DOB: J. Capital Advisors - Hearing Decision

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IN THE MATTER OF:

J. CAPITAL ADVISORS, LLC 
          
             d/b/a 

J. CAPITAL ADVISORS  
WEALTH MANAGEMENT
   (CRD No. 151176)
   ("J. Capital Advisors")

AARON JOUSAN JOHNSON
   (CRD No. 4402048)
   ("Johnson")

(Collectively, "Respondents")

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FINDINGS OF FACT,

CONCLUSIONS OF LAW

AND ORDER

DOCKET NO. RS-13-8063-S

INTRODUCTION

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

The above-referenced matter was initiated upon charges brought by the Commissioner to suspend or revoke the registration of J. Capital Advisors as an investment adviser in Connecticut and to suspend or revoke the registration of Johnson as an investment adviser agent in Connecticut.  On March 18, 2013, the Commissioner issued a Notice of Intent to Suspend or Revoke Registration as an Investment Adviser and as an Investment Adviser Agent, Order Summarily Suspending Registration as an Investment Adviser and as an Investment Adviser Agent, and Notice of Right to Hearing against Respondents ("Notice").  The Notice was sent by certified mail, return receipt requested, to Respondents.  On April 1, 2013, Respondents requested a hearing on the Notice.

On April 9, 2013, the Commissioner issued a Notification of Hearing and Designation of Hearing Officer stating that the hearing would be held on May 21, 2013, at 10 a.m. ("Hearing”), at the Department and appointing Attorney Stacey Serrano as Hearing Officer.  On May 21, 2013, Hearing Officer Serrano granted Respondents' request for a continuance of the Hearing, and rescheduled the Hearing to May 28, 2013, at 10 a.m.  On May 28, 2013, a hearing was held at the Department.  Attorney Paul A. Bobruff represented the Department at the Hearing and Respondents failed to appear at the Hearing.  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.

Section 36a-1-31(b) of the Regulations of Connecticut State Agencies provides, in pertinent part, that “[w]hen a party fails to appear at a scheduled hearing, the allegations against the party may be deemed admitted.  Without further proceedings or notice to the party, the presiding officer shall submit to the commissioner a proposed final decision containing the relief sought in the notice . . . . ”

