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In Re: Merrill Lynch

Order
Wednesday, February 21, 2018
Docket No. 18-011-S

STIPULATION AND CONSENT AGREEMENT

            The Securities Division of the Vermont Department of Financial Regulation (the “Department”), Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) and Lawrence K. Barber (“Barber”) hereby stipulate and agree as follows:

  1. Pursuant to the authority contained in 8 V.S.A. §§ 10-13 and Title 9 V.S.A. Chapter 150, the Commissioner of the Department is charged with administering and enforcing the Vermont Uniform Securities Act (the “Act”).
  2. Respondents Merrill Lynch and Barber (collectively “Respondents”) acknowledge and admit the jurisdiction of the Commissioner over the subject matter of this Stipulation and Consent Agreement set forth herein.
  3. Merrill Lynch is a Broker-Dealer and an Investment Adviser registered with the U.S. Securities and Exchange Commission, and maintains its headquarters at One Bryant Park, New York, NY 10036.
  4. Barber is a registered agent of Merrill Lynch licensed by the Department with a business address of 60 Lake Street, Burlington, VT 05401. 
  5. On May 25, 2015, a Vermont-resident individual who is a client of Merrill Lynch (“Client”) filed a complaint with the Department’s Securities Division against Merrill Lynch, following which the Department opened an investigation into the matters described in the complaint.
  6. Based on the Department’s investigation, the Department makes the Findings of Fact and Conclusions of Law set forth herein.
  7. Merrill Lynch and Barber neither admit nor deny the Findings of Fact and Conclusions of Law set forth herein.
  8. The parties all desire to avoid the expense and uncertainty of litigation, and accordingly agree to settle this matter on the terms set forth herein.

Findings of Fact

  1. Client is a client of Merrill Lynch and was a client of Barber.
  2. In or around April 2014, Client met with Barber to review her account.  At that time, according to Respondents, Client was displeased with the performance in her account. Barber recommended that Client transfer to a fee-based account in the Merrill Lynch Investment Advisory Program (“MLIAP”). 
  3. MLIAP accounts offered options of “client discretion,” meaning that Client would have to authorize each transaction in the account, or “advisor investment and trading authority,” meaning that Client authorized Merrill Lynch to make transactions in the account.
  4. At the time Client opened an MLIAP account, Client completed the paperwork for her MLIAP account to have advisor investment and trading authority.  However, despite formally authorizing advisor investment and trading authority, Client discussed with Barber that her MLIAP account would initially be opened as a “Personalized Strategy” with Client Discretion, and ML sent her paperwork confirming that the account would operate with Client Discretion. 
  5. Per Merrill Lynch’s Investment Advisory Program Wrap Fee Program Brochure, with the Personalized Strategy with Client Discretion account, Barber could assist in recommending investments and asset allocations, but any transaction that changed investments, asset allocation, or rebalancing required Client’s prior authorization. 
  6. Prior to selecting the Personalized Strategy with Client Discretion, Client and Barber discussed that a mutual fund and certain equity positions with large unrealized capital gains would not be sold so that Client would not incur capital gains tax liability. 
  7. Client told Barber that income from capital gains would put Client at risk of losing certain benefits and services that depended upon Client’s annual income being below certain levels. 
  8. During the ensuing months, according to Barber, he had difficulty reaching Client.  As a result, Barber was not always able to obtain Client’s instructions to effect transactions necessary for Client’s accounts to remain in accord with Client’s selected strategy and target asset allocation.
  9. In or around December 2014, following months of Barber experiencing difficulty in reaching Client during market hours, Barber transferred Client’s accounts to a “Managed Strategy” with advisor investment and trading authority – i.e., permitting Merrill Lynch to exercise discretion in effecting transactions in Client’s accounts without the need for Barber to speak to Client in advance of every transaction.
  10. Contrary to Merrill Lynch’s Investment Advisory Program Wrap Fee Program Brochure, Barber did not obtain Client’s prior authorization for this change.
  11. Barber asserts that he believed that this strategy with advisor investment and trading authority was more suitable for Client, and would better protect Client’s assets in a downward market than Client’s personalized strategy because the Managed Strategy would enable Merrill Lynch to automatically rebalance Client’s portfolio consistent with Client’s selected objectives and target asset allocation, thereby overcoming the challenges in reaching Client.
  12. When Barber switched Client from the Personalized Strategy to a Managed Strategy with investment and trading authority, he effectively took control of Client’s account without her consent. 
  13. Barber’s asserted challenges in communicating with Client during market hours or any supposed advantages to Client of adviser discretion do not justify Barber taking control of Client’s accounts without her consent.
  14. Contemporaneous with this change, Barber asserts that he notified Client of the change by leaving a message for her about the change, but did not receive a response from Client.  In addition, Merrill Lynch delivered to Client notices reflecting the update to her MLIAP strategy.  These notifications do not justify or mitigate Barber taking control of client’s account without her consent.
  15. In unilaterally transitioning Client’s accounts to the Managed Strategy on Merrill Lynch’s systems, Barber inadvertently failed to segregate Client’s mutual fund and equity positions with large unrealized capital gains from sale during periodic automatic rebalancing transactions.
  16. The failure to segregate assets was due to Barber’s inadvertant error using a recently introduced Merrill Lynch trading platform.
  17. As a result of this change to the Managed Strategy with investment and trading authority, the mutual fund and equity positions were automatically sold in order to align Client’s accounts with the Managed Strategy.  Barber could have, but did not, prevent the unauthorized sale of the designated securities when he switched Client’s accounts to the Managed Strategy.
  18. The designated securities were sold on December 5, 2014 and resulted in capital gains for 2014, which Client had previously instructed Barber to avoid.
  19. Barber’s failure to continue the segregation of Client’s previously-segregated assets during the transition to the Managed Strategy was a violation of Merrill Lynch’s policies and procedures to the extent that it was inconsistent with Client’s instructions.
  20. Barber was unaware that the December 2014 sales had included the designated securities until Client contacted him in February 2015, prompting Barber to review those sales.
  21. In or around February 2015, following inquiries from Client, Client and Barber reviewed Client’s accounts, at which point Barber recognized that Client’s previously segregated holdings had mistakenly been sold, that Client had incurred an increased capital gains tax liability for the year 2014, and that Client was therefore at risk of no longer qualifying for the state income-based benefits.
  22. In or around March 2015, Barber assisted Client in analyzing the impact of his mistake on Client’s capital gains tax liability for the year 2014.  
  23. While doing so, Barber used his Merrill Lynch email account and his personal electronic device(s) to communicate with Client.
  24. During those communications, Barber requested Client’s password to access her Merrill Lynch online account in order to obtain her 2014 account information, so that he could more easily assess the tax consequences of the error. 
  25. Merrill Lynch’s written supervisory procedures (“WSP’s”)  require associated persons to use only approved email addresses for electronic correspondence, to allow the designated surveillance system to monitor and retain the electronic communication in accordance with FINRA Rules.
  26. Barber’s email request for Client’s password, and his subsequent access of Client’s online account information using that password, violated Merrill Lynch’s policies and procedures. 
  27. One of Barber’s emails requesting Client’s password was flagged by Merrill Lynch’s email review system, which is designed to identify, among other things, emails requesting passwords from clients.
  28. According to Merrill Lynch,this email was reviewed by a designated person in Merrill Lynch’s supervision area. 
  29. According to Merrill Lynch, its records indicate that that email was reviewed by that person, closed, but was not escalated for further action as required by the firm’s policies and procedures.    
  30. In response to Barber’s email request, Client sent her account password to Barber’s personal communication device.
  31. In violation of Merrill Lynch’s policies and procedures, Barber received and used the account password to access Client’s Merrill Lynch account information so he could calculate the impact of his mistake on Client’s capital gains tax liability using tax preparation software.  Barber then provided the tax-consequence information to Client.
  32. Client subsequently complained to both Merrill Lynch and the Department concerning the above facts.
  33. In addition, Client sought reimbursement from Merrill Lynch regarding the losses incurred due to having to pay unwanted capital gains taxes, her potential loss of government assistance, and her tax preparation and filing costs.
  34. The Department recognizes that Merrill Lynch, in responding to Client’s complaint, fully reimbursed Client for her increased capital gains tax liability and the costs of filing an amended tax return, as well as other costs and fees that were caused by the events described above.
  35. Following Client’s complaint, Merrill Lynch issued a letter of reprimand to Barber noting that he acted inconsistenly with firm policies and instructing him to revew the applicable sections of the firm’s policies and procedures manual.  Merrill Lynch did not comprehensively or proactively search through Barber’s electronic communications, impose heightened supervision over such communications, or require Barber to undergo additional training. 
  36. In addition, by failing to escalate the improper email for further review, Merrill Lynch did not follow FINRA supervisory requirements to carry out its own supervisory policies and procedures for monitoring electronic communications with regard to Barber.

