DOB: Summer 2009 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XXIII  No. 2
Summer 2009

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 2009 will be held on Tuesday, October 20, 2009 at the New Haven Lawn Club in New Haven, Connecticut.  As a result of the State's cost-saving measures, this year's event will be shortened to a half day and will start at 12:00 p.m.  Due to the abbreviated schedule, continuing education credit will not be available for the event.  The theme of this year's program will be Frontiers of Regulatory Reform, with a special emphasis on the Obama Administration’s reform plan and what it affects – risk management, traditional regulators, hedge funds, advisers, mandatory arbitration, derivatives – and more.  The program will also include special segments on regulatory updates of interest to investment advisers and broker-dealers. Each panel includes an ample opportunity for you to pose questions directly to regulators. Equally important, you will have an opportunity to network and compare notes with other financial services industry professionals.  The program cost, which includes a luncheon, is a very affordable $70 per person.  As in prior years, a discount is also available for two or more attendees from the same organization.  Further information, including registration forms, will be posted to our website as the event nears.

This year's program features a keynote luncheon address by Dr. Gary B. Gorton, Frederick Frank Class of 1954 Professor of Management and Finance at the Yale University School of Management.  Prior to joining the Yale faculty, Dr. Gorton was a professor of banking and finance at The Wharton School of the University of Pennsylvania.  He also served as a research associate of the National Bureau of Economic Research and a member of the Moody's Investors Services Academic Advisory Panel.  Dr. Gorton's long list of credentials also includes directing the FDIC's research program on banks and the economy; teaching at the University of Chicago Graduate School of Business; and working as a senior economist at the Federal Reserve Bank of Philadelphia.  His research has been featured in the American Economic Review, the Review of Economic Studies, the Review of Financial Studies, the Journal of Economic Theory, the Journal of Political Economy, the Journal of Finance, the Journal of Monetary Economics, the Journal of Business, and the Journal of Money, Credit, and Banking.  Dr. Gorton received his doctorate in economics from the University of Rochester, master's degrees in economics from the University of Rochester and Cleveland State University, and a master's degree in Chinese Studies from the University of Michigan.

As always, we welcome your feedback and suggestions.

Howard F. Pitkin
Banking Commissioner


Commonwealth Exploration Corporation, Derek M. Lofton (CRD ID number 11017768) and Carlos E. Conde – Order to Cease and Desist and Notice of Intent to Fine Issued

On June 30, 2009, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2008-7560-S) against Commonwealth Exploration Corporation, a Florida corporation having its principal office at 2002 Summit Boulevard, Suite 1225, Atlanta, Georgia; Carlos E. Conde of 1231 Adams Street, Franklin, Tennessee; and Derek M. Lofton of 118 Pond Drive, Stockbridge, Georgia.  Respondent Conde was the president of Commonwealth Exploration Corporation, and respondent Lofton was an agent of the company.  The Order to Cease and Desist and Notice of Intent to Fine stated that respondent Lofton had been the subject of a May 14, 2002 Order to Cease and Desist and Notice of Intent to Fine issued by the Commissioner (Docket No. CF-2002-5554-S).  The 2002 Order to Cease and Desist had become permanent on June 27, 2002 and respondent Lofton was fined $20,000 on July 30, 2002.

The current action alleged that, in 2007, respondents Commonwealth Exploration Corporation, Lofton and Conde sold unregistered interests in Perimeter Summit, LLP, a Georgia limited liability partnership, in violation of Section 36b-16 of the Connecticut Uniform Securities Act.  Perimeter Summit, LLP was allegedly formed to acquire oil and gas development projects in Kentucky.  The current action also alleged that the respondents violated the antifraud provisions in Section 36b-4 of the Act by disseminating offering documents that failed to disclose 1) financial information about the performance of prior interests in oil and gas rights in which Commonwealth Exploration Corporation was the manager; 2) investment risk factors; 3) that respondent Lofton was not registered to sell securities in Connecticut; 4) that the Perimeter Summit, LLP interests were not registered in Connecticut; and 5) that Lofton was subject to a prior Connecticut administrative action alleging that he sold unregistered securities in an unregistered capacity.  The current action also alleged that, in violation of Section 36b-6 of the Act, respondents Commonwealth Exploration Corporation and Conde employed respondent Lofton as an unregistered agent of issuer, and that respondent Lofton unlawfully transacted securities business in that capacity.

