DOB: Wadsworth Inv Co et al - Final Decision

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IN THE MATTER OF:

WADSWORTH INVESTMENT CO., INC.
CRD No. 5844
("WIC")

PORTFOLIO TIMING SERVICE d/b/a
PTS ASSET MANAGEMENT
IARD No. 111047
("PTS")

WILLIAM F. WADSWORTH
CRD No. 456251
("Wadsworth")

WILLIAM F. WADSWORTH, JR.
CRD No. 1987068
("Wadsworth, Jr.")

(Collectively "Respondents")



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FINDINGS OF FACT,
CONCLUSIONS OF LAW
AND ORDER

DOCKET NO. CFNR-10-7779-S 





 

  


 

INTRODUCTION

The Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a, Sections 36b-1 to 36b-34, inclusive, of the Connecticut General Statutes, the Connecticut Uniform Securities Act (“Act”), and the regulations promulgated thereunder (Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies) (“Regulations”).

The above-referenced matter was initiated upon charges brought by the Commissioner to issue a permanent order to cease and desist against Respondents, revoke the broker-dealer registration of WIC, revoke the broker-dealer agent registrations of Wadsworth and Wadsworth, Jr.; revoke the investment adviser agent registration of Wadsworth, and impose fines upon each Respondent.  On August 11, 2010, the Commissioner issued an Order to Cease and Desist, Notice of Intent to Revoke Registration as Broker-dealer, Notice of Intent to Revoke Registration as Broker-dealer Agent, Notice of Intent to Revoke Registration as Investment Adviser Agent, Notice of Intent to Fine and Notice of Right to Hearing against Respondents (“Notice”), which was Amended and Restated on June 1, 2011 (“Amended Notice”).

After due notice, a hearing was held at the Department of Banking (“Department”) over 13 various days between July 19 and September 15, 2011.  The hearing was conducted in accordance with Chapter 54 of the Connecticut General Statutes, the “Uniform Administrative Procedure Act”, and the Department’s contested case regulations, Sections 36a-1-19 to 36a-1-57, inclusive, of the Regulations of Connecticut State Agencies.  On September 19, 2011, the Commissioner entered into Consent Orders with Wadsworth, Jr. and PTS resolving the allegations made in the Amended Notice against these two Respondents.

With respect to the remaining Respondents, having read the entire record, including testimony of the witnesses and documentary evidence, I make the following findings of fact and conclusions of law based on the preponderance of evidence in the record.

FINDINGS OF FACT*

*For ease of reference, numbers have been assigned to each transcript.
A table containing the assignments is attached as Exhibit A
.

Procedural Filings

1. On August 11, 2010, the Commissioner issued an Order to Cease and Desist, Notice of Intent to Revoke Registration as Broker-dealer, Notice of Intent to Revoke Registration as Broker-dealer Agent, Notice of Intent to Revoke Registration as Investment Adviser Agent, Notice of Intent to Fine and Notice of Right to Hearing against Respondents, which was Amended and Restated on June 1, 2011  (HO Exs. 1, 2; Tr. 1 at 23-24.)
2. On August 25, 2010, the Department received an Appearance and Request for Hearing from Wadsworth on behalf of WIC, PTS and Wadsworth.  (HO Ex. 4; Tr. 1 at 23-24.)
3. On August 25, 2010, the Department received an Appearance and Request for Hearing from Wadsworth Jr. on behalf of himself.  (HO Ex. 4.)
4. On August 25, 2010, Respondents filed a Request for a Bill of Particulars.  (HO Ex. 4.)
5.
On September 1, 2010, the Commissioner appointed Attorney Doniel Kitt as Hearing Officer.  (HO Ex. 1.)
6. On September 23, 2010, Hearing Officer Kitt granted a continuance in the matter to a date to be determined.  (HO Ex. 5.)
7.
On October 7, 2010, the Commissioner redesignated the Hearing Officer in the matter as Attorney Stacey Serrano.  (HO Ex. 10.)
8.
On October 18, 2010, each Respondent filed a Motion to Dismiss Order to Cease and Desist, Revocation of Registration and Order Imposing Fine for Failure to Comply with Section 4-182(c) of the General Statutes of Connecticut.  (HO Ex. 12.)  On October 25, 2010, the Department filed an Objection to each such Motion.  (HO Ex. 14.)
9. On November 5, 2010, the Commissioner denied each Respondent’s Motion to Dismiss Order to Cease and Desist, Revocation of Registration and Order Imposing Fine for Failure to Comply with Section 4-182(c) of the General Statutes of Connecticut.  (HO Ex. 18.)
10. On November 19, 2010, Stephen Z. Frank, Esq., entered an Appearance on behalf of WIC.  (HO Ex. 20.)
11. On January 26, 2011, the Hearing Officer issued a Protective Order concerning the confidential records retained by the Securities and Business Investments Division (“Division”) of the Department of Banking pertaining to the Notice.  (HO Ex. 3.)
12. On February 14, 2011, Wadsworth filed a request for reconsideration of the prior Motion to Dismiss with respect to Wadsworth, Jr. and PTS.  (HO Ex. 38.)
13. On February 18, 2011, the Department filed a response to the February 14, 2011, request for reconsideration.  (HO Ex. 39.)
14. On March 16, 2011, the Department issued a Bill of Particulars clarifying the Notice.  (HO Ex. 23.)
15. On March 25, 2011, the Commissioner denied the request for reconsideration.  (HO Ex. 47.)
16. On April 12, 2011, the Department filed a motion to remove Attorney Frank as representative for WIC in this matter.  (HO Ex. 67.)  Also on April 12, 2011, Attorney Frank filed a response to such motion.  (HO Ex. 61.)  On April 19, 2011, the Hearing Officer denied such motion.  (HO Ex. 67.)
17. On April 14, 2011, Wadsworth filed a Motion for an Order to Compel that Attorney Silverman Produce Exhibits as you Previously Ordered, a Concurrence with Stephen Frank’s Recent Motion, and Motion for Sanctions.  (HO Ex. 59.)  On April 14, 2011, the Department objected to such Motion.  (HO Ex. 60.)  On April 20, 2011, the Hearing Officer denied such Motion.  (HO Ex. 71.)
18. On April 26, 2011, WIC filed a Motion for a Protective Order from Inquiries by the Securities Division which are in Violation of the Connecticut Statutes Filed on Behalf of All Respondents.  (HO Ex. 72.)  On April 28, 2011, the Department filed an Objection to such Motion.  (HO Ex. 73.)  On May 24, 2011, the Hearing Officer denied such Motion and scheduled the hearing for July 19, 20 and 21, 2011.  (HO Ex. 75.)
19. The hearing was held on the following dates: July 19, 20 and 21, August 3, 4, 5, 16, 17, 18 and 19, and September 12, 14 and 15, 2011.  (Tr. 1-13.)
20. Attorneys Jesse Silverman and Paul Bobruff appeared at the hearing on behalf of the Department.  (Tr. 1 at 9.)
21. Wadsworth appeared at the hearing on behalf of WIC, PTS and himself; Stephen Z. Frank appeared at the hearing on behalf of WIC; and Mr. William Wadsworth Jr. appeared at the hearing on behalf of himself.  (Tr. 1 at 10-11.)
22. During the first day of the hearing, Attorney Silverman clarified that the written supervisory procedures (“WSP”) at issue in the proceeding included those relating to contingent deferred sales charges (“CDSCs”) and mutual fund exchanges and the Department intended to introduce potentially thousands of blank pre-signed forms from WIC and PTS.  (Tr. 1 at 14-19.)
23. On September 19, 2011, the Commissioner entered into Consent Orders with Wadsworth, Jr. and PTS resolving the allegations made in the Amended Notice against these two Respondents.  (Tr. 13 at 165-166.)

Registrants

24. WIC is a registered broker-dealer and Financial Industry Regulatory Authority (“FINRA”) member firm with its principal place of business in Wallingford, Connecticut.  (Dept. Ex. 99 at 7; Tr. 2 at 259-260.)
25. WIC was established in 1971 and specializes in mutual funds.  (Tr. 1 at 59.)  WIC is also a solicitor for PTS.  (Tr. 1 at 67.)
26.
Wadsworth is a registered broker-dealer agent, registered investment adviser agent, WIC’s President and sole General Securities Principal. (Dept Ex. 77 at 1; Dept. Ex. 99 at 7.)
27. Wadsworth is responsible for the actions of WIC.  (Tr. 10 at 42-43.)

Disciplinary History

28. In the early 1970s, while Wadsworth was president of WIC, he had agreed to an NASD censure of WIC.  (Dept. Ex. 44 at 1; Tr. 3 at 628-629; Tr. 8 at 152.)
29. In 1972, the Department issued an administrative action seeking to revoke the registrations of WIC and Wadsworth, alleging that they had failed to supervise one of their registered representatives.  WIC’s and Wadsworth’s registrations were not revoked.  (Tr. 11 at 75-76; Resp. Ex. 53; Tr. 11 at 72.)
30.
Wadsworth was censured by the NASD in 1981 in response to a complaint brought by the NASD.  (Dept. Ex. 29 at 2.)
31. FINRA issued an Order Accepting Offer of Settlement dated September 18, 2009, against WIC and Wadsworth (“FINRA Order”), which found, among other items, that “[f]rom September 2002 through at least September 2006, WIC, acting through Wadsworth, permitted DA [Dale Aldieri] to act as the firm’s Chief Compliance Officer and to perform functions requiring registration as a General Securities Principal when he was not so registered.”  (Dept Ex. 100 at 5; Tr. 2 at 367.)
32. The FINRA Order found that:

   
From September 2002 through August 2006, WIC, acting through Wadsworth, failed to establish and maintain a supervisory system and written supervisory procedures (WSPs) reasonably designed to achieve compliance with applicable securities laws and regulations.  During that entire period, Wadsworth was WIC’s President and sole General Securities Principal, and was responsible for establishing, maintaining and enforcing WIC’s supervisory system and WSPs. . . . 

For example, WIC’s procedures entirely failed to address the following areas:
 
• e-mail review and retention; . . .
• Mutual fund redemptions and CDSC charges . . . .
 
(Dept. Ex. 100 at 10-11.) 
33. The FINRA Order found that:

   
In the 2003 LOC [Letter of Caution], WIC and Wadsworth were put on notice about several deficiencies in the firm’s WSPs, including the procedures relating to the review of CDSC charges and mutual fund redemptions.  Despite receiving the LOC and representing that the noted deficiencies would be corrected, however, WIC and Wadsworth failed to adopt procedures addressing those areas.
 
(Dept. Ex. 100 at 11-12.)
 
34. The FINRA Order found that “[f]rom September 23, 2002 through September 26, 2008, WIC failed to maintain and preserve certain of its business-related e-mails as required by Exchange Act Rule 17a-4.  (Dept. Ex. 100 at 18.)
35. Included among the sanctions in the FINRA Order were that WIC undertake a review of its procedures regarding the preservation of electronic mail communications for compliance with applicable laws, regulations and rules.  (Dept. Ex. 100 at 28; Tr. 2 at 383.)