CONCLUSIONS OF LAW

Barber

  1. 9 V.S.A. § 5412(c) provides that, where the Commissioner of the Department finds that the order is in the public interest, and where 9 V.S.A. § 5412(d)(1) - (6), (8), (9), (10), (12), or (13) authorizes the action, the Commissioner may censure, impose a bar on, or impose a civil penalty on a registrant and recover the costs of the investigation from the registrant. 
  2. 9 V.S.A. § 5412(d)(13) provides that a person may be disciplined under § 5412(a) - (c) if the person “has engaged in dishonest or unethical practices in the securities, commodities, investment, franchise, banking, finance, or insurance business within the previous 10 years.”
  3. The Department’s Order 06-43-S, Exhibit 6.1, provides that violating any provision of the Rules of Fair Practice of the NASD (now FINRA) or any applicable fair practice or ethical standard promulgated by the SEC, the CFTC, or an SRO approved by either the SEC or the CFTC constitutes unethical practices as used in § 5412(d)(13) of the Act.
  4. Exhibit 6.1 to Order 06-43-S also requires that agents shall “observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.” 
  5. § 3.05 of Exhibit 6.1 to Order 06-43-S states that “[r]ecommending to a customer the purchase, sale or exchange of any security without reasonable grounds to believe that such transaction or recommendation is suitable for the customer based upon reasonable inquiry concerning the customer’s . . .  investment objectives, financial situation and needs and any other relevant information known by the broker-dealer or agent,” constitutes an “unethical or dishonest practice[]” under § 5412(d)(13) of the Act.
  6. FINRA Rule 2111 requires, in part, that an  associated person  “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the . . .  associated person to ascertain the customer’s investment profile.”  Among other characteristics, a customer’s investment profile would include the customer’s financial situation and needs, and tax status.
  7. In addition, a broker handling an account in which the broker has discretion to make transactions without client approval becomes the fiduciary of his customer.  Among other duties, such a broker must manage the account in a manner directly comporting with the needs and objectives of the customer; keep the customer informed as to each completed transaction; and clearly explain the practical impact and potential risks of the course of dealing in which the broker is engaged. 
  8. The Department’s Order 06-43-S, Exhibit 6.5, enumerates acts or practices that constitute unethical or dishonest practices of investment adviser representatives.
  9. Given that Barber both took control of Client’s assets and failed to inform Client and obtain her consent before initiating the automatic rebalancing, however necessary he felt these actions to be, by law Barber is deemed to have recommended to Client an unsuitable strategy (i.e., one that included automatic rebalancing and did not segregate the designated assets as per Client’s instructions).  Barber thereby violated 9 VSA § 5412(d)(13).
  10. By improperly using his personal device and email address to communicate with Client, as well as by requesting and receiving Client’s password, Barber violated both the WSP’s and FINRA rules for communication with clients and records retention, and therefore violated 9 V.S.A. § 5412(d)(13).
  11. Barber violated 9 V.S.A. § 5502(a)(3) by improperly effecting transactions without authority to do so, by exercising discretionary power without first obtaining authority, by effecting an unsuitable sale, by failing to segregate securities held in safekeeping, by requesting and receiving customer account passwords, and by accessing customer accounts with the passwords.

Merrill Lynch

  1. 9 V.S.A. § 5412(c) provides that, where the Commissioner of the Department finds that the order is in the public interest, and where 9 V.S.A. § 5412(d)(9) authorizes the action, the Commissioner may censure, impose a bar on, or impose a civil penalty on a registrant and recover the costs of the investigation from the registrant.
  2. It is a failure to supervise reasonably under § 5412(d)(9) when a firm: “has failed to supervise reasonably an agent, investment adviser representative, or other individual, if the agent, investment adviser representative, or other individual was subject to the person’s supervision and committed a violation of this chapter … or a rule adopted or order issued under this chapter within the previous 10 years.”
  3. FINRA Rule 3110 requires a member firm to establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with the applicable securities laws and regulations and FINRA rules.   
  4. Although investment advisers are not subject to Exchange Act and FINRA rules in their role as advisers, an investment adviser’s duty to supervise its employees is comparable to the duty to supervise imposed on broker-dealers.  See § 203(e)(6) of the Advisers Act and § 15(b)(4)(E) of the Exchange Act.
  5. Merrill Lynch violated 9 V.S.A. § 5412(d)(9) by (a) failing to escalate for further supervisory review Barber’s email requesting his Client’s Merrill Lynch password; and (b) failing to supervise reasonably in connection with Barber’s unauthorized sale of the designated securities.
  6. The Commissioner finds the following relief appropriate and in the public interest.
  7. NOW THEREFORE, Respondents have agreed to enter into this Stipulation and Consent Agreement with the Department on the terms and conditions hereinafter set forth in lieu of proceeding with a hearing.
  8. In consideration of the mutual covenants contained herein, the Department and Respondents stipulate and agree as follows:

UNDERTAKINGS

  1. Barber shall make a payment to the Vermont Department of Financial Regulation within ten (10) business days of the execution of this Stipulation and Consent Agreement in the amount of twenty thousand dollars ($20,000.00) which shall comprise the following two payments:

An administrative penalty in the amount of eighteen thousand dollars ($18,000.00);
A payment to the Vermont Department of Financial Regulation Financial Services Education & Training Special Fund in the amount of two thousand dollars ($2,000.00).

  1. Merrill Lynch shall make a payment to the Vermont Department of Financial Regulation within ten (10) business days of the execution of this Stipulation and Consent Agreement in the amount of one hundred and twenty thousand dollars ($120,000.00) which shall comprise the following three payments:

An administrative penalty of eighty thousand dollars ($80,000.00) to the State of Vermont;
A reimbursement to the Department for investigative and other expenses, in the sum of thirty thousand dollars ($30,000.00); and
A ten thousand dollar ($10,000.00) payment to the Vermont Department of Financial Regulation Financial Services Education & Training Special Fund.

