DOB: Spring 2017 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. XXXI  No. 1 
Spring 2017

Features

Enforcement and Other Highlights 


BANKING COMMISSIONER REMINDS EXEMPT REPORTING ADVISERS OF THEIR
FORM ADV STATE FILING OBLIGATIONS POST DODD-FRANK


In 2011, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Among other things, Dodd-Frank exempts from federal investment adviser registration those investment advisers who: 1) act as an investment adviser solely to one or more venture capital funds; or 2) act as an investment adviser solely to private funds and who have assets under management in the United States of less than $150 million (collectively, “ERAs”).
 
To clarify state requirements governing ERAs, on July 11, 2011, the Banking Commissioner issued an Order Governing Certain Investment Advisers Exempt from Federal Registration Following Passage of Dodd-Frank (“2011 Order”).  The 2011 Order exempted ERAs from state registration as long as they “make the reports required by SEC Rule 204-4 available to the Commissioner in electronic format once the IARD [Investment Adviser Registration Depository] system has been updated to accept such reports and relay them to affected states.”
 
In the five years since the passage of Dodd-Frank and the issuance of the 2011 Order, the federal reporting requirements for ERAs have been formalized, and the IARD system has been updated to accept filings made on behalf of ERAs subject to the 2011 Order.  Moreover, the SEC has recently signaled that it may begin conducting books and records examinations of ERAs.  Therefore, the Commissioner is now issuing this reminder to all investment advisers relying on the ERA exemption that they must complete key portions of Part IA of Form ADV in order to be considered compliant with the 2011 Order.
 
Investment advisers relying on the Connecticut ERA exemption should review their form filings and ensure that any deficiencies are corrected no later than June 30, 2017.  Subsequent to June 30, 2017, if the Commissioner becomes aware of an ERA’s failure to make required filings, the Commissioner may pursue such enforcement measures as may be appropriate, including but not limited to administrative fines under Section 36b-27 of the Connecticut Uniform Securities Act.
 
Required filings
 
Investment advisers relying on the state ERA exemption must complete the Form ADV items prescribed by the Securities and Exchange Commission.  Currently, the requirements consist of Form ADV Items 1, 2, 3, 6, 7, 10 and 11 of Part IA, as well as corresponding schedules.  Per federal requirements, new ERAs must file within 60 days of becoming an ERA.  As a reminder, the filing requirements are set forth in 17 CFR 275.204-4.

Issued March, 2017.
       


ADMINISTRATIVE ACTIONS

Omniview Capital Advisors, LLC, Omni View Capital LLC and Abraxas J. Discala (CRD No. 3188107) – Amended and Restated Order to Cease and Desist, Amended and Restated Order to Make Restitution and Amended and Restated Notice of Intent to Fine Issued

On February 17, 2017, the Banking Commissioner amended and restated an August 17, 2016 Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CRF-16-8169-S) previously issued against Omniview Capital Advisors, LLC (“Advisors”) of 140 Rowayton Avenue, Norwalk, Connecticut 06853 and Abraxas J. (“AJ”) Discala, Chief Executive Officer and principal of Advisors.  Advisors marketed itself as a merchant bank that sought to create partnerships with entities that were fundamentally sound in order to provide required capital and strategic advice.  The action was amended to add Omni View Capital LLC (“Capital”) as a respondent.  Capital, which shared the same business address as Advisors and was also controlled by Discala, held itself out as a privately held investment advisory and merchant banking firm.
 

As amended, the action alleged that Advisors and Capital each transacted business as an unregistered broker-dealer in violation of Section 36b-6(a) of the Connecticut Uniform Securities Act and that Discala transacted business as an unregistered broker-dealer agent.  Specifically, Respondents Advisors and Discala had been retained by Crackpot Inc., a Nevada entity, and Scanbuy, Inc., a Delaware corporation, to raise funds for those issuers on a compensated basis. 
 
According to the amended action, Advisors and/or Capital, through Discala, sold shares of Crackpot Inc. and Scanbuy, Inc. to Connecticut investors in 2014.  The securities sold were not registered in contravention of Section 36b-16 of the Act.  In addition, the amended action alleged that the respondents violated the antifraud provisions in Section 36b-4(a) of the Act by failing to disclose to the investors the risks associated with the Crackpot Inc. and Scanbuy, Inc. investments; financial information relating to the investments; the registration status of the shares; and the fact that Advisors, Capital and Discala were not registered under the Act.  The amended action acknowledged that the Scanbuy, Inc. investors had received a $7,500 partial refund from respondent Capital.  Originally, the action had stated that the partial refund came from respondent Advisors.
 

Newly added respondent Capital was afforded an opportunity to request a hearing on the allegations.  The joint request for a hearing previously filed by Advisors and Discala was preserved as it related to the allegations in the amended action.
 


