DOB: Winter 2008 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XXII  No. 4
Winter 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

As we enter 2009, economic instability continues to present special challenges at both the state and federal levels.  To date, there have been few signs of financial recovery.  Foreclosure rates continue to soar, job losses abound, and consumer confidence drops.  The federal Troubled Asset Relief Program, or TARP, has spawned a plethora of ideas on how to best fix the problem.  From the creation of a special bank to acquire mortgage-backed securities and other undesirable assets, to proposed improvements in federal insurance - the suggestions keep coming.  However, what is most necessary is a solution that would ultimately calm market jitters, lend certainty to interest rates and, so doing, make our financial institutions healthier in the long run.

State government has not been immune from the vicissitudes of the economic downturn.  The Department of Banking has become increasingly cost-conscious and is actively striving to improve efficiency while maintaining an excellent standard of service to the investing public and to the industries we regulate.  We are the regulatory face of the securities industry in Connecticut.

Periods of economic uncertainty often bring out the underbelly of the markets - the scammers who prey on unsuspecting members of the Connecticut investing public.  When times are good, fraud may be more difficult to detect.  In troubled economic times, the number of complaints received by the agency rises.

As a proactive, investor protection measure, the department recently partnered with AARP to produce a series of radio spots warning seniors and others about fraudulent conduct, including ponzi schemes.  The radio spots, which were financed by a grant to the AARP Foundation from the Investor Protection Trust, started airing on Connecticut stations in January 2009.

It is also noteworthy that the Securities Division has streamlined the filing requirements for securities private placements in light of SEC Release No. 33-8891 which mandates electronic filing at the federal level by March 15, 2009.  The states as a group are collaborating on a multi-state electronic filing system.  While we cannot predict when such a system might become operational, we are constantly evaluating our procedures to make the capital raising process easier.  For more information, please visit the private placement section of our website.

As always, we welcome your feedback and suggestions.

Howard F. Pitkin
Banking Commissioner


Markland Technologies, Inc. Fined $100,000 for Employing Unregistered Agent of Issuer

On December 2, 2008, the Banking Commissioner entered an Order Imposing Fine (Docket Nos. CF-2008-7550-S and CF-2008-7549-S) against Markland Technologies, Inc. of 222 Metro Center Boulevard, Warwick, Rhode Island and formerly of 90 Grove Street, Ridgefield, Connecticut.  The respondent had been the subject of an August 15, 2008 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing alleging that the respondent employed one Chad A. Verdi as an agent at a time when Verdi was not registered as such under the Connecticut Uniform Securities Act.  The Order to Cease and Desist, being uncontested, had become permanent on September 23, 2008.

In fining Markland Technologies, Inc. $100,000, the Commissioner found that the respondent violated Section 36b-6(b) of the Connecticut Uniform Securities Act by employing an unregistered agent of issuer.  The respondent did not appear or contest the imposition of the fine.

Jesse John Hinkley (CRD # 5098659) Ordered to Cease and Desist from Regulatory Violations; Notice of Intent to Fine Issued

On December 1, 2008, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2008-7426-S) against Jesse John Hinkley of New Fairfield, Connecticut.  The respondent was formerly associated with New Castle Financial Services LLC (CRD number 102380), a securities brokerage firm.  The action alleged that, between November 8, 2006 and July 16, 2007 and in violation of Section 36b-6(a) of the Connecticut Uniform Securities Act, the respondent transacted business as an agent of New Castle Financial Services LLC while unregistered.  In addition, the action alleged that the respondent violated the antifraud provisions in Section 36b-4 of the Act by representing to at least one potential investor that the respondent would pay the investor $13,000 in six weeks if the investor paid Hinkley $8,500; representing that the respondent’s other clients were achieving a 40% investment return when, in reality, Hinkley had no other clients; and failing to disclose any investment risks to potential investors.  The respondent was 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.

