DOB: Fall 2011 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XXV  No. 3
Fall 2011

Features

Enforcement and Other Highlights 
Contributors

Eric Wilder, Director
Cynthia Antanaitis, Assistant Director


Department Announces Free Compliance Workshop for Investment Advisers 

The Department of Banking, in cooperation with Sacred Heart University, will hold a free compliance workshop for investment advisers on Friday, December 9, 2011 from 9 a.m. to 12 p.m. at the university's Schine Auditorium, 5151 Park Avenue, Fairfield, Connecticut.  The workshop will target investment advisers switching from SEC registration to state registration following passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Other compliance issues will also be discussed.

Attendees may register online or at the door.  Directions and details are also available on the department’s website.
 
Do you have a question or two you would like us to address at the workshop?  Questions may be submitted online.  You may respond as many times as you’d like, and anonymous questions are acceptable. 
 
Eric Wilder Appointed as New Securities Division Director

On October 4, 2011, Commissioner Howard F. Pitkin announced that he had named Eric Wilder as Director of the Securities and Business Investments Division of the Department of Banking.  Mr. Wilder had been serving in an acting capacity since April of 2011.

“Eric is extremely qualified and has extensive knowledge of the securities industry,” Commissioner Pitkin observed.  “He is a dedicated professional, who fully understands how the industry runs.”

Mr. Wilder began working at the Connecticut Department of Banking in 1978.  He had been serving as an Assistant Director of the Securities Division since 1984.  Mr. Wilder holds a Bachelor of Science in Accounting from Western New England University. 


MidAmerica Resources, Inc. a/k/a MA Resources, Inc. Fined $100,000 for Unregistered Security Sales, Fraudulent Conduct 
 
On August 26, 2011, the Banking Commissioner issued an Order Imposing Fine (Docket No. CF-11-7790-S) against MidAmerica Resources, Inc. a/k/a MA Resources, Inc. of 3943 Irvine Boulevard, Suite 439, Irvine, California.  MidAmerica Resources, Inc. is or was the Joint Venture Manager and Joint Venture Operator of CherryHomes Joint Venture, an entity purportedly formed to develop oil and gas in Texas.  The Order Imposing Fine had been preceded by a February 16, 2011 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-11-7790-S) alleging that, beginning in 2006, MidAmerica Resources, Inc., Thomas C. Hanscome (CRD number 1243201), president of MidAmerica Resources, Inc., and Lance David Brooks sold unregistered CherryHomes Joint Venture units to at least one elderly Connecticut resident at a time when neither Brooks nor Hanscome was registered as an agent of issuer under the Connecticut Uniform Securities Act.  The February 16, 2011 action had also alleged that insufficient disclosure was made concerning the material terms of the offering, including its risks. The Order to Cease and Desist, being uncontested, had become permanent on April 19, 2011.

In fining MidAmerica Resources, Inc. $100,000, the Commissioner found that the respondent violated Sections 36b-4(a), 36b-4(b) and 36b-16 of the Act, and materially aided Brooks' and Hanscome's violations of Sections 36b-6(a) and 36b-16 of the Act.

MidAmerica Resources, Inc. did not appear or contest the imposition of the fine.

Air-Byrd/River Joint Venture Fined $100,000 for Selling Unregistered Securities, Employing an Unregistered Agent of Issuer, Engaging in Fraudulent Conduct

On August 26, 2011, the Banking Commissioner issued an Order Imposing Fine against Air-Byrd/River Joint Venture, a McKinney, Texas-based entity formed for the purported purpose of oil and gas development in Kansas.  The Order Imposing Fine had been preceded by a February 16, 2011 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-11-7790-S) alleging that the respondent sold unregistered securities to at least one elderly Connecticut investor, failed to provide material disclosures to investors and employed one Lance David Brooks (CRD number 2111084) as an unregistered agent of issuer.  The Order to Cease and Desist, being uncontested, had become permanent on April 19, 2011.

In fining Air-Byrd/River Joint Venture $100,000, the Commissioner found that the respondent violated Sections 36b-4(a), 36b-4(b), 36b-6(b) and 36b-16 of the Connecticut Uniform Securities Act.

Air-Byrd/River Joint Venture did not appear or contest the imposition of the fine.

