Ohio Securities Bulletin 2002:2 1

Bob TaftGovernor of Ohio

Gary C. SuhadolnikDirector of Commerce

Deborah L. Dye JoyceCommissioner of Securities

A QUARTERLY PUBLICATION OF THE OHIO DIVISION OF SECURITIES

OHIO SECURITIES BULLETIN

COMMERCEDEPARTMENT OF

OHIO

DIVISION OF

SECURITIEShttp://www.securities.state.oh.us

The Ohio Department of Commerce is an equal opportunity employer and service provider.

continued on page 2Ohio Securities Bulletin

Issue 2002:2

Table of Contents

Division Guidance on Commonly Encountered Investment Adviser Issues

By Tom Geyer and Caryn Francis

On January 1, 2002, the first man-date of a two-prong initiative by the Divi-sion of Securities to use the InvestmentAdviser Registration Depository (IARD)became effective. Investment advisers li-censed, or seeking to be licensed, in Ohioachieved entitlement from the NationalAssociation of Securities Dealers, Inc.,transitioned onto the IARD, and submit-ted Forms ADV to the Division via theonline IARD throughout the first two quar-ters of 2002. At this juncture, no paperfilings can be submitted by investmentadvisers to the Division for initial licen-sure, to renew licensure, or for purposes ofupdating information—all filings must besubmitted via the IARD.

Beginning January 1, 2003, theDivision will implement the second prongof the IARD initiative and require all rep-resentatives or agents of investment advis-

IARD MANDATE: Investment Adviser Representativesers—known in Ohio as investment adviserrepresentatives—to submit all initial, re-newal and associated filings to the Divisionvia the IARD. As with the 2002 mandate,investment adviser representatives will begiven until the end of the second quarter2003 to transition onto the IARD. Thisdeadline must be met by current Ohiolicensees in order to continue to offer in-vestment advisory services in Ohio. AfterJanuary 1, 2003, those persons initiallyseeking investment adviser representativelicensure can only file their applications viathe IARD.

In anticipation of the Division’supcoming IARD mandate for investmentadviser representatives, investment advis-ers should visit the IARD web site atwww.iard.com or contact the IARD hotlineat 240-386-4848 for additional informa-tion.

Division Guidance on CommonlyEncountered Investment Adviser Issues ....... 1

IARD MANDATE: InvestmentAdviser Representatives ................................ 1

Ohio Securities Conference ......................... 5

Enforcement Section Reports ...................... 6

Licensing Statistics ..................................... 10

Final Order Summaries .............................. 10

Registration Statistics ................................. 11

Capital Formation Statistics ....................... 11

March 18, 2002, marked the threeyear anniversary of the effective date of theOhio investment adviser laws. In thesethree-plus years, the Division has licensedover 550 investment advisers and over8,900 investment adviser representatives,and received notice filings from nearly 900SEC-registered investment advisers oper-ating in Ohio. In connection with thislicensing program, the Division launcheda field examination program with the goalof conducting on-site examinations of allDivision-licensed investment advisers forcompliance with Ohio law. In addition,the Division has initiated enforcement ef-forts in the investment advisory area, andin February 2002 the Division secured thefirst criminal conviction under the Ohioinvestment adviser laws.

As the Division’s investment adviserregulatory program continues to mature,the Division wishes to provide guidance onthe following commonly encountered is-sues. Since Ohio law is based on the federalInvestment Advisers Act of 1940, the Divi-sion believes that federal law and Securitiesand Exchange Commission interpretationsprovide persuasive guidance in the follow-ing areas.

1. Custody

R.C. 1707.44(M)(2) prohibits aninvestment adviser or investment adviserrepresentative that is licensed (or requiredto be licensed) by the Division from takingor having custody of funds or securities ofany person, except as provided in rulesadopted by the Division. The Division’scustody rules are set out in O.A.C. 1301:6-

Ohio Securities Bulletin 2002:22

Receptionist ...................... 644-7381 Enforcement .............. 466-6140Broker-Dealer ................... 466-3466 Registration ............... 466-3440Records ............................. 466-3001 Webmaster ................ 644-8401

All listings are area code (614)

The Ohio Securities Bulletin is a quarterly publication of the Ohio Department of Commerce,Division of Securities. The primary purpose of the Bulletin is to (i) provide commentary on timely ortimeless issues pertaining to securities law and regulation in Ohio, (ii) provide legislative updates, (iii)report the activities of the enforcement section, (iv) set forth registration and licensing statistics and (v)provide public notice of various proceedings.

The Division encourages members of the securities community to submit for publication articles on timelyor timeless issues pertaining to securities law and regulation in Ohio. If you are interested in submitting anarticle, contact the Editor for editorial guidelines and publication deadlines. The Division reserves the right toedit articles submitted for publication.

Portions of the Ohio Securities Bulletin may be reproduced without permission if properacknowledgement is given.

OHIO SECURITIES BULLETINDesiree T. Shannon, Esq., Editor

Ohio Division of Securities77 South High Street, 22nd Floor • Columbus, Ohio 43215

http://www.securities.state.oh.us

continued from page 1Adviser Issues

3-44(B), and impose a series of safekeep-ing, notice and audit requirements. Therules are designed to provide a minimumlevel of protection and security for clientfunds and securities. While the six stepsestablished by the Division’s custody rulesare black and white, the issue of whatconstitutes “custody” has presented somegray areas. Further clouding this area is thefact that it is possible for an adviser to havecustody with respect to some accounts, andnot have custody with respect to otheraccounts.

General Definition of “Custody”

The Form ADV defines custody asdirectly or indirectly holding client fundsor securities, having authority to obtainpossession of client funds or securities, orhaving the ability to appropriate clientfunds or securities.1 Physical possession isthe classic case of custody. However, cus-tody also can arise without physical pos-session. In this regard, the Division sharesthe view of the SEC that an adviser hascustody when the adviser:

• has a general power of attorneyover a client’s account

• has signatory power over aclient’s checking account

• maintains an omnibus-type ac-count in its own name at a broker ora bank in which client securities aremaintained after trades settle

• obtains advisory fees by directlybilling client custodians withouteffective oversight by the client oran independent party

• serves as a trustee of client trusts.

