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IN THE MATTER OF: OMNIVIEW CAPITAL ADVISORS, LLC
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INTRODUCTION
The Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (“Act”), and the regulations promulgated thereunder, Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies (“Regulations”).
The above-referenced matter was initiated upon charges brought by the Commissioner to issue a permanent order to cease and desist, impose a fine and issue an order of restitution against each Respondent. On August 17, 2016, the Commissioner issued an Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing against Advisors and Discala (“Notice”). On February 17, 2017, the Commissioner issued an Amended and Restated Order to Cease and Desist, Amended and Restated Order to Make Restitution, Amended and Restated Notice of Intent to Fine and Notice of Right to Hearing against Respondents (“Amended Notice”).
The Amended Notice alleges that: (1) Advisors and Capital transacted business as a broker-dealer in or from Connecticut absent registration, in violation of Section 36b-6(a) of the Act; (2) Discala transacted business as a broker-dealer agent of Advisors and/or Capital in or from Connecticut absent registration, in violation of Section 36b-6(a) of the Act; (3) Respondents offered and sold securities in or from Connecticut to at least one investor, which securities were not registered in Connecticut under the Act, in violation of Section 36b-16 of the Act; and (4) the conduct of Respondents constitutes, in connection with the offer, sale or purchase of any security, directly or indirectly employing a device, scheme or artifice to defraud, making an untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or engaging in an act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in violation of Section 36b-4(a) of the Act.
On September 29, 2016, Respondents requested a hearing. After due notice, a hearing was held at the Department of Banking (“Department”) on April 27, 2017. The hearing was conducted in accordance with Chapter 54 of the Connecticut General Statutes, the “Uniform Administrative Procedure Act”, and the Department’s contested case regulations, Sections 36a-1-19 to 36a-1-57, inclusive, of the Regulations of Connecticut State Agencies.
Having read the entire record, including testimony of the witnesses and documentary evidence, I make the following findings of fact and conclusions of law based on the preponderance of evidence in the record.
FINDINGS OF FACT
| 1. | On August 17, 2016, the Commissioner issued an Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing against Advisors and Discala. (HO Ex. 1; Tr. at 11.) 1 |
| 2. | On September 29, 2016, the Department received a written request for a hearing from Andrew B. Bowman, Esq. (“Attorney Bowman”). (HO Ex. 1.) |
| 3. | On October 11, 2016, the Commissioner appointed Attorney Stacey Serrano as Hearing Officer. (HO Ex. 1.) |
| 4. | On February 17, 2017, the Commissioner issued an Amended and Restated Order to Cease and Desist, Amended and Restated Order to Make Restitution, Amended and Restated Notice of Intent to Fine and Notice of Right to Hearing against Respondents. (HO Ex. 2; Tr. at 2-3.) |
| 5. |
The hearing was held on April 27, 2017. (Tr. at 3.) |
| 6. | Attorney Paul A. Bobruff appeared at the hearing on behalf of the Department. (Tr. at 4.) |
| 7. |
Attorney Bowman appeared at the hearing on behalf of Respondents. (Tr. at 4.)
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| 8. |
Discala is an individual whose address last known to the Commissioner is 10 Vincent Place, Norwalk, Connecticut. (HO Ex. 2; DOB Ex. 42 at 10; Tr. at 89-90.) |
| 9. | Discala was the Chief Executive Officer of Advisors and Capital. (Tr. at 39.) |
| 10. | Advisors is or was a Delaware limited liability company formed on February 3, 2011, with places of business at 140 Rowayton Avenue, 2nd Floor, Rowayton, Connecticut, and at 140 Rowayton Avenue, Suite C, Rowayton, Connecticut. (DOB Exs. 15, 15C, 21; Tr. at 78, 84-85.) |
| 11. | Capital is or was a Delaware limited liability company formed on April 4, 2012, with a place of business at 140 Rowayton Avenue, 2nd floor, Rowayton, Connecticut. (DOB Exs. 2, 21A; Tr. at 36-37, 84-85.) |
| 12. | During 2013, Discala was listed as the Chief Executive Officer and Dounya Irrgang was listed as the Marketing Director on the website of Advisors. (DOB Ex. 15; Tr. at 79.) |
| 13. | Also on its website, Advisors represented that it was a merchant banking and financial advisory firm headquartered in Rowayton, Connecticut. (DOB Ex. 15B.) |
| 14. | The Disclaimer on Advisor’s website provided: “This website does not constitute an offer to sell or buy any securities and may not be used or relied upon in connection with any offer or sale of securities. . . . To the extent that licenses or other governmental approvals are required by OmniView or any of its affiliates to perform any of the activities or services described on this website, OmniView currently does not possess such licenses and has not received such approvals. Such licenses and approvals include, but are not limited to, those related to activities and services of a broker-dealer and investment adviser and those related to investment banking”. (DOB Ex. 15D; Tr. at 78.) |
