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IN THE MATTER OF: THE MAGIC PLUNGER, LLC (Collectively "Respondents") * * * * * * * * * * * * * * * * * |
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ORDER TO CEASE AND DESIST ORDER TO MAKE RESTITUTION AND NOTICE OF RIGHT TO HEARING DOCKET NO. CRF-11-7667-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 the regulations promulgated thereunder (Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies) (“Regulations”). |
| 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 had 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. |
| 4. |
As a result of the Investigation, the Commissioner has the authority to issue a cease and desist order against Respondents pursuant to Section 36b-27(a) of the Act.
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| 5. |
As a result of the Investigation, the Commissioner has the authority to order that Respondents make restitution pursuant to Section 36b-27(b) of the Act. |
| 6. | As a result of the Investigation, the Commissioner has the authority to impose a fine against Respondents pursuant to Section 36b-27(d) of the Act. |
II. RESPONDENTS
| 7. | The Magic Plunger, LLC (“Magic Plunger”) is a limited liability company with its principal place of business at 12 Beaverbrook Road, West Simsbury, Connecticut 06092. The purported business of Magic Plunger is or was the manufacturing and marketing of toilet plungers. |
| 8. | Jerold L. John (“John”) is an individual whose address last known to the Commissioner is 12 Beaverbrook Road, West Simsbury, Connecticut 06092. At all times relevant hereto, John was the managing member and executive vice president of Magic Plunger. |
| 9. | Dale N. Thorp (“Thorp”) is an individual whose address last known to the Commissioner is 12 Morgan Place, Unionville, Connecticut 06085. At all times relevant hereto, Thorp was the chief executive officer of Magic Plunger. |
III. STATEMENT OF FACTS
| 10. | From at least December 2005 through March 2008, Magic Plunger issued securities in the form of senior subordinate[d] debentures, promissory notes and certificates of “limited membership interest”. |
| 11. | From at least December 2005 through June 2007, Respondents, individually or in concert, offered and sold securities consisting of senior subordinated debentures (“Debentures”) issued by Magic Plunger to at least 77 investors, in an amount of approximately two million dollars ($2,000,000). |
| 12. | In connection with the offer and sale of Debentures, Respondents provided investors with a document for signature entitled “The Magic Plunger LLC Senior Subordinated Convertible Debenture” (“Debenture Agreement”). |
| 13. | The Debenture Agreement provided that investors would earn interest on the unpaid principal amount of the Debentures from the date of signing the Debenture Agreement until the unpaid principal was paid in full with a right of conversion into fully paid non-assessable shares of common stock of Magic Plunger. |
| 14. |
From January 2008 through March 2008, Respondents issued new securities, in the form of promissory notes and certificates of “limited membership interest” in Magic Plunger. These promissory notes and certificates of “limited membership interest” were issued, offered and sold in lieu of common stock to investors exercising their conversion privilege pursuant to the Debenture Agreement. |
| 15. | The Debentures, promissory notes and certificates of “limited membership interest” offered and sold by Respondents were never registered in Connecticut under Section 36b-16 of the Act, nor were they exempt from registration under Section 36b-21 of the Act, nor were they the subject of a filed exemption claim or claim of covered security status. |
| 16. | Respondents failed to make interest payments to all investors as represented and failed to disclose to investors that Respondents lacked sufficient funds to make interest payments as stated in the Debenture Agreement. |
| 17. | Respondents omitted to disclose to investors that an oral agreement existed between Magic Plunger, John and Thorp which provided that John and Thorp would receive four hundred thousand dollars ($400,000) from investor funds for coming up with the Magic Plunger product idea and its preliminary design. |
| 18. | In connection with the offer and sale of the Debentures, promissory notes and certificates of “limited membership interest”, Respondents failed to disclose, inter alia, the risk of loss of the entire investment; any risk factors related to the investment; any financial or background information on directors, officers and/or principals of Magic Plunger; the remuneration to be paid and/or paid to directors, officers and/or principals of Magic Plunger; payments to be made and/or made to affiliated companies; the estimated cash proceeds of the Magic Plunger securities offering; the registration status of the securities; the purposes for which the cash proceeds of the offering would be used by Magic Plunger; Magic Plunger’s financial statements; information substantiating how the represented rates of return could be achieved; Respondents’ ability to meet their obligations under the Debentures and promissory notes; and material litigation involving any directors, officers and/or principals of Magic Plunger. Each of these omitted items was material to investors and prospective investors of the Debentures, promissory notes and certificates of “limited membership interest”. |
| 19. | Magic Plunger investor funds totaling approximately one million three hundred seventy-eight thousand five hundred dollars ($1,378,500) were deposited into a Wells Fargo bank account (“Wells Fargo Account”). |
| 20. | Contrary to Respondents’ representations to investors, investor funds deposited into the Wells Fargo Account were primarily used for purposes other than the manufacturing and marketing of toilet plungers or making interest payments to investors, and by June of 2006, the investor funds in the Wells Fargo Account were primarily dissipated. |
| 21. | In August 2006, Respondents opened a bank account at Bank of America (“BOA Account”). Respondents solicited funds for the purchase of Debentures from new investors and placed funds into the BOA Account to, inter alia, meet certain deadlines for making prior investors’ interest payments. |
