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ORDER TO CEASE AND DESIST ORDER TO PROVIDE DISGORGEMENT AND NOTICE OF RIGHT TO HEARING DOCKET NO. CDF-16-8313-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. | On June 23, 2015, the Commissioner entered a Consent Order with respect to Peter David Hershman (“Respondent”) in connection with the Commissioner’s allegation that Hershman violated Section 36b-6(c) of the Act by transacting business as an unregistered investment adviser agent, which Consent Order is incorporated by reference herein. |
| 3. |
As a result of new evidence that the Securities and Business Investments Division (“Division”) of the Department of Banking obtained in April 2016, and pursuant to Section 36b-26(a) of the Act, the Commissioner, through the Division, has conducted an investigation into the activities of Respondent to determine if he has violated, is violating or is about to violate provisions of the Act or Regulations. |
| 4. | As a result of the investigation, the Commissioner has reason to believe that Respondent has violated certain provisions of the Act. |
| 5. |
As a result of the investigation, the Commissioner has reason to believe that a basis exists to issue a cease and desist order against Respondent 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 order that Respondent provide disgorgement as authorized by Section 36b-27(b) of the Act. |
| 7. | As a result of the investigation, the Commissioner has reason to believe that a basis exists to impose a fine upon Respondent as authorized by Section 36b-27(d) of the Act. |
II. RESPONDENT
| 8. |
Respondent is an individual who resides at 121 Limewood Avenue, Branford, Connecticut, and is an attorney licensed to practice law in Connecticut. Respondent has never been registered in any capacity under the Act. |
III. STATEMENT OF FACTS
9.
In April 2014, the Commissioner, through the Division, conducted an investigation pursuant to Section 36b-26(a) of the Act into the activities of Respondent to determine whether Respondent was violating or was about to violate any provision of the Act or any regulation or order under the Act (“First Investigation”).
10.
As a result of the First Investigation, the Commissioner had reason to believe the Respondent violated certain provisions of the Act. Specifically, the Division obtained evidence that:
(a)
Respondent had a business relationship with Essex Financial Services, Inc. (CRD No. 127549) (“EFS”) of 176 Westbrook Road, Essex, Connecticut 06426 and its founder, John William Rafal (CRD No. 809031) (“Rafal”). EFS is an investment adviser registered with the Securities and Exchange Commission since August 7, 2003 and a broker-dealer registered under the Act since September 22, 2003. Rafal was the founder, President and Chief Executive Officer of EFS from April 2003 to July 2013. Rafal was registered as a broker-dealer agent and investment adviser agent of EFS under the Act;
(b)
In 2010 Respondent referred a multimillion dollar investment advisory account (“Account”) to Rafal and EFS. After the Account was referred, Rafal agreed, on behalf of EFS, to pay Respondent an annual referral fee of $50,000 (“Referral Fees”), despite the fact that Respondent was not registered under the Act as an investment adviser agent of EFS. Although EFS made arrangements for Respondent to take the Series 65 exam, Respondent did not take the Series 65 examination and never became a registered investment adviser agent of EFS in Connecticut;
(c)
On July 25, 2012, Respondent, through his law firm (“Respondent’s Law Firm”), sent EFS Invoice #22066 for $12,500, which was paid by EFS. On November 14, 2012, Respondent’s Law Firm sent EFS a second invoice, Invoice #22290 for $12,690, which was paid by EFS. In total, EFS paid Respondent $25,190 in Referral Fees in connection with Invoice #22066 and Invoice #22290;
(d)
On March 21, 2013, Respondent’s Law Firm sent EFS Invoice #22612 for $24,570. This invoice was never paid by EFS; and
(e)
In April 2013, EFS informed Respondent that because Respondent never became registered as an investment adviser agent, Respondent would be required to return the Referral Fees of $25,190 (the combined payment for Invoice #22066 and Invoice #22290) to EFS. Respondent returned the Referral Fees to EFS by check dated April 17, 2013.
11.
During the First Investigation, on February 6, 2015, the Division issued subpoenas duces tecum to Respondent individually and to Respondent’s Law Firm (“February 6, 2015 Subpoenas”). Among other things, the February 6, 2015 Subpoenas requested “all documentation relating to [Respondent’s Law Firm] invoice #22066, #22290, and #22612.” (February 6, 2015 Subpoenas, Document Request #3).
