 20, 2008.  A hearing on the Notice of Intent to Fine is pending.

One Key LLC Assessed $500 for Delinquent Private Placement Notice Filing

On May 27, 2008, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-08-7485-S) with One Key LLC, a securities issuer located at 792 South Main Street, #101, Mansfield, Massachusetts.  The Stipulation and Agreement recited that One Key LLC had advised the department that, in October 2006 and early 2007, it had sold limited liability company interests to two Connecticut residents under Rule 506 of federal Regulation D at a time when no notice filing had been made under Section 36b-21(e) of the Connecticut Uniform Securities Act and that, in not making a timely filing, the issuer had relied on the advice of prior legal counsel.  The issuer made a curative state filing in November 2007.  Pursuant to the Stipulation and Agreement, One Key LLC agreed to pay a $500 fine and to refrain from offering or selling securities in or from Connecticut absent compliance with Section 36b-16 of the Act, including timely compliance with any applicable filing requirements.

T. Richard Spoor (CRD # 146486) Assessed $6,900 for Failing to Register as Investment Adviser or Make Investment Advisory Notice Filing

On May 9, 2008, the Banking Commissioner entered into a Stipulation and Agreement with T. Richard Spoor, a sole proprietorship located at 184 Main Street, Lakeville, Connecticut.  The Stipulation and Agreement alleged that, 1) following his 1997 retirement from a Clifton, New Jersey investment adviser, T. Richard Spoor transacted business as an investment adviser in Connecticut, providing financial planning services to clients in Connecticut and in other states; and 2) at the time such services were rendered, T. Richard Spoor was not registered as an investment adviser under the Connecticut Uniform Securities Act or the Investment Advisers Act of 1940.  T. Richard Spoor has since become registered as an investment adviser with the Securities and Exchange Commission.  Pursuant to the Stipulation and Agreement, T. Richard Spoor agreed to implement revised compliance procedures and to pay $6,900 to the department.  Of that amount, $5,000 constituted an administrative fine and $1,900 represented reimbursement for past due investment advisory filing fees.  In addition, T. Richard Spoor agreed to retain an independent consultant to review his internal procedures for compliance with regulatory requirements and make appropriate remedial recommendations.

Ecosol Solar Technologies Inc. Assessed $750 for Delinquent Private Placement Notice Filings

On May 8, 2008, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-08-7483-S) with Ecosol Solar Technologies Inc., an issuer of securities located in Ottawa, Ontario, Canada.  The Stipulation and Agreement recited that 1) legal counsel to Ecosol Solar Technologies Inc. had advised the department that the issuer had sold shares of its common stock to three Connecticut residents in two offerings, the first of which occurred between 2002 and 2004, and the second of which occurred in 2007; 2) the Connecticut investors involved were all employed in the securities industry and, according to the issuer, qualified as “accredited investors” within the meaning of Rule 501(a) under the Securities Act of 1933; and 3) the issuer had made curative private placement filings and remitted back fees for the offerings in question.  In resolution of the matter, Ecosol Solar Technologies Inc. agreed to pay the department $750 as an administrative fine and to refrain from selling securities in or from Connecticut absent compliance with statutory filing requirements.

Blue Coast Financial Group, Inc. a/k/a Questar Financial Group – Stop Order Entered Denying Effectiveness to Business Opportunity Registration

On May 5, 2008, following a hearing, the Banking Commissioner issued Findings of Fact, Conclusions of Law and a Stop Order Denying Effectiveness to a Business Opportunity Registration (Docket No. SO-2007-846-B) with respect to Blue Coast Financial Group, Inc. a/k/a Questar Financial.  The respondent is located at 2929 North Power Road, Suite C100, Mesa, Arizona, and offers an arrangement whereby purchasers can start a business auditing workers compensation insurance premiums.  The Commissioner's action had been preceded by a May 4, 2007 Notice of Intent to Issue Stop Order Denying Effectiveness to a Business Opportunity Registration and Notice of Right to Hearing alleging that the business opportunity registration was materially incomplete or contained materially false or misleading statements with respect to disciplinary events involving the seller’s principals and related entities, the risks factors involved in the arrangement and key background information.   Shawn Hull, CEO of the respondent, was also the president of Taxback, LLC, against whom the Commissioner issued an Order to Cease and Desist and Notice of Intent to Fine on January 10, 2005, and Taxback Opportunities, LLC, which had been the subject of a January 10, 2005 Notice of Intent to Issue Stop Order Revoking Business Opportunity Registration and Notice of Intent to Fine.  The allegations against Taxback, LLC and Taxback Opportunities, LLC had been resolved via a June 7, 2005 Consent Order involving both parties.

In entering the Stop Order, the Commissioner found that the respondent's disclosure document 1) falsely represented that Shawn Hull and Lindsay Hull, president of the respondent, were not subject to an October 12, 2007 Consent Order entered by the State of Washington when, in fact, both Shawn Hull and Lindsay Hull were named as respondents in the Washington action; 2) failed to disclose the Connecticut Order to Cease and Desist against Taxback, LLC and the June 7, 2005 Consent Order, characterizing the Commissioner's prior enforcement action as a "compliance letter"; 3) failed to disclose key risk factors in contravention of Section 36b-63(b)(27) of the Connecticut Business Opportunity Investment Act; and 4) failed to disclose the business experience of the seller's executive officers and supervisory personnel, including president Lindsay Hull's association with the franchisor Glove Lady, LLC,  the business experience of director Shelee Loughmiller and background information on vice-president Brian Felderstein.

