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IN THE MATTER OF: (Collectively "Respondents") * * * * * * * * * * * * * * * * * * |
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NOTICE OF INTENT TO FINE AND NOTICE OF RIGHT TO HEARING DOCKET NO. CF-17-8254-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 the authority to issue a cease and desist order against Respondents pursuant to Section 36b-27(a) of the Act. |
| 5. |
As a result of the Investigation, the Commissioner has the authority to impose a fine upon Respondents pursuant to Section 36b-27(d) of the Act. |
II. RESPONDENTS
| 6. |
Signal Lake Side Fund, L.P. (“SL Side Fund”) is an investment fund and Delaware limited partnership formed on January 9, 2004. SL Side Fund’s principal place of business and address last known to the Commissioner is 606 Post Road East, Westport, Connecticut 06880. |
| 7. | Signal Lake Side Fund II, L.P. (“SL Side Fund II”) is an investment fund and Delaware limited partnership formed on November 20, 2007. SL Side Fund II’s principal place of business and address last known to the Commissioner is 606 Post Road East, Westport, Connecticut 06880. |
| 8. | Signal Lake Side Fund IIA, L.P. (“SL Side Fund IIA”) is an investment fund and Delaware limited partnership formed on July 6, 2009. Signal Lake Side Fund IIA’s principal place of business and address last known to the Commissioner is 606 Post Road East, Westport, Connecticut 06880. |
| 9. | Signal Lake Management, LLC (“SL Management”) is a Delaware limited liability company formed on November 2, 1998. SL Management’s principal place of business and address last known to the Commissioner is 606 Post Road East, Westport, Connecticut 06880. At all times pertinent hereto, SL Management has been the investment manager of SL Side Fund, SL Side Fund II and SL Side Fund IIA (hereinafter collectively referred to as “the Funds”) and has rendered investment advisory services to the Funds. |
| 10. | Signal Lake General Partner LLC (“SL General Partner”) is a Delaware limited liability company formed on August 21, 2013. SL General Partner’s principal place of business and address last known to the Commissioner is 606 Post Road East, Westport, Connecticut 06880. As discussed further below, on October 28, 2016, SL General Partner filed as an exempt reporting adviser on the IARD system with the SEC and the Division. |
| 11. | Barton W. Stuck (“Stuck”) is an individual whose address last known to the Commissioner is 289 Main Avenue, Apt. 36, Norwalk, Connecticut 06851-6155. Stuck is one of two managing members of SL Management and one of two managing directors of SL General Partner and the majority owner of SL General Partner. Stuck is not and has not been registered in any capacity under the Act. |
III. STATEMENT OF FACTS
12.
Stuck formed SL Management to serve as the investment manager of each of the Funds with the intention that the Funds would invest in software and technologies companies. On January 6, 2003, Stuck also formed Signal Lake SF, LLC (“Signal Lake SF”) (a non-respondent), a Delaware limited liability company to serve as the general partner of each of the Funds. Stuck is the managing member of Signal Lake SF, and as such controlled and was essentially the alter ego of the Funds and SL Management. Stuck exercised complete control and decision making for the Funds, SL Management and Signal Lake SF.
13.
Stuck formed SL General Partner to serve as the investment manager of Signal Lake Operations LLC (a non-respondent). As one of two managing directors of SL General Partner and its majority owner, Stuck controlled and was essentially the alter ego of SL General Partner.
Unregistered Securities Activities
14.
From approximately 2008 to approximately 2010, Stuck, on behalf of SL Management, offered and/or sold shares of SL Side Fund (“SL Side Shares”) from Connecticut to investors in Connecticut and other states. The SL Side Shares were never registered in Connecticut under Section 36b-16 of the Act nor were they the subject of a filed exemption claim or claim of covered security status.
15.
From approximately 2007 to approximately 2014, Stuck, on behalf of SL Management, offered and/or sold shares of SL Side Fund II (“SL Side II Shares”) from Connecticut to investors in Connecticut and other states. The SL Side II Shares were never registered in Connecticut under Section 36b-16 of the Act nor were they the subject of a filed exemption claim or claim of covered security status.
16.
From approximately 2011 to approximately 2014, Stuck, on behalf of SL Management, offered and/or sold shares of SL Side Fund IIA (“SL Side IIA Shares”) from Connecticut to investors in Connecticut and other states. The SL Side IIA Shares were never registered in Connecticut under Section 36b-16 of the Act nor were they the subject of a filed exemption claim or claim of covered security status.
17.
From approximately 2008 to approximately 2014, SL Management transacted business as an investment adviser by giving securities-related investment advice, through Stuck, to the Funds for compensation without being registered as an investment adviser under the Act.
18.