Respondent Lofton requested a hearing on the Order to Cease and Desist.  Since Commonwealth Exploration Corporation and Carlos E. Conde did not request a hearing on the Order to Cease and Desist, the Order to Cease and Desist became permanent as to each of them on August 7, 2009.  A hearing on the Notice of Intent to Fine is pending with respect to all parties.

John D. Crooks (CRD # 3071684) – Broker-dealer Agent Registration Revoked

On May 15, 2009, the Banking Commissioner entered an Order (Docket No. R-2009-7582-S) revoking the agent registration of John D. Crooks of 26 Canterbury Turnpike, Norwich, Connecticut.  The respondent had been previously associated with GunnAllen Financial, Inc., a Connecticut-registered broker-dealer.

The revocation order had been preceded by an April 15, 2009 Notice of Intent to Revoke Registration as Agent (Docket No. R-2009-7582-S) alleging that, on February 24, 2009, in the Superior Court for the Judicial District of New London, the respondent pled nolo contendere to third degree larceny in violation of Section 53a-124 of the Connecticut General Statutes.  The respondent allegedly used his positions as treasurer of Veterans Memorial High Stakes Bingo, Inc. and of the Norwich Little League, Inc. to embezzle a total of $13,150 from both organizations.

The Commissioner found that the respondent’s felony conviction supported revocation of the respondent’s registration.  The respondent did not appear or contest the revocation proceeding.

TDA Advantage Trust and Thomas F. Desteph Ordered to Cease and Desist from Selling Unregistered Securities, Transacting Business as Unregistered Agent of Issuer; Notice of Intent to Fine Issued

On April 7, 2009, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2008-7555-S) with respect to TDA Advantage Trust and Thomas F. Desteph, both of 1 Dustin Lane, Jaffrey, New Hampshire and 4 Summit Road, Keene, New Hampshire.  The action alleged that, in 2003, TDA Advantage Trust, through Thomas F. Desteph, sold unregistered promissory notes to at least one Connecticut investor in contravention of Section 36b-16 of the Connecticut Uniform Securities Act.  The action also alleged that Thomas F. Desteph transacted business as an unregistered agent of issuer in violation of Section 36b-6 of the Act, and that TDA Advantage Trust also violated Section 36b-6 by employing respondent Desteph as an unregistered agent.  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.

Jesse John Hinkley (CRD # 5098659) Barred from Connecticut Securities Business for Ten Years; Fined $2,500

On June 24, 2009, the Banking Commissioner entered a Consent Order resolving the matters set forth in a December 1, 2008 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2008-7426-S) issued against Jesse John Hinkley of New Fairfield, Connecticut.  The respondent had been associated with New Castle Financial Services LLC (CRD number 102380), a securities brokerage firm.  The Order to Cease and Desist and Notice of Intent to Fine had 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 using scripted sales presentations that contained various false and misleading statements of material fact.

The Consent Order barred Hinkley for ten years from transacting business in Connecticut as a broker-dealer, agent, investment adviser or investment adviser agent.  The Consent Order also directed Hinkley to cease and desist from regulatory violations and required that he pay a $2,500 fine.

Eric John Weiss (CRD # 2244852) Barred from Transacting Connecticut Securities Business for Seven Years; Agent Registration Revoked

On June 9, 2009, the Banking Commissioner entered a Consent Order (No. CO-09-7664-S) with respect to Eric John Weiss, a broker-dealer agent of American Capital Partners, LLC (CRD number 119249).  The Consent Order alleged that 1) prior to becoming registered as an agent of American Capital Partners, LLC under the Connecticut Uniform Securities Act, Weiss violated Section 36b-6(a) of the Act by transacting business in an unregistered capacity for that firm; 2) Weiss engaged in a dishonest or unethical practice by falsely reporting on firm records that the securities transactions he effected for Connecticut customers while he was unregistered were associated with a New Jersey address; and 3) Weiss engaged in conduct made actionable by Section 36b-31-15b(a)(8) of the Regulations under the Act by recommending unsuitable investments to Connecticut customers.

The Consent Order revoked Weiss’ Connecticut agent registration effective June 9, 2009 and barred him for seven years from transacting business in or from Connecticut as a broker-dealer, agent, investment adviser, investment adviser agent or agent of issuer.  During the term of the bar, Weiss was also precluded from 1) supervising any broker-dealer agents with respect to securities business transacted in or from Connecticut or with respect to Connecticut-based securities brokerage accounts; and 2) acting as a finder for compensation, receiving or splitting commissions or similar remuneration and/or receiving referral fees in connection with the offer, sale or purchase of securities in or from Connecticut.  The Consent Order also directed Weiss to cease and desist from regulatory violations.