Air-Byrd Operations LLC Fined $100,000 for Unregistered Security Sales, Fraudulent Conduct

On August 26, 2011, the Banking Commissioner issued an Order Imposing Fine against Air-Byrd Operations LLC, the joint venture manager of Air-Byrd/River Joint Venture, a McKinney, Texas-based entity formed for the purported purpose of oil and gas development in Kansas.  The Order Imposing Fine had been preceded by a February 16, 2011 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-11-7790-S) alleging that, from at least 2006, Air-Byrd Operations LLC made multiple sales of unregistered joint venture units to at least one elderly Connecticut investor absent material disclosures.  The Order to Cease and Desist, being uncontested, had become permanent on April 19, 2011.

In fining Air-Byrd Operations LLC $100,000, the Commissioner found that the respondent violated Sections 36b-4(a), 36b-4(b) and 36b-16 of the Connecticut Uniform Securities Act, and materially aided Lance David Brooks' violations of Sections 36b-6(a) and 36b-16 of the Act.  Respondent Brooks was the president of Air-Byrd/River Joint Venture.

Air-Byrd Operations LLC did not appear or contest the imposition of the fine.

Lance David Brooks (CRD # 2111084) Fined $100,000 for Unregistered Security Sales, Transacting Business as an Unregistered Agent of Issuer, Fraudulent Conduct

On August 26, 2011, the Banking Commissioner issued an Order Imposing Fine (Docket No. CF-11-7790-S) against Lance David Brooks of 10695 Wild Rose Court, McKinney, Texas.  The Order Imposing Fine had been preceded by a February 16, 2011 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-11-7790-S) alleging that, starting in 2006, Brooks sold unregistered units in Texas-based CherryHomes Joint Venture and in Air-Byrd/River Joint Venture to at least one elderly Connecticut investor at a time when Brooks was not registered as an agent of issuer or in any other capacity under the Connecticut Uniform Securities Act.  The February 16, 2011 action had also alleged that insufficient disclosure was made to investors concerning investment risks.  In addition, the summary offering memorandum for Air-Byrd/River Joint Venture purportedly failed to disclose that, on January 7, 2005, the Commonwealth of Pennsylvania announced that it had entered a Summary Order to Cease and Desist against Brooks for violations of that state’s securities laws stemming from Brooks’ cold-calling Pennsylvania residents to invest in a separate joint venture.  The February 16, 2011 action had also alleged that Brooks, acting in an unregistered capacity, sold unregistered securities of Regal Royalty Resource, a precious metals investment vehicle, to one or more elderly Connecticut investors without providing investors with material disclosures concerning the investment.  The Order to Cease and Desist, being uncontested, had become permanent on April 19, 2011.


In fining respondent Brooks $100,000, the Commissioner found that Brooks violated Sections 36b-4(a), 36b-4(b), 36b-6 and 36b-16 of the Act.  Respondent Brooks did not appear or contest the imposition of the fine.


Regal Royalty Resource Fined $100,000 for Unregistered Security Sales, Employing An Unregistered Agent of Issuer, Fraudulent Conduct

On August 26, 2011, the Banking Commissioner issued an Order Imposing Fine (Docket No. CF-11-7790-S) against Regal Royalty Resource of 10695 Wild Rose Court, McKinney, Texas.  The Order Imposing Fine had been preceded by a February 16, 2011 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-11-7790-S) alleging that Regal Royalty Resource was an investment vehicle whose purpose was to enable investors to acquire precious metals, and that Regal Royalty Resource and Lance David Brooks (CRD number 2111084) sold unregistered securities to at least one elderly Connecticut investor while Brooks was not registered to sell securities in Connecticut.  According to the February 16, 2011 action, investors received no disclosures concerning the investment risks involved or Regal Royalty Resource’s ability to make the precious metals purchases, nor did investors receive independent credible evidence that the purchases had, in fact, been made.  The Order to Cease and Desist, being uncontested, had become permanent on April 19, 2011.

In fining Regal Royalty Resource $100,000, the Commissioner found that the concern violated Sections 36b-4(a), 36b-4(b), 36b-6(b) and 36b-16 of the Connecticut Uniform Securities Act.  Regal Royalty Resource did not appear or contest the imposition of the fine.

CherryHomes Joint Venture Fined $100,000 for Unregistered Security Sales, Employing Unregistered Agents of Issuer, Fraudulent Conduct

On August 26, 2011, the Banking Commissioner issued an Order Imposing Fine (Docket No. CF-11-7790-S) against CherryHomes Joint Venture of 3609 Williams Drive, Suite 105, Georgetown, Texas.  CherryHomes Joint Venture was formed for the purported purpose of oil and gas development in Texas.  The Order Imposing Fine had been preceded by a February 16, 2011 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-11-7790-S) alleging that unregistered CherryHomes Joint Venture units had been sold to at least one elderly Connecticut investor by unregistered agents Lance David Brooks (CRD number 2111084) and Thomas C. Hanscome (CRD number 1243201), and that insufficient disclosure was made concerning the material terms of the offering, including its risks.  The Order to Cease and Desist, being uncontested, had become permanent on April 19, 2011.

