Spring 2011 Securities Bulletin

State of Connecticut
Department of Banking

Securities and Business Investments Division
Securities Bulletin

Vol. XXV No. 1 - Spring 2011

Features

Quarterly Statistical Summaries

Enforcement and Other Highlights

Administrative Orders and Notices

Consent Orders

Stipulation and Agreements

Contributors

Cynthia Antanaitis, Assistant Director and Bulletin Editor Eric Wilder, Assistant Director

ADMINISTRATIVE ORDERS AND NOTICES

Cynergy Advance Services, LLC Fined $100,000 for Selling Unregistered Securities, Employing an Unregistered Agent and Violating State Antifraud Provisions

On March 31, 2011, the Banking Commissioner entered an Order Imposing Fine (Docket No. CF-2010-7740-S) against Cynergy Advance Services, LLC of 1128 Royal Palm Beach Boulevard, Suite 145, Royal Palm Beach, Florida. The respondent also maintains or has maintained offices at 745 Main Street, Newington, Connecticut and 615 West Johnson Avenue, Suite 202, Cheshire, Connecticut. The Order Imposing Fine had been preceded by a January 19, 2011 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing alleging that, in 2008, co-respondent Shelly A. Richard, acting on behalf of Cynergy Advance Services, LLC, sold unregistered securities of Cynergy Advance Services, LLC from Connecticut, promising a 10% annual return. The January 19, 2011 action had also alleged that 1) the respondents failed to pay investors any principal or interest on the securities, and 2) that the respondents did not apprise investors of the investment risks involved or provide information on Cynergy Advance Service, LLC or the company’s ability to meet its obligations in connection with the securities offered. The January 19, 2011 action further alleged that the respondents’ conduct violated the antifraud provisions in Section 36b-4(a) of the Connecticut Uniform Securities Act; and that respondent Richard transacted business as an unregistered agent of issuer in violation of Section 36b-6 of the Act. The Order to Cease and Desist, being uncontested, had become permanent as to Cynergy Advance Services, LLC on February 8, 2011. Similarly, since respondent Shelly A. Richard did not appear or contest the Order to Cease and Desist, the Order to Cease and Desist became permanent as to her on March 23, 2011.

In fining respondent Cynergy Advance Services, LLC $100,000, the Commissioner found that the company violated Sections 36b-16, 36b-6(b) and 36b-4(a) of the Connecticut Uniform Securities Act. Respondent Cynergy Advance Services, LLC did not appear or contest the imposition of the fine.

Daniel Quentin Humphrey (CRD # 2580858), Finity Financial Group, LLC, Waterford Loan Fund, LLC, Oasis Properties I, LLC and Scott L. Wilson – Order to Cease and Desist and Notice of Intent to Fine Issued

On March 4, 2011, the Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-11-7719-S) against Daniel Quentin Humphrey, currently of 108 Bordeaux Lane, Alpine, Utah; Finity Financial Group, LLC of 708 South Avenue, New Canaan, Connecticut, an entity of which Humphrey was a member; Waterford Loan Fund, LLC, a securities issuer located at 215 South State Street, Suite 550, Salt Lake City, Utah; Oasis Properties I, LLC, an issuer of securities located at 1055 West Red Cliff Drive, C-517, Washington, Utah; and Scott L. Wilson, manager of Oasis Properties I, LLC.

The action alleged that: 1) between 2002 and 2005, respondent Humphrey engaged in private securities transactions without notice to his employing broker-dealer by selling unregistered promissory notes issued by respondent Waterford Loan Fund, LLC; 2) respondent Humphrey violated Section 36b-6(a) of the Connecticut Uniform Securities Act by acting as an unregistered agent of issuer of Waterford Loan Fund, LLC; 3) respondent Waterford Loan Fund, LLC violated Sections 36b-16 and 36b-6(b) of the Act by selling unregistered securities and employing respondent Humphrey as an unregistered agent of issuer; 4) respondent Humphrey transacted business as an unregistered agent of issuer of Oasis Properties I, LLC in conjunction with an offering of that entity’s Series C notes; 5) Oasis Properties I, LLC violated Section 36b-6(b) of the Act by employing respondent Humphrey as an unregistered agent of issuer; 6) Oasis Properties I, LLC and respondent Wilson violated Section 36b-16 of the Act by selling unregistered Series F secured promissory notes; and 7) from at least 2006 forward, respondent Humphrey, alone and doing business as Finity Financial Group (a sole proprietorship) and Finity Financial Group, LLC, transacted business as an investment adviser in Connecticut absent registration.

