Fall 2020 Securities Bulletin

State of Connecticut
Department of Banking

Securities and Business Investments Division Securities Bulletin

Vol. XXXIV No. 3 - Fall 2020

Features

Quarterly Statistical Summaries

Enforcement and Other Highlights

Administrative Actions

Consent Orders

Stipulation and Agreements

ADMINISTRATIVE ACTIONS

Solace Investments, LLC and Rafael Alves Muzzi - Orders Imposing Fine Entered

On September 4, 2020, the Banking Commissioner entered two separate Orders Imposing Fine against Solace Investments, LLC of 90 Church Street, Naugatuck, Connecticut 06770 and against Rafael Alves Muzzi , the sole member of Solace Investments, LLC (Docket No. CRF-20-8411-S). Solace Investments, LLC and Rafael Alves Muzzi were named as co-respondents in a June 25, 2020 Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CRF-20-8411-S). The June 25, 2020 action had alleged that from at least January 2017 to June 2018, Muzzi, individually and through Solace Investments, LLC, raised approximately $800,000 from at least 25 investors primarily located in Connecticut for the purpose of pooling investor funds to invest in FOREX accounts managed by Muzzi to trade currency. The June 25, 2020 action also alleged that, from at least January 2017, in connection with offers and sales of the FOREX investments, Muzzi, directly and through Solace Investments, LLC 1) represented to investors that their money would be invested in FOREX investments when, in reality, only a portion of such investments were ever made; 2) failed to disclose to investors the amount of investor monies that Muzzi failed to invest and that he kept for himself; and 3) mailed monthly account statements to investors that did not accurately reflect the true status and transactional history of such accounts. The respondents also allegedly failed to disclose to prospective investors any risk factors related to the FOREX investments, including financial information on Muzzi or Solace Investments, LLC; the fact that respondents would use a portion of investor monies for personal expenses and to pay off earlier investors or that the FOREX investments were not registered under the Connecticut Uniform Securities Act. The Order to Cease and Desist, Order to Make Restitution and Notice of Intent to Fine had further alleged that respondents violated the antifraud provisions in Section 36b-4(a) of the Connecticut Uniform Securities Act; engaged in dishonest or unethical practices in violation of Section 36b-4(b) of the Act; and sold unregistered securities in violation of Section 36b-16 of the Act.

Since neither Solace Investments, LLC nor Rafael Alves Muzzi requested a hearing on the allegations, the Order to Cease and Desist and the Order to Make Restitution became permanent as to each of them on July 30, 2020 and July 14, 2020, respectively.

In addition, Solace Investments, LLC and Rafael Alves Muzzi did not request a hearing on the Notice of Intent to Fine and the Orders Imposing Fine were entered by default. Finding that Solace Investments, LLC and Rafael Alves Muzzi violated the antifraud provisions in Section 36b-4(a) of the Act, engaged in dishonest or unethical practices in violation of Section 36b-4(b) of the Act and sold unregistered securities in violation of Section 36b-16 of the Act, the Commissioner fined Solace Investments, LLC $300,000 and imposed a $300,000 fine on Rafael Alves Muzzi.

Herbert H. Hafen a/k/a Elias Herbert Hafen (CRD No. 867068) Fined $100,000

On August 17, 2020, the Banking Commissioner entered an Order Imposing Fine (Docket No. CDF-20-8474-S) against Herbert H. Hafen , currently of Nashville, Tennessee and formerly of New Canaan, Connecticut. Hafen, also known as Elias Hafen , Elias Niggebrugge and E. Herbert Niggebrugge , was previously registered as a broker-dealer agent and investment adviser agent of Wells Fargo Clearing Services, LLC and Morgan Stanley in Connecticut. The Order Imposing Fine had been preceded by a February 11, 2020 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing alleging that respondent Hafen violated Section 36b-5(f) of the Connecticut Uniform Securities Act by engaging in dishonest or unethical practices in connection with his investment advisory activities. More specifically, from approximately July 2011 to 2018 and at a time when he was registered in Connecticut, Hafen allegedly convinced an elderly advisory client to move her IRA funds to an outside investment opportunity. Hafen allegedly knew that the IRA, which the client had inherited from her deceased husband, was intended to support the client for the rest of her life. Instead of investing the client's funds, Hafen purportedly used them to pay his own credit card bills, mortgage and other personal expenses and to repay another investor who had also relayed monies to Hafen for investment purposes. In addition, the February 11, 2020 action alleged that Hafen falsely represented to the client that her IRA account was valued at $300,000 when it really held only $150,000 in available funds. Ultimately, Hafen's employing firm reimbursed the client for her loss.

