Source: https://portal.ct.gov/DOB/Enforcement/Securities-Orders-2/Wadsworth-Inv-Co-et-al---Final-Decision
Timestamp: 2019-04-20 00:25:46+00:00

Document:
The Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a, Sections 36b-1 to 36b-34, inclusive, of the Connecticut General Statutes, the Connecticut Uniform Securities Act (“Act”), and the regulations promulgated thereunder (Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies) (“Regulations”).
The above-referenced matter was initiated upon charges brought by the Commissioner to issue a permanent order to cease and desist against Respondents, revoke the broker-dealer registration of WIC, revoke the broker-dealer agent registrations of Wadsworth and Wadsworth, Jr.; revoke the investment adviser agent registration of Wadsworth, and impose fines upon each Respondent. On August 11, 2010, the Commissioner issued an Order to Cease and Desist, Notice of Intent to Revoke Registration as Broker-dealer, Notice of Intent to Revoke Registration as Broker-dealer Agent, Notice of Intent to Revoke Registration as Investment Adviser Agent, Notice of Intent to Fine and Notice of Right to Hearing against Respondents (“Notice”), which was Amended and Restated on June 1, 2011 (“Amended Notice”).
After due notice, a hearing was held at the Department of Banking (“Department”) over 13 various days between July 19 and September 15, 2011. The hearing was conducted in accordance with Chapter 54 of the Connecticut General Statutes, the “Uniform Administrative Procedure Act”, and the Department’s contested case regulations, Sections 36a-1-19 to 36a-1-57, inclusive, of the Regulations of Connecticut State Agencies. On September 19, 2011, the Commissioner entered into Consent Orders with Wadsworth, Jr. and PTS resolving the allegations made in the Amended Notice against these two Respondents.
With respect to the remaining Respondents, having read the entire record, including testimony of the witnesses and documentary evidence, I make the following findings of fact and conclusions of law based on the preponderance of evidence in the record.
*For ease of reference, numbers have been assigned to each transcript.
A table containing the assignments is attached as Exhibit A.
From September 2002 through August 2006, WIC, acting through Wadsworth, failed to establish and maintain a supervisory system and written supervisory procedures (WSPs) reasonably designed to achieve compliance with applicable securities laws and regulations. During that entire period, Wadsworth was WIC’s President and sole General Securities Principal, and was responsible for establishing, maintaining and enforcing WIC’s supervisory system and WSPs. . . .
• e-mail review and retention; . . .
• Mutual fund redemptions and CDSC charges . . . .
In the 2003 LOC [Letter of Caution], WIC and Wadsworth were put on notice about several deficiencies in the firm’s WSPs, including the procedures relating to the review of CDSC charges and mutual fund redemptions. Despite receiving the LOC and representing that the noted deficiencies would be corrected, however, WIC and Wadsworth failed to adopt procedures addressing those areas.
c. failed to provide procedures for e-mail review and retention and certain internal communications in its WSP, and allowed Dale Aldieri (“Aldieri”) to act as its Chief Compliance Officer without being registered as a General Securities Principal with FINRA and providing evidence that Aldieri had taken and successfully passed an examination as principal given by the Securities and Exchange Commission (“SEC”) or by a securities self-regulatory organization, in wilful violation of Section 36b-31-6f of the Regulations.
Effective September 1, 2006 . . . Wadsworth, like all Registered Representatives, will refrain from . . . [WIC] client emails. Also . . . [WIC] established on September 1, 2006 a client file titled “inbound client emails”. In the event a client sends an email to . . . [WIC], said email will be printed[.] A copy will be retained in the file and a form letter (as attached) will be mailed to the client.
Hence from September 1, 2006 forward NO person from . . . [WIC] is permitted to communicate to . . . [WIC] clients via email.
(c) the signor had legal capacity to sign.
The Commissioner is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act and the regulations promulgated thereunder (Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies). The Commissioner’s authority includes the power to revoke the registration of WIC as a broker-dealer in Connecticut pursuant to Section 36b-15(a) of the Act, revoke the registrations of Wadsworth as a broker-dealer agent and an investment adviser agent in Connecticut pursuant to Section 36b-15(a) of the Act, to issue orders to cease and desist against WIC and Wadsworth individually pursuant to Section 36b-27(a) of the Act, and to impose a fine upon WIC and Wadsworth individually pursuant to Section 36b-27(d) of the Act.
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).
The Department alleges that WIC failed to maintain complete and accurate books and records and to make such records available to the Commissioner, in wilful violation of Section 36b-14(a) of the Act and Section 36b-31-14a of the Regulations by failing to maintain e-mail records relating to its broker-dealer business and corporate records.