FINDINGS OF FACT

1. J. Capital Advisors is a Connecticut limited liability company formed on August 1, 2007.  J. Capital Advisors maintains its principal office at 1610 Saybrook Road, Haddam, Connecticut 06438 and a mailing address at P.O. Box 385, Haddam, Connecticut 06438.  J. Capital Advisors shares the same address as J. Capital Risk Management LLC, a Connecticut limited liability company formed on December 4,2009, and J. Capital Investment Partners, LLC, a Connecticut limited liability company formed on February 10, 2011.  Other than 1610 Saybrook Road, Haddam, Connecticut, J. Capital Advisors has reported no other offices, either in Connecticut or out-of-state, from which it conducts business. (Hearing Off. Ex. 1.)
2. J. Capital Advisors was registered as an investment adviser under the Act from September 3, 2009 to December 31, 2009 and from February 3, 2010 to the present. (Hearing Off. Ex. 1.)
3. Johnson is an individual whose addresses last known to the Commissioner are c/o J. Capital Advisors Wealth Management, 1610 Saybrook Road, Haddam, Connecticut 06438, and 136 Old Chester Road, Haddam, Connecticut 06438.  At all times pertinent hereto, Johnson was and remains the President and Chief Investment Officer of J. Capital Advisors as well as a control person of the firm.  Johnson is also the President of J. Capital Investment Partners, LLC and J. Capital Risk Management, LLC. (Hearing Off. Ex. 1.)
4. Other than Johnson, J. Capital Advisors has no additional reported officers or control persons. (Hearing Off. Ex. 1.)
5. Johnson was registered as an investment adviser agent of J. Capital Advisors under the Act from September 3, 2009 to December 31, 2009 and from February 3, 2010 to the present. (Hearing Off. Ex. 1.)
6. On December 13, 2012, staff of the Securities and Business Investments Division of the Department ("Division") attempted to conduct an examination of J. Capital Advisors' books and records at the firm's 1610 Saybrook Road, Haddam, Connecticut location.  No one appeared to be on the premises and no one answered the door. (Hearing Off. Ex. 1.)
7. On December 13, 2012, the Division e-mailed Johnson, stating that the Division had visited the firm's office that day but found no one present.  The e-mail indicated that the Division wished to reschedule the examination for December 19, 2012. (Hearing Off. Ex. 1.)
8. On December 13, 2012, Johnson replied to the Division's December 13, 2012 e-mail, stating that he would be out of the country but returning "after New Years." (Hearing Off. Ex. 1.)
9. On January 3, 2013, the Division e-mailed Johnson stating that an examination of the firm's Haddam office had been scheduled for January 7, 2013. (Hearing Off. Ex. 1.)
10. On January 7, 2013, the Division staff again attempted to conduct an examination of J. Capital Advisors' books and records at the firm's 1610 Saybrook Road, Haddam, Connecticut location.  No one appeared to be on the premises and no one answered the door. (Hearing Off. Ex. 1.)
11. On January 7, 2013, the Division e-mailed Johnson, requesting that he supply availability dates for the examination. (Hearing Off. Ex. 1.)
12. By e-mail dated January 29, 2013, Johnson advised the Division "I've been hospitalized and recovering and have been out of commission."  In an e-mail dated January 31, 2013, Johnson stated "I will gladly make arrangements for access to books and records, as stated, I have been ill and on leave." (Hearing Off. Ex. 1.)
13. At no time did Johnson provide specifics to the Division concerning his anticipated recovery time or when he would make the records available for examination.  In addition, at no time did Respondents offer to provide the required records through a third party such as retained legal counsel. (Hearing Off. Ex. 1.)
14. On February 5, 2013, the Division e-mailed Johnson, requesting that he produce the required records on February 20, 2013.  In addition, the Division requested that Johnson appear before the Division on February 28, 2013.  On February 22, 2013, the Division sent a letter to Johnson via certified mail, return receipt requested.  On February 26, 2013, the Division left a telephone message for Johnson concerning Johnson's appearance before the Division on February 28, 2013. (Hearing Off. Ex. 1.)
15. Johnson failed to appear before the Division on February 28, 2013, and the Division received no explanation concerning his absence. (Hearing Off. Ex. 1.)
16. To date, J. Capital Advisors has failed to produce required records or open its records to examination by the Division. (Hearing Off. Ex. 1.)
17. Commencing in 2010, J. Capital Advisors had an arrangement with various clearing brokers pursuant to which advisory clients of J. Capital Advisors would authorize the clearing broker to pay J. Capital Advisors its fees as directed by J. Capital Advisors. (Hearing Off. Ex. 1.)
18. From at least 2011 forward, the frequency and amount of fees deducted from J. Capital Advisors client accounts at the participating clearing firms increased significantly, in some cases causing a marked depletion of client account holdings.  Some of the affected clients filed complaints with the Division, indicating that they had not received prior disclosure concerning the extent of the fees or the basis on which the fees were calculated. (Hearing Off. Ex. 1.)
19. J. Capital Advisors failed to update its Forrn ADV on file with the Commissioner to disclose, inter alia, the status of its business operations, including hours when it was open for business and the scope of it client activity. (Hearing Off. Ex. 1.)
20. By letter dated January 17, 2013, the Division provided Respondents with an opportunity to show compliance with the legal requirements for the retention of their respective registrations.  Although Johnson replied by e-mail on behalf of Respondents, Johnson's response was not persuasive in that he did not fully address the Division's concerns. (Hearing Off. Ex. 1.)
21. During the course of the Department's September 2011 examination of J. Capital Advisors, Johnson submitted three client statements to the Department that contained falsified fee amounts. (Tr. at 21-24.)
22. The Department issued a subpoena to Johnson and J. Capital Advisors in March 2013. (Tr. at 24-25.) Johnson failed to comply with the subpoena, but did provide a personal monthly statement to the Department that had been falsified. (Tr. at 26-27.)
23. From the date of the issuance of the Notice through April 26, 2013, Johnson withdrew approximately $25,000 in fees from J. Capital Advisors' clients' accounts. (Tr, at 28-29.)  Johnson had actively initiated such fee withdrawals after his investment adviser agent registration was suspended by inputting the dollar amounts to be deducted from his clients' accounts to be swept into his sundry account. (Tr. at 31, 43-44.)
24. In total, J. Capital Advisors and Johnson withdrew approximately $654,000 from J. Capital Advisors' clients' accounts. (Tr. at 41.)  Johnson charged excessive fees on all but three of his clients' accounts. (Tr. at 41.)
25. At the hearing, the Department requested that both J. Capital Advisors' investment adviser registration and Johnson's investment adviser agent registration be revoked. (Tr. at 15-16.)

