DOB: Black Diamond Research Consent Order

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IN THE MATTER OF:

BLACK DIAMOND RESEARCH, LLC

    (CRD Number 130836)

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CONSENT ORDER

NO. CO-05-7235-S

PRELIMINARY STATEMENT

WHEREAS the Banking Commissioner is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the "Act") and Sections 36b-31-2 et seq. of the Regulations of Connecticut State Agencies (the "Regulations") promulgated under the Act;

WHEREAS the Commissioner, through the Securities and Business Investments Division of the Department of Banking, has conducted an investigation pursuant to Sections 36b-8 and 36b-26 of the Act into the activities of Black Diamond Research, LLC (“Black Diamond”), an applicant for investment adviser registration with its principal office at 51 East 42nd Street, Suite 416, New York, New York, and of Black Diamond’s members, agents, employees and representatives to determine whether they, or any of them, have violated or are about to violate any provision of the Act or any regulation or order under the Act;

WHEREAS the Commissioner, as a result of such investigation, alleges that, from at least 2003, Black Diamond transacted business as an investment adviser for approximately eleven Connecticut clients in violation of Section 36b-6(c) of the Act and continued to conduct unregistered activity after filing its registration application with the Commissioner;

WHEREAS Black Diamond has represented to the Commissioner that 1) its business focused on the generation of research analyses concerning securities; 2) its clients were “institutional” in nature; 3) in providing investment advisory services to Connecticut clients from 2003 forward, it had believed that the institutional nature of its business excluded it from the Connecticut definition of “investment adviser”; and 4) no written contracts were executed with the Connecticut clients at the inception of the investment advisory relationship;

WHEREAS effective July 1, 1997, P.A. 97-220 had amended Section 36b-3 of the Act to remove the exclusion from the definition of "investment adviser" formerly contained in Section 36b-3(6)(G) of the Act for investment advisers having only institutional clients in this state;

WHEREAS the Commissioner believes that the department's allegations would support the initiation of an administrative proceeding to deny or condition Black Diamond’s investment adviser registration under Sections 36b- 15(a)(2)(B) and 36b-15(a)(2)(H) of the Act;

WHEREAS Section 36b-15(a) of the Act provides, in part, that:  “The commissioner may, by order, deny . . . any registration or, by order, restrict or impose conditions on the securities or investment advisory activities that an applicant or registrant may perform in this state if the commissioner finds that (1) the order is in the public interest, and (2) the applicant or registrant or, in the case of a broker-dealer or investment adviser, any partner, officer, or director, any person occupying a similar status or performing similar functions, or any person directly or indirectly controlling the broker-dealer or investment adviser . . . (B) has wilfully violated or wilfully failed to comply with any provision of sections 36b-2 to 36b-33, inclusive, or a predecessor statute or any regulation or order under said sections or a predecessor statute; [or] (H) has engaged in fraudulent, dishonest or unethical practices in the securities or commodities business, including abusive sales practices in the business dealings of such applicant, registrant or person with current or prospective customers or clients . . . . "

WHEREAS Section 36b-6(c) of the Act provides, in part, that:  “(1)  No person shall transact business in this state as an investment adviser unless registered as such by the commissioner as provided in sections 36b-2 to 36b-33, inclusive, or exempted pursuant to subsection (e) of this section”;

WHEREAS Section 36b-5 of the Act provides, in part, that:  “(1)  It is unlawful for any investment adviser that is . . . required to be registered under sections 36b-2 to 36b-33, inclusive, to have, enter into, extend or renew any investment advisory contract, whether written or oral, unless it is signed by the client or clients and discloses in writing:  (A) That the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client; (B) that an assignment of the contract may not be made by the investment adviser without the consent of the other party to the contract; (C) that the investment adviser, if a partnership, shall notify the other party to the contract of any change in the membership of the partnership within a reasonable time after the change; (D) the fee arrangement between the investment adviser and the client or clients; and (E) the services which the investment adviser will render”;

WHEREAS Section 36b-31-15c(a) of the Regulations states, in part, that:  “In implementing section 36b-15(a)(2)(H) of the general statutes, the following shall be deemed ‘dishonest or unethical practices in the securities . . . business’ by investment advisers without limiting those terms to the following practices . . . (15) Entering into, extending or renewing any investment advisory contract unless such contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount and the manner of calculating the amount of the prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the investment adviser and that the investment adviser shall not make an assignment of the contract without the consent of the other party to the contract . . . . ’

WHEREAS an administrative proceeding initiated under Section 36b-15 of the Act would constitute a "contested case" within the meaning of Section 4-166(2) of the Connecticut General Statutes;

WHEREAS Section 4-177(c) of Chapter 54 of the Connecticut General Statutes provides that"[u]nless precluded by law, a contested case may be resolved by stipulation, agreed settlement, or consent order or by the default of a party";

WHEREAS Section 36b-31(a) of the Act provides, in part, that: "The Commissioner may from time to time make, amend and rescind such ... orders as are necessary to carry out the provisions of Sections 36b-2 to 36b-33, inclusive [of the Connecticut Uniform Securities Act]";

CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, Black Diamond, through its execution of this Consent Order, voluntarily waives the following rights:

1. To be afforded written notice and opportunity for a hearing within the meaning of Sections 36b-15(f), 4-177(a) and 4-177(b) of the Connecticut General Statutes;
2. To present evidence and argument and to otherwise avail itself of Section 4-177c(a) of the Connecticut General Statutes;
3. To present its position in a hearing in which it is represented by counsel;
4. To have a written record of the hearing made and a written decision issued by a hearing officer; and
5. To seek judicial review of, or otherwise challenge or contest, the matters described herein, including the validity of this Consent Order;

CONSENT TO ENTRY OF FINDINGS

WHEREAS Black Diamond, through its execution of this Consent Order, accepts and consents to the entry of the following Findings by the Commissioner:

1. That the entry of this Consent Order is appropriate, in the public interest and consistent with the purposes fairly intended by the policy and provisions of the Act;
2. That from at least 2003, Black Diamond transacted business as an investment adviser in violation of Section 36b-6(c) of the Act;
3. That Black Diamond, an investment adviser required to be registered under the Act, violated Section 36b-5(1) of the Act by entering into, extending or renewing investment advisory contracts for Connecticut clients without reducing such contracts to writing and including in such contracts the disclosures required by Section 36b-5(1) of the Act;
4. That Black Diamond’s failure to procure a written investment advisory contract from its Connecticut clients at the inception of the investment advisory relationship constituted a dishonest or unethical practice in the securities business within the meaning of Section 36b-15(a)(2)(H) of the Act and Section 36b-31-15c(a)(15) of the Regulations; and
5. That the department's allegations would support the initiation of an administrative proceeding to deny or condition Black Diamond’s investment adviser registration under Sections 36b-15(a)(2)(B) and 36b-15(a)(2)(H) of the Act;
 
CONSENT TO ENTRY OF SANCTIONS AND REMEDIAL MEASURES

WHEREAS, Black Diamond, through its execution of this Consent Order, consents to the Commissioner issuing an order imposing on it the following sanctions and remedial measures:

1. Black Diamond shall implement revised supervisory and compliance procedures designed to improve regulatory compliance, which procedures shall, at a minimum, provide for enhanced monitoring of state investment adviser licensing requirements;
2. For a two-year period, commencing on the date this Consent Order is entered by the Commissioner, Black Diamond shall submit to the Division Director a written report each calendar quarter 1) describing any securities-related complaints, actions or proceedings (including arbitrations) (such complaints, actions or proceedings referred to collectively as "Complaints") involving entities and individuals located in Connecticut and initiated against Black Diamond or any of Black Diamond’s members, agents, employees or representatives for the quarter; 2) providing information on the disposition of any such Complaints or on any Complaints reflected in an earlier report filed pursuant to this paragraph; and 3) attaching copies of such Complaints and any dispositional documents.  If no securities-related Complaints exist for the quarter, the report shall so indicate. The first such report shall be due no later than ten business days following the close of the quarter ending March 31, 2006, and the final report shall be due no later than ten business days following the close of the quarter ending March 31, 2008;
3. No later than the date this Consent Order is entered by the Commissioner, Black Diamond shall remit to the department via certified bank check payable to “Treasurer, State of Connecticut” the sum of ten thousand nine hundred dollars ($10,900), ten thousand dollars ($10,000) of which shall constitute an an administrative fine, four hundred dollars ($400) of which shall represent past due registration fees and five hundred dollars ($500) of which shall constitute reimbursement for division investigative costs;

ORDER

THE COMMISSIONER HEREBY ORDERS THAT:

1. The Findings and Sanctions set forth above be and are hereby entered;
2. Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against Black Diamond, its members, agents, employees or representatives based upon a violation of this Consent Order or the matters underlying its entry if the Commissioner determines that compliance is not being observed with the terms hereof or if any representation made by Black Diamond and reflected herein is subsequently determined to be untrue;
3. Contemporaneously with the entry of this Consent Order by the Commissioner, the name "Black Diamond Research, LLC” shall be entered on the register of investment advisers in accordance with Section 36b-8 of the Act; and
4. This Consent Order shall become final when issued.
 
 

               ________/s/_________
 John P. Burke
            Banking Commissioner

So ordered at Hartford, Connecticut                 
this 17th day of January, 2006.                         
 

CONSENT TO ENTRY OF ORDER

I, Patrick Gallagher, state on behalf of Black Diamond Research, LLC, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Black Diamond Research, LLC; that Black Diamond Research, LLC agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Black Diamond Research, LLC voluntarily consents to the entry of this Consent Order expressly waiving any rights it may have to a hearing on the matters described herein.

                                                                       

      Black Diamond Resesarch, LLC

By
       ________/s/_______________
      Patrick Gallagher
      Managing Director


On this 10th day of Jan. 2006, personally appeared Patrick Gallagher, signer of the foregoing Consent Order, who, being duly sworn, did acknowledge to me that he was authorized to execute the same on behalf of Black Diamond Research, a limited liability company, and acknowledged the same to be his free act and deed, before me.


_______________/s/______________
Notary Public
My Commission Expires:  04-29-06


 

 

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