| 15. | Bryan Hagen (“Bryan”) believed that OmniView had a very nice website that touted the financial success of Discala. (Tr. at 139.) |
| 16. | The Advisors website represented that Discala had over 20 years of experience in merchant banking, principal investing and financial advisory, and throughout his career, advised on over $1 billion in secured debt, equity and mezzanine financing transactions across a broad spectrum of industries. (DOB Ex. 15.) |
| 17. | Bryan and Kelly Hagen (“Hagens”) had been introduced to OmniView and Discala by Andy Pritchard (“Pritchard”). (Tr. at 134-136.) |
| 18. | Bryan had known Pritchard since March of 2004. Bryan stated that Pritchard was his best friend at the time of his transactions with Capital. (Tr. at 160, 161.) |
| 19. | Pritchard told Bryan about Crackpot Cubed, implying that it was an up-and-coming social media company and that he had prior success investing with Discala. (Tr. at 134-135, 160-161.) |
| 20. | Bryan understood Crackpot Inc. (“Crackpot”), Crackpot Cubed and Cubed (“Cubed”) to be the same stock. (Tr. at 137-138.) |
| 21. | Crackpot was a Nevada corporation from approximately June 27, 2013 to June 30, 2015. (DOB Ex. 23; Tr. at 84-85.) |
| 22. | Crackpotcube was a reserved name in Nevada that expired on August 13, 2013. (DOB Ex. 23A; Tr. at 84-85, 87.) |
| 23. | Crackpotcube Inc. (“Crackpotcube”) was a Nevada corporation from approximately May 20, 2013 to May 31, 2015. (DOB Ex. 23B; Tr. at 84-85.) |
| 24. | On March 5, 2014, Dounya Discala e-mailed Bryan thanking him for his interest in investing in the Crackpotcube, stating that she was attaching a “Stock Purchase Agreement” and providing wiring instructions for Capital. (DOB Ex. 2; Tr. at 43.) |
| 25. | Dounya Discala’s maiden name was Dounya Irrgang (collectively, “Dounya”). Dounya is or was the wife of Discala. (Tr. at 44, 103-104.) |
| 26. | Dounya used an e-mail address of ddiscala at omniviewcap.com in her communications with the Hagens. (DOB Ex. 2; Tr. at 37.) |
| 27. | Capital returned to the Hagens only the signature page of the Stock Purchase Agreement executed by Discala and the Hagens, representing the Hagens’ purchase of 10,000 shares of Crackpot. (DOB Exs. 2, 2A; Tr. at 36-37, 133.) |
| 28. | On March 7, 2014, the Hagens transferred $10,000 by wire to Capital for the purchase of Crackpot shares. (DOB Exs. 2B, 36; Tr. at 36-37, 46, 49-50, 133.) |
| 29. | On or about March 21, 2014, Crackpot and Cubed entered into an Intellectual Property Purchase Agreement whereby Cubed purchased Crackpot’s intellectual property, representing substantially the entire business of Crackpot. (DOB Ex. 24A; Tr. at 90, 92, 98.) |
| 30. | On approximately March 24, 2014, Cubed disclosed that it had purchased Crackpot’s Get CUBED mobile-first platform and related intellectual property in exchange for $350,000 and 2,537,455 shares of Cubed stock and a portion of its future revenues. (DOB Ex. 28; Tr. at 90.) |
| 31. | On or about March 25, 2014, 2,537,455 shares of Cubed stock were transferred to Crackpot. (DOB Ex. 24B; Tr. at 90.) |
| 32. | A previous name of Cubed was Northwest Resources, Inc. (“Northwest”). (DOB Exs. 25, 27; Tr. at 90, 93.) |
| 33. | Effective April 2, 2014, the Hagens and Discala, Chief Executive Officer of Capital, executed a Purchase Agreement, representing the Hagens’ purchase of 30,000 shares of Crackpot for $30,000. (DOB Ex. 3A; Tr. at 36-37, 53, 138, 139.) |
| 34. | By e-mail dated April 2, 2014 to Christopher Marra and Dounya, Pritchard stated that he was attaching a stock purchase agreement for $30,000 and that since Bryan was already in the stock purchase agreement for $10,000, it would bring him to an investment of $40,000. (DOB Ex. 3; Tr. at 36-37, 56-57.) |
| 35. | On April 3, 2014, the Hagens transferred $30,000 by wire to Capital for the purchase of Crackpot shares. (DOB Exs. 3B, 36; Tr. at 53, 138-139.) |
| 36. | Bryan was unaware of the changes in ownership and transfer of intellectual property between Crackpot and Cubed that occurred between his purchases of Crackpot in March and April of 2014. (Tr. at 142-143.) |
| 37. | On or about April 24, 2014, Cubed filed a Form D, Notice of Exempt Offering of Securities with the United States Securities and Exchange Commission under Rule 506(b). (DOB Ex. 25.) |
| 38. | Around May 8, 2014, the Hagens noticed that shares of a company with a listing symbol of CRPT were being publicly traded for between $5 and $7. (Tr. at 141.) |
| 39. | By e-mail dated May 8, 2014 to Dounya, Kelly Hagen stated that they had noticed that Crackpot had launched and asked when they should expect to receive their shares of Crackpot. (DOB Ex. 4 at 2; Tr. at 36-37, 58.) |