Since respondent Hafen did not request a hearing on the Order to Cease and Desist, the Order to Cease and Desist became permanent on March 15, 2020. The respondent also did not request a hearing on the Notice of Intent to Fine. Accordingly, adopting as findings the allegations contained in the Notice, the Commissioner found that Hafen violated Section 36b-5(f) of the Act and imposed a $100,000 fine against Hafen.

Adam Westphalen (CRD No. 2821723) and Mosaic Financial Strategies LLC (CRD Numbers 288997 and 149364)

On July 27, 2020, following an administrative hearing, the Banking Commissioner entered Findings of Fact, Conclusions of Law and an Order (Docket No. CRNDF-19-8408-S) in the matter of Mosaic Financial Strategies LLC ( f/k/a Mosaic Portfolio Strategists LLC and doing business as Mosaic Advisory Partners ) (“Mosaic”) of 40 Maple Road, Easton, Connecticut 06612 and Adam Westphalen, principal of the firm. Mosaic had previously been registered as an investment adviser in Connecticut until 2014, and reapplied for investment adviser registration under a different CRD number. Adam Westphalen also reapplied for registration as an investment adviser agent of Mosaic.

The action had been preceded by a May 10, 2019 Amended and Restated Order to Cease and Desist, Amended and Restated Order to Make Restitution, Amended and Restated Notice of Intent to Deny Registrations as an Investment Adviser and as an Investment Adviser Agent and Amended and Restated Notice of Intent to Fine (collectively, the "Notice"). Among other things, the Notice had alleged that 1) from approximately 2004 forward, Westphalen was involved with various businesses, to wit, Triton Investment Partners LLC, Vista Financial Strategies LLC, Vista Investment Advisors LLC and Mosaic College Planners; and 2) Westphalen and Mosaic failed to amend their Connecticut registration filings to disclose their affiliations with Triton Investment Partners LLC, Vista Financial Strategies LLC and Mosaic College Planners in violation of Section 36b-31-14e of the Regulations under the Connecticut Uniform Securities Act. The Notice also alleged that, 1) following the expirations of their prior registrations, Mosaic and Westphalen transacted business as an unregistered investment adviser and an unregistered investment adviser agent, respectively, in contravention of Sections 36b-6(c)(1) and 36b-6(c)(2) of the Act; 2) that Mosaic falsely represented on its reapplication that it had not rendered investment advisory services; 3) that Westphalen sold unregistered securities in violation of Section 36b-16 of the Act 4) that Westphalen violated the antifraud provisions in Section 36b-4(a) of the Act in conjunction with sales of Omni Oil and Gas Inc. and Triton Investment Partners LLC to investors; and 5) that Westphalen transacted business as an unregistered agent of issuer in violation of Section 36b-6(a) of the Act.

Based on the hearing record, the Commissioner found that Westphalen and Mosaic violated Section 36b-31-14e of the Regulations by failing to update their regulatory filings to reflect their association with Triton Investment Partners LLC, Vista Financial Strategies LLC, Vista Investment Advisors LLC and Mosaic College Planners as well as New Horizon Financial Strategies, an entity from whom Mosaic received investment advisory fees. The Commissioner also found that Mosaic and Westphalen violated Sections 36b-6(c)(1) and 36b-6(c)(2) of the Act by transacting business as an unregistered investment adviser and unregistered investment adviser agent, respectively. In addition, the Commissioner found that 1) respondents violated Section 36b-23 of the Act by making false or misleading statements to the department; 2) Westphalen sold unregistered securities of Omni Oil and Gas, Inc., and Triton Investment Partners LLC in violation of Section 36b-16 of the Act; 3) Westphalen violated the antifraud provisions in Section 36b-4(a) of the Act in conjunction with sales of Omni Oil and Gas Inc. and Triton Investment Partners LLC to investors; and 4) Mosaic failed to preserve its investment advisory records as required by Section 36b-14(a)(1) of the Act and Section 36b-31-14b(a) of the Regulations. However, there was insufficient evidence in the record to support the allegation that Westphalen transacted business as an unregistered agent of issuer in violation of Section 36b-6(a) of the Act.

