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IN THE MATTER OF: WADSWORTH INVESTMENT CO., INC. (Collectively "Respondents")
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ORDER TO CEASE AND DESIST NOTICE OF INTENT TO REVOKE AND NOTICE OF RIGHT TO HEARING DOCKET NO. CFNR-10-7779-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, as amended by Public Act 10-141, 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. |
| 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 2010 Supplement to the General Statutes (“2010 Supplement”), as amended by Public Act 10-141. |
| 5. |
As a result of the Investigation, the Commissioner brings this administrative action pursuant to Section 36b-15(a) of the 2010 Supplement, as amended by Public Act 10-141, and Section 4-182(c) of the General Statutes of Connecticut to revoke the registration of WIC as a broker-dealer in Connecticut; revoke the registrations of Wadsworth as a broker-dealer agent and as an investment adviser agent in Connecticut; and revoke the registration of Wadsworth, Jr. as a broker-dealer agent in Connecticut.
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| 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 2010 Supplement, as amended by Public Act 10-141. |
II. RESPONDENTS
| 7. | WIC and PTS are affiliated entities located at 879 Church Street, Route 68, Wallingford, Connecticut 06492. WIC has been registered as a broker-dealer under the Act since at least January 1, 1986. PTS has been registered as an investment adviser under the Investment Advisers Act of 1940 since October 12, 1990, and has made an investment advisory notice filing under Section 36b-6(e) of the Act. |
| 8. | Wadsworth is a control person of WIC, as well as its President and Chief Compliance Officer. Wadsworth has been registered as a broker-dealer agent of WIC under the Act since at least January 1, 1986. Wadsworth is also a control person of PTS as well as its Chief Compliance Officer and general partner. Wadsworth has been registered as an investment adviser agent of PTS under the Act since March 16, 2001. Wadsworth has also been registered as an investment adviser agent of ITS Asset Management, L.P. (CRD No. 106977), since January 2, 1996. |
| 9. |
Wadsworth, Jr. has been registered as a broker-dealer agent of WIC under the Act since November 11, 1996. Wadsworth, Jr. is also the national sales manager for PTS. |
III. STATEMENT OF FACTS
| 10. | From at least June 29, 2006 to the present, WIC, PTS and Wadsworth, from Connecticut, offered shares in a purported private offering investment opportunity named DECA ONE (“DO Shares”) through letters and private communications with potential investors. The DO Shares were never registered in Connecticut, nor were they covered securities, nor were they exempt from registration. |
| 11. | During two in-person client seminars (“Seminars”) and by letters dated November 2006 and March 2007 (“Letters”), WIC, PTS and Wadsworth made certain representations and recommendations to customers and clients of WIC and PTS. WIC, PTS and Wadsworth, inter alia, recommended to all of their clients that they transfer all of their holdings out of the Oppenheimer Fund Family (“Oppenheimer Funds”) into the AIM Fund Family (“AIM Funds”). In both the Seminars and the Letters, WIC, PTS and Wadsworth represented to their investors that: (1) the Oppenheimer Funds were the only fund family that will “not trade an account on the day PTS submits a trade”, which forces PTS to wait a full day to implement their clients’ instructions and results in delays which cost their clients tens of thousands of dollars; (2) PTS had a major buy in the High Yield Bond Category but that the Oppenheimer Funds refused to implement that buy instruction; (3) all other investors had signed the documents to exit the Oppenheimer Funds and enter the AIM Funds; and (4) Wadsworth and his family would be making the switch out of the Oppenheimer Funds into the AIM Funds. |
| 12. | The Seminars and Letters, however, failed to disclose, inter alia, that: 1) the Oppenheimer Funds were in the process of terminating the agreements of both WIC and PTS to sell the Oppenheimer Funds due to troubling business practices at both WIC and PTS; 2) the Oppenheimer Fund’s method of implementing order instructions had been in existence since at least 2002, and had not changed; 3) the Oppenheimer Fund’s method of implementing order instructions saved PTS’ clients money in many circumstances; 4) the Oppenheimer Fund did not refuse to execute the buy instruction into the High Yield Bond Category; 5) not every investor had signed the documents to exit the Oppenheimer Funds and enter the AIM Funds; 6) investors would be paying substantial fees to make the switch out of the Oppenheimer Funds into the AIM Funds; and 7) Wadsworth and his family would not be paying any fees to make the switch into the AIM Funds. |
| 13. | Pursuant to the Investigation, the Division requested certain books and records in correspondence with the Respondents. |
| 14. | During the Investigation, the Division discovered that in 2007 Dale Aldieri (“Aldieri”) (CRD No. 1230340), on behalf of WIC, routinely approved new account forms, issued compliance directives and memoranda to WIC’s registered personnel, and held himself out as WIC’s Chief Compliance Officer. At no point was Aldieri registered as a General Securities Principal with FINRA, nor had WIC provided evidence that Aldieri has taken and successfully passed a current examination as principal given by the United States Securities and Exchange Commission or by a securities self-regulatory organization. |