| 40. | Also on May 8, 2014, Dounya responded by e-mail indicating that nobody had received shares on their end. (DOB Ex. 4.) |
| 41. | On or about June 10, 2014, the 2,537,455 shares of Cubed stock owned by Crackpot were transferred to various parties, including Arielle Pritchard, with 183,335 shares of such 2,537,455 shares of Cubed stock remaining with Crackpot. (DOB Ex. 24C; Tr. at 89-90.) |
| 42. | The Hagens never received Cubed shares. (Tr. at 93, 113.) |
| 43. | On or about June 3, 2014, Scanbuy, Inc. (“Scanbuy”) announced that it had engaged Advisors for its business and financial services. (DOB Ex. 6; Tr. at 61.) |
| 44. | On or about June 20, 2014, Capital, through Discala, and the Hagens entered into a Participation Purchase Agreement (“PPA”) for participation interests in 30,000 registered shares of Scanbuy at the purchase price of $.50 each. (DOB Ex. 9A; Tr. at 67-70.) |
| 45. | The PPA was unsigned by Discala and the Hagens, but Exhibit A to the PPA was signed by the Hagens. (DOB Exs. 9A, 9B; Tr. at 67.) |
| 46. | On June 27, 2014, the Hagens transferred $15,000 by wire to Capital for the purchase of Scanbuy. (DOB Exs. 9B, 10, 12; Tr. at 67, 70, 147-148.) |
| 47. | Scanbuy was a Delaware corporation incorporated on March 24, 2000. (DOB Ex. 22; Tr. at 84 85, 87.) |
| 48. | Bryan had heard of the Scanbuy investment through Pritchard. (DOB Exs. 11, 11A; Tr. at 67, 145.) |
| 49. | In an e-mail from Pritchard to Bryan, Pritchard stated that he liked the Scanbuy investment a lot, that they have 11.5 million active users including big clients like Coca-Cola and Home Depot, among others, and that last year their app called Scanlife beat out Uber and others as the #1 New Tech Solution. (DOB Ex. 11.) |
| 50. | Pritchard likely provided the Scanbuy investor deck to Bryan; no information other than the PPA was provided by OmniView to Bryan. (Tr. at 144-146.) |
| 51. | Bryan performed his own research on Scanbuy, which indicated that Scanbuy seemed to be a very well-run company and an even better investment than Crackpot. (Tr. at 144-145.) |
| 52. | On or about July 17, 2014, the bank used by the Hagens for the June 27, 2014 wire transfer of $15,000 to Capital attempted to recall the wire transfer on behalf of the Hagens but was unsuccessful because the FBI had frozen the account. (DOB Ex. 13; Tr. at 67, 73-74.) |
| 53. | The federal government seized approximately $184,000 from bank accounts in the name of Advisors, Capital or Discala on July 15, 2014. (DOB Ex. 44; Tr. at 122.) |
| 54. | On July 22, 2014, the Hagens complained to Cesar Garcia of the Department by e-mail stating that they had just found out that the CEO of Capital, Discala, was indicted for security manipulation schemes and that they wanted to do everything they could to recover the $55,000 they had invested with Capital. (DOB Ex. 1; Tr. at 36-37, 41, 158-159.) |
| 55. | By check dated November 17, 2014, Capital provided Bryan $7,500, which represented a partial refund of the amount that the Hagens paid to Capital for Scanbuy. (DOB Ex. 14; Tr. at 67, 74 75, 156) |
| 56. | As of March 29, 2017, Discala had never been registered as an agent of issuer, broker-dealer agent, investment adviser agent, broker-dealer or investment adviser under the Act. (DOB Exs. 16, 20B; Tr. at 80-82, 81, 84, 85.) |
| 57. | As of February 15, 2017, Advisors had never been registered as an investment adviser or broker-dealer under the Act and had never filed an investment advisory notice under Section 36b-6(e) of the Act. (DOB Ex. 17; Tr. at 80-82.) |
| 58. | As of April 26, 2017, Capital had never been registered as an investment adviser or broker-dealer under the Act and had never filed an investment advisory notice under Section 36b-6(e) of the Act. (DOB Ex. 18; Tr. at 80, 82.) |
| 59. | As of February 16, 2017, Scanbuy and Crackpot had never filed a securities registration, exemption or notice filing under Section 36b-16, 36b-17, 36b-18, 36b-19 or 36b-21 of the Act. (DOB Ex. 19; Tr. at 80, 82-83.) |
| 60. | On or about May 14, 2013, Scanbuy filed a Form D Notice of Exempt Offering of Securities with the United States Securities and Exchange Commission under Rule 506. Scanbuy did not file a notice of the Form D filing with the Department. (DOB Ex. 5; Tr. at 61, 65, 82-83.) |
| 61. | Several persons other than the Hagens provided monies to Capital with notations referencing Crackpot, Cubed and Scanbuy. (DOB Exs. 36, 40; Tr. at 89-90.) |
| 62. | Dounya was listed as a member and an authorized signatory on Capital’s bank accounts at Chase. (DOB Ex. 35; Tr. at 89 90, 99.) |
| 63. | Dounya was listed as the sole member on the signature card for a Capital account at Bank of America. (DOB Ex. 39; Tr. at 89-90, 105.) |
| 64. | On February 24, 2015, the Department issued a Subpoena Duces Tecum to Discala to produce certain documents and provide testimony regarding his securities-related activities in and from Connecticut. (DOB Ex. 42A; Tr. at 90.) |
| 65. | On February 24, 2015, the Department issued a Subpoena Duces Tecum to Advisors to produce certain documents and provide testimony regarding its securities-related activities in and from Connecticut. (DOB Ex. 42B; Tr. at 90.) |