Books and Records Violations

36. The Amended Notice alleges that WIC:

a.    failed to maintain complete and accurate books and records and make such records available to the Commissioner, by failing to maintain and produce WIC e-mails and corporate records, in wilful violation of Section 36b-14(a) of the Act and Section 36b-31-14a of the Regulations; 
     
b. failed to make its required books and records available to the Commissioner, by failing to produce WIC e-mails and corporate records, in wilful violation of Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations; 
     
c.   failed to provide procedures for e-mail review and retention and certain internal communications in its WSP, and allowed Dale Aldieri (“Aldieri”) to act as its Chief Compliance Officer without being registered as a General Securities Principal with FINRA and providing evidence that Aldieri had taken and successfully passed an examination as principal given by the Securities and Exchange Commission (“SEC”) or by a securities self-regulatory organization, in wilful violation of Section 36b-31-6f of the Regulations.

(HO Ex. 2.)
37. The Division conducted an in-person examination of WIC during April 2011.  (Tr. 1 at 160.)
38.
In connection with such examination, Division examiners requested copies of WIC e-mails.  An e mail folder with a few printed e-mails was provided to Cesar Garcia, Division Manager, by Jan Trojanowski, Office Assistant.  (Tr. 2 at 350-351; Tr. 5 at 111-113; Dept. Ex. 104.)  Ms. Trojanowski only printed out e-mails from clients.  (Tr. 13 at 146-147.)
39. E-mails are books and records required to be maintained by registered broker-dealers, particularly if pertaining to conversations with customers, investments and solicitations.  (Dept. Ex. 11-65; Tr. 2 at 272-273.)
40. There were numerous e-mails containing information concerning WIC’s broker-dealer activities and clients that were produced to the Division in response to a request for PTS e-mails.  These e mails were not previously produced in connection with the Division’s request for WIC e-mails.  (Tr. 2 at 351- 361, 366; Dept. Ex. 81.)
41. One e-mail in the PTS production concerned a WIC client account and was dated November 16, 2009.  (Dept. Ex. 81-10; Tr. 2 at 374-375.)
42. Wadsworth did great amounts of WIC business via two non-WIC e-mail accounts.  (Tr. 5 at 36.)
43. Heidi Wayne communicated with certain WIC representatives, such as Bill Saas, by e-mail.  (Tr. 5 at 73.)
44. In letters to clients, Wadsworth requested client e-mail addresses.  (Tr. 6 at 38; Dept. Ex. 59; Resp. Ex. 12.)
45. Stephen Monahan, a client, sent e-mails to Wadsworth concerning his transactions with WIC.  (Tr. 6 at 56, 107-108.)
46. Several e-mails sent between April and November 2010, which were included in the PTS production, concerned WIC’s selling agreement with Invesco Distributors, Inc., formerly known as AIM Distributors.  (Dept. Ex. 81.)
47.
Ms. Trojanowski has used her personal e-mail account for WIC business purposes.  (Tr. 13 at 144; Dept. Ex. 81-49.)
48. In connection with the Department’s examination of WIC, by letter dated April 1, 2011, the Department requested copies of all forms which had been signature guaranteed by WIC since March 1, 2008; forms which are blank and pre-signed; and any forms, documents, spreadsheets, and/or communications requesting or maintaining user IDs and/or passwords utilized by customers to access any website.  (Dept. Ex. 3.)  Ms. Trojanowski, on behalf of WIC, responded by letter dated April 3, 2011, that such categories of documents were “not applicable”.  (Dept. Ex. 4.)
49. Also in connection with such examination, Wadsworth provided a list of WIC personnel dated April 8, 2011, which listed the following personnel:  Wadsworth, Wadsworth, Jr., Sandra Wadsworth, John Mattingly and Jan Trojanowski.  (Tr. 1 at 192; Dept. Ex. 8.)
50. The list notes that there are numerous independent contractors who provide services for WIC in the areas of compliance, legal and accounting.  (Dept. Ex. 8.)
51. Ms. Trojanowski works at the WIC office as a full time employee and acts as the office manager.  Among her responsibilities are managing paperwork regarding mutual fund company agreements and making the required CRD filings.  (Tr. 8 at 87; Tr. 13 at 118, 119, 122.)
52. As of August 4, 2011, Ms. Wayne had been employed by WIC for at least six months, solely for the purpose of providing signature guarantees.  (Tr. 5 at 69-71.)
53. Katherine DeLauro performs services for WIC as a bookkeeper who comes in the office two or three times a week.  (Tr. 8 at 90.)
54. Attorney Frank is an Executive Representative of WIC and considered an employee for FINRA purposes.  He is a 1099 independent contractor and non salaried officer of WIC for payroll purposes.  (HO Ex. 61; Ex. 11-28.)
55. In connection with the ongoing investigation of WIC, by e-mail dated April 19, 2011 to Wadsworth, Attorney Silverman requested certain corporate records of WIC, including corporate by-laws and minutes of shareholders’ or directors’ meetings, to be produced as soon as possible, but no later than 5 p.m., April 20, 2011.  (Dept. Ex. 79.)
56. Wadsworth received such e-mail dated April 19, 2011, but never produced the documents requested.  (Tr. 5 at 32-34; Tr. 11 at 197.)
57. The April 19, 2011, request for documents was reiterated by Klemes Klementon, Principal Examiner, and Attorney Silverman.  The deadline for the production of records was extended to 5 p.m., April 25, 2011.  (Dept. Ex. 79 at 2; Tr. 5 at 34.)
58. On May 24, 2011, the Hearing Officer denied the Motion for a Protective Order from Inquiries by the Securities Division which are in Violation of the Connecticut Statutes Filed on Behalf of All Respondents, stating that the Regulations expressly allow the Department to continue to investigate WIC, even after commencement of a contested case.  The Ruling also stated that the records requested by the Department were corporate records of WIC required to be maintained by a broker-dealer pursuant to Section 36b-31-14a(b)(3) of the Regulations and it was within the Commissioner’s authority to request the production of such records.  (HO Ex. 75.)
59. In connection with the examination of WIC, Division examiners obtained a copy of WIC’s WSP.  (Dept. Ex. 11; Tr. 2 at 343.)
60. The only e-mail policy in WIC’s WSP states, in pertinent part, that:

  
Effective September 1, 2006 . . . Wadsworth, like all Registered Representatives, will refrain from . . . [WIC] client emails.  Also . . . [WIC] established on September 1, 2006 a client file titled “inbound client emails”.  In the event a client sends an email to . . . [WIC], said email will be printed[.]  A copy will be retained in the file and a form letter (as attached) will be mailed to the client.
 
Hence from September 1, 2006 forward NO person from . . . [WIC] is permitted to communicate to . . . [WIC] clients via email.
 
(Tr. 2 at 281 -282; Dept. Ex. 11 at 11-60) 
61. WIC’s WSP provide no reference to CDSCs.  (Tr. 2 at 279-280.)

Fraudulent Business Practices and Misrepresentations

62. The Amended Notice alleges that by using pre-signed blank client forms, providing false signature guarantees, utilizing false names to gain access to client information and by falsely holding themselves out as the client during on-line transactions, WIC and Wadsworth each engaged in a dishonest or unethical practice in the securities business in wilful violation of Section 36b-4(b) of the Act and within the meaning of Sections 36b-31-15a and 36b-31-15b of the Regulations.  (HO Ex. 2 at 11-12.)
63. In connection with the April 2011 examination of WIC, Division examiners discovered a handful of forms to liquidate investments with WIC that were pre-signed by the client and where the date, accounts, amounts and check payable fields were blank.  (Tr. 1 at 179; Dept. Ex. 7.)
64. By letter dated April 5, 2007, the SEC noted that during its examination of WIC, “[t]he staff found seven blank liquidation request forms that were pre-signed by customers, and apparently intended to be used by the Registrant to make redemptions from customer accounts at mutual fund companies”, and stated that such practice was believed to be an internal control weakness.  (Tr. 10 at 19; Dept. Ex. 68 at 11.)
65. By letter dated May 17, 2007 to the SEC, Wadsworth stated, on behalf of WIC, that “[w]e have discontinued the policy of allowing clients to leave us pre-signed liquidation forms.”  (Dept. Ex. 15 at 12.)
66. PTS directs its broker-dealers to send back forms pre-signed by its clients.  (Tr. 4 at 69-71.)
67. Wadsworth signature guaranteed PTS forms that were pre-signed by the client and where the date was left blank.  (Dept. Ex. 13.)
68. A signature guarantee is a signature guaranteed by a bank or trust company saying exactly who the signer is, very similar to a notary guaranteeing a signature.  The person performing the signature guarantee is required to see the person sign the document and verify through a driver’s license or similar document that the person signing is actually the person.  (Tr. 2 at 269.)
69. WIC’s WSP provides, in pertinent part, that

Section 8-306 of the Uniform Commercial Code defines a guarantee of signature as a warranty, with respect to the signature of an endorser of a security or an originator of an instruction regarding a security, that, at the time of signing,

(a)    the signature was genuine; 
      
(b)    the signor was an appropriate person to sign, or if the signature is by an agent, the agent had actual authority to act on behalf of the appropriate person; and
     
(c)    the signor had legal capacity to sign. 

(Dept. Ex. 11-66.)
70. Both Wadsworth and Ms. Wayne provided signature guarantees without seeing the person physically sign the document.  (Tr. 4 at 83; Tr. 5 at 89.)
71.
A PTS liquidation authorization form for a client’s account was dated April 27, 2005 and contained the signature of Mr. Larry Neher.  The signature was signature guaranteed by Aldieri of WIC.  (Tr. 11 at 212-213; Dept. Ex. 113.)
72. Mr. Neher died on September 1, 2003.  (Tr. 11 at 212-213; Resp. Ex. 59.)
73. Ms. Lori Brelsford Verzillo was employed by WIC as an administrative assistant from December 2005 to November 2007.  (Dept. Ex. 118.)
74.
While employed by WIC, Ms. Verzillo made phone calls to Oppenheimer and misrepresented to them that she was calling as a rep assistant from a firm and/or broker-dealer other than PTS or WIC.  (Dept. Ex. 118.)
75.
On November 30, 2010, Wadsworth called MetLife with Mr. Dombrowik and his wife present in Wadsworth’s office to get certain information about Mr. Dombrowik’s MetLife account and to make certain transactions in such account.  (Tr. 4 at 92-94, 153; Resp. Ex. 25.)
76. WIC was not the broker-dealer of record for Mr. Dombrowik with MetLife.  (Tr. 4 at 142.)
77. Mr. Dombrowik opened a new account with Wadsworth and WIC on December 15, 2010.  (Dept. Ex. 10.)
78.
Mr. and Mrs. Dombrowik had requested that Mr. Dombrowik’s MetLife account be added to their PTS services contract in November 2010.  (Tr. 7 at 157; Resp. Ex. 24, 25.)
79. Changes were made on-line to Mr. Dombrowik’s MetLife account on November 30, 2010 and February 15, 2011.  (Dept. Ex. 10 at 3.)
80.
Mr. and Mrs. Dombrowik had requested that PTS no longer manage Mr. Dombrowik’s MetLife account on or about March 11, 2011.  (Tr. 7 at 159; Dept. Ex. 10 at 2.)
81. Mr. and Mrs. Dombrowik never had a complaint about Wadsworth or WIC.  (Tr. 7 at 165; Resp. Ex. 25.)
82. Wadsworth is a permanent resident of Florida and spends winters in Florida. (HO Exs. 21 and 25; Tr. 7 at 177.)
83.
It is perfectly acceptable for a registered representative to assist a client who is physically present in the registered representative’s office or on the phone with the registered representative, in making an exchange online in his or her investment account.  (Tr. 2 at 296.)

