DOB: Ulysses Partners et al - Findings; Order

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IN THE MATTER OF:

ULYSSES PARTNERS, LLC


JAMES E. NEILSEN
(CRD NO. 4825841)

 

(Collectively,
"Respondents")

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FINDINGS OF FACT,
CONCLUSIONS OF LAW
AND ORDER

DOCKET NO. CRF-13-8014-S
 

[Editorial Note:  Footnotes appear at end of document.]

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 Ulysses Partners, LLC (“Ulysses”) and James E. Neilsen (“Neilsen”), impose a fine upon each Respondent and issue an order of restitution against each Respondent.  On January 9, 2014, the Commissioner issued an Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing against Respondents (“Notice”).  On February 18, 2014, the Commissioner amended paragraph 11 of the Notice by issuing an Amendment to Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing (“Amendment”).

The Notice, as amended, alleges that:  (1) Ulysses transacted business as a broker-dealer in Connecticut absent registration, in violation of Section 36b-6(a) of the Act; (2) Neilsen transacted business as a broker-dealer agent of Ulysses in Connecticut absent registration, in violation of Section 36b-6(a) of the Act; (3) Respondents offered and sold securities in or from Connecticut to at least ten investors, which securities were not registered in Connecticut under the Act, in violation of Section 36b-16 of the Act; and (4) the conduct of Respondents constitutes, 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 violation of Section 36b-4(a) of the Act.

On January 23, 2014, Respondents requested a hearing.  After due notice, a hearing was held at the Department of Banking (“Department”) on April 22, 2014 and June 17, 2014.  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.

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

 
Procedural Findings
  
1. On January 9, 2014, the Commissioner issued an Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing against Respondents.  (HO Ex. 1.)
2. On January 23, 2014, the Department received a written request for a hearing from Brian J. Woolf, Esq., Woolf Law Firm, LLC on behalf of Respondents.  (HO Ex. 1.)
3. On January 27, 2014, the Commissioner appointed Attorney Stacey Serrano as Hearing Officer.  (HO Ex. 1.)
4. On February 18, 2014, the Commissioner issued an Amendment to Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing against Respondents.  (HO Ex. 2.)
5. On February 14, 2014, the Hearing Officer continued the hearing in the matter from March 4, 2014 to April 22, 2014.  (HO Ex. 4.)
6. The hearing was held on April 22, 2014 and June 17, 2014.  (Tr. 4/22/14 (“Tr. 1”) and 6/17/14 (“Tr. 2”).)
7. Attorney Elena Zweifler appeared at the hearing on behalf of the Department.  (Tr. 1 at 5.)
8. Attorney Brian Woolf appeared at the hearing on behalf of both Respondents.  (Tr. 1 at 5.)
9. All investors in Ulysses who testified during the administrative hearing (Investors 1, 2, 3 and 4) were sequestered and did not hear each other’s testimony.  (Tr. 1 at 7.)
10. On September 18, 2014, the parties stipulated that Respondent’s Exhibit B should be amended by Exhibit 4 dated 9-18-14 and that such exhibit accurately represents the identity of the persons who invested in Ulysses and the principal amount invested by each person.  Also on September 18, 2014, the Hearing Officer accepted such exhibit into evidence.
 
  
Respondents
    
11. The intended purpose of Ulysses was to solicit hedge funds and earn compensation for such solicitation.  (Tr. 1 at 36.)
12. Ulysses was never registered as a broker-dealer or investment adviser in Connecticut, nor did it have a securities registration or exemption notice on file.  (Tr. 1 at 49, 65; Tr. 2 at 27-29; Exs. 13 and 14.)
13. Since 2007, Ulysses was never profitable.  (Tr. 2 at 9.)
14. From 2007 to 2009, the Principals of Ulysses were James E. Neilsen and Catherine Sheridan.  (Tr. 1 at 36-37; Ex. 18 at 19-20.)  Ms. Sheridan left Ulysses as principal at the end of 2009.  (Ex. 18 at 20.)
15. Ms. Sheridan represented that she required a monthly draw from Ulysses of approximately $45,000 a month through January 2011, and had received approximately $2 million from Ulysses over five years.  (Ex. 18 at 35, 81-82, 125-126.)  Ms. Sheridan represented that such monies were for living expenses, her family, and expenses related to the business.  (Ex. 18 at 35.)
16. Neither the Ulysses promissory notes, the subscription agreements nor marketing materials indicated that Ms. Sheridan would receive the substantial sums of money she did.  (Tr. 2 at 40.)
17. Neilsen was a CPA.  (Tr. 1 at 38.)  As a CPA, Neilsen performed routine tax functions, provided investment advice and offered investments.  (Tr. 1 at 38-39.)
18. Neilsen was Chief Financial Officer of Ulysses.  In this capacity, he was responsible for day-to-day accounting, capital raising and soliciting of investors on behalf of Ulysses.  (Tr. 1 at 39-41; Tr. 2 at 11.)  Generally, Neilsen solicited the investments in Ulysses.  (Tr. 1 at 72.)
19. Neilsen was employed as a broker-dealer representative at Tradition Asiel Securities Inc. from December 17, 2004 to July 2, 2007.  (Tr. 1 at 46-48; Ex. 15.)
20. In August 2008, Neilsen began employment with Sound Securities, LLC as a broker-dealer agent.  (Ex. 15; Tr. 1 at 47-48.)  Neilsen ended employment with Sound Securities LLC in December of 2009 and became affiliated with Longship Alternative Asset Management on January 15, 2010.  (Ex. 15; Tr. 1 at 47.)  Neilsen was licensed with FINRA with Longship Alternative Asset Management but not registered or licensed in the State of Connecticut to sell securities with that entity.  (Tr. 1 at 47.)
21. Neilsen has not been licensed or registered with the Connecticut Securities and Business Investments Division in any capacity since December 9, 2009.  (Tr. 1 at 65; Ex. 15.)
  
