N. Atl. Sec., LLC v. Office of Sec.

Citation92 A.3d 335,2014 ME 67
PartiesNORTH ATLANTIC SECURITIES, LLC, et al. v. OFFICE OF SECURITIES.
Decision Date15 May 2014
CourtSupreme Judicial Court of Maine (US)

OPINION TEXT STARTS HERE

Neal L. Weinstein, Esq., Old Orchard Beach, (orally), for appellants North Atlantic Securities, LLC, Michael J. Dell'Olio & Associates, LLC, and Michael J. Dell'Olio.

Paul Stern, Dep. Atty. Gen. (orally), Office of the Attorney General, Augusta, for appellee Office of Securities.

Panel: SAUFLEY, C.J., and ALEXANDER, LEVY,*SILVER, MEAD, GORMAN, and JABAR, JJ.

Majority: ALEXANDER, SILVER, GORMAN, and JABAR, JJ.

Concurrence/Dissent: SAUFLEY, C.J. and MEAD, J.

ALEXANDER, J.

[¶ 1] North Atlantic Securities, LLC; Michael J. Dell'Olio & Associates, LLC; and Michael J. Dell'Olio appeal from a judgment entered in the Business and Consumer Docket ( Nivison, J.) affirming the revocation of each of their securities licenses by the Securities Administrator of the Office of Securities. The revocations resulted from transactions in 2006 and 2008 through which Dell'Olio, his son, and the entities under Dell'Olio's control received more than $200,000 in loans from Dell'Olio's elderly mother-in-law, 1 who was a client. Most of the loans were not repaid. The companies and Dell'Olio argue that charges arising from the 2006 transactions were time-barred, the administrative record fails to support the Administrator's factual findings, the administrative process and the Administrator herself were biased, and the penalty imposed was excessive. We affirm the judgment.

I. STATUTORY AND REGULATORY FRAMEWORK

[¶ 2] The Maine Uniform Securities Act, 32 M.R.S. §§ 16101–16702 (2013), 2 includes licensing requirements for broker-dealers,3 agents, 4 investment advisers,5 and investment adviser representatives 6 who deal in securities, id. §§ 16401–16411, and authorizes disciplinary action against licenseesto protect the public interest, including by revoking or suspending a license, id. § 16412. The Securities Administrator of the Office of Securities is responsible for determining whether discipline