(2) . . . every registered broker-dealer, shall make, keep and preserve such accounts, correspondence, memoranda, papers, books and other records as the Securities and Exchange Commission requires. All such records shall be preserved for such period as the Securities and Exchange Commission requires.
Every registered broker-dealer shall keep and maintain, open to inspection by the commissioner, the books and records required to be kept by the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. . . . Compliance with the requirements of the United States Securities and Exchange Commission concerning preservation of records in an electronic medium is deemed compliance with this subsection.
In construing the requirements of Rule 17a-4, the SEC has expressly stated that e-mail messages must be retained if they relate to the broker-dealer’s “business as such” and that “the content and audience of the message determine whether a copy must be preserved, regardless of whether the message was sent on paper or sent electronically.” See SEC Release Nos. 34-38245 (62 FR 6469 (Feb. 12, 1997)) and 34 44992 66 FR 55818 (Nov. 2, 2001)).
Rule 17a-4. WIC had also been recently warned of this issue by FINRA.
There is no evidence establishing that WIC failed to maintain the corporate records requested, such as by-laws and minutes of shareholder meetings. There is only evidence that WIC failed to produce such records to the Department which is discussed further below in connection with the alleged violation of Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations.
The Department alleges that the violations of the Act and Regulations by WIC were wilful. A violation of the Act is wilful if a person had knowledge of the conduct which constituted the violation. In State v. Andresen, the Connecticut Supreme Court stated, “[w]e conclude that wilfully violating provisions of the Uniform Act, and therefore CUSA, requires ‘proof that the person acted intentionally in the sense that [she] was aware of what [she] was doing. Proof of evil motive or intent to violate the law, or knowledge that the law was being violated, is not required.’ L. Loss, Commentary on the Uniform Securities Act (1976) § 204 (a)(2)(B), official comment, p. 29 . . . .” 256 Conn. 313, 339 (2001).
Personnel at WIC, including Wadsworth, routinely utilized e-mails to conduct WIC business and failed to retain them as business records. Such conduct establishes that WIC failed to maintain books and records in wilful violation of Section 36b-14(a) of the Act and Section 36b-31-14a of the Regulations by failing to maintain e-mails relating to its broker-dealer business, which forms a basis for the revocation of WIC’s broker-dealer registration in Connecticut pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine pursuant to Section 36b-27(d) of the Act.
The Department alleges that WIC failed to make its required books and records available to the Commissioner when so requested, in wilful violation of Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations by failing to produce WIC’s e-mails relating to its broker-dealer business and corporate records when requested to do so by the Department.
(a) . . . (2) . . . every registered broker-dealer, shall make, keep and preserve such accounts, correspondence, memoranda, papers, books and other records as the Securities and Exchange Commission requires. All such records shall be preserved for such period as the Securities and Exchange Commission requires. . . . (d) All the records of a . . . registered broker-dealer referred to in subsection (a) of this section are subject at any time or from time to time to such reasonable periodic, special or other examinations by the commissioner, . . . as the commissioner deems necessary or appropriate in the public interest or for the protection of investors. Every . . . registered broker-dealer shall keep such records open to examination by the commissioner and, upon the commissioner’s request, shall provide copies of any such records to the commissioner. . . .
(a) For purposes of this section, (1) “commissioner” includes any representative of the commissioner conducting an examination and (2) “records” includes, but is not limited to, diaries, logs, notes, memoranda, reports, advisories, updates, ledgers, journals, visual and audio recordings, manual and computer records and related software, and any summary, outline and index thereof.
(b) A registered broker-dealer . . . shall (1) make its records available to the commissioner in readable form; . . . [and] (3) provide copies or computer printouts of records when so requested . . . .
In First Providence v. Burke, 2001 Conn. Super. LEXIS 3287, the Connecticut Superior Court, interpreting Section 36b-14(d) of the Act, relied on the Official Commentary to the Model Act, stating “failure to submit to a reasonable inspection is a violation of the Act, which may result in an action by the Administrator . . . . Indeed, the purpose behind this particular subsection as noted in New Jersey regarding a virtually identical provision, is to facilitate “investigation and checking to make certain that all requirements of the law and rules relative to the operation of the business are complied with”. Id. at *25 (internal punctuation omitted). The court continued on interpreting “reasonable” as “fair, proper, or moderate under the circumstances”. Id. at 27-29.
The Hearing Officer had previously opined that documents, such as by-laws and minutes of meetings, were corporate records required to be maintained by WIC pursuant to Section 36b-31-14a(b)(3) of the Regulations. Accordingly, an e-mail by Attorney Silverman to Wadsworth requesting such documents is a reasonable inquiry to ensure that such record requirements were being complied with by WIC. Wadsworth admitted to not producing such records, asserting only that such request was unusual coming from a Department attorney and requiring production within 24 hours. While the initial turn-around time was rather short, it must be noted that the production deadline was extended by several days and still not adhered to. In addition, the record reflects that the request was not only made by Attorney Silverman, but reiterated by Klemes Klementon, Principal Examiner for the Division.