From approximately 2008 to approximately 2014, SL Management, while transacting business as an investment adviser, engaged Stuck as an unregistered investment adviser agent.
19.
From approximately 2008 to approximately 2014, Stuck transacted business as an investment adviser agent of SL Management by providing investment advice on securities to the Funds for compensation without being registered as an investment adviser agent under the Act.
Fraud in Connection with the Offer and Sale of Any Security
20.
Investor A is an individual based in Westchester, New York. At various times in 2008 and 2009, Stuck, individually and on behalf of SL Management, offered and sold from Connecticut SL Side Fund II partnership interests to Investor A. Specifically, on September 2, 2008 Investor A purchased $150,000 of SL Side Fund II partnership interests; on September 16, 2008 Investor A purchased $50,000 of SL Side Fund II partnership interests; and on January 14, 2009 Investor A purchased $50,000 of SL Side Fund II partnership interests.
21.
In August 2009, Stuck solicited Investor A to invest additional money in SL Side Fund II. Investor A asked Stuck whether and to what extent other investors were investing in SL Side Fund II. In response, Stuck, individually and on behalf of SL Management made multiple representations to Investor A that an investor was making a multi-million dollar investment in SL Side Fund II. Below is a sample of several e-mail exchanges between Stuck and Investor A:
(a)
In an August 31, 2009 e-mail to Stuck, Investor A told Stuck that “[s]ince the funding is the most important point for me, my understanding is that the balance of SLSFII is being filled out and that another approx. 120 mil [sic] is coming.” In an e-mail response on August 31, 2009, Stuck represented to Investor A that “we are about to draw down $50M of commitment THIS WEEK [.] An additional $25M minimum will be drawn down by end of the year and the rest of next year.”
(b)
In a September 11, 2009 e-mail to Investor A, Stuck represented that “Wire hit at 9:42AM to Signal Lake bank account for $11M.”
(c)
In an October 6, 2009 e-mail to Stuck, Investor A asked Stuck if a certain investor put $39 million into the SL Side Fund II, and Stuck responded that “It is now increasing to $89M and an initial drawn [sic] down has occurred.”
22.
Based on the Investigation, the above representations by Stuck were false at the time because SL Side Fund II did not receive any of the above referenced allocations of money. Stuck made these representations to induce Investor A to purchase additional SL Side Fund II partnership interests despite Stuck knowing that SL Side Fund II had not received these monies.
23.
Investor A relied upon the above representations and made a fourth purchase of SL Side Fund II partnership interests on September 2, 2009 for $250,000.
Stuck and SL General Partner filed a Form ADV with Inaccurate and Misleading Information
24.
On October 28, 2016, Stuck filed certain sections of Part IA of Form ADV for SL General Partner on the IARD system. SL General Partner indicated that SL General Partner was relying on the “private fund exemption” to the investment adviser registration requirement. The “private fund exemption” was created by the Dodd Frank Wall Street Reform and Consumer Protection Act in 2011 and exempts from investment adviser registration those entities that act solely as an adviser to a private fund and have assets under management of less than $150 million. Such entities are required by 17 Code of Federal Regulations §275.204-4 and the Commissioner’s 2011 “Order Governing Certain Investment Advisers Exempt from Federal Registration Following Passage of Dodd-Frank” to file certain portions of the Form ADV.
25.
SL General Partner’s October 28, 2016 Form ADV filing indicated that it was adviser to a private fund, Signal Lake Operations LLC (a non-respondent), and, among other things, made the following representations:
(a)
The current gross asset value of Signal Lake Operations LLC is $145,000,000;
(b)
SL General Partner’s books and records are located with an accounting firm in Stamford, Connecticut (“Accounting Firm”); and
(c)
Signal Lake Operations LLC’s financial statements were subject to an annual audit by the Accounting Firm.
These three representations were false at the time of the filing. The gross asset value of Signal Lake Operations LLC was not $145,000,000 or anywhere close to that amount. Specifically, in response to the Division’s March 30, 2017 request for Signal Lake Operations LLC’s financial statements, Stuck did not provide any documents but instead in a letter to the Division on May 8, 2017 characterized the $145,000,000 listed on the Form ADV as “anticipated funds” that he “expect[s] to receive . . . in the next seven to ten days.” Therefore, at the time of the filing, Signal Lake Operations LLC did not have a gross asset value of $145,000,000. Also, SL General Partner’s book and records were neither located at the Accounting Firm nor was the Accounting Firm engaged by SL General Partner to perform an annual audit of Signal Lake Operations LLC’s financial statements.
26.
On March 17, 2017, SL General Partner filed an Annual Amendment to its Form ADV repeating the three representations stated above, all of which were false (for the same reasons outlined above) at the time of the filing on March 17, 2017.
27.