American Capital Partners, LLC (CRD # 119249) Assessed $20,000 for Employing Unregistered Agents; $12,985 Rescission Offer Extended to Connecticut Customers with Potential Suitability Claims

On June 9, 2009, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-09-7647-S) with American Capital Partners, LLC of 205 Oser Avenue, Hauppauge, New York.  The firm is registered as a broker-dealer under the Connecticut Uniform Securities Act.  The Stipulation and Agreement alleged that 1) from approximately 2007 forward, the firm violated Section 36b-6(b) of the Act by employing at least two unregistered agents; 2) the firm engaged in conduct proscribed by Section 36b-31-15a(b) of the Regulations under the Act and FINRA Rule 1031(a) by employing one or more unregistered “cold callers”; and 3) in violation of Section 36b-31-6f(b) of the Regulations, the firm failed to establish, enforce and maintain an adequate supervisory system.

In furtherance of its desire to resolve the matter informally with the agency, the firm furnished proof that it had extended to those Connecticut customers having potential suitability claims a rescission offer totaling approximately $12,985.

Pursuant to the Stipulation and Agreement, the firm agreed to 1) retain an independent consultant to review its internal procedures for compliance with the Act and the Regulations thereunder; 2) file quarterly reports for two years describing any complaints, actions, proceedings, reprimands, censures or warnings involving the firm and its agents and relating to Connecticut securities activity; and 3) remit $20,000 to the agency.  Of that amount, $15,000 constituted an administrative fine and $5,000 would be applied to defray department investigative costs.  In addition, the Stipulation and Agreement required that the firm pay the expenses associated with one or more examinations of its offices conducted by the Division within 24 months, such expenses not to exceed $3,000 in the aggregate.

Damian Kevon Wilson (CRD # 4765109) Fined $500 For Transacting Business as a Broker-dealer Agent Prior to Registration

On June 9, 2009, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-09-7663-S) with Damian Kevon Wilson, a registered broker-dealer agent of American Capital Partners, LLC since February 22, 2008.  The Stipulation and Agreement alleged that, in early 2008 and immediately prior to his becoming registered as an agent of the firm, Wilson transacted business for American Capital Partners, LLC in an unregistered capacity.  Pursuant to the Stipulation and Agreement, Wilson agreed to pay a $500 fine and to refrain from violative conduct.

Fox Run Management LLC (CRD # 149092) Assessed $2,500 for Rendering Investment Advisory Services to an Affiliated Fund While Unregistered

On June 12, 2009, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-09-7671-S) with Fox Run Management LLC of 35 Fox Run Lane, Greenwich, Connecticut.  The firm is the general partner of, and holds a controlling interest in, Fox Run Alpha Fund, L.P. (CRD number 44826), a broker-dealer registered under the Connecticut Uniform Securities Act and an issuer of securities.  The Stipulation and Agreement alleged that, from 1999 to 2008, Fox Run Management LLC rendered investment advisory services for compensation solely to Fox Run Alpha Fund, L.P. at a time when Fox Run Management LLC was not registered as an investment adviser in Connecticut.  Fox Run Management LLC has since applied for Connecticut investment adviser registration.  In executing the Stipulation and Agreement, Fox Run Management LLC represented that it had relied upon prior legal counsel in not pursuing investment adviser registration at an earlier date.

Pursuant to the Stipulation and Agreement, Fox Run Management LLC agreed to refrain from engaging in violative conduct and to remit $2,500 to the agency.  Of that amount $500 constituted an administrative fine; $1,500 would be applied to reimburse the department for past due registration fees; and $500 would be applied to defray the Division’s examination and investigative costs.

Fox Run Management LLC became registered as an investment adviser in Connecticut on June 12, 2009.

OneShare Investments, LLC (CRD # 144049) - Broker-dealer Registration Conditioned

On June 23, 2009, the Banking Commissioner entered into a Stipulated Agreement (No. ST-09-7689-S) conditioning the broker-dealer registration of OneShare Investments, LLC of 3450 Third Street, Building 1D, Third Floor, San Francisco, California.  The Stipulated Agreement alleged that at least two active officers of the firm did not fulfill the experience requirements in Section 36b-31-7a of the Regulations under the Connecticut Uniform Securities Act.  The Stipulated Agreement required that, for two years, any securities business transacted by the firm in or from Connecticut be limited as follows:  1) all securities transactions would be unsolicited; 2) the firm would effect securities transactions for no more than twenty-five Connecticut securities customers per calendar year; and 3) the firm would restrict its Connecticut securities business to customers obtained through the firm’s affiliate, One Share of Stock, Inc.  In addition, the Stipulated Agreement required that, for a two year period, the firm notify the Division Director of any disciplinary events, including sales-related securities complaints, against the firm, its members, officers, directors, control persons, agents, employees and representatives.