Blue Coast Financial Group, Inc., Shawn Hull and Lindsay Hull – Notice of Intent to Issue Stop Order Denying Effectiveness to a Business Opportunity Registration, Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing Issued

On November 5, 2008, the Banking Commissioner issued a Notice of Intent to issue a stop order denying the business opportunity registration of Blue Coast Financial Group, Inc. (Docket No. CSF-2008-859-B).  On the same day, the Commissioner issued an Order to Cease and Desist and Notice of Intent to Fine against Blue Coast Financial Group, Inc., Shawn Hull and Lindsay Hull.  The corporation, located at 2929 North Power Road, Suite C100, Mesa, Arizona, offers an arrangement whereby purchasers can start a business facilitating audits of workers compensation insurance premiums for the purpose of uncovering errors and overcharges.  A previous registration filed by Blue Coast Financial Group, Inc. had been denied by the Commissioner on May 5, 2008 following a hearing (Docket No. SO-2007-846-B).  Blue Coast Financial Group, Inc. subsequently reapplied for registration under the Connecticut Business Opportunity Investment Act.

The November 5, 2008 action alleged that the  second application and disclosure document failed to adequately disclose 1) the backgrounds of Shawn Hull, Director and CEO of the corporation; Lindsay Hull, President and Director of Blue Coast Financial Group, Inc.; Shelee Loughmiller, Blue Coast Financial Group, Inc.’s Vice President of Training; and Brian Felderstein, Vice President of Broker Development for the corporation; 2) the business experience of Blue Coast Financial Group, Inc.’s predecessor; 3) whether and under what circumstances the initial payment made by the purchaser-investor was returnable;  4) key terms of the business opportunity agreement; and 5) the employment of Brian Felderstein with FOS, LLC.   The November 5, 2008 action also alleged  that the second application and disclosure document misstated the facts surrounding 1) the Commissioner’s January 10, 2005 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing against Taxback, LLC; 2) the Commissioner’s January 10, 2005 Notice of Intent to Issue Stop Order Revoking Effectiveness of a Business Opportunity Registration, Notice of Intent to Fine and Notice of Right to Hearing against Taxback Opportunities, LLC; and 3) the Commissioner’s June 7, 2005 Consent Order with respect to Taxback, LLC and Taxback Opportunities, LLC.  In addition, the November 5, 2008 action alleged that the second application and disclosure document failed to provide the financial statement required by law and failed to adequately summarize the principal factors that made the business opportunity one or high risk or of a speculative nature.

The November 5, 2008 action further alleged that, in offering unregistered business opportunities, respondents Blue Coast Financial Group, Inc., Shawn Hull and Lindsay Hull violated Section 36b-67(1) of the Connecticut Business Opportunity Investment Act.  Such conduct would, if proven, support the entry the entry of a stop order against Blue Coast Financial Group, Inc. and the entry of an order imposing fine and a cease and desist order against all respondents.

Respondent Blue Coast Financial Group, Inc. was afforded an opportunity to request a hearing on the Notice of Intent to Issue Stop Order Denying Effectiveness to a Business Opportunity Registration.  Respondents Blue Coast Financial Group, Inc., Shawn Hull and Lindsay Hull were also 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.

Vision Travel, Inc. a/k/a Global Vision Travel Fined $115,000 for Selling Unregistered Travel Agency Business Opportunities

On November 5, 2008, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2008-844-B) against Vision Travel, Inc. a/k/a Global Vision Travel of First Street, Suite 304, Metro Office Park #7, Guaynabo, Puerto Rico.  The Order Imposing Fine had been preceded by an August 15, 2008 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing alleging that, from at least August 16, 2006 to November 3, 2006, the respondent sold unregistered multi-level marketing virtual travel agency business opportunities to at least eight Connecticut purchasers in violation of the Connecticut Business Opportunity Investment Act.  Since the respondent had not requested a hearing on the Order to Cease and Desist, the Order to Cease and Desist had become permanent on September 23, 2008.

After finding that the respondent violated Section 36b-67(1) of the Connecticut Business Opportunity Investment Act, the Commissioner fined the respondent $115,000.  The Order Imposing Fine stated that there was no evidence in the record that the respondent had offered or provided restitution to the Connecticut purchaser-investors.  The respondent did not appear or contest the imposition of the fine.  Section 36a-1-31(b) of the Regulations of Connecticut State Agencies provides that the allegations against a party may be deemed admitted where the party fails to appear at a scheduled hearing.