The respondents were afforded an opportunity to request a hearing on the allegations in the Order to Cease and Desist and Notice of Intent to Fine.

CherryHomes Joint Venture, MidAmerica Resources, Inc. a/k/a MA Resources, Inc., Thomas C. Hanscome (CRD # 1243201), Air-Byrd/River Joint Venture, Air-Byrd Operations LLC, Lance David Brooks (CRD # 2111084) and Regal Royalty Resource – Order to Cease and Desist and Notice of Intent to Fine Issued

On February 16, 2011, the Commissioner entered an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-11-7790-S) against 1) CherryHomes Joint Venture (“CherryHomes JV”) of 3609 Williams Drive, Suite 105, Georgetown, Texas; 2) CherryHomes JV’s joint venture manager, MidAmerica Resources, Inc. (“MRI”), of 3943 Irvine Boulevard, Suite 439, Irvine, California; 3) Thomas C. Hanscome, president of MRI; 4) Air-Byrd/River Joint Venture (“River”) of 10695 Wild Road Court, McKinney, Texas; 5) River’s joint venture manager, Air-Byrd Operations LLC (“AB Operations”), of P.O. Box 263, Prosper, Texas; 6) River president Lance David Brooks of 10695 Wild Road Court, McKinney, Texas; and 7) Regal Royalty Resource of 10695 Wild Road Court, McKinney, Texas. CherryHomes JV and River were formed for the purported purpose of oil and gas development in Texas and Kansas, respectively.

The action alleged that, starting in 2006, Brooks, Hanscome and MRI offered and sold unregistered CherryHomes JV Units to at least one elderly Connecticut investor in violation of Section 36b-16 of the Connecticut Uniform Securities Act and at a time when Brooks and Hanscome were not registered as agents of issuer under the Act. The action also alleged that insufficient disclosure was made concerning the material terms of the offering, including its risks.

In addition, the action alleged that, from at least 2006, respondents Brooks and AB Operations made multiples sales of unregistered River JV Units to at least one elderly Connecticut investor at a time when respondents Brooks and AB Operations were not registered to sell securities in any capacity under the Act. The action added that insufficient disclosure was provided to investors. In particular, the summary offering memorandum failed to disclose that, on January 7, 2005, the Commonwealth of Pennsylvania announced that it had entered a Summary Order to Cease and Desist against AB Operations and Brooks for violations of that state’s securities laws stemming from Brooks’ cold-calling Pennsylvania residents to invest in a separate joint venture managed by AB Operations.

The action further alleged that Regal Royalty Resource was an investment vehicle whose purpose was to enable investors to acquire precious metals, and that respondents Brooks and Regal Royalty Resource sold unregistered securities to at least one elderly Connecticut investor while Brooks was not registered to sell securities in Connecticut. According to the action, investors received no disclosures concerning the investment risks involved or Regal Royalty Resource’s ability to make the precious metals purchases, nor did investors receive independent credible evidence that the purchases had, in fact, been made.

The respondents were afforded an opportunity to request a hearing on the allegations in the Order to Cease and Desist and Notice of Intent to Fine.

