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ORDER TO MAKE RESTITUTION NOTICE OF INTENT TO SUSPEND OR REVOKE REGISTRATIONS AS A BROKER-DEALER AND AN INVESTMENT ADVISER NOTICE OF INTENT TO SUSPEND OR REVOKE REGISTRATION AS A BROKER-DEALER AGENT NOTICE OF INTENT TO FINE AND NOTICE OF RIGHT TO HEARING DOCKET NO. CRSRF-16-8108-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 Section 36b-26(a) of the Act, the Commissioner, through the Securities and Business Investments Division (“Division”) of the Department of Banking, has conducted an investigation into the activities of Respondents to determine if Respondents have violated, are violating or are about to violate provisions of the Act or Regulations (“Investigation”). |
| 3. |
As a result of the Investigation, the Commissioner has reason to believe that Respondents have violated certain provisions of the Act and Regulations. |
| 4. | As a result of the Investigation, the Commissioner has reason to believe that a basis exists to issue a cease and desist order against Respondents as authorized by Section 36b-27(a) of the Act. |
| 5. |
As a result of the Investigation, the Commissioner has reason believe that a basis exists to order that Respondents make restitution as authorized by subsections (b) and (c) of Section 36b-27. |
| 6. | As a result of the Investigation, the Commissioner brings this administrative action pursuant to Section 36b-15(a) of the Act and Section 4-182(c) of the General Statutes of Connecticut to suspend or revoke the registrations of Cantone Research Inc. (“CRI”) as a broker-dealer and an investment adviser in Connecticut, and suspend or revoke the registration of Victor Polakoff (“Polakoff”) as a broker-dealer agent in Connecticut. |
| 7. | As a result of the Investigation, the Commissioner has reason to believe that a basis exists to impose a fine upon Respondents as authorized by Section 36b-27(d) of the Act. |
II. RESPONDENTS
| 8. |
CRI is a New Jersey corporation with its principal place of business at 766 Shrewsbury Avenue, Suite E-401, Tinton Falls, New Jersey 07724 (“New Jersey Main Office”). CRI has an active branch office located at 120 Broadway, 21st floor, New York, New York 10271. From June 9, 1993 to the present, CRI has been registered as a broker-dealer under the Act. In addition, from February 17, 2004 to the present, CRI has been registered as an investment adviser under the Act. |
| 9. | Polakoff is an individual whose address last known to the Commissioner is 9 Hooper Avenue, Atlantic Highlands, New Jersey 07716. At all times pertinent hereto, Polakoff was and remains a control person of CRI as well as its Executive Vice President and Supervisor of its New Jersey Main Office. From July 31, 1998 to the present, Polakoff has been registered under the Act as a broker-dealer agent of CRI. |
III. STATEMENT OF FACTS
Background on Robert Lawrence Gray
| 10. | Robert Lawrence Gray (CRD No. 228103) (“Gray”) is an individual who is not registered in any capacity under the Act. |
| 11. | On July 15, 1977, the National Association of Securities Dealers (“NASD”), predecessor to the Financial Industry Regulatory Authority (“FINRA”), rendered a final decision against Gray permanently barring Gray from association with any NASD member in any capacity. |
| 12. | On June 8, 1998, the United States District Court for the Southern District of New York entered a default judgment against Gray and permanently enjoined him from violating the antifraud provisions of the Securities Exchange Act of 1934 and various registration, books and records and other provisions of the Investment Advisers Act of 1940. (SEC v. Robert L. Gray, S.D.N.Y., 97 Civ. 5732) The court also ordered Gray to disgorge $121,654, representing his ill gotten gains, plus $48,071 in prejudgment interest. The 1998 injunction was the result of a Securities and Exchange Commission civil complaint alleging that from January 1993 through June 1996, Gray, while acting as an unregistered investment adviser: (a) misappropriated over $139,000 from his advisory clients; (b) made material misrepresentations to clients concerning their investments to conceal his misappropriation; (c) engaged in free-riding at the expense of a registered broker-dealer through which client trades were effected; (d) failed to maintain required investment advisory records; (e) failed to furnish clients with required written disclosure statements; (f) entered into advisory contracts that unlawfully provided for performance-based compensation and did not prohibit assignment of the contracts without client consent; (g) failed to adhere to the rules governing treatment of client funds in an adviser’s custody; and (h) failed to disclose his disciplinary history to his clients. |
|
Gray’s Relationship to CRI and Polakoff | |
| 13. | Prior to 2010, Gray had an informal arrangement with a representative of CRI (“Agent A”), not a party to this action, through whom Gray would effect securities trades on behalf of at least two investors for whom Gray rendered investment advisory services. The investors maintained brokerage accounts at CRI. Agent A was responsible for introducing Gray to Polakoff. |