• acts as the general partner of alimited partnership client.2

This list describes situations wherean adviser has the authority to obtain clientfunds or securities, or has the ability toappropriate the funds or securities, whetheror not the adviser has physical possession ofthe funds or securities. In these situations,the adviser must comply with the Division’s

custody rules, except in the limited circum-stances described below. Specifically, de-scribed below are certain situations in whichthe adviser does not have physical pos-session of client funds or securities, andmay put in place certain safeguards in orderto avoid being deemed to have custody.

Alternate Safeguards When the Adviser Hasthe Authority to Deduct Fees From ClientAccounts

The authority to deduct fees from aclient account represents the ability to ap-propriate client funds, and thus falls withinthe general definition of custody. How-ever, where a client account is held by anindependent custodian, an adviser maydeduct fees from the account and not bedeemed to have custody if the adviser fol-lows one of the following two alternativesets of safeguards:

• Alternative One: (1) The clientprovides written authorization permittingthe adviser’s fees to be paid directly fromthe client’s account held by an indepen-dent custodian; (2) the adviser sends to theclient, and to the custodian at the sametime, a bill showing the amount of the fee,the value of the client’s assets on which thefee was based, and the specific manner in

which the adviser’s fee was calculated; and(3) the custodian agrees to send the client astatement, at least quarterly, indicating allamounts disbursed from the account in-cluding the amount of advisory fees paiddirectly to the adviser.3

• Alternative Two: (1) The clientprovides written authorization permittingthe adviser’s fees to be paid directly from theclient’s account held by an independentcustodian; (2) the adviser sends a bill to thecustodian indicating only the amount of thefee to be paid by the custodian; (3) at thesame time the bill is sent to the custodian,the adviser sends to the client a separatestatement showing the amount of the fee,the value of the client’s assets on which thefee was based, and the specific manner inwhich the adviser’s fee was calculated; (4)the adviser discloses to clients that it is theclient’s responsibility to verify the accuracyof the fee calculation and that the custodianwill not determine whether the fee is prop-erly calculated; and (5) the custodian agreesto send the client a statement, at least quar-terly, indicating all amounts disbursed fromthe account including the amount of advi-sory fees paid directly to the adviser.4

Ohio Securities Bulletin 2002:2 3

continued on page 4

Alternate Safeguards When an Investment Ad-viser Serves as Both General Partner of, andInvestment adviser to, a Limited Partnership

When an investment adviser servesas both the general partner of, and invest-ment adviser to, a limited partnership, theadviser generally has the authority to dis-pose of funds and securities of the limitedpartnership, and collect advisory fees fromthe limited partnership. This authorityfalls within the general definition of cus-tody. However, if an investment adviser/general partner puts in place the followingsafeguards, the investment adviser/generalpartner may make certain withdrawals with-out being deemed to have custody.5

If the limited partnership account isheld by an independent custodian,6 theinvestment adviser/general partner mayreceive advisory fees directly from the ac-count of the limited partnership, providedthat: (1) an attorney or an independentcertified public accountant for the partner-ship (“independent representative”)7 pro-vides written authorization, in each case,permitting the advisory fees to be paiddirectly from the partnership’s account;(2) the investment adviser sends to theindependent representative and to the cus-todian at the same time, a bill showing theamount of the fee, the value of thepartnership’s assets on which the fee wasbased, and the specific manner in whichthe adviser’s fee was calculated; and (3) thecustodian sends to the independent repre-sentative and to the partnership a state-ment, at least quarterly, indicating allamounts disbursed from the account in-cluding the amount of advisory fees thatare paid directly to the investment adviser.

In addition to receiving advisory feesfrom the limited partnership account heldby an independent custodian, the invest-ment adviser/general partner may makewithdrawals representing (i) bona fide re-ductions in its capital investment in thelimited partnership; (ii) its pro rata share ofincome or capital gains; or (iii) operatingand administrative expenses, provided thatin each case: (1) the investment advisersends to the independent representativeinformation sufficient for such representa-tive to calculate the correct amount of thecapital account balances; (2) the indepen-dent representative authorizes the custo-dian in writing to make such a transfer; and

(3) the custodian sends to the independentrepresentative and to the limited partner-ship, at least quarterly, a statement indicat-ing all amounts disbursed from the limitedpartnership’s account.8

Determining the Existence of a “Client Trust”

As mentioned above, serving as thetrustee of a client trust constitutes custodyand requires compliance with the custodyrules. Like the SEC, the Division will findthat a trust constitutes a “client trust” if anyof the following apply: (1) there is aninvestment advisory contract between theadviser and the trust; (2) the grantor is acurrent client9 of the adviser; or (3) thetrust agreement provides that the trusteewill be compensated and that the trusteewill render advice regarding securities tothe trust.10

Alternate Safeguards When the AdviserServes as the Trustee of a Client Trust

When an adviser serves as a trustee ofa client trust, and the trust assets are held byan independent custodian, the adviser mayestablish alternate safeguards by giving cer-tain instructions to the custodian and anotice to the client.11 An adviser thatestablishes and follows the following safe-guards will not be deemed to have custodywith respect to client trusts held by anindependent custodian and covered by thesafeguards.

First, the adviser must provide writ-ten instructions to the custodian as follows:

(1) You will not deliver trust secu-rities to any officer or employee ofthe investment adviser, nor will youtransmit any funds to the invest-ment adviser or to any of its em-ployees, except that you may paytrustee fees to the trustee and in-vestment management fees to theinvestment adviser, provided that:

(a) the grantor of the trust, theattorneys for the trust (if it is atestamentary trust), the co-trusteeof the trust (other than an officer oremployee of the investment ad-viser), or a defined beneficiary of

the trust has authorized you in writ-ing to pay those fees;

(b) the statements for those feesshow the amount of the fees for thetrustee, and in the case of state-ments for investment managementfees, show the value of the trustassets on which the fee is based andthe manner in which the fee wascalculated; and

(c) you agree to send to the grantorof the trust, the attorneys for atestamentary trust, the co-trustee(other than an officer or employeeof the investment adviser), or adefined beneficiary of the trust, atleast quarterly, a statement of alldisbursements from the account ofthe trust, including the amount ofinvestment management fees paidto the investment adviser and theamount of trustee fees paid to thetrustee.