In fining CherryHomes Joint Venture $100,000, the Commissioner found that the entity violated Sections 36b-4(a), 36b-4(b), 36b-6(b) and 36b-16 of the Connecticut Uniform Securities Act.  CherryHomes Joint Venture did not appear or contest the imposition of the fine.

The Magic Plunger, LLC, Jerold L. John and Dale N. Thorp – Order to Cease and Desist, Order to Make Restitution and Notice of Intent to Fine Issued Following Allegations of Fraudulent Security Sales

On July 14, 2011, the Banking Commissioner issued an Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CRF-11-7667-S) against The Magic Plunger, LLC and Jerold L. John, both of 12 Beaverbrook Road, West Simsbury, Connecticut, and Dale N. Thorp of 12 Morgan Place, Unionville, Connecticut.  The business of The Magic Plunger, LLC is or was the manufacturing and marketing of toilet plungers.  Respondent John was The Magic Plunger, LLC’s managing member, and Respondent Thorp was its chief executive officer.

The action alleged that from at least December 2005 through March 2008, the respondents sold unregistered securities consisting of senior subordinated convertible debentures, promissory notes and certificates of “limited membership interest.”  Approximately $2 million of debentures were purportedly sold to investors.  The action also alleged that the respondents violated the antifraud provisions in Section 36b-4(a) of the Connecticut Uniform Securities Act by failing to disclose to investors that: 1) respondents John and Thorp would receive $400,000 from investor funds for developing the Magic Plunger product idea; and 2) investors might lose their entire investment.

In addition, the respondents allegedly failed to apprise investors concerning risks related to the investment; any financial or background information on The Magic Plunger, LLC’s officers, directors and principals, including their compensation; financial information concerning The Magic Plunger, LLC; material litigation involving the officers, directors and principals of The Magic Plunger, LLC; payments made to affiliated companies; the estimated cash proceeds of the securities offering and how the proceeds would be used; information substantiating how the represented rates of return could be achieved; and information concerning the respondents’ ability to meet their obligations under the debentures and promissory notes.

The action directed the respondents to cease and desist from regulatory violations and to make restitution of those sums obtained in violation of Section 36b-4(a) of the Act.  The respondents were afforded an opportunity to request a hearing on the Order to Cease and Desist, Order to Make Restitution and Notice of Intent to Fine.


Thomas C. Hanscome (CRD # 1243201) Barred from Connecticut Securities Activity for Ten Years

On September 23, 2011, the Banking Commissioner entered a Consent Order (Docket No. CF-11-7790-S) with respect to Thomas C. Hanscome of Irvine, California.  Hanscome was the president of MidAmerica Resources, Inc., the Joint Venture Manager and Joint Venture Operator of CherryHomes Joint Venture, a Texas enterprise formed for the purpose of oil and gas development.  Thomas C. Hanscome had been the subject of a February 16, 2011 Order to Cease and Desist and Notice of Intent to Fine (Docket No. CF-11-7790-S) alleging that he sold unregistered joint venture units of CherryHomes Joint Venture to at least one elderly Connecticut investor, transacted business as an unregistered agent of issuer, engaged in dishonest or unethical practices and violated the antifraud provisions in Section 36b-4(a) of the Connecticut Uniform Securities Act.

The Consent Order acknowledged that Thomas C. Hanscome had provided documentation to the agency evidencing his financial inability to pay the fine that otherwise would have been assessed against him.

The Consent Order barred Hanscome from transacting business in or from Connecticut as a broker-dealer, agent, investment adviser or investment adviser agent for ten years, and directed him to cease and desist from regulatory violations.