| 14. | In or about 2010, a Connecticut investor (“Connecticut Investor”) met Gray at a social function in Florida. Gray convinced the Connecticut Investor that transferring the Connecticut Investor’s brokerage account to CRI would allow Gray to directly trade securities in the account through Gray’s “guy”, Polakoff. The Connecticut Investor and Gray discussed Gray receiving a percentage of the profits derived from trades in the Connecticut Investor’s account and Gray sharing in any losses. |
| 15. | At Gray’s recommendation and believing in Gray’s purported investment expertise, the Connecticut Investor transferred his brokerage account to CRI in or about May 2010. The Connecticut Investor’s newly opened discretionary account at CRI was to be handled by Polakoff. |
| 16. | Although Polakoff had discretion over the account, in reality, Gray selected the trades. Polakoff went along with arrangement because of his special relationship with Gray. |
| 17. | From May 2010 through September 2010, Polakoff and CRI permitted Gray to direct trading in the Connecticut Investor’s account. No signed authorization from the Connecticut Investor was on file with CRI or Polakoff giving Gray permission to direct trading in the account. In addition, Polakoff disseminated account information to Gray, again without written documentation from the Connecticut Investor evidencing the Connecticut Investor’s acquiescence to this arrangement. |
| 18. | The Connecticut Investor lost approximately $200,000 as a result of the trades directed by Gray and effected through CRI and Polakoff. |
| 19. | CRI and Polakoff were both aware of Gray’s disciplinary history before the Connecticut Investor’s brokerage account was transferred to CRI in May 2010. |
|
Sale of Unregistered Securities | |
| 20. | From June 21, 2010 to September 3, 2010, at Gray’s recommendation, the Connecticut Investor made multiple purchases of XenaCare Holdings, Inc. (“Xenacare”) securities through CRI. Polakoff effected the trades at Gray’s direction. |
| 21. | At no time were the securities issued by XenaCare registered under the Act, nor was an exemption filing or claim of covered -security status made with the Division. |
|
Inaccurate Books and Records | |
| 22. | From June 21, 2010 to September 3, 2010, Polakoff executed forty-one (41) purchases of XenaCare securities on behalf of the Connecticut Investor. Of the forty-one (41) purchases, twenty-one (21) were recorded as unsolicited on CRI’s books and records, while the remaining twenty (20) were recorded as solicited. |
| 23. | However, since the impetus behind the purchase was Gray, CRI records describing the XenaCare securities trades as solicited by the firm were inaccurate. |
| 24. | From May 17, 2010 to September 2, 2010, Polakoff executed seventy-two (72) purchases of Lapolla Industries, Inc. (“Lapolla”) securities on behalf of the Connecticut Investor. Of the seventy-two (72) purchases, sixty-two (62) trades were recorded as unsolicited on CRI’s books and records, while the remaining ten (10) were recorded as solicited. |
| 25. | The Division found no evidence that CRI directly solicited the Connecticut Investor to purchase the Lapolla securities. Rather, the impetus behind the purchase was Gray. Consequently, CRI records describing the Lapolla securities trades as solicited by the firm were inaccurate. |
|
Polakoff Engaged in Undisclosed Outside Business Activity | |
| 26. | At all times pertinent hereto, Carol Gray was a brokerage client of CRI. Carol Gray’s brokerage account at CRI was serviced by Polakoff. Carol Gray is or was the spouse of Gray. |
| 27. | On September 30, 2010, Polakoff wrote a check for $73,000 made payable to client Carol Gray. |
| 28. | In a written statement to the Commissioner, and during on the record testimony, Polakoff stated that the money given to his client, Carol Gray, was to be applied to Polakoff’s joint purchase of an investment property. |
| 29. | At no time did Polakoff disclose to CRI that he was involved in outside business activity with a client in contravention to FINRA Rule 3270. |
|
Failure to Supervise | |
| 30. | As Executive Vice President of CRI, Polakoff was charged with exercising supervisory authority on behalf of CRI, a function he also shared with CRI’s compliance officer. |
| 31. | CRI’s written supervisory procedures stated, “When a third party who is not the principal or named person on the account will give instructions regarding orders . . . the Firm must have a signed third-party trading authorization. The authorization is signed by the principal of the account and the third party, giving the third party authority to act on behalf of the principal. The signed trading authorization must be received BEFORE accepting instructions from the third party.” (Emphasis in text) |
