DOB: Papic, Eddie-Findings-CD-FINE

* * * * * * * * * * * * * * 


IN THE MATTER OF:

EDDIE PAPIC
CRD NO. 3140836

    ("Respondent")

* * * * * * * * * * * * *

*
*
*
*
*
*
*
*
*
*
*

FINDINGS OF FACT,
CONCLUSIONS OF
LAW AND ORDER

FINDINGS OF FACT

1) On February 5, 2004, John P. Burke, Banking Commissioner of the State of Connecticut ("Commissioner") issued an Order to Cease and Desist ("Order"), Notice of Intent to Fine and Notice of Right to Hearing (collectively "Notice") against Respondent. (Ex. H.O. 4.)
2) The Notice provides that a hearing will be held in accordance with Section 36b-27(d)(2) of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act ("Act") and Chapter 54 of the Connecticut General Statutes. (Ex. H.O. 4.)
3) On February 6, 2004, the Notice was sent by registered mail number RB052355375US, return receipt requested, to Respondent at 58 Camp Avenue, Darien, Connecticut 06820. (Ex. H.O. 4.)
4) The Notice asserted that:
a. Respondent is an individual whose address last known to the Commissioner is 58 Camp Avenue, Darien, Connecticut 06820.
b. For all times relevant to the Notice, Respondent was the co-manager of Criterion Investment Capital LLC ("Criterion LLC").
c. For all times relevant to the Notice, Criterion LLC was the general partner and manager of Criterion Investment Fund I L.P. ("CIF"), a hedge fund located in Connecticut.
d. For all times relevant to the Notice, Respondent and his co-manager, Wilder Douglas Carnes ("Carnes"), were responsible for the day-to-day management of CIF.
e. From at least January 2001 to January 2002, Respondent made at least one offer and sale of securities from Connecticut in the form of limited partnership interests in CIF ("Criterion L.P. Interests") for the account of at least one Connecticut investor.
f. From at least January 2001 to January 2002, Respondent, in connection with the offer and sale of the Criterion L.P. Interests, failed to disclose to any Connecticut investor that, within five years proceeding the offer or sale of the Criterion L.P. Interests, he had filed a personal bankruptcy petition under the Federal bankruptcy laws which was discharged by the Bankruptcy Court in 1998 ("Bankruptcy").
g. Prior to any offers and sales of the Criterion L.P. Interests to Connecticut investors, Respondent and Carnes drafted a Confidential Offering Circular for CIF ("Circular") on behalf of Criterion LLC. The Circular was distributed by Respondent and Carnes to every Connecticut investor prior to their purchase of a Criterion L.P. Interest.
h. Respondent prepared his own biography ("Biography") for the Circular.
i. Respondent failed to disclose the 1998 Bankruptcy in the Biography contained in the Circular.
j. For most of 2001, Respondent actively pursued a Connecticut investor to invest in CIF.
k. During the course of Respondent's many offers of Criterion L.P. Interests to the investor, Respondent presented documents to the investor entitled "Criterion Investment Fund I L.P. Statement of Changes in the Capital Account of . . . [name redacted]" ("Account Document") and "Criterion Investment Capital LLC Performance 2001" ("Performance Document").
l. The Account Document was an account statement of an unnamed investor in CIF, and indicated that an investment of $250,000 in CIF from January 1, 2001 to October 31, 2001, resulted in a loss of $21,233 to such investor. There was only one investment of $250,000 made in CIF on January 1, 2001. As of October 31, 2001, the total loss to such investment was $249,857.
m. The Performance Document was presented to the investor on November 20, 2001. Respondent represented to the investor that the Performance Document showed the performance of CIF from January 1, 2001 through November 20, 2001. The Performance Document stated that the annual return for CIF was 5.62% and that the total investments in CIF had been $8,150,000, when the annual return for CIF to that date had been negative 100% and total deposits in CIF to that date had been approximately $1,602,890. In addition, the Performance Document did not accurately reflect the rate of return on investment in CIF for the first 11 months of 2001, nor did it accurately reflect the beginning and ending monthly balances for CIF for such months.
n. On or about December 10, 2001, the investor invested approximately $152,000 in CIF. Respondent assured the investor that his funds would be held by CIF and would not be invested by CIF until at least January 1, 2002.
o. In January 2002, the investor contacted Respondent to inquire on the progress of his investment. Respondent informed the investor that his investment had decreased approximately 10% in value.
p. The investor's funds were invested by Respondent in CIF on December 10, 2001. On December 31, 2001, the investor's investment was worth $10,974.
q. The investor's investment in CIF was worthless by January 25, 2002.
r. When offering the Criterion L.P. Interests for sale in Connecticut, Respondent presented a copy of the Circular to potential investors for their review. The Circular stated that: (1) the minimum investment in CIF was $500,000, when all investors in CIF invested less than $500,000; (2) the objective of CIF was to achieve superior long-term capital appreciation with moderate risk, primarily in equity securities and related instruments, and that CIF would invest in options from time to time, when the average equity security was held by CIF for 19 days and the majority of transactions effected by CIF after July 1, 2001, were in options; (3) each investor must have a net worth in excess of $1,000,000 and must be an accredited investor, when at least two Connecticut investors did not have such a net worth and were not accredited investors; and (4) Criterion LLC would transmit to each limited partner an annual report containing the audited financial statements of the partnership and a quarterly report on the status of the partnership, when in fact no such reports were ever produced or transmitted to the Connecticut investors.
s. At no time did Respondent inform the Connecticut investors that: Criterion LLC had allowed all of the Connecticut investors to invest sums in CIF of less than $500,000; the average length of time that securities were held by CIF was 19 days; after July 1, 2001, the majority of transactions in CIF were in options; and two non-accredited investors had been allowed to invest in CIF.
t. From at least January 2001 to January 2002, Respondent made recommendations and rendered advice regarding securities to CIF in Connecticut, on behalf of Criterion LLC, and received compensation, directly or indirectly, for such advisory services.
u. From at least January 2001 to January 2002, Respondent was an individual occupying similar status and performing similar functions of a partner or officer of an investment adviser.
v. At no time was Respondent registered in Connecticut as investment adviser agent of Criterion LLC, nor did he qualify for any exemption or exclusion from registration as such under the Act. (Ex. H.O. 4.)
5) The Notice asserted that the conduct of Respondent, as more fully described in paragraphs 10 through 14, inclusive, 23 and 24, constitutes, in connection with the offer, sale or purchase of a security, omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading. Such conduct was in violation of subsection (a)(2) of Section 36b-4 of the Act, which constitutes a basis for an order to cease and desist to be issued against Respondent under Section 36b-27(a) of the Act, as amended by Public Act 03-259, and for the imposition of a fine against Respondent under Section 36b-27(d) of the Act. (Ex. H.O. 4.)