  1. Merrill Lynch and Barber hereby waive their statutory rights to notice and a hearing before the Commissioner of the Department, or his designated appointee.
  2. Merrill Lynch and Barber acknowledge and agree to enter into this Stipulation and Consent Agreement freely and voluntarily, and that except as set forth herein, no promise was made to induce either to enter into it. 
  3. Merrill Lynch and Barber acknowledge their understanding of the terms, conditions, undertakings, and obligations contained in this Stipulation and Consent Agreement.
  4. Merrill Lynch and Barber each acknowledge they have consulted with their respective attorneys in this matter.
  5. Merrill Lynch and Barber acknowledge that noncompliance with any of the terms of this Stipulation and Consent Agreement may constitute a separate violation of the securities laws of the State of Vermont and may subject it or him to sanctions.
  6. Merrill Lynch and Barber acknowledge that this Stipulation and Consent Agreement constitutes a valid agreement duly rendered by the Commissioner and agree to be fully bound by it.
  7. Merrill Lynch and Barber further acknowledge that the Commissioner retains jurisdiction over this matter for the purposes of enforcing this Stipulation and Consent Agreement.
  8. This Stipulation and Consent Agreement is not intended to subject Barber, Merrill Lynch, or any of their affiliates to any disqualification under Vermont laws, or rules or regulations thereunder, federal securities laws, or rules and regulations thereunder, the rules and regulations of self-regulatory organizations or various states or U.S. Territories, including any disqualification from relying upon the registration exemptions or safe harbor provisions to which Barber, Merrill Lynch, or any of their affiliates may be subject.  Nothing in this Stipulation and Consent Agreement is intended in any way to subject Barber, Merrill Lynch, or any of their affiliates to any statutory disqualification by FINRA in any way. 
  9. This Stipulation and Consent Agreement is not, and shall not be deemed to be, a final order of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct.
  10. Any acts performed or documents executed in further of this Stipulation and Consent Agreement: (a) may not be deemed or used as an admission of, or evidence of, the validity of any alleged wrongdoing, liability or lack of any wrongdoing or liability; or (b) may not be deemed or used as an admission of, or evidence of any such alleged fault or omission of Merrill Lynch or Barber in any civil, criminal, arbitration, or administrative proceeding in any court, administrative agency or other tribunal.
  11. The terms set forth in this Stipulation and Consent Agreement represent the complete agreement between the parties as to its subject matter.
  12. The undersigned representative of Merrill Lynch affirms that he has taken all necessary steps to obtain the authority to bind Merrill Lynch to the obligations stated herein and has the authority to bind Merrill Lynch to the obligations stated herein.

 

Merrill Lynch, Pierce, Fenner & Smith IncORPORATED,

By:      _______________________________________      Date: ___________________

Mark L. Keene, Esq.

            Merrill Lynch, Pierce, Fenner & Smith Incorporated

LAWRENCE K. BARBER,

______________________________________________                Date: ___________________

By: __________________________             Dated this ___ day of February, 2018.

(Print Name: ________________________)

STATE OF ______________ )  SS

COUNTY OF ____________)

            On the ____ day of ______, 2018, personally appeared ____________________, being the signer of the foregoing Stipulation and Consent Agreement and acknowledged the same to be his/her free act and deed.

                                                Before me, _______________________________

                                                                  Notary Public

                                                                  My commission expires ____________

Division of Securities,

Vermont Department of Financial Regulation,

By:      _______________________________________                  Date: ___________________

            William Carrigan

            Deputy Commissioner of Securities

            Vermont Department of Financial Regulation

CONSENT ORDER

IT IS HEREBY ORDERED:

Each of the Respondents shall comply with all agreements, stipulations, and undertakings as recited above.
Nothing contained in this Order shall restrain or limit the Department in responding and addressing any consumer complaint about one or both Respondents filed with the Department or shall preclude the Department from pursuing any other violation of law.

Entered at Montpelier, Vermont, this ______ day of ________________, 2018.

____________________________________

Michael Pieciak, Commissioner

Vermont Department of Financial Regulation

In Re: Jacinto “Spirit Wolf” Vega, Jr.

Order
Thursday, June 7, 2018
Docket No. 18-015-S

FINAL CEASE AND DESIST ORDER

Based on the Ex Parte Motion for a Cease and Desist Order (“the Motion”) filed by the Securities Division of the Vermont Department of Financial Regulation (“the Department”), the Commissioner entered on February 28, 2018 an Ex Parte Cease and Desist Order (“the Ex Parte Order”).  Respondent was provided notice and a copy of the Ex Parte Order and a separate Notice describing his opportunity to request a hearing.  Respondent has acknowledged receipt of the Ex Parte Order and has not requested a hearing or otherwise formally contested the Commissioner’s findings or conclusions. As a result, the Commissioner makes the following findings of fact and conclusions of law and enters the following final order:

I.          FINDINGS OF FACT

1.         Respondent Jacinto “Spirit Wolf” Vega is a Vermont resident with a last known physical address of 2519 VT Rte. 105, Apt. C, Newport Center, Vermont 05857, and a last known mailing address of Post Office Box 474, Newport, Vermont 05855.

2.         Respondent is not registered as an investment adviser or in any other capacity with the Department, and he is not employed by or associated with a broker-dealer or investment adviser registered in Vermont.

3.         An investigation by the Securities Division revealed that Respondent engaged in unregistered activity by holding himself out as an investment adviser and by entering into one or more contracts to serve as a “financial adviser” and provide financial advice for Vermont residents in return for compensation. Vega advised Vermont resident A.C. to sign a contract which establishes Vega as Image Consultant, Financial Adviser and Advocate for a period of 3 years and further provides that Vega will “supply services as a financial adviser upon request from the client for the length of the contract in order to assure a smooth and financially sound transition.”  The contract further provided Mr. Vega with compensation of $500 at the time of execution plus $1500 per year.

4. A.C. suffers from multiple physical and mental impairments.

5. In the absence of a Cease and Desist Order, Vega may convince other vulnerable adults to give him substantial sums of money or other assets.

6. On February 28, 2018, the Commissioner entered an Ex Parte Order requiring Respondent to cease and desist from holding himself out as an investment adviser without being properly registered, in violation of 9 V.S.A. § 5403.

7.    On March 1, 2018, the Department caused the Ex Parte Order and Notice of Opportunity to Request a Hearing to be sent to Respondent by certified mail (return receipt requested), and by regular mail.  On March 28, 2018, Department counsel sent to Ex Parte Order, Notice and supporting documents to Respondent by electronic mail.  

8.     Respondent has acknowledged receipt of the Ex Parte Order and Notice, and he has not requested a hearing.

9.    Respondent has not contested the findings of fact or conclusions of law in the Ex Parte Order.

II.  CONCLUSIONS OF LAW

1.         Pursuant to 9 V.S.A. §§ 5401 through 5404, it is unlawful for a person to act as a broker-dealer, agent, investment adviser or investment adviser representative without first being registered to do so with the Department.

2.         The term “investment adviser” includes a “financial planner or other person that, as an integral component of other financially related services, provides investment advice to others for compensation as part of a business or that holds itself out as providing investment advice to others for compensation.” 9 V.S.A. § 5102(15)

3.         By engaging in the conduct described above, Mr. Vega violated 9 V.S.A. § 5403 by holding himself out as an investment adviser and offering his services as an investment adviser in return for compensation without being registered with the Department.

III. COMMISSIONER’S AUTHORITY

1.         Pursuant to 9 V.S.A. § 5604(a)(1), the Commissioner may issue orders or directives to any person to cease and desist from specific conduct if the Commissioner finds that the person has engaged, is engaging, or is about to engage in an act, practice or course of business which constitutes a violation of 9 V.S.A. Chapter 150, the Vermont Uniform Securities Act.  