| 66. | Discala invoked his Fifth Amendment right and privilege against self-incrimination in response to the Department’s Subpoena Duces Tecum. (DOB Exs. 41, 42; Tr. at 89-90, 109-111.) |
| 67. | During the hearing Attorney Bowman represented that Discala was continuing to assert his Fifth Amendment privilege against self-incrimination. (Tr. at 89.) |
| 68. | The Department requested that an adverse inference be drawn from Discala’s invoking his Fifth Amendment right to the Department’s requests for production and testimony. (Tr. at 15, 121.) |
| 69. | Discala executed the three sales of Crackpot and Scanbuy to the Hagens on behalf of Capital. (Tr. at 113-114.) |
| 70. | Both the Hagens and Capital were located in Connecticut at the time of the three sales of Crackpot and Scanbuy. (Tr. at 114.) |
| 71. | The Hagens never received shares of Crackpot or Scanbuy. (Tr. at 128.) |
| 72. | The Hagens had provided money to Capital for investment purposes and had expected to make a profit without having to do anything more than provide the funds. (Tr. at 171-172.) |
| 73. | Monies were transferred from Capital’s bank accounts at Chase Bank and Bank of America into Discala and Dounya’s personal bank accounts. (Tr. at 116-117). |
| 74. | On approximately April 9, 2014, Discala withdrew $20,000 from Capital’s Chase Bank account while at Mohegan Sun. (DOB Ex. 36; Tr. at 118.) |
| 75. | Capital was the financial advisor to Crackpot and Crackpotcube beginning in November 2013. (DOB Ex. 33; Tr. at 89-90.) |
| 76. | Cubed represented that Capital’s role was to raise up to $1.1 million for operating cash for Crackpot and Crackpotcube and that Capital reached this goal in March 2014. Subsequently, Capital was asked to re-open the private placement and raised an additional $1.725 million. (DOB Ex. 33.) |
| 77. | Cubed also represented that a reverse merger occurred with Northwest (wherein Crackpot became the operating subsidiary of Northwest, n/k/a Cubed). (DOB Ex. 33.) |
| 78. | Capital was paid a fee equal to 8% of the funds it raised for Cubed. (DOB Ex. 33; Tr. at 119.) |
| 79. | It was Bryan’s understanding that his money was never transferred from Capital to Crackpot or Scanbuy. (DOB Ex. 12; Tr. at 148-149.) |
| 80. | Bryan never spoke with Discala before signing the stock participation agreements; all of his communications had been with Pritchard and Dounya. (Tr. at 136, 170.) |
| 81. | Other than the Scanbuy participation agreement, Bryan received no information from Discala, Advisors or Capital regarding the registration status of Scanbuy, Crackpot, Cubed, Discala, Advisors or Capital. (Tr. at 146.) |
| 82. | During the hearing, the Department requested that the maximum fine of $100,000 per violation be imposed on each Respondent, for a total fine of $300,000 per Respondent. (Tr. at 26-28.) |
CONCLUSIONS OF LAW
The Commissioner is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act, and the regulations promulgated thereunder, Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies. The Commissioner’s authority includes the power to issue an order to cease and desist against each Respondent pursuant to Section 36b-27(a) of the Act, impose a fine upon each Respondent pursuant to Section 36b-27(d) of the Act, and to issue an order of restitution upon each Respondent pursuant to Section 36b-27(b) of the Act.
Standard of Evidence
The applicable standard of proof in Connecticut administrative cases, including those involving fraud and severe sanctions, is the preponderance of the evidence standard. Goldstar Medical Services v. Department of Social Services, 288 Conn. 790, 819 (2008). “[I]t is the exclusive province of the trier of fact to make determinations of credibility, crediting some, all, or none of a given witness’ testimony. . . . [A]n agency [is not] required to use in any particular fashion any of the materials presented to it as long as the conduct of the hearing is fundamentally fair.” Id. at 830 (internal citations omitted).
“Review of an administrative agency decision requires a court to determine whether there is substantial evidence in the administrative record to support the agency’s findings of basic fact and whether the conclusions drawn from those facts are reasonable.” Id. at 833. “An administrative finding is supported by substantial evidence if the record affords a substantial basis of fact from which the fact in issue can be reasonably inferred.” Id. “[T]here is no distinction between direct and circumstantial evidence so far as probative force is concerned. . . . In fact, circumstantial evidence may be more certain, satisfying and persuasive than direct evidence.” Id. at 834 (internal citations omitted).
Violations of the Connecticut Uniform Securities Act 2
| 1. |
The Department alleges that Advisors and Capital each transacted business as a broker-dealer in or from Connecticut absent registration, in violation of Section 36b-6(a) of the Act.
