Securities and Business Investments Division
Securities Bulletin
Vol. XX  No. 4	Winter 2006

Features

• A Word from the Banking Commissioner
• Quarterly Statistical Summaries 

• Administrative Actions and Settlements
• Criminal Matters 

A WORD FROM THE BANKING COMMISSIONER

Securities Forum 2006, held on October 26, 2006 at the Crowne Plaza Hotel and Conference Center in Cromwell, Connecticut was extremely successful.  The conference focused on attempts to regulate the burgeoning hedge fund industry.  Zachary J. Bagdon, Executive Director of the International Center for Finance at Yale University’s School of Management, delivered the keynote address.

In December, the Securities and Exchange Commission proposed new rules that would prohibit investment advisers to hedge funds and other pooled investment vehicles from defrauding investors in those funds.  The proposal would also require that accredited investors in pooled investment vehicles be “superaccredited.”  At the state level, two bills are currently pending in the legislature that would 1) regulate hedge fund disclosures and 2) impose a reporting obligation where the hedge fund accepts investments in excess of $10 million from pension funds.  While these measures trigger a healthy debate on how to prevent certain abuses that have blighted this industry, I would recommend a good dose of caution, particularly where state legislation is concerned.  Legislation should be uniform across jurisdictions; provide clear guidance to the industry; not duplicate existing state and federal provisions; be workable from an administrative standpoint and not impose undue burdens on Connecticut businesses.  Above all, since many Connecticut-based hedge funds operate globally, a truly effective solution involves cooperation at the state, federal and international levels, and would include input from banks, broker-dealers and other counterparties to hedge fund transactions.  Of course, the agency’s authority to investigate fraud remains intact, and we will continue to be vigilant in pursuing enforcement remedies against those who have harmed investors.

As always, we welcome your comments and suggestions.


Howard F. Pitkin
Banking Commissioner

Harrison Douglas, Inc. (CRD # 16515) – Consent Order Conditioning Registration as Broker-dealer Issued

On December 20, 2006, the Commissioner entered a Consent Order Conditioning Registration as Broker-dealer (No. CO-06-7343-S) with respect to Harrison Douglas, Inc., an applicant for broker-dealer registration under the Connecticut Uniform Securities Act.  The firm is located at 3025 South Parker Road 801, Aurora, Colorado.  The Consent Order was predicated, in part, on 1) a June 25, 2001 censure and fine imposed by the NASD against the firm and its president (No. C3A010023) for selling shares of an initial public offering to residents of a state where the offering was not registered and completing a false offering questionnaire for the lead underwriter; 3) a September 17, 2003 censure and fine imposed by the NASD against the firm and its president (No. C3A030028) for failing to exercise adequate supervisory controls by permitting the firm’s president to perform duties requiring registration while his registration status was inactive due to the president’s failure to complete required continuing education requirements; and 3) an April 30, 2004 order entered by the Commissioner denying the firm’s registration (Docket No. ND-2004-6925-S).  The Consent Order embodied certain representations by the firm, to wit:  1) that the firm had made organizational changes to improve its handling of compliance and regulatory issues; and 2) that the firm was seeking Connecticut registration to enable it to service a long term client who had recently moved to Connecticut and whose status as an “accredited investor” the firm would ensure.

The Consent Order imposed various restrictions on the firm’s Connecticut securities activities.  Specifically, the Consent Order provided that, for three years, the firm would 1) restrict its Connecticut securities business to no more than ten individuals or entities each of whom qualified as an “accredited investor” under Rule 501(a) of Regulation D; 2) restrict its Connecticut securities business to effecting transactions in securities listed on the New York Stock Exchange, the NASDAQ Global Select Market or the NASDAQ Global Market; securities issued by investment companies regulated under the Investment Company Act of 1940; and limited partnership interests where the subject offerings were registered or the subject of a perfected exemptive claim or claim of covered security status under the Connecticut Uniform Securities Act; and 3) not employ more than two agents at any one time to represent it in effecting securities transactions in or from Connecticut.  The Consent Order also conditioned the firm’s registration on the firm engaging an outside party to conduct an annual compliance audit for three years; and on the firm’s providing quarterly reports to the agency for three years describing any complaints, actions or proceedings initiated by Connecticut customers.

Harrison Douglas, Inc. became registered as a broker-dealer under the Connecticut Uniform Securities Act on December 20, 2006.