6) The Notice asserted that the conduct of Respondent, as more fully described in paragraphs 16 through 20, inclusive, constitutes, in connection with the offer, sale or purchase of a security, the making of untrue statements of material facts. Such conduct was in violation of subsection (a)(2) of Section 36b-4 of the Act, which constitutes a basis for an order to cease and desist to be issued against Respondent under Section 36b-27(a) of the Act, as amended, and for the imposition of a fine against Respondent under Section 36b-27(d) of the Act. (Ex. H.O. 4.)
7) The Notice asserted that the conduct of Respondent, as more fully described in paragraphs 15 through 24, inclusive, constitutes, in connection with the offer, sale or purchase of a security, the engaging in a practice and course of business which operates as a fraud or deceit upon any person. Such conduct was in violation of subsection (a)(3) of Section 36b-4 of the Act, which constitutes a basis for an order to cease and desist to be issued against Respondent under Section 36b-27(a) of the Act, as amended, and for the imposition of a fine against Respondent under Section 36b-27(d) of the Act. (Ex. H.O. 4.)
8) The Notice asserted that Respondent's transacting business as an investment adviser agent within Connecticut absent registration as such, as more fully described in paragraphs 25 through 27, inclusive, was in violation of Section 36b-6(c) of the Act, which constitutes a basis for an order to cease and desist to be issued against Respondent under Section 36b-27(a) of the Act, as amended, and for the imposition of a fine against Respondent under Section 36b-27(d) of the Act. (Ex. H.O. 4.)
9) The Notice stated that pursuant to Section 36b-27(a) of the Act, as amended, Respondent would be afforded an opportunity for a hearing on the allegations set forth in the Notice. (Ex. D.)
10) The Notice stated that a hearing would be granted to Respondent if a written request for a hearing was received by the Department of Banking ("Department"), Legal Division, 260 Constitution Plaza, Hartford, Connecticut 06103-1800 within fourteen (14) days following Respondent's receipt of the Order. (Ex. H.O. 4.)
11) On February 26, 2004, the Commissioner issued a Notification of Hearing and Designation of Hearing Officer. (Ex. D.)
12) Pursuant to the Notification of Hearing and Designation of Hearing Officer, William Nahas, Jr. was appointed as Hearing Officer. (Ex. H.O. 1)
13) By letter dated August 2, 2004, Attorney Richard Slavin withdrew as counsel for Respondent and requested a continuance of the hearing. (Ex. H.O. 5.)
14) The hearing was held on 19 different dates between November 18, 2004 and February 24, 2005, at the Department. (Tr. 11-18-04 - 2-24-05.)
15) By letter dated October 4, 2004, Attorney Raymond A. Levites, counsel for Respondent, requested a waiver of the requirement of having local counsel present during the hearing that is set forth in Section 36a-1-32(b) of the Regulations of Connecticut State Agencies. (Ex. H.O. 2; Tr. 11-18-04 at 6.)
16) By letter dated October 4, 2004, Hearing Officer Nahas granted Attorney Levites a waiver from having to comply with the provisions of Section 36a-1-32(b) of the Regulations of Connecticut State Agencies. (Ex. H.O. 3; Tr. 11-18-04 at 6.)
17) Attorney Levites appeared at the hearing on behalf of Respondent. (Tr. 11-18-04 at 5.)
18) Attorneys Stacey Serrano Sarlo, Nirja Savill and Gayle Fierer appeared at the hearing on behalf of the Department. (Tr. 11-18-04 at 62.)
19) CIF was a limited partnership that pooled limited partner funds for investment purposes. (Tr. 1 5 05 at 75.)
20) Criterion LLC was the General Partner of CIF. (Ex. D; Tr. 1-5-05 at 75.)
21) Criterion LLC was organized under the laws of the State of Delaware. (Ex. D; Tr. 1-5-05 at 74.)
22) Respondent, Carnes, Attorney Kevin McGovern, Ryan Ross and John B. O'Connell were the organizers of Criterion LLC. (Tr. 1-5-05 at 101.)
23) Criterion LLC had an office at One Lafayette Place, Greenwich, Connecticut and then at 56 John Street, Southport, Connecticut. (Ex. D; Tr. 1-14-05 at 72.)
24) Criterion LLC managed the investments and implemented the investment strategy for CIF. (Tr. 1 5-05 at 76.)
25) Criterion LLC was an investment adviser to CIF. (Tr. 11-29-04 at 1656.)
26) CIF had 19 separate limited partner accounts listed on its Capital Accounting Detail Report dated 1/1/01 to 12/31/01. (Ex. O.)
27) Respondent and Carnes were managing members of Criterion LLC. (Ex. D; Tr. 1-6-05 at 31.)
28) Prior to CIF, Respondent had no experience operating an entity that made investments. (Ex. ii at 22.)
29) The Confidential Offering Circular issued by CIF was dated December 1, 2000. (Ex. D.)
30) The individuals who invested in CIF were provided with a copy of the Circular. (Ex. ii at 31.)
31) The law firm of McGovern & Associates was hired by Criterion LLC to edit and review CIF documents, including the Circular, and to make sure that CIF was in compliance with the requirements of law. (Tr. 1-19-05 at 128, 135, 136.)
32) McGovern & Associates charged Criterion LLC thousands of dollars in legal fees for compliance-related services. (Ex. 17.)
33) Respondent testified that McGovern & Associates never raised the issue of subsequent disclosure with Respondent. (Tr. 1 6 05 at 66-68.)
34) Section 31 of the Circular states, in part, that the Circular and "related documents have been prepared or reviewed by counsel engaged by the General Partner". (Ex. D.)
35) Respondent wrote his own Biography for the Circular. (Tr. 1-19-05 at 134.)
36) Respondent filed for bankruptcy on December 10, 1997 and was discharged from bankruptcy on March 31, 1998. (Ex. A.)
37) Respondent's form U4 disclosed Respondent's previous bankruptcy. (Tr. 1-19-05 at 129.)
38) Respondent provided McGovern & Associates with a copy of his form U4. (Tr. 1-19-05 at 131.)
39) Respondent's Biography, which appears on page 5 of the Circular, does not mention his Bankruptcy. (Ex. D.)
40) Carnes testified that he was never advised by McGovern & Associates that he had to disclose the Bankruptcy in his Biography for the Circular. (Tr. 1-19-05 at 135.)
41) As a managing member of Criterion LLC, Respondent implemented the investment strategy for CIF. (Tr. 1-5-05 at 76.)
42) Respondent implemented investment strategy, made trades and did most of the accounting for CIF. (Tr. 1-5-05 at 76.)
43) Respondent was not registered in Connecticut as an Investment Adviser Agent after December 31, 2000. (Tr. 11-19-04 at 373.)
44) Respondent and Carnes consulted with each other and made investment decisions jointly on how CIF should invest. (Tr. 1-5-05 at 77.)
45) Respondent solicited new business for CIF. (Ex. GG at 40.)
46) Respondent solicited Edward Segen ("Segen") of 105 Signal Hill Road, Wilton, Connecticut, to invest in CIF. (Tr. 11-18-04 at 90-92, 203, 217; 11-22-04 at 681; 11-29-04 at 922, 925; 1-11-05 at 70.)
47) Prior to Segen investing in CIF, Respondent had a conversation with Segen and told him that CIF was doing horribly. (Tr. 11-22-04 at 686; 1-5-05 at 101-104.)
48) Prior to Segen investing in CIF, in approximately August 2001, Carnes had a conversation with Segen and told him that CIF was doing horribly. (Tr. 11-22-04 at 686; 1-19-05 at 146-147.)
49) A copy of the Circular was given to Segen in the summer or fall of 2001. (Tr. 11-18-04 at 71.)
50) At the time Segen invested in CIF, he was not aware that Respondent had filed for bankruptcy. (Tr. 11-29-04 at 821.)
51) If Segen had known about Respondent's Bankruptcy prior to investing in CIF, it is information he would have considered to be relevant when deciding whether to invest in CIF. (Tr. 11-29-04 at 820-822.)
52) On page 8 of the Circular, it states in part: "Options. From time to time the Partnership may invest in options. The trading of options is highly speculative and may entail risks that are greater than those present when investing in other Securities." (Ex. D.)
53) On the first page of the Circular, it states in part:

The Partnership invests principally, but not solely, in equity securities that are traded publicly in domestic markets . . . . When deemed appropriate by the General Partner, the Partnership may also invest in preferred stocks, convertible securities, warrants, options, bonds and other fixed income securities, derivatives, private securities, foreign securities and money market instruments. The Partnership also engages in short selling, margin trading, hedging and other investment strategies.

(Ex. D.)

54) On page 4 of the Circular, under the heading "Investment Strategy", it states in part:

The Partnership invests in, holds, sells, trades and otherwise deals in Securities, consisting principally, but not solely, of equity Securities and other equity related instruments that are traded publicly in domestic markets. When deemed appropriate by the General Partner, the Partnership may invest in preferred stocks, convertible Securities, warrants, options, [and] bonds . . . .

Consistent with the General Partner's opportunistic approach, there are no fixed limitations as to specific asset classes invested in by the Partnership. While the Partnership primarily will invest in publicly-traded equity Securities . . . it may invest in and trade all types of Securities and may concentrate investments in particular industries and companies. The Partnership intends to use short positions and other hedging devices to attempt to reduce market risk and, where the General Partner believes appropriate, use leverage in making investments.

The Partnership is not limited with respect to the types of investment strategies it may employ or the markets or instruments in which it may invest. Over time, markets change and the General Partner will seek to capitalize on attractive opportunities wherever they might be. Depending on conditions and trends in Securities markets and the economy generally, the General Partner may pursue other objectives or employ other techniques it considers appropriate and in the best interest of the Partnership.

(Ex. D.)