2.         In light of the known violations of 9 V.S.A. § 5403, the risk that the financial health and welfare of additional Vermont residents may be affected by Vega’s conduct, and Respondent’s failure to request a hearing, a final cease and desist order is appropriate in this case.

3. In light of the known violation of 9 V.S.A. § 5403  a financial penalty is appropriate in this case.

             

IV.                 ORDER

PURSUANT TO 9 V.S.A. SECTION 5604, IT IS HEREBY ORDERED: 

Respondent Jacinto “Spirit Wolf” Vega has violated 9 V.S.A. § 5403 by holding himself out as an investment adviser without being properly registered with the Department.
Respondent Jacinto “Spirit Wolf” Vega is ordered to CEASE and DESIST from offering or transacting business in this state as an unregistered investment adviser in violation of 9 V.S.A. § 5403.  
Respondent Jacinto “Spirit Wolf” Vega is ordered to pay the Department a financial penalty of $15,000 on or before July 1, 2018 for his violation of V.S.A. § 5403.

Dated at Montpelier, Vermont this ______ day of June 2018.

____________________________________

Michael S. Pieciak, Commissioner

In Re: DA Davidson

Order
Thursday, July 26, 2018
Docket No. 18-029-S

STIPULATION AND CONSENT ORDER

This Stipulation and Consent Order (the “Order”) is entered this ___ day of _____, 2018 by and among D.A. Davidson and Co. (“Respondent” or “the Firm”), and the State of Vermont Department of Financial Regulation (“Department”).

WHEREAS, the Commissioner of the Department (“Commissioner”) is responsible for administering and enforcing the Vermont Uniform Securities Act (“Securities Act”), Title 9, Chapter 150 of the Vermont Statutes Annotated, and the Vermont Securities Regulations, Order 06-43-S (replaced by Rule S-2016-01, effective July 1, 2016), pursuant to which the Department has conducted a review of Respondent; and

The Department has concluded that Respondent violated the Securities Act and Regulations by failing to have adequate supervisory systems and written procedures resulting in one broker effecting 9 unregistered transactions in the State of Vermont; and

The Department has accordingly sought, and Respondent, without the necessity of further formal proceedings, has agreed to take corrective and remedial measures as more specifically described herein;

Solely for the purpose of this matter’s resolution, Respondent neither admits nor denies the Findings of Fact and the Violations of Law set forth in the Order, and consents to the entry of the Order by the Department; and

Respondent elects to permanently waive any right to a hearing and appeal under the Vermont Administrative Procedure Act, Title 3, Chapter 25 of the Vermont Statutes Annotated; the rules, regulations, and orders of the Commissioner; and any right it may have to judicial review by any court with respect to this Order.

NOW THEREFORE, the parties so stipulate, and the Commissioner makes findings and conclusions as follows:

FINDINGS OF FACT
1.The Commissioner is responsible for administering and enforcing the Securities Act.
2.Respondent is a brokerage firm with a principal place of business at 8 Third Street North, Great Falls, MT 59401-3104.  Respondent has been a registered broker in Vermont since December 14, 1994.
3.Terence Douglas Welsh was an agent (the Firm’s agents are referred to as “financial advisors” (“FA”)) with the Firm from August 2013 to October 2017.  Welsh was not registered in Vermont at any time during his affiliation with the Firm.
4.Respondent applied to register Welsh in Vermont but due to the proposed conditions of registration in Vermont, Respondent withdrew the application.
5.Welsh conducted business prior to and/or during the Department’s review of the application.  Welsh effected 11 transactions for two clients located in Vermont while working as an agent of Respondent.
6.Client One was a trust account that was registered in California. The trust had co‑trustees, one of whom lived in Vermont. Welsh corresponded with the co-trustee in Vermont to effect trades between October 2016 and May 2017. Respondent discovered the communication between Welsh and the Vermont co-trustee and directed Welsh to stop the activity because he was not registered in Vermont. Respondent subsequently reassigned the trust account.
7.Respondent has the following procedures relating to unregistered activity:
a.Respondent’s system generates an “FA Missing Registration Report” when an agent initiates a transaction for a client whose address of record is in a state where the agent is not registered.  The agent is then directed to contact the Registration Department to register in that state.  The system does not stop the transaction.
b.Respondent’s process encourages agents to contact Respondent’s Registration Department when a client submits an address change form and the new address is in a state where the agent is not registered.
c.In August 2017, Respondent enhanced its workflow system so that client address changes could be processed through the system as opposed to being processed manually.  The advantage to processing in changes in the workflow system is that the system automatically flags an agent when a client’s new address is in a state where the agent is not registered.  The agent is still responsible for initiating the registration process.
8.Client Two lived in Utah but relocated to Vermont. On September 28, 2017, Welsh effected two transactions for Client Two after the client relocated to Vermont. Respondent was monitoring Welsh’s transactions after discovering the issue with Client One and flagged and cancelled the two trades.
9.Despite Respondent’s actions, Welsh effected nine unregistered trades for the trust account between October 2016 and May 2017. Respondent questioned him and reported Welsh’s unregistered activity to the Department.
10.When Respondent questioned Welsh about the unregistered activity, Welsh voluntarily resigned his position with Respondent.

CONCLUSIONS OF LAW

11.The Vermont Uniform Securities Act prohibits an individual from transacting business in Vermont as an agent unless the individual is registered as an agent or is exempt from registration.  9 V.S.A. § 5402(a).
12.Broker-dealers must establish and maintain supervisory procedures reasonably designed to assist in detecting violations of, preventing violations of, and achieving compliance with the Vermont Uniform Securities Act, the Department’s regulations, and other applicable laws, regulations, and rules of self-regulatory organizations.  VSR § 3-3(a)(2).
13.A broker-dealer who fails to establish and maintain adequate supervisory procedures is deemed to have “failed to reasonably supervise” its agents in violation of 9 V.S.A. § 5412(d)(9).
14.Despite the ability to track unregistered transactions and to flag an agent when a client’s address changes to a state where the agent is not registered, Respondents did not prevent the agent from initiating eleven unregistered trades, nine of which were completed, in violation of 9 V.S.A. § 5402(a).
15.Respondent’s written supervisory procedures (WSPs) relating to trust accounts were inadequate because the trades effected for the co-trustee located in Vermont did not trigger a registration report because the account registration for the trust was listed in California.  The failure to prevent the trades was a violation of VSR § 3-3(a)(2) and 9 V.S.A. § 5412(d)(9).
CONSENT ORDER

NOW, THEREFORE, based on Respondent’s stipulation, and on the basis of the Findings of Fact and Conclusions of Law, the Commissioner issues the following Order, to be fully complied with following receipt by the Commissioner of the duly executed Consent to Entry of Administrative Order:

1.Respondent will pay an administrative penalty in the amount of $40,000 to the Vermont Department of Financial Regulation and contribute $20,000 to the “VT DFR – Financial Services Education & Training Special Fund” within 10 days of the execution of this Stipulation and Consent Order.
2.Respondent will revise policies to ensure that when an unregistered Vermont transaction is identified, either (1) the transaction will be placed on hold until the agent’s registration is verified or (2) the transaction will be effected by another agent who is registered in Vermont.
3.Respondent agrees to revise its policies and procedures to reasonably address the allegations in paragraph 15 of this Order and provide a written description of the revisions to the Department within ninety (90) days of this Order.
4.If Respondent fails or neglects to comply with any of the terms, conditions or undertakings set forth in this Order, the Department may, upon written notice to Respondent, institute any legal or administrative proceedings it deems appropriate to enforce same and to seek such other appropriate sanctions, and Respondent shall consent to the entry of judgment for any unpaid balance.
5.The Order is not intended to form the basis for any disqualifications under the laws of any state, the District of Columbia, Puerto Rico, or the U.S. Virgin Islands; under the rules or regulations of any securities or commodities regulator or self-regulatory organizations; or under the federal securities laws, including but not limited to, Section 3(a)(39) of the Securities Exchange Act of 1934; under the FINRA rules prohibiting continuance in membership or disqualification under other SRO rules prohibiting continuance in membership.  Furthermore, pursuant to U.S. Securities and Exchange Commission Rule 506(d)(2)(iii) of Regulation D, Rule 262(b)(3) of Regulation A and Rule 503(b)(3) of Regulation CF, disqualification under Rules 504 and 506(d)(1) of Regulation D and Rule 262(a) of Regulation A under the Securities Act of 1933 and Rule 503 of Regulation CF should not arise as a consequence of this Order. 
6.The Order is not intended to be a final order based upon violations of any Vermont statute, rule, or regulation that prohibits fraudulent, manipulative, or deceptive conduct, and the Order waives any disqualification in the Vermont laws, or rules or regulations hereunder, including any disqualification from relying upon the registration exemptions or safe harbor provisions to which D.A. Davidson or any of its affiliates may be subject.  The Order is not intended to form a basis of a disqualification under Section 204(a)(2) of the Uniform Securities Act of 1956 or Section 412(d) of the Uniform Securities Act of 2002.

 

This ORDER shall become effective immediately upon the date set forth below.

BY ORDER OF THE COMMISSIONER

Entered at Montpelier, Vermont, this _____ day of _________________, 2018.

_______________________________________
MICHAEL S. PIECIAK, Commissioner
Vermont Department of Financial Regulation

 

 

CONSENT BY D.A. DAVIDSON & CO. TO THE ENTRY OF AN ORDER BY THE COMMISSIONER IMPOSING TERMS, CONDITIONS AND UNDERTAKINGS UNDER THE VERMONT SECURITIES LAWS

1.         D.A. Davidson & Co. (“Respondent”), hereby admits the jurisdiction of the Commissioner over the subject matter of this proceeding; and solely with respect to this matter, knowingly and voluntarily waives any and all rights to a hearing before the Commissioner or his designee, and all other procedures otherwise available under Vermont law, the rules of the Department, the provisions of Chapter 25 of Title 3 regarding contested cases, or any right he may have to judicial review by any court by way of suit, appeal, or extraordinary remedy with respect to the terms of the Order set forth herein.

2.         Respondent acknowledges that this Order constitutes a valid order duly rendered by the Commissioner and agrees to be fully bound by it.

3.         Respondent acknowledges and agrees that the Order is entered into freely and voluntarily and that no promise was made, nor was any coercion used, to induce the Respondent to enter into the Order.

4.         Respondent acknowledges its understanding of all terms, conditions, and obligations contained in the Order and further acknowledges that should it fail to comply with any and all provisions of the Order, the Commissioner may impose additional sanctions and seek other appropriate relief subject to the Respondent’s right to a hearing pursuant to Vermont’s securities laws.

5.         The Order is not intended to form the basis for any disqualifications under the laws of any state, the District of Columbia, Puerto Rico, or the U.S. Virgin Islands; under the rules or regulations of any securities or commodities regulator or self-regulatory organizations; or under the federal securities laws, including but not limited to, Section 3(a)(39) of the Securities Exchange Act of 1934; under the FINRA rules prohibiting continuance in membership or disqualification under other SRO rules prohibiting continuance in membership.  Furthermore, pursuant to U.S. Securities and Exchange Commission Rule 506(d)(2)(iii) of Regulation D, Rule 262(b)(3) of Regulation A and Rule 503(b)(3) of Regulation CF, disqualification under Rules 504 and 506(d)(1) of Regulation D and Rule 262(a) of Regulation A under the Securities Act of 1933 and Rule 503 of Regulation CF should not arise as a consequence of this Order.

6.         The Order is not intended to be a final order based upon violations of any Vermont statute, rule, or regulation that prohibits fraudulent, manipulative, or deceptive conduct, and the Order waives any disqualification in the Vermont laws, or rules or regulations hereunder, including any disqualification from relying upon the registration exemptions or safe harbor provisions to which D.A. Davidson or any of its affiliates may be subject.  The Order is not intended to form a basis of a disqualification under Section 204(a)(2) of the Uniform Securities Act of 1956 or Section 412(d) of the Uniform Securities Act of 2002.

Dated this ____ day of June 2018.

AGREED AND ACCEPTED BY:

Authorized agent for D.A. Davidson & Co.

Printed Name:                                                                        

Title:                                                                                      

Signature:                                                                                                       

BEFORE ME this _______ day of _________________________, 2018, personally appeared _____________________ who acknowledged that he executed the foregoing for the purposes therein contained, and that such act of execution is his free act and deed.

____________________________

Notary Public

My Commission Expires: ________

Agreed and accepted:

__________________________

William Carrigan,
Deputy Commissioner of Securities
Vermont Department of Financial Regulation

Cease and Desist Levelnet Inc. and Paul Shkliaev

Order
Friday, May 25, 2018
Docket No. 18-030-S

CEASE AND DESIST ORDER

The Commissioner of the Vermont Department of Financial Regulation (“Commissioner”), based on the Ex Parte Motion for Cease and Desist Order filed by the Securities Division and the attachment thereto, finds that grounds exist to order that the above-named Respondents immediately cease and desist from violating the Vermont Uniform Securities Act, 9 V.S.A. Chapter 150 (“the VUSA”), and hereby issues the following Findings of Fact, Conclusions of Law, Order and Notice of Right to Hearing.

FINDINGS OF FACT

Summary of Findings

LevelNet is currently engaged in a token offering, also known as an initial coin offering (“ICO”).  LevelNet is marketing and selling tokens through its website and targeted internet advertising for the purported purpose of raising funds to develop and launch the LevelNet Network, a decentralized antivirus platform.  LevelNet’s website describes two phases of the ICO and names two issuers of tokens, Level Capital LLC (issuer of “LVL tokens”) and LevelNet Foundation (issuer of “LVLS tokens”).  In the first phase, described as a “noninvestment,” Level Capital will issue LVL tokens that will allow token owners to use LevelNet services and to sell tokens on cryptocurrency exchanges.  The second phase is described as an “investment” and involves the sale of LVLS tokens.  The website states that purchasers of LVLS tokens will have shares in the LevelNet project and will share in the profits generated by a newly-created fund.  In this phase, LVL tokens may be exchanged for LVLS tokens.  While LevelNet claims that the offering is compliant with securities laws, in actuality, LevelNet is offering unregistered securities in violation of the Vermont Uniform Securities Act.

The Respondents

LevelNet is a corporation organized in California with a registered business address of 34 Peach Blossom, Irvine, California 92618.  LevelNet’s website states that its United States office is located at 100 Spectrum Center Drive, Suite 900, Irvine, California 92618.  The corporation is described as a software development business.
LevelNet is not registered to do business in Vermont with the Vermont Secretary of State’s Office and is not registered in any capacity with the Vermont Securities Division. 
Paul Shkliaev is the Chief Executive Office and founder of LevelNet. His last known address is 34 Peach Blossom, Irvine, CA 92618.