Section 36b-6(a) of the Act states, in pertinent part, that:
No person shall transact business in this state as a broker-dealer unless such person is registered under sections 36b-2 to 36b-34, inclusive. Section 36b-3(5) of the Act defines “broker-dealer”, in pertinent part, as:
[A]ny person engaged in the business of effecting transactions in securities for the account of others or for such person’s own account. Section 36b-3(19) of the Act defines “security”, in pertinent part, as:
[A]ny note, stock . . . preorganization certificate or subscription, transferable share, investment contract . . . or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. The evidence establishes that Capital transacted business as a broker-dealer in or from Connecticut absent registration, in violation of Section 36b-6(a) of the Act. In particular, Capital entered into various purchase agreements with the Hagens during 2014 in which it agreed to sell shares of Crackpot stock and participation interests in Scanbuy shares. The purchase agreements evidenced the sale of securities, as defined by Section 36b-3(19) of the Act, and in furtherance of such agreements, the Hagens provided $55,000 by wire transfer to Capital. Bryan testified that such funds were provided to Capital for investment purposes and that he had expected to receive shares of Crackpot and Scanbuy in return, but never did. The record also reflects that Capital was never registered as a broker-dealer under the Act. As a result, Capital transacted business as a broker-dealer in Connecticut, in violation of Section 36b-6(a) of the Act.
There was limited evidence produced during the hearing concerning the activities performed by Advisors, therefore, the record fails to establish that Advisors transacted business as a broker-dealer in Connecticut, in violation of Section 36b-6(a) of the Act. |
| 2. |
The Department alleges that Discala transacted business as a broker-dealer agent of Advisors and/or Capital in Connecticut absent registration, in violation of Section 36b-6(a) of the Act.
Section 36b-6(a) of the Act states, in pertinent part, that:
No individual shall transact business as an agent in this state unless such individual is (1) registered as an agent of the broker-dealer . . . . Section 36b-3(1) of the Act states, in pertinent part, that:
“Agent” means any individual, other than a broker-dealer, who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. . . . A general partner, officer or director of a broker-dealer or issuer, or a person occupying a similar status or performing similar functions, is an agent only if such person otherwise comes within the definition and any compensation that such person receives is directly or indirectly related to purchases or sales of securities. As discussed above, Capital transacted business as a broker-dealer in Connecticut by effecting transactions in securities of Crackpot and Scanbuy with the Hagens. At all times, Discala was the individual who represented Capital and executed the stock purchase agreements on behalf of Capital with the Hagens. Discala also had extensive negotiations with Crackpot and Scanbuy concerning their capital raise. Further, the record reflects that Discala was never registered under the Act and was indirectly compensated for such activities by withdrawing monies from Capital’s bank accounts for his personal use. As a result, Discala transacted business as a broker-dealer agent of Capital, in violation of Section 36b-6(a) of the Act. The record fails to establish that Discala transacted business as a broker-dealer agent of Advisors in Connecticut in violation of Section 36b-6(a) of the Act. |
| 3. |
The Department alleges that Respondents offered and sold securities in or from Connecticut to at least one investor, which securities were not registered in Connecticut under the Act, in violation of Section 36b-16 of the Act.
Section 36b-16 of the Act, states, in pertinent part, that:
No person shall offer or sell any security in this state unless (1) it is registered under sections 36b-2 to 36b-34, inclusive, (2) the security or transaction is exempted under section 36b-21, or (3) the security is a covered security provided such person complies with any applicable requirements in subsections (c), (d) and (e) of section 36b-21. Section 36b-3(19) of the Act defines “security”, in pertinent part, as:
[A]ny note, stock . . . preorganization certificate or subscription, transferable share, investment contract . . . or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. The record reflects that from March to June 2014, the Hagens provided $55,000 to Capital to purchase securities of Crackpot and Scanbuy. The purchase agreements evidencing the sale of Crackpot and Scanbuy were executed by Discala.
The sale of such securities by Capital, through Discala, violated Section 36b-16 of the Act. In particular, neither Crackpot nor Scanbuy were registered under the Act, nor were notice filings made under the Act. While a Form D filing 3 was made on behalf of Scanbuy with the Securities and Exchange Commission, a claim of exemption from the registration requirements under the Act must be made and proven by the Respondents. See State v. Andresen, 256 Conn. 313, 329–30 (2001). 4 Further, Section 36b-21(g) of the Act provides, in pertinent part, that “the burden of proving an exemption, preemption, exclusion or an exception from a definition is upon the person claiming it”. No evidence was produced by Respondents supporting a claim of exemption or exclusion in connection with their sales of Crackpot and Scanbuy. Accordingly, such conduct constitutes a violation of Section 36b-16 of the Act by Discala and Capital.
The record fails to establish that Advisors offered or sold securities in Connecticut, in violation of Section 36b-16 of the Act. |
| 4. |
The Department alleges that the conduct of Respondents constitutes, in connection with the offer, sale or purchase of any security, directly or indirectly employing a device, scheme or artifice to defraud, making an untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or engaging in an act, practice or course of business which operates as a fraud or deceit upon any person, in violation of Section 36b-4(a) of the Act.
Section 36b-4(a) 5 of the Act states that:
No person shall, in connection with the offer, sale or purchase of any security, directly or indirectly: (1) Employ any device, scheme or artifice to defraud; (2) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. Section 36b-3(8) of the Act states that “fraud”, “deceit” and “defraud” “are not limited to common-law deceit”.