55) In the "Summary of the Offering" on page 1 of the Circular, it states, in part, next to "Interests Offered": "The minimum investment by a Limited Partner is $500,000, but the General Partner may waive the minimum subscription requirement for any investor . . .". (Ex. D.)
56) On page 18 of the Circular, it states under the heading "The Offering": "Minimum Subscription. The minimum subscription that may be accepted from a Limited Partner is $500,000. The General Partner may waive the minimum subscription requirement for any investor and raise the minimum requirement in the future." (Ex. D.)
57) All of the individuals who invested in CIF invested less than $500,000. (Ex. O.)
58) The Circular does not disclose that all of the limited partners of CIF invested less than $500,000. (Ex. D.)
59) On page 15 of the Circular, under the headings "Suitability Standards" and "Accredited Investor and Net Worth Requirements", it states, in part, that: "Interests will be sold only to accredited investors, each of whom has a net worth in excess of $1,000,000." (Ex. D.)
60) On page 16 of the Circular it states, in part: "Reliance on Subscriber Information. …the General Partner may waive minimum suitability standards not imposed by law." (Ex. D.)
61) CIF had two non-accredited investors. (Ex. 4.)
62) Pursuant to the Circular, the net worth of an accredited investor is in excess of $1 million. (Ex. D at 15.)
63) The Circular did not disclose the fact that CIF had two non-accredited investors. (Ex. D.)
64) CIF filed Form D, Uniform Limited Offering Exemption, with the Securities and Exchange Commission ("SEC") in March of 2001. (Ex. 4.)
65) On page 5 of the Form D that CIF filed with the SEC, it indicates that as of March 7, 2001, four accredited investors had purchased $1,500,000 of CIF securities and two non-accredited investors had purchased $500,000 of CIF securities. (Ex. 4.)
66) On page 5 of the Form D that CIF filed with the SEC, it indicates that the aggregate amount of the offering is $25,000,000, and that as of March 7, 2001, $2,000,000 has been invested in CIF. (Ex. 4.)
67) Prior to investing in CIF, Segen was given a copy of the Form D that CIF filed with the SEC. (Tr. 11-22-04 at 695; 2-3-05 at 144, 145.)
68) In response to Segen's request for the documents, in approximately August 2001, Carnes delivered the Circular and CIF's Regulation D filing with the SEC to Segen at Segen's office. (Ex. D; Ex. 4; Tr. 1-11-05 at 86; 11-22-04 at 601, 603; 2-3-05 at 127, 164.)
69) The Performance Document, Exhibit B, shows a beginning balance for the months of January to November 2001, the gain or loss for each month and the return or loss for each month. (Ex. B.)
70) The Performance Document shows an investment of $4,850,000 in January 2001, $1,250,000 in February 2001 with a total investment of $8,150,000 from January through November 2001. (Ex. B.)
71) The month-to-month totals set forth on the Performance Document are not cumulative. (Ex. B; Tr. 12-7-04 at 1194, 1195, 1200.)
72) The Performance Document indicates that the year-to-date percentage return from January 1, 2001 up to an including part of November 2001 was 5.62%. (Ex. B.)
73) Respondent prepared the Performance Document. (Tr. 1-5-05 at 77.)
74) Respondent faxed Segen the Performance Document on November 20, 2001 in response to a request from Segen. (Tr. 11-22-04 at 611; 1-5-05 at 118-119; 1-19-05 at 141.)
75) Exhibit LL contains assumptions for the Performance Document. (Ex. LL; Tr. 1-5-05 at 112-118; 1-6-05 at 22-23; 1-14-05 at 111.)
76) Segen asked Respondent to provide him with a sample of the type of statement he would receive as a limited partner of CIF. (Tr. 11-18-04 at 60, 64; 11-22-04 at 544; 1-5-05 at 158, 162, 163; 12 17 04 at 1877, 1881, 1891.)
77) Exhibit C (Exhibit 5, Exhibit JJ) was prepared by Respondent to show Segen the type of information he would receive from CIF. (Ex. C, 5, JJ; Tr. 1-5-05 at 158, 163.)
78) Exhibit C (Exhibit 5, Exhibit JJ) is in the form of a statement which discloses a capital contribution of $250,000 on January 1, 2001, an account balance of $228,777 on October 31, 2001, and a net decrease of $21,223 for the account. (Ex. C, 5, JJ; Tr. 11-18-04 at 62.)
79) Respondent did not send Exhibit C (Exhibit 5, Exhibit JJ) to any other limited partner. (Tr. 1-5-05 at 159.)
80) Exhibit C (Exhibit 5, Exhibit JJ) was generated from an accounting program used by CIF that contained preprinted fields on the form. (Tr. 1-5-05 at 163-165.)
81) When generating Exhibit C (Exhibit 5, Exhibit JJ), Respondent imputed the $250,000 capital contribution information into the program and the program calculated the account status based on information contained in a database that had not been updated. (Tr. 1-5-05 at 170-172, 176.)
82) Respondent testified that prior to faxing Exhibit C (Exhibit 5, Exhibit JJ) to Segen, he blacked-out the name of the CIF limited partner that appeared by default on the form he generated from the accounting program used by Respondent. (Tr. 1-5-05 at 163-167, 179.)
83) Respondent faxed Exhibit C (Exhibit 5, Exhibit JJ) to Segen on November 26, 2001. (Tr. 11-18-04 at 60, 61.)
84) Respondent told Segen that Segen could invest less than $500,000 in CIF. (Tr. 11-29-04 at 797 798.)
85) Segen signed the Circular on November 29, 2001. (Ex. D; Tr. 2-3-05 at 127, 165.)
86) Segen testified that he may have received additional documents from CIF on November 20, 2001 in addition to page 1 of Exhibit B. (Tr. 11-22-04 at 685-686.)
87) Segen testified that he may have received additional documents from CIF in December 2001 and that he may have thrown the documents away. (Tr. 11-22-04 at 649; 12-13-04 at 1537.)
88) Segen testified that in addition to the exhibits in this proceeding, he may have received other documents from CIF by fax prior to investing in CIF. (Tr. 11-22-04 at 542.)
89) Segen testified that he scanned and read sections of the Circular prior to investing in CIF. (Tr. 11 22-04 at 706.)
90) Segen knew, prior to investing in CIF, that $25,000,000 had not been invested in CIF. (Tr. 11 22 04 at 613, 614; 11-29-04 at 757.)
91) Section 10.4(b) on page 11 of the Circular provides that the General Partner would receive a special profit allocation with respect to each Limited Partner. (Ex. D.)