| 32. | CRI and Polakoff failed to follow the firm’s supervisory procedures in that they did not at any time obtain a trading authorization, signed by the Connecticut Investor and by Gray, giving Gray authority to act on behalf of the Connecticut Investor. |
IV. STATUTORY AND REGULATORY BASIS FOR
ORDER TO CEASE AND DESIST,
ORDER TO MAKE RESTITUTION,
SUSPENSION OR REVOCATION OF REGISTRATIONS
AS A BROKER-DEALER, AN INVESTMENT ADVISER AND A
BROKER-DEALER AGENT, AND
ORDER IMPOSING FINE
a. Respondents Materially Aided Gray’s Violation of
Section 36b-6(c)(1) of the Act
| 33. | Paragraphs 1 through 32, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 34. |
Section 36b-6(c)(1) of the Act prohibits an individual from transacting business, directly or indirectly, in this state as an investment adviser if the individual is barred from employment or association with a broker-dealer by a self-regulatory organization. CRI and Polakoff wilfully and materially aided Gray’s violation of Section 36b-6(c)(1) of the Act. Such conduct supports (a) the suspension or revocation of CRI’s broker-dealer and investment adviser registrations in this state pursuant to Section 36b-15(a)(2)(M) of the Act; and (b) the suspension or revocation of Polakoff’s registration as a broker-dealer agent in Connecticut pursuant to Section 36b-15(a)(2)(M) of the Act. |
| 35. | CRI and Polakoff materially aided Gray’s violation of Section 36b-6(c)(1) of the Act. Such material assistance supports (a) the entry of an order to cease and desist against CRI and Polakoff pursuant to Section 36b-27(a)(3) of the Act; (b) the entry of an order to make restitution against CRI and Polakoff pursuant to Section 36b-27(c) of Act; and (c) the imposition of an administrative fine upon CRI and Polakoff pursuant to Section 36b-27(d)(1)(C) of the Act. |
b. CRI and Polakoff Engaged in Dishonest or Unethical Practices
in the Securities Business
| 36. | Paragraphs 1 through 35, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 37. |
CRI, alone and through its control person Polakoff, engaged in dishonest or unethical practices in the securities business by knowingly allowing an individual who had been permanently barred by the NASD and who had no documented authority to act on behalf of the Connecticut Investor to direct trading in the Connecticut Investor’s account, as more fully described in paragraphs 10 through 20, inclusive. In addition to being prohibited by Section 36b-4(b) of the Act, such conduct, being inimical to high standards of commercial honor and just and equitable principles of trade, is proscribed by FINRA Rule 2010 and constitutes a dishonest or unethical practice in the securities business within the meaning of Section 36b-15(a)(2)(H) of the Act and Sections 36b-31-15a(b), 36b-31-15b(c) and 36b-31-15c(b) of the Regulations. Such conduct thus forms a basis for (a) an order to cease and desist to be issued against CRI and its control person Polakoff under Section 36b-27(a) of the Act, (b) an order that CRI and its control person Polakoff make restitution under subsections (b) and (c) of Section 36b-27 of the Act, (c) the imposition of a fine upon CRI and its control person Polakoff under Section 36b-27(d) of the Act, (d) an order suspending or revoking CRI’s registrations as a broker-dealer and an investment adviser in Connecticut pursuant to Section 36b-15(a)(2)(H) of the Act, and (e) an order suspending or revoking Polakoff’s registration as a broker-dealer agent in Connecticut; |
c. Violation of 36b-16 of the Act by Respondents –
Sale of Unregistered Securities
| 38. | Paragraphs 1 through 37, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 39. |
Respondents offered and sold securities to at least one Connecticut investor, which securities were not registered in Connecticut under the Act, as more fully described in paragraphs 20 and 21. The offer and sale of such securities absent registration constitutes a violation of Section 36b-16 of the Act, which forms a basis for an order to cease and desist to be issued against Respondents under Section 36b-27(a) of the Act, an order that Respondents make restitution under Section 36b-27(b) of the Act, the imposition of a fine upon Respondents pursuant to Section 36b-27(d) of the Act, and, as a wilful violation, constitutes grounds for the suspension or revocation of CRI’s registrations as a broker-dealer and an investment adviser in Connecticut and Polakoff’s registration as a broker-dealer agent in Connecticut pursuant to Section 36b-15(a)(2)(B) of the Act. |
d. Violation of Section 36b-31-14a(a) of the Regulations by CRI –
Inaccurate Books and Records
| 40. | Paragraphs 1 through 39, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 41. |
CRI failed to maintain true and accurate books and records as more fully described in paragraphs 22 through 25, inclusive. The failure to maintain true and accurate books and records constitutes a violation Section 36b-31-14a(a) of the Regulations, which forms a basis for an order to cease and desist to be issued against CRI under Section 36b-27(a) of the Act, the imposition of a fine upon CRI pursuant to Section 36b-27(d) of the Act, and, as wilful misconduct, constitutes grounds for the suspension or revocation of CRI’s registrations as a broker-dealer and an investment adviser in Connecticut pursuant to Section 36b-15(a)(2)(B) of the Act. |