Investors in Ulysses
    
22. The Department commenced its investigation as a result of a complaint from a Ulysses investor.  (Tr. 1 at 64.)
23. During the hearing, Respondents introduced an exhibit indicating that from May 2005 through August 2012, 29 investors had invested a total of $6,842,156 in Ulysses, 7 of which were supposedly family members.  (Resp. Ex. B.)
24. According to Exhibit 4 dated 9-18-14, approximately 33 investors, 7 of which were supposedly family members, invested a total of $7,438,541 in Ulysses.  (Exhibit 4 dated 9-18-14.)  The list also indicates $1,895,994 in accrued interest, $4,058,221 in payments made and $5,276,315 as the balance outstanding.  (Exhibit 4 dated 9-18-14.)
25. All investors’ monies were deposited into the same Ulysses bank account for which Neilsen was signatory.  (Tr. 2 at 8, 31.)  Ms. Sheridan was not party to any Ulysses checking accounts.  (Ex. 18 at 23.)
26. Generally, the individual investors invested money in Ulysses to receive a profit or return on their investment.  (Tr. 2 at 9.)  Only one investor in Ulysses was provided written information concerning the investment prior to investing.  (Tr. 2 at 23.)
27. Generally, the investors in Ulysses did not play a role or have decision-making authority concerning Ulysses.  The only individuals with decision making authority for Ulysses were Neilsen and Ms. Sheridan.  (Tr. 2 at 10-11.)
  
Investor 1
 
28. Investor 1 considered Neilsen a good friend and had known him for 18 to 20 years.  (Tr. 1 at 145.)
29. Neilsen had prepared Investor 1’s personal and business taxes for years prior to investing in Ulysses.  (Tr. 1 at 145-146.)
30. Neilsen solicited Investor 1 to invest in Ulysses.  (Tr. 1 at 147.)  In May 2006, Investor 1 provided $250,000 to Ulysses for what he understood to be an investment.  (Tr. 1 at 147, 173.)
31. Investor 1 entered into an “Investment Agreement” with Ulysses effective May 11, 2006, evidencing a $250,000 investment in Ulysses.  (Ex. 9a.)  The Investment Agreement was executed by Neilsen on behalf of Ulysses and stated that the investor would “receive all the rights as an owner” and the investment would be “personally guaranteed by James E Neilsen”.  (Ex. 9a at 1.)  The Investment Agreement also provided for “a guaranteed monthly draw in the amount of five percent (5%) of net profits.”  (Ex. 9a at 1.)
32. Neilsen told Investor 1 that he would get an 8 to 10 percent return on his investment and that he was ensured to get his money back.  (Tr. 1 at 148, 174.)
33. Neilsen guaranteed Investor 1’s investment and said there was no risk.  (Tr. 1 at 149, 174.)
34. Every time Investor 1 inquired concerning the status of the investment, Neilsen would make comments like, “don’t worry about it.  You’re going to be a millionaire if you give me another year or so.”  (Tr. 1 at 152-153, 158.)
35. Investor 1 spoke with Neilsen approximately monthly, during which conversations Neilsen indicated that Ulysses was profitable and making a lot of money.  (Tr. 1 at 156.)
36. Neilsen and Investor 1 had discussions regarding Ulysses prior to his investment.  (Tr. 1 at 160 161.)
37. Of the $250,000 invested in Ulysses, Investor 1 represented that no monies have been repaid.  (Tr. 1 at 172.)
 