The LevelNet Offering

LevelNet is currently conducting an Initial Coin Offering (“ICO”) and is in the “pre-sale” stage of the offering.  Affidavit of Emily Kisicki at ¶ 3.
Shkliaev is the face of the offering.  He appears in interviews and video broadcasts to promote the offering.  LevelNet has a YouTube channel with information videos describing LevelNet, its projects, and the ICO.  These videos typically feature Shkliaev.  Affidavit of Emily Kisicki at ¶ 17.

6.         LevelNet describes two phases of the ICO and names two issuers of tokens, Level Capital LLC (issuer of “LVL tokens”) and LevelNet Foundation (issuer of “LVLS tokens”).  These two entities do not appear to be formally organized or registered under state law. 

7.         The ICO’s stated purpose is “fundraising for the development and launch of LevelNet Network.” Affidavit of Emily Kisicki at ¶ 7.

8.         LevelNet purports to be developing a decentralized antivirus platform to be shared by members of the LevelNet network.  LevelNet’s advertising anticipates that it will have rapid success that will result in returns for project investors. LevelNet projects on its website that it “will reach one hundred million users by 2021, with over $220 million in sales and over $80 million of free cash flows for distribution to shareholders.”  Affidavit of Emily Kisicki at ¶ 6.

9.         On May 16, 2018, the “ICO details” page stated that $777,132 was raised through 346 backers. On May 24th, 2018, the “ICO details” page stated that $749,981 was raised through 359 backers.  A “token sale bonus” structure is detailed on the website as: 10% for 0-$1.5 million raised, 7% for 1.5-5m raised, 5% for 5-7 million raised, and 3% for 7-12 million raised. The “soft cap” is $1.5 million, and the “hard cap” is $12 million. Details are also given regarding the “Roadmap”: the LVL token sale began in Quarter 1 of 2018, “exchange of LVL stock tokens for LVLS tokens” will take place in Quarter 4 of 2018, and sales of LVLS tokens will take place in Quarter 1 of 2019.  Affidavit of Emily Kisicki at ¶ 13.

The LevelNet Offering: Investment in a Common Enterprise

10.       Phase One of the Offering.  During the time that the ICO is being conducted, LevelNet is still in its development phase and is not currently operational.  LevelNet, through Level Capital, will issue “LVL tokens”, that will be invested in “operations and infrastructure development for the final completion of LevelNet End-Point Security and its commercial launch”.  LVL tokens will be sold on cryproshare exchanges.  Affidavit of Emily Kisicki at ¶¶ 7 and 8.

11.       Phase Two of the Offering.  LevelNet, through LevelNet Foundation, will create an investment fund and issue “LVLS tokens” to investors in the fund. These tokens represent shares in the LevelNet Network project and the investor will share in the funds profits.  In this phase, LVL tokens may also be exchanged for LVLS tokens.  Affidavit of Emily Kisicki at ¶ 9.

12.       In both phases of the offering, purchasers of tokens are providing capital to LevelNet for investment in the LevelNet Network. 

LevelNet Offering: Expectation of Profit

13.       LevelNet makes representations to potential investors regarding the expectation of profit resulting from the investment in both phases of the ICO, to be gained through no effort of the investor.  LevelNet represents that an investor may make money in a number of ways, including (1) through the increase in the value of it tokens; (2) as a result of the ability to exchange LVL tokens for LVLS tokens; and (3) by owning shares of LevelNet and participating in the profits of the LevelNet Network.  Affidavit of Emily Kisicki at ¶ 15.

LevelNet attempts to distinguish the profitability of its offering from the myriad of other offerings by internet companies.  LevelNet states that “unlike many internet companies” LevelNet projects will generate significant profits and investors will share in those profits in a relatively short time.  LevelNet places a valuation of the company at between $583,000,000 and $1,268,000,000.  LevelNet projects that at a $1,000,000,000 valuation, investors in phase two may earn a return of 2062% over 4-5 years.  Affidavit of Emily Kisicki at ¶ 16.

LevelNet Offering: Availability

LevelNet tokens are available for purchase by investors located in the United States, including in Vermont. LevelNet has made various statements regarding limits on U.S.-based buyers, including stating in its “ICO FAQs” that US citizens purchasing tokens for speculative purposes must invest through Startengine.com, a crowdfunding platform. No such Startengine offering currently exists. The “ICO FAQs” also purport to limit investment in LVLS tokens in the United States to “qualified investors.”  Affidavit of Emily Kisicki ¶ 10.
Despite claims regarding limits placed on US participants, once an investor expresses interest in the offering, LevelNet communication suggests that no such limits exist.  One communication from LevelNet expressly stated that LevelNet may now accept investments from US residents, including the purchase of shares in LevelNet.  Affidavit of Emily Kisicki at ¶ 11.
After Ms. Kisicki’s initial contact with LevelNet, a subsequent visit to LevelNet’s webpage revealed two pop ups: 1) advising that she could get a promo code for 1000 tokens sent to her via Facebook Messenger, and 2) advising that she could join LevelNet now and get “10% bonus for tokens before $1.5m”. The homepage stated that the public pre-sale is live and ends in 15 days, 14 hours. Affidavit of Emily Kisicki at ¶ 12.
After viewing the LevelNet webpage, Ms. Kisicki was the target of internet advertising by LevelNet on other sites on multiple occasions.   Affidavit of Emily Kisicki at ¶ 18.
LevelNet does not appear eligible for a registration exemption as it did not notice file through the US Securities Exchange Commission’s Edgar Database.
By promoting its offering with no restrictions on its website, through targeted advertising, and elsewhere on the internet, LevelNet and Shkliaev are advertising, promoting, and offering securities to United States residents, including Vermont residents.

CONCLUSIONS OF LAW

Pursuant to § 5604(a)(1) of the VUSA, the Commissioner may issue a cease and desist order without a prior hearing if he determines that “a person has engaged, is engaging, or is about to engage in an act, practice, or course of business constituting a violation” of the VUSA. 
Pursuant to § 5102(28)(D) of the VUSA, a security “includes an investment in a common enterprise with the expectation of profits to be derived primarily from the efforts of a person other than the investor.” 
The LVL tokens offered by LevelNet are “securities” as defined in 9 V.S.A. § 5102(28)(D) of the VUSA. 

24.       LevelNet is offering securities in the form of LVL and LVLS tokens that are neither registered with the Division, nor “federal covered,” nor exempt from registration, in violation of  9 V.S.A. § 5301.

25.       LevelNet is effecting or attempting to effect transactions in securities for the accounts of others or for its own account without registration in violation of 9 V.S.A. § 5401(a).

26.       LevelNet has engaged in, is engaging in, or is about to engage in a violation of 9 V.S.A. § 5301, and LevelNet has engaged in, is engaging in, or is about to engage in a violation of 9 V.S.A. § 5401.

27.       LevelNet has engaged in deceptive advertising in violation of V.S.R. § 3-1(e)(16) by making unfounded and unrealistic claims regarding expected project success and investor returns, and by falsely asserting that the ICO does not represent a securities offering and is in compliance with securities laws.

28.       Shkliaev, by actively promoting the offering to Vermonters, is transacting business in the State without registration as an agent in violation of 9 V.S.A. § 5402(a).

29.       Shkliaev has engaged in, is engaging in, or is about to engage in a violation of 9 V.S.A. § 5402(a).

30.       9 V.S.A. § 5604 authorizes the Commissioner to issue an order directing a person to cease and desist from engaging in an act, practice, or course of business that constitutes a violation of the VUSA.

31.       9 V.S.A. § 5604 further authorizes the Commissioner, in a final order, to order a civil penalty; costs of investigation; restitution; and/or disgorgement of any sums obtained in violation of the VUSA.