12.
On June 26, 2015, without holding a hearing and without trial or adjudication of any issue of fact or law, and prior to the initiation of any formal proceeding, the Commissioner entered a Consent Order (No. CO-15-8222-S) (“Consent Order”) with respect to Respondent. In separate actions, the Commissioner also entered separate Consent Orders with respect to EFS and Rafal.
13.
At all times prior to the entry of the Consent Order, Respondent led the Commissioner to believe that Respondent was no longer in possession of any money or compensation relating to Respondent’s referral of the Account to EFS and Rafal.
14.
On April 26, 2016, the Division obtained new evidence that Respondent failed to disclose to the Division in response to the February 6, 2015 Subpoenas, at any time during the First Investigation or at any other time prior to or following the entry of the Consent Order. This new evidence was not specifically addressed in the Consent Order, and was obtained from the Securities and Exchange Commission.
15.
Specifically, the Division obtained evidence that in April 2013, Rafal took it upon himself to pay Respondent the Referral Fees out of his own pocket. On April 5, 2013, Rafal issued from a personal account he controlled a $24,570 check payable to Respondent’s Law Firm (“April 5, 2013 Check”). The April 5, 2013 Check was for the same amount as the amount on Invoice #22612, the invoice that Respondent had sent to EFS, but that EFS never paid. Respondent accepted the April 5, 2013 Check and deposited it into a bank account that Respondent controlled. The April 5, 2013 Check was not specifically addressed in the Consent Order.
16.
On April 17, 2013, Respondent issued a check for $25,190 to EFS (“April 17, 2013 Check”). The check was drawn on the account of Respondent’s Law Firm. This amount represented the total of Invoice #22066 ($12,500) and Invoice #22290 ($12,690).
17.
EFS acknowledged receipt of Respondent’s $25,190 payment in an April 19, 2013 letter to Respondent. That letter stated, in part, that “all solicitors of investment advisory business must be registered before they receive any fees for that business. Failure to rectify this mistake could result in regulatory consequences for EFS and for you as the law prohibits the payment of fees to an unregistered person and also prohibits the receipt of fees by an unregistered person.”
18.
However, on the very same day that Respondent issued the $25,190 referral fee refund to EFS, Rafal issued a $25,190 check to Respondent’s Law Firm. The check (“April 17, 2013 Check”) was drawn on a personal account Rafal controlled and was issued to reimburse Respondent for the $25,190 referral fee refund Respondent made to EFS. On April 18, 2013, Respondent deposited the April 17, 2013 Check into a bank account he controlled. The April 17, 2013 Check was not specifically addressed in the Consent Order.
19.
In light of this newly discovered evidence, the Commissioner, through the Division, conducted a second investigation pursuant to Section 36b-26(a) of the Act (“Second Investigation”) to determine whether Respondent’s failure to disclose to the Division his receipt of the April 5, 2013 Check and/or the April 17, 2013 Check was a violation of any provision of the Act or any regulation or order under the Act.
20.
As part of the Second Investigation, on April 28, 2016, the Division issued subpoenas duces tecum to Respondent (and Respondent’s Law Firm) (“April 28, 2016 Subpoenas”) requiring Respondent to appear for testimony and provide the Division with certain documents relating to the April 5, 2013 Check and the April 17, 2013 Check. The parties scheduled Respondent’s appearance for June 30, 2016.
21.
On June 29, 2016, the Division received notice from Respondent’s counsel that Respondent would not appear and would not provide documents to the Division in response to the April 28, 2016 Subpoena.
22.
At all times prior to the entry of the Consent Order, Respondent led the Division to believe that he returned all fees and compensation received in connection with his referral of the Account and that he was no longer in possession of any funds related to his referral of the Account.
23.
Although the February 6, 2015 Subpoenas requested all documents related to invoices #22066, #22290 and #22612, at no time prior to the entry of the Consent Order did Respondent disclose to the Division the existence of either the April 5, 2013 Check or the April 17, 2013 Check, or that Respondent received any money directly from Rafal in April 2013 in connection with the Account. This was an omission of material fact.