(2) Other than as set forth in (1)(a)above, you may transfer funds orsecurities (or both) of the trust onlyupon the direction of an officer oremployee of the investment adviserwhom you have duly accepted as anauthorized signatory for such in-structions to you, and only to thefollowing:

(a) a trust company, bank trustdepartment, or brokerage firm in-dependent of the investment ad-viser, for the account of the trust towhich the assets relate;

(b) the named grantors or to thenamed beneficiaries of the trust;

(c) a third person independent ofthe investment adviser in paymentof the fees or charges of the thirdperson, including, but not limitedto: (i) attorney’s, accountant’s, orcustodian’s fees for the trust; and(ii) taxes, interest, maintenance orother expenses, if there is propertyother than securities or cash ownedby the trust;

(d) third persons independent ofthe investment adviser for any otherpurpose legitimately associated withthe management of the trust; or

Ohio Securities Bulletin 2002:24

continued from page 3Adviser Issues

(e) a broker-dealer in the normalcourse of portfolio purchases andsales, provided that the transfer ismade on payment against deliverybasis or payment against trust re-ceipt.

Second, if the custodian agrees tothese instructions and is authorized to paythe fees, the adviser must send to the grantorof the trust, the attorney for the trust if it isa testamentary trust, the co-trustee (otherthan an officer or employee of the invest-ment adviser), or a defined beneficiary ofthe trust, at the same time that it sends anystatement to the custodian, a statementshowing the amount of the trustee fee orinvestment management fee, the value ofthe assets on which the fees were based, andthe specific manner in which the fees werecalculated.

2. Use of “RegisteredInvestment Adviser”

A person that is properly licensed asan investment adviser with the Division, orproperly registered as an investment ad-viser with the SEC, may use the phrase“Registered Investment Adviser.” In addi-tion, a person may state that such person islicensed by the Division, by another state,or registered with the SEC, if such state-ment is true and the effect of such licensureor registration is not misrepresented.12

However, a person is prohibited fromusing the initials “R.I.A.” or “RIA.”13 Sincethese initials have no generally understoodmeaning, and initials appearing after aname usually indicate a degree or licensedprofessional position, use of these initialswould be misleading.14 Further, no personmay represent or imply in any manner thatsuch person has been sponsored, recom-mended or approved, or that such person’sabilities or qualifications have in any re-spect been passed upon by the State ofOhio, the Ohio Department of Commerce,the Division, or any other state or federalagency.15

3. Record-keeping

Every investment adviser licensed bythe Division is required to make and keeptrue, accurate and current copies of certainspecified books and records.16

The Meaning of “Current”

The Division recognizes that “cur-rent,” as used in the record-keeping rule, willvary with the circumstances of the advisorybusiness and the nature of the records beingkept. As a general rule:

• Primary records of transactions, suchas order memoranda, confirmations, invoices,journal entries and logs, must be createdconcurrently with the transaction, or as soonas practicable thereafter. Primary records oftransactions must be kept up-to-date at alltimes.17

• Secondary records of transactions, suchas ledgers and other comparable records towhich transactional information is posted,generally must be updated within a few daysafter transactions occur.18 In the case of asmall adviser, with a few clients, postingtransactional data to secondary records withinninety days of the transaction may be suffi-cient.

Applicability of Books and Records Rules

The Division’s books and records rulesapply to all investment advisers licensed bythe Division. There is no exception for soleproprietorships or other small businesses.Every Division licensed investment advisermust keep the sixteen items required byO.A.C. 1301:6-3-151(C)(1). Advisers withcustody of client funds or securities also mustkeep the additional five items required byO.A.C. 1301:6-3-151(C)(2). Finally, advis-ers that manage client assets, must, in addi-tion to the items required by O.A.C. 1301:6-3-151(C)(1) and (2), keep the two itemsrequired by O.A.C. 1301:6-3-151(C)(3).

4. Hedge Clauses

Since advisers are required to act inthe best interests of their clients, advisers maynot use a “hedge clause” or similar contrac-tual provision to attempt to limit the adviser’s

liability. Examples of typical hedge clausesthat are impermissible include those withlanguage excusing the adviser from liabilityexcept in cases of “gross negligence,” “wan-ton malfeasance,” “reckless misconduct” or“willful misconduct.” O.A.C. 1301:6-3-44(E)(1)(d) prohibits the use of, and declaresvoid, any condition, stipulation, or provisionbinding any person to waive compliance withthe Ohio Securities Act or any rule promul-gated thereunder.

Endnotes

1 Item 6 in the Glossary of Terms ofForm ADV.

2 SEC Letter from the Office ofCompliance Inspections and Exami-nations to Registered InvestmentAdvisers on Areas Reviewed and Vio-lations Found During Inspections(May 1, 2000), available atwww.sec.gov/divis ions/ocie/advltr.htm.

3 SEC Release IA-1000 (Dec. 3,1985), Item II.C.5.

4 John B. Kennedy, SEC No-Ac-tion Letter (June 5, 1996).

5 See, e.g., Bennett ManagementCompany, Inc., SEC No-Action Let-ter (Feb. 26, 1990).

6 The independent custodian(s) canbe a bank (Bennett ManagementCompany, Inc., SEC No-Action Let-ter (Feb. 26, 1990); an independentbroker-dealer (GBU, Inc., SEC No-Action Letter (April 22, 1993)); or acombination of both (PIMS Incor-porated, SEC No-Action Letter (Oct.21, 1991).

7 The purpose of the independentrepresentative is to address any po-tential conflicts of interest. An ac-countant or attorney for the generalpartner is not an independent repre-sentative. See GBU, Inc., SEC No-Action Letter (April 22, 1993).

Ohio Securities Bulletin 2002:2 5

OHIO SECURITIES CONFERENCE

�� NOVEMBER � ��

Executive Conference and Training CenterVern Riffe Center

77 South High Street, 31st FloorColumbus, Ohio 43215

Investment Adviser UpdateSecurities Law in Cyberspace

Ohio Control Share Acquisition Act: Northrop Grumman v.TRWPrivate Placements

Sarbanes-Oxley Act OverviewOhio Division of Securities Panel

presented byOhio Division of Securities

The Cybersecurities Law Institute at the University of Toledo College of Law

The meetings of the Ohio Division of Securities Advisory Committeeswill be held in conjunction with this Conference.

