DOB: Royal Alliance Consent Order

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IN THE MATTER OF:

ROYAL ALLIANCE ASSOCIATES, INC.
   
(CRD Number 23131)

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   CONSENT ORDER

   File No. CO-2007-7033-S

PRELIMINARY STATEMENT

WHEREAS, the Banking Commissioner (the “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 promulgated under the Act (the “Regulations”);
 
WHEREAS, Royal Alliance Associates, Inc. (“Royal Alliance”) is a broker-dealer registered in Connecticut under the Act since July 24, 1989, and has its principal office located at 733 Third Avenue, New York, New York;
 
WHEREAS, the Commissioner, through the Securities and Business Investments Division (the “Division”) of the Department of Banking, conducted an investigation pursuant to Section 36b-26(a) of the Act into the activities of Royal Alliance to determine whether Royal Alliance had violated, was violating or was about to violate any provision of the Act or the Regulations thereunder (the “Investigation”);
 
WHEREAS, as a result of the Investigation, the Commissioner ascertained that from 1989 to 2004, Kevin O. Kelley (CRD number 1183995) was registered with Royal Alliance as an agent and manager at various offices of the firm in Stamford, Connecticut (collectively, the “Stamford Offices”), and that Kelley also conducted business under the d/b/a “Acorn Research and Management, Inc.”;
 
WHEREAS the Stamford Offices, through Kelley and other agents, (1) recommended and sold Coyote Network Systems, Inc. (“Coyote”) stock to a small number of clients serviced by the Stamford Offices; (2) such sales were incorrectly marked “unsolicited”; (3) Royal Alliance failed to review the due diligence conducted by Kelley and his associates prior to their recommending Coyote securities to their clients; (4) Royal Alliance failed to determine if the sales of Coyote securities were suitable since many of the Coyote investors were elderly; and (5)Royal Alliance failed to determine whether there were conflicts of interest between Coyote and agents of the Stamford Offices, including Kelley;
 
WHEREAS, the Commissioner also ascertained as result of the Investigation that, in performing audits of the Stamford Offices, Royal Alliance failed to discover that 1) Kelley concealed the fact that he had been preparing fraudulent statements that improperly inflated the value of client holdings and had been forwarding those statements to his clients; 2) Kelley, unbeknownst to Royal Alliance and his clients, had a direct or indirect interest in various securities sold to those clients, which securities included, but were not limited to, First Ventures Leasing, e-tel, M-Power, Ausam Biotechnologies, Swift Energy and HEP; and 3) Kelley’s support staff maintained in the Stamford Offices the check books for Acorn Research and Management, Inc., an account into which client funds were deposited and misappropriated by Kelley for his personal use;
 
WHEREAS, as a result of the Investigation, the Commissioner also ascertained that, although the Division recommended to Royal Alliance that one or more agents under Kelley’s supervision should be subject to heightened supervision, Royal Alliance failed to implement such heightened oversight;
 
WHEREAS, after receiving several customer inquiries, Royal Alliance terminated Kelley’s association with the firm on April 1, 2004;
 
WHEREAS, the Commissioner alleges that, in contravention of Section 36b-31-6f of the Regulations, Royal Alliance failed to adequately enforce and maintain a system for supervising the activities of its agents, including Kelley, and its Connecticut office operations reasonably designed to achieve compliance with applicable securities laws and regulations;
 
WHEREAS, if proven, Royal Alliance’s alleged violation of Section 36b-31-6f of the Regulations would constitute  a basis for issuing an order suspending or revoking Royal Alliance’s registration as a broker-dealer in Connecticut pursuant to Section 36b-15(a) of the Act, as well as a basis for imposing a fine pursuant to the Section 36b-27(d) of the Act;
 
WHEREAS, an administrative proceeding initiated under Sections 36b-15 or 36b-27 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 the Connecticut General Statutes provides, in relevant part, that “[u]nless precluded by law, a contested case may be resolved by . . . consent order”;
 
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive”;
 
WHEREAS, in cooperation and consultation with the Division, Royal Alliance paid compensation to the individuals harmed by the wrongdoing occurring from the Stamford Offices, such restitution exceeding $9.2 million to date, including interest;
 
WHEREAS, in furtherance of its desire to resolve this matter informally with the Commissioner, Royal Alliance has offered to make a contribution of two hundred fifty thousand dollars ($250,000) to the Department of Banking Securities Investor Education Fund, one hundred twenty-five thousand dollars ($125,000) of which would be dedicated to the furtherance of Connecticut investor education through forums, the production and/or distribution of pamphlets, brochures, videos or other appropriate media; and one hundred twenty-five thousand dollars ($125,000) of which would be dedicated to providing independent consultants, expert witnesses and/or the preparation of reports to assist the Division in evaluating proposed regulatory changes.  Such contribution shall be made no later than thirty (30) days after the date this Consent Order is entered by the Commissioner;
 