Timothy Robin Touloukian (CRD # 2803832) – Agent Registration Conditioned Following NASD Suspension

On December 13, 2006, the Commissioner entered a Consent Order Conditioning Registration as an Agent (No. CO-06-7345-S) with respect to Timothy Robin Touloukian, an applicant for broker-dealer agent registration under the Connecticut Uniform Securities Act.  The Consent Order was predicated on claims that, in 2006, Timothy Touloukian had been suspended by the National Association of Securities Dealers for 45 days and fined $15,000 based on allegations that Touloukian, acting for the benefit of four hedge fund clients, violated NASD Rule 2110 by using different broker codes to circumvent mutual fund policies against excessive market timing (Acceptance, Waiver and Consent number EAF0400370003).  The suspension concluded on September 20, 2006.  Touloukian’s employing firm, Spencer Clarke LLC, signed off on various supervisory obligations as a precondition to registering Touloukian in Connecticut.

The Consent Order restricted Touloukian’s Connecticut securities business for three years to securities listed on the New York Stock Exchange, the NASDAQ Global Select Market or the NASDAQ Global Market; securities issued by investment companies regulated under the Investment Company Act of 1940; government securities; and exchange-listed options.  In addition, the Consent Order prescribed specific supervisory controls to be implemented by Spencer Clarke LLC with respect to Touloukian’s securities activities.  Spencer Clarke LLC was also required for three years to notify the department each quarter of any complaints, actions or proceedings involving Touloukian.  The Consent Order also prohibited Touloukian from 1) engaging in conduct that would constitute a violation of law or of Spencer Clarke LLC’s supervisory and compliance procedures; and 2) engaging in any act or practice to circumvent restrictions on market timing imposed by any issuer of securities, insurance company or securities brokerage firm, including, without limitation, employing multiple broker identifying numbers, multiple customer accounts, accounts coded as confidential, multiple branch codes and multiple clearing firms, and misrepresenting the identities of brokerage customers or the agent(s) servicing customer accounts.  Timothy Robin Touloukian became registered as a broker-dealer agent of Spencer Clarke LLC in Connecticut on December 13, 2006.

Regal Nails, LLC Fined $3,000 for Unregistered Business Opportunity Sales

On November 28, 2006, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-06-843-B) with Regal Nails, LLC, now or formerly of  10146 Florida Boulevard, Baton Rouge, Louisiana and 11488 South Choctaw Drive, Baton Rouge, Louisiana.  Regal Nails, LLC was a franchisor of nail salons located in Wall-Mart Stores.  The Stipulation and Agreement alleged that, prior to establishing a colorable claim to use of the trademark exclusion in Section 36b-61(6)(D) of the Connecticut Business Opportunity Investment Act, the company made one or more unregistered business opportunity sales in Connecticut in contravention of the state’s business opportunity laws.  The Stipulation and Agreement recited that counsel to Regal Nails, LLC had represented to the Commissioner in writing that Regal Nails, LLC had ceased offering and selling franchises, and that future franchises would be sold through the company’s successor, Regal Nails, Salon & Spa, LLC.  Regal Nails, Salon & Spa, LLC filed for registration under the Act in late 2006.  Pursuant to the Stipulation and Agreement, Regal Nails, LLC agreed to pay a $3,000 fine to the department.  In addition, Regal Nails, LLC, its members, officers, agents, employees, representatives and successors in interest agreed to refrain from engaging in conduct that would constitute a violation of the Act.

Merrill Lynch, Pierce, Fenner & Smith Incorporated (CRD # 7691) Fined $1 Million for Inadequate Oversight of Market Timing Activity; Directed to Pay an Additional $2.5 Million to Promote Investor Education and Investor Protection Initiatives

On November 22, 2006, the Banking Commissioner entered a Consent Order (Docket No. CO-2006-7013-S) with respect to Merrill Lynch, Pierce, Fenner & Smith Incorporated, a broker-dealer registered under the Connecticut Uniform Securities Act.  The Consent Order alleged that the firm failed to maintain certain books and records relating to trade execution in accounts maintained at mutual fund companies for the purpose of facilitating market timing by a hedge fund client of the firm.  The trades were handled by agents of the firm’s Fort Lee, New Jersey branch office.  The Consent Order also claimed that the firm failed to exercise adequate supervisory controls over the Fort Lee, New Jersey agents who circumvented the firm’s policy against market timing mutual funds.  The firm ultimately terminated the agents’ employment and instituted internal remedial measures.