| 15. | During the Investigation, the Division reviewed WIC’s Written Supervisory Procedures (“WSP”). The WSP failed to address numerous areas of the firm’s securities business by failing to provide procedures for, inter alia, E-mail review and retention, and certain internal communications. |
| 16. | During the Investigation, the Division discovered that WIC maintained in customer files certain forms and documents, including securities liquidation forms and new account applications, which were blank except for customer’s signatures. |
| 17. | During the Investigation, the Division discovered that WIC failed to accurately keep and maintain, inter alia, certain business related E-mails. These business related E-mails are books and records that are required to be kept and preserved pursuant to Section 36b-14(a)(2) of the Act. |
| 18. |
During the Investigation, the Division obtained taped recordings of telephone calls made by representatives of both WIC and PTS to a large complex of mutual funds (“Mutual Fund”) which held assets of certain clients of both WIC and PTS. During these calls, the employees of WIC and PTS, as well as Wadsworth, Jr., utilized false names and held themselves out to the Mutual Fund as employees of other registered firms in order to gain access to certain account information which otherwise would have been denied to them. |
| 19. | On May 22, 2008, pursuant to the Investigation, the Division interviewed Wadsworth, Jr. on the record regarding certain aspects of the Investigation, including his use of false names to fraudulently obtain information from the Mutual Fund. In response, Wadsworth, Jr. told the Division that he had never used certain false names himself to obtain information from the Mutual Fund, and that he had never directed any employee to use false names to obtain information from the Mutual Fund. In fact, Wadsworth, Jr. had both used false names with the Mutual Fund himself, and directed others to use false names with the Mutual Fund. |
| 20. | On January 5, 2009, March 16, 2009 and May 27, 2009, the Commissioner gave WIC, Wadsworth and Wadsworth, Jr. written notice pursuant to Section 4-182(c) of the General Statutes of Connecticut that they each may have engaged in conduct which, if proven, would constitute a basis for the suspension or revocation of their registrations in Connecticut, and gave them the opportunity to show compliance with all lawful requirements for the retention of their registrations in Connecticut. |
IV. STATUTORY AND REGULATORY BASIS FOR ORDER TO CEASE AND DESIST,
REVOCATION OF REGISTRATION AS BROKER-DEALER,
BROKER-DEALER AGENT AND INVESTMENT ADVISER AGENT
AND ORDER IMPOSING FINE
a. Violation of Section 36b-23 of the Act by Wadsworth, Jr. -
Making an Oral Statement in an Investigation that is
False or Misleading in a Material Respect
| 21. | Paragraphs 1 through 20, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 22. |
Wadsworth, Jr.’s statements to the Division, as more fully described in paragraph 19, were, at the time and in light of the circumstances under which they were made, false or misleading in a material respect, which constitutes a violation of Section 36b-23 of the Act, as amended by Public Act 10-141. Such violation forms a basis for an order to cease and desist to be issued against Wadsworth, Jr. under Section 36b-27(a) of the 2010 Supplement, as amended, the revocation of the registration in Connecticut of Wadsworth, Jr. under Section 36b-15(a) of the 2010 Supplement, as amended, and the imposition of a fine against Wadsworth, Jr. under Section 36b-27(d) of the 2010 Supplement, as amended. |
b. Violations of Section 36b-4(a) of the Act by WIC, PTS and Wadsworth –
Fraud in Connection with the Offer and Sale of any Security
| 23. | Paragraphs 1 through 22, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 24. |
The conduct of WIC, PTS and Wadsworth, as more fully described in paragraphs 11 and 12, constitutes, in connection with the offer, sale or purchase of any security, 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 wilful violation of Section 36b-4(a) of the 2010 Supplement, which forms a basis for an order to cease and desist to be issued against WIC, PTS and Wadsworth under Section 36b-27(a) of the 2010 Supplement, as amended, the revocation of the registrations in Connecticut of WIC and Wadsworth pursuant to Section 36b-15(a) of the 2010 Supplement, as amended, and the imposition of a fine against WIC, PTS and Wadsworth under Section 36b-27(d) of the 2010 Supplement, as amended. |
c. Wilful Violations of Section 36b-16 of the Act by WIC, PTS and Wadsworth –
Offer and Sale of Unregistered Securities
| 25. | Paragraphs 1 through 24, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 26. |
WIC, PTS and Wadsworth effected the offer and sale of the DO Shares, which securities were not registered in Connecticut under the Act, as more fully described in paragraph 10. The offer and sale of such securities absent registration constitutes a wilful violation of Section 36b-16 of the Act, as amended by Public Act 10-141, and such wilful violation forms a basis for an order to cease and desist to be issued against WIC, PTS and Wadsworth pursuant to Section 36b-27(a) of the 2010 Supplement, as amended, the revocation of the registrations in Connecticut of WIC and Wadsworth pursuant to Section 36b-15(a) of the 2010 Supplement, as amended, and the imposition of a fine against WIC, PTS and Wadsworth pursuant to Section 36b-27(d) of the 2010 Supplement, as amended. |
d. Dishonest and Unethical Practices by WIC and Wadsworth, Jr.