With respect to the production of e-mails, the record reflects that some e-mails were produced to Division examiners by WIC’s office manager, Ms. Trojanowski. She produced all the e-mails which she maintained for WIC, which happened to be only those e-mails received from clients. Such action demonstrated that WIC failed to maintain its e-mail records, as discussed above, rather than failed to produce such records.
WIC failed to make its required books and records available to the Commissioner by failing to provide corporate records when requested, in wilful violation of Section 36b-14(d) of the Act and Section 36b-31-14f of the Regulations, which forms a basis for the revocation of WIC’s broker-dealer registration pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine pursuant to Section 36b-27(d) of the Act.
The Department alleges that WIC failed to enforce and maintain adequate supervisory procedures by failing to provide procedures for, inter alia, e-mail review and retention and certain internal communications, and allowing Aldieri to act as its Chief Compliance Officer, in wilful violation of Section 36b-31-6f of the Regulations.
Each registered broker-dealer . . . shall establish, enforce and maintain a system for supervising the activities of its agents, investment adviser agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations.
Each member shall develop written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing written (i.e., non-electronic) and electronic correspondence with the public relating to its investment banking or securities business, including procedures to review incoming, written correspondence directed to registered representatives and related to the member’s investment banking or securities business to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with firm procedures. . . .
The only e-mail policy in WIC’s WSP concerns e-mails to clients and strictly forbids them. It does not address the “great amount” of business done by e-mail by Wadsworth, nor does it expressly provide a procedure by which Wadsworth shall review business related e-mails, even though this was an area of weakness previously cited by FINRA.
WIC’s lack of a policy to monitor electronic communications is just one of many examples which demonstrate that WIC failed to establish, enforce and maintain a system for supervising the activities of its agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations. As discussed later, WIC’s supervisory system was also inadequate with respect to its use of signature guarantees and its allowance of Aldieri to act as a principal while not licensed as such.
WIC’s failure to establish, enforce and maintain an adequate compliance system constitutes a wilful violation of Section 36b-31-6f of the Regulations, which forms a basis for the revocation of WIC’s broker-dealer registration pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine pursuant to Section 36b-27(d) of the Act.
The Department alleges that WIC and Wadsworth, in connection with the offer, sale or purchase of any security, directly or indirectly employed a device, scheme or artifice to defraud, made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or engaged in an act, practice or course of business which operated as a fraud or deceit upon a person, in wilful violation of Section 36b-4(a) of the Act in connection with the sale of Oppenheimer funds and purchase of AIM Funds by WIC clients.
No person shall, in connection with the offer, sale or purchase of any security, directly or indirectly . . . (2) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading . . . .
In particular, the Department alleges that, in connection with WIC’s clients’ sale of Oppenheimer Funds and the purchase of AIM Funds, during two client appreciation meetings in October 2006 and by letters dated November 2006 and March 2007, WIC and Wadsworth represented that: (a) Oppenheimer Funds were the only fund family that will “not trade an account on the day PTS submits a trade”, which forces PTS to wait a full day to implement their clients’ instructions and results in delays which cost their clients tens of thousands of dollars; (b) PTS had a major buy in the High Yield Bond Category but that the Oppenheimer Funds refused to implement that buy instruction; (c) all other investors had signed the documents to exit the Oppenheimer Funds and enter the AIM Funds; and (d) Wadsworth and his family would be making the switch out of the Oppenheimer Funds into the AIM Funds.
The Department also alleges that WIC and Wadsworth failed to disclose that: (a) the Oppenheimer Funds were in the process of terminating the agreements of both WIC and PTS to sell the Oppenheimer Funds due to troubling business practices at both WIC and PTS; (b) the Oppenheimer Fund’s method of implementing order instructions had been in existence since at least 2002, and had not changed; (c) the Oppenheimer Fund’s method of implementing order instructions saved PTS’ clients money in many circumstances; (d) the Oppenheimer Fund did not refuse to execute the buy instruction into the High Yield Bond Category; (e) not every investor had signed the documents to exit the Oppenheimer Funds and enter the AIM Funds; (f) investors would be paying substantial fees to make the switch out of the Oppenheimer Funds into the AIM Funds; and (g) Wadsworth and his family would not be paying any fees to make the switch into the AIM Funds.
