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NOTICE OF INTENT TO DENY ORDER TO CEASE AND DESIST AND NOTICE OF RIGHT TO HEARING DOCKET NO. NDCDF-17-8218-S |
I. PRELIMINARY STATEMENT
| 1. | The Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies (“Regulations”) promulgated under the Act. |
| 2. | Pursuant to Sections 36b-8 and 36b-26 of the Act, the Commissioner, through the Securities and Business Investments Division (“Division”) of the Department of Banking, conducted an investigation (“Investigation”) into the activities of James Albert Pettit (“Pettit”). |
| 3. |
As a result of the Investigation by the Division, the Commissioner has reason to believe that Pettit has violated certain provisions of the Act and Regulations. |
| 4. | As a result of the Investigation by the Division, the Commissioner has reason to believe that a basis exists under Section 36b-15(a) of the Act for denying Pettit’s registrations as a broker-dealer agent and an investment adviser agent under the Act. |
| 5. |
As a result of the Investigation by the Division, the Commissioner has reason to believe that a basis exists to issue a cease and desist order against Pettit as authorized by Section 36b-27(a) of the Act. |
| 6. | As a result of the Investigation, the Commissioner has reason to believe that a basis exists to impose a fine upon Pettit as authorized by Section 36b-27(d) of the Act. |
II. RESPONDENT
| 7. |
Pettit, an applicant for broker-dealer agent and investment adviser agent registration under the Act, is a Connecticut resident. |
III. STATEMENT OF FACTS
8.
On January 20, 2015, Pettit applied for registration as a broker-dealer agent and an investment adviser agent of Ameriprise Financial Services Inc. pursuant to Section 36b-7 of the Act. On February 23, 2016, Ameriprise Financial Services Inc. filed a Form U-5 seeking to withdraw Pettit’s pending registration applications in Connecticut. Pettit had previously been registered as a broker-dealer agent and an investment adviser agent of Janney Montgomery Scott, LLC (“Janney”) under the Act from February 2007 to December 17, 2014 when he voluntarily terminated his association with Janney.
9.
The Form U-5 filed by Janney indicated that, at the time Pettit terminated his association with the firm, Janney was conducting an internal review of Pettit’s outside business activity.
10.
The Investigation conducted by the Division pursuant to Sections 36b-8 and 36b-26 of the Act extended to Pettit’s outside business activity while associated with Janney.
Client A: Improper Borrowing of Money and Failure to Comply with Firm Procedures
11.
At all times pertinent hereto, Janney’s written supervisory procedures (“WSPs”) required disclosure and approval of outside business activity in accordance with FINRA Rule 3270.
12.
Client A is an individual whose relationship with Pettit predated Pettit’s association with Janney. When Pettit became associated with Janney as a broker-dealer agent and an investment adviser agent, Client A became a client of Janney. Client A had a majority interest in an outside business entity (the “Client A Entity”). Pettit held a minority interest in the Client A Entity. The Client A Entity also became a Janney client after Pettit became associated with the firm.
13.
Pettit requested permission from Janney to engage in an outside business activity involving the Client A Entity. On May 19, 2011, Janney permitted the outside business activity with restrictions, including, without limitation, that Pettit refrain from writing checks drawn on accounts of the Client A Entity.
14.
Notwithstanding such restrictions, from approximately October 27, 2011 to November 3, 2014 and without the knowledge of Client A or the pre-approval of Janney, Pettit wrote checks totaling $128,039.87 from the Client A Entity account to the account of an entity formed, owned and controlled exclusively by Pettit. Pettit characterized the withdrawn amounts as loans to himself. The withdrawn amounts were subsequently questioned by an outside accountant for the Client A Entity.
Additional Improper Borrowing of Money from Clients B and C
15.
Previously, in June 2011, Pettit had borrowed $50,000 from a different Janney client (“Client B”). Client B held an advisory account with Janney.
16.
Pettit testified under oath before the Division that he borrowed the $50,000 from Client B in order to pay a personal outstanding tax bill, among other things.
17.
On March 18, 2014, Pettit borrowed $8,000 from a third client of Janney (“Client C”). Client C held a commission based account with Janney.
18.
Janney’s firm policy stated, in part, that: “all loans between a registered person and a client of the registered person are prohibited, unless an exception is available in accordance with the exception procedure. [A]ll proposed lending and borrowing between a [Financial Advisor] and his client shall be subject to the pre-approvals of the Branch Manager.”