Stuck executed the October 28, 2016 and March 17, 2017 Form ADV filings, and therefore represented to the Commissioner that the information and statements made in such filings were true and correct.
ORDER IMPOSING FINE
a. Violation of Section 36b-16 of the Act by Stuck, SL Side Fund, SL Side Fund II and SL Side Fund IIA –
Offer and/or Sale of Unregistered Securities
| 28. | Paragraphs 1 through 27, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 29. |
Stuck, SL Side Fund, SL Side Fund II and SL Side Fund IIA offered and sold securities from Connecticut to at least one investor, which securities were not registered in Connecticut under the Act nor the subject of a filed exemption claim or claim of covered security status, as more fully described in paragraphs 6 through 8, inclusive, 11, and 14 through 16, inclusive. 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 Stuck, SL Side Fund, SL Side Fund II and SL Side Fund IIA under Section 36b-27(a) of the Act, and for the imposition of a fine upon Stuck, SL Side Fund, SL Side Fund II and SL Side Fund IIA under Section 36b-27(d) of the Act. |
b. Violation of Section 36b-6(c)(1) of the Act by SL Management –
Unregistered Investment Adviser
| 30. | Paragraphs 1 through 29, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 31. |
SL Management transacted business as an investment adviser in Connecticut absent registration, as more fully described in paragraphs 9, and 12 through 19, inclusive. Such conduct constitutes a violation of Section 36b-6(c)(1) of the Act, which forms a basis for an order to cease and desist to be issued against SL Management under Section 36b-27(a) of the Act, and for the imposition of a fine upon SL Management under Section 36b-27(d) of the Act. |
c. Violation of Section 36b-6(c)(2) of the Act by Stuck –
Unregistered Investment Adviser Agent
| 32. | Paragraphs 1 through 31, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 33. |
Stuck transacted business as an investment adviser agent of SL Management in Connecticut absent registration, as more fully described in paragraphs 11 through 19, inclusive. Such conduct constitutes a violation of Section 36b-6(c)(2) of the Act, which forms a basis for an order to cease and desist to be issued against Stuck under Section 36b-27(a) of the Act, and for the imposition of a fine upon Stuck under Section 36b-27(d) of the Act. |
d. Violation of Section 36b-6(c)(3) of the Act by SL Management –
Engaging an Unregistered Investment Adviser Agent
| 34. | Paragraphs 1 through 33, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 35. |
SL Management engaged an unregistered investment adviser agent, as described more fully in paragraphs 12 through 19, inclusive. Such conduct constitutes a violation of Section 36b-6(c)(3) of the Act, which forms a basis for an order to cease and desist to be issued against SL Management under Section 36b-27(a) of the Act, and the imposition of a fine upon SL Management pursuant to Section 36b-27(d) of the Act. |
e. Violation of Section 36b-4(a) of the Act by Stuck and Signal Lake Management –
Fraud in Connection with the Offer and Sale of any Security
| 36. | Paragraphs 1 through 35, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 37. |
The conduct of Stuck and SL Management, as more fully described in paragraphs 20 through 23, 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 or would operate 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 Stuck and SL Management under Section 36b-27(a) of the Act, and for the imposition of a fine upon Stuck and SL Management under Section 36b-27(d) of the Act. |
f. Violation of Section 36b-23 of the Act by SL General Partner and Stuck –
Material Misleading Statement Made to the Division
| 38. | Paragraphs 1 through 37, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 39. |
Stuck, on behalf of SL General Partner, filed with the Commissioner a Form ADV and an Annual Amendment to Form ADV containing certain statements, as more fully described in paragraphs 24 through 27, inclusive. Such statements contained in the Form ADV and the Annual Amendment to Form ADV, were, at the time and in the light of the circumstances under which they were made, false or misleading in a material respect and constitute a violation of Section 36b-23, which forms a basis for an order to cease and desist to be issued against SL General Partner and Stuck pursuant to Section 36b-27(a) of the Act, and the imposition of a fine upon SL General Partner and Stuck pursuant to Section 36b-27(d) of the Act. |
V. ORDER TO CEASE AND DESIST, NOTICE OF INTENT TO FINE AND
NOTICE OF RIGHT TO HEARING