The evidence is inconclusive regarding the following assertions: (a) Oppenheimer is the only fund family that does not trade an account on the same day that PTS submits a trade, (b) PTS had a major buy in the High Yield Bond category that Oppenheimer refused to implement, (c) Oppenheimer was in the process of terminating its agreements with WIC and PTS, and (d) Oppenheimer’s method of implementing instructions had not changed since 2002 and saved PTS’ clients money in many circumstances.
There is evidence that: (a) not all investors had signed documents to exit Oppenheimer and enter AIM Funds, (b) Wadsworth and his family made the switch out of Oppenheimer into AIM and had to pay fees to enter AIM Funds and (c) investors paid substantial fees to make the switch into AIM.
A material fact is a fact that “a reasonable investor would have considered significant in making investment decisions.” Ganino v. Citizens Utilities Co., 228 F.3d 154, 161 (2d Cir. 2000). A fact need not be outcome determinative for it to be material. See id., 161-62; Folger Adam Co. v. PMI Industries, Inc., 938 F.2d 1529, 1533-34 (2d Cir.), cert. denied, 502 U.S. 983, 112 S. Ct. 587, 116 L. Ed. 2d 612 (1991). On the other hand, “[a]n omitted fact may be immaterial if the information is trivial . . . or is so basic that any investor could be expected to know it . . . .” (Citations omitted; internal quotation marks omitted.) Ganino v. Citizens Utilities Co., supra, 162; see also Levitin v. PaineWebber, Inc., 159 F.3d 698, 702 (2d Cir. 1998), cert. denied, 525 U.S. 1144, 119 S. Ct. 1039, 143 L. Ed. 2d 47 (1999).
Lehn v. Dailey, 77 Conn. App. 621, 628-29 (Conn. App. Ct. 2003).
complained of the fees incurred and stated that he “did not fully understand the costs involved.” Further, a client who did not attend the meeting and received the letter complained to the Department of the significant fees and potentially unethical practices associated with the Oppenheimer to AIM transaction. She attached the November 2006 letter from Wadsworth which encouraged investors to make the switch.
The November 2006 letter urges clients to immediately sign documents authorizing the transfer to AIM and cites several reasons for WIC’s malcontentedness with Oppenheimer. The only mention of fees is in a barely legible footer. In Papic v. Burke, 2007 Conn. Super. LEXIS 820 (aff’d, 113 Conn. App. 198 (Conn. App. Ct. 2009)), the Superior Court relied on Demaria v. Andersen in construing whether securities disclosure was sufficient. The Demaria court explained, “[a] prospectus will violate federal securities laws if it does not disclose ‘material objective factual matters,’ or buries those matters beneath other information, or treats them cavalierly.” Demaria v. Andersen, 318 F.3d 170, 180 (2d Cir. N.Y. 2003), citing Olkey, 98 F.3d at 5 (quoting I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991)). Applying such standard, the disclosure of fees in the letter was insufficient, and similarly, the client appreciation meetings treated the discussion of fees cavalierly. As Wadsworth testified, he did not discuss fees from the podium, but had prospectuses available for clients to review. The value to clients of such prospectus disclosure was questionable, at best, considering the voluminous nature of prospectuses and the atmosphere of the client appreciation meetings, where clients were encouraged to sign the transfer documents on the spot.
client appreciation meetings. Likewise, its reference to 300 client accounts, representing at the most 83 actual clients, is misleading.
In addition, Wadsworth testified that he did not tell clients that WIC and PTS had been kicked out of Oppenheimer in the March 2007 letter because it was “completely irrelevant”. The termination of WIC’s selling agreement with Oppenheimer is a completely relevant and a material fact which should have been disclosed to investors in the March 2007 letter. Termination of the selling agreement prevented WIC from executing any further securities transactions in Oppenheimer for its clients.
WIC and Wadsworth made material omissions in connection with the offer, purchase and sale of mutual funds when encouraging WIC clients to make the switch from Oppenheimer to AIM. Such conduct constitutes a wilful violation of Section 36b-4(a) of the Act by WIC and Wadsworth individually, which forms a basis for the revocation of WIC’s broker-dealer registration and Wadsworth’s broker-dealer agent and investment adviser agent registrations pursuant to Section 36b-15(a) of the Act and the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act against WIC and Wadsworth individually and the imposition of a fine pursuant to Section 36b-27(d) of the Act upon WIC and Wadsworth individually.
The Department alleges that by using pre-signed blank client forms, providing false signature guarantees, utilizing false names to gain access to client information and by falsely holding themselves out as the client during on-line transactions, both WIC and Wadsworth engaged in dishonest or unethical business practices in the securities business, in wilful violation of Section 36b-4(b) of the Act and within the meaning of Sections 36b-31-15a and 36b-31-15b of the Regulations.