Portfolio Timing Service d/b/a PTS Asset Management (IARD # 111047) Fined $25,000; Order to Cease and Desist Made Permanent

On September 19, 2011, the Banking Commissioner entered a Consent Order (Docket No. CFNR-10-7779-S) with respect to Portfolio Timing Service d/b/a PTS Asset Management, an investment adviser registered with the Securities and Exchange Commission.  The respondent had been the subject of a June 1, 2011 Amended and Restated Order to Cease and Desist and Notice of Intent to Fine (Docket No. CFNR-10-7779-S).  Also named in the action were Wadsworth Investment Co., Inc., William F. Wadsworth, Sr. and William F. Wadsworth, Jr.  The administrative action alleged that the respondents, including Portfolio Timing Service, offered and sold unregistered securities and engaged in fraudulent, dishonest or unethical practices by using or permitting the use of pre-signed, blank client forms; calling, or allowing other employees to call, mutual funds and use false identities to gain client information that otherwise would have been denied to them; and posing, or permitting others to pose, as clients to obtain access to a third party mutual fund’s online client accounts.

The Consent Order rendered the Order to Cease and Desist permanent as of September 19, 2011, and fined Portfolio Timing Service $25,000.  In addition, the Consent Order directed the respondent to 1) hire an independent Compliance Officer to replace William F. Wadsworth, Sr.; 2) provide the Commissioner with access to the respondent’s books and records for three years; and 3) refrain from engaging William F. Wadsworth, Sr. as an investment adviser agent, employee, officer, director, general partner or manager for ten years.  While the Consent Order did permit William F. Wadsworth, Sr. to continue to serve on Portfolio Timing Service’s Investment Committee, Portfolio Timing Service was precluded for ten years from compensating William F. Wadsworth, Sr. for any activities performed on behalf of the respondent or its successors in interest.

William F. Wadsworth, Jr. (CRD # 1987068) Fined $5,000; Order to Cease and Desist Made Permanent

On September 19, 2011, the Banking Commissioner entered a Consent Order (Docket No. CFNR-10-7779-S) with respect to William F. Wadsworth, Jr.  The respondent had been the subject of a June 1, 2011 Amended and Restated Order to Cease and Desist, Notice of Intent to Fine and Notice of Intent to Revoke Registration as a Broker-dealer Agent (Docket No. CFNR-10-7779-S).  Also named in the action were Wadsworth Investment Co., Inc., Portfolio Timing Service d/b/a PTS Asset Management and William F. Wadsworth, Sr.  The administrative action alleged that the respondents, including William F. Wadsworth, Jr., engaged in fraudulent, dishonest or unethical practices by using or permitting the use of pre-signed, blank client forms; calling, or allowing other employees to call, mutual funds and use false identities to gain client information that otherwise would have been denied to them; and posing, or permitting others to pose, as clients to obtain access to a third party mutual fund’s online client accounts.  The action had also alleged that William F. Wadsworth, Jr. violated Section 36b-23 of the Connecticut Uniform Securities Act by making materially false or misleading statements in a department investigation.

The Consent Order rendered the Order to Cease and Desist permanent as of September 19, 2011 and directed William F. Wadsworth, Jr. to pay a $5,000 fine to the agency.

Douglas S. Weiss (IARD # 156697) Assessed $5,180 for Prior Unregistered Investment Adviser Activity

On August 9, 2011, the Banking Commissioner entered a Consent Order (No. CO-11-7956-S) with respect to Douglas S. Weiss, a sole proprietor applicant for investment adviser registration located at 597 Westport Avenue, Unit A420, Norwalk, Connecticut.  The Consent Order alleged that, from at least 2007, Douglas S. Weiss transacted business as an investment adviser absent registration and, in so doing, failed to enter into written investment advisory contracts with clients as required by Section 36b-5(b) of the Connecticut Uniform Securities Act.  In resolution of the matter, Douglas S. Weiss agreed to refrain from violative conduct and to pay $5,180 to the department.  Of that amount, $4,000 constituted an administrative fine, $680 represented reimbursement for past due investment adviser registration fees; and $500 would be applied to defray the Division’s investigative costs.  Douglas S. Weiss became registered as an investment adviser in Connecticut on August 9, 2011.

A&F Financial Securities, Inc. (CRD # 44791) Fined $20,000 for Inadequate Disclosure of “Postage and Handling” Charges

On July 18, 2011, the Banking Commissioner entered a Consent Order (Docket No. CO-11-7793-S) with respect to A&F Financial Securities, Inc., a registered broker-dealer located at 6901 Jericho Turnpike, Suite 217, Syosset, New York.  The Consent Order alleged that the firm engaged in dishonest and unethical practices by failing to disclose to Connecticut customers that transactional “Postage and Handling Charges” charged to those customers included a profit to the firm, and that the fee was not based on the costs of handling a particular transaction.  The Consent Order fined the firm $20,000 and directed that it cease and desist from regulatory violations.  In addition, the Consent Order required that the firm reimburse affected Connecticut customers the difference between the “Postage and Handling Charges” they paid for each transaction and the actual amount of the firm’s ticket and clearing charge and the postage fee assessed by the firm’s clearing broker.