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, BARTON W. STUCK has committed at least one violation of Section 36b-16 of the Act, at least one violation of 36b-6(c)(2) of the Act, at least one violation of Section 36b-4(a) of the Act, and at least one violation of Section 36b-23 of the Act;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, SIGNAL LAKE MANAGEMENT LLC has committed at least one violation of Section 36b-6(c)(1) of the Act, at least one violation of Section 36b-6(c)(3) of the Act, and at least one violation of Section 36b-4(a) of the Act;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, SIGNAL LAKE SIDE FUND, L.P. has committed at least one violation of Section 36b-16 of the Act;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, SIGNAL LAKE SIDE FUND II, L.P. has committed at least one violation of Section 36b-16 of the Act;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, SIGNAL LAKE SIDE FUND IIA, L.P. committed at least one violation of Section 36b-16 of the Act;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, SIGNAL LAKE GENERAL PARTNER LLC has committed at least one violation of Section 36b-23 of the Act;
WHEREAS, notice is hereby given to each Respondent that the Commissioner intends to impose a maximum fine not to exceed one hundred thousand dollars ($100,000) per violation upon each Respondent;
WHEREAS, the Commissioner further finds that the issuance of an Order to Cease and Desist 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 BARTON W. STUCK CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation: (1) offering and selling unregistered securities in or from Connecticut; (2) transacting business as an investment adviser agent in Connecticut absent registration under the Act; (3) 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; and (4) filing a document with the Commissioner that contains statements that are, at the time and in light of the circumstances under which they are made, false or misleading in any material respect;
WHEREAS, the Commissioner ORDERS that SIGNAL LAKE MANAGEMENT LLC CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation: (1) transacting business as an investment adviser in Connecticut absent registration; (2) engaging an unregistered investment adviser agent; and (3) 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;
WHEREAS, the Commissioner ORDERS that SIGNAL LAKE SIDE FUND, L.P. CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation, offering and selling unregistered securities in or from Connecticut;
WHEREAS, the Commissioner ORDERS that SIGNAL LAKE SIDE FUND II, L.P. CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation, offering and selling unregistered securities in or from Connecticut;
WHEREAS, the Commissioner ORDERS that SIGNAL LAKE SIDE FUND IIA, L.P. CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation, offering and selling unregistered securities in or from Connecticut;
WHEREAS, the Commissioner ORDERS that SIGNAL LAKE GENERAL PARTNER LLC CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation, filing a document with the commissioner that contains statements that are, at the time and in light of the circumstances under which they are made, false or misleading in any material respect;
THE COMMISSIONER FURTHER ORDERS THAT, pursuant to 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. To request a hearing, each Respondent must 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 Form as “pro se”. If a hearing is requested, the hearing will be held on September 19, 2017, at 10 a.m., at the Department of Banking, 260 Constitution Plaza, Hartford, Connecticut.
The hearing will be held in accordance with the provisions of Chapter 54 of the General Statutes of Connecticut. At such hearing, Respondents 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 shall remain in effect and become permanent against any such Respondent and the Commissioner may order that the maximum fine be imposed upon any such Respondent.
| Dated at Hartford, Connecticut, | ____/s/_____________ | |
| this 27th day of June 2017. | Jorge L. Perez | |
| Banking Commissioner |
CERTIFICATION
I hereby certify that on this 27th day of June 2017, I caused to be mailed by certified mail, return receipt requested, the foregoing Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing to: Barton W. Stuck, 289 Main Avenue, Apt. 36, Norwalk, Connecticut 06851-6155, certified mail no. 7012 3050 0000 6997 6483; Signal Lake Management, LLC at 606 Post Road East, Westport, Connecticut 06880, certified mail no. 7012 3050 0000 6997 6490, and c/o Barton W. Stuck, 289 Main Avenue, Apt. 36, Norwalk, Connecticut 06851-6155, certified mail no. 7012 3050 0000 6997 6506; Signal Lake Side Fund, L.P., at 606 Post Road East, Westport, Connecticut 06880, certified mail no. 7012 3050 0000 6997 6513, and c/o Barton W. Stuck, 289 Main Avenue, Apt. 36, Norwalk, Connecticut 06851-6155, certified mail no. 7012 3050 0000 6997 6520; Signal Lake Side Fund II, L.P., at 606 Post Road East, Westport, Connecticut 06880, certified mail no. 7012 3050 0000 6997 6537, and c/o Barton W. Stuck, 289 Main Avenue, Apt. 36, Norwalk, Connecticut 06851-6155, certified mail no. 7012 3050 0000 6997 6544; Signal Lake Side Fund IIA, L.P., at 606 Post Road East, Westport, Connecticut 06880, certified mail no. 7012 3050 0000 6997 6551, and c/o Barton W. Stuck, 289 Main Avenue, Apt. 36, Norwalk, Connecticut 06851-6155, certified mail no. 7012 3050 0000 6997 6568; Signal Lake General Partner LLC at 606 Post Road East, Westport, Connecticut 06880, certified mail no. 7012 3050 0000 6997 6575, and c/o Barton W. Stuck, 289 Main Avenue, Apt. 36, Norwalk, Connecticut 06851-6155, certified mail no. 7012 3050 0000 6997 6582.
| __/s/____ |
| W. C. Hall |
| Paralegal |