WHEREAS, Royal Alliance and the Commissioner now desire to resolve the foregoing matter without the need for administrative proceedings, and agree to the language in this Consent Order;

CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, Royal Alliance, through its execution of this Consent Order, voluntarily waives the following rights:

1. To be afforded an opportunity for a hearing within the meaning of Sections 36b-15(f) and 36b 27(d)(2) of the Act, and Section 4 177(a) of the Connecticut General Statutes;
2. To present evidence and argument and to otherwise avail itself of Sections 36b-15(f) and 36b 27(d)(2) of the Act, and 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.

ACKNOWLEDGEMENT OF THE COMMISSIONER'S ALLEGATIONS

WHEREAS, Royal Alliance, through its execution of this Consent Order, acknowledges the following allegations of the Commissioner, without admitting or denying them:

1. The entry of this Consent Order 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 the Act; and
2. In contravention of Section 36b-31-6f of the Regulations, Royal Alliance failed to adequately enforce and maintain a system for supervising the activities of its agents and its Connecticut office operations reasonably designed to achieve compliance with applicable securities laws and regulations.  Such conduct, if proven, would constitute a basis for an order suspending or revoking Royal Alliance’s registration as a broker-dealer in Connecticut pursuant to Section 36b-15(a) of the Act and an order imposing a fine pursuant to Section 36b-27(d) of the Act;

WHEREAS, if the foregoing allegations were proven, the Commissioner would have the authority to enter findings after granting Royal Alliance an opportunity for a hearing;

WHEREAS, this Consent Order concludes the investigation by the Commissioner concerning the matters alleged herein and any related civil or administrative action that could be commenced under the Act or the Regulations on behalf of the Commissioner relating to Royal Alliance, its current affiliates and its current employees based upon the conduct described herein;

WHEREAS, Royal Alliance acknowledges the possible consequences of an administrative hearing and voluntarily agrees to consent to the entry of the sanctions described below;

CONSENT TO ENTRY OF SANCTIONS

WHEREAS, Royal Alliance, through its execution of this Consent Order, consents to the Commissioner’s entry of a Consent Order imposing on it the following sanctions:
 
No later than the date this Consent Order is entered by the Commissioner, Royal Alliance shall be assessed an administrative penalty of seven hundred fifty thousand dollars ($750,000) in the aggregate.  Of that amount, Royal Alliance shall pay via check payable to “Treasurer, State of Connecticut” the sum of five hundred thousand dollars ($500,000) no later than the date this Consent Order is entered by the Commissioner.  The payment of the remaining two hundred fifty thousand dollars ($250,000) will be forgiven if, within sixty (60) days after the entry of this Consent Order by the Commissioner, Royal Alliance provides satisfactory documentary evidence to the Division Director that it has dedicated one hundred twenty five thousand dollars ($125,000) per year for the next two years to hire additional auditors and/or compliance associates to improve its supervisory and compliance systems.  Royal Alliance shall provide documentation acceptable to the Division Director substantiating these expenditures.

CONSENT ORDER

NOW THEREFORE, the Commissioner enters the following:

1. The 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 Royal Alliance based upon a violation of this Consent Order or the matters underlying its entry if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by Royal Alliance and reflected herein are subsequently discovered to be untrue;
3. Royal Alliance agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any finding in this Consent Order or creating the impression that this Consent Order is without factual basis; and
4. This Consent Order shall become final when issued.
 
 

               ________/s/_________ 
    Howard F. Pitkin
            Banking Commissioner

So ordered at Hartford, Connecticut                 
this 26th day of February 2007.                         
 

CONSENT TO ENTRY OF ORDER

I, Mark Quinn, state on behalf Royal Alliance Associates, Inc. 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 Royal Alliance Associates, Inc.; that Royal Alliance Associates, Inc. agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Royal Alliance Associates, Inc. voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein.


      Royal Alliance Associates, Inc.

By
       ________/s/_______________
       Mark Quinn 
      

State of:    New York
County of:  New York

On this the 21st day of February, 2007, Mark Quinn personally appeared before me and acknowledged that he is the Senior Vice President of Royal Alliance Associates, Inc., a corporation, and that he, being authorized to do so, executed the foregoing instrument for the purposes therein contained as an officer of the corporation.

In witness whereof I hereunto set my hand.


_______________/s/_____________
Notary Public
Date Commission Expires:  August 16, 2009

 


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