92) Prior to investing in CIF, Segen negotiated a reduction in the special profit the General Partner of CIF was entitled to receive pursuant to Section 10.4(b) of the Circular from 20% to 10%. (Exhibit D, Tr. 11-22-04 at 706-707.)
93) Segen testified that he read and was aware of the provision in the Circular, prior to investing in CIF, that gave the general partner the ability to waive the $500,000 minimum subscription requirement for an investor. (Tr. 11-22-04 at 710-711; 11-29-04 at 786.)
94) When Segen invested in CIF, he wanted his funds "invested right away" to catch a potential year-end rally. (Tr. 11-18-04 at 92, 231; 11-29-04 at 904, 905, 906, 934, 936; 1-6-05 at 31.)
95) Around the time Segen invested in CIF, Respondent told Segen that they would invest his funds "as soon as they can". (Tr. 11-29-04 at 932, 937, 939-942.)
96) Prior to December 10, 2001, Respondent told Segen that his funds would be invested in December 2001. (Tr. 11-29-04 at 933.)
97) Segen invested $152,724.01 in CIF on December 10, 2001. (Ex. O; Tr. 11-18-04 at 89-92; 11 29 04 at 946.)
98) Segen was a limited partner of CIF. (Ex. O.)
99) Segen was the last limited partner to invest in CIF. (Ex. O.)
100) CIF invested all of Segen's funds in options. (Ex. R.)
101) Subsequent to December 10, 2001, Respondent told Segen that his funds could not be invested until January 2002. (Tr. 11-18-04 at 92-93; 11-29-04 at 903-904, 908, 934, 944, 946, 947.)
102) Segen's $152,724.01 investment in CIF was worth $10,947 on January 1, 2002. (Ex. O.)
103) In approximately January 2002, Respondent told Segen that his investment had decreased approximately 10% in value, when it had decreased over 90%. (Ex. O; Tr. 11-22-04 at 680-681; 11-29-04 at 907-910.)
104) By letter dated May 29, 2002, Segen filed a complaint with the Department. (Ex. F.)
105) In his May 29, 2002 letter to the Department, Segen complained that he was told by Respondent on approximately December 20, 2001, that his funds would not be invested until January 2, 2002, when his funds were invested prior to such date; CIF had invested in options and not long-term securities; and the Performance Document given to him by Respondent prior to investing was false. (Ex. F.)
106) Segen did not (a) refer to Exhibit C (Exhibit 5, Exhibit JJ) in his May 29, 2002, letter of complaint to the Department, (b) bring Exhibit C (Exhibit 5, Exhibit JJ) with him to his June 25, 2002, deposition at the Department, or (c) indicate that he was misled by Exhibit C (Exhibit 5, Exhibit JJ) until he testified at the hearing. (Tr. 12-13-04 at 1393; 12-17-04 at 1873-1875.)
107) Pursuant to the terms of the Offering Circular, the General Partner was required to transmit to each Limited Partner an annual report containing audited financial statements of the Partnership, including a statement of assets and liabilities, a statement of operations and a statement of changes in net assets. (Ex. D.)
108) Pursuant to the terms of the Offering Circular, the General Partner was required to furnish, at least quarterly, to the Limited Partners a report on the status of the Partnership, including the performance of the Partnership relative to industry benchmarks. (Ex. D; Tr. 11-30-04 at 1000.)
109) Respondent testified that except for the members of Criterion LLC, CIF did not send quarterly reports or an annual report or statement to the limited partners of CIF as required by the Offering Circular. (Tr. 1-5-05 at 132, 136, 137.)
110) At approximately the end of January 2002, Segen asked Respondent for a statement concerning how his investment in CIF was doing. (Tr. 11-18-04 at 104-106.)
111) After investing in CIF, Segen did not receive any reports from CIF. (Tr. 11-29-04 at 926, 949.)
112) During a telephone conversation in approximately April 2003, Segen threatened to assault Respondent. (Tr. 11-18-04 at 184, 190, 192; 1-11-05 at 109.)
113) Respondent informed the police that Segen had threatened him. (Ex. NN; Tr. 1-11-05 at 111; 1 14 05 at 96, 97.)
114) Philip Middlebrook ("Middlebrook") of 244 Glen Brook Road, Stamford, Connecticut, was a non-accredited investor who invested approximately $155,000 in CIF. (Tr. 2-3-05 at 246, 248.)
115) Middlebrook testified that Respondent informed him of the Bankruptcy prior to Middlebrook investing in CIF. (Tr. 2-3-05 at 247.)
116) John B. O'Connell, an organizer of Criterion LLC and a limited partner of CIF who invested approximately $205,000 in CIF, stated in an Affidavit dated February 24, 2004, that he was aware of Respondent's Bankruptcy prior to his investing in CIF. (Ex. 28.)
117) Respondent received funds in the form of a draw from Criterion LLC during the months of January through October 2001 for his duties as a managing member of Criterion LLC. (Ex. W; Tr. 11 30 04 at 1091, 1093, 1095; 12-15-04 at 1664-1679.)
118) On page 21 of the Circular under the headings "Compensation of and Benefits to the General Partner" and "Management Fees", it states, in part: "For the General Partner's services in evaluating, selecting and, where appropriate, negotiating investments for the Partnership, and otherwise managing and administering the Partnership's business and affairs, the General Partner is paid by the Partnership a quarterly Management Fee with respect to each Limited Partner equal to .25% of the value of that Limited Partner's Capital Account." (Ex. D.)
119) Pursuant to Section 11 on page 14 of the Circular, Criterion LLC was entitled to a management fee of .25 percent of the value of the Limited Partners' capital accounts based upon the value of the assets and liabilities of CIF determined pursuant to Section 10 of the Circular, on the first day of each fiscal quarter. (Ex. D; Tr. 12-15-04 at 1667-1672.)
120) As a managing member of Criterion LLC, Respondent was entitled to take management fees from CIF. (Ex. D.)
121) As a managing member of Criterion LLC, Respondent chose not to take any management fees from CIF. (Tr. 1-24-05 at 23.)
122) Between January 1, 2001 and December 31, 2001, 77.82% of CIF's trades were in stock and 22.18% of CIF's trades were in options. (Ex. R.)
123) In November and December 2001, 100% of CIF's trades were in options. (Ex. R.)
124) CIF traded in options after September 2001 because options provided CIF with greater leverage. (Ex. GG at 46.)
125) During 2001, CIF made 684 stock trades and 195 option trades. (Ex. R; Tr. 12-29-04 at 2207.)