The Consent Order fined the firm $1 million.  The Consent Order also required that the firm contribute an additional $1.5 million over a three year period to the Merrill Lynch & Co. Foundation Inc., and earmark that amount to promote financial literacy in public schools in all member jurisdictions of the North American Securities Administrators Association.  In addition, the Consent Order directed the firm to 1) pay the State of Connecticut Department of Education $500,000 over three years to promote financial literacy initiatives in Connecticut public schools as determined by the Commissioner of Education; and 2) pay $500,000 over three years to the National White Collar Crime Center to train Connecticut regulatory and law enforcement personnel in investigating and prosecuting violations of financial, banking, corporate and securities laws.

Steven G. Morton and Oxford Micro Devices, Inc. Directed to Cease and Desist from Regulatory Violations; Notice of Intent to Fine Issued

On November 22, 2006, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2006-6859-S) against Oxford Micro Devices, Inc. of Lantern Ridge Office Park, 731 Main Street, Building 2, Suite B3,
Monroe, Connecticut, and its president Steven G. Morton.  The action alleged that the respondents violated Section 36b-16 of the Connecticut Uniform Securities Act by selling over $1.2 in unregistered stock and warrants to investors in Connecticut and other states.  The action also alleged that the respondents violated the antifraud provisions in Section 36b-4 of the Act by failing to disclose the market risks of investing in the Oxford Micro Devices, Inc. securities; making income forecasts without providing a reasonable basis for the projections; and falsely representing to investors that the issuer had signed a deal with a company that made security systems for casinos.  The respondents were afforded an opportunity to request a hearing on the Order to Cease and Desist.  A hearing on the Notice of Intent to Fine is pending.

Crystal Sky Enterprises, LLC and Christina E. Foster Directed to Cease and Desist from Regulatory Violations; Notice of Intent to Fine Issued

On November 21, 2006, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2006-7137-S) against Crystal Sky Enterprises, LLC of 238 Raritan Street, Keyport, New Jersey and its managing member, Connecticut-based Christina E. Foster.  The action alleged that the respondents sold unregistered securities consisting of promissory notes in violation of Section 36b-16 of the Connecticut Uniform Securities Act, and that Christina E. Foster was not registered as an agent of issuer under the Act.  The note investment would finance the purchase of real property and the related redevelopment of a New Jersey former middle school building.  The action also alleged that the respondents violated the antifraud provisions in Section 36b-4 of the Act by failing to disclose in the issuer’s prospectus risk factors, financial information on the issuer and the work histories of the issuer’s managing members.  The prospectus represented that investors would receive a guaranteed 20 percent return if the real estate project, purportedly financed by commercial lenders, did not move forward to loan settlement and a guaranteed 100 percent return if loan settlement occurred.  Since respondent Crystal Sky Enterprises, LLC did not request a hearing on the Order to Cease and Desist, the Order to Cease and Desist became permanent as to it on January 18, 2007.  A hearing on the Notice of Intent to Fine is pending.

Terry Lee Feibus (CRD  # 2923404)  - Amended and Restated Order to Cease and Desist and Notice of Intent to Fine Issued

On November 6, 2006, the Banking Commissioner issued an Amended and Restated Order to Cease and Desist and Notice of Intent to Fine (Docket No. CF-2006-7155-S) against Terry Lee Feibus of 18429 Old Princton Lane, Boca Raton, Florida.  The Amended and Restated Order to Cease and Desist and Notice of Intent to Fine modified the Commissioner’s June 6, 2006 Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing against respondent Feibus.  The amended action alleged that at various times in 2003, respondent Feibus sold unregistered securities of Deltagen Inc., GoAmerica Inc., Hop-On.com, Loudeye Technologies, Paradigm Med Inds, Peregrine Pharmaceuticals Inc., Predictive Systems Inc., Robotic Vision Systems Inc., Sagent Tech Inc., Skyway Communications, Tellium Inc. and Valicert Inc. (the “Unregistered Securities”) in violation of Section 36b-16 of the Connecticut Uniform Securities Act.  The amended action also alleged that respondent Feibus violated Section 36b-6 of the Act by transacting business as an unregistered agent in conjunction with sales and purchases of the Unregistered Securities as well as securities of 1st Investors Blue Chip FD-1, 1st Investors Growth & Inc.-A, 1st Investors Tot Return FD A, 1st Investors USA Midcap Opp A, Charter Communications CL A, Federated Growth Strategy FD-B, Federated Hi Inc. BD FD CL-B, Federated Kaufmann B, Lantronix Inc., Lucent Technologies Inc., Prosoft I-net Solutions Inc., Radview Software Ltd., Redback Networks Inc., Silicon Graphics Inc. (DE) and Transwitch Corp.  The respondent was afforded an opportunity to request a hearing on the Order to Cease and Desist.  A hearing on the Notice of Intent to Fine is pending.