False Statements

84.
The Amended Notice alleges that Wadsworth made false statements to the Division that were, at the time and in light of the circumstances under which they were made, false or misleading in a material respect by stating to the Division that there had never been a complaint filed against him, stating that WIC did not use or maintain e-mail accounts or pre-signed blank client forms in conducting business, and providing an inaccurate list of WIC employees to Division examiners, in wilful violation of Section 36b-23 of the Act.  (HO Ex. 2 at 13.)
85.
In a letter to the Department dated August 14, 2009, signed by Wadsworth, he stated, “I am proud that with over 100 registered reps I have supervised over 42 years, there has not been a single regulatory or customer complaint, fine, etc.”  (Dept. Ex. 22 at 1.)
86.
On the CRD Disclosure forms for both Wadsworth and WIC, the following comment, in pertinent part, was entered:  “The State of Connecticut has made allegations of wrongdoing against WIC, it’s [sic] IA affiliate, one of its registered reps and myself.  We believe that the fact that the above entities have been licensed with CT for a total of 60 years without a single complaint speaks more than all written words in their allegations.”  (Dept. Ex. 27 and 28.) Wadsworth admitted that such statement was not accurate.  (Tr. 3 at 639-646.)
87.
Customer complaints must be filed with FINRA on the 3070/CRD system if a complaint is not able to be resolved quickly by the broker with the customer.  (Tr. 2 at 255, 262-264.)
88.
When a broker-dealer fails to make complaint filings with FINRA, it denies FINRA a full regulatory picture of the firm and an understanding of any underlying problems at the firm.  (Tr. 2 at 265.)
89.
There had been many, many complaints against WIC, including one complaint by Elizabeth Bunting in the early 1990s.  (Tr. 1 at 69, 73; Tr. 3 at 520; Dept. Ex. 30.)
90.
Wadsworth signed a document dated October 24, 2006, which, in his handwriting, stated, in pertinent part, “[o]ver the past 40 years, I have had supervisory responsibility for 80+ NASD registered reps.  My track record is unblemished; our disciplinary history is zero; client complaint history is zero.”  (Tr. 3 at 656-657; Dept. Ex. 19.)
91.
By letter dated February 8, 2007, a Connecticut resident complained to the Department of potentially unethical practices by WIC in connection with the switch out of Oppenheimer Funds.  (Dept. Ex. 34.)
92.
By e-mail dated March 5, 2007, a Connecticut client complained to Aldieri of the fees incurred by switching to AIM Funds, stating that he “did not fully understand the costs involved.” (Dept. Ex. 35)
93.
In September 2008, a Connecticut resident, sent a letter to Wadsworth complaining of various items pertaining to Wadsworth and WIC, including the fees incurred by transferring his funds to AIM.  (Dept Ex. 40; Tr. 4 at 222-223; Tr. 12 at 108-110.)  In particular, his letter states, in pertinent part, “[y]ou clearly misrepresented the transfer to AIM Funds that cost us THOUSANDS of dollars without disclosing to us the cost the night of the dinner when you advised us to sign the paperwork without telling us these very material costs.”  (Dept. Ex. 40 at 3.)

WIC's Ownership Changes and Failure to Notify the Commissioner

94.
The Amended Notice alleges that WIC failed to update the Commissioner regarding its ownership changes in wilful violation of Section 36b-31-14e(a) of the Regulations.  (HO Ex. 2 at 15.)
95. In 2002, Wadsworth relinquished 99% of the ownership of WIC to Wadsworth Family, LLC.  (Dept. Ex. 99 at 7.)
96.
According to a CRD printout dated April 25, 2011, Wadsworth Family LLC is listed as the passive owner, owning 75% or more of WIC since June 2002. (Dept. Ex. 80 at 1; Tr. 5 at 29, 32.)
97.
Articles of Dissolution were filed with the Connecticut Secretary of State for Wadsworth Family, LLC on September 30, 2010 which stated that the “LLC has discontinued doing business and has no assets.”.  (Dept. Ex. 80 at 3; Tr. 5 at 29-30.)
98. A broker-dealer (BD) form would have to be amended if the entity listed as owner on the BD form dissolved.  (Tr. 2 at 326.)

Unregistered Securities Offering

99.
The Amended Notice alleges that WIC and Wadsworth effected the offer and sale of DECA ONE shares, which securities were not registered in Connecticut, in wilful violation of Section 36b-16 of the Act.  (HO Ex. 2 at 14.)
100. DECA ONE is a limited liability company that was created four to six years ago that operates from WIC’s offices in Wallingford.  (Tr. 5 at 47.)
101.
By letter dated June 29, 2006, Wadsworth, on behalf of WIC, offered approximately 80 persons a “private, commission free, investment opportunity” in DECA ONE, with a minimum investment of $1 million.  (Emphasis in original.)  (Dept. Ex. 84; Tr. 5 at 47.)
102. The June 29, 2006, letter was the only solicitation of DECA ONE by Wadsworth.  (Tr. 5 at 61-62.)
103. Wadsworth Family LLC made an investment of $5 million in DECA ONE.  (Dept. Ex. 9 at 2.)
104. Wadsworth never registered DECA ONE with a state or federal regulatory agency.  (Tr. 5 at 61.)
105. There were no notice filings concerning DECA ONE made with the Division.  (Tr. 2 at 413.)
106.
Wadsworth testified at the hearing that there were no offering documents for DECA ONE, even though he had previously testified otherwise. In his previous testimony to FINRA, Wadsworth stated that there were offering documents for DECA ONE and that his wife helped him write them.  (Tr. 5 at 50-54; Tr. 12 at 74-75; Dept. Ex. 92 at 423, 433.)
107. By letter dated February 28, 2007 to FINRA, Wadsworth mentioned only six clients receiving the DECA ONE letter.  (Dept. Ex. 88.)
108.
Mr. Monahan was a client of WIC and had received the DECA ONE letter, but was not one of the clients referenced as receiving the letter in Wadsworth’s letter to FINRA.  (Tr. 12 at 56-59.)

Misrepresentations and Omissions to Clients

109.
The Amended Notice alleges that during two in-person client seminars and by letters dated November 2006 and March 2007, WIC and Wadsworth made certain representations and recommendations to customers and clients of WIC, which constituted, in connection with the offer, sale or purchase of any security, directly or indirectly employing a device, scheme or artifice to defraud, making an untrue statement of a material fact or 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, or engaging in an act, practice or course of business which operates as a fraud or deceit upon any person, in wilful violation of Section 36b-4 of the Act.  (HO Ex. 2 at 11.)
110.
WIC held a client appreciation luncheon and dinner on October 26, 2006 at the Yankee Silversmith Inn in Wallingford, Connecticut.  (Dept. Ex. 1 at 11 [PTS-WADSWORTH-000002].)
111.
There were approximately 23 attendees at the client appreciation luncheon and 103 attendees at the client appreciation dinner.  (Dept. Ex. 1 at 22 [PTS-WADSWORTH-000013]; Dept. Ex. 1 at 21 [PTS-WADSWORTH-000012].)
112.
At the client appreciation lunch and dinner, Wadsworth recommended to clients that they switch out of Oppenheimer into AIM mutual funds.  (Tr. 4 at 160-161; Tr. 6 at 128-129.)
113. It is the broker’s responsibility to make a suitability determination and recommend certain investments to clients.  (Tr. 8 at 185.)
114.
Mr. Mattingly assisted clients to switch out of Oppenheimer at the client appreciation dinner.  Not all clients present at the dinner made the switch.  (Tr. 3 at 596-597.)
115.
Some clients signed documents that night to make the switch from Oppenheimer to AIM, but turned them in to Wadsworth a few days later.  (Tr. 6 at 129.)
116.
Wadsworth stated to the attendees at the client appreciation dinner that at a luncheon meeting earlier that same day, 100 percent of the attendees signed documents to exit Oppenheimer funds.  (Tr. 3 at 554-555.)
117.
Letters dated November 2006 and March 2007 authored by Wadsworth were sent to WIC clients recommending the switch from Oppenheimer to AIM mutual funds.  (Tr. 5 at 160; Dept. Exs. 59, 65.)
118.
The November 2006 letter concerning the Oppenheimer to AIM switch states, in pertinent part, that “every single person signed documents that authorized the change from Oppenheimer to AIM (OVER Three Hundred client accounts).”  (Emphasis in original.)  Wadsworth asserted that such statement only referred to the persons actually present at the client appreciation parties.  (Tr. 4 at 210-211, 215; Dept. Ex. 59 at 2; Tr. 4 at 202-203.)
119.
The statements in the letter dated November 2006 signed by Wadsworth were verbatim the statements made at the client appreciation seminars.  (Tr. 4 at 160-161; Dept. Ex. 59.)
120. The March 2007 letter was virtually identical to the November 2006 letter.  (Dept. Ex. 59 and 65.)
121. Mr. Burch was a client of Wadsworth who received the November 2006 letter with a few changes.  (Tr. 6 at 20-21; Resp. Ex. 12.)
122.
By letter dated February 29, 2008, the SEC requested that Wadsworth “provide documents sufficient to identify the name . . . and brokerage firm of each PTS customer who owned shares in one or more Oppenheimer funds as of the date of the October 2006 WIC customer meetings who did not switch from the Oppenheimer fund family to the AIM fund family from the date of the October 2006 WIC customer meetings through the present time”.  (Dept. Ex. 1 at 5.)
123.
In response, Wadsworth provided a spreadsheet which identified several clients of WIC who did not transfer their funds from Oppenheimer to AIM, however such clients were not attendees at the October 2006 client appreciation meetings.  (Dept. Ex. 1 at 21-12 [PTS-WADSWORTH-000012-000013] and 453-456 [PTS-WADSWORTH-000444-000447]; Tr. 4 at 214-215; Tr. 5 at 21.)
124. WIC has selling agreements with mutual fund companies which permit WIC to sell the mutual funds.  (Tr. 8 at 72.)
125.
Wadsworth testified that he was unaware that Oppenheimer was in the process of terminating the selling agreement with WIC at the time of the October 2006 client appreciation luncheon and dinner or the November 2006 letter.  (Tr. 4 at 195-196.)
126.
There was a breakdown in communication and service between WIC and Oppenheimer, which was disclosed in the November 2006 and March 2007 letters. (Dept. Ex. 59 and 65.)
127.
Wadsworth testified that he became aware that Oppenheimer was planning on terminating its agreement around the Christmas holidays in 2006, and Oppenheimer actually revoked WIC’s authority in April 2007.  (Tr. 4 at 196.)
128.
By letter dated December 18, 2006 to Wadsworth, Oppenheimer notified WIC that it would be terminating its selling agreement with WIC effective January 12, 2007.  (Dept. Ex. 1 at 325 [PTS-WADSWORTH-000306]; Tr. 10 at 71-72.)
129.
In February 2007, Oppenheimer settled with the States of Washington and Colorado over concerns with bulk trade agreements, in which it paid $769,500 in fines and restitution, and agreed to terminate such selling agreements.  (Ex. 1 at 408 [PTS-WADSWORTH-000399].)
130.
Wadsworth did not tell clients that WIC and PTS had been kicked out of Oppenheimer in his March 2007 letter because he believed such fact was completely irrelevant.  (Tr. 5 at 27-28; Dept. Ex. 59 and 65.)
131.
One of the issues discussed at the client appreciation dinner was that Oppenheimer was not executing trades on a timely basis.  (Tr. 3 at 594-595; Tr. 6 at 150, 179; Tr. 7 at 115.)
132. Mutual fund companies have to execute trades or exchanges on the same day that they are received if submitted before 4 o’clock.  (Tr. 2 at 289.)
133. All other mutual fund companies which WIC and PTS dealt with executed trades on the same day trades were received. (Dept. Ex. 94 at 59.)
134.
Oppenheimer had not been executing trades on the same day for several years prior to November 2006.  (Tr. 4 at 200-201; Dept Ex. 1 at 346-347 [PTS-WADSWORTH-000337-000338; Dept. Ex. 51.)
135.
Wadsworth had told the clients present at the client appreciation meetings that the fact that Oppenheimer would no longer execute trades as quick as Wadsworth saw fit was a new change.  (Tr. 7 at 113-116.)
136.
During the client appreciation luncheon and dinner, Wadsworth stated that he would be moving his family investments in Oppenheimer, but did not discuss whether he was going to pay any fees to make the switch from Oppenheimer.  (Tr. 13 at 41; Tr. 3 at 591; Tr. 4 at 231-232.)
137.
Several clients were aware that when clients’ investments go over a certain dollar amount, such as Wadsworth’s, fees paid to a mutual fund drop, and in some cases, go to zero.  (Tr. 6 at 192.)
138.
Wadsworth did not discuss Oppenheimer Funds surrender charges and AIM sales charges from the podium at the client appreciation luncheon or dinner. (Dept. Ex. 40 at 10; Tr. 4 at 224-225; Tr. 3 at 591.)
139.
CDSCs are fees paid by the client if the client exits a fund within a certain period of time and are explained to clients at the point of purchase in the prospectus, and each year thereafter, in the prospectus.  (Tr. 8 at 80; Tr. 10 at 91.)
140. CDSCs  represent deferred charges in lieu of a front-end surrender charge.  (Tr. 4 at 34-35; Tr. 8 at 80.)
141.
WIC receives its commission up front on mutual funds with CDSCs, and does not receive commissions at the point of payment of the CDSCs.  (Tr. 4 at 44; Tr. 8 at 81-82.)
142. Approximately 34 clients paid CDSC charges totaling approximately $52,000 to exit Oppenheimer Funds.  (Tr. 10 at 144; Dept. Ex 69 at 6.)
143.
By letter dated December 28, 2006 from Oppenheimer to WIC clients, Oppenheimer referred clients to the relevant Oppenheimer Fund prospectus to determine whether the redemption of Fund shares would be subject to a CDSC charge or redemption fee. (Dept. Ex. 1 at 396 [PTS-WADSWORTH-000387].)
144.
The November 2006 and March 2007 letters reference an enclosure of an AIM brochure/prospectus and commission charges in a footer.  (Tr. 6 at 24; Resp. Ex. 12 at 2.)
145. Commission charges related to the Oppenheimer to AIM transaction were referenced in the prospectuses.  (Tr. 6 at 130.)
146.
A load fund is a fund with a front-end commission charge and a no-load fund is typically a fund that does not have a front-end commission charge. (Tr. 4 at 42.)  The front-end commission of a load fund goes to the broker-dealer that transacted the sale.  (Tr. 4 at 43.)
147. Class A shares typically have front-end commission charges that immediately dilute the amount of a client’s capital.  (Tr. 10 at 157.)
148. Approximately 83 clients purchased Class A shares of the AIM Funds.  (Tr. 10 at 156; Dept. Ex. 69 at 7-10.)
149. Wadsworth and his family’s accounts paid fees on the purchase of Class A shares of the AIM Funds.  (Dept Ex. 69 at Ex. 9.)
150.
When the assets in a client’s account are $1 million or more, no front-end commissions are charged on the purchase of Class A shares.  (Tr. 10 at 157-160.)
151.
WIC made approximately $750,000 on the switch from Oppenheimer to AIM, of which $500,000 was paid directly from client accounts and $250,000 paid from the funds.  (Tr. 4 at 227; Tr. 10 at 166; Dept. Ex. 69, Ex. 4; Tr. 10 at 162-163.)
152. Several clients were pleased with the decision to switch from Oppenheimer to AIM.  (Resp. Ex. 46.)