ORDER TO PROVIDE DISGORGEMENT AND ORDER IMPOSING FINE
a. Violation of Section 36b-23 of the Act by Respondent –
False or Misleading Statements or Omissions of Fact Made to the Division
| 24. | Paragraphs 1 through 23, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 25. |
Respondent made a statement to the Commissioner and in connection with such statement, omitted to state a material fact necessary to make the statement made, in the light of the circumstances under which it was made, not false or misleading, as more fully described in paragraphs 10 through 23, inclusive. Such conduct constitutes a violation of Section 36b-23 of the Act, which forms a basis for an order to cease and desist to be issued against Respondent pursuant to Section 36b-27(a) of the Act, an order to provide disgorgement pursuant to Section 36b-27(b) of the Act, and the imposition of a fine upon Respondent pursuant to Section 36b-27(d) of the Act. |
b. Dishonest or Unethical Practices in the Securities Business by Respondent
| 26. | Paragraphs 1 through 25, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 27. |
Respondent’s surreptitious acceptance of prohibited referral fees relating to the solicitation of an advisory account, as more fully described in paragraphs 10 and 14 through 23, inclusive, constitutes a dishonest or unethical practice in the securities business within the meaning of Section 36b-5(f) of the Act and grounds for administrative action under section 36b-27 of the Act. |
V. ORDER
NOTICE OF INTENT TO FINE AND NOTICE OF RIGHT TO HEARING
WHEREAS, as a result of the Second Investigation, the Commissioner finds that, with respect to the activity described herein, Respondent has committed at least one violation of Section 36b-23 of the Act and has engaged in a dishonest or unethical practice in the securities business;
WHEREAS, the Commissioner further finds that the issuance of an Order to Cease and Desist, Order to Provide Disgorgement and the imposition of a fine upon Respondent 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 Respondent that the Commissioner intends to impose a fine not to exceed the maximum fine of one hundred thousand dollars ($100,000) per violation upon Respondent;
WHEREAS, the Commissioner ORDERS that PETER DAVID HERSHMAN CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation, making statements to the Commissioner and in connection with such statements, omitting to state material facts necessary to make the statements made, in the light of the circumstances under which they were made, not false or misleading, and engaging in a dishonest or unethical practice in the securities business;
WHEREAS, the Commissioner ORDERS that PETER DAVID HERSHMAN PROVIDE DISGORGEMENT of any sums shown to have been obtained as a result of a dishonest or unethical practice in the securities business. Specifically, the Commissioner ORDERS that: Within forty-five (45) days from the date this Order to Provide Disgorgement becomes permanent, Respondent shall remit the sum of $49,760 to the Department by cashier’s check, certified check or money order, made payable to “Treasurer, State of Connecticut”. Such sum represents the amount Respondent received from Rafal as payment for the Referral Fees.
THE COMMISSIONER FURTHER ORDERS THAT, pursuant to Section 36b-27 of the Act, 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 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 Respondent 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 October 12, 2016, 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, 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 Respondent does not request a hearing within the time period prescribed or fails to appear at any such hearing, the allegations herein against Respondent will be deemed admitted. Accordingly, the Order to Cease and Desist and Order to Provide Disgorgement shall remain in effect and become permanent against Respondent and the Commissioner may order a fine upon the Respondent up to the maximum fine allowable under the Act.
| Dated at Hartford, Connecticut, | ____/s/_____________ | |
| this 19th day of August 2016. | Jorge L. Perez | |
| Banking Commissioner |
CERTIFICATION
I hereby certify that on this 19th day of August 2016, I caused to be mailed by certified mail, return receipt requested, the foregoing Order to Cease and Desist, Order to Provide Disgorgement, Notice of Intent to Fine and Notice of Right to Hearing to Peter David Hershman, c/o Carole R. Bernstein, Esq., Law Offices of Carole R. Bernstein, 41 Maple Avenue North, Westport, Connecticut 06880, certified mail no. 7012 3050 0000 6997 6193.
| ___/s/____ |
| W. C. Hall |
| Paralegal |