Westrock Advisors, Inc. (CRD # 114338) – Broker-dealer Registration Revoked; Firm Fined $250,000

On January 20, 2011, the Banking Commissioner entered an Order revoking the broker-dealer registration of Westrock Advisors, Inc. and fining the firm $250,000 (Docket No. RCF-10-7887-S). The firm maintains its principal office at 230 Park Avenue, New York, New York. The action had been preceded by a December 8, 2010 Order to Cease and Desist, Notice of Intent to Revoke Registration as Broker-dealer and Notice of Intent to Fine alleging that Westrock Advisors, Inc. violated a September 4, 2008 Consent Order (No. CO-2008-7530-S) to which it was subject by selling unregistered Pink Sheet securities, opening options accounts for Connecticut customers who did not qualify as “accredited investors”; and failing to reimburse the Division for the costs associated with an examination of the firm’s Melville, New York office. The December 8, 2010 action had also alleged that the firm failed to provide Division staff with material records; failed to comply with minimum net capital requirements; and failed to enforce and maintain adequate supervisory procedures with respect to the usage of sales scripts and with respect to compliance with the terms of the 2008 Consent Order. The Order to Cease and Desist, being uncontested, had become permanent on January 6, 2011.

The firm likewise failed to appear or contest the Notice of Intent to Revoke Registration as Broker-dealer and the Notice of Intent to Fine. Section 36a-1-31(a) of the Regulations of Connecticut State Agencies states that a party’s failure to timely request a hearing may result in the allegations against that party being deemed admitted. In ordering that the firm’s broker-dealer registration be revoked and that the firm be fined $250,000, the Commissioner found that Westrock Advisors, Inc. violated the 2008 Consent Order as well as Sections 36b-16 and 36b-14(d) of the Connecticut Uniform Securities Act and Sections 36b-31-14f, 36b-31-9b(a), 36b-31-9b(b), 36b-31-9b(c) and 36b-31-6f of the Regulations under the Act.

Mortgage and Credit Solutions, LLC (CRD # 81414) and Sean Patrick Moriarty (CRD # 11024703) – Order to Cease and Desist and Notice of Intent to Fine Issued

On January 11, 2011, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2010-870-B) against Mortgage and Credit Solutions, LLC of 155 North College Avenue, Suite 220, Fort Collins, Colorado, and Sean Patrick Moriarty, its sole owner and managing member. The action alleged that, from at least June 2008 forward, the respondents offered and sold unregistered business opportunities to Connecticut purchaser-investors in violation of the Connecticut Business Opportunity Investment Act. The business opportunity in question would enable purchasers to start a mortgage and credit counseling business. The respondents allegedly represented that they would provide marketing support to purchaser-investors as well as an income guarantee. The respondents were afforded an opportunity to request a hearing on the Order to Cease and Desist and Notice of Intent to Fine.

CONSENT ORDERS

Salomon Whitney LLC (CRD # 145012) Fined $12,500, Directed to Reimburse Customers for Fee Differential Following Allegations of Inadequate Fee Disclosure

On March 4, 2011, the Banking Commissioner entered a Consent Order (Docket No. RCF-10-7792-S) with respect to Salomon Whitney LLC of 15 Deer Park Avenue, Suite 1, Babylon Village, New York. The Consent had been preceded by a September 23, 2010 Order to Cease and Desist, Notice of Intent to Revoke Registration as Broker-dealer, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. RCF-10-7792-S) alleging that the firm violated the antifraud provisions in the Connecticut Uniform Securities Act and engaged in dishonest and unethical practices by not disclosing to Connecticut customers that a transactional “Handling Fee” charged to Connecticut customers included a profit to the firm, that certain customers paid lower fees and that the fee was not based on the costs of handling a particular transaction. The September 23, 2010 action had also alleged that the firm 1) violated Section 36b-14(a) of the Connecticut Uniform Securities Act by failing to maintain required books and records; 2) failed to provide agency staff with copies or computer printouts of records when so requested in contravention of Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations; and 3) failed to enforce and maintain adequate supervisory procedures.

In resolution of the matter, the Consent Order directed the firm to cease and desist from regulatory violations and to pay a $12,500 fine. In addition, the Consent Order required that the firm furnish the Division with proof within 45 days that the firm had reimbursed each affected Connecticut customer the difference between the “Handling Fee” paid by the customer for each transaction, and the actual amount of the firm’s ticket and clearing charge and the postage fee assessed by Salomon Whitney LLC’s clearing firm.