e. Dishonest or Unethical Practices Within the Meaning
of Section 36b-31-15b(c) of the Regulations by Polakoff –
Outside Business Activity Involving a Firm Client
| 42. | Paragraphs 1 through 41, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 43. |
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] |
| 44. | Polakoff engaged in dishonest or unethical practices in the securities business by engaging in outside business activity absent written notice to CRI, as more fully described in paragraphs 27 through 29, inclusive. Such conduct constituted a dishonest or unethical business practice within the meaning of Section 36b-31-15b(c) of the Regulations and thus a basis for an order to cease and desist to be issued against Polakoff under Section 36b-27(a) of the Act, and for the suspension or revocation of Polakoff’s broker-dealer agent registration in Connecticut pursuant to Section 36b 15(a)(2)(H) of the Act. |
f. Violation of Section 36b-31-6f of the Regulations by CRI –
Failure to Enforce and Maintain Adequate Supervisory Proceduresr
| 45. | Paragraphs 1 through 44, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 46. |
CRI’s failure to establish, enforce and maintain a system for supervising the activities of its agents and employees that was reasonably designed to achieve compliance with applicable securities laws and regulations, as more fully described above, constitutes a violation of Section 36b-31-6f of the Regulations, which forms a basis for an order to cease and desist to be issued against CRI under Section 36b-27(a) of the Act, the imposition of a fine upon CRI pursuant to Section 36b-27(d) of the Act, and constitutes grounds for the suspension or revocation of CRI’s registrations as a broker-dealer and an investment adviser in Connecticut pursuant to Section 36b-15(a)(2)(K) and, as wilful misconduct, Section 36b-15(a)(2)(B) of the Act. |
V. ORDER TO CEASE AND DESIST,
ORDER TO MAKE RESTITUTION,
NOTICE OF INTENT TO SUSPEND OR REVOKE
REGISTRATIONS AS A BROKER-DEALER, AN INVESTMENT
ADVISER AND A BROKER-DEALER AGENT,
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, CRI has committed at least one violation of Section 36b-16 of the Act; at least one violation of Section 36b-4(b) of the Act; at least one violation of Sections 36b-31-14a(a) and 36b-31-6f of the Regulations; wilfully and materially aided a violation of Section 36b-6(c)(1) of the Act; 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 Section 36b-31-15a(b) of the Regulations;
WHEREAS, as a result of the investigation, the Commissioner finds that, with respect to the activity described herein, Polakoff has committed at least one violation of Section 36b-16; at least one violation of Section 36b-4(b) of the Act; wilfully and materially aided a violation of Section 36b-6(c)(1) of the Act; 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 Section 36b-31-15b(c) of the Regulations;
WHEREAS, the Commissioner also has reason to believe that grounds exist for suspending or revoking CRI’s registrations as a broker-dealer and an investment adviser in Connecticut pursuant to Sections 36b-15(a)(2)(B), 36b-15(a)(2)(H), 36b-15(a)(2)(K) and 36b-15(a)(2)(M) of the Act;
WHEREAS, the Commissioner has reason to believe that grounds exist for suspending or revoking Polakoff’s registration as a broker-dealer agent in Connecticut pursuant to Sections 36b-15(a)(2)(B), 36b 15(a)(2)(H) and 36b-15(a)(2)(M) of 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 . . . registrant and to the employer . . . if such . . . registrant is an agent . . . (2) opportunity for hearing, and (3) written findings of fact and conclusions of law”;
WHEREAS, notice is hereby given to Respondents that their respective registrations in Connecticut shall be suspended or revoked, subject to each Respondent’s right to request a hearing on the allegations set forth above;
WHEREAS, notice is hereby given to Respondents that the Commissioner intends to impose a fine not to exceed the maximum allowed by the Act of one hundred thousand dollars ($100,000) per violation;
WHEREAS, the Commissioner further finds that the issuance of an Order to Cease and Desist against Respondents, an Order to Make Restitution against Respondents, an Order Suspending or Revoking CRI’s registrations as a broker-dealer and an investment adviser in Connecticut, an Order Suspending or Revoking Polakoff’s registration as a broker-dealer agent in Connecticut, and the imposition of a fine upon Respondents 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, the Commissioner ORDERS that CANTONE RESEARCH INC. CEASE AND DESIST from directly or indirectly violating, or materially aiding any other person in violating, the provisions of the Act and Regulations, including without limitation, (1) engaging in dishonest or unethical practices in the securities business, (2) offering or selling unregistered securities in Connecticut, (3) failing to maintain true and accurate books and records, and (4) failing to enforce and maintain adequate supervisory procedures that are reasonably designed to achieve compliance with applicable securities laws and regulations;