CONCLUSIONS OF LAW

I. Violation of Section 36b-4(a)(2) of the Act - Omission of Material Facts
in the Offer and Sale of a Security

1) Section 36b-4(a)(2) of the Act states that:

No person shall, in connection with the offer, sale or purchase of any security, directly or indirectly . . . (2) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.

The record establishes that from at least January 2001 to January 2002, Respondent made offers and sales of securities from Connecticut, in the form of limited partnership interests in CIF, for the account of Connecticut investors.

2) In the Notice it is alleged that Respondent's conduct, in connection with the offer, sale or purchase of a security, was in violation of Section 36b-4(a)(2) of the Act because he failed to disclose his Bankruptcy in the Circular, which constitutes omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
The record establishes that Respondent failed to disclose his Bankruptcy in the Circular. Respondent's failure to disclose his Bankruptcy in the Circular constitutes, in connection with the offer, sale or purchase of a security to Connecticut investors, omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.
3) In the Notice it is alleged that Respondent conduct constitutes, in connection with the offer, sale or purchase of a security, omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading in violation of Section 36b-4(a)(2) of the Act because the Circular stated that: (a) the minimum investment in CIF was $500,000, when all investors in CIF invested less than $500,000; (b) the objective of CIF was to achieve superior long-term capital appreciation with moderate risk, primarily in equity securities and related instruments, and that CIF would invest in options from time to time, when the average equity security was held by CIF for 19 days and the majority of transactions effected by CIF after July 1, 2001, were in options; (c) each investor must have a net worth in excess of $1,000,000 and must be an accredited investor, when at least two Connecticut investors did not have such a net worth and were not accredited investors; and (d) Criterion LLC would transmit to each limited partner an annual report containing the audited financial statements of the partnership and a quarterly report on the status of the partnership, when in fact no such reports were ever produced or transmitted to the Connecticut investors.
a) The Circular states that the minimum investment in CIF was $500,000. The record establishes that all of the limited partners of CIF invested less than $500,000. Respondent's failure to inform Connecticut investors that every one of CIF's limited partners invested less than $500,000 constitutes, in connection with the offer, sale or purchase of a security, an omission to state material facts necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.
b) The Circular states that CIF invests principally, but not solely, in equity securities and, when deemed appropriate by the General Partner, CIF may also invest in other types of securities including options. In addition, the Circular states that depending on conditions and trends, the General Partner may pursue other objectives or employ other techniques it considers appropriate and in the best interest of CIF. The record establishes that between January 1, 2001 and December 31, 2001, 77.82% of CIF's trades were in stock and 22.18% were in options. During 2001, CIF made 684 stock trades and 195 trades in options. Since 77.82% of CIF's trades were in stock and the Circular provided that, depending on conditions and trends, the General Partner may pursue other objectives or employ other techniques it considers appropriate and in the best interest of CIF, the record fails to support a finding that Respondent, in connection with the offer, sale or purchase of a security, directly or indirectly omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading when the majority of transactions effected by CIF after August 2001 were in options.
c) The Circular states that each investor must have a net worth in excess of $1,000,000 and must be an accredited investor. The record establishes that two Connecticut investors did not have a net worth in excess of $1,000,000 and were not accredited investors. Respondent's failure to inform the Connecticut investors in the Circular that CIF had two limited partners who did not have a net worth in excess of $1,000,000 and who were not accredited investors constitutes, in connection with the offer, sale or purchase of a security, an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.
d) The Circular states that Criterion LLC would transmit to each limited partner an annual report containing the audited financial statements of the partnership and a quarterly report on the status of the partnership. The record establishes that Criterion LLC failed to comply with such requirement. Respondent's failure to inform Connecticut investors in the Circular that Criterion LLC did not transmit to each limited partner an annual report containing the audited financial statements of the partnership and a quarterly report on the status of the partnership constitutes, in connection with the offer, sale or purchase of a security, an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.

II. Violation of Section 36b-4(a)(2) of the Act - Making Untrue Statements of Material Facts

4) In the Notice it is alleged that Respondent, in connection with the offer, sale or purchase of a security, made untrue statements of material facts in violation of Section 36b-4(a)(2) of the Act when he: (a) presented the Account Document to a Connecticut investor; (b) presented the Performance Document to a Connecticut investor on November 20, 2001; (c) assured a Connecticut investor, who on or about December 10, 2001, invested in CIF, that the investor's funds would be held by CIF and would not be invested by CIF until at least January 1, 2002, when in fact the investor's funds were invested on December 10, 2001; and (d) informed a Connecticut investor in January 2002 that his investment had decreased approximately 10% in value when his $152,724.01 investment was worth only $10,974 on December 31, 2001.
a) The record fails to support a finding that the conduct of Respondent, in connection with the offer, sale or purchase of a security, constitutes the making of untrue statements of material facts in violation of Section 36b-4(a)(2) of the Act when Respondent presented the Account Document to a Connecticut investor.
b) The record fails to support a finding that the conduct of Respondent, in connection with the offer, sale or purchase of a security, constitutes the making of untrue statements of material facts in violation of Section 36b-4(a)(2) of the Act when he presented the Performance Document to a Connecticut investor.
c) The record establishes that the investor, who invested in CIF on or about December 10, 2001, was assured by Respondent that his funds would be held by CIF and would not be invested by CIF until at least January 1, 2002, when the investor's funds were invested on December 10, 2001. Respondent's conduct, when he informed a Connecticut investor in December 2001 that the investor's funds would be held by CIF and would not be invested by CIF until at least January 1, 2002, when the funds were invested on December 10, 2001, constitutes, in connection with the offer, sale or purchase of a security, the making of an untrue statement of a material fact in violation of Section 36b-4(a)(2) of the Act.
d) The record establishes that Respondent informed a Connecticut investor in January 2002 that his investment had decreased approximately 10% in value when his $152,724.01 investment was worth only $10,974 on December 31, 2001. Respondent's conduct, when he informed a Connecticut investor in January 2002 that his investment had decreased approximately 10% in value when his $152,724.01 investment was worth only $10,974 on December 31, 2001, constitutes, in connection with the offer, sale or purchase of a security, the making of an untrue statement of a material fact in violation of Section 36b-4(a)(2) of the Act.