Section 36b-4(b) of the Act states, in pertinent part, that: "No person shall, in connection with the offer, sale or purchase of any security, directly or indirectly engage in any dishonest or unethical practice."
(a) In implementing section 36b-15(a)(2)(H) of the general statutes, the following shall be deemed “dishonest or unethical practices in the securities . . . business” by broker-dealers without limiting those terms to the following practices: . . .
(b) In construing the term “dishonest or unethical practices in the securities . . . business” as used in this section and in section 36b 15(a)(2)(H) of the general statutes, the commissioner may consider whether the conduct in question is proscribed by any rule of a national securities exchange or self-regulatory organization registered under federal securities laws administered by the United States Securities and Exchange Commission.
(a) In implementing section 36b-15(a)(2)(H) of the general statutes, the following shall be deemed “dishonest or unethical practices in the securities . . . business” by agents without limiting those terms to the following practices: . . .
(c) In construing the term “dishonest or unethical practices in the securities . . . business” as used in this section and in section 36b 15(a)(2)(H) of the general statutes, the commissioner may consider whether the conduct in question is proscribed by any rule of a national securities exchange or self-regulatory organization registered under federal securities laws administered by the United States Securities and Exchange Commission.
whether such use of false names was in connection with an offer, sale or purchase of a security as required by Section 36b 4(b) of the Act.
accessing a client’s on-line account would be perfectly acceptable.
Finally, WIC and Wadsworth did engage in a dishonest or unethical practice by using signature guarantees in a manner that was inconsistent with industry standard. Both Heidi Wayne and Wadsworth admitted to using signature guarantee stamps without being physically present to see the person sign the documents. This was not consistent with the practice and purpose of signature guarantees as testified by Mr. McDonald and stated in the supervisory manual.
This also created the opportunity for signatures to be guaranteed whereby individuals no longer had the legal capacity to sign, such as in the case of Mr. Neher. Mr. Neher died on September 1, 2003, but yet, on April 27, 2005, his signature was guaranteed by Aldieri of WIC in connection with a securities transaction.
companies. Such conduct is a basis for the revocation of WIC’s broker-dealer registration and Wadsworth’s broker-dealer agent and investment adviser agent registrations pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act against WIC and Wadsworth individually and the imposition of a fine pursuant to Section 36b-27(d) of the Act upon WIC and Wadsworth individually.
The Department alleges that by failing to update the Commissioner, through the CRD, to reflect the change in ownership of WIC, WIC failed to promptly file a correcting amendment in wilful violation of Section 36b-31-14e of the Regulations.
Section 36b-31-14e(a) of the Regulations, states, in pertinent part: "If the information contained in any application for registration as a broker-dealer . . . or in any amendment thereto, is or becomes inaccurate . . . in any material respect for any reason, the . . . registrant shall promptly file a correcting amendment with the commissioner."
amended if the entity listed as the broker-dealer’s owner dissolved. Wadsworth contended that the entity simply moved to Florida and provided evidence of a Florida address, however, the Florida entity had a different tax identification number than the Connecticut entity referenced on the CRD. (Ex. A to Wadsworth’s brief, November 7, 2011.) No amendment indicating such change in ownership was filed promptly as required by Connecticut regulations.
WIC’s failure to file a correcting amendment on the CRD from September 30, 2010 to April 25, 2011, constitutes a wilful violation of Section 36b-31-14e(a) of the Regulations, which forms a basis for the revocation of WIC’s broker-dealer registration in Connecticut under Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine under Section 36b-27(d) of the Act.
The Department alleges that WIC and Wadsworth offered securities that were not registered, in wilful violation of Section 36b-16 of the Act.
Section 36b-16 of the Act states, in pertinent part, that: "No person shall offer or sell any security in this state unless (1) it is registered under sections 36b-2 to 36b-34, inclusive, (2) the security or transaction is exempted under section 36b-21, or (3) the security is a covered security provided such person complies with any applicable requirements in subsections (c), (d) and (e) of section 36b-21."
Section 36b-3(16)(B) of the Act states that “offer” or “offer to sell” includes “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value”.
Section 36b-21(g) of the Act states, in pertinent part, that: "In any proceeding under sections 36b-2 to 36b-34, inclusive, the burden of proving an exemption, preemption, exclusion or an exception from a definition is upon the person claiming it."
[A]ny transaction if all the following conditions are satisfied: (A) The offer and sale is effectuated by the issuer of the security; (B) the total number of purchasers of all securities of the issuer does not exceed ten . . . (C) no advertisement, article, notice or other communication published in any newspaper, magazine or similar medium, broadcast over television or radio or communicated by other electronic means or any other general solicitation is used in connection with the sale; and (D) no commission, discount or other remuneration is paid or given directly or indirectly in connection with the offer and sale, and the total expenses, excluding legal and accounting fees, in connection with the offer and sale do not exceed one per cent of the total sales price of the securities. . . .