WHEREAS, the Commissioner ORDERS that VICTOR POLAKOFF CEASE AND DESIST from directly or indirectly violating, or materially aiding any other person in violating, the provisions of the Act and Regulations, including without limitation, (1) engaging in dishonest or unethical business practices in the securities business, and (2) offering or selling unregistered securities in Connecticut;
WHEREAS, the Commissioner ORDERS that CANTONE RESEARCH INC. AND VICTOR POLAKOFF MAKE RESTITUTION of any sums obtained as a result of their violations of Section 36b-4(b) of the Act and as a result of the dishonest or unethical business practices described herein, plus interest at the legal rate set forth in Section 37-1 of the General Statutes of Connecticut. Specifically, the Commissioner ORDERS that:
| 1. | Within thirty (30) days from the date this Order to Make Restitution becomes permanent, Respondents shall provide the Division with a written disclosure which contains (a) the name and address of each Connecticut investor who held an account(s) at CRI in which Gray was allowed to direct trades, (b) the amount of trading losses sustained by each investor, (c) the timeframe in which trading by Gray took place, and (d) the amount of any refund of loss payments made to each investor; |
| 2. | Within forty-five (45) days from the date this Order to Make Restitution becomes permanent, Respondents shall reimburse each investor the amount of trading losses sustained by the investor plus interest, less funds returned in the form of purported refunds of losses and purported interest payments, with respect to each investor’s account. Such restitution shall be made by certified check, and shall be sent by certified mail, return receipt requested, to each affected investor; and |
| 3. | Within ninety days (90) days from the date this Order to Make Restitution becomes permanent, Respondents shall provide the Division with proof in the form of copies of the certified checks and the return receipts required by paragraph 2 of Section V of this Order and Notice (collectively “Order”), that Respondents have reimbursed each investor the amount of trading losses sustained by the investor plus interest, less funds returned in the form of purported refunds of losses and purported interest payments, with respect to each investor’s account. |
THE COMMISSIONER FURTHER ORDERS THAT, pursuant to Sections 36b-15(f) and 36b-27 of the Act, each Respondent 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 each Respondent’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 any Respondent will not be represented by an attorney at the hearing, please complete the Appearance and Request for Hearing Forma as “pro se”. If a hearing is requested, the hearing will be held on December 20, 2016 at 10 a.m., at the Department of Banking, 260 Constitution Plaza, Hartford, Connecticut 06103.
The hearing will be held in accordance with the provisions of Chapter 54 of the General Statutes of Connecticut. At such hearing, each Respondent 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 any Respondent does not request a hearing within the time period prescribed or fails to appear at any such hearing, the allegations herein against any such Respondent will be deemed admitted. Accordingly, the Order to Cease and Desist and Order to Make Restitution shall remain in effect and become permanent against any such Respondent, the Commissioner shall, as the case may be, issue an order suspending or revoking CRI’s registration as a broker-dealer and an investment adviser in Connecticut, issue an order suspending or revoking Polakoff’s registration as a broker-dealer agent in Connecticut, and the Commissioner may order that the maximum fine be imposed upon any such Respondent.
| Dated at Hartford, Connecticut, | _____/s/____________ | |
| this 20th day of October 2016. | Jorge L. Perez | |
| Banking Commissioner |
CERTIFICATION
I hereby certify that on this 21st day of October 2016, I caused to be mailed by certified mail, return receipt requested, the foregoing Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Suspend or Revoke Registrations as a Broker-dealer and an Investment Adviser, Notice of Intent to Suspend or Revoke Registration as a Broker-dealer Agent, Notice of Intent to Fine and Notice of Right to Hearing to: Cantone Research Inc., 766 Shrewsbury Avenue, Suite E-401, Tinton Falls, New Jersey 07724, certified mail no. 7012 3050 0000 6997 6308; and Victor Polakoff, 9 Hooper Avenue, Atlantic Highlands, New Jersey 07716, certified mail no. 7012 3050 0000 6997 6315.
| ___/s/_____ | |
| W. C. Hall | |
| Paralegal |