4 L.I.F.E., Inc. and Terry Mayfield Fined $300,000 in Total for Violations of Securities Registration and Antifraud Provisions

On October 10, 2008, the Banking Commissioner entered an Order Imposing Fine (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 respondents had been the subject of a March 8, 2007 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing alleging 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 March 8, 2007 action had 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.  Since the respondents did not request a hearing on the Order to Cease and Desist, the Order to Cease and Desist became permanent as to respondent Mayfield on March 28, 2007 and permanent as to respondent 4 L.I.F.E., Inc. on May 3, 2007.

After finding that the respondents violated sections 36b-16 and 36b-4 of the Act, the Commissioner fined respondent 4 L.I.F.E., Inc. $150,000 and respondent Mayfield $150,000.  The respondents did not appear at the hearing preceding the imposition of the fine.

Java’s Brewin Development, Inc. Fined $30,000 for Unregistered Business Opportunity Sales

On October 8, 2008, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2008-845-B) against Java’s Brewin Development, Inc. of 190 Turnpike Road, Suite 6, #367, Westborough, Massachusetts.  The corporation had been the subject of a May 30, 2008 Order to Cease and Desist which, being uncontested, had become permanent on June 20, 2008.

In fining Java’s Brewin Development, Inc. $30,000, the Commissioner found 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.  The respondent did not appear or contest the imposition of the fine.

RKS Advisors, LLC (CRD # 145927) and Robert Keith Strauss (CRD # 1863131) – Consent Order Conditioning Registration as an Investment Adviser and as an Investment Adviser Agent Issued

On November 4, 2008, the Banking Commissioner entered a Consent Order conditioning the registration of RKS Advisors, LLC as an investment adviser under the Connecticut Uniform Securities Act and the registration of Robert Keith Strauss as an investment adviser agent of the firm (No. CO-08-7583-S).  The firm is located at 184 Atlantic Street, Stamford, Connecticut.  The Consent Order alleged that the firm and Robert Strauss failed to disclose on the firm’s Form ADV the October 20, 2006 entry of an Order of Investigation by the State of Oklahoma against Strauss and Emerging Money Corporation, an entity controlled by Strauss.  The matters described in the Oklahoma Order of Investigation concerned the offer, sale and/or purchase of securities in connection with a “Stock-to-Cash Program” and were resolved via  a June 9, 2008 Agreement between the State of Oklahoma, Emerging Money Corporation and Strauss.  The Consent Order also alleged that Strauss listed himself as an investment adviser representative of RKS Advisors, LLC on the website of Emerging Money Corporation at a time when RKS Advisors, LLC was not registered as an investment adviser and Strauss was not registered as an investment adviser agent of the firm under the Connecticut Uniform Securities Act.

The Consent Order Conditioning Registration as an Investment Adviser and as an Investment Adviser Agent 1) directed Strauss and RKS Advisors, LLC to refrain from marketing the Stock-to-Cash or any similar program in or from Connecticut and from engaging, employing or affiliating with any individuals or entities selling or offering the Stock-to-Cash program or any similar program in or from the state; and 2) limited the investment advisory activities of RKS Advisors, LLC and Strauss for two years to exchange listed securities, commercial paper, certificates of deposit, corporate debt, municipal securities, investment company securities, United States government securities and insurance products subject to regulation by the Connecticut Insurance Commissioner.  In addition, the Consent Order required that RKS Advisors, LLC and Strauss provide the agency with quarterly reports for two years concerning any securities-related complaints, actions or proceedings involving RKS Advisors, LLC or Strauss.  Finally, the Consent Order required that RKS Advisors, LLC and Strauss pay $3,500 to the department.  Of that amount, $2,500 constituted an administrative fine and $1,000 would be applied to defray agency investigative costs.

RKS Advisors, LLC became registered as an investment adviser in Connecticut on November 4, 2008.  Also on November 4, 2008, Robert Keith Strauss became registered as an investment adviser agent of the firm.