In particular, the Department alleged the following conduct to be violative:
• In connection with the offer and sale of the Crackpot shares, Respondents failed to disclose any financial information about the investment, the registration status of the Crackpot shares, that neither Advisors nor Capital was a registered broker-dealer in Connecticut, that Discala was not a registered broker-dealer agent in Connecticut, and risk factors related to the investment; and • In connection with the offer and sale of the Scanbuy shares, Respondents failed to disclose any financial information about the investment, the registration status of the Scanbuy shares, that Advisors and Capital were not registered broker-dealers in Connecticut, that Discala was not a registered broker-dealer agent in Connecticut, and risk factors related to the investment.
The Department alleges that Respondents failed to disclose certain information in connection with the offer and sale of Crackpot and Scanbuy shares, in violation of Section 36b-4(a) of the Act. Since the first prong of Section 36b-4(a) of the Act may be interpreted to require intent by the violator and Respondents’ intent was not discussed during the hearing, 6 this section will be limited to an analysis of whether their conduct violated Section 36b-4(a)(2) or 36b-4(a)(3) of the Act. However, once again, the record fails to establish actions by Advisors that violated Section 36b-4(a) of the Act. While the Advisors website touted the financial expertise of Discala, it is unclear to what extent Advisors played a role in the offer and sale of securities to the Hagens. The record also fails to reflect how the Advisors website appeared at the time of the securities transactions by the Hagens in 2014. At the outset, it must be noted that in order for untrue statements or omissions to occur in violation of Section 36b-4(a)(2) of the Act, there must be affirmative statements made by Capital and Discala. However, from the record it appears that very few statements, if any, were made by Discala and Capital in connection with the Hagens’ purchase of Crackpot and Scanbuy securities. Bryan repeatedly stated that he became interested in the Crackpot and Scanbuy investments from communications with his best friend, Pritchard. Bryan also admitted to researching the companies himself and never having a conversation with Discala. With no statements being made about Crackpot or Scanbuy by Capital and Discala in connection with their offer or sale, there can be no untrue statements and no omissions of material facts to have made prior statements misleading.
Absent statements made by Discala and Capital in connection with the offer and sale of Crackpot and Scanbuy, we must determine whether Discala and Captial’s [sic] failure to make various statements concerning the registration status and financial condition of the investments constituted engaging in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in violation of Section 36b-4(a)(3) of the Act. Although Connecticut courts have deemed certain activity violative of Section 36b-4(a)(3) of the Act, see e.g. Papic v. Burke, 2007 Conn. Super. LEXIS 820 (Conn. Super. Ct. March 22, 2007) aff’d 113 Conn. App. 198 (2009), there is limited Connecticut case law construing such phrase.
Since the Act is a substantial adoption of the Uniform Securities Act, analysis performed by other states construing similar securities provisions is instructive. 7 In State v. Davidson, 131 N.C. App. 276 (1998), the Court of Appeals of North Carolina when reviewing the lower court’s state securities fraud conviction, found that the defendant’s failure to deliver a prospectus and issuance of a “guaranteed interest rate certificate” provided “additional evidence of defendant’s fraudulent and deceptive acts”. Id. at 284. In Maryland Securities Commissioner v. U.S. Securities Corp, 122 Md. App. 574 (1998) the court upheld a securities administrative decision which found that a broker’s failure to disclose certain information in connection with the registration status of the securities sold to investors acted as a deceit upon the investors, regardless of whether the deceit involved a material fact. The court looked at the effect on the investors, stating that “[c]learly, the Maryland residents were deceived by acts or a course of business in connection with the offer and sale of stock.” Id. at 597. This is consistent with the U.S. Supreme Court’s interpretation of Section 17 in Aaron v. Securities and Exchange Commission, 446 U.S. 680, 696 (emphasis in original). “The language of § 17(a)(3), under which it is unlawful for any person ‘to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit,’ . . . quite plainly focuses upon the effect of particular conduct on members of the investing public, rather than upon the culpability of the person responsible.’”
Likewise, the Hagens were deceived by the actions and inactions of Capital and Discala. The Hagens entered into stock purchase agreements having no idea that Discala and Capital were unregistered persons offering unregistered securities in violation of Connecticut securities laws. The Hagens also had no idea there was a risk that they may not receive shares of Crackpot and Scanbuy. Moreover, Discala, as the CEO of Capital and Advisors, was in a unique position of authority and knowledge regarding the Scanbuy and Crackpot transactions. 8 Rather than ensuring full disclosure of potentially adverse information to the Hagens, Discala and Capital facilitated the concealment of such information for their own benefit and gain. As a result, Discala and Capital violated Section 36b-4(a)(3) of the Act. |
Authority to Issue Order to Cease and Desist,
Order to Make Restitution and Order Imposing Fine
Section 36b-27 of the Act provides, in pertinent part, that:
|
(a) Whenever it appears to the commissioner after an investigation that any person has violated, is violating or is about to violate any of the provisions of sections 36b-2 to 36b-34, inclusive, . . . the commissioner may, in the commissioner’s discretion, order (1) the person . . . to cease and desist from the violations . . . of the provisions of said sections . . . . After such an order is issued, the person named in the order may, within fourteen days after receipt of the order, file a written request for a hearing. Any such hearing shall be held in accordance with the provisions of chapter 54.