CONCLUSIONS OF LAW

1. Pursuant to 36a-1-31(b) of the Regulations of Connecticut State Agencies, the allegations made in the Notice against J. Capital Advisors and Johnson are deemed admitted.
2. 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).
3. J. Capital Advisors, alone and through its president and control person Johnson, failed to keep required records open to examination by the Commissioner and failed to provide copies of such records to the Commissioner upon the Commissioner's repeated requests, in wilful violation of Section 36b-14(d) of the Act, which constitutes a basis for the revocation of J. Capital Advisors' investment adviser registration pursuant to Section 36b-15(a)(2)(B) of the Act.
4. J. Capital Advisors, alone and through its president and control person Johnson, upon the Commissioner's repeated requests, failed to make its records available to the Commissioner and failed to facilitate the examination of such records, in wilful violation of Section 36b-31-14f(b) of the Regulations, which constitutes a basis for the revocation of J. Capital Advisors' investment adviser registration pursuant to Section 36b-15(a)(2)(B) of the Act.
5. J. Capital Advisors refused, through its president and control person Johnson, to furnish material information to the Commissioner, to wit, books and records required by law, which constitutes a basis for the revocation of J. Capital Advisors' investment adviser registration pursuant to Section 36b-15(a)(2)(L) of the Act.
6. J. Capital Advisors, alone and through its president and control person Johnson, engaged in dishonest or unethical practices in connection with the rendering of investment advice, to wit, deducting excessive, undisclosed client advisory fees from client accounts, in wilful violation of Section 36b-5(f) of the Act, which constitutes a basis for the revocation of J. Capital Advisors' investment adviser registration pursuant to Sections 36b-15(a)(2)(B) and 36b-15(a)(2)(H) of the Act.
7. J. Capital Advisors, alone and through its president and control person Johnson, failed to update its Form ADV, in violation of Section 36b-31-14e(a) of the Regulations.
8. Johnson engaged in dishonest or unethical practices in connection with the rendering of investment advice, to wit, deducting excessive, undisclosed client advisory fees from client accounts, in wilful violation of Section 36b-5(f) of the Act, which constitutes a basis for the revocation of Johnson's investment adviser agent registration pursuant to Sections 36b-15(a)(2)(B) and 36b-15(a)(2)(H) of the Act.
9. Johnson wilfully aided, abetted, counseled, commanded, induced or procured J. Capital Advisors' violation of Section 36b-14(d) of the Act, and Sections 36b-31-14f(b) and 36b-31-14e(a) of the Regulations, which constitutes a basis for the revocation of Johnson's investment adviser agent registration pursuant to Section 36b-15(a)(2)(M) of the Act.
10. The Notice, Hearing and this Findings of Fact, Conclusions of Law and Order comply with Sections 36b-15(f) and 36b-31 of the Act and Sections 4-177 and 4-182 of the Connecticut General Statutes.
11. Based upon the nature of each Respondent's actions in violation of the Act and Regulations and the absence of mitigating factors in the record regarding Respondents' violations, I find that the issuance of this order revoking the registration of J. Capital Advisors as an investment adviser and revoking the registration of Johnson as an investment adviser agent is necessary and appropriate in the public interest and 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.
    
ORDER

Having read the record, I hereby ORDER that:

1. Pursuant to Sections 36b-15(a)(2)(B), 36b-15(a)(2)(H), and 36b-15(a)(2)(L) of the Act, the registration of J. Capital Advisors, LLC d/b/a J. Capital Advisors Wealth Management as an investment adviser in Connecticut be and is hereby REVOKED;
  
2. Pursuant to Sections 36b-15(a)(2)(B), 36b-15(a)(2)(H), and 36b-15(a)(2)(M) of the Act, the registration of Aaron Jousan Johnson as an investment adviser agent in Connecticut be and is hereby REVOKED; and
     
3. This Order shall become effective when mailed.



Dated at Hartford, Connecticut,       _______/s/____________
this 21st day of October 2013.      Howard F. Pitkin 
         Banking Commissioner 



This Order was sent by certified mail,
return receipt requested, to
Aaron J. Johnson on behalf of all Respondents
and hand delivered to Paul A. Bobruff, Esq.,
on October 21, 2013.
 
Aaron J. Johnson
P. 0.Box 385
Haddam, CT  06438
Certified Mail No. 7012 1010 0001 7317 4414
  
    

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