The applicability of any of the statutory exemptions in Section 36b-21 of the Act is a question of fact. Andresen, supra, at 325. By the facts presented during the hearing, it would appear that such exemption applies to this transaction. DECA ONE was offered only by Wadsworth on behalf of WIC, the only purchasers of the security were Wadsworth family members, and there was no public advertisement of the security. The record fails to establish that Wadsworth and WIC offered securities in violation of Section 36b-16 of the Act.
The Department alleges that by allowing Aldieri to act as a manager without having submitted evidence that he had taken and passed an examination as principal, WIC wilfully violated Section 36b-31-15e of the Regulations.
(a) For purposes of this section, “manager” means (1) any person who directly or indirectly supervises securities sales personnel or (2) any person responsible for the day-to-day operation and supervision of an office of a broker-dealer in this state.
(b) Each applicant for broker-dealer registration shall supply evidence to the commissioner that all officers, partners or sole proprietors who act as managers and all managers shall have taken and successfully passed an examination as principal given by the United States Securities and Exchange Commission or by a securities self-regulatory organization registered under the Securities Exchange Act of 1934.
(c) Each registered broker-dealer shall supply evidence to the commissioner that all new officers, partners or sole proprietors who act as managers shall have taken and successfully passed an examination as principal given by the United States Securities and Exchange Commission or by a securities self-regulatory organization registered under the Securities Exchange Act of 1934.
The evidence clearly indicates that Aldieri was acting as a manager for WIC and failed to take the requisite principal exam. Wadsworth testified that in 2002, the NASD suggested that Aldieri should take the principal exam and Wadsworth agreed to such undertaking. Yet, as Wadsworth testified, Aldieri failed to take the exam even though his responsibilities remained the same and he remained employed with WIC through 2007.
WIC’s failure to provide evidence to the Division that Aldieri, while acting as manager, had successfully passed his principal examination constitutes a wilful violation of Section 36b-31-15e of the Regulations, which form a basis for the revocation of WIC’s broker-dealer registration pursuant to Section 36b-15(a) of the Act, the issuance of an order to cease and desist pursuant to Section 36b-27(a) of the Act, and the imposition of a fine pursuant to Section 36b-27(d) of the Act.
The Department alleges that Wadsworth made false or misleading statements to the Commissioner, in wilful violation of Section 36b-23 of the Act by stating in his CRD filing and letters to the Division that there had never been a complaint filed against him, stating that WIC did not use or maintain e-mail accounts or pre-signed blank forms in conducting business, and providing an inaccurate list of WIC employees.
Section 36b-23 of the Act states, in pertinent part: "No person shall make or cause to be made orally or in any document filed with the commissioner or in any proceeding, investigation or examination under sections 36b-2 to 36b-34, inclusive, any statement that is, at the time and in the light of the circumstances under which it is made, false or misleading in any material respect or, in connection with the statement, omit to state a material fact necessary to make the statement made, in the light of the circumstances under which was made, not false or misleading."
Since Connecticut courts have not construed “material” in this context, the Merriam-Webster’s definition of this term is prescriptive. Merriam-Webster’s defines “material” as “having real importance or great consequences <facts ~ to the investigation>”. Merriam-Webster’s Collegiate Dictionary 715 (10th ed. 2001).
The record establishes that there have been several complaints against Wadsworth, and Wadsworth admitted as much in his testimony at the hearing. However, Wadsworth falsely stated in both his CRD filing and letters to the Department that there had never been a complaint against him. Furthermore, the fact of whether Wadsworth ever had a complaint against him is clearly material to a regulator, as testified to by Mr. McDonald, in order to provide a full regulatory picture of the firm and an understanding of the underlying problems at the firm.
an executive representative is not misleading in a material respect, as the list does mention the existence of additional persons who perform services for WIC as independent contractors.
Section 36b-27(d) of the Act.
hearing. Any such hearing shall be held in accordance with the provisions of chapter 54.
(1) Whenever the commissioner finds as the result of an investigation that any person has violated any of the provisions of sections 36b-2 to 36b-34, inclusive, or any regulation, rule or order adopted or issued under said sections, the commissioner may send a notice to (A) such person . . . by registered or certified mail, return receipt requested . . . . The notice shall be deemed received by the person on the earlier of the date of actual receipt or the date seven days after the date on which such notice was mailed or sent. Any such notice shall include: (i) A reference to the title, chapter, regulation, rule or order alleged to have been violated; (ii) a short and plain statement of the matter asserted or charged; (iii) the maximum fine that may be imposed for such violation; (iv) a statement indicating that such person may file a written request for a hearing on the matters asserted not later than fourteen days after receipt of the notice; and (v) the time and place for the hearing.