In September, a Conference Brochure with detailed information and registrationinstructions will be sent to all Ohio subscribers to the Ohio Securities Bulletin.

8 See, e.g., Bennett ManagementCompany, Inc., SEC No-Action Let-ter (Feb. 26, 1990); Lend Lease In-ternational, SEC No-Action Letter(Sept. 11, 1991); Canyon Manage-ment Company, SEC No-ActionLetter (Oct. 15, 1991).

9 A client is a “current client” for eachyear in which the client either re-ceives advice from the adviser or paysfor advice received, or to be received,from the adviser. SEC Release IA-1000 (Dec. 3, 1985), Item II.C.4.

10 Melville G. MacKay, SEC No-Action Letter (May 27, 1997).

11 Blum Shapiro Financial ServicesInc., SEC No-Action Letter (April16, 1993).

12 O.A.C. 1301:6-3-44(E)(2).

13 Securities & Syndication Review,SEC No-Action Letter (Feb. 16,1984).

14 Id.

15 O.A.C. 1301:6-3-44(E)(1)(a).

16 O.A.C. 1301:6-3-151(C).

17 American Asset ManagementCompany, SEC No-Action Letter(Aug. 24, 1987).

18 Id.

Ohio Securities Bulletin 2002:26

Enforcement Section Reports

Duncan Hill, Inc.

On May 9, 2002, Duncan Hill, Inc.entered into a Consent Agreement with theDivision and consented to the issuance of aCease and Desist Order, Division OrderNo. 02-134. Respondent’s business addressis in Ohio.

The Division found that Duncan Hill,Inc. violated the provisions of Ohio RevisedCode section 1707.44(C)(1) by selling un-registered convertible promissory notes thatdid not meet the qualifications for the re-quested exemption for private placementspursuant to R.C. 1707.03(Q). The FinalOrder to Cease and Desist was issued onMay 9, 2002.

Edward Eugene Hawkins

On May 29, 2002, the Division is-sued Division Order No. 02-147, a Ceaseand Desist Order, against Edward EugeneHawkins. Respondent is an Ohio resident.

On August 8, 2001, the Divisionissued a Notice of Opportunity for Hearing,Division Order No. 01-231, to EdwardEugene Hawkins. After an administrativehearing held on January 16, 2002 in whichthe Hearing Officer ultimately found in theDivision’s favor, the Division issued its finalCease and Desist Order. The Division heldthat the Respondent violated the provisionsof Ohio Revised Code section 1707.44(C)(1)by selling unregistered investments in a bankdebenture trading program for Meyah In-vestment Group. The Division also heldthat the investments were sold in violationof Ohio Administrative Code Section1301:6-3-19(A)(19) since they were notauthorized by his employing dealer, Securi-ties Management and Research, Inc.

Ivan A. Shepard

On April 2, 2002, the Division issuedDivision Order No. 02-106, a Cease andDesist Order, to Ivan A. Shepard of BayVillage, Ohio.

The Division found that Shepard, anOhio-licensed insurance agent, violated theprovisions of Ohio Revised Code section1707.44(C)(1) and Ohio AdministrativeCode 1301:6-3-19(A)(19) by, respectively,

selling unregistered securities in the form ofpay telephone and related service agree-ments for National Communications Mar-keting, Inc. and Communications Market-ing Associates, Inc., and failing to obtainprior authorization from securities dealerSignator Investors, Inc. whom he was li-censed with at the time of the sales, i.e.“selling away”. ETS Payphones, Inc. wasthe exclusive supplier of the customer-ownedcoin operated telephones. The Securitiesand Exchange Commission obtained a per-manent injunction against ETS for securi-ties law violations. On March 1, 2002, theDivision issued a Notice of Opportunity forHearing, Division Order 02-079, toShepard.

The Division notified Shepard of hisright to an adjudicative hearing pursuant toChapter 119 of the Revised Code. A hear-ing was not requested and the Cease andDesist Order was issued on April 2, 2002.

Joseph Sirilla, Jr.

On April 10, 2002, the Division is-sued Division Order No. 02-113, a Ceaseand Desist Order to Joseph Sirilla, Jr. ofCampbell, Ohio.

The Division found that Sirilla, anOhio-licensed insurance agent, violated theprovisions of Ohio Revised Code section1707.44(C)(1) and Ohio AdministrativeCode 1301:6-3-19(A)(19) by, respectively,selling unregistered securities in the form ofpay telephone and related service agree-ments for National Communications Mar-keting, Inc. and Communications Market-ing Associates, Inc., and failing to obtainprior authorization from securities dealerConseco Securities, Inc. whom he was li-censed with at the time of the sales, i.e.“selling away”. The Division found that hewas paid commissions of 12% for selling thesecurities. ETS Payphones, Inc. was theexclusive supplier of the customer-ownedcoin-operated telephones. The Securitiesand Exchange Commission obtained a per-manent injunction against ETS for securi-ties law violations. On March 6, 2002, theDivision issued a Notice of Opportunity forHearing, Division Order 02-083, to Sirilla.

The Division notified Sirilla of hisright to an adjudicative hearing pursuant to

Chapter 119 of the Revised Code. A hear-ing was not requested and the Cease andDesist Order was issued on April 10, 2002.

George A. Price

On April 16, 2002, the Division is-sued Division Order No. 02-118, a Ceaseand Desist Order to George A. Price ofShadyside, Ohio.

The Division found that Price, anOhio-licensed insurance agent, violated theprovisions of Ohio Revised Code sections1707.44(A)(1) and 1707.44(C)(1) by sell-ing unregistered securities in the form of paytelephone and related service agreements forNational Communications Marketing, Inc.and Communications Marketing Associ-ates, Inc. while he was unlicensed as a secu-rities salesperson. The Division found thathe was paid commissions of 10% to 12% forselling the securities. ETS Payphones, Inc.was the exclusive supplier of the customer-owned coin-operated telephones. The Se-curities and Exchange Commission obtaineda permanent injunction against ETS forsecurities law violations. On March 13,2002, the Division issued a Notice of Op-portunity for Hearing, Division Order 02-091, to Price.