Unregistered Personnel

153.
The Amended Notice alleges that WIC’s behavior in allowing Aldieri to act as WIC’s Chief Compliance Officer without providing evidence that Aldieri had currently taken and successfully passed an examination as principal given by the SEC or by a securities self-regulatory organization constitutes a wilful violation of Section 36b-31-15e of the Regulations.  (HO Ex. 2 at 14-15.)
154.
Compliance officers of broker-dealers must be registered principals.  (Tr. 2 at 271-272.)  The Series 24 exam allows persons to act as principals and to make supervisory and suitability decisions.  (Tr. 8 at 130.)
155.
Currently, Wadsworth is the Chief Compliance Officer of WIC.  (Tr. 3 at 652; Tr. 13 at 122.)  Wadsworth is a licensed principal and holds a Series 24.  (Tr. 1 at 61; Tr. 8 at 130.)
156.
Aldieri was an employee who had worked for Wadsworth for approximately 20 years up to 5 years ago.  (Tr. 8 at 117-118.)  With respect to all of Aldieri’s material functions, including his compliance function, he reported to Wadsworth.  (Tr. 8 at 126-127.)
157. Prior to 2002, Aldieri was overall operations manager for both PTS and WIC.  (Tr. 8 at 119.)
158. In 2002, the NASD suggested that Aldieri should take the Series 24, and Wadsworth agreed to such undertaking.  (Tr. 8 at 129-130.)
159. Aldieri told examiners during the '02 FINRA exam that he would be getting a principal’s license, and failed to do so.  (Tr. 8 at 133.)
160.
By letter dated March 17, 2003 to the NASD, Wadsworth and Aldieri stated that “Dale Aldieri will obtain his general securities principal registration by June 15, 2003.  Until that time, William F. Wadsworth will review and approve all new applications and new accounts.”  The letter was signed by Wadsworth as President and Compliance Officer and Aldieri as Compliance Associate.  (Tr. 12 at 23-24; Dept. Ex. 50 at 1.)
161. After such letter, Aldieri’s compliance job duties did not change, and Aldieri did not become registered as a principal.  (Tr. 12 at 27.)
162.
By handwritten note dated May 1, 2005, Wadsworth stated that “Registered Principal . . . Wadsworth and/or CCO Dale Aldieri review all new client applications to purchase funds or annuities.”  (Dept Ex. 2 at 10.)
163.
The WSP states that all client applications are reviewed by the Compliance Officer, who must be licensed as an NASD (FINRA) Principal.  (Dept. Ex. 11-54.)
164.
Aldieri was terminated by WIC effective May 30, 2007 and sanctioned by the NASD in December 2008.  (Tr. 3 at 675; Tr. 8 at 140-14; Resp. Ex. 36A, Dept. Ex. 102.)

Notice

165.
By letter dated May 24, 2011, the Department gave an opportunity to show compliance for WIC to retain its broker-dealer registration and for Wadsworth to retain his broker-dealer agent and investment adviser agent registrations, in accordance with Section 4-182(c) of the Connecticut General Statutes.  (Dept. Ex. 77.)

Miscellaneous

166.
Wadsworth admitted that he previously stated to FINRA that WIC did not have any affiliates and that such statement was inaccurate.  (Tr. 12 at 48-52.)
167.
WIC may be operating in other states in which it is not currently registered, such as Massachusetts and New York.  (Tr. 12 at 152-153; Dept. Ex. 14 at 11.)
168.
Wadsworth created a charitable foundation called the Wadsworth Family Foundation LLC and puts in $20,000 to $50,000 each year.  (Resp. Ex. 9; Tr. 13 at 151-152.)

CONCLUSIONS OF LAW

The Commissioner is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act and the regulations promulgated thereunder (Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies).  The Commissioner’s authority includes the power to revoke the registration of WIC as a broker-dealer in Connecticut pursuant to Section 36b-15(a) of the Act, revoke the registrations of Wadsworth as a broker-dealer agent and an investment adviser agent in Connecticut pursuant to Section 36b-15(a) of the Act, to issue orders to cease and desist against WIC and Wadsworth individually pursuant to Section 36b-27(a) of the Act, and to impose a fine upon WIC and Wadsworth individually pursuant to Section 36b-27(d) of the Act.

Standard of Evidence

The applicable standard of proof in Connecticut administrative cases, including those involving fraud and severe sanctions, is the preponderance of the evidence standard.  Goldstar Medical Services v. Department of Social Services, 288 Conn. 790, 819 (2008).  “[I]t is the exclusive province of the trier of fact to make determinations of credibility, crediting some, all, or none of a given witness’ testimony . . . .  [A]n agency [is not] required to use in any particular fashion any of the materials presented to it as long as the conduct of the hearing is fundamentally fair.  Id. at 830 (internal citations omitted).

“Review of an administrative agency decision requires a court to determine whether there is substantial evidence in the administrative record to support the agency’s findings of basic fact and whether the conclusions drawn from those facts are reasonable.”  Id. at 833.  “An administrative finding is supported by substantial evidence if the record affords a substantial basis of fact from which the fact in issue can be reasonably inferred.”  Id.  “There is no distinction between direct and circumstantial evidence so far as probative force is concerned . . . .  In fact, circumstantial evidence may be more certain, satisfying and persuasive than direct evidence.”  Id. at 834 (internal citations omitted).

Violations of the Connecticut Uniform Securities Act and Regulations

1.
The Department alleges that WIC failed to maintain complete and accurate books and records and to make such records available to the Commissioner, in wilful violation of Section 36b-14(a) of the Act and Section 36b-31-14a of the Regulations by failing to maintain e-mail records relating to its broker-dealer business and corporate records.
 
Section 36b-14(a) of the Act states, in pertinent part, that:
 
(2) . . . every registered broker-dealer, shall make, keep and preserve such accounts, correspondence, memoranda, papers, books and other records as the Securities and Exchange Commission requires.  All such records shall be preserved for such period as the Securities and Exchange Commission requires.
 
Section 36b-31-14a(a) of the Regulations states, in pertinent part, that:
 
Every registered broker-dealer shall keep and maintain, open to inspection by the commissioner, the books and records required to be kept by the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. . . .  Compliance with the requirements of the United States Securities and Exchange Commission concerning preservation of records in an electronic medium is deemed compliance with this subsection.
 
Rule 17a-4 of the Securities Exchange Act (17 CFR 240.17a-4) provides, in pertinent part, that:
 
(b)  Every member, broker and dealer subject to § 240.17a-3 shall preserve for a period of not less than three years, the first two years in an easily accessible place: . . . (4)  Originals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to rules of a self-regulatory organization of which the member, broker or dealer is a member regarding communications with the public. As used in this paragraph (b)(4), the term
communications includes sales scripts.
 
In construing the requirements of Rule 17a-4, the SEC has expressly stated that e-mail messages must be retained if they relate to the broker-dealer’s “business as such” and that “the content and audience of the message determine whether a copy must be preserved, regardless of whether the message was sent on paper or sent electronically.”  See SEC Release Nos. 34-38245 (62 FR 6469 (Feb. 12, 1997)) and 34 44992 66 FR 55818 (Nov. 2, 2001)).
 
The record is replete with instances of WIC using e-mail for official broker-dealer matters.  WIC used e-mail in connection with its selling agreements, to communicate with its registered representatives and concerning client accounts.  Furthermore, Wadsworth admitted to doing a “great amount” of WIC business via e-mail.  However, when asked for WIC e-mails by Division examiners in April 2011, WIC produced only a small folder containing a few e-mails received by clients, and which did not contain e mails created in the normal course of business by WIC.  Such e-mail records were required to be maintained pursuant to
Rule 17a-4.  WIC had also been recently warned of this issue by FINRA.
 