Investor 2
  
38. Neilsen performed Investor 2’s personal and business taxes.  (Tr. 1 at 186.)
39. Neilsen represented to Investor 2 that she would make a lot of money in Ulysses.  (Tr. 1 at 188.)
40. Investor 2 provided $25,000 to Ulysses for what she understood to be an investment.  (Tr. 1 at 195; Ex. 4a.)
41. Investor 2 entered into an “Investment Agreement” with Ulysses effective October 1, 2005, evidencing a $30,000 investment in Ulysses.  (Ex. 4b.)  The Investment Agreement was executed by Neilsen on behalf of Ulysses and stated that the investor would “receive all the rights as an owner” and the investment would be “personally guaranteed by James E Neilsen”.  (Ex. 4b at 1.)  The Investment Agreement provided for “a guaranteed monthly draw in the amount of five percent (3%) [sic] of net profits plus 8% interest against outstanding principal.”  (Ex. 4b at 1.)
42. Investor 2 knew Neilsen for a long time, both as a friend and professional, and trusted him.  (Tr. 1 at 188, 232.)
43. Prior to investing, Neilsen spoke with Investor 2 about Ulysses on 10 to 12 occasions.  (Tr. 1 at 190.)
44. Investor 2 did not have decision-making authority or play a role in the day-to-day operations of Ulysses.  (Tr. 1 at 195-196, 215-216.)
45. Investor 2 knew that Neilsen was trying to get into the brokerage business.  (Tr. 1 at 189.)
46. Investor 2 understood Ulysses to be a fund that was going to invest in a lot of different spectrums, gold and ethanol, and work with other hedge funds.  (Tr. 1 at 189, 223-224.)
47. Neilsen told Investor 2 that she was going to make a high yield on her money.  (Tr. 1 at 191.)
48. Neilsen did not discuss the risks of investing in Ulysses with Investor 2.  (Tr. 1 at 192.)
49. Investor 2 was the first person in her family to invest in Ulysses and told her family about it.  (Tr. 1 at 204.)
50. Neilsen told Investor 2 that her investment was safe and monies were guaranteed.  (Tr. 1 at 218, 226-230; Ex. 4b.)
51. Investor 2 based her decision to invest in Ulysses on the trust she held in Neilsen and that he was very excited about the venture.  (Tr. 1 at 246.)
  
  
Investor 3
  
52. Investor 3 had used Neilsen as his personal accountant for approximately 20 years.  Neilsen did his personal and business tax returns.  (Tr. 1 at 78-79.)
53. Neilsen offered Investor 3 an investment in Ulysses in approximately May or June 2009.  Neilsen explained that it was an investment which would shield a substantial amount of income from future taxes as well as pay a quarterly or yearly dividend.  (Tr. 1 at 84.)
54. Neilsen did not disclose the risks of investing in Ulysses to Investor 3, but he did say that the plan was very sound and that they had very large contracts that had been signed or were being signed, including the Pennsylvania Teacher’s Union signing a multibillion dollar contract.  (Tr. 1 at 84-85, 94.)
55. Investor 3 did not have a role or any decision making authority in Ulysses.  (Tr. 1 at 108.)
56. Investor 3 did not think that Neilsen was in the brokerage business.  (Tr. 1 at 85.)
57. Investor 3 and Neilsen entered into an “Investment Agreement” effective June 30, 2009, which stated in pertinent part, “the parties agree that Investor will Purchase 2 Units of Ulysses Partners, LLC for $50,000.00. . . .  [T]he principal balance of $50,000.00 will be personally guaranteed by Ulysses Partners, LLC and James E Neilsen.”  (Tr. 1 at 86-87; Exhibit 11a.)  It also provided for “a guaranteed return of ten & one half percent (.105%) [sic] and any additional appreciation in the underlying appreciation of Ulysses.”  (Ex. 11a at 1.)
58. In June or July 2011, Investor 3 was approached by Neilsen to invest $1 million in Ulysses.  Neilsen represented that one of the original partners of Ulysses had passed away and his estate was willing to give up his ownership in exchange for the original investment that had been free of all interest, dividends or current value, which Neilsen indicated far exceeded $1 million.  (Tr. 1 at 102.)
59. Neilsen told Investor 3 that the $1 million would be returned within 12 to 18 months with interest, as well as a six digit income which was expected to be $250,000 to $350,000 per year in real income.  (Tr. 1 at 105.)
60. On August 2, 2011, Neilsen, on behalf of Ulysses, executed a “Promissory Note” evidencing a $1,000,000 investment by Investor 3.  (Ex. 11b.)  The note stated that it would bear interest at the rate of nine percent (9%).  (Ex. 11b at 1.)
61. Neilsen did not explain to Investor 3 how the monies invested in Ulysses would be used and did not provide any written document explaining such.  (Tr. 1 at 88-89, 94.)
62. Investor 3 never received any monthly statements or any other documents reflecting the status of the Ulysses investment.  (Tr. 1 at 89.)
63. Investor 3 was told by Neilsen that his tax liability was being paid by Ulysses.  (Tr. 1 at 90-92.)
64. Investor 3 dealt solely with Neilsen on behalf of Ulysses.  (Tr. 1 at 95-96.)
65. Investor 3 believed that Neilsen had been filing his tax returns, but was recently informed by the Internal Revenue Service that a tax return had not been filed since 2010.  (Tr. 1 at 96-99.)
66. Neilsen had failed to pay Investor 3’s tax liability for 2010, 2011 and 2012.  (Tr. 1 at 101.)
67. Investor 3 only recalls receiving two $4,000 checks from Ulysses, which checks bounced.  (Tr. 1 at 108.)
68. In total, Investor 3 represents that he invested approximately $1,225,000.  (Tr. 1 at 109.)
  