The Division notified Price of hisright to an adjudicative hearing pursuant toChapter 119 of the Revised Code. A hear-ing was not requested and the Cease andDesist Order was issued on April 16, 2002.

William G. Burkett

On April 30, 2002, the Division is-sued Division Order No. 02-129, a Ceaseand Desist Order to William G. Burkett ofPowell, Ohio.

The Division found that Burkett, anOhio-licensed insurance agent, violated theprovisions of Ohio Revised Code sections1707.44(A)(1), 1707.44(B)(4), 1707.44(C)(1) and 1707.44(G) and Ohio Administra-tive Code 1301:6-3-19(A)(5) by sellingunregistered securities in the form of paytelephone and related service agreements forNational Communications Marketing, Inc.and Communications Marketing Associ-ates, Inc. while he was unlicensed as a secu-

Ohio Securities Bulletin 2002:2 7

continued on page 8

rities salesperson. He also misrepresentedthe risks and suitability of investing in thesecurities. The Division found that he sharedcommissions of at least 14% with anothersalesperson from the securities sales. ETSPayphones, Inc. was the exclusive supplierof the customer-owned coin-operated tele-phones. The Securities and Exchange Com-mission obtained a permanent injunctionagainst ETS for securities law violations.On March 28, 2002, the Division issued aNotice of Opportunity for Hearing, Divi-sion Order 02-104, to Burkett.

The Division notified Burkett of hisright to an adjudicative hearing pursuant toChapter 119 of the Revised Code. A hear-ing was not requested and the Cease andDesist Order was issued on April 30, 2002.

Ronald A. Thompson

On May 9, 2002, the Division issuedDivision Order No. 02-135, a Cease andDesist Order to Ronald A. Thompson ofBoca Raton, Florida.

The Division found that Thomp-son violated the provisions of Ohio Re-vised Code sections 1707.44(A)(1),1707.44(C)(1) and Ohio AdministrativeCode 1301:6-3-19(A)(19) by selling unreg-istered securities in the form of pay tele-phone and related service agreements forNational Communications Marketing, Inc.and Communications Marketing Associ-ates, Inc., some of which were made whilehe was unlicensed as a securities salesperson,and he shared commissions with someonewho wasn’t licensed as a salesperson at thetime of some of the sales. The Divisionfound that he shared commissions of at least14% with another salesperson from thesecurities sales. ETS Payphones, Inc. wasthe exclusive supplier of the customer-ownedcoin-operated telephones. The Securitiesand Exchange Commission obtained a per-manent injunction against ETS for securi-ties law violations. On March 28, 2002, theDivision issued an Amended Notice ofOpportunity for Hearing, Division Order02-063, to Thompson.

The Division notified Thompson ofhis right to an adjudicative hearing pursuantto Chapter 119 of the Revised Code. Ahearing request was made and then with-

drawn, and the Cease and Desist Order wasissued on May 9, 2002.

Combined Agency, Inc.;James E. Ady

On May 9, 2002, the Division issueda Cease and Desist Order, Division OrderNo. 02-137, to Combined Agency, Inc. andJames E. Ady of Spokane, Washington.

The Division found that CombinedAgency and Ady violated the provisions ofOhio Revised Code sections 1707.44(A)(1)and 1707.44(C)(1) by selling unregisteredviatical settlements while unlicensed as asecurities dealer and salesperson. TheDivision’s investigation stemmed from thesale of viatical settlements of Robin HoodInternational, Ltd. to Ohio investors. TheDivision found that commissions of 10%were paid to Combined Agency and Ady forthe viatical settlements. On April 4, 2002,the Division issued a Notice of Opportunityfor Hearing, Division Order 02-111, toCombined Agency and Ady.

The Division notified CombinedAgency and Ady of their right to an adjudi-cative hearing pursuant to Chapter 119 ofthe Revised Code. A hearing was not re-quested and the Cease and Desist Order wasissued on May 9, 2002.

Keith A. Votaw

On May 9, 2002, the Division issuedDivision Order No. 02-138, a Cease andDesist Order to Keith A. Votaw ofBellefontaine, Ohio.

The Division found that Votaw, anOhio-licensed insurance agent, violated theprovisions of Ohio Revised Code sections1707.44(A)(1) and 1707.44(C)(1) by sell-ing unregistered securities in the form of paytelephone and related service agreements forNational Communications Marketing, Inc.and Communications Marketing Associ-ates, Inc. while he was unlicensed as a secu-rities salesperson. The Division found thathe was paid commissions of 10% to 12% forselling the securities. ETS Payphones, Inc.was the exclusive supplier of the customer-owned coin-operated telephones. The Se-curities and Exchange Commission obtaineda permanent injunction against ETS forsecurities law violations. On April 4, 2002,the Division issued a Notice of Opportunity

for Hearing, Division Order 02-110, toVotaw.

The Division notified Votaw of hisright to an adjudicative hearing pursuant toChapter 119 of the Revised Code. A hear-ing was not requested and the Cease andDesist Order was issued on May 9, 2002.

Beneficial Assistance

On May 24, 2002, the Division is-sued a Final Order to Cease and Desist,Division Order No. 02-144, to BeneficialAssistance of Baltimore, Maryland.

The Division found that BeneficialAssistance violated the provisions of OhioRevised Code section 1707.44(C)(1) by sell-ing unregistered viatical settlements total-ing approximately $1,504,037.08 to Ohioinvestors through local salespeople whichthe company recruited and paid sales com-missions.

On October 26, 2001, the Divisionissued a Notice of Opportunity for Hearing,Division Order 01-284, to Beneficial. Anadministrative hearing was requested andheld on February 4, 2002. The hearingofficer issued a report containing recom-mendations that were favorable to the Divi-sion. The report was accepted by the Divi-sion, and the Final Order to Cease andDesist was issued on May 24, 2002.

Delbert R. Cogar

On June 3, 2002, the Division issuedDivision Order No. 02-151, a Cease andDesist Order to Delbert R. Cogar of Ada,Ohio.