| 27. | Paragraphs 1 through 26, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 28. |
The conduct of WIC, as more fully described in paragraphs 16 and 18, is conduct which constitutes a dishonest or unethical practice in the securities business within the meaning of Section 36b-31-15a of the Regulations, which forms a basis for an order to cease and desist to be issued against WIC under Section 36b-27(a) of the 2010 Supplement, as amended, and the revocation of the registration in Connecticut of WIC pursuant to Section 36b-15(a) of the 2010 Supplement, as amended. |
| 29. | The conduct of Wadsworth, Jr., as more fully described in paragraph 18, is conduct which constitutes a dishonest or unethical practice in the securities business within the meaning of Section 36b-31-15b of the Regulations, which forms a basis for an order to cease and desist to be issued against Wadsworth, Jr. under Section 36b-27(a) of the 2010 Supplement, as amended, and the revocation of the registration in Connecticut of Wadsworth, Jr. pursuant to Section 36b-15(a) of the 2010 Supplement, as amended. |
e. Wilful Violation of Section 36b-31-6f of the Regulations by WIC –
Failure to Enforce and Maintain Adequate Supervisory Procedures
| 30. | Paragraphs 1 through 29, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 31. |
WIC’s failure to provide procedures for, inter alia, E-mail review and retention and certain internal communications, as more fully described in paragraph 15, constitutes a wilful violation of Section 36b-31-6f of the Regulations, which forms a basis for an order to cease and desist to be issued against WIC pursuant to Section 36b-27(a) of the 2010 Supplement, as amended, the revocation of the registration in Connecticut of WIC pursuant to Sections 36b-15(a) of the 2010 Supplement, as amended, and the imposition of a fine against WIC pursuant to Section 36b-27(d) of the 2010 Supplement, as amended. |
f. Wilful Violation of Section 36b-14 of the Act and
Section 36b-31-14a of the Regulations by WIC –
Failure to Maintain Books and Records
| 32. | Paragraphs 1 through 31, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 33. |
WIC’s failure to maintain complete and accurate books and records, as more fully described in paragraph 17, constitutes a wilful violation of Section 36b-14 of the Act, as amended by Public Act 10-141, and Section 36b-31-14a of the Regulations. Such wilful violation forms a basis for an order to cease and desist to be issued against WIC pursuant to Section 36b-27(a) of the 2010 Supplement, as amended, the revocation of the registration in Connecticut of WIC pursuant to Section 36b-15(a) of the 2010 Supplement, as amended, and the imposition of a fine against WIC pursuant to Section 36b-27(d) of the 2010 Supplement, as amended. |
V. ORDER TO CEASE AND DESIST, NOTICE OF INTENT TO REVOKE
REGISTRATIONS AS BROKER-DEALER, BROKER-DEALER AGENT AND
INVESTMENT ADVISER AGENT, NOTICE OF INTENT TO FINE
AND NOTICE OF RIGHT TO HEARING
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, WIC has committed at least one violation of Section 36b-4(a) of the 2010 Supplement, at least one violation of Section 36b-14 of the 2010 Supplement, as amended, at least one violation of Section 36b-16 of the Act, as amended, at least one violation of Section 36b-31-6f of the Regulations, at least one violation of Section 36b-31-14a of the Regulations and engaged in conduct that constitutes a dishonest or unethical practice in the securities business within the meaning of Section 36b-31-15a of the Regulations;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, PTS has committed at least one violation of Section 36b-4(a) of the 2010 Supplement, as amended, and at least one violation of Section 36b-16 of the Act, as amended;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, Wadsworth has committed at least one violation of Section 36b-4(a) of the 2010 Supplement, as amended, and at least one violation of Section 36b-16 of the Act, as amended;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, Wadsworth, Jr. has committed at least one violation of Section 36b-23 of the Act, as amended, and has engaged in conduct that constitutes a dishonest or unethical practice in the securities business within the meaning of Section 36b-31-15b of the Regulations;