Peter David Hershman (CRD No. 5999754)

On March 27, 2017, the Commissioner entered a Consent Order (No. CO-17-8313-S) with respect to attorney Peter David Hershman.  Hershman had been the subject of an August 19, 2016 Order to Cease and Desist, Order to Provide Disgorgement, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CDF-16-8313-S), and had had a business relationship with Essex Financial Services, Inc. (“EFS”) (CRD No. 127549) and John William Rafal (CRD No. 809031), founder of that firm.  Hershman had also been the subject of a June 26, 2015 Consent Order (No. CO-15-8222) alleging that Hershman, with the express or implied authorization of EFS, solicited at least one investment advisory client on behalf of EFS on a compensated basis, and, in so doing, transacted business as an unregistered investment adviser agent in violation of Section 36b-6(c) of the Connecticut Uniform Securities Act.


The August 19, 2016 action had alleged that, at all times prior to the entry of the Consent Order, Hershman led the Commissioner to believe that Hershman was no longer in possession of any money or compensation relating to advisory referrals.  The August 19, 2016 action was based on new evidence, undisclosed to the agency by Hershman, and obtained from the Securities and Exchange Commission.  That evidence indicated that, in April 2013, on the same day that Hershman issued a referral fee refund to EFS, Rafal issued a check in the same amount to Hershman’s law firm, a check that Hershman deposited into an account he controlled.  Taking it upon himself to pay Hershman, Rafal also issued to Hershman a check for a billed amount that EFS had not paid; Hershman also deposited that check.  Despite Hershman’s receipt of the payments, Hershman allegedly did nothing to dispel the Commissioner’s impression that Hershman was no longer in possession of any referral-based money or compensation.   Accordingly, the August 19, 2016 action alleged that Hershman violated Section 36b-23 of the Connecticut Uniform Securities Act by making materially misleading statements or omissions, and that Hershman engaged in dishonest or unethical practices in the securities business.


Respondent Hershman had requested a hearing on the allegations in the August 19, 2016 action.  The March 27, 2017 Consent Order resolved the matter without further proceedings.   In January, 2017, the SEC imposed a securities industry bar on Hershman and ordered, among other things, that Hershman pay $49,760 in disgorgement (representing fees received from Rafal).


The March 27, 2017 Consent Order fined Hershman $8,500 and directed him to cease and desist from regulatory violations.

John William Rafal (CRD No. 809031) – Broker-dealer Agent and Investment Adviser Agent Registrations Revoked; Permanent Bar Imposed


On January 26, 2017, the Banking Commissioner entered a Consent Order (No. CO-17-8312-S) with respect to John William Rafal who had been the founder, President and Chief Executive Officer of Essex Financial Services, Inc. (“EFS”).  The 2017 Consent Order resolved allegations against Rafal contained in an August 19, 2016 Order to Cease and Desist, Notice of Intent to Revoke Registration as a Broker-dealer Agent, Notice of Intent to Revoke Registration as an Investment Adviser Agent, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CRF-16-8312-S).

Rafal had also been the subject of a related November 23, 2015 Consent Order (No. CO-15-8158) alleging that Rafal engaged in dishonest or unethical practices in the securities business by 1) improperly and knowingly authorizing the payment of advisory referral fees by EFS to a third party attorney whom Rafal knew was not registered as an investment adviser agent of EFS under the Connecticut Uniform Securities Act; and 2) requesting that the attorney provide EFS with an itemized invoice mischaracterizing the services the attorney would perform for EFS.  Among other things, the November 23, 2015 Consent Order fined Rafal $25,000.


The August 19, 2016 administrative action had alleged that, at all times prior to the entry of the 2015 Consent Order, Rafal represented and led the Commissioner to believe that the third party attorney was no longer in possession of any money or compensation relating to advisory referrals.  The August 19, 2016 administrative action was based on new evidence, undisclosed to the agency by Rafal, and obtained from the Securities and Exchange Commission.  That evidence indicated that, in April 2013, and notwithstanding EFS’ instruction that the attorney not receive advisory referral fees while unregistered, Rafal took it upon himself to personally pay the attorney the referral fees.  The attorney deposited the payments which included reimbursement for the referral fee refund the attorney previously made to EFS.  The attorney’s receipt of the payments stood in stark contrast to Rafal’s prior representations to the Commissioner, representations that had led the Commissioner to believe the attorney no longer possessed any referral-based money or compensation.  Consequently, the August 19, 2016 action alleged that Rafal violated Section 36b-23 of the Connecticut Uniform Securities Act by making materially misleading statements or omissions.  The action also alleged that Rafal engaged in dishonest or unethical practices in the securities business.