The Commissioner rejected the respondent's claim that the Commissioner was only authorized to issue a stop order denying effectiveness to a business opportunity registration when the business opportunity was already registered.

Source Capital Group, Inc. (CRD # 36719) Sanctioned for Alleged Violation of Prior Consent Order Entered as a Condition to Agent Registration

On April 28, 2008, the Banking Commissioner entered a Consent Order (No. CO-2008-7499-S) with respect to Source Capital Group, Inc. of 276 Post Road West, Westport, Connecticut.  The firm is registered as a broker-dealer under the Connecticut Uniform Securities Act.  The Consent Order alleged that 1) on August 29, 2006, as a precondition to registering Donatas Belys Vildzius (CRD number 2202883) as an agent of the firm, the Commissioner entered a Consent Order Conditioning Registration as an Agent (No. CO-06-7298-S); 2) the August 29, 2006 Consent Order, to which the firm was a signatory, obligated Source Capital Group, Inc. to file quarterly reports with the department for two years concerning any complaints, actions or proceedings involving Vildzius; and 3) Source Capital Group, Inc. violated the August 29, 2006 Consent Order by failing to abide by the quarterly reporting requirement.

The April 28, 2008 Consent Order directed Source Capital Group, Inc. to cease and desist from regulatory violations and to pay $4,000 to the agency.  Of that amount, $2,500 constituted an administrative fine and $1,500 would be applied to defray the Division’s investigative costs.  In addition, the Consent Order reinstituted for a two year period the quarterly complaint reporting requirement concerning Vildzius.  The Consent Order also directed Source Capital Group, Inc. to hire a consultant to review the firm’s supervisory and compliance procedures.

Bayou Technologies, Inc. and Steven O. Canady Sanctioned Following Allegations of Unregistered Securities Sales, Unregistered Agent of Issuer Activity

On April 3, 2008, the Banking Commissioner entered a Consent Order with respect to Bayou Technologies, Inc. and Steven O. Canady, both of 1170 Peachtree Street, Suite 1200, Atlanta, Georgia.  The respondents had been the subject of a June 15, 2007 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2007-7331-S) alleging that, between 2003 and 2005, respondent Bayou Technologies, Inc., through respondent Canady, sold unregistered shares of its common stock to Connecticut investors in violation of Section 36b-16 of the Connecticut Uniform Securities Act.  The action had also alleged that, in contravention of Section 36b-6 of the Act, respondent Bayou Technologies, Inc. employed respondent Canady as an unregistered agent of issuer, and that respondent Canady transacted business in such capacity.  The Consent Order rendered the June 15, 2007 Order to Cease and Desist permanent, and acknowledged the respondents’ representation that Bayou Technologies, Inc. had offered rescission to each Connecticut investor who had purchased unregistered stock.  In addition, the Consent Order fined respondent Bayou Technologies, Inc. $10,000.


STATISTICAL SUMMARY

Licensing At A Glance
at the end of the quarter

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Broker-dealers Registered 2,588  2,607    
Broker-dealer Agents Registered 137,282  139,383    
Broker-dealer Branch Offices Registered  2,815 2,804     
Investment Advisers Registered 452  462    
SEC Registered Advisers Filing Notice 1,818   1,874    
Investment Adviser Agents Registered 9,187 9,357     
Agents of Issuer Registered  32  32    
 
 

Securities and Business
Opportunity Filings

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Offerings Reviewed  57 59
 
  116
Investment Company Notice Filings 529 458
 
  987
Exemptions and Exemptive Notices 949 813      1,762
 
 
Examinations
     
Broker-dealers  19 35 
 
  54
Investment Advisers 3 17 
 
  20
 
 
Securities Investigations
 
Opened 29 28     57
Closed 19  16     35
Ongoing as of End of Quarter 110 102    
Subpoenas issued 13 17     30
Matters referred from Attorney General 1 5     6
Matters referred from Other Agencies 0  0     0
 
 
Business Opportunity Investigations
 
Investigations Opened 1  2     3
Investigations Closed 0  5     5
Ongoing as of End of Quarter 12  8    
 
 
Securities Enforcement: Remedies and Sanctions
 
Notices of Intent to Deny (Licensing) 0
0
 
 
0
Notices of Intent to Suspend (Licensing)
0
0
 
 
0
Notices of Intent to Revoke (Licensing)
0
0
 
 
0
Denial Orders (Licensing) 0  0
 
  0
Suspension Orders (Licensing) 0 0
 
  0
Revocation Orders (Licensing) 1  0
 
  1
Notices of Intent to Fine 1  1
 
  2
Orders Imposing Fine 1  0
 
  1
Cease and Desist Orders 3  3
 
  6
Notices of Intent to Issue Stop Order 0  0
 
  0
Activity Restrictions/Bars 1  1     2
Stop Orders 0  1     1
Vacating/Withdrawal/ Modification Orders 0  0     0
Restitutionary Orders 0  0
 
  0
Injunctive Relief Obtained 0  0     0
 
 

Proceedings and Settlements

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Administrative Actions
3
2
 
 
5
Consent Orders
3
4
 
 
7
Stipulation and Agreements
2
3
 
 
5
 
 

Monetary Relief

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Monetary Sanctions Imposed
$46,850
$34,650
 
 
$81,500
Other (Financial Literacy)
0
0
 
 
0
Restitution or Other Monetary Relief (includes rescission offer amounts) $37,030
$14,573
 
 
$51,603
 
 

Securities Referrals

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



Securities Division