(2) If a hearing is requested within the time specified in the notice, the commissioner shall hold a hearing upon the charges made unless such person fails to appear at the hearing. Any such hearing shall be held in accordance with the provisions of chapter 54. After the hearing if the commissioner finds that the person has violated . . . any of the provisions of sections 36b-2 to 36b-34, inclusive, or any regulation, rule or order adopted or issued under said sections, the commissioner may, in the commissioner’s discretion and in addition to any other remedy authorized by said sections, order that a fine not exceeding one hundred thousand dollars per violation be imposed upon such person. If such person fails to appear at the hearing, the commissioner may, as the facts require, order that a fine not exceeding one hundred thousand dollars per violation be imposed upon such person. The commissioner shall send a copy of any order issued pursuant to this subsection by registered or certified mail, return receipt requested, . . . to any person named in such order.
The Commissioner is provided with the authority to revoke the broker-dealer registration of WIC, to restrict or impose conditions on the securities activities of WIC, and to revoke the broker-dealer agent and investment adviser agent registrations of Wadsworth pursuant to Section 36b-15(a) of the Act.
substantial evidence. . . .
(f) No order may be entered under this section except as provided in subsection (c) of this section without (1) appropriate prior notice to the . . . registrant and to the employer or prospective employer if such . . . registrant is an agent or investment adviser agent, (2) opportunity for hearing, and (3) written findings of fact and conclusions of law.
The record establishes that the violations of the Act and Regulations by WIC and Wadsworth were wilful, as required by Section 36b-15(a)(2)(B) of the Act. WIC and Wadsworth were aware of the underlying conduct, which constituted the violations discussed herein. The record also establishes that WIC and Wadsworth engaged in “dishonest or unethical practices in the securities . . . business” within the meaning of Section 36b-15(a)(2)(H) of the Act; WIC and Wadsworth failed to reasonably supervise agents within the meaning of Section 36b-15(a)(2)(K) of the Act by failing to supervise Aldieri; WIC withheld or refused to furnish material information to the Commissioner within the meaning of Section 36b-15(a)(2)(L) of the Act by failing to produce its corporate records; and Wadsworth made material misrepresentations to the Commissioner within the meaning of Section 36b 15(a)(2)(L) of the Act by stating that there had never been a complaint against him.
(a) In a contested case, all parties shall be afforded an opportunity for hearing after reasonable notice.
(b) The notice shall be in writing and shall include: (1) A statement of the time, place, and nature of the hearing; (2) a statement of the legal authority and jurisdiction under which the hearing is to be held; (3) a reference to the particular sections of the statutes and regulations involved; and (4) a short and plain statement of the matters asserted.
The Amended Notice issued by the Commissioner complied with Sections 36b-27(a), 36b-27(d) and 36b-15(f) of the Act and Section 4-177 of the Connecticut General Statutes.
No . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-34, inclusive.
In First Providence, a Connecticut court reviewing the term “public interest” in the context of sanctioning an entity’s broker-dealer registration stated, “the legislative history provides some evidence that the CUSA was intended to protect the interests of citizens of Connecticut and, thus, support the commissioner’s finding that the revocation is in the ‘public interest’. In introducing the bill to the House, Representative William J. Scully, Jr. stated ‘we feel this bill will go a long way to help the people of the State to protect their interest . . . ’ 20 H.R. Proc., PT. 11, 1977 Sess., p. 4518. Furthermore, ‘the primary purpose behind [CUSA] was to institute comprehensive registration requirements and thereby improve surveillance of securities trading.” First Providence, supra, at 21-22 citing Connecticut National Bank v. Giacomi, 233 Conn. 304, 320, 659 A.2d 1166 (1995).
There was ample testimony during the hearing from clients of WIC and Wadsworth who were very pleased with their investment experience. Wadsworth had provided them with considerable returns on their investments and good customer service during his 40 years with the firm. On several occasions, Wadsworth went above and beyond the call of duty advocating for his clients. Wadsworth also engaged in many philanthropic endeavors from establishing a charitable foundation to running a racquetball tournament for numerous years.
While such actions and service are commendable, the inquiry of whether sanctioning an individual’s or entity’s security registration is in the public interest does not end there. Public interest requires appropriate surveillance of securities transactions in accordance with the legislative intent of the Act and thus, it is imperative that securities regulatory requirements such as e-mail retention and effective supervisory procedures are complied with by a broker-dealer. It is also necessary that registered individuals and entities cooperate with securities regulators, heed regulator warnings and can be relied on to provide accurate and complete records and testimony to their regulator. These mechanisms exist to create accountability with respect to securities transactions and provide assurance that clients’ interests and monies are adequately protected.