Following the initiation of the Commissioner’s August 19, 2016 proceeding, on January 6, 2017, the Securities and Exchange Commissioner barred Rafal from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and required that Rafal pay a civil money penalty of $275,000, disgorgement of $275,000 and prejudgment interest of $27,297.72 to the SEC (SEC Administrative Proceeding File No. 3-17760).  In addition, on November 29, 2016 Rafal agreed to plead guilty (“Guilty Plea”) in the United States District Court for the District of Massachusetts to one count of violating 18 U.S.C. Section 1505 (obstruction of justice, a felony) (United States of American v. John William Rafal, Case No. 1:17-cr-10004).


The January 26, 2017 Consent Order revoked Rafal’s registration as a broker-dealer agent and an investment adviser agent in Connecticut.  In addition, the 2017 Consent Order permanently barred Rafal from 1) transacting business in or from Connecticut as a broker-dealer, agent, investment adviser or investment adviser agent; 2) acting in any other capacity requiring a license or registration from the Commissioner; and 3) absent the consent of the Commissioner, holding any position as a director, officer, employee or independent contractor with any Connecticut-chartered bank or credit union or any federal bank or credit union having a Connecticut principal office or with a holding company that holds a subsidiary that is a bank as defined in Section 36a-2 of the Connecticut General Statutes.  The January 26, 2017 Consent Order fined Rafal an additional $15,000 and required that he cease and desist from regulatory violations.

 


Cantor Fitzgerald & Co. (CRD No. 134) Assessed $2,100 for Employing Unregistered Agents

On January 5, 2017, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-16-8340-S) with Cantor Fitzgerald & Co., a registered broker-dealer having its principal office at 110 East 59th Street, 4th Floor, New York, New York 10022.  The Stipulation and Agreement alleged that the firm had employed three unregistered agents in contravention of Section 36b-6(b) of the Connecticut Uniform Securities Act.  All three agents have since become registered in Connecticut.  In resolution of the matter, the firm agreed to refrain from violative conduct and to pay $2,100 to the agency.  Of that amount, $1,500 constituted an administrative fine and $600 represented reimbursement for past due broker-dealer agent registration fees.
 


STATISTICAL SUMMARY

Licensing At A Glance
at the end of the quarter

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Broker-dealers Registered   2,180  
  
  
Broker-dealer Agents Registered 164,522   
  
  
Broker-dealer Branch Offices Registered 2,597  
  
  
Investment Advisers Registered 528         
  
SEC Registered Advisers Filing Notice 2,141          
  
Investment Adviser Agents Registered 13,542         
  
Exempt Reporting Advisers
117
  
  
  
Agents of Issuer Registered 18          
  
Conditional Registrations
0
  
  
  
 
 

Securities and Business
Opportunity Filings

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Offerings Reviewed 62     
  
     62
Investment Company Notice Filings 568      
  
     568
Exemptions and Exemptive Notices 945                 945
 
 
Examinations
     
Broker-dealers 17     
  
      17
Investment Advisers 26     
  
     26
 
 
Securities Investigations
 
Opened 15          
  
15
Closed 23          
  
23
Ongoing as of End of Quarter 82          
  
Subpoenas issued 5                5
Matters referred from Attorney General 1                1
Matters referred from Other Agencies 0                 0
 
 
Business Opportunity Investigations
 
Investigations Opened 1                 1
Investigations Closed 1     
  
     1
Ongoing as of End of Quarter 2                    
 
 
Enforcement: Remedies and Sanctions
 
Notices of Intent to Deny (Licensing) 0
  
  
     
0
Notices of Intent to Suspend (Licensing)
0
  
  
  
0
Notices of Intent to Revoke (Licensing)
0
  
  
  
0
Denial Orders (Licensing) 0     
  
     0
Suspension Orders (Licensing) 0      
  
  
0
Revocation Orders (Licensing) 1     
  
     1
Notices of Intent to Fine 0     
  
     0
Orders Imposing Fine 0     
  
     0
Cease and Desist Orders 0     
  
     0
Notices of Intent to Issue Stop Order 0     
  
  
0
Activity Restrictions/Bars 1     
  
  
1
Stop Orders 0                0
Vacating/Withdrawal/ Modification Orders 1                    1
Restitutionary Orders 0     
  
      0
Injunctive Relief Obtained 0                0
 
 

Proceedings and Settlements

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

Monetary Relief*

1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
to Date
Monetary Sanctions Imposed
$23,500
  
  
    
$23,500
Portion attributable to settlements
$23,500
  
  
  
$23,500
Attributable to Court-Ordered Penalties
0
  
  
  
0
Restitution or Other Monetary Relief
(includes rescission offer amounts)
$17,000
  
   
       $17,000

*Cents eliminated

 

Securities Referrals

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



Securities Division