Carrington Capital Management, LLC Assessed $3,800 for Delinquent Investment Advisory Notice Filing, Failure to Make Regulatory Filings in Conjunction with Securities Sales

On October 19, 2006, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-06-7302-S) with Carrington Capital Management, LLC of 7 Greenwich Office Park, Greenwich, Connecticut.  The firm is registered as an investment adviser with the Securities and Exchange Commission.  The Stipulation and Agreement alleged that, from approximately May 2004 until March 2006, the firm transacted advisory business in Connecticut without making the requisite notice filing under Section 36b-6(e) of the Connecticut Uniform Securities Act.  The firm has since complied with the state’s notice filing requirement for calendar year 2006.  In addition, the Stipulation and Agreement claimed that, at various times commencing in 2004, interests in Carrington Investment Partners (US) LP and Carrington Investment Partners (Cayman) LP were sold in or from Connecticut at a time when no registration, exemption or claim of covered security status had been filed with the department.

Pursuant to the Stipulation and Agreement, the firm agreed to pay $3,800 to the department.  Of that amount, $1,000 constituted an administrative penalty for failing to timely file the notice required by Section 36b-6(e) of the Act; $2,500 constituted an administrative penalty for failing to comply with applicable securities registration, exemption and notice filing requirements; and $300 represented reimbursement for past due investment adviser notice filing fees.

Roll-A-Cover, LLC and Michael P. Morris Directed to Cease and Desist from Offering or Selling Unregistered Business Opportunities; Notice of Intent to Fine Issued

On October 18, 2006, the Banking Commissioner issued an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2006-820-B) against Roll-A-Cover, LLC of 674 Amity Road, Bethany, Connecticut and 36 Sargent Drive, Bethany, Connecticut and its managing partner, Michael P. Morris.  The action alleged that in January 2004, the respondents offered and sold an unregistered business opportunity from Connecticut in contravention of the Connecticut Business Opportunity Investment Act.  Roll-A-Cover, LLC is in the business of marketing retractable pool covers and other outdoor enclosures.  The action also alleged that the respondents failed to provide prospective purchaser-investors with a disclosure document in violation of Section 36b-63(a) of the Act.  The respondents were afforded an opportunity to request a hearing on the Order to Cease and Desist.  A hearing on the Notice of Intent to Fine is pending.

Shimoda Capital Advisors Limited (CRD # 112347) Assessed $2,500 for Failing to File Advisory Notice

On October 16, 2006, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-06-7328-S) with Shimoda Capital Advisors Limited, an investment adviser registered with the Securities and Exchange Commission.   Although the firm’s principal address is c/o Caledonian House, Jennet Street, George Town, Cayman Islands, the firm maintains or has also maintained a place of business at 15 River Road, Suite 230, Wilton, Connecticut.   The Stipulation and Agreement alleged that from July 6, 2001 forward, the firm transacted business as an investment adviser in or from Connecticut at a time when no notice filing or fee had been remitted pursuant to Section 36b-6(e) of the Connecticut Uniform Securities Act.  The Stipulation and Agreement acknowledged that David J. Mapley, director of the firm, had represented to the Division that 1) the firm currently did not conduct, and would not conduct, business in the United States; 2) the firm did not currently have U.S. clients nor would it have U.S. clients in the future; and 3) the firm had not serviced any U.S. clients in the past.  Pursuant to the Stipulation and Agreement, Shimoda Capital Advisors Limited agreed to review, revise and implement supervisory and compliance procedures necessary to ensure compliance with state investment advisory notice filing and registration requirements, as the case might be.  In addition, the firm agreed to pay $2,500 to the department.  Of that amount, $1,500 constituted an administrative fine and $1,000 constituted reimbursement for past due notice filing fees.