  
Investor 4
  
69. Neilsen did Investor 4’s personal and business taxes for over 25 years.  (Tr. 1 at 114.)
70. Neilsen solicited Investor 4’s investment in Ulysses.  (Tr. 1 at 115-116.)
71. Neilsen did not discuss the risks of investing in Ulysses with Investor 4.  (Tr. 1 at 116.)
72. On April 24, 2008, a “Subscription Agreement” was executed by Neilsen and Ms. Sheridan evidencing the purchase of a 7% interest in Ulysses at a purchase price of $125,000 by Investor 4.  (Ex. 3.)  The Subscription Agreement stated that the purchase was for “investment only”.  (Ex. 3 at 1.)  The Subscription Agreement also stated that the “purchase of the interest is a speculative investment which involves a high degree of risk of loss . . . .  However, the Company will personally guarantee the principal.”  (Ex. 3 at 2.)
73. Investor 4 invested $213,430 in Ulysses from her IRA account.  (Tr. 1 at 120.)
74. Investor 4 entered into an “Investment Agreement” with Ulysses effective October 1, 2008, evidencing a $213,430.19 investment in Ulysses.  (Ex. 10c.)  The Investment Agreement stated that the investor would “receive an option to convert the investment interest to 6.68 Units in Ulysses Partners, LLC” and the investment would be “personally guaranteed by Ulysses Partners, LLC and James E Neilsen”.  (Ex. 10c at 1.)  It also provided for “a guaranteed return of twelve and one half percent (.12.5%) [sic] and any additional appreciation in the underlying option.”  (Ex. 10c at 1.)
75. Investor 4 entered into a second “Investment Agreement” with Ulysses effective October 1, 2008, evidencing a $1,455 investment in Ulysses.  (Ex. 10c.)  The Investment Agreement was executed by Neilsen on behalf of Ulysses and stated that the investor would “receive an option to convert the investment interest to .05 Units in Ulysses Partners, LLC” and the investment would be “personally guaranteed by Ulysses Partners, LLC and James E Neilsen”.  (Ex. 10c at 3.)  It also provided for “a guaranteed return of twelve and one half percent (.12.5%) [sic] and any additional appreciation in the underlying option.”  (Ex. 10c at 3.)
76. Investor 4 entered into a third “Investment Agreement” with Ulysses effective June 30, 2009, evidencing a $200,000 investment in Ulysses.  (Ex. 10d.)  The Investment Agreement was executed by Neilsen on behalf of Ulysses and stated that “Investor will Purchase 4 Units in the GSL Advisors preferred Units of Ulysses Partners, LLC” and the investment would be “personally guaranteed by Ulysses Partners, LLC and James E Neilsen”.  (Ex. 10d at 1.)  It also provided for “a guaranteed return of twelve & one half percent (.125%) [sic] and any additional appreciation in the underlying appreciation of the preferred Units in Ulysses.”  (Ex. 10d at 1.)
77. Investor 4 understood that monies provided to Ulysses were for investment purposes.  (Tr. 1 at 119.)
78. Investor 4 was not involved in the day-to-day operation of Ulysses and did not have any decision-making authority.  (Tr. 1 at 119.)
79. Neilsen represented to Investor 4 that he would personally guarantee her investment in Ulysses at 12.5 percent interest.  (Tr. 1 at 120, 122.)
80. Investor 4 represents that she invested approximately $650,000 and was paid back approximately $200,000 to $225,000.  (Tr. 1 at 129-130.)
81. Investor 4 invested with Neilsen simply because she trusted him.  (Tr. 1 at 139.)
  