III. Violation of Section 36b-4(a)(3) of the Act -
Engaging in a Fraudulent Practice or Course of Business

Section 36b-4(a)(3) of the Act states:

No person shall, in connection with the offer, sale or purchase of any security, directly or indirectly . . . (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

5) In the Notice it is alleged that, in connection with the offer, sale or purchase of a security, the conduct of Respondent operated as a fraud or deceit upon Connecticut investors in violation of Section 36b-4(a)(3) of the Act when he: (a) presented the Account Document to a Connecticut investor; (b) presented the Performance Document to a Connecticut investor on November 20, 2001; (c) assured a Connecticut investor, who on or about December 10, 2001, invested in CIF, that the investor's funds would be held by CIF and would not be invested by CIF until at least January 1, 2002, when in fact the investor's funds were invested on December 10, 2001; (d) informed a Connecticut investor in January 2002, that his investment had decreased approximately 10% in value when his $152,724.01 investment was worth only $10,974 on December 31, 2001; (e) presented a copy of the Circular to potential investors which states that (1) the minimum investment in CIF was $500,000, when all investors in CIF invested less than $500,000; (2) the objective of CIF was to achieve superior long-term capital appreciation with moderate risk, primarily in equity securities and related instruments, and that CIF would invest in options from time to time, when the average equity security was held by CIF for 19 days and the majority of transactions effected by CIF after July 1, 2001, were in options; (3) each investor must have a net worth in excess of $1,000,000 and must be an accredited investor, when at least two Connecticut investors did not have such a net worth and were not accredited investors; and (4) Criterion LLC would transmit to each limited partner an annual report and a quarterly report, when in fact no such reports were ever produced or transmitted to the Connecticut investors.
a) The record fails to support a finding that Respondent's conduct, in connection with the offer, sale or purchase of a security, operated as a fraud or deceit upon the Connecticut investor, in violation of Section 36b-4(a)(3) of the Act, when Respondent presented the Connecticut investor with the Account Document.
b) The record fails to support a finding that Respondent's conduct, in connection with the offer, sale or purchase of a security, operated as a fraud or deceit upon the Connecticut investor, in violation of Section 36b-4(a)(3) of the Act, when Respondent presented the Connecticut investor with the Performance Document.
c) The record establishes that the Connecticut investor who invested in CIF on or about December 10, 2001, was assured by Respondent in December 2001 that his funds would be held by CIF and would not be invested by CIF until at least January 1, 2002, when in fact, the investor's funds were invested on December 10, 2001. Respondent's conduct, in connection with the offer, sale or purchase of a security, operated as a fraud or deceit upon the Connecticut investor, in violation of Section 36b-4(a)(3) of the Act, when he assured a Connecticut investor that the investor's funds would be held by CIF and would not be invested by CIF until at least January 1, 2002, and the investor's funds were invested by CIF on December 10, 2001.
d) The record establishes that Respondent informed a Connecticut investor in January 2002 that his investment had decreased approximately 10% in value when his $152,724.01 investment was worth only $10,974 on December 31, 2001. Therefore, there is sufficient evidence to find that Respondent's conduct, in connection with the offer, sale or purchase of a security, operated as a fraud or deceit upon the Connecticut investor, in violation of Section 36b-4(a)(3) of the Act, when he informed a Connecticut investor in January 2002 that his investment had decreased approximately 10% in value and his $152,724.01 investment was worth only $10,974 on December 31, 2001.
e) The record establishes that Respondent presented a copy of the Circular to potential investors which stated that: (1) the minimum investment in CIF was $500,000, when all investors in CIF invested less than $500,000; (2) the objective of CIF was to achieve superior long-term capital appreciation with moderate risk, primarily in equity securities and related instruments, and that CIF would invest in options from time to time, when the average equity security was held by CIF for 19 days and the majority of transactions effected by CIF after July 1, 2001, were in options; (3) each investor must have a net worth in excess of $1,000,000 and must be an accredited investor, when at least two Connecticut investors did not have such a net worth and were not accredited investors; and (4) Criterion LLC would transmit to each limited partner an annual report and a quarterly report, when in fact no such reports were ever produced or transmitted to the Connecticut investors.
There is sufficient evidence to find that Respondent's conduct, in connection with the offer, sale or purchase of a security, operated as a fraud or deceit upon the Connecticut investor, in violation of Section 36b-4(a)(3) of the Act, when he presented a copy of the Circular to potential investors which stated that: the minimum investment in CIF was $500,000, when all investors in CIF invested less than $500,000; each investor must have a net worth in excess of $1,000,000 and must be an accredited investor, when at least two Connecticut investors did not have such a net worth and were not accredited investors; and Criterion LLC would transmit to each limited partner an annual report and a quarterly report, when no such reports were ever produced or transmitted to the Connecticut investors.
f) The record fails to support a finding that Respondent's conduct, in connection with the offer, sale or purchase of a security, operated as a fraud or deceit upon the Connecticut investor, in violation of Section 36b-4(a)(3) of the Act, when he presented a copy of the Circular to potential investors which stated that the objective of CIF was to achieve superior long-term capital appreciation with moderate risk, primarily in equity securities and related instruments, and that CIF would invest in options from time to time, when the average equity security was held by CIF for 19 days and the majority of transactions effected by CIF after July 1, 2001, were in options.