OneShare Investments, LLC became registered as a broker-dealer in Connecticut on June 23, 2009.

Martin Scott Sands (CRD # 1186904) - Broker-dealer Agent Registration Conditioned

On June 11, 2009, the Banking Commissioner executed a Stipulated Agreement (No. ST-09-7305-S) conditioning the broker-dealer agent registration of Martin Scott Sands.   Sands had applied for Connecticut registration as a broker-dealer agent of Lane Capital Markets LLC, an unaffiliated firm located in Southport, Connecticut.  The Stipulated Agreement noted that Sands was currently subject to a November 29, 2004 Consent Order Conditioning Registration as an Investment Adviser Agent and Restricting Securities-Related Activities (File No. CO-04-7093-S) that had been entered by the Banking Commissioner.  That Consent Order was based on allegations that Sands had been subject to a December 18, 2003 bar and an October 2000 suspension by the New York Stock Exchange.  The Stipulated Agreement also noted that Sands had been the subject of complaints arising from his prior association with Sands Brothers & Co., Ltd., a broker-dealer firm in which he held a controlling interest and of which he was co-owner.

The Stipulated Agreement required that during Sands' association with Lane Capital Markets LLC, 1) Sands would not act as a general securities principal supervising sales activities on behalf of the firm, be involved in the day-to-day compliance or sales supervision of other firm agents, supervise himself or be supervised by Steven Brett Sands (CRD number 730742); and 2) Sands' securities activities in and from Connecticut would be supervised by the compliance officer of Lane Capital Markets LLC.  The Stipulated Agreement also required Lane Capital Markets LLC to notify the Division promptly for three years concerning reportable disciplinary events involving Sands and to provide copies of related documentation.

Contemporaneously with the signing of the Stipulated Agreement, Martin Scott Sands became registered as a broker-dealer agent of Lane Capital Markets LLC under the Connecticut Uniform Securities Act.


STATISTICAL SUMMARY

Licensing At A Glance
at the end of the quarter

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Broker-dealers Registered 2,537  2,543
Broker-dealer Agents Registered 134,610  135,747    
Broker-dealer Branch Offices Registered 2,805 2,795
Investment Advisers Registered 445 460
SEC Registered Advisers Filing Notice 1,838 1,866
Investment Adviser Agents Registered 9,329 9,386
Agents of Issuer Registered 30 29
Conditional Registrations
1
2
 
 
 
 

Securities and Business
Opportunity Filings

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Offerings Reviewed 33 40
 
  73
Investment Company Notice Filings 382 374
 
756
Exemptions and Exemptive Notices 715 530 1,245
 
 
Examinations
     
Broker-dealers 37  16
 
  53
Investment Advisers 20  18
 
38
 
 
Securities Investigations
 
Opened 49 38
 
87
Closed 23 22
 
45
Ongoing as of End of Quarter 153 169
 
Subpoenas issued 8 13 21
Matters referred from Attorney General 8 11 19
Matters referred from Other Agencies 1 2 3
 
 
Business Opportunity Investigations
 
Investigations Opened 3 2 5
Investigations Closed 3 0 3
Ongoing as of End of Quarter 5 7
 
 
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
1
 
1
Denial Orders (Licensing) 0 0
 
0
Suspension Orders (Licensing) 0 0
 
0
Revocation Orders (Licensing) 0 2
 
2
Notices of Intent to Fine 0 2
 
2
Orders Imposing Fine 0 0
 
0
Cease and Desist Orders 5 4
 
9
Notices of Intent to Issue Stop Order 0 0
 
0
Activity Restrictions/Bars 0 2 2
Stop Orders 0 0 0
Vacating/Withdrawal/ Modification Orders 1 0 1
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
0
3
 
3
Consent Orders
6
2
 
8
Stipulation and Agreements
2
3
 
5
 
 

Monetary Relief

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Monetary Sanctions Imposed
$159,879
$25,500
 
$185,379
Other (Financial Literacy)
$50,000
0
 
 
$50,000
Other (Law enforcement protecting Seniors)
0
0
 
 
0
Restitution or Other Monetary Relief (includes rescission offer amounts) $4,412,921
$88,954
 
$4,501,875
 
 

Securities Referrals

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



Securities Division