  
Other Investors
  
82. Investor 5 entered into an “Investment Agreement” with Ulysses effective November 6, 2006, evidencing a $20,000 investment in Ulysses.  (Ex. 6a.)  The Investment Agreement was executed by Neilsen on behalf of Ulysses and stated that the investor would “receive all the rights as an owner” and the investment would be “personally guaranteed by James E Neilsen”.  (Ex. 6a at 1.)  It also provided for a “guaranteed monthly income in the amount of three percent (.03%) [sic] of net profits or 9% per annum.”  (Ex. 6a at 1.)
83. Also on November 6, 2006, Neilsen, on behalf of Ulysses, executed a “Promissory Note” evidencing a $20,000 investment by Investor 5.  (Ex. 6b.)  The note stated that it would “bear interest at the rate of nine percent (9%).”  (Ex. 6b at 1.)
84. On October 8 (year unspecified), Neilsen, on behalf of Ulysses, executed a “Promissory Note” evidencing a $125,000 investment by Investor 6.  (Ex. 12a.)  The note stated that it would “bear interest at the rate of nine percent (10%)” [sic].  (Ex. 12a at 1.)
85. On August 10 (year unspecified), Neilsen, on behalf of Ulysses, executed a “Promissory Note” evidencing a $75,000 investment by Investor 7.  (Ex. 12b.)  The note stated that it would “bear interest at the rate of nine percent (10%)” [sic].  (Ex. 12b at 1.)
86. On May 6, 2005, Neilsen, both individually and on behalf of Ulysses, executed a note evidencing a $157,000 investment by Investor 8.  (Ex. 12c.)  The note stated that it would bear “interest at the rate of nine (9%) percent per annum and two and a half (2.5%) of the net profit”.  (Ex. 12c at 1.)

    
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 issue orders to cease and desist against Ulysses and Neilsen, individually, pursuant to Section 36b-27(a) of the Act, impose a fine upon Ulysses and Neilsen, individually, pursuant to Section 36b-27(d) of the Act, and to issue an order of restitution upon Ulysses and Neilsen, individually, pursuant to Section 36b-27(b) 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).
            
  
Alleged Violations of the Connecticut Uniform Securities Act 1
  
1. The Department alleges that Ulysses transacted business as a broker-dealer in Connecticut absent registration, in violation of Section 36b-6(a) of the Act. 36b-6(c)(2) of the Act.

Section 36b-6(a) of the Act states, in pertinent part, that:  "No person shall transact business in this state as a broker-dealer unless such person is registered under sections 36b-2 to 36b-34, inclusive."

Section 36b-3(5) of the Act defines “broker-dealer”, in pertinent part, as:  "[A]ny person engaged in the business of effecting transactions in securities for the account of others or for such person’s own account.  “Broker-dealer” does not include (A) an agent, (B) an issuer . . . . "

Section 36b-3(13) of the Act defines “issuer” as:  “[A]ny person who issues or proposes to issue any security . . . . ”

The evidence fails to demonstrate that Ulysses transacted business as a broker-dealer in Connecticut.  The only evidence proffered during the course of the hearing was that Ulysses and Neilsen offered and sold investments in Ulysses to Connecticut investors.  Investors understood that they were investing in Ulysses, and there is no evidence that Ulysses held itself out as a broker-dealer or of monies being invested by Ulysses in securities other than Ulysses.  While Ulysses may have had intentions of becoming a broker-dealer, there is no evidence that such intentions came to fruition and that Ulysses actually effected security transactions in any entities other than itself.  Ulysses acted as an issuer when it offered and sold its own securities and, by statute, an “issuer” is excluded from the definition of “broker-dealer”.
2. The Department alleges that Neilsen transacted business as a broker-dealer agent of Ulysses in Connecticut absent registration, in violation of Section 36b-6(a) of the Act.
 
Section 36b-6(a) of the Act states, in pertinent part, that:  “No individual shall transact business as an agent in this state unless such individual is (1) registered as an agent of the broker-dealer . . . .”

As discussed above, there is insufficient evidence that Ulysses transacted business as a broker-dealer.  As a result, it is impossible that Neilsen transacted business as a broker-dealer agent of Ulysses, and such allegation must also fail.
3. The Department alleges that Ulysses and Neilsen offered and sold securities in or from Connecticut to at least ten investors, which securities were not registered in Connecticut under the Act, in 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(19) of the Act states, in pertinent part, that:

    'Security' means any note . . . evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, . . . preorganization certificate or subscription, . . . investment contract, . . . or, in general, any interest or instrument commonly known as a 'security' . . . .  'Security' includes . . . (B) as an 'investment contract', an interest in a limited liability company 2  . . . .

The record reflects that, from 2005 to 2012, 33 persons invested approximately $7,438,341 in Ulysses.  Ulysses evidenced the monies received in various methods – promissory notes, subscription agreements, and investment agreements.  Regardless of the form in which the monies received and owed were evidenced, one thing is certain:  all monies were received for investment purposes and deposited into the same Ulysses bank account.  The witnesses, even though sequestered, testified to the same significant facts that they were investing in Ulysses to receive a profit or return, were offered the investment by Neilsen, and had no active role in the operations of the company.
 