There is no evidence establishing that WIC failed to maintain the corporate records requested, such as by-laws and minutes of shareholder meetings.  There is only evidence that WIC failed to produce such records to the Department which is discussed further below in connection with the alleged violation of Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations.
 
The Department alleges that the violations of the Act and Regulations by WIC were wilful.  A violation of the Act is wilful if a person had knowledge of the conduct which constituted the violation.  In State v. Andresen, the Connecticut Supreme Court stated, “[w]e conclude that wilfully violating provisions of the Uniform Act, and therefore CUSA, requires ‘proof that the person acted intentionally in the sense that [she] was aware of what [she] was doing.  Proof of evil motive or intent to violate the law, or knowledge that the law was being violated, is not required.’  L. Loss, Commentary on the Uniform Securities Act (1976) § 204 (a)(2)(B), official comment, p. 29 . . . .”  256 Conn. 313, 339 (2001).
 
Personnel at WIC, including Wadsworth, routinely utilized e-mails to conduct WIC business and failed to retain them as business records.  Such conduct establishes that WIC failed to maintain books and records in wilful violation of Section 36b-14(a) of the Act and Section 36b-31-14a of the Regulations by failing to maintain e-mails relating to its broker-dealer business, which forms a basis for the revocation of WIC’s broker-dealer registration in Connecticut pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine pursuant to Section 36b-27(d) of the Act.
  
2.
The Department alleges that WIC failed to make its required books and records available to the Commissioner when so requested, in wilful violation of Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations by failing to produce WIC’s e-mails relating to its broker-dealer business and corporate records when requested to do so by the Department.
 
Section 36b-14 of the Act states, in pertinent part, that:
 
(a) . . . (2) . . . every registered broker-dealer, shall make, keep and preserve such accounts, correspondence, memoranda, papers, books and other records as the Securities and Exchange Commission requires.  All such records shall be preserved for such period as the Securities and Exchange Commission requires. . . . (d)  All the records of a . . . registered broker-dealer referred to in subsection (a) of this section are subject at any time or from time to time to such reasonable periodic, special or other examinations by the commissioner, . . . as the commissioner deems necessary or appropriate in the public interest or for the protection of investors.  Every . . . registered broker-dealer shall keep such records open to examination by the commissioner and, upon the commissioner’s request, shall provide copies of any such records to the commissioner. . . .
 
Section 36b-31-14f of the Regulations states in pertinent part, that:
 
(a)  For purposes of this section, (1) “commissioner” includes any representative of the commissioner conducting an examination and (2) “records” includes, but is not limited to, diaries, logs, notes, memoranda, reports, advisories, updates, ledgers, journals, visual and audio recordings, manual and computer records and related software, and any summary, outline and index thereof.
 
(b)  A registered broker-dealer . . . shall (1) make its records available to the commissioner in readable form; . . . [and] (3) provide copies or computer printouts of records when so requested . . . .
 
In First Providence v. Burke, 2001 Conn. Super. LEXIS 3287, the Connecticut Superior Court, interpreting Section 36b-14(d) of the Act, relied on the Official Commentary to the Model Act, stating “failure to submit to a reasonable inspection is a violation of the Act, which may result in an action by the Administrator . . . .  Indeed, the purpose behind this particular subsection as noted in New Jersey regarding a virtually identical provision, is to facilitate “investigation and checking to make certain that all requirements of the law and rules relative to the operation of the business are complied with”.  Id. at *25 (internal punctuation omitted).  The court continued on interpreting “reasonable” as “fair, proper, or moderate under the circumstances”.  Id. at 27-29.
 
The Hearing Officer had previously opined that documents, such as by-laws and minutes of meetings, were corporate records required to be maintained by WIC pursuant to Section 36b-31-14a(b)(3) of the Regulations.  Accordingly, an e-mail by Attorney Silverman to Wadsworth requesting such documents is a reasonable inquiry to ensure that such record requirements were being complied with by WIC.  Wadsworth admitted to not producing such records, asserting only that such request was unusual coming from a Department attorney and requiring production within 24 hours.  While the initial turn-around time was rather short, it must be noted that the production deadline was extended by several days and still not adhered to.  In addition, the record reflects that the request was not only made by Attorney Silverman, but reiterated by Klemes Klementon, Principal Examiner for the Division.
 
With respect to the production of e-mails, the record reflects that some e-mails were produced to Division examiners by WIC’s office manager, Ms. Trojanowski.  She produced all the e-mails which she maintained for WIC, which happened to be only those e-mails received from clients.  Such action demonstrated that WIC failed to maintain its e-mail records, as discussed above, rather than failed to produce such records.
 
WIC failed to make its required books and records available to the Commissioner by failing to provide corporate records when requested, in wilful violation of Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations, which forms a basis for the revocation of WIC’s broker-dealer registration pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine pursuant to Section 36b-27(d) of the Act.
 
3.
The Department alleges that WIC failed to enforce and maintain adequate supervisory procedures by failing to provide procedures for, inter alia, e-mail review and retention and certain internal communications, and allowing Aldieri to act as its Chief Compliance Officer, in wilful violation of Section 36b-31-6f of the Regulations.
 
Section 36b-31-6f(b) of the Regulations provides, in pertinent part, that:
 
Each registered broker-dealer . . . shall establish, enforce and maintain a system for supervising the activities of its agents, investment adviser agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations.
 
WIC, a FINRA member firm, is subject to FINRA, formerly NASD, rules.  NASD Rule 3010(d)(2) states, in pertinent part, that:
 
Each member shall develop written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing written (i.e., non-electronic) and electronic correspondence with the public relating to its investment banking or securities business, including procedures to review incoming, written correspondence directed to registered representatives and related to the member’s investment banking or securities business to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with firm procedures. . . .
 
Furthermore, in its Regulatory Notice 07-59 concerning “Supervision of Electronic Communications”, FINRA stated that it, “expects a firm to have supervisory policies and procedures to monitor all electronic communications technology used by the firm and its associated persons to conduct the firm’s business . . . .  [F]irms are reminded that they have a separate, but equally important, obligation to ensure that their use of electronic communications media enables them to make and keep records, as required by SEC Rules 17a-3 and 17a-4, NASD Rule 3110 and NYSE Rule 440.”  (Emphasis in original.)
 
The only e-mail policy in WIC’s WSP concerns e-mails to clients and strictly forbids them.  It does not address the “great amount” of business done by e-mail by Wadsworth, nor does it expressly provide a procedure by which Wadsworth shall review business related e-mails, even though this was an area of weakness previously cited by FINRA.
 
WIC’s lack of a policy to monitor electronic communications is just one of many examples which demonstrate that WIC failed to establish, enforce and maintain a system for supervising the activities of its agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations.  As discussed later, WIC’s supervisory system was also inadequate with respect to its use of signature guarantees and its allowance of Aldieri to act as a principal while not licensed as such.
 
WIC’s failure to establish, enforce and maintain an adequate compliance system constitutes a wilful violation of Section 36b-31-6f of the Regulations, which forms a basis for the revocation of WIC’s broker-dealer registration pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine pursuant to Section 36b-27(d) of the Act.
 
4.
The Department alleges that WIC and Wadsworth, in connection with the offer, sale or purchase of any security, directly or indirectly employed a device, scheme or artifice to defraud, made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or engaged in an act, practice or course of business which operated as a fraud or deceit upon a person, in wilful violation of Section 36b-4(a) of the Act in connection with the sale of Oppenheimer funds and purchase of AIM Funds by WIC clients.
 
Section 36b-4(a) of the Act states, in pertinent part,
 
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 . . . .
 
In particular, the Department alleges that, in connection with WIC’s clients’ sale of Oppenheimer Funds and the purchase of AIM Funds, during two client appreciation meetings in October 2006 and by letters dated November 2006 and March 2007, WIC and Wadsworth represented that:  (a) Oppenheimer Funds were the only fund family that will “not trade an account on the day PTS submits a trade”, which forces PTS to wait a full day to implement their clients’  instructions and results in delays which cost their clients tens of thousands of dollars; (b) PTS had a major buy in the High Yield Bond Category but that the Oppenheimer Funds refused to implement that buy instruction; (c) all other investors had signed the documents to exit the Oppenheimer Funds and enter the AIM Funds; and (d) Wadsworth and his family would be making the switch out of the Oppenheimer Funds into the AIM Funds.
 
The Department also alleges that WIC and Wadsworth failed to disclose that:  (a) the Oppenheimer Funds were in the process of terminating the agreements of both WIC and PTS to sell the Oppenheimer Funds due to troubling business practices at both WIC and PTS; (b) the Oppenheimer Fund’s method of implementing order instructions had been in existence since at least 2002, and had not changed; (c) the Oppenheimer Fund’s method of implementing order instructions saved PTS’ clients money in many circumstances; (d) the Oppenheimer Fund did not refuse to execute the buy instruction into the High Yield Bond Category; (e) not every investor had signed the documents to exit the Oppenheimer Funds and enter the AIM Funds; (f) investors would be paying substantial fees to make the switch out of the Oppenheimer Funds into the AIM Funds; and (g) Wadsworth and his family would not be paying any fees to make the switch into the AIM Funds.
 
The evidence is inconclusive regarding the following assertions:  (a) Oppenheimer is the only fund family that does not trade an account on the same day that PTS submits a trade, (b) PTS had a major buy in the High Yield Bond category that Oppenheimer refused to implement, (c) Oppenheimer was in the process of terminating its agreements with WIC and PTS, and (d) Oppenheimer’s method of implementing instructions had not changed since 2002 and saved PTS’ clients money in many circumstances.
 
There is evidence that:  (a) not all investors had signed documents to exit Oppenheimer and enter AIM Funds, (b) Wadsworth and his family made the switch out of Oppenheimer into AIM and had to pay fees to enter AIM Funds and (c) investors paid substantial fees to make the switch into AIM.
 
Wadsworth made several statements recommending the transfer of clients’ funds from Oppenheimer to AIM.  These statements were surely made in connection with the offer, sale or purchase of a security–Oppenheimer and AIM mutual funds.  Next, it must be considered whether the statements made contained an untrue material fact or omitted to state a material fact.  Connecticut courts have interpreted the term “material” in the securities context as follows:

      A material fact is a fact that “a reasonable investor would have considered significant in making investment decisions.”  Ganino v. Citizens Utilities Co., 228 F.3d 154, 161 (2d Cir. 2000).  A fact need not be outcome determinative for it to be material.  See id., 161-62; Folger Adam Co. v. PMI Industries, Inc., 938 F.2d 1529, 1533-34 (2d Cir.), cert. denied, 502 U.S. 983, 112 S. Ct. 587, 116 L. Ed. 2d 612 (1991).  On the other hand, “[a]n omitted fact may be immaterial if the information is trivial . . . or is so basic that any investor could be expected to know it . . . .”  (Citations omitted; internal quotation marks omitted.)  Ganino v. Citizens Utilities Co., supra, 162; see also Levitin v. PaineWebber, Inc., 159 F.3d 698, 702 (2d Cir. 1998), cert. denied, 525 U.S. 1144, 119 S. Ct. 1039, 143 L. Ed. 2d 47 (1999).               
 
Lehn v. Dailey, 77 Conn. App. 621, 628-29 (Conn. App. Ct. 2003).
 