Concluding that there was no evidence of mitigating circumstances provided during the hearing, the Commissioner fined the respondents $900,000, jointly and severally. The Commissioner also denied Westphalen's registration as an investment adviser agent and denied Mosaic Financial Strategies LLC's registration as an investment adviser. The May 10, 2019 Order to Cease and Desist and Order to Make Restitution were also rendered permanent as to each respondent, with investor restitution being due in 45 days. The Commissioner directed the respondents to pay $490,000, excluding interest, to the affected investors.

CONSENT ORDERS

J.R. Bautista, Jr. (CRD No. 1859027)

On September 10, 2020, the Banking Commissioner entered a Consent Order (Docket No. CO-20-8480A-S) with respect to J.R. Bautista, Jr.

Bautista had been the subject of a January 28, 2020 Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CRF-20-8480-S). Also named in the January 28, 2020 action were Native American Energy Group, Inc., Raj S. Nanvaan and Joseph Gatano D'Arrigo. Bautista was a consultant to Native American Energy Group, Inc. Native American Energy Group, Inc. was a purported development stage company specializing in oil, natural gas and alternative energy systems. The January 28, 2020 action had alleged that respondents Native American Energy Group, Inc. and Bautista violated Section 36b-16 of the Connecticut Uniform Securities Act by selling unregistered common shares of the company to at least one Connecticut investor. The action had also alleged that all respondents violated the antifraud provisions in Section 36b-4(a) of the Act by failing to disclose to the affected investor that the investment proceeds were actually being wired out to respondents D’Arrigo, Nanvaan and Bautista rather than being used to invest in oil or gas investments.

The September 10, 2020 Consent Order acknowledged that Bautista had provided documentation to the agency indicating that Bautista had reimbursed the affected investor $5,000, which represented the investment amount attributable to Bautista's involvement in the offering. The Consent Order directed Bautista to cease and desist from regulatory violations and fined him $10,000.

Wilmington Capital Securities, LLC (CRD No. 133839)

On August 25, 2020, the Banking Commissioner entered a Consent Order (No. CO-20-202-91-S) with respect to Wilmington Capital Securities, LLC , a Connecticut-registered broker-dealer located at 600 Old Country Road, Suite 200, Garden City, New York 11530. The Consent Order alleged that the firm engaged in dishonest or unethical business practices within the meaning of Section 36b-31-15a(b) of the Regulations under the Connecticut Uniform Securities Act by paying an unregistered sales assistant a percentage of the commissions earned by those broker-dealer agents the sales assistant supported. The Consent Order also alleged that the firm violated Section 36b-31-6f(b) of the Regulations by failing to establish, enforce and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations.

The Consent Order directed the firm to cease and desist from regulatory violations and to remit $11,275 to the department. Of that amount, $10,000 constituted an administrative fine and $1,275 represented reimbursement for past due broker-dealer agent registration fees.

Schupp & Grochmal, LLC, SG Insurance Investment Fund, LLC, SG Insurance & Technology Investment Fund, LLC and David Alexander Schupp (CRD No. 415958)

On August 21, 2020, the Banking Commissioner entered a Consent Order (No. CO-20-8389-S) with respect to Schupp & Grochmal, LLC f/k/a Townsend, Schupp & Grochmal, LLC of 64 Higley Road, West Granby, Connecticut 06090 and David Alexander Schupp ("Schupp"), managing member of Schupp & Grochmal, LLC. Also named in the Consent Order were SG Insurance Investment Fund, LLC f/k/a TSG Insurance Investment Fund, LLC and SG Insurance & Technology Investment Fund, LLC f/k/a TSG Insurance & Technology Investment, LLC (the "Funds"). Schupp was the manager of both Funds, and Schupp & Grochmal, LLC served as the investment adviser to the Funds.

Schupp & Grochmal, LLC was involved with the Connecticut Insurance Reinvestment Act Program which was ultimately administered by the State of Connecticut Department of Economic and Community Development. The Consent Order stated that Schupp and nonparties Frederick Snow Townsend, Jr. and Joseph Lawrence Grochmal, Jr. (CRD No. 1012907) established the Funds to participate in the Connecticut Insurance Reinvestment Act Program.