Whether the monies invested in Ulysses constitute “securities” is a question of law.  Applying Connecticut law, it is clear that the monies invested constitute “investment contracts”.  In Jarozewski v. Gamble, 2013 Conn. Super. LEXIS 2064, (Conn. Super. Ct. Sept. 12, 2013), a Connecticut court recently interpreted the term “security” and, in particular, “investment contract” within the meaning of Section 36b-3(19) of the Act.  At issue in Jarozewski was whether the sale of a 15% interest in a limited liability company constituted an “investment contract”, even though the buyer was allowed to participate in the operations of the company as a minority member.
 
The Connecticut court advised that one should look to the substance and not the form of the transaction and that “in applying and interpreting CUSA the court may be guided by both the Uniform Securities Act and its commentary as well as the interpretation of federal courts regarding the Securities Act of 1933.  Connecticut National Bank v. Giacomi, 233 Conn. 304, 319, 659 A.2d 1166 (1995); Lehn v. Dailey, 77 Conn.App. 621, 631-32, 825 A.2d 140 (2003).”  Jarozewski at *6-*7.
 
To interpret the term “investment contract”, the Connecticut court initially looked at SEC v. Howey, a 1945 U.S. Supreme Court decision, which held that for purposes of the federal securities law an investment contract “means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of its promoter or a third party” and noted that courts have interpreted its “solely” provision differently.  Jarozewski at *8.  In particular, “[s]ome courts have held that an investment contract requires only proof that ‘the efforts made by those other than the investor are undeniably the significant ones, those essential managerial efforts which affect the failure or success of the enterprise.’  SEC v. Glenn W. Turner Enterprises, Inc.., 474 F.2d 476, 482 (9th Cir. 1983), cert. denied, 414 U.S. 821, 94 S. Ct. 117, 38 L. Ed. 2d 53.  See also Security [sic] and Exchange Commission v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974).”  Jarozewski at *8-*9.

The court then looked to a “risk capital test” applied in the state of Hawaii to interpret the term “investment contract”.  In Commissioner of Securities v. Hawaii Market Center, Inc., 52 Haw. 642, 485 P.2d 105, 47 ALR 3rd 1366, the court held that an “investment contract” is created whenever:

   (1) An offeree furnishes initial value to an offeror, (2) a portion of this initial value is subjected to the risks of the enterprise, (3) the furnishing of the initial value is induced by the offer or promises or representations which give rise to a reasonable understanding that a valuable benefit, over and above the initial value, will accrue to the offeree as a result of the operation of the enterprise, (4) the offeree does not receive the right to exercise any practical and actual control over the managerial decisions of the enterprise.  Blue Sky Laws-Investment Contracts 47 ALR 3rd 1375, 1382-83 (1973).  See also Healy v. Consumer Business Systems, Inc., 5 Ore. App. 19, 482 P.2d 549 (Oregon App. 1971).

See Jarozewski at *9-*10.

The Connecticut court concluded that under either analysis, the limited liability company interests constituted “investment contracts”, regardless of the fact that the minority member was allowed to participate in the operations of the company.  In this case, there is no level of participation by investors in the operations of Ulysses.  All investors invested their money in the common enterprise of Ulysses Partners, LLC and expected profit solely from the efforts of others - Neilsen and Sheridan - surely meeting the requirements of an “investment contract” as set forth in Howey.  Likewise, in accordance with the test set forth in Hawaii Market Center, investors provided money to Ulysses subject to the risk of the entity and were enticed by significant profits offered by Neilsen, while not exercising any practical or actual control over the managerial decisions of the enterprise.
 
Respondents assert that the monies provided by the 30 plus individuals constitute loans.  However, credible investor testimony convinces otherwise.  All witnesses fell victim to the trust that they held in Neilsen who had acted as their personal and business accountant for the last 20 years.  They invested money in Ulysses through Neilsen, fully believing in their friend and the returns he promised.  Furthermore, most of the documents evidencing the monies contributed to Ulysses were tellingly labeled “Investment Agreements”.
 
In summary, the Ulysses subscription agreements, promissory notes and investment agreements constituted “securities” and, in particular “investment contracts”, within the meaning of Section 36b-3(19) of the Act.  The Ulysses securities were not registered in Connecticut and no evidence was produced by Respondents supporting a claim of exemption or exclusion.  Section 36b-21(g) of the Act provides, in pertinent part, that “the burden of proving an exemption, preemption, exclusion or an exception from a definition is upon the person claiming it.”3  Accordingly, such conduct constitutes a violation of Section 36b-16 of the Act by Ulysses and Neilsen.
4.
The Department alleges that the conduct of Ulysses and Neilsen constitutes, 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 violation of Section 36b-4(a) of the Act.