Andrew Seafus Prophet (CRD # 4016402) – Consent Order Conditioning Registration as an Agent and as an Investment Adviser Agent Issued

On October 10, 2008, the Banking Commissioner entered a Consent Order conditioning the registrations of Andrew Prophet as a broker-dealer agent of Summit Brokerage Services, Inc. (CRD number 33432) and as an investment adviser agent of Summit Financial Group, Inc. (CRD number 109485).  The Consent Order alleged that, while previously associated with another securities brokerage firm as an agent, Prophet deposited into his personal account an annuity check returned by a Connecticut client to Prophet because the check was in an erroneous amount.  The Consent Order also alleged that, on at least two separate occasions, Prophet accepted gratuities from clients in excess of $100 in contravention of FINRA Rule 3060.  As a precondition to registration, the Consent Order restricted Prophet’s securities sales and advisory activities for two years to exchange-listed securities, investment company securities and governmental securities.  The Consent Order also prohibited Prophet for two years from having custody of client funds or securities, and holding or exercising discretionary trading authority and/or a power of attorney with respect to any customer account.  In addition, the Consent Order also prescribed certain supervisory controls over Prophet’s activities, and required that the affected firms provide the department with quarterly reports for two years regarding any complaints, actions or proceedings involving Prophet.

Andrew Prophet became registered as a broker-dealer agent of Summit Brokerage Services, Inc. on October 10, 2008, and as an investment adviser agent of Summit Financial Group, Inc. the same day.


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 2,630   2,566
Broker-dealer Agents Registered 137,282  139,383  141,003  131,788
Broker-dealer Branch Offices Registered  2,815 2,804  2,773   2,757
Investment Advisers Registered 452  462  453 448 
SEC Registered Advisers Filing Notice 1,818   1,874  1,900 1,831 
Investment Adviser Agents Registered 9,187 9,357  9,518  9,300 
Agents of Issuer Registered  32  32  32 34 
Conditional Registrations
0
0
0
2
 
 

Securities and Business
Opportunity Filings

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Offerings Reviewed  57 59
27
31  174
Investment Company Notice Filings 529 458
476
7,134  8,597
Exemptions and Exemptive Notices 949 813 838  530 3,130
 
 
Examinations
     
Broker-dealers  19 35 
40
43  137
stment Advisers 3 17 
20
14  54
 
 
Securities Investigations
 
Opened 29 28 53
31
141
Closed 19  16  25
34
94
Ongoing as of End of Quarter 110 102 130
127
Subpoenas issued 13 17  8  9 47
Matters referred from Attorney General 1 5 6  5 17
Matters referred from Other Agencies 0  0  3  0 3
 
 
Business Opportunity Investigations
 
Investigations Opened 1  2 0 6
Investigations Closed 0  5 1 11
Ongoing as of End of Quarter 12  8 7
 
 
Enforcement: Remedies and Sanctions
 
Notices of Intent to Deny (Licensing) 0
0
0
 0
0
Notices of Intent to Suspend (Licensing)
0
0
0
 0
0
Notices of Intent to Revoke (Licensing)
0
0
0
 0
0
Denial Orders (Licensing) 0  0
0
 0 0
Suspension Orders (Licensing) 0 0
0
 0 0
Revocation Orders (Licensing) 1  0
0
 0 1
Notices of Intent to Fine 1  1
4
 2 8
Orders Imposing Fine 1  0
2
 4 7
Cease and Desist Orders 3  3
8
 2 16
Notices of Intent to Issue Stop Order 0  0
0
 1 1
Activity Restrictions/Bars 1  1  4  0 6
Stop Orders 0  1  0  0 1
Vacating/Withdrawal/ Modification Orders 0  0  2  0 2
Restitutionary Orders 0  0
 0
 0 0
Injunctive Relief Obtained 0  0  0  0 0
 
 

Proceedings and Settlements

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Administrative Actions
3
2
6
 6
17
Consent Orders
3
4
6
 0
13
Stipulation and Agreements
2
3
1
 0
6
 
 

Monetary Relief

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Monetary Sanctions Imposed
$46,850
$34,650
$6,835,600
$548,000 
$7,465,100
Other (Financial Literacy)
0
0
$300,000
0
$300,000
Other (Law enforcement protecting Seniors)
0
0
$50,000
0
$50,000
Restitution or Other Monetary Relief (includes rescission offer amounts) $37,030
$14,573
$23,476
$550,395 
$625,474
 
 

Securities Referrals

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Criminal (Chief State's Attorney)
1
1
2
3
7
Civil (Attorney General)
0
1
0
0
1
Other Agency Referrals
2
0
0
0
2



Securities Division