The Division found that Cogar, anOhio-licensed insurance agent, violated theprovisions of Ohio Revised Code sections1707.44(A)(1) and 1707.44(C)(1) by sell-ing unregistered securities in the form of paytelephone and related service agreements forNational Communications Marketing, Inc.and Communications Marketing Associ-ates, Inc. while he was unlicensed as a secu-rities salesperson. The Division found thathe was paid commissions of 10% to 12% forselling the securities. ETS Payphones, Inc.was the exclusive supplier of the customer-owned coin operated-telephones. The Se-curities and Exchange Commission obtaineda permanent injunction against ETS forsecurities law violations. On April 23, 2002,

Ohio Securities Bulletin 2002:28

continued from page 7Enforcement Reports

the Division issued a Notice of Opportunityfor Hearing, Division Order 02-122, toCogar.

The Division notified Cogar of hisright to an adjudicative hearing pursuant toChapter 119 of the Revised Code. A hear-ing was not requested and the Cease andDesist Order was issued on June 3, 2002.

Robert A. Tennant

On June 12, 2002, the Division is-sued Division Order No. 02-164, a Ceaseand Desist Order to Robert A. Tennant ofAkron, Ohio.

The Division found that Tennant, anOhio-licensed insurance agent, violated theprovisions of Ohio Revised Code sections1707.44(A)(1) and 1707.44(C)(1) by sell-ing unregistered securities in the form of paytelephone and related service agreements forNational Communications Marketing, Inc.and Communications Marketing Associ-ates, Inc. while he was unlicensed as a secu-rities salesperson. The Division found thathe was paid commissions of 12% for sellingthe securities. ETS Payphones, Inc. was theexclusive supplier of the customer-ownedcoin-operated telephones. The Securitiesand Exchange Commission obtained a per-manent injunction against ETS for securi-ties law violations. On May 9, 2002, theDivision issued a Notice of Opportunity forHearing, Division Order 02-139, toTennant.

The Division notified Tennant of hisright to an adjudicative hearing pursuant toChapter 119 of the Revised Code. A hear-ing was not requested and the Cease andDesist Order was issued on June 12, 2002.

Jeffrey W. Fleming

On May 15, 2002, the Division is-sued a Cease and Desist Order, DivisionOrder No. 02-143, to Jeffrey W. Fleming ofBoardman, Ohio.

On April 4, 2002, the Division issueda Notice of Opportunity for Hearing, Divi-sion Order No. 02-108, to Jeffrey W.Fleming pursuant to Revised Code Chapter119. The Division alleged that Flemingviolated Ohio Revised Code sections

1707.44(A)(1) and 1707.44(C)(1) by sell-ing securities to Ohio residents without alicense and selling or causing to be soldunregistered securities to Ohio residents inthe form of investment contracts of ETSPayphones Inc. and Phoenix Telecom Inc.The Division also notified Fleming of hisright to an adjudicative hearing pursuant toChapter 119 of the Revised Code. A hear-ing was not requested and a final Cease andDesist Order was issued to Fleming on May15, 2002.

John Zimmerman

On January 14, 2002, the Divisionissued Order No. 02-019, a Cease and De-sist Order, against John Zimmerman.Throughout 1999 Zimmerman sold to Ohioresidents, on behalf of Accelerated BenefitsCorporation, fractionalized interests inviatical settlements. These interests in viaticalsettlements are securities under the OhioSecurities Act but were not registered withthe Division. Furthermore, Respondent’sconduct with respect to selling the fraction-alized interests in viatical settlements con-stituted his acting as a dealer, as defined byOhio Revised Code Section 1707.01(E)(1),even though he was not licensed as such.Therefore, on December 10, 2001, the Di-vision issued Order No. 01-326, a Notice ofOpportunity for Hearing, against JohnZimmerman for allegedly violating OhioRevised Code Section 1707.01(C)(1),i.e.,the unregistered sale of securities, alongwith Ohio Revised Code Section1707.44(A)(1), i.e., selling securities to Ohioresidents without being licensed as a dealer.The Respondent did not request a hearingpursuant to Chapter 119 of the Ohio Re-vised Code, thereby allowing the Divisionto issue its Cease and Desist Order No. 02-019, which incorporated the allegations setforth in the Notice of Opportunity for Hear-ing.

William Griffioen

On January 14, 2002, the Divisionissued Order No. 02-018, a Cease and De-sist Order against William Griffioen. FromOctober of 1999 through December of 1999,Griffioen sold to Ohio residents, on behalfof Accelerated Benefits Corporation, frac-tionalized interests in viatical settlements.

These interests in viatical settlements aresecurities under the Ohio Securities Act butwere not registered with the Division. Fur-thermore, Respondent’s conduct with re-spect to selling the fractionalized interests inviatical settlements constituted his acting asa dealer, as defined by Ohio Revised CodeSection 1707.01(E)(1), even though he wasnot licensed as such. Therefore, on Decem-ber 10, 2001, the Division issued Order No.01-325, a Notice of Opportunity for Hear-ing, against William Griffioen for allegedlyviolating Ohio Revised Code Section1707.01(C)(1), i.e.,the unregistered sale ofsecurities, along with Ohio Revised CodeSection 1707.44(A)(1), i.e., selling securi-ties to Ohio residents without being li-censed as a dealer. The Respondent did notrequest a hearing pursuant to Chapter 119of the Ohio Revised Code, thereby allowingthe Division to issue its Cease and DesistOrder No. 02-018, which incorporated theallegations set forth in the Notice of Oppor-tunity for Hearing.

David Barnes

On January 14, 2002, the Divisionissued Order No. 02-020, a Cease and De-sist Order against David Barnes. FromAugust of 1999 through October of 1999,Barnes sold to Ohio residents, on behalf ofAccelerated Benefits Corporation, fraction-alized interests in viatical settlements. Theseinterests in viatical settlements are securitiesunder the Ohio Securities Act but were notregistered with the Division. Furthermore,Respondent’s conduct with respect to sell-ing the fractionalized interests in viaticalsettlements constituted his acting as a dealer,as defined by Ohio Revised Code Section1707.01(E)(1), even though he was notlicensed as such. Therefore, on December10, 2001, the Division issued Order No.01-323, a Notice of Opportunity for Hear-ing against David Barnes for allegedly vio-lating Revised Code Section 1707.01(C)(1),i.e.,the unregistered sale of securities, alongwith Revised Code Section 1707.44(A)(1),i.e., selling securities to Ohio residents with-out being licensed as a dealer. The Respon-dent did not request a hearing pursuant toChapter 119 of the Ohio Revised Code,thereby allowing the Division to issue itsCease and Desist Order No. 02-020, whichincorporated the allegations set forth in theNotice of Opportunity for Hearing.