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

   No person shall, in connection with the offer, sale or purchase of any security, directly or indirectly:  (1) Employ any device, scheme or artifice to defraud; (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; or (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

Section 36b-3(8) of the Act states that “fraud”, “deceit” and “defraud” are not limited to common-law deceit.

In particular, the Department alleged the following conduct to be violative:

  •   
Neilsen, individually and/or on behalf of Ulysses, induced Neilsen’s CPA clients to invest in Ulysses by representing to them that the investment was an excellent one that would generate a high rate of return.
  
In connection with the offers and sales of promissory notes and investment agreements in Ulysses, Neilsen, individually and/or on behalf of Ulysses, did not provide investors with any offering document (other than the underlying promissory note or investment agreement), describing the business of Ulysses or disclosing any risks associated with investing in Ulysses.
  
In connection with the offers and sales of promissory notes and investment agreements in Ulysses, Neilsen, individually and/or on behalf of Ulysses, failed to disclose to investors, inter alia:  (a) the nature of Ulysses’ business; (b) the risks associated with investing in Ulysses; (c) that Ulysses used a portion of the offering proceeds to pay Ms. Sheridan a monthly draw; (d) that Ms. Sheridan used some of the monies she received from Ulysses to pay her personal monthly living expenses; and (e) the registration status of the promissory notes and investment agreements in Ulysses.

There is sufficient evidence in the record that Neilsen induced his CPA clients to invest in Ulysses by misrepresenting the anticipated rate of return of the investment and omitting any type of written disclosure or discussion of risks.  Neilsen’s statements and lack of disclosure constitute untrue statements of material fact and omissions 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.  See, e.g., Connecticut National Bank v. Giacomi, 242 Conn. 17 (Conn. 1997) (holding that promoters sold securities by means of numerous untrue statements of material facts and omissions when they provided investors overly optimistic forecasts of the investment and failed to disclose the associated risks).
 
In addition, Neilsen’s conduct in its entirety constitutes “engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”  Although Connecticut courts have deemed certain activity violative of Section 36b-4(a)(3), see e.g. Papic v. Burke, 2007 Conn. Super. LEXIS 820 (Conn. Super. Ct. March 22, 2007) aff’d 113 Conn. App. 198 (Conn. App. Ct. 2009), there is a dearth of Connecticut case law construing such phrase.  Connecticut statutes advise that, at the outset, phrases should be construed according to the commonly approved usage of the language.

Section 1-2z of the Connecticut General Statutes states that:

   The meaning of a statute shall, in the first instance, be ascertained from the text of the statute itself and its relationship to other statutes. If, after examining such text and considering such relationship, the meaning of such text is plain and unambiguous and does not yield absurd or unworkable results, extratextual evidence of the meaning of the statute shall not be considered.

Section 1-1(a) of the Connecticut General Statutes states that:

   In the construction of the statutes, words and phrases shall be construed according to the commonly approved usage of the language; and technical words and phrases, and such as have acquired a peculiar and appropriate meaning in the law, shall be construed and understood accordingly.

Black’s Law Dictionary defines “fraud” as “[a] knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment” and “a misrepresentation made recklessly without belief in its truth to induce another person to act.”  Black’s Law Dictionary (9th ed. 2009).  “Deceit” is defined as “[t]he act of intentionally giving a false impression” and “[a] false statement of fact made by a person knowingly or recklessly . . . with the intent that someone else will act upon it.”  Id.
 
Analysis performed by other states construing similar securities provisions is also instructive.  Missouri construed “operates or would operate as fraud or deceit” in its state securities act similar to its federal counterpart, and noted that it “quite plainly focuses upon the effect of particular conduct on members of the investing public, rather than upon the culpability of the person responsible”, and looked to the plain and ordinary meaning of such terms, as such terms were defined in Black’s Law Dictionary.  Financial Solutions and Associates, et al. v. Carnahan, et al., 316 S.W. 3d 518; Mo. App. LEXIS 967 (2010) (citing Aaron v. Sec. & Exch. Comm’n, 446 U.S. 680, 697, 100 S.Ct. 1945, 1955, 64 L.Ed.2d 611 (1980).  In North Carolina v. Davidson, 131 N.C. App. 276 (1998), the Court of Appeals of North Carolina found that the defendant’s failure to deliver a prospectus and issuance of a “guaranteed interest rate certificate” provided “additional evidence of defendant’s fraudulent and deceptive acts” when reviewing the lower court’s state securities fraud conviction.  Id. at 284.
 