Daniel Dvorznak (CRD # 2809819) Censured for Allegedly Causing False or Misleading Documents to be Filed With the Agency

On July 18, 2011, the Banking Commissioner entered a Consent Order (Docket No. CO-11-7941-S) with respect to Daniel Dvorznak, a registered broker-dealer agent of A&F Financial Securities, Inc.  The Consent Order alleged that, in violation of Section 36b-23 of the Connecticut Uniform Securities Act, Daniel Dvorznak caused certain documents that were materially false or misleading to be filed with the Commissioner.  The Consent Order censured Daniel Dvorznak and directed him to cease and desist from regulatory violations.

Nicholas George Tsikitas (CRD # 2871712) Censured for Allegedly Causing False or Misleading Documents to be Filed With the Agency

On July 18, 2011, the Banking Commissioner entered a Consent Order (Docket No. CO-11-7942-S) with respect to Nicholas George Tsikitas, a registered broker-dealer agent of A&F Financial Securities, Inc.  The Consent Order alleged that, in violation of Section 36b-23 of the Connecticut Uniform Securities Act, Nicholas Tsikitas caused certain documents that were materially false or misleading to be filed with the Commissioner.  The Consent Order censured Nicholas Tsikitas and directed him to cease and desist from regulatory violations.


STATISTICAL SUMMARY

Licensing At A Glance
at the end of the quarter

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Broker-dealers Registered 2,397 2,444 2,455  
Broker-dealer Agents Registered 145,618 149,085 151,925  
Broker-dealer Branch Offices Registered 2,688 2,671 2,703  
Investment Advisers Registered 485 491 501  
SEC Registered Advisers Filing Notice 1,861 1,886 1,898  
Investment Adviser Agents Registered 10,377 10,560 10,713  
Agents of Issuer Registered 24 24  25  
Conditional Registrations
0
0
0
 
 
 

Securities and Business
Opportunity Filings

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Offerings Reviewed 34 42
42
   118
Investment Company Notice Filings 538 539
479
  1,556
Exemptions and Exemptive Notices 776 744 655   2,175
 
 
Examinations
     
Broker-dealers 15 18
28
   61
Investment Advisers 11 13
38
   62
 
 
Securities Investigations
 
Opened 31 22 19
 
72
Closed 38 32  24
 
94
Ongoing as of End of Quarter 119 108  102
  
 
Subpoenas issued 8 15  26     49
Matters referred from Attorney General 5 1  3    9
Matters referred from Other Agencies 1 0  0    1
 
 
Business Opportunity Investigations
 
Investigations Opened 1 3 1    5
Investigations Closed 0 3
3
    6
Ongoing as of End of Quarter 3 3  1       
 
 
Enforcement: Remedies and Sanctions
 
Notices of Intent to Deny (Licensing) 0
1
0
   
1
Notices of Intent to Suspend (Licensing)
0
0
0
  
0
Notices of Intent to Revoke (Licensing)
0
3
0
  
3
Denial Orders (Licensing) 0 1
0
    1
Suspension Orders (Licensing) 0 0
0
   0
Revocation Orders (Licensing) 1 1
0
    2
Notices of Intent to Fine 4 3
1
  8
Orders Imposing Fine 2 1
6
  9
Cease and Desist Orders 4 3
1
  8
Notices of Intent to Issue Stop Order 0 0
0
  0
Activity Restrictions/Bars 2 3
2
  7
Stop Orders 0 0 0   0
Vacating/Withdrawal/ Modification Orders 0 0 0   0
Restitutionary Orders 0 2
1
  3
Injunctive Relief Obtained 0 0 0    0
 
 

Proceedings and Settlements

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Administrative Actions
5
6
7
 
18
Consent Orders
5
7
7
   
19
Stipulation and Agreements
3
0
0
   
3
 
 

Monetary Relief*

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Monetary Sanctions Imposed
$668,550
$491,600
$655,180
     $1,815,330
Restitution or Other Monetary Relief
(includes rescission offer amounts)
$18,049,151
$574,950
$48,137
 
$18,662,101

*Cents eliminated

 

Securities Referrals

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Criminal (Chief State's Attorney)
1
5
1
7
Civil (Attorney General)
2
0
0
2
Other Agency Referrals
1
1
1
3



Securities Division