Ohio Securities Bulletin 2002:2 9

Timothy D. Austin

On January 14, 2002, the Divisionissued Order No. 02-021, a Cease and De-sist Order, against Timothy D. Austin. FromDecember of 1998 through August of 2000,Austin sold to Ohio residents, on behalf ofAccelerated Benefits Corporation, fraction-alized interests in viatical settlements. Theseinterests in viatical settlements are securitiesunder the Ohio Securities Act but were notregistered with the Division. Therefore, onDecember 10, 2001, the Division issuedOrder No. 01-324, a Notice of Opportu-nity for Hearing against Timothy D. Austinfor allegedly violating Ohio Revised CodeSection 1707.01(C)(1), i.e.,the unregisteredsale of securities. The Respondent did notrequest a hearing pursuant to Chapter 119of the Ohio Revised Code, thereby allowingthe Division to issue its Cease and DesistOrder No. 02-021, which incorporated theallegations set forth in the Notice of Oppor-tunity for Hearing.

Kevin L. Lawrence

On May 28, 2002, the Division is-sued Order No. 02-146, a Cease and DesistOrder, against Kevin L. Lawrence. FromJuly 2000 through April 2001, Lawrence, aspresident of Health Maintenance Centers,Inc., sold to Ohio residents shares of com-mon stock in Health Maintenance Centers,Inc. These shares of stock are securitiesunder the Ohio Securities Act but were notregistered with the Division. Therefore, onMarch 8, 2002, the Division issued OrderNo.02-087, a Notice of Opportunity forHearing against Kevin L. Lawrence for al-legedly violating Ohio Revised Code Sec-tion 1707.44 (C)(1), i.e. the unregisteredsale of securities. Mr. Lawrence consentedto the issuance of Order No.02-146, whichincorporated the allegations set forth in theNotice of Opportunity for Hearing.

Health Maintenance Centers, Inc.

On May 9, 2002, the Division issuedOrder No. 02-136, a Cease and Desist Or-der against Health Maintenance Centers,Inc. From July 2000 through April 2001,Health Maintenance Centers, Inc. sold toOhio residents shares of common stock insaid corporation. These shares of stock are

securities under the Ohio Securities Act butwere not registered with the Division. There-fore, on March 8, 2002 , the Division issuedOrder No.02-087, a Notice of Opportunityfor Hearing, against Health MaintenanceCenters, Inc. for allegedly violating RevisedCode Section 1707.44 (C)(1), i.e. the un-registered sale of securities. Health Mainte-nance Centers, Inc. did not request a hear-ing pursuant to Chapter 119 of the OhioRevised Code, thereby allowing the Divi-sion to issue its Cease and Desist Order No.02-136 which incorporated the allegationsset forth in the Notice of Opportunity forHearing as findings.

Caribbean Treasure Hunters, Inc.

On June 19, 2002, the Division is-sued Division Order No. 02-167, a Ceaseand Desist Order against Caribbean Trea-sure Hunters, Inc., which conducted busi-ness from Deerfield Beach, Florida.

The Division found that the Respon-dent had violated the provisions of OhioRevised Code section 1707.44(C)(1) by sell-ing unregistered securities. The Division’sallegations stem from the offer for sale inAugust 2001 by means of a “cold call”convertible preferred stock. The Divisionnotified Respondent of its right to an ad-ministrative hearing pursuant to Chapter119 of the Revised Code, which Respon-dent waived by failing to timely request ahearing. Therefore, the Division issuedCease and Desist Order No. 02-167.

James F. Crawford

On June 6, 2002, the Division issuedDivision Order No. 02-162, a Cease andDesist Order, by Consent, against James F.Crawford. Respondent conducted businessfrom North Canton, Ohio.

The Division found that Respondentviolated Ohio Revised Code section1707.44(C)(1) by selling unregistered secu-rities, and that Respondent further violatedOhio Administrative Code Rule 1301:6-3-19(A)(19) by “selling away” while employedby Lincoln Financial Advisors Corporation.

The Division’s allegations stem fromthe sale of promissory notes, investmentcontracts and limited liability company

membership interests for Allstate Finance,Inc., Alpha Telecom, Inc. and Hotel Con-nect #600, LLC.

The Division notified Respondent ofhis right to an administrative hearing pursu-ant to Chapter 119 of the Revised Code,which Respondent waived by entering intothe Consent Agreement. Therefore, theDivision issued Cease and Desist Order No.02-162.

Criminal Updates

On April 15, 2002, Essam A. Mikhailwas sentenced to four years in prison andordered to pay $29,123 in restitution.Mikhail was indicted on May 25, 2001, andpled guilty on February 11, 2002, in FranklinCounty Common Pleas Court to one felonycount of acting as an unlicensed investmentadviser and one felony count of improperlymaintaining custody of a client’s funds orsecurities. This case represents the Division’sfirst conviction under the new investmentadviser provisions to the Ohio SecuritiesAct enacted in March 1999.

On April 22, 2002, D. Gerald Lachpled guilty in the Clermont County Com-mon Pleas Court to 12 counts of sellingunregistered securities to Ohio residents.He was sentenced to four years in prison andgiven credit for the approximately one yearhe has already served. Lach was originallyindicted on August 30, 2000, on 55 felonycounts in connection with sales of securitiesin several companies that he owned or con-trolled including Cincinnati Regional Ini-tiative Inc., Midwest Regional Authority,Community Concerned Citizens Inc., andStorehouse Malachai 3:10 Inc. Four addi-tional counts, including one count of sellingunregistered securities, two counts of falserepresentations in the sale of securities, andone count of fraudulent activity in the saleof securities were added on January 25,2001, after authorities learned that Lachhad attempted to sell $200,000 in stock inearly January 2001.