WHEREAS, the Commissioner has reason to believe that such acts or conduct constitute grounds for revoking WIC’s registration in Connecticut as a broker-dealer, Wadsworth’s registrations in Connecticut as a broker-dealer agent and an investment adviser agent, and Wadsworth, Jr.’s registration in Connecticut as a broker-dealer agent, pursuant to Section 36b-15 of the 2010 Supplement, as amended;
WHEREAS, the Commissioner further finds that the issuance of this Order to Cease and Desist, the issuance of an order revoking the registrations of WIC, Wadsworth and Wadsworth, Jr. in Connecticut 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 WIC, Wadsworth and Wadsworth, Jr. that the their respective registrations in Connecticut shall be revoked, subject to each Respondents’ right to request a hearing on the allegations set forth above;
WHEREAS, notice is hereby given to Respondents that the Commissioner intends to impose a maximum fine not to exceed One Hundred Thousand Dollars ($100,000) per violation;
WHEREAS, the Commissioner ORDERS that WIC CEASE AND DESIST from directly or indirectly violating the provisions of the Act and Regulations, including without limitation, (1) in connection with the offer, sale or purchase of any security, 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, (2) offering or selling unregistered securities in Connecticut, (3) engaging in dishonest or unethical business practices, (4) failing to maintain and enforce adequate supervisory procedures, and (5) failing to maintain required books and records;
WHEREAS, the Commissioner ORDERS that PTS CEASE AND DESIST from directly or indirectly violating the provisions of the Act and Regulations, including without limitation, (1) in connection with the offer, sale or purchase of any security, 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, and (2) offering or selling unregistered securities in Connecticut;
WHEREAS, the Commissioner ORDERS that Wadsworth CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation, (1) in connection with the offer, sale or purchase of any security, 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, and (2) offering or selling unregistered securities in Connecticut;
WHEREAS, the Commissioner ORDERS that Wadsworth, Jr. CEASE AND DESIST from directly or indirectly violating the provisions of the Act and Regulations, including without limitation, (1) making statements to the Division which are, at the time and in light of the circumstances under which they were made, false or misleading in a material respect, and (2) engaging in dishonest or unethical business practices;
AND WHEREAS, pursuant to Sections 36b-15(f) and 36b-27 of the 2010 Supplement, as amended, Respondents will be afforded an opportunity for a hearing on the allegations set forth above.
THE COMMISSIONER FURTHER ORDERS that a hearing will be granted to each Respondent if a written request for a hearing is received by the Department of Banking, Securities Division, 260 Constitution Plaza, Hartford, Connecticut 06103-1800 within fourteen (14) days following each Respondents’ 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 October 5, 2010, 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.
The Commissioner shall issue an order revoking the registration in Connecticut of WIC, Wadsworth and Wadsworth, Jr. if any such Respondent 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 11th day of August 2010. | Howard F. Pitkin | |
| Banking Commissioner |
CERTIFICATION
I hereby certify that on this 11th day of August 2010, the foregoing Order to Cease and Desist, Notice of Intent to Revoke Registration as Broker-dealer, Notice of Intent to Revoke Registration as Broker-dealer Agent, Notice of Intent to Revoke Registration as Investment Adviser Agent, Notice of Intent to Fine and Notice of Right to Hearing was sent by certified mail, return receipt requested, to Wadsworth Investment Co., Inc., 879 Church Street, Route 68, Wallingford, Connecticut 06492, certified mail no. 7008 1140 0002 4974 3619; Portfolio Timing Service d/b/a PTS Asset Management, 879 Church Street, Route 68, Wallingford, Connecticut 06492, certified mail no. 7008 1140 0002 4974 3626; William F. Wadsworth, 879 Church Street, Route 68, Wallingford, Connecticut 06492, certified mail no. 7008 1140 0002 4974 3633; and William F. Wadsworth, Jr., 141 Four Mile Road, West Hartford, Connecticut 06107, certified mail no. 7008 1140 0002 4974 3640.
| ______/s/__________ | |
| Jesse Silverman | |
| Prosecuting Attorney |