Banco Espírito Santo S.A. and Espírito Santo e Comercial de Lisboa, Inc. Agree to Offer Rescission to Connecticut Residents Affected by Unregistered Security Sales; $2,500 Fine Imposed

On March 3, 2011, the Commissioner entered a Consent Order (No. CO-10-7774-S) with respect to Banco Espírito Santo S.A. (“BES”), a commercial bank headquartered in Lisbon, Portugal, and Espírito Santo e Comercial de Lisboa, Inc. (“ESCLINC”), a wholly-owned subsidiary of BES having an office at 1118 Madison Avenue, Bridgeport, Connecticut. The Consent Order recited that, in 2009, BES had notified the Division that certain employees and employees of its affiliates offered and sold certain unregistered securities and provided investment advice to Connecticut residents absent compliance with applicable securities registration and licensing requirements. The Consent Order added that BES had represented to the Division that it would offer rescission to Connecticut customers for losses sustained as a result of the self-reported violations. The Consent Order found that 1) BES and its affiliates violated Section 36b-6(a) of the Connecticut Uniform Securities Act by effecting securities transactions for Connecticut residents absent registration as a broker-dealer; 2) BES and its affiliates violated Section 36b-6(a)(1) of the Act by employing unregistered agents; 3) BES and/or its affiliates violated Section 36b-6(d) of the Act by transacting business from an unregistered broker-dealer branch office located at 1118 Madison Avenue, Bridgeport, Connecticut; 4) ESCLINC violated Section 36b-6(c) of the Act by rendering investment advice for compensation absent registration as an investment adviser in Connecticut; and 5) BES and its affiliates violated Section 36b-16 of the Act by offering and selling unregistered securities to Connecticut customers.

The Consent Order directed BES and ESCLINC to cease and desist from regulatory violations, and required that BES pay a $2,500 fine to the agency. In addition, the Consent Order required that BES offer rescission to all eligible Connecticut customers in accordance with procedures described in the Consent Order.

S&E Investment Group Barred from Connecticut Securities Activity for Ten Years

On February 17, 2011, the Banking Commissioner entered a Consent Order (Docket No. CF-2010-7660-S) with respect to S&E Investment Group, a general partnership located at 670 Tennis Club Drive, Fort Lauderdale, Florida. The Consent Order had been preceded by a June 24, 2010 Order to Cease and Desist and Notice of Intent to Fine alleging that, from at least July 1993 forward, the firm sold unregistered partnership interests to at least one Connecticut investor, notwithstanding the investor’s lack of experience in financial and business matters. The June 24, 2010 action had also alleged that the firm violated the antifraud provisions in Section 36b-4(a) of the Connecticut Uniform Securities Act by failing to make material disclosures to investors, including disclosures regarding risk, how investor funds would be invested and financial information on the respondent.

The Consent Order acknowledged that S&E Investment Group had provided documentation to the agency indicating that the firm was unable to pay the fine that otherwise would have been assessed against it pursuant to the June 24, 2010 action and the Consent Order. The Consent Order barred S&E Investment Group from transacting securities or investment advisory business in Connecticut for ten years and directed it to cease and desist from regulatory violations. In addition, the Consent Order acknowledged that, to facilitate the resolution of the matter, Stefanie DeLuca, Managing General Partner of the firm, had agreed to refrain for five years from accepting investment funds from public or private investors without first advising the Division in writing and retaining securities legal counsel to oversee compliance with state securities laws.

Grosvenor Partners, Ltd. a/k/a Aster Associates Barred From Connecticut Securities Activity for Ten Years