IV. Violation of Section 36b-6(c) of the Act -
Unregistered Investment Adviser Agent Activity

Section 36b-6(c) of the Act states, in part, that:

No individual shall transact business as an investment adviser agent, within or from this state, unless such individual is registered as an investment adviser agent of the investment adviser for whom such individual acts in transacting such business.

Section 36b-3(11)(A) of the Act states that:

"Investment adviser agent" includes (i) any individual, including an officer, partner or director of an investment adviser, or an individual occupying a similar status or performing similar functions, employed, appointed or authorized by or associated with an investment adviser to solicit business from any person for such investment adviser, within or from this state, and who receives compensation or other remuneration, directly or indirectly, for such solicitation; or (ii) any partner, officer, or director of an investment adviser, or an individual occupying a similar status or performing similar functions, or other individual employed, appointed, or authorized by or associated with an investment adviser, who makes any recommendation or otherwise renders advice regarding securities to clients and who receives compensation or other remuneration, directly or indirectly, for such advisory services.

Section 36b-3(10) of the Act defines "investment adviser" to mean, in pertinent part:

[A]ny person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities. "Investment adviser" does not include (A) an investment adviser agent . . . .

6) In the Notice it is alleged that Respondent transacted business as an investment adviser agent within Connecticut absent registration in violation of Section 36b-6(c) of the Act.
a) The record establishes that Criterion LLC was an "investment adviser" within the meaning of Section 36b 3(10) of the Act since it engaged in the business of advising others as to the value of securities or as to the advisability of investing in, purchasing or selling securities, for compensation.
b) The record establishes that Respondent acted as an "investment adviser agent" in Connecticut within the meaning of 36b 3(11)(A) of the Act since he was a partner and officer of Criterion LLC who made recommendations or otherwise rendered advice regarding securities for a client on behalf of Criterion LLC and received compensation or remuneration for such services.
c) Respondent's failure to register as an investment adviser agent constitutes a violation of Section 36b 6(c) of the Act.

V. Authority to Issue Order to Cease and Desist and Impose Fine

7) Section 36b-27(a) of the Act, as amended, states, in part:

Whenever it appears to the commissioner after an investigation that any person or persons have violated, are violating or are about to violate any of the provisions of sections 36b-2 to 36b-33, inclusive, or any regulation, rule or order adopted or issued under said sections, or that the further sale or offer to sell securities would constitute a violation of said sections or any such regulation, rule or order, or that any person or persons have engaged in a dishonest or unethical practice in the securities or commodities business within the meaning of sections 36b-31-15a to 36b-31-15d, inclusive, of the regulations of Connecticut state agencies, the commissioner may in the commissioner's discretion order the person or persons or any other person that is, was or would be a cause of the violation of such sections or any such regulation, rule or order, due to an act or omission such other person knew or should have known would contribute to such violation, to cease and desist from the violations or the causing of the violations of the provisions of said sections or of the regulations, rules or orders thereunder, or from the further sale or offer to sell securities constituting or which would constitute a violation of the provisions of said sections or of the regulations, rules or orders thereunder, or from further engaging in such dishonest or unethical practice.

Section 36b-27(a) of the Act, as amended, authorizes the Commissioner to order a person to cease and desist from violating the Act.

8) Section 36b-27(d)(2) of the Act (prior to being amended by Public Act 03-259) states, in pertinent part:

After the hearing if the commissioner finds that the person or persons have violated any of the provisions of sections 36b-2 to 36b-33, inclusive, or any regulation, rule or order adopted or issued under said sections, the commissioner may, in the commissioner's discretion and in addition to any other remedy authorized by said sections, order that a fine not exceeding ten thousand dollars per violation be imposed upon such person or persons.

Section 36b-27(d)(2) of the Act (prior to being amended by Public Act 03-259) authorizes the Commissioner to order the imposition of a fine for each violation of the Act in an amount not exceeding Ten Thousand Dollars ($10,000) per violation in addition to any other remedy authorized by the Act.

9) Section 36b-31(b) of the Act states, in pertinent part:

No regulation, form or order may be made, amended or rescinded unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-33, inclusive.

a) The record establishes at least four separate violations of Section 36b-4(a)(2) of the Act, one violation of Section 36b-4(a)(3) of the Act and one violation of Section 36b-6(c) of the Act.
b) The record supports the issuance of an order to cease and desist prohibiting Respondent from violating the Act.
c) The record supports the imposition of a fine imposed on Respondent.
d) The record supports a finding that this action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of Sections 36b-2 to 36b-33, inclusive, of the Act

ORDER

Having read the record, I HEREBY ORDER:

1) Pursuant to Section 36b-27(a) of the Act, as amended, Eddie Papic to CEASE AND DESIST from violating Sections 36b-4(a)(2), 36b-4(a)(3) and 36b-6(c) of the Act.
2) Pursuant to Section 36b-27(d)(2) of the Act, Eddie Papic to pay a FINE in the amount of Forty-Thousand Dollars ($40,000). The civil penalty shall be paid by certified check, bank check or money order payable to "Treasurer, State of Connecticut", not less than ninety (90) days following the issuance of this order.

________/s/_________
John P. Burke
Banking Commissioner

Dated at Hartford, Connecticut
this 8th day of August 2005.

This order was sent by certified mail,
return receipt requested, to
Respondent's attorney on
August 8, 2005.

Raymond Levites, Esq. 
Pavelic & Levites, P.C.
1251 Avenue of the Americas, Suite 920
New York, NY 10020

Certified Mail No. 7003 0500 0002 2517 6529


Administrative Orders and Settlements