The Consent Order alleged that, at various times from approximately 2011 forward, 1) Schupp & Grochmal, LLC transacted business as an unregistered investment adviser and engaged one or more unregistered investment adviser agents in violation of Section 36b-6(c) of the Connecticut Uniform Securities Act; 2) Schupp violated Section 36b-6(c)(2) of the Act by transacting business as an unregistered investment adviser agent; and 3) Schupp & Grochmal, LLC, Schupp and the Funds sold unregistered membership interests in the Funds to investors in violation of Section 36b-16 of the Act.

The Consent Order directed each respondent to cease and desist from regulatory violations and required that the respondents remit $10,510, jointly and severally, to the agency. Of that amount, $7,500 constituted an administrative fine and $3,010 represented reimbursement for past due registration fees.

Lawrence Insurance - 5, LLC and Joseph Lawrence Grochmal, Jr. (CRD No. 1012907)

On August 21, 2020, the Banking Commissioner entered a Consent Order (No. CO-20-8389-S) with respect to Lawrence Insurance - 5, LLC ("Lawrence Insurance") of 359 North Plain Road, Housatonic, Massachusetts 01236-9741 and Joseph Lawrence Grochmal, Jr. , manager of the limited liability company.

By way of background, the Consent Order alleged that two entities, SG Insurance Investment Fund, LLC f/k/a TSG Insurance Investment Fund, LLC and SG Insurance & Technology Investment Fund, LLC f/k/a TSG Insurance & Technology Investment, LLC (the "Funds") were formed in 2000 to participate in the Connecticut Insurance Reinvestment Act Program that was ultimately administered by the State of Connecticut Department of Economic and Community Development. The Consent Order alleged that Lawrence Insurance, in turn, was created as a vehicle for investing in the Funds. More specifically, the Consent Order alleged that at various times between December 28, 2012 and August 28, 2015, Lawrence Insurance and Grochmal violated Section 36b-16 of the Connecticut Uniform Securities Act by selling unregistered membership interests in Lawrence Insurance to investors.

The Consent Order fined the respondents $2,000, jointly and severally, and directed them to cease and desist from regulatory violations.

John J. Lynch

On August 6, 2020, the Banking Commissioner entered a Consent Order (No. CO-20-202015-S) with respect to John J. Lynch of Reading, Pennsylvania and formerly of Sandy Hook, Connecticut. Lynch was the owner and control person of JM Financial Solutions LLC, a currently defunct entity that was in the business of preparing tax returns.

The Consent Order alleged that from approximately June 2016 to approximately November 2017, Lynch, through JM Financial Solutions, LLC, sold approximately $65,000 of interests in various investment funds offered by Woodbridge Group of Companies, LLC d/b/a Woodbridge Wealth ("Woodbridge") to three investors. Woodbridge Group of Companies, LLC, based in California, was a defendant in a civil action brought by the Securities and Exchange Commission alleging that it operated a purported Ponzi scheme. For his role in selling interests in the Woodbridge funds, Lynch received $2,583.33 in total remuneration from Woodbridge. The Consent Order alleged that Lynch violated Section 36b-16 of the Connecticut Uniform Securities Act by selling unregistered securities and that he transacted business as unregistered agent of issuer in contravention of Section 36b-6(a) of the Act. The Consent Order acknowledged Lynch's representation that, based on Woodbridge’s representations, he believed that the Woodbridge Funds were not securities and that securities registration was unnecessary.

The Consent Order fined Lynch $3,500 and directed him to cease and desist from regulatory violations. In addition, the Consent Order required that Lynch disgorge to affected investors the $2,583.33 in remuneration he earned from Woodbridge. The monies would be deposited with Lynch's legal counsel which would then oversee disbursement of the funds to investors.

STIPULATION AND AGREEMENTS

Boomerang Capital, LLC (CRD No. 120313)

On September 17, 2020, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-20-2021007-S) with Boomerang Capital, LLC , a Connecticut-registered broker-dealer located at 12 Runkenhage Road, Darien, Connecticut 06820. The firm does not conduct retail brokerage business but acts as a placement agent for funds managed by SEC-registered investment advisers.

The Stipulation and Agreement alleged that the firm received a percentage of management and performance fees from two funds and, in so doing, transacted business an unregistered investment adviser in violation of Section 36b-6(c)(1) of the Connecticut Uniform Securities Act.