On February 14, 2011, the Commissioner entered a Consent Order (Docket No. CF-2010-7661-S) with respect to Grosvenor Partners, Ltd. a/k/a Aster Associates, a limited partnership located at 223 Coral Lane, Palm Beach, Florida. The respondent’s principal is Frank J. Avellino. Grosvenor Partners, Ltd. had been the subject of a June 24, 2010 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2010-7661-S) alleging that, commencing in June 1995, Grosvenor Partners, Ltd. violated the antifraud provisions in Section 36b-4(a) of the Connecticut Uniform Securities by failing to make key disclosures to investors, including the fact that Frank J. Avellino had been the subject of a 1992 Order of Preliminary Injunction and Other Equitable Relief on Consent procured by the Securities and Exchange Commission ( Securities and Exchange Commission v. Avellino & Bienes et al ., No. 92-CF-8314 (S.D.N.Y)). The SEC action had alleged that Frank Avellino guaranteed that investors could achieve a return of between 13.5% and 20% by investing monies with Bernard L. Madoff. The June 24, 2010 Order to Cease and Desist and Notice of Intent to Fine had also alleged that 1) the respondent failed to tell at least one Connecticut investor that all of the investor’s funds would be placed with Bernard Madoff; and 2) the respondent’s offering of limited partnership interests absent registration violated Section 36b-16 of the Act.

The Consent Order acknowledged that 1) Grosvenor Partners, Ltd. had provided documentation to the Division evidencing its financial inability to pay the fine that otherwise would have been assessed against it; and 2) to facilitate the informal resolution of the matter, Frank J. Avellino had consented to the entry of certain sanctions against him. Without admitting or denying that it had violated Sections 36b-16 and 36b-4(a) of the Connecticut Uniform Securities Act, Grosvenor Partners, Ltd. consented to be barred for ten years from transacting business in or from Connecticut as a broker-dealer or investment adviser. The Consent Order also directed Grosvenor Partners, Ltd. to cease and desist from regulatory violations. In addition, the Consent Order barred Frank J. Avellino from seeking Connecticut registration as a broker-dealer, agent, investment adviser or investment adviser agent for five years.

Charles Schwab & Co., Inc. (CRD # 5393) and Charles Schwab Investment Management, Inc. (IARD # 106753) Fined $300,000 In Connection With Marketing of The Schwab YieldPlus Fund

On January 31, 2011, the Banking Commissioner entered a Consent Order (Docket No. CO-10-7548-S) with respect to Charles Schwab & Co., Inc., a Connecticut-registered broker-dealer, and Charles Schwab Investment Management, Inc., an investment adviser registered with the Securities and Exchange Commission. Both entities are located at 211 Main Street, San Francisco, California. The Consent Order alleged that, in connection with the marketing and sale of The Schwab YieldPlus Fund, Charles Schwab & Co., Inc. failed to exercise adequate supervisory controls by permitting its representatives to inaccurately characterize the Fund’s risks and make representations inconsistent with the Fund’s prospectus. The Consent Order also alleged that Charles Schwab Investment Management, Inc., manager of the Fund, changed the Fund’s concentration policy for non-agency mortgage-backed securities without a shareholder vote.

The Consent Order directed the respondents to cease and desist from regulatory violations and to pay $300,000 to the department. The Consent Order also required that the respondents provide up to $2.5 million in compensation to those Connecticut investors who invested in the fund between May 31, 2006 and March 17, 2008, with the first payment being made by June 30, 2011. Investors who sold their fund shares after March 17, 2008 would be deemed to have sold as of March 17, 2008. In addition, the Consent Order provided for an Expedited Arbitration procedure, to be held in Connecticut, for those Connecticut investors who 1) bought Fund shares prior to November 15, 2006; 2) maintained their holdings at any time from May 31, 2006 through the present; 3) elected to initiate an arbitration claim after January 31, 2011 and had not previously pursued arbitration or litigation against the respondents with respect to the Fund, or settled with any of the respondents; and 4) were not members of the state or federal classes in the YieldPlus securities class action litigation (No. 08-cv-01510 WHA) with respect to the shares at issue in the Expedited Arbitration.

STIPULATION AND AGREEMENTS

Paydici, Inc. Fined $250 for Late Rule 506 Notice Filing

On February 24, 2011, the Commissioner entered into a Stipulation and Agreement (No. ST-11-7888-S) with Paydici, Inc., an issuer of convertible promissory notes located at 117 NW Fifth Avenue, Portland, Oregon. The Stipulation and Agreement stated that newly retained legal counsel to Paydici, Inc. had notified the Division that the issuer was delinquent in making a Rule 506 notice filing under Section 36b-21(e) of the Connecticut Uniform Securities Act. The notification included a curative filing and required fee. Pursuant to the Stipulation and Agreement, Paydici, Inc. agreed to pay a $250 fine to the department and to refrain from selling securities in Connecticut absent compliance with Section 36b-16 of the Act.