(b) Whenever it appears to the commissioner, after an investigation, that any person has violated any of the provisions of sections 36b-2 to 36b 34, inclusive, . . . the commissioner may, in addition to any other remedy under this section, order the person to (1) make restitution of any sums shown to have been obtained in violation of any of the provisions of said sections . . . plus interest at the legal rate set forth in section 37-1 . . . . After such an order is issued, the person named in the order may, not later than fourteen days after receipt of the order, file a written request for a hearing. Any such hearing shall be held in accordance with the provisions of chapter 54. . . .
(d) (1) Whenever the commissioner finds as the result of an investigation that any person has violated any of the provisions of sections 36b-2 to 36b-34, inclusive, . . . the commissioner may send a notice to (A) such person . . . by registered or certified mail, return receipt requested, or by any express delivery carrier that provides a dated delivery receipt. The notice shall be deemed received by the person on the earlier of the date of actual receipt or the date seven days after the date on which such notice was mailed or sent. Any such notice shall include: (i) A reference to the title, chapter, regulation, rule or order alleged to have been violated; (ii) a short and plain statement of the matter asserted or charged; (iii) the maximum fine that may be imposed for such violation; (iv) a statement indicating that such person may file a written request for a hearing on the matters asserted not later than fourteen days after receipt of the notice; and (v) the time and place for the hearing.
(2) If a hearing is requested within the time specified in the notice, the commissioner shall hold a hearing upon the charges made unless such person fails to appear at the hearing. Any such hearing shall be held in accordance with the provisions of chapter 54. After the hearing if the commissioner finds that the person has violated . . . any of the provisions of sections 36b 2 to 36b-34, inclusive, . . . the commissioner may, in the commissioner’s discretion and in addition to any other remedy authorized by said sections, order that a fine not exceeding one hundred thousand dollars per violation be imposed upon such person. If such person fails to appear at the hearing, the commissioner may, as the facts require, order that a fine not exceeding one hundred thousand dollars per violation be imposed upon such person. The commissioner shall send a copy of any order issued pursuant to this subsection by registered or certified mail, return receipt requested, or by any express delivery carrier that provides a dated delivery receipt, to any person named in such order. |
No evidence of mitigating circumstances was provided during the hearing.
Notice and Public Interest
Section 4-177 of the Connecticut General Statutes provides, in pertinent part, that:
|
(a) In a contested case, all parties shall be afforded an opportunity for hearing after reasonable notice.
(b) The notice shall be in writing and shall include: (1) A statement of the time, place, and nature of the hearing; (2) a statement of the legal authority and jurisdiction under which the hearing is to be held; (3) a reference to the particular sections of the statutes and regulations involved; and (4) a short and plain statement of the matters asserted. . . . |
The Notice and Amended Notice issued by the Commissioner complied with subsections (a), (b) and (d) of Section 36b-27 of the Act and Section 4-177 of the Connecticut General Statutes.
Section 36b-31(b) of the Act provides, in pertinent part, that:
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No . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-34, inclusive. . . . |
Section 36b-31(b) of the Act requires that the Commissioner find that an order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of Sections 36b-2 to 36b-34, inclusive. In this case, the activities of Discala and Capital, in violation of the Act, involved failing to register as a broker-dealer and broker-dealer agent, in violation of Section 36b-6(a) of the Act, selling unregistered securities, in violation of Section 36b-16 of the Act and engaging in an act, practice or course of business that operated as a fraud or deceit, in violation of Section 36b-4(a) of the Act. Prohibition of such practices is consistent with the purpose of the Act as as [sic] discussed by the Connecticut Legislature in 1977. “Securities laws generally contain three basic elements—registration of brokers and salesmen, antifraud provisions and registration of securities . . . .” Connecticut Nat. Bank v. Giacomi, 233 Conn. 304, 320, 659 A.2d 1166, 1173 (1995). In addition, the issuance of an order to cease and desist and order imposing fine against Discala and Capital should serve to deter future harm to Connecticut residents and, for those Connecticut residents who have already suffered financial loss as a result of their conduct, an order to make restitution will serve to lessen such losses.
I conclude that it is necessary and appropriate in the public interest and for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of Sections 36b-2 to 36b-34, inclusive, of the Act to enter the following order.