STATEMENT OF PENALTY OR COSTS

The Commissioner will seek a penalty of up to $15,000.00 for each violation and will seek actual costs of investigation.

ORDER

Now, therefore, pursuant to 9 V.S.A. § 5604(a)(1), section 13 of Department Regulation 82-1(Revised), the reasons set forth in the foregoing Findings of Fact and Conclusions of Law, and the considerations set forth in 9 V.S.A. § 5604(e), the Commissioner hereby ORDERS that: 

1.         LevelNet shall CEASE AND DESIST from transacting any business as an unregistered broker dealer in Vermont.

2.         LevelNet shall CEASE AND DESIST from offering or selling unregistered securities in Vermont.

3.         Shkliaev shall CEASE AND DESIST from offering or selling unregistered securities in Vermont.

 

ENTERED at Montpelier, Vermont, this 25th day of May 2018.

                                                _____________________________________

                                                Michael S. Pieciak, Commissioner

                                                Vermont Department of Financial Regulation

In Re: Toro Jax Holdings, LLC

Order
Thursday, November 1, 2018
Docket No. 18-043-S

STIPULATION AND CONSENT ORDER

            This stipulation and Consent Order (Order) is entered the _______day of _________, 2018, by and among Toro Jax Holdings, LLC (Respondent), and the State of Vermont Department of Financial Regulation (Department). 

            WHEREAS, the Commissioner of the Department is responsible for administering and enforcing the Vermont Uniform Securities Act, Title 9, Chapter 150 of the Vermont Statutes, and the Vermont Securities Regulations, Rule S-2016-01, pursuant to which the Department has conducted a review of the Respondent; and

            The Department has concluded that Respondent violated the Securities Act and Regulations by failing to file timely a required Form D and notice filing fee via the Electronic Filing Database (EFD) maintained by the North American Securities Administrators’ Association; and

            The Department has accordingly sought, and Respondent, without the necessity of further formal proceedings, has agreed to take corrective and remedial measures as more specifically described herein; and

            The Department does not intend this Order to be a final order based upon violations of any Vermont statute, rule, or regulation that prohibits fraudulent, manipulative, or deceptive conduct, and this Order waives any disqualification of the Respondent by the Commissioner based solely on the untimeliness of the notice filing at issue in this Order. The waiver includes any disqualifications from securities registration provisions or securities registration exemptions or related safe-harbor provisions in Vermont law; and 

            Respondent neither admits nor denies the Findings of Fact and the Conclusions of Law set forth in the Order; and

            Respondent consents to the entry of the Order by the Department; and

            Respondent hereby waives any right to a hearing and appeal under the Vermont Administrative Procedure Act, Title 3, Chapter 25 of the Vermont Statutes: the rules, regulations and orders of the Commissioner; and any right it may have to judicial review by any court with respect to this Order. 

            NOW THEREFORE, the parties stipulate, and the Commissioner makes findings and conclusions as follows:

 

FINDINGS OF FACT

1.         Respondent is a firm with a principal place of business at 410 Jericho Turnpike, Suite 320, Jericho, NY. 

2.         Respondent sells and/or has sold securities in Vermont that are subject to the notice-filing requirements in 9 V.S.A. § 5302 and Rule S-2016-01, § 4-3.

3.         On July 6, 2018, Respondent made a first sale to a Vermont resident.

4.         On August 16, 2018, Respondent delivered to the Department via EFD a complete notice filing which included a Form D and filing fee of $600.

 

CONCLUSIONS OF LAW

5.         Respondent was required to submit a notice filing for the sale of securities in Vermont by July 23, 2018, 15 calendar days (or the first business day after, as applicable) after the first sale in Vermont. Rule S-2016-01, § 4-3(b).

6.         Respondent filed its notice filing 25 days late, in violation of Rule S-2016-01, § 4-3(b). 

7.         Based on the foregoing and on the Department’s notice filing penalty schedule, the Commissioner concludes that Respondent shall pay an administrative penalty of three-hundred dollars ($300.00) to the Department for the period during which the filing was overdue. 

 

ORDER

8.         Respondent shall pay an administrative penalty in the amount of $300.00 to Vermont Department of Financial Regulation concurrent with Respondent’s execution of this Stipulation and Consent Order.  

 

BY ORDER OF THE COMMISSIONER

Entered at Montpelier, Vermont, this _______ day of _________, 2018

__________________________________

MICHAEL S. PIECIAK, Commissioner

Vermont Department of Financial Regulation

 

AGREED AND ACCEPTED BY:

Authorized agent for Respondent, Toro Jax Holdings, LLC

Printed Name: _______________________________

Title:                _______________________________

Signature:        _______________________________          Date:____________________

In Re: Barker Partnership Fund

Order
Tuesday, November 6, 2018
Docket No. 18-044-S

STIPULATION AND CONSENT ORDER

            This stipulation and Consent Order (Order) is entered the _______day of ________, 20___, by and among Barker Partnership Fund (Respondent), and the State of Vermont Department of Financial Regulation (Department). 

            WHEREAS, the Commissioner of the Department is responsible for administering and enforcing the Vermont Uniform Securities Act, Title 9, Chapter 150 of the Vermont Statutes, and the Vermont Securities Regulations, Rule S-2016-01, pursuant to which the Department has conducted a review of the Respondent; and

            The Department has concluded that Respondent violated the Vermont Uniform Securities Act and Vermont Securities Regulations by failing to file timely a required Form D and notice filing fee via the Electronic Filing Database (EFD) maintained by the North American Securities Administrators’ Association; and

            The Department has accordingly sought, and Respondent, without the necessity of further formal proceedings, has agreed to take corrective and remedial measures as more specifically described herein; and

            The Department does not intend this Order to be a final order based upon violations of any Vermont statute, rule, or regulation that prohibits fraudulent, manipulative, or deceptive conduct, and this Order waives any disqualification of the Respondent by the Commissioner based solely on the untimeliness of the notice filing at issue in this Order. The waiver includes any disqualifications from securities registration provisions or securities registration exemptions or related safe-harbor provisions in Vermont law; and 

            Respondent neither admits nor denies the Findings of Fact and the Conclusions of Law set forth in the Order; and

            Respondent consents to the entry of the Order by the Department; and

            Respondent hereby waives any right to a hearing and appeal under the Vermont Administrative Procedure Act, Title 3, Chapter 25 of the Vermont Statutes; the rules, regulations and orders of the Commissioner; and any right it may have to judicial review by any court with respect to this Order. 

            NOW THEREFORE, the parties stipulate, and the Commissioner makes findings and conclusions as follows:

 

FINDINGS OF FACT

1.         Respondent is a firm with a principal place of business at 2F Landmark Square, 64 Earth Close, Seven Mile Beach, Grand Cayman, Cayman Islands.

2.         Respondent sells and/or has sold securities in Vermont that are subject to the notice-filing requirements in 9 V.S.A. § 5302 and Rule S-2016-01, § 4-3.

3.         On February 1, 2016, Respondent made a first sale to a Vermont resident.

4.         On or about July 13, 2018, Respondent, on its own initiative and through counsel, contacted the Department by telephone to report the sale and inquire regarding filing requirements.  

5.         On July 16, 2018, Respondent delivered to the Department via EFD a complete notice filing which included a Form D and filing fee of $600.

 

CONCLUSIONS OF LAW

6.         Respondent was required to submit a notice filing for the sale of securities in Vermont by February 16, 2016, fifteen calendar days after the first sale in Vermont. Rule S-2016-01, § 4-3(b).