19.
Janney’s annual compliance questionnaire to its representatives posed the following question: “Are you familiar with and fully understand and agree to be bound by Janney’s policy prohibiting loans to or from clients of the Firm?” Pettit answered “yes” to this question on the 2011, 2012, and 2013 questionnaires.
20.
At no point did Pettit seek pre-approval from Janney to borrow monies from Client B or Client C.
Failure to Amend Regulatory Filings to Disclose Tax Liens
21.
Pettit’s Form U-4 filed by Ameriprise Financial Services Inc. in January 2015 disclosed five tax liens totaling approximately $297,574.20. Pettit did not report these liens on his prior Form U-4 filed while he was associated with Janney.
22.
The first lien was imposed in November 2009, three additional liens were imposed in 2011 and the final of the five liens was imposed in 2013. As of March 24, 2016, one lien remains outstanding.
23.
Janney’s annual compliance questionnaire to its representatives posed the following question regarding the disclosure of liens: “Are you aware that each registered and non-registered associate has a continuing obligation to ensure that Janney is immediately notified of any change in personal information such as . . . [an] unsatisfied lien?” Pettit answered “yes” to this question on his 2011, 2012 and 2013 annual questionnaires.
24.
During the term of his association with Janney, Pettit failed to update his Form U-4 to disclose the existence or status of the five liens and failed to otherwise notify Janney of their existence or status.
Self-dealing Involving Clients
25.
Janney’s policy required that all fiduciary appointments, including but not limited to executor and power of attorney appointments, be pre-approved by the agent’s supervisor, the supervisor’s supervisor and the Chief Compliance Officer.
26.
Without disclosing to or securing approval from Janney, Pettit exercised power of attorney over the account of an elderly Janney client (“Client D”). Pettit was granted the power of attorney in 2010 while he was associated with Janney.
27.
Under Connecticut law, in order to receive compensation for work performed pursuant to a power of attorney, the power of attorney documents must clearly state that such compensation is permissible. The document granting Pettit power of attorney did not provide for monetary compensation.
28.
In sworn testimony before the Division, Pettit stated that he had not benefitted financially from his role as power of attorney over Client D’s accounts.
29.
In actuality, while exercising power of attorney, Pettit wrote checks financially benefiting himself from Client D’s account at a non-brokerage financial institution. The first check (“Check One”), dated April 2, 2012, was for $10,000. On January 4, 2013, eight days before Client D’s death, Pettit wrote himself a second check (“Check Two”) for $25,000.
30.
Pettit represented to the Division that Check One was for 50-60 hours of work he put in to prepare Client D’s house for resale.
31.
In sworn testimony before the Division, Pettit explained that Check Two covered his “[h]aving been – time spent as power of attorney taking care of stuff for [Client D].”
32.
When Client D passed away on January 12, 2013, Pettit did not immediately notify Janney.
33.
Pettit was also the named executor of Client D’s estate. It was only on August 16, 2013 that Pettit submitted an estate valuation form to Janney indicating that he would be acting as executor of Client D’s estate.
34.
On December 18, 2013, nearly a year after Client D passed away, Pettit’s supervisor requested an exception to allow Pettit to be executor of Client D’s estate. The request, which was in writing, stated that (i) Pettit would not receive any compensation for acting as executor; and (ii) Pettit did not receive any benefit from Client D beyond what Pettit earned managing Client D’s brokerage account.
35.
However, before he notified Janney that he was the executor of Client D’s estate, Pettit in fact accepted monetary compensation for his role as executor. On November 8, 2013, Pettit wrote a $14,000 check made payable to “Edward J. Murphy Clients Fund Account” from Client D’s estate account. On November 12, 2013, attorney Edward J. Murphy in turn issued a $14,000 check to Pettit from the Attorney Edward J. Murphy Client Fund account. That check bore the notation “[Client D] Estate – Executor’s Fees”.
36.
On December 4, 2013, Pettit wrote himself an additional $14,000 check from Client D’s estate account. In sworn testimony before the Division, Pettit explained that he planned to take a five percent executor’s fee and that the $14,000 represented a portion of that percentage.
37.
In total, Pettit paid himself $69,000 for acting as the executor of Client D’s estate.
38.