ORDER
Having read the record, I hereby find that Capital and Discala have violated Sections 36b-16, 36b-6(a) and 36b-4(a) of the Act and have obtained monies from Connecticut residents as result of such violations, so as to ORDER, pursuant to Sections 36b-27(a), 36b-27(b) and 36b-27(d) of the Act, that:
| 1. | The Amended and Restated Order to Cease and Desist issued against Omni View Capital LLC on February 17, 2017, be made PERMANENT with respect to violations of Sections 36b-16, 36b-6(a) and 36b-4(a) of the Act; | ||||
| 2. | The Amended and Restated Order to Cease and Desist issued against Abraxas J. Discala a/k/a AJ Discala on February 17, 2017, be made PERMANENT with respect to violations of Sections 36b-16, 36b-6(a) and 36b-4(a) of the Act; | ||||
| 3. |
Omni View Capital LLC and Abraxas J. Discala a/k/a AJ Discala, jointly and severally, shall make restitution to Bryan and Kelly Hagen as follows:
| ||||
| 4. |
With respect to every investor other than Bryan and Kelly Hagen who purchased Crackpot Inc. and Scanbuy, Inc. from Omni View Capital LLC and Abraxas J. Discala a/k/a AJ Discala from August 15, 2013 through December 2014, the Amended and Restated Order to Make Restitution issued against Omni View Capital LLC and Abraxas J. Discala a/k/a AJ Discala on February 17, 2017, be made PERMANENT; | ||||
| 5. |
A FINE of One Hundred Fifty Thousand Dollars ($150,000) be imposed upon Omni View Capital LLC, to be remitted to the Department of Banking by wire transfer, cashier’s check, certified check or money order, made payable to “Treasurer, State of Connecticut”, no later than thirty (30) days after the date this Order is mailed; | ||||
| 6. |
A FINE of One Hundred Fifty Thousand Dollars ($150,000) be imposed upon Abraxas J. Discala a/k/a AJ Discala, to be remitted to the Department of Banking by wire transfer, cashier’s check, certified check or money order, made payable to “Treasurer, State of Connecticut”, no later than thirty (30) days after the date this Order is mailed; and | ||||
| 7. |
This Order shall become effective when mailed. |
| Dated at Hartford, Connecticut, | ____/s/____________ | |
| this 13th day of October 2017. | Jorge L. Perez | |
| Banking Commissioner |
This Order was sent by certified mail,
return receipt requested, to
Respondents' Attorney
and hand delivered to Paul A. Bobruff, Esq.
on October 17, 2017.
Andrew B. Bowman, Esq.
Law Offices of Andrew B. Bowman
1804 Post Road East
Westport, CT 06880
Certified Mail No. 70162070000104623153
ENDNOTES
| Parenthetical references relate to exhibits entered into the hearing record by the Hearing Officer (“HO Ex.”) or the Department (“DOB Ex.”). Transcript (“Tr.”) pages reflect where an exhibit was entered into the record or where relevant testimony was given. | ||
| Citations to the Act reflect the most recent statutory text applicable during the time period of underlying conduct. | ||
| Regulation D Rule 506 offerings are considered covered securities pursuant to Section 18(b)(4) of the Securities Act of 1933. | ||
| “[T]he purpose of . . . [the Act] supports the conclusion that a defendant should bear, as an affirmative defense, the burden of proving that no registration was required for the offer or sale of the securities at issue. ‘[T]he primary purpose behind . . . [the Act] was to institute comprehensive registration requirements and thereby improve surveillance of securities trading.’ Given this regulatory purpose, we conclude that, as a matter of policy, it would make little sense to construe the statute in a manner that would make it exceedingly difficult for the state to enforce the prohibition on the sale of unregistered securities in § 36b-16.” State v. Andresen, 256 Conn. 313, 329–30, 340 (2001) (internal citations omitted) | ||
| This provision as originally drafted, was modeled on Section 17(a) of the Federal Securities Act of 1933. “Section 36b-4 corresponds to § 101 of the Uniform Securities Act of 1956 (Uniform Securities Act).” Demiraj v. Uljaj, 137 Conn. App. 800, 806 (2012). “Section 101 of the Uniform Act was modeled on Rule 10b-5 of the Securities and Exchange Commission (SEC), which, in turn, was modeled on § 17(a) of the federal Securities Act of 1933. L. Loss, Commentary on the Uniform Securities Act (1976) official comment to § 101, p. 6.” Connecticut Nat. Bank v. Giacomi, 233 Conn. 304, 321 (1995). | ||
| In construing similar language in Section 17(a) of the Securities Act, the U.S. Supreme Court stated, “[t]he language of § 17(a) strongly suggests that Congress contemplated a scienter requirement under § 17(a)(1), but not under § 17(a)(2) or § 17(a)(3). The language of § 17(a)(1), which makes it unlawful ‘to employ any device, scheme, or artifice to defraud,’ plainly evinces an intent on the part of Congress to proscribe only knowing or intentional misconduct. Even if it be assumed that the term ‘defraud’ is ambiguous, given its varied meanings at law and in equity, the terms ‘device,’ ‘scheme,’ and ‘artifice’ all connote knowing or intentional practices”. Aaron v. Sec. & Exch. Comm’n, 446 U.S. 680, 695, 96 (1980). | ||
| “[B]ecause the Connecticut Uniform Securities Act, General Statutes §§ 36b-2 to 36b-33, is a substantial adoption of the major provisions of the 1956 Uniform Securities Act, we may look to interpretations of that act in interpreting analogous language in our own statutes.” Lehn v. Dailey, 77 Conn. App. 621, 631-632 (2003) (internal citations omitted). | ||
| For example, in construing duties of disclosure under Rule 10b-5, courts have considered “the relationship between the plaintiff and defendant, the parties’ relative access to the information to be disclosed, the benefit derived by the defendant from the purchase or sale, defendant’s awareness of plaintiff’s reliance on defendant in making its investment decisions, and defendant’s role in initiating the purchase or sale”. First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir. 1977) (internal citations omitted). |