| 22. | John, Thorp and principals of Magic Plunger who were located in Texas individually or in concert, misappropriated a significant amount of money from investor funds that were deposited into the Wells Fargo Account and/or the BOA Account. |
IV. STATUTORY BASIS FOR ORDER TO CEASE AND DESIST,
ORDER TO MAKE RESTITUTION AND ORDER IMPOSING FINE
a. Violation of Section 36b-16 of the Act –
Offer and Sale of Unregistered Securities
| 23. | Paragraphs 1 through 22, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 24. |
Respondents offered and sold unregistered securities in or from Connecticut to at least one investor, as more fully described in paragraphs 7 through 14, which securities were not registered in Connecticut under the Act, as more fully described in paragraph 15. 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 and for the imposition of a fine against Respondents under Section 36b-27(d) of the Act. |
b. Violation of Section 36b-4(a) of the Act –
Fraud in Connection with the Offer and Sale of any Security
| 25. | Paragraphs 1 through 24, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 26. | The conduct of Respondents, as more fully described in paragraphs 7 through 22, inclusive, 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. Such conduct constitutes a violation of Section 36b-4(a) 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, and for the imposition of a fine against Respondents under Section 36b-27(d) of the Act. |
V. ORDER TO CEASE AND DESIST, ORDER TO MAKE RESTITUTION,
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, Respondents have committed at least one violation of Section 36b-16 of the Act, and at least one violation of Section 36b-4(a) of the Act;
WHEREAS, the Commissioner further finds that the issuance of an Order to Cease and Desist, Order to Make Restitution, and the imposition of a fine against 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, notice is hereby given to Respondents that the Commissioner intends to impose a maximum fine not to exceed one hundred thousand dollars ($100,000) per violation against Respondents;
WHEREAS, the Commissioner ORDERS that Respondents CEASE AND DESIST from directly or indirectly violating the provisions of the Act and Regulations, including without limitation, (1) offering and selling unregistered securities, and (2) in connection with the offer, sale or purchase of any security, directly or indirectly employing any 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;
WHEREAS, the Commissioner ORDERS that Respondents MAKE RESTITUTION of any sums obtained as a result of Respondents’ violations of Sections 36b-4(a) of the Act, 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 covers the period from December 1, 2005 to the date this Order to Make Restitution becomes permanent and which contains (a) the name and address of each investor, (b) the amount Respondents collected from each investor, (c) the amount of any refunds of principal or purported interest payments Respondents 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 funds collected from the investor plus interest, less funds returned in the form of purported refunds of principal and purported interest payments made to the investor, with respect to all transactions effected from December 1, 2005 to the date this Order to Make Restitution becomes permanent. 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 to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing (collectively “Order”), that Respondents have reimbursed each investor the amount of funds collected from investors plus interest, less funds returned in the form of purported refunds of principal and purported interest payments, with respect to all transactions effected from December 1, 2005 to the date this Order to Make Restitution becomes permanent. |
THE COMMISSIONER FURTHER ORDERS THAT, pursuant Section 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. The enclosed Appearance and Request for Hearing Form must be completed and mailed 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 Form as “pro se”. Once a written request for a hearing is received, the Commissioner may issue a notification of hearing and designation of hearing officer that acknowledges receipt of a request for a hearing, designates a presiding officer and sets the date of the hearing in accordance with Section 4-177 of the General Statutes of Connecticut and Section 36a-1-21 of the Regulations of Connecticut State Agencies. If a hearing is requested, the hearing will be held on September 13, 2011 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, 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.
This Order to Cease and Desist shall remain in effect and become permanent against any Respondent that fails to request a hearing within the prescribed time period or fails to appear at any such hearing.
This Order to Make Restitution shall remain in effect and become permanent against any Respondent that fails to request a hearing within the prescribed time period or fails to appear at any such hearing.
The Commissioner may order that the maximum fine be imposed upon any Respondent that fails to request a hearing within the prescribed time period or fails to appear at any such hearing.
| Dated at Hartford, Connecticut, | ________/s/________ | |
| this 14th day of July 2011. | Howard F. Pitkin | |
| Banking Commissioner |
CERTIFICATION
I hereby certify that on this 15th day of July 2011, the foregoing Order to Cease and Desist, Order to Make Restitution, Notice of Intent to Fine and Notice of Right to Hearing was sent by certified mail, return receipt requested, to The Magic Plunger, LLC, 12 Beaverbrook Road, West Simsbury, Connecticut 06092, certified mail no. 7010 1870 0001 3619 4721; Jerold L. John, 12 Beaverbrook Road, West Simsbury, Connecticut 06092, certified mail no. 7010 1870 0001 3619 4738; and Dale N. Thorp, 12 Morgan Place, Unionville, Connecticut 06085, certified mail no. 7010 1870 0001 3619 4745.
_______/s/_________
Paul A. Bobruff
Prosecuting Attorney