Lorcom Technologies, Inc. Fined $2,500 for Unregistered Stock Sales

On October 3, 2006, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-06-7329-S) with Lorcom Technologies, Inc., an issuer of securities that maintains or has maintained a place of business at 11 East 26th Street, Suite 1901, New York, New York and 8517 Fourth Avenue, Second Floor, Brooklyn, New York.  The Stipulation and Agreement recited that the issuer, through its prior legal counsel, had advised the agency that Lorcom Technologies, Inc. had completed a private placement of its common stock in 2003 to residents of Connecticut and other states; that the 2003 offering, although styled a private placement under Rule 506 of Regulation D, did not fulfill the information requirements in Rule 502(b) of the Regulation D; and that, to cure its failure to file under the Connecticut Uniform Securities Act, the issuer would extend a multi-state rescission offer to all affected investors and register its common stock with the Securities and Exchange Commission.  The Stipulation and Agreement also recited that the federal registration statement had been withdrawn due to the issuer’s economic hardship.  The Stipulation and Agreement alleged that from August 2003 through October 2003, the issuer sold shares of its common stock to two Connecticut investors in contravention of Section 36b-16 of the Act and at a time when the securities were not registered under the Act or the subject of an exemptive claim or claim of covered security status.

In resolution of the matter, Lorcom Technologies, Inc. agreed to pay a $2,500 fine to the department and to refrain from offering or selling securities in or from the state absent compliance with Section 36b-16 of the Act.

Kevin O. Kelley Sentenced to 170 Months in Prison for Defrauding Seniors

The United States Attorney for the Southern District of New York announced on November 8, 2006 the sentencing of former broker-dealer agent Kevin O. Kelley in Manhattan federal court to 170 months in prison for defrauding senior citizen clients of approximately $4.2 million from 1999 through 2004.  On June 7, 2006, a jury convicted the defendant of four counts of securities fraud and three counts of wire fraud.  In two schemes, the defendant claimed to sell investors stock in two private companies, E-Tel, Inc. and AusAm Biotech, Inc., but instead stole the investors’ funds and used them for his personal benefit.  In a third scheme, the defendant sold securities in a partnership called First Venture Leasing, in which he owned a controlling interest, without disclosing his personal ownership and involvement in that company. In the fourth scheme, the defendant bought investors stock in a publicly traded company, Coyote Network Systems, without authorization from the clients, and without disclosing that his consulting firm had entered into an agreement to provide consulting services in return for significant quantities of stock if the stock price increased to certain designated levels.  Kelley perpetrated these schemes by providing investors with false account statements that misled them about the true value of their investments in E-Tel, Inc., AusAm Biotech, Inc. and First Venture Leasing.  The defendant had been detained without bail since his conviction, based, in part, on the court’s determination that he had committed perjury at trial by denying his criminal conduct and had shown a propensity to defraud others for his own pecuniary gain.

The Securities and Business Investments Division of the Connecticut Department of Banking provided assistance in the federal prosecution of the matter.  Kelley had been permanently barred by the department from conducting securities business in Connecticut on August 23, 2005.

Frank Kania Convicted of Larceny, Securities Counts

Chief State's Attorney Christopher L. Morano announced on July 12, 2006 the conviction of a former Stafford Springs, Connecticut antiques dealer for larceny and securities violations stemming from investments in his business.  Frank Kania, currently of Ellington, Connecticut was found guilty of 14 counts of Securities Fraud and one count each of Larceny in the Second Degree, Selling Unregistered Securities, and  Issuing a Bad Check.  Mr. Kania was convicted in a non-jury trial conducted before the Honorable Judge Gary White in the Superior Court for the
Judicial District of Tolland at Rockville.  Mr. Kania, a former Connecticut state trooper, sold promissory notes that are considered securities under state law to multiple victims who believed he was using their money to purchase inventory for his antiques business.  According to the testimony at the trial, Mr. Kania failed to make payments on the notes, resulting in a loss of approximately $157,000 to the victims, who included two 78-year-old women.  The evidence showed that Mr. Kania committed securities fraud by failing to inform investors that he was using their investments not only to purchase antiques but in fact to make payment on $3 million in loans he had taken.  Larceny in the Second Degree and the securities fraud counts carry a maximum prison term of ten years each.   Sale of Unregistered Securities carries a maximum of two years incarceration, and Issuing a Bad Check carries up to five years incarceration.

On September 21, 2006, Hartford Superior Court Judge Gary White sentenced the defendant to 10 years incarceration, execution suspended after 2 years served, and 5 years probation.  During the first 3 years of probation, Mr. Kania was ordered to wear an electronic monitor under house arrest.  Judge White also ordered Mr. Kania to perform 200 hours of community service during the last 2 years of probation and to make full restitution in the amount of $153,749 to the victims who invested in his business, $83,500 of which has already been paid.  The case was prosecuted by the Elder Services Bureau in the Chief State’s Attorney’s Office.

The Securities and Business Investments Division of the State of Connecticut Department of Banking provided assistance in the prosecution of this case.

STATISTICAL SUMMARY

Securities Division