7.         Respondent filed its notice filing 881 days late, in violation of Rule S-2016-01, § 4-3(b). 

8.         Based on the foregoing and on the Department’s notice filing penalty schedule, the Commissioner concludes that Respondent shall pay an administrative penalty of one-thousand five-hundred dollars ($1,500.00) to the Department for the period during which the filing was overdue. 

 

ORDER

9.         Respondent shall pay an administrative penalty in the amount of $1,500.00 to Vermont Department of Financial Regulation concurrent with Respondent’s execution of this Stipulation and Consent Order.  

 

BY ORDER OF THE COMMISSIONER

Entered at Montpelier, Vermont, this ________ day of _________, 2018

__________________________________

MICHAEL S. PIECIAK, Commissioner

Vermont Department of Financial Regulation

 

AGREED AND ACCEPTED BY:

Authorized agent for Respondent, Barker Partnership Fund

Printed Name: _______________________________

Title:                _______________________________

Signature:        _______________________________          Date:____________________

Stock Investment Management Inc.

Order
Tuesday, November 27, 2018
Docket No. 18-049-S

STIPULATION AND CONSENT ORDER

 

This Stipulation and Consent Order is entered this 27th day of November 2018 by and among Peter Stock (“Stock”), Stock Investment Management Inc. (“SIMI”) (together, “Respondents”) and the Vermont Department of Financial Regulation (the “Department”).

WHEREAS, the Commissioner of the Department (“Commissioner”), through the Securities Division of the Department is responsible for enforcing the Vermont Uniform Securities Act (“VUSA”), Title 9, Chapter 150 of the Vermont Statutes Annotated, pursuant to which the Department has conducted an investigation of Respondents’ activities as they relate to updating Form ADV and complying with Vermont’s cybersecurity requirements; and

As a result of the Department’s investigation, the Department concluded that Respondents violated the VUSA and applicable provisions of the Vermont Securities Regulations (“V.S.R.”) and

The Department has sought certain penalties and remedial acts; and

            Respondents have agreed to make certain payments to the Department and take certain other actions; and

             Respondents elect to permanently waive any right to a hearing and appeal under VUSA, 3 V.S.A.   Chapter 25, the Vermont Administrative Procedure Act; and the rules, regulations and orders of the Commissioner with respect to this Administrative Consent Order (the “Order”).

NOW, THEREFORE, the Commissioner, as administrator of the VUSA, hereby enters this Order.

JURISDICTION AND AUTHORITY

  1. Respondents are subject to the jurisdiction of the Commissioner in this matter pursuant to the VUSA and consent to the entry of this Order.

PARTIES

  1. Stock is an investment adviser representative registered in Vermont (CRD # 1071329).
  2. SIMI is a registered investment adviser (CRD # 121590) with its principal place of business at 3556 Main Street, Manchester, Vermont 05254.
  3. The Commissioner is charged, inter alia, with administering and enforcing the securities laws of the State of Vermont as set forth in the VUSA and in the V.S.R.

FINDINGS OF FACT

  1. Stock is the President and sole employee of SIMI and operates SIMI from a private residence in Manchester, Vermont.
  2. At all times relevant to this matter, Stock was registered in Vermont as an   investment adviser representative and SIMI was registered in Vermont as an investment adviser.
  3. On at least five occasions, SIMI failed to timely file its required Annual Updating Amendments to Form ADV. In 2014, 2015 and 2018, SIMI failed entirely to file the Amendments; in 2016 and 2017, SIMI filed the Amendments late and only after being reminded to do so by the Department.
  4. The Department sent SIMI reminders of its obligation to file Annual Updating Amendments through multiple emails and letters.   
  5. For at least two years, SIMI failed to comply with Vermont’s cybersecurity requirements by failing to establish and maintain written procedures to ensure cybersecurity. In its 2017 and 2018 written responses to the Division’s annual Investment Adviser Questionnaire, SIMI indicated it did not maintain any written procedures regarding cybersecurity.   
  6. On October 25, 2017, through Securities Deputy Commissioner Carrigan, the Department advised SIMI that it was not in compliance with V.S.R. 8-4 and asked it to provide the Department with documentation of compliance with V.S.R. 8-4.
  7. Despite the Department’s notification, SIMI failed to remedy its noncompliance.

CONCLUSIONS OF LAW  

  1. Peter Stock is an investment adviser representative within the meaning of 9 V.S.A. section 5102(16).
  2. It is a violation of V.S.R. 7-1(b)(2)(B) to fail to file an Annual Updating Amendment to Form ADV within 90 days after the end of the investment adviser’s fiscal year.
  3. It is a violation of V.S.R. 8-4 to fail to establish and maintain written procedures designed to ensure cybersecurity.
  4. It is a violation of 9 V.S.A. 5412(d)(2) to willfully violate the VUSA, the V.S.R. or any lawful Order of the Commissioner.  
  5. Pursuant to 9 V.S.A. Sections 5412, 5603, and 5604, the above violations constitute a basis for the assessment of administrative penalties.
  6. The Commissioner finds the following relief appropriate and in the public interest.

ORDER

On the basis of the Findings of Fact and Conclusions of Law, and Respondents’ consents to the entry of this Order,

IT IS HEREBY ORDERED:

  1. This precludes any other action the Commissioner could commence under applicable Vermont law as it relates to the subject matter of this Order.
  2. Respondents shall cease and desist from violating the VUSA and the V.S.R. and will comply with all applicable provisions therein.
  3. Within thirty (30) days following the entry of this Order, Respondents shall pay to the Department an administrative penalty in the sum of $15,000.  
  4. Within thirty (30) days following the entry of this Order, Respondents shall provide to the Department evidence that it is in full compliance with V.S.R. 8-4.   
  5. Nothing herein shall be construed as limiting the Commissioner’s authority to conduct an investigation of Respondents for matters not resolved by this Order or reasons unrelated to the subject matter of this Order.
  6. Respondents acknowledge that the Commissioner shall not be precluded in any manner from seeking to subject them to further sanctions or enforcement proceedings for any alleged violation of this Order.
  7. Respondents consent to the entry of this Order and acknowledge their consent is given freely and voluntarily and that except as otherwise set forth herein, no promise was made to induce them to consent.
  8. Respondents voluntarily waive their right to a hearing on this matter and to judicial review of this Consent Order under VUSA; 3 V.S.A. Chapter 25, the Vermont Administrative Procedures Act, and the rules, regulations and orders of the Commissioner.
  9. Respondents further acknowledge that the Commissioner retains jurisdiction over this matter for purposes of enforcing this Order.
  10. This Order shall be governed by and construed under the laws of the State of Vermont.
  11. This Order shall be binding upon Respondents and upon all their successors and assigns with respect to all conduct subject to the provisions above and all future obligations, responsibilities, commitments, restrictions and conditions.

  Entered at Montpelier, Vermont this 27th day of November2018.

BY ORDER OF THE COMMISSIONER

 /s/Michael S. Pieciak

Michael S. Pieciak, Commissioner

Vermont Department of Financial Regulation

AGREED AND ACCEPTED:

PETER STOCK

______________________________________________  _________________________

Signature                                                                                           Date

STOCK INVESTMENT MANAGEMENT INC.

______________________________________________  __________________________

Signature                                                                                           Date                           

By: ______________________________________________________________________

Printed name and title                                                                

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Department of Financial Regulation
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89 Main Street, Montpelier, VT 05620 - 3101

802-828-3301
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