Ultimately, the probate court denied all but $10,000 of the executor fees charged by Pettit to Client D’s estate. Finding the sums charged by Pettit to be exorbitant when compared to the work performed, the court ordered that Pettit repay the excess compensation to the estate.
39.
Following Client D’s death and continuing through December 2013, Pettit continued to collect advisory fees for Client D’s account at Janney.
40.
On April 30, 2015, in response to a Division investigative request, Pettit provided the Division with a list of all bank and brokerage accounts over which he had signatory authority from 2010 to April 30, 2015.
41.
Even though he had signatory authority over Client D’s accounts by virtue of his having a power of attorney and acting as executor, Pettit did not include Client D’s accounts on the list provided to the Division.
Application Status
42.
Section 36b-15(e)(1) of the Act provides, in pertinent part, that:
Withdrawal . . . of an application for registration as . . . [an] agent . . . or investment adviser agent, becomes effective ninety days after receipt of . . . a notice of intent to withdraw such application for registration or within such shorter period of time as the commissioner may determine, unless a denial . . . proceeding is pending when the application or notice is filed or a proceeding to deny . . . or impose conditions upon the withdrawal is instituted within ninety days after the application or notice is filed. If a proceeding is pending or instituted, withdrawal becomes effective at such time and upon such conditions as the commissioner by order determines. If no proceeding is pending or instituted and withdrawal automatically becomes effective, the commissioner may nevertheless institute a denial . . . proceeding under subsection (a) of this section within one year after withdrawal became effective.
43.
The withdrawal of Pettit’s pending registration applications as a broker-dealer agent and an investment adviser agent of Ameriprise Financial Services, Inc. became effective by operation of law on May 23, 2016. Section 36b-15(e)(1) of the Act authorizes the Commissioner to nonetheless institute denial proceedings within one year following the effective date of the withdrawal.
BROKER-DEALER AGENT AND AN INVESTMENT ADVISER AGENT,
ORDER TO CEASE AND DESIST AND ORDER IMPOSING FINE
a. Fraudulent, Dishonest or Unethical Practices by Pettit – Self-dealing
| 44. | Paragraphs 1 through 43, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 45. |
Through a course of conduct involving self-dealing with clients, Pettit engaged in fraudulent, dishonest or unethical practices in the securities, investment or finance business within the meaning of Section 36b-15(a)(2)(H) of the Act. Such conduct supports the initiation of proceedings to deny Pettit’s registrations as a broker-dealer agent and an investment adviser agent under the Act. |
b. Dishonest or Unethical Business Practices Within the Meaning of
Section 36b-31-15b(a)(1) of the Regulations by Pettit –
Borrowing Money from Accounts Carried for Brokerage Customers
| 46. | Paragraphs 1 through 45, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 47. |
As more fully described in paragraphs 11 through 14, inclusive, Pettit engaged in dishonest or unethical business practices in the securities business by borrowing money from an account carried for a Janney customer (i.e. the Client A Entity account) without the customer’s prior consent and without notice to Janney. Such conduct constitutes a dishonest or unethical practice in the securities business within the meaning of Sections 36b-31-15b(a)(1) of the Regulations, which forms a basis for an order to cease and desist to be issued against Pettit under Section 36b-27(a) of the Act, as well as a basis for the denial of Pettit’s registrations as a broker-dealer agent and an investment adviser agent in Connecticut pursuant to Section 36b-15(a)(2)(H) of the Act. |
c. Dishonest or Unethical Business Practices Within the Meaning of
Sections 36b-31-15d(a)(3) and 36b-31-15c(a)(6) of the Regulations by Pettit –
Borrowing Money from an Advisory Client of Janney
| 48. | Paragraphs 1 through 47, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 49. |
Pettit’s borrowing of money from an advisory client of Janney (i.e. Client B) as more fully described in paragraphs 15, 16 and 18 through 20, inclusive, was a dishonest or unethical business practice proscribed by Sections 36b-31-15d(a)(3) and 36b-31-15c(a)(6) of the Regulations. Such conduct would therefore support the initiation of administrative proceedings to deny Pettit’s broker-dealer agent and investment adviser agent registrations under Section 36b-15(a)(2)(H) of the Act, as well as the entry of a cease and desist order under Section 36b-27(a) of the Act. |
d. Dishonest or Unethical Business Practices Within the Meaning of