Websafety, Inc. f/k/a Blindspot Alert, Inc. f/k/a Promotions on Wheels Holdings, Inc. Fined $500 for Delinquent Rule 506 Notice Filing

On February 14, 2011, the Commissioner entered into a Stipulation and Agreement (No. ST-10-7861-S) with Websafety, Inc., an issuer of common stock located at 2201 West Royal Lane, Suite 200, Irving, Texas. The Stipulation and Agreement stated that Websafety, Inc. had made a late Rule 506 notice filing under Section 36b-21(e) of the Connecticut Uniform Securities Act, and that the company’s newly retained legal counsel had brought the matter to the Division’s attention. Pursuant to the Stipulation and Agreement, Websafety, Inc. agreed to pay a $500 fine to the department and to refrain from selling securities in Connecticut absent compliance with Section 36b-16 of the Act.

David Lerner Associates, Inc. (CRD # 5397) Assessed $2,800 for Permitting Agent Commissions to be Split With Unregistered Personnel

On January 11, 2011, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-10-7882-S) with David Lerner Associates, Inc., a Connecticut-registered broker-dealer located at 477 Jericho Turnpike, P.O. Box 9006, Syosset, New York. The Stipulation and Agreement alleged that, from 2005 through 2010, the firm permitted two sales assistants who were not registered as agents in Connecticut to be paid a percentage of agent commissions receivable in connection with Connecticut securities sales. Pursuant to the Stipulation and Agreement, the firm agreed to refrain from violative conduct and to pay $2,800 to the department. Of that amount, $2,000 constituted an administrative fine and $800 represented reimbursement for past due 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

2,397

Broker-dealer Agents Registered

145,618

Broker-dealer Branch Offices Registered

2,688

Investment Advisers Registered

485

SEC Registered Advisers Filing Notice

1,861

Investment Adviser Agents Registered

10,377

Agents of Issuer Registered

24

Conditional Registrations

0

Securities and Business
Opportunity Filings

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

Year to Date

Offerings Reviewed

34

34

Investment Company Notice Filings

538

538

Exemptions and Exemptive Notices

776

776

Examinations

Broker-dealers

15

15

Investment Advisers

11

11

Securities Investigations

Opened

31

31

Closed

38

38

Ongoing as of End of Quarter

119

Subpoenas issued

8

8

Matters referred from Attorney General

5

5

Matters referred from Other Agencies

1

1

Business Opportunity Investigations

Investigations Opened

1

1

Investigations Closed

0

0

Ongoing as of End of Quarter

3

Enforcement: Remedies and Sanctions

Notices of Intent to Deny (Licensing)

0

0

Notices of Intent to Suspend (Licensing)

0

0

Notices of Intent to Revoke (Licensing)

0

0

Denial Orders (Licensing)

0

0

Suspension Orders (Licensing)

0

0

Revocation Orders (Licensing)

1

1

Notices of Intent to Fine

4

4

Orders Imposing Fine

2

2

Cease and Desist Orders

4

4

Notices of Intent to Issue Stop Order

0

0

Activity Restrictions/Bars

2

2

Stop Orders

0

0

Vacating/Withdrawal/ Modification Orders

0

0

Restitutionary Orders

0

0

Injunctive Relief Obtained

0

0

Proceedings and Settlements

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

Year to Date

Administrative Actions

5

5

Consent Orders

5

5

Stipulation and Agreements

3

3

Monetary Relief*

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

Year to Date

Monetary Sanctions Imposed

$668,550

$668,550

Restitution or Other Monetary Relief
( includes rescission offer amounts
)

$18,049,151

$18,049,151

*
Cents eliminated

Securities Referrals

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

Year to Date

Criminal (Chief State's Attorney)

1

1

Civil (Attorney General)

2

2

Other Agency Referrals

1

1

Securities Division