The fees associated with the transaction were clearly material and, as several clients complained, were not disclosed.  For example, one client who attended the client appreciation meeting complained, “[y]ou clearly misrepresented the transfer to AIM Funds that cost us THOUSANDS of dollars without disclosing to us the cost the night of the dinner when you advised us to sign the paperwork without telling us these very material costs.”  Another client
complained of the fees incurred and stated that he “did not fully understand the costs involved.”  Further, a client who did not attend the meeting and received the letter complained to the Department of the significant fees and potentially unethical practices associated with the Oppenheimer to AIM transaction.  She attached the November 2006 letter from Wadsworth which encouraged investors to make the switch.
 
The November 2006 letter urges clients to immediately sign documents authorizing the transfer to AIM and cites several reasons for WIC’s malcontentedness with Oppenheimer.  The only mention of fees is in a barely legible footer.  In Papic v. Burke, 2007 Conn. Super. LEXIS 820 (aff’d, 113 Conn. App. 198 (Conn. App. Ct. 2009)), the Superior Court relied on Demaria v. Andersen in construing whether securities disclosure was sufficient.  The Demaria court explained, “[a] prospectus will violate federal securities laws if it does not disclose ‘material objective factual matters,’ or buries those matters beneath other information, or treats them cavalierly.”  Demaria v. Andersen, 318 F.3d 170, 180 (2d Cir. N.Y. 2003), citing Olkey, 98 F.3d at 5 (quoting I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991)).  Applying such standard, the disclosure of fees in the letter was insufficient, and similarly, the client appreciation meetings treated the discussion of fees cavalierly.  As Wadsworth testified, he did not discuss fees from the podium, but had prospectuses available for clients to review.  The value to clients of such prospectus disclosure was questionable, at best, considering the voluminous nature of prospectuses and the atmosphere of the client appreciation meetings, where clients were encouraged to sign the transfer documents on the spot.
 
Also in the November 2006 and March 2007 letters, the statement that “every single person signed documents that authorized the change from Oppenheimer to AIM (OVER Three Hundred client accounts)” omits material facts which cause the statement to be misleading.    (Emphasis in original.)  The record is clear that not all WIC clients made the switch and the statement fails to make any distinction between all WIC clients and only attendees at the
client appreciation meetings.  Likewise, its reference to 300 client accounts, representing at the most 83 actual clients, is misleading.
 
In addition, Wadsworth testified that he did not tell clients that WIC and PTS had been kicked out of Oppenheimer in the March 2007 letter because it was “completely irrelevant”.  The termination of WIC’s selling agreement with Oppenheimer is a completely relevant and a material fact which should have been disclosed to investors in the March 2007 letter.  Termination of the selling agreement prevented WIC from executing any further securities transactions in Oppenheimer for its clients.
 
WIC and Wadsworth made material omissions in connection with the offer, purchase and sale of mutual funds when encouraging WIC clients to make the switch from Oppenheimer to AIM.  Such conduct constitutes a wilful violation of Section 36b-4(a) of the Act by WIC and Wadsworth individually, which forms a basis for the revocation of WIC’s broker-dealer registration and Wadsworth’s broker-dealer agent and investment adviser agent registrations pursuant to Section 36b-15(a) of the Act and the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act against WIC and Wadsworth individually and the imposition of a fine pursuant to Section 36b-27(d) of the Act upon WIC and Wadsworth individually.
 
5.
The Department alleges that by using pre-signed blank client forms, providing false signature guarantees, utilizing false names to gain access to client information and by falsely holding themselves out as the client during on-line transactions, both WIC and Wadsworth engaged in dishonest or unethical business practices in the securities business, in wilful violation of Section 36b-4(b) of the Act and within the meaning of Sections 36b-31-15a and 36b-31-15b of the Regulations.
 
Section 36b-4(b) of the Act states, in pertinent part, that:  "No person shall, in connection with the offer, sale or purchase of any security, directly or indirectly engage in any dishonest or unethical practice."
 
Section 36b-31-15a of the Regulations states, in pertinent part, that:
 
(a)  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 broker-dealers without limiting those terms to the following practices: . . .
 
(b)  In construing the term “dishonest or unethical practices in the securities . . . business” as used in this section and in section 36b 15(a)(2)(H) of the general statutes, the commissioner may consider whether the conduct in question is proscribed by any rule of a national securities exchange or self-regulatory organization registered under federal securities laws administered by the United States Securities and Exchange Commission.
 
Section 36b-31-15b of the Regulations states, in pertinent part, that:
 
(a)  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 agents without limiting those terms to the following practices: . . .
 
(c)  In construing the term “dishonest or unethical practices in the securities . . . business” as used in this section and in section 36b 15(a)(2)(H) of the general statutes, the commissioner may consider whether the conduct in question is proscribed by any rule of a national securities exchange or self-regulatory organization registered under federal securities laws administered by the United States Securities and Exchange Commission.
 
Section 36b-15(a)(2)(H) of the Act states, in pertinent part, that:
 
The commissioner may, by order, . . . revoke any registration or, by order, restrict or impose conditions on the securities or investment advisory activities that . . . [a] registrant may perform in this state if the commissioner finds that . . . (2) the . . . 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: . . . (H) has engaged in fraudulent, dishonest or unethical practices in the securities, commodities, investment, franchise, business opportunity, banking, finance or insurance business, including abusive sales practices in the business dealings of such . . . registrant or person with current or prospective customers or clients[.]
 
There is an absence of Connecticut case law construing the phrase “dishonest or unethical practices” within the securities context.  Thus, the phrase should be construed according to the commonly approved usage of the language.  See, Section 1-1(a) of the Connecticut General Statutes.  The Connecticut Supreme Court has stated that when the legislature has not provided a specific definition of a word in a statute, the Court looks to the common understanding of that word as expressed in a dictionary.  State v. Russo, 259 Conn. 436, 449, cert. denied 537 US 879 (2002).  Merriam-Webster’s Collegiate Dictionary 332 (10th ed. 2001) defines “dishonest” as “characterized by lack of truth, honesty, or trustworthiness”, and while there is no definition of “unethical” in Merriam-Webster’s dictionary, Black’s Law Dictionary 1062 (Abridged 6th ed. 1991) defines “unethical” as “not ethical; hence, colloquially, not according to business or professional standards.”
 
With respect to such allegations, the evidence indicates the following:  a handful of blank pre-signed forms were maintained by WIC.  The SEC had previously warned WIC that utilization of such forms was inappropriate and an internal control weakness.  While the pre-signed forms constitute evidence that WIC engaged in an unethical practice in the securities business, not purporting with professional standards, in violation of Section 36b-15(a)(2)(H) of the Act, it is unclear to what extent they were actually used to satisfy the requisite nexus “in connection with an offer, sale or purchase of any security”.  Likewise, the only evidence of WIC utilizing false names to mutual fund companies is the affidavit submitted by Lori Brelsford Verzillo.  While this constitutes evidence that WIC engaged in a dishonest practice in the securities business, in violation of Section 36b-15(a)(2)(H) of the Act, it is unclear
whether such use of false names was in connection with an offer, sale or purchase of a security as required by Section 36b 4(b) of the Act.
 
There is also insufficient evidence indicating that Wadsworth held himself out as the client with respect to on-line transactions.  While it is almost certain the Dombrowiks would not perform any transactions on-line by themselves, Wadsworth may have simply helped the Dombrowiks while they were physically present in his office or participating over the phone, as asserted by Wadsworth.  Furthermore, Mr. McDonald testified that such manner of
accessing a client’s on-line account would be perfectly acceptable.
 
Finally, WIC and Wadsworth did engage in a dishonest or unethical practice by using signature guarantees in a manner that was inconsistent with industry standard.  Both Heidi Wayne and Wadsworth admitted to using signature guarantee stamps without being physically present to see the person sign the documents.  This was not consistent with the practice and purpose of signature guarantees as testified by Mr. McDonald and stated in the supervisory manual. 
This also created the opportunity for signatures to be guaranteed whereby individuals no longer had the legal capacity to sign, such as in the case of Mr. Neher.  Mr. Neher died on September 1, 2003, but yet, on April 27, 2005, his signature was guaranteed by Aldieri of WIC in connection with a securities transaction.
 
WIC’s and Wadsworth’s use of signature guarantees constitute wilful violations of Section 36b-4(b) of the Act and constitutes engaging in dishonest or unethical practices within the meaning of Sections 36b-31-15a and 36b-31-15b of the Regulations, respectively.  WIC also engaged in dishonest or unethical practices within the meaning of Section 36b-31-15a of the Regulations by maintaining blank pre-signed forms and utilizing false names to mutual fund
companies.  Such conduct is a basis for the revocation of WIC’s broker-dealer registration and Wadsworth’s broker-dealer agent and investment adviser agent registrations pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act against WIC and Wadsworth individually and the imposition of a fine pursuant to Section 36b-27(d) of the Act upon WIC and Wadsworth individually.
 
6.
The Department alleges that by failing to update the Commissioner, through the CRD, to reflect the change in ownership of WIC, WIC failed to promptly file a correcting amendment in wilful violation of Section 36b-31-14e of the Regulations.
 
Section 36b-31-14e(a) of the Regulations, states, in pertinent part: "If the information contained in any application for registration as a broker-dealer . . . or in any amendment thereto, is or becomes inaccurate . . . in any material respect for any reason, the . . . registrant shall promptly file a correcting amendment with the commissioner."
 
The “Direct Owners/Executive Officers” listed on the WIC CRD as of April 25, 2011, listed the Wadsworth Family, LLC as owner of at least 75% of WIC since June 2002.  On September 30, 2010, however, according to the records of the Connecticut Secretary of the State, the Wadsworth Family, LLC was dissolved, noting that the “LLC has discontinued doing business and has no assets.”  Mr. McDonald testified that a broker-dealer form would have to be
amended if the entity listed as the broker-dealer’s owner dissolved.  Wadsworth contended that the entity simply moved to Florida and provided evidence of a Florida address, however, the Florida entity had a different tax identification number than the Connecticut entity referenced on the CRD.  (Ex. A to Wadsworth’s brief, November 7, 2011.)  No amendment indicating such change in ownership was filed promptly as required by Connecticut regulations.
 
WIC’s failure to file a correcting amendment on the CRD from September 30, 2010 to April 25, 2011, constitutes a wilful violation of Section 36b-31-14e(a) of the Regulations, which forms a basis for the revocation of WIC’s broker-dealer registration in Connecticut under Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine under Section 36b-27(d) of the Act.
 
7.
The Department alleges that WIC and Wadsworth offered securities that were not registered, in wilful violation of Section 36b-16 of the Act.
 
Section 36b-16 of the Act states, in pertinent part, that:  "No person shall offer or sell any security in this state unless (1) it is registered under sections 36b-2 to 36b-34, inclusive, (2) the security or transaction is exempted under section 36b-21, or (3) the security is a covered security provided such person complies with any applicable requirements in subsections (c), (d) and (e) of section 36b-21."
 
Section 36b-3(16)(B) of the Act states that “offer” or “offer to sell” includes “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value”.
 
Section 36b-21(g) of the Act states, in pertinent part, that: "In any proceeding under sections 36b-2 to 36b-34, inclusive, the burden of proving an exemption, preemption, exclusion or an exception from a definition is upon the person claiming it."
 