Paul A. Rendina was arraigned inWilloughby Municipal Court on June 27,2002 on seven securities counts (all seconddegree felonies) filed against him on May20th. The counts include one count of the

Continued on page 12

Ohio Securities Bulletin 2002:210

Final Order SummariesThe following is a summary of recent final orders issued by the Division in response to salesperson and investment adviser representative licenseapplications.

Licensing StatisticsLicense Type YTD 2001

Dealer 2,337

Salesmen 123,694

Investment Adviser 1,448

Investment Adviser Representative 8,933

PARTY DECISION ORDER ALLEGATIONSSENT/NO. H.O. RECOMMENDATIONS

Charles William Sheets Denied 5/2/02 ADM 1301:6-3-19(D)02-130 (2),(7), and (9)

1707.19(A)(1)Findings Approved

Horizon Investment Advisors, Inc. Denied 6/6/02 ADM 1301:6-3-19(D)(9)02-161 R.C. 1707.19(F)

Hearing Not Requested

Ohio Securities Bulletin 2002:2 11

Registration Statistics

The following table sets forth the number ofregistration, exemption, and notice filingsreceived by the Division during the secondquarter of 2002, compared to the number offilings received during the second quarter of2001. Likewise, the table compares the year-to-date filings for 2002 and 2001.

Capital Formation Statistics*Because the Division's mission includes enhancing

capital formation, the Division tabulates the aggregatedollar amount of securities to be sold in Ohio pursuant tofilings made with the Division. As indicated in the notesto the table, the aggregate dollar amount includes a valueof $1,000,000 for each "indefinite" investment companyfiling. However, the table does not reflect the value ofsecurities sold pursuant to "self-executing exemptions"like the "exchange listed" exemption in R.C. 1707.02(E)and the "limited offering" exemption in R.C. 1707.03(O).Nonetheless, the Division believes that the statistics setout in the table are representative of the amount of capitalformation taking place in Ohio.

*Categories reflect amount of securities registered, offered, oreligible to be sold in Ohio by issuers.**Investment companies may seek to sell an indefiniteamount of securities by submitting maximum fees. Basedon the maximum filing fee of $1100, an indefinite filingrepresents the sale of a minimum of $1,000,000 worth ofsecurities, with no maximum. For purposes of calculatingan aggregate capital formation amount, each indefinitefiling has therefore been assigned a value of $1,000,000.

Filing Type 2nd Qtr ‘02 YTD ‘02 2nd Qtr ‘01 YTD ‘01

1707.03(Q) 34 68 31 70

1707.03(W) 4 12 1 9

1707.03(X) 275 524 262 563

1707.03(Y) 1 5 4 4

1707.04/.041 1 3 0 1

1707.06 17 48 17 40

1707.09/.091 49 85 34 84

Form NF 1144 2225 1109 2517

1707.39/.391 11 24 27 50

Total 1536 2993 1485 3340

Filing Type Second Qtr 2002 YTD 2002

Exemptions

Form 3(Q) 317,264,737 386,431,935

Form 3(W) 8,832,580 22,494,580

Form 3(X) 41,696,877,829 179,903,333,032

Form 3(Y) 1,000,000 409,751,000

Registrations

Form .06 192,879,463 445,925,862

Form .09/.091 3,506,807,790 17,000,017,216

Investment Companies

Definite 92,165,700 2,211,110,799

Indefinite** 613,000,000 1,141,000,000

TOTAL $46,428,828,099 $201,307,064,424

Ohio Securities Bulletin 2002:212

OHIO SECURITIES BULLETIN

Ohio Department of CommerceDivision of Securities77 South High Street22nd FloorColumbus, Ohio 43215

PRSRT STDU.S. POSTAGE

PAIDCOLUMBUS, OH

PERMIT NO. 8019

unregistered sale of securities, three countsof securities fraud and three counts of falserepresentations in the sale of securities. Thecharges relate to the sale of securities byRendina, a C.P.A., to Ohio investors in hisentities, Willowlake Rental Partnership #197and 34101 GP, Inc. Rendina’s preliminaryhearing is scheduled for July 25, 2002.

Theresa Stencil

Theresa Stencil was indicted on twocounts of engaging in a pattern of corruptactivity, 14 counts of theft, 19 counts ofselling unregistered securities, two counts ofsecuring writings by deception, and onecount of tampering with records by a LorainCounty grand jury on April 10, 2002. Sten-cil owned and operated Augar-Lane Devel-opment Co. Ltd, Western Reserve ArabianLtd., Merit Financial Services, Inc. and Fam-

ily Focus Center. The Division of SecuritiesSuspended Stencil's securities salespersonlicense for the sale of Augar-Lane promis-sory notes to Ohio investors on October 19,2001, and subsequently revoked her securi-ties license on January 28, 2002.

John H. Rodeman

On April 16, 2002, John H. Rodemanpled guilty to a four count Information in U.S.District Court in Akron. The four countsincluded conspiracy, securities fraud, mail fraudand filing a false income tax return. Rodemanis a former salesman and participant in AndrewP. Bodnar's $41 million ponzi scheme. InAugust 1998, the Division filed a motionasking the Summit County Court of Com-mon Pleas to appoint a receiver to recover theassets of Bodnar and his affiliated entities. Thecourt approved the application, appointed theReceiver and the Receivership is still ongoing.

continued from page 9Enforcement Reports Civil Actions

George J. Fiorini II dba TheFiorini Agency and Guardian

Investments, LLC.

An agreed permanent injunction wasentered against Guardian Investments onApril 8, 2002, in Hamilton County Com-mon Pleas Court. A contempt hearing washeld by the court and Fiorini was foundguilty of contempt on April 19, 2002, andordered to provide all documents and infor-mation to a CPA appointed by the court.On April 20, 2001, the Division filed acomplaint requesting preliminary and per-manent injunctions in Hamilton CountyCommon Pleas Court against George J.Fiorini II dba The Fiorini Agency andGuardian Investments, LLC. Fiorini ad-vertised and sold his “10% Plus IncomePlan” to Ohio residents and represented theplan as a low risk investment opportunity.In fact, Fiorini offered high risk, unsecuredpromissory notes in Guardian Investments.On Septermber 4, 2001, the court enteredan order granting the Division a prelimi-nary injunction.