Sections 36b-31-15b(c) of the Regulations by Pettit –
Borrowing Money from a Broker-dealer Client of Janney
| 50. | Paragraphs 1 through 49, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 51. |
Pettit engaged in dishonest or unethical business practices in the securities business by borrowing money from a broker-dealer client of Janney (i.e. Client C) without pre-approval from his firm as required by FINRA Rule 3240, as more fully described in paragraphs 17 through 20, inclusive. Such conduct is proscribed by FINRA and constitutes a dishonest or unethical practice in the securities business within the meaning of Section 36b-31-15b(c) of the Regulations and would therefore support the initiation of administrative proceedings to deny Pettit’s broker-dealer agent and investment adviser agent registrations under Section 36b-15(a)(2)(H) of the Act, as well as the entry of a cease and desist order under Section 36b-27(a) of the Act. |
e. Violation of Section 36b-23 of the Act –
Materially False or Misleading Statements and Omissions by Pettit to the Commissioner
| 52. | Paragraphs 1 through 51, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 53. |
Pettit’s statement to the Commissioner denying that he received payments while holding a power of attorney for a client, as more fully described in paragraphs 28 through 38, inclusive, constitutes a materially false or misleading statement. In addition, Pettit’s failure to provide responsive and accurate information to the Commissioner concerning accounts over which Pettit had signatory authority, as more fully described in paragraphs 40 and 41, constituted an omission to state a material fact necessary to make other statements made to the Commissioner, in the light of the circumstances under which they were made, not false or misleading. Such conduct violated Section 36b-23 of the Act and, as such, supports the entry of a cease and desist order against Pettit under 36b-27(a) of the Act and the imposition of a fine upon Pettit pursuant to Section 36b-27(d) of the Act. Such statements, being wilful, also support proceedings to deny Pettit’s registrations as a broker-dealer agent and an investment adviser agent pursuant to Section 36b-15(a)(2)(B) of the Act. |
| 54. | In making material misrepresentations to the Commissioner and, upon request made by the Commissioner, withholding or concealing material information from the Commissioner in connection with an investigation pursuant to Section 36b-26 of the Act, Pettit also engaged in conduct supporting the initiation of proceedings to deny Pettit’s registrations as a broker-dealer agent and an investment adviser agent under Section 36b-15(a)(2)(L) of the Act. |
f. Violation of Section 36b-31-14e of the Regulations
Duty to Amend Information Previously Filed
| 55. | Paragraphs 1 through 54, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 56. |
During his association with Janney, Pettit’s failure to amend his state regulatory filings under the Act to disclose tax liens, one in 2009, three in 2011, and one in 2013, as more fully described in paragraphs 21 through 24, inclusive, constituted a violation of Section 36b-31-14e of the Regulations. Such conduct therefore supports the entry of a cease and desist order against Pettit under 36b-27(a) of the Act, the imposition of a fine upon Pettit pursuant to Section 36b-27(d) of the Act, and, as wilful misconduct, also supports proceedings to deny Pettit’s registrations as a broker-dealer agent and an investment adviser agent pursuant to Section 36b-15(a)(2)(B) of the Act. |
g. Dishonest or Unethical Business Practices Within the Meaning of
Section 36b-31-15b(c) of the Regulations by Pettit –
Outside Business Activity Involving a Firm Client Absent Prior Written Notice to Janney
| 57. | Paragraphs 1 through 56, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 58. |
FINRA Rule 3270 states in pertinent part, “[n]o registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member.” [Emphasis supplied] |
| 59. | Pettit engaged in dishonest or unethical practices in the securities business by engaging in outside business activity absent written notice to Janney, as more fully described in paragraph 29 through 38, inclusive. Such conduct would be proscribed as a dishonest or unethical practice under Section 36b 31-15b(c) of the Regulations and, as such, would support the entry of an order to cease and desist against Pettit under Section 36b-27(a) of the Act and constitute grounds for the denial of Pettit’s registrations as a broker-dealer agent and an investment adviser agent in Connecticut pursuant to Section 36b-15(a)(2)(H) of the Act. |
V. NOTICE OF INTENT TO DENY REGISTRATIONS AS A
BROKER-DEALER AGENT AND AN INVESTMENT ADVISER AGENT,
ORDER TO CEASE AND DESIST, NOTICE OF INTENT TO FINE AND