Wadsworth and WIC offered shares of DECA ONE to clients by letter dated June 29, 2006.  Wadsworth admitted to not filing any registration documents or notice filings for such security with the State of Connecticut.  However, in WIC’s brief, Respondents assert the exemption provided by Section 36b-21(b)(15) of the Act, which states in pertinent part:
 
[A]ny transaction if all the following conditions are satisfied: (A) The offer and sale is effectuated by the issuer of the security; (B) the total number of purchasers of all securities of the issuer does not exceed ten . . . (C) no advertisement, article, notice or other communication published in any newspaper, magazine or similar medium, broadcast over television or radio or communicated by other electronic means or any other general solicitation is used in connection with the sale; and (D) no commission, discount or other remuneration is paid or given directly or indirectly in connection with the offer and sale, and the total expenses, excluding legal and accounting fees, in connection with the offer and sale do not exceed one per cent of the total sales price of the securities. . . .
 
The applicability of any of the statutory exemptions in Section 36b-21 of the Act is a question of fact.  Andresen, supra, at 325.  By the facts presented during the hearing, it would appear that such exemption applies to this transaction.  DECA ONE was offered only by Wadsworth on behalf of WIC, the only purchasers of the security were Wadsworth family members, and there was no public advertisement of the security.  The record fails to establish that Wadsworth and WIC offered securities in violation of Section 36b-16 of the Act.
  
8.
The Department alleges that by allowing Aldieri to act as a manager without having submitted evidence that he had taken and passed an examination as principal, WIC wilfully violated Section 36b-31-15e of the Regulations.
 
Section 36b-31-15e of the Regulations states, in pertinent part:
 
(a)  For purposes of this section, “manager” means (1) any person who directly or indirectly supervises securities sales personnel or (2) any person responsible for the day-to-day operation and supervision of an office of a broker-dealer in this state.
 
(b)  Each applicant for broker-dealer registration shall supply evidence to the commissioner that all officers, partners or sole proprietors who act as managers and all managers shall have taken and successfully passed an examination as principal given by the United States Securities and Exchange Commission or by a securities self-regulatory organization registered under the Securities Exchange Act of 1934.
 
(c)  Each registered broker-dealer shall supply evidence to the commissioner that all new officers, partners or sole proprietors who act as managers shall have taken and successfully passed an examination as principal given by the United States Securities and Exchange Commission or by a securities self-regulatory organization registered under the Securities Exchange Act of 1934.
 
The evidence clearly indicates that Aldieri was acting as a manager for WIC and failed to take the requisite principal exam.  Wadsworth testified that in 2002, the NASD suggested that Aldieri should take the principal exam and Wadsworth agreed to such undertaking.  Yet, as Wadsworth testified, Aldieri failed to take the exam even though his responsibilities remained the same and he remained employed with WIC through 2007.
 
WIC’s failure to provide evidence to the Division that Aldieri, while acting as manager, had successfully passed his principal examination constitutes a wilful violation of Section 36b-31-15e of the Regulations, which form a basis for the revocation of WIC’s broker-dealer registration pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine pursuant to Section 36b-27(d) of the Act.
 
9.
The Department alleges that Wadsworth made false or misleading statements to the Commissioner, in wilful violation of Section 36b-23 of the Act by stating in his CRD filing and letters to the Division that there had never been a complaint filed against him, stating that WIC did not use or maintain e-mail accounts or pre-signed blank forms in conducting business, and providing an inaccurate list of WIC employees.
 
Section 36b-23 of the Act states, in pertinent part: "No person shall make or cause to be made orally or in any document filed with the commissioner or in any proceeding, investigation or examination under sections 36b-2 to 36b-34, inclusive, any statement that is, at the time and in the light of the circumstances under which it is made, false or misleading in any material respect or, in connection with the statement, omit to state a material fact  necessary to make the statement made, in the light of the circumstances under which was made, not false or misleading."
 
Since Connecticut courts have not construed “material” in this context, the Merriam-Webster’s definition of this term is prescriptive. Merriam-Webster’s defines “material” as “having real importance or great consequences <facts ~ to the investigation>”.  Merriam-Webster’s Collegiate Dictionary 715 (10th ed. 2001).
 
The record establishes that there have been several complaints against Wadsworth, and Wadsworth admitted as much in his testimony at the hearing. However, Wadsworth falsely stated in both his CRD filing and letters to the Department that there had never been a complaint against him.  Furthermore, the fact of whether Wadsworth ever had a complaint against him is clearly material to a regulator, as testified to by Mr. McDonald, in order to provide a full regulatory picture of the firm and an understanding of the underlying problems at the firm.
 
The evidence does not establish that Wadsworth told Division staff that WIC did not use e-mail accounts or pre-signed blank forms in conducting business.  With respect to the personnel list provided by Wadsworth on April 8, 2011, Heidi Wayne should have been listed as an employee.  However, the failure to disclose her limited WIC employment status is not false or misleading in a material respect.  Similarly, the failure to disclose Stephen Frank as
an executive representative is not misleading in a material respect, as the list does mention the existence of additional persons who perform services for WIC as independent contractors.
 
Wadsworth’s statements to the Division and in his CRD filing that there had never been a complaint against him constitute a wilful violation of Section 36b-23 of the Act, which forms a basis for the revocation of Wadsworth’s broker-dealer agent and investment adviser agent registrations pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine pursuant to
Section 36b-27(d) of the Act.

Authority to Issue Order to Cease and Desist and Impose Fine

Section 36b-27(a) of the Act provides, in pertinent part, that:

 
Whenever it appears to the commissioner after an investigation that any person has violated, is violating or is about to violate any of the provisions of sections 36b-2 to 36b-34, inclusive, or any regulation, rule or order adopted or issued under said sections, . . . or that any person has engaged in a dishonest or unethical practice in the securities . . . 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 (1) the person . . . to cease and desist from the violations . . . of the provisions of said sections or of the regulations, rules or orders thereunder . . . or from further engaging in such dishonest or unethical practice. . . .  After such an order is issued, the person named in the order may, within fourteen days after receipt of the order, file a written request for a
hearing.  Any such hearing shall be held in accordance with the provisions of chapter 54.

Section 36b-27(d) of the Act provides, in pertinent part, that:

 
(1)  Whenever the commissioner finds as the result of an investigation that any person has violated any of the provisions of sections 36b-2 to 36b-34, inclusive, or any regulation, rule or order adopted or issued under said sections, the commissioner may send a notice to (A) such person . . . by registered or certified mail, return receipt requested . . . .  The notice shall be deemed received by the person on the earlier of the date of actual receipt or the date seven days after the date on which such notice was mailed or sent.  Any such notice shall include:  (i) A reference to the title, chapter, regulation, rule or order alleged to have been violated; (ii) a short and plain statement of the matter asserted or charged; (iii) the maximum fine that may be imposed for such violation; (iv) a statement indicating that such person may file a written request for a hearing on the matters asserted not later than fourteen days after receipt of the notice; and (v) the time and place for the hearing.
 
(2)  If a hearing is requested within the time specified in the notice, the commissioner shall hold a hearing upon the charges made unless such person fails to appear at the hearing.  Any such hearing shall be held in accordance with the provisions of chapter 54.  After the hearing if the commissioner finds that the person has violated . . . any of the provisions of sections 36b-2 to 36b-34, 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 one hundred thousand dollars per violation be imposed upon such person.  If such person fails to appear at the hearing, the commissioner may, as the facts require, order that a fine not exceeding one hundred thousand dollars per violation be imposed upon such person.  The commissioner shall send a copy of any order issued pursuant to this subsection by registered or certified mail, return receipt requested, . . . to any person named in such order.

Authority to Revoke and to Restrict or
Impose Conditions on Registration

The Commissioner is provided with the authority to revoke the broker-dealer registration of WIC, to restrict or impose conditions on the securities activities of WIC, and to revoke the broker-dealer agent and investment adviser agent registrations of Wadsworth pursuant to Section 36b-15(a) of the Act.

Section 36b-15(a) of the Act states, in pertinent part,

 
The commissioner may, by order . . .  revoke any registration or, by order, restrict or impose conditions on the securities or investment advisory activities that . . . [a] registrant may perform in this state if the commissioner finds that (1) the order is in the public interest, and (2) the . . . registrant or, in the case of a broker-dealer or investment adviser, any partner, officer, or director or 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-34, inclusive, . . . or any regulation or order under said sections ... (H) has engaged in fraudulent, dishonest or unethical practices in the securities, commodities, investment, franchise, business opportunity, banking, finance or insurance business, including abusive sales practices in the business dealings of such . . . registrant or person with current or prospective customers or clients; . . . (K) has failed reasonably to supervise:  (i) The agents . . . of such . . . registrant, if the . . . registrant is a broker-dealer . . . ; or (ii) the agents of a broker-dealer . . . if such . . . registrant . . . is or was an agent . . . or other person charged with exercising supervisory authority on behalf of the broker-dealer . . . [or] (L) in connection with any investigation conducted pursuant to section 36b-26 or any examination under subsection (d) of section 36b-14, has made any material misrepresentation to the commissioner or upon request made by the commissioner, has withheld or concealed material information from, or refused to furnish material information to the commissioner, provided, there shall be a rebuttable presumption that any records . . . that are withheld or concealed from the commissioner in connection with any such investigation or examination are material, unless such presumption is rebutted by
substantial evidence. . . .
 
(f)  No order may be entered under this section except as provided in subsection (c) of this section without (1) appropriate prior notice to the . . . registrant and to the employer or prospective employer if such . . . registrant is an agent or investment adviser agent, (2) opportunity for hearing, and (3) written findings of fact and conclusions of law.

The record establishes that the violations of the Act and Regulations by WIC and Wadsworth were wilful, as required by Section 36b-15(a)(2)(B) of the Act.  WIC and Wadsworth were aware of the underlying conduct, which constituted the violations discussed herein.  The record also establishes that WIC and Wadsworth engaged in “dishonest or unethical practices in the securities . . . business” within the meaning of Section 36b-15(a)(2)(H) of the Act; WIC and Wadsworth failed to reasonably supervise agents within the meaning of Section 36b-15(a)(2)(K) of the Act by failing to supervise Aldieri; WIC withheld or refused to furnish material information to the Commissioner within the meaning of Section 36b-15(a)(2)(L) of the Act by failing to produce its corporate records; and Wadsworth made material misrepresentations to the Commissioner within the meaning of Section 36b 15(a)(2)(L) of the Act by stating that there had never been a complaint against him.

Notice

Section 4-177 of the Connecticut General Statutes provides, in pertinent part, that:

 
(a)  In a contested case, all parties shall be afforded an opportunity for hearing after reasonable notice.
 
(b)  The notice shall be in writing and shall include:  (1) A statement of the time, place, and nature of the hearing; (2) a statement of the legal authority and jurisdiction under which the hearing is to be held; (3) a reference to the particular sections of the statutes and regulations involved; and (4) a short and plain statement of the matters asserted.

The Amended Notice issued by the Commissioner complied with Sections 36b-27(a), 36b-27(d) and 36b-15(f) of the Act and Section 4-177 of the Connecticut General Statutes.

Public Interest

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

 
No . . . order may be made . . . 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-34, inclusive.

In First Providence, a Connecticut court reviewing the term “public interest” in the context of sanctioning an entity’s broker-dealer registration stated, “the legislative history provides some evidence that the CUSA was intended to protect the interests of citizens of Connecticut and, thus, support the commissioner’s finding that the revocation is in the ‘public interest’.  In introducing the bill to the House, Representative William J. Scully, Jr. stated ‘we feel this bill will go a long way to help the people of the State to protect their interest . . . ’ 20 H.R. Proc., PT. 11, 1977 Sess., p. 4518.  Furthermore, ‘the primary purpose behind [CUSA] was to institute comprehensive registration requirements and thereby improve surveillance of securities trading.”  First Providence, supra, at 21-22 citing Connecticut National Bank v. Giacomi, 233 Conn. 304, 320, 659 A.2d 1166 (1995).