Neilsen’s actions of misrepresenting the anticipated rate of return of the investments in Ulysses, guaranteeing the principal and omitting any type of written disclosure or discussion of risks to a group of persons who had trusted him for years as their personal and business accountant constituted an act, practice, or course of business that operated or would operate as a fraud or deceit upon any person.  Through his misrepresentations and omissions, Neilsen induced his tax clients to invest in Ulysses and intentionally gave them a false impression that it was a no-risk lucrative venture.  He perpetuated this fraud for years, beginning in 2005 and lasting until at least 2012, often receiving repeated investments from the same persons.  Moreover, when investors asked about the status of their investment, he continued the deceit, making statements indicating Ulysses was profitable and investors were sure to be millionaires, when, in fact, Ulysses had never made a profit.  As a result, through Neilsen’s actions with investors in Ulysses, Respondents violated both subdivisions (2) and (3) of Section 36b-4(a) of the Act.
       
    
Authority to Issue Order to Cease and Desist,
Order to Make Restitution 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, . . . the commissioner may, in the commissioner’s discretion, order (1) the person . . . to cease and desist from the violations . . . .  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(b) of the Act provides, in pertinent part, that:

Whenever it appears to the commissioner, after an investigation, that any person has violated any of the provisions of sections 36b-2 to 36b-34, inclusive, . . . the commissioner may, in addition to any other remedy under this section, order the person to (1) make restitution of any sums shown to have been obtained in violation of any of the provisions of said sections . . . plus interest at the legal rate set forth in section 37-1 . . . .  After such an order is issued, the person named in the order may, not later than 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, . . . the commissioner may send a notice to (A) such person . . . by registered or certified mail, return receipt requested, or by any express delivery carrier that provides a dated delivery receipt.  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, . . . 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, or by any express delivery carrier that provides a dated delivery receipt, to any person named in such order.

  Although statutorily authorized to impose a fine of up to $100,000 per violation, I am imposing a minimal fine of $25,000 on Ulysses and Neilsen, jointly and severally, due to the desire to direct any monies available to Respondents towards making restitution to Connecticut investors.
 
  
Notice and Public Interest
 
  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 Notice issued by the Commissioner complied with the [sic] Sections 36b-27(a), 36b-27(b) and 36b-27(d) of the Act and Section 4-177 of the Connecticut General Statutes.

    
Section 36b-31(b) of the Act provides, 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. . . .

Section 36b-31(b) of the Act requires that the Commissioner find that an order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of Sections 36b-2 to 36b-34, inclusive.  In this case, Respondents’ actions in violation of the Act involved failing to register a security in violation of Section 36b-16 of the Act, and in connection with the offer and sale of such unregistered security, directly or indirectly, making an untrue statement of a material fact or omitting to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading, and engaging in an act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in violation of subdivisions (2) and (3), respectively, of Section 36b-4(a) of the Act.  Future harm to Connecticut residents will be deterred through the issuance of an order to cease and desist against Respondents and, for those Connecticut residents who have already suffered financial loss as a result of Respondents’ conduct, an order to make restitution will serve to lessen such losses.

I conclude that it 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 to enter the following order.

      

ORDER
  

Having read the record, I hereby ORDER, pursuant to Sections 36b-27(a), 36b-27(b) and 36b-27(d) of the Act, that:
  
1. The Order to Cease and Desist issued against Ulysses Partners, LLC on January 9, 2014, be made PERMANENT with respect to violations of Sections 36b-16, 36b-4(a)(2) and 36b-4(a)(3) of the Act;
2. The Order to Cease and Desist issued against James E. Neilsen on January 9, 2014, be made PERMANENT with respect to violations of Sections 36b-16, 36b-4(a)(2) and 36b-4(a)(3) of the Act;
3. The Order to Make Restitution issued against Ulysses Partners, LLC and James E. Neilsen be made PERMANENT, provided that the time period specified in paragraph 1(a) of the Order to Make Restitution be revised to May 2005 through September 2012;
4. A FINE of Twenty-five Thousand Dollars ($25,000) be imposed against Ulysses Partners, LLC and James E. Neilsen, jointly and severally, 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 thirty (30) days after the date this Order is mailed; and
5. This Order shall become effective when mailed.
 

Dated at Hartford, Connecticut,       ______/s/__________ 
this 13th day of November 2014.   Howard F. Pitkin 
    Hearing Officer [sic]


This Order was sent by certified mail,
return receipt requested, to Respondents'
attorney and hand delivered to
Elena Zweifler, Esq., on November 13, 2014.

Brian J. Woolf, Esq.
Woolf Law Firm, LLC
50 Founders Plaza
East Hartford, CT 06108
Certified Mail No. 7012 1010 0001 7264 8305

 

Footnotes

1   
Citations to the Act reflect the most recent statutory text applicable during the time period of underlying conduct.  Non-technical amendments occurring during such time period are footnoted separately by the respective statutory cite.
      
2  Public Act 05-177 added the text of subparagraph (B) effective October 1, 2005.
      
3  “Preemption” and “exclusion” were added to this provision as a result of Public Act 05-177 effective October 1, 2005.
      


Administrative Orders and Settlements