The firm has since applied for Connecticut investment adviser registration.

In resolution of the matter, the firm agreed to refrain from regulatory violations and to pay $5,020 to the department. Of that amount, $4,000 constituted an administrative fine and $1,020 represented reimbursement for past due registration fees.

Monitor Capital, LLC (CRD No. 146087)

On July 20, 2020, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-20-202013-S) with Monitor Capital, LLC , a Connecticut-registered broker-dealer located at 8 Soundshore Drive, Greenwich, Connecticut. The firm's business focuses on acting as placement agent for funds managed by investment advisers registered with the Securities and Exchange Commission.

The Stipulation and Agreement alleged that, in 2016, the firm referred an entity to an SEC-registered investment adviser and received compensation based on a percentage of the management and performance fees that the adviser charged the entity. In so doing, the firm allegedly violated Section 36b-6(c) of the Connecticut Uniform Securities Act by transacting business as an unregistered investment adviser. The firm has since become registered as an investment adviser in Connecticut.

In resolution of the matter, the firm agreed to refrain from regulatory violations and to pay $6,720 to the department. Of that amount, $5,000 constituted an administrative fine and $1,720 represented reimbursement for past due investment adviser and investment adviser agent registration fees.

STATISTICAL SUMMARY

Licensing At A Glance

at the end of the quarter

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

Broker-dealers Registered

2,053

2,038

2,032

Broker-dealer Agents Registered

173,318

175,350

178,176

Broker-dealer Branch Offices Registered

2,480

2,482

2,470

Investment Advisers Registered

499

493

496

SEC Registered Advisers Filing Notice

2,280

2,287

2,320

Investment Adviser Agents Registered

15,061

15,189

15,513

Exempt Reporting Advisers

139

140

141

Agents of Issuer Registered

3

3

3

Conditional Registrations

0

0

0

Securities and Business
Opportunity Filings

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

Year to Date

Offerings Reviewed

43

14

23

80

Investment Company Notice Filings

499

303

382

1,184

Exemptions and Exemptive Notices

1,059

1,068

1,148

3,275

Examinations

Broker-dealers

25

17

18

60

Investment Advisers

36

34

31

101

Securities Investigations

Opened

9

6

18

33

Closed

10

10

18

38

Ongoing as of End of Quarter

94

90

90

Subpoenas issued

5

5

1

11

Matters referred from Attorney General

0

0

0

0

Matters referred from Other Agencies

0

0

0

0

Business Opportunity Investigations

Investigations Opened

1

0

1

2

Investigations Closed

0

0

0

0

Ongoing as of End of Quarter

2

2

3

Enforcement: Remedies and Sanctions

Notices of Intent to Deny (Licensing)

1

0

0

1

Notices of Intent to Suspend (Licensing)

0

0

0

0

Notices of Intent to Revoke (Licensing)

2

1

0

3

Denial Orders (Licensing)

0

0

2

2

Suspension Orders (Licensing)

0

0

0

0

Revocation Orders (Licensing)

0

1

0

1

Notices of Intent to Fine

4

2

0

6

Orders Imposing Fine

3

4

4

11

Cease and Desist Orders

4

2

0

6

Notices of Intent to Issue Stop Order

0

0

0

0

Activity Restrictions/Bars

0

3

0

3

Stop Orders

0

0

0

0

Vacating/Withdrawal/ Modification Orders

0

1

0

1

Restitutionary Orders and Disgorgement Orders

3

0

2

5

Injunctive Relief Obtained

0

0

0

0

Proceedings and Settlements

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

Year to Date

Administrative Actions

5

6

4

15

Consent Orders

1

4

5

10

Stipulation and Agreements

0

3

2

5

Monetary Relief*

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

Year to Date

Monetary Sanctions Imposed

$751,136

$1,037,700

$1,649,025

$3,437,861

Portion attributable to settlements

$51,136

$437,700

$49,025

$537,861

Attributable to Court-Ordered Penalties

Restitution or Other Monetary Relief ( includes rescission offer amounts )

$46,140

$215,831

$497,583

$759,554

Cents eliminated

Securities Referrals

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

Year to Date

Criminal Matters

0

0

1

1

Civil (Attorney General)

0

0

1

1

Other Agency Referrals

0

0

3

3