WIC’s practices were not compliant with securities laws and regulations. Especially in recent years, Wadsworth had been repeatedly warned by regulators of such concerns. The record reflects that Wadsworth ignored these warnings and several of the troublesome practices continued. Overall, Wadsworth and WIC demonstrated a general indifference to securities compliance in a highly regulated environment. As Wadsworth admitted to being the person responsible for all of WIC’s actions, Wadsworth was the primary cause of WIC’s compliance failures.
Wadsworth failed to display integrity in his interactions with both regulators and clients. Time and time again, Wadsworth changed his story to regulators–for example, as to whether: offering documents were drafted for DECA ONE, any complaints had been made by clients and WIC had any affiliates. Wadsworth was also evasive and not forthcoming to regulators, as demonstrated by his response to FINRA concerning the offering of DECA ONE in which he mentioned only six, of the over 80 persons, who received the DECA ONE letter. These same characteristics carried over to Wadsworth’s dealings with his clients as evidenced by the fact that Wadsworth never conveyed the complete truth concerning the Oppenheimer to AIM transaction.
Finally, integral to the considerations in sanctioning a broker-dealer’s registration is the effect of such action on existing clients and the surrounding community. Great measures are taken to keep businesses operating in Connecticut and to ensure that the best interests of clients are met. WIC’s clients have a long history with the firm and WIC’s continued existence will likely provide some level of stability and convenience for such clients. Moreover, with new management, an atmosphere of compliance and transparency to regulators and clients may prosper. Accordingly, the Order below provides such an alternative for WIC if it seeks to avail itself of such option.
I conclude that it is in the public interest, for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of Sections 36b-2 to 36b-34, inclusive, of the Act to revoke the investment adviser agent and broker-dealer agent registrations of Wadsworth and to enter the following order.
Designate, and identify in writing to the Commissioner, a new President and full-time Chief Compliance Officer, sufficiently experienced in securities regulation, to replace William F. Wadsworth. The President shall be responsible for the supervision of the entire broker-dealer operations of Wadsworth Investment Co., Inc., including compliance and sales practices. The Chief Compliance Officer shall be responsible for supervising the compliance aspects of the firm’s operations in and from Connecticut and for providing compliance training to employees and agents of Wadsworth Investment Co., Inc. The experience and identity of such President and Chief Compliance Officer shall be subject to approval by the Commissioner.
Submit a plan, acceptable to the Commissioner, including specific steps and time periods, to: (A) divest the ownership interest in the firm, either direct or indirect, held by William F. Wadsworth; (B) relocate the physical location of Wadsworth Investment Co., Inc.’s offices to a location other than William F. Wadsworth’s residential address; and (C) notify all clients of this Order and changes to Wadsworth Investment Co., Inc.’s future organizational structure.
Submit evidence, acceptable to the Commissioner, that Wadsworth Investment Co., Inc., has complied with all the terms of this Order, including the payment of fines, and remedied all underlying conduct causing or contributing to the violations herein, including, but not limited to: (A) establishing an effective system for supervising the activities of its agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations; (B) implementing an e-mail retention system in accordance with Rule 17a-4 of the Securities Exchange Act; (C) destroying all pre-signed blank client forms and clients’ user ids and passwords for on-line investment accounts; and (D) ceasing the use of signature guarantee stamps without Wadsworth Investment Co., Inc., employees being physically present to see the person sign the document.
After such ninety (90) day period, Wadsworth Investment Co., Inc., shall ensure that William F. Wadsworth no longer: (1) acts in any capacity for Wadsworth Investment Co., Inc., whether or not compensated for such services; and (2) exercises any control of Wadsworth Investment Co., Inc., either directly or indirectly, including, but not limited to, participating in corporate governance matters, training personnel, and supervising the daily operations, sales practices and compliance aspects of the firm.
The restrictions and conditions specified in paragraph (a)(1) above shall remain in effect for a period of three (3) years following the date this Order is mailed. Wadsworth Investment Co., Inc., shall seek the approval by the Commissioner for any successor President or Chief Compliance Officer during such three (3) year period.
The plan submitted to the Commissioner pursuant to paragraph (a)(2) above shall be fully implemented in a time period acceptable to the Commissioner, and the restrictions on Wadsworth Investment Co., Inc., pursuant to items (A) and (B) of such paragraph shall be permanent.
(e) As used in the above restrictions and conditions, Wadsworth Investment Co., Inc., shall include any successor in interest.
7. The Order shall become effective when mailed.
c/o William F. Wadsworth, Jr.

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