There was ample testimony during the hearing from clients of WIC and Wadsworth who were very pleased with their investment experience.  Wadsworth had provided them with considerable returns on their investments and good customer service during his 40 years with the firm.  On several occasions, Wadsworth went above and beyond the call of duty advocating for his clients.  Wadsworth also engaged in many philanthropic endeavors from establishing a charitable foundation to running a racquetball tournament for numerous years.

While such actions and service are commendable, the inquiry of whether sanctioning an individual’s or entity’s security registration is in the public interest does not end there.  Public interest requires appropriate surveillance of securities transactions in accordance with the legislative intent of the Act and thus, it is imperative that securities regulatory requirements such as e-mail retention and effective supervisory procedures are complied with by a broker-dealer.  It is also necessary that registered individuals and entities cooperate with securities regulators, heed regulator warnings and can be relied on to provide accurate and complete records and testimony to their regulator.  These mechanisms exist to create accountability with respect to securities transactions and provide assurance that clients’ interests and monies are adequately protected.

WIC’s practices were not compliant with securities laws and regulations.  Especially in recent years, Wadsworth had been repeatedly warned by regulators of such concerns.  The record reflects that Wadsworth ignored these warnings and several of the troublesome practices continued.  Overall, Wadsworth and WIC demonstrated a general indifference to securities compliance in a highly regulated environment.  As Wadsworth admitted to being the person responsible for all of WIC’s actions, Wadsworth was the primary cause of WIC’s compliance failures.

Wadsworth failed to display integrity in his interactions with both regulators and clients.  Time and time again, Wadsworth changed his story to regulators–for example, as to whether:  offering documents were drafted for DECA ONE, any complaints had been made by clients and WIC had any affiliates.  Wadsworth was also evasive and not forthcoming to regulators, as demonstrated by his response to FINRA concerning the offering of DECA ONE in which he mentioned only six, of the over 80 persons, who received the DECA ONE letter.  These same characteristics carried over to Wadsworth’s dealings with his clients as evidenced by the fact that Wadsworth never conveyed the complete truth concerning the Oppenheimer to AIM transaction.

Finally, integral to the considerations in sanctioning a broker-dealer’s registration is the effect of such action on existing clients and the surrounding community.  Great measures are taken to keep businesses operating in Connecticut and to ensure that the best interests of clients are met.  WIC’s clients have a long history with the firm and WIC’s continued existence will likely provide some level of stability and convenience for such clients. Moreover, with new management, an atmosphere of compliance and transparency to regulators and clients may prosper.  Accordingly, the Order below provides such an alternative for WIC if it seeks to avail itself of such option.

I conclude that it is in the public interest, for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of Sections 36b-2 to 36b-34, inclusive, of the Act to revoke the investment adviser agent and broker-dealer agent registrations of Wadsworth and to enter the following order.

ORDER

Having read the record, I hereby ORDER:

1.

Pursuant to Sections 36b-15(a)(2)(B), 36b-15(a)(2)(H), 36b-15(a)(2)(K) and 36b-15(a)(2)(L) of the Act, that Wadsworth Investment Co., Inc.’s registration as a broker-dealer be and is hereby REVOKED effective ninety (90) days from the date this Order is mailed, unless Wadsworth Investment Co., Inc., complies with the following restrictions and conditions on its broker-dealer activities in Connecticut:

(a)   
No later than ninety (90) days from the date this Order is mailed, Wadsworth Investment Co., Inc., shall:

(1)    
Designate, and identify in writing to the Commissioner, a new President and full-time Chief Compliance Officer, sufficiently experienced in securities regulation, to replace William F. Wadsworth.  The President shall be responsible for the supervision of the entire broker-dealer operations of Wadsworth Investment Co., Inc., including compliance and sales practices.  The Chief Compliance Officer shall be responsible for supervising the compliance aspects of the firm’s operations in and from Connecticut and for providing compliance training to employees and agents of Wadsworth Investment Co., Inc.  The experience and identity of such President and Chief Compliance Officer shall be subject to approval by the Commissioner.
 
(2)   
Submit a plan, acceptable to the Commissioner, including specific steps and time periods, to:  (A) divest the ownership interest in the firm, either direct or indirect, held by William F. Wadsworth; (B) relocate the physical location of Wadsworth Investment Co., Inc.’s offices to a location other than William F. Wadsworth’s residential address; and (C) notify all clients of this Order and changes to Wadsworth Investment Co., Inc.’s future organizational structure.
 
(3)    
Submit evidence, acceptable to the Commissioner, that Wadsworth Investment Co., Inc., has complied with all the terms of this Order, including the payment of fines, and remedied all underlying conduct causing or contributing to the violations herein, including, but not limited to:  (A) establishing an effective system for supervising the activities of its agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations; (B) implementing an e-mail retention system in accordance with Rule 17a-4 of the Securities Exchange Act; (C) destroying all pre-signed blank client forms and clients’ user ids and passwords for on-line investment accounts; and (D) ceasing the use of signature guarantee stamps without Wadsworth Investment Co., Inc., employees being physically present to see the person sign the document.
 
(4)    
Submit an affidavit to the Commissioner, executed by a duly authorized officer, attesting to its wilful compliance with the restrictions and conditions on its broker-dealer registration in Connecticut enumerated in paragraphs (b), (c) and (d) below, and consenting to the immediate revocation of Wadsworth Investment Co., Inc.’s broker-dealer registration in Connecticut, without an opportunity for notice and hearing in conjunction therewith, if Wadsworth Investment Co., Inc., fails to abide by any of the restrictions and conditions stated in paragraphs (b), (c) and (d) below; provided that, prior to any such immediate revocation, the Commissioner agrees to provide Wadsworth Investment Co., Inc., with an informal opportunity to show compliance with such
restrictions and conditions.
 
(b)
After such ninety (90) day period, Wadsworth Investment Co., Inc., shall ensure that William F. Wadsworth no longer:  (1) acts in any capacity for Wadsworth Investment Co., Inc., whether or not compensated for such services; and (2) exercises any control of Wadsworth Investment Co., Inc., either directly or indirectly, including, but not limited to, participating in corporate governance matters, training personnel, and supervising the daily operations, sales practices and compliance aspects of the firm.
 
(c)
The restrictions and conditions specified in paragraph (a)(1) above shall remain in effect for a period of three (3) years following the date this Order is mailed. Wadsworth Investment Co., Inc., shall seek the approval by the Commissioner for any successor President or Chief Compliance Officer during such three (3) year period.
 
(d)
The plan submitted to the Commissioner pursuant to paragraph (a)(2) above shall be fully implemented in a time period acceptable to the Commissioner, and the restrictions on Wadsworth Investment Co., Inc., pursuant to items (A) and (B) of such paragraph shall be permanent.
 
(e) As used in the above restrictions and conditions, Wadsworth Investment Co., Inc., shall include any successor in interest. 

2.
Pursuant to Sections 36b-15(a)(2)(B), 36b-15(a)(2)(H), 36b-15(a)(2)(K) and 36b-15(a)(2)(L) of the Act, that William F. Wadsworth’s registrations as an investment adviser agent and a broker-dealer agent in Connecticut be and are hereby REVOKED.  The revocation of such registrations precludes William F. Wadsworth from engaging in investment adviser agent and broker-dealer agent activities in Connecticut that solicit or facilitate new business, including for existing clients.  The revocation of such registrations does not preclude William F. Wadsworth from engaging in activities necessary to the winding down of his business in Connecticut, such as liquidating transactions, transferring accounts, forwarding any checks received, responding to regulatory inquiries, and otherwise fielding client telephone calls for account servicing or document requests, for a period of sixty (60) days from the date this Order is mailed;
 
3.
Pursuant to Section 36b-27(a) of the Act, that the Amended and Restated Order to Cease and Desist issued against Wadsworth Investment Co., Inc., on June 1, 2011, shall be and is hereby made PERMANENT, with respect to violations of Sections 36b-4(a), 36b-4(b), 36b-14(a) and 36b 14(d) of the Act, Sections 36b-31-6f, 36b-31-14a, 36b-31-14e(a), 36b-31-14f and 36b-31-15e of the Regulations and dishonest or unethical practices within the meaning of Section 36b-31-15a of the Regulations;
 
4.
Pursuant to Section 36b-27(a) of the Act, that the Amended and Restated Order to Cease and Desist issued against William F. Wadsworth on June 1, 2011, shall be and is hereby made PERMANENT, with respect to violations of Sections 36b-4(a), 36b-4(b) and 36b-23 of the Act and dishonest or unethical practices within the meaning of Section 36b-31-15b of the Regulations;
5.
Pursuant to Section 36b-27(d) of the Act, that a FINE of Two Hundred Fifty Thousand Dollars ($250,000) be imposed against Wadsworth Investment Co., Inc., to be remitted to the Department of Banking by cashier’s check, certified check or money order, made payable to “Treasurer, State of Connecticut”, no later than forty-five (45) days from the date this Order is mailed;
 
6.
Pursuant to Section 36b-27(d) of the Act, that a FINE of Two Hundred Thousand Dollars ($200,000) be imposed against William F. Wadsworth, to be remitted to the Department of Banking by cashier’s check, certified check or money order, made payable to “Treasurer, State of Connecticut”, no later than forty-five (45) days from the date this Order is mailed; and
 
7. The Order shall become effective when mailed.

Dated at Hartford, Connecticut,       ________/s/________ 
this 7th day of February 2012.   Howard F. Pitkin 
    Banking Commissioner 


This Order was sent by certified mail,
return receipt requested, to
Respondents and Stephen Z. Frank, Esq.,
and hand delivered to Paul A. Bobruff, Esq.,
on February 7, 2012.

Wadsworth Investment Co., Inc. 
c/o William F. Wadsworth, President
879 Church Street
Wallingford, CT 06492
Certified Mail No. 7011 0470 0002 2573 1659

Portfolio Timing Service 
d/b/a PTS Asset Management
c/o William F. Wadsworth, Jr.
565 Washington Avenue, Suite 7
North Haven, CT 06473
Certified Mail No. 7011 0470 0002 2573 1666

William F. Wadsworth  
879 Church Street
Wallingford, CT 06492
Certified Mail No. 7011 0470 0002 2573 1673

William F. Wadsworth, Jr. 
141 Four Mile Road
West Hartford, CT 06107
Certified Mail No. 7011 0470 0002 2573 1680

Stephen Z. Frank, Esq. 
P. O. Box 129
North Conway, NH 03860
Certified Mail No. 7011 0470 0002 2573 1697

Paul A. Bobruff, Esq.
Principal Attorney
State of Connecticut
Department of Banking
260 Constitution Plaza
Hartford, CT 06103


 Exhibit A

Transcript Assignments


 Volume Hearing Date 
   
 1
  July 19, 2011
 2
  July 20, 2011  
 3
  July 21, 2011
 4
   August 3, 2011
 5
  August 4, 2011 
 6
  August 5, 2011 
 7
  August 16, 2011 
 8
  August 27, 2011 
 9
  August 18, 2011 
 10
  August 19, 2011 
 11
  September 12, 2011 
 12
  September 14, 2011 
 13
  September 15, 2011 

                              
 


Administrative Orders and Settlements