NOTICE OF RIGHT TO HEARING
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, Pettit has committed at least one violation of Section 36b-23 of the Act and at least one violation of Section 36b-31-14e of the Regulations; and engaged in dishonest or unethical practices in the securities business within the meaning of Section 36b-15(a)(2)(H) of the Act and Sections 36b-31-15b(a)(1), 36b-31-15d(a)(3), 36b-31-15b(c) of the Regulations;
WHEREAS, the Commissioner has reason to believe that a basis exists under Sections 36b 15(a)(2)(B), 36b-15(a)(2)(H) and 36b-15(a)(2)(L) of the Act for denying Pettit’s registrations as a broker-dealer agent and an investment adviser agent under the Act;
WHEREAS, Section 36b-15(f) of the Act provides, in pertinent part, that “[n]o order may be entered under this section except as provided in subsection (c) of this section without (1) appropriate prior notice to the applicant . . . and to the employer or prospective employer if such applicant . . . is an agent or investment adviser agent, (2) opportunity for hearing, and (3) written findings of fact and conclusions of law”;
WHEREAS, the Commissioner has reason to believe that a basis exists under Section 36b-27(a) of the Act and Section 36b-27(d) of the Act for entering an Order to Cease and Desist and an Order Imposing Fine against Pettit;
WHEREAS, the Commissioner further finds that the issuance of an Order denying Pettit’s registration as a broker-dealer agent and an investment adviser agent under the Act, an Order to Cease and Desist against Pettit, and the imposition of a fine upon Pettit is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policies and provisions of the Act;
WHEREAS, notice is hereby given to Pettit that the Commissioner intends to impose a fine not to exceed the maximum fine of one hundred thousand dollars ($100,000) per violation upon Pettit;
WHEREAS, the Commissioner ORDERS that JAMES ALBERT PETTIT CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation those provisions requiring registration as a broker-dealer, broker-dealer agent, investment adviser or investment adviser agent; and (1) engaging in dishonest or unethical practices in the securities business; (2) making material misrepresentations to the Commissioner and, upon request made by the Commissioner, withholding or concealing material information from the Commissioner in connection with an investigation pursuant to Section 36b-26 of the Act; and (3) failing to promptly file correcting amendments to his registration filings;
THE COMMISSIONER FURTHER ORDERS THAT, pursuant to Sections 36b-15(f) and 36b 27 of the Act, Pettit will be afforded an opportunity for a hearing on the allegations set forth above if a written request for a hearing is received by the Department of Banking, Securities and Business Investments Division, 260 Constitution Plaza, Hartford, Connecticut 06103-1800 within fourteen (14) days following Pettit’s receipt of this Order. To request a hearing, complete and return the enclosed Appearance and Request for Hearing Form to the above address. If Pettit will not be represented by an attorney at the hearing, please complete the Appearance and Request for Hearing Form as “pro se”. If a hearing is requested, the hearing will be held on June 29, 2017, at 10 a.m., at the Department of Banking, 260 Constitution Plaza, Hartford, Connecticut.
The hearing will be held in accordance with the provisions of Chapter 54 of the General Statutes of Connecticut. At such hearing, Pettit will have the right to appear and present evidence, rebuttal evidence and argument on all issues of fact and law to be considered by the Commissioner.
If Pettit fails to request a hearing within the prescribed time period or fails to appear at any such hearing, the allegations herein will be deemed admitted. Accordingly, the Order to Cease and Desist shall remain in effect and become permanent against Pettit, the Commissioner shall issue an order denying Pettit’s registrations as a broker-dealer agent and an investment adviser agent, and the Commissioner may order that the maximum fine be imposed upon Pettit.
| Dated at Hartford, Connecticut, | ____/s/_____________ | |
| this 15th day of May 2017. | Jorge L. Perez | |
| Banking Commissioner |
CERTIFICATION
I hereby certify that on this 16th day of May 2017, I caused to be mailed by certified mail, return receipt requested, the foregoing Notice of Intent to Deny Registrations as a Broker-dealer Agent and an Investment Adviser Agent, Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing to: James Albert Pettit, 10 Flagstad Road, West Hartford, Connecticut 06107, certified mail no. 7012 3050 0000 6997 6469; and Ameriprise Financial Services, Inc., 63 High Street, Suffield, Connecticut 06078-2113, certified mail no. 7012 3050 0000 6997 6476.
| ___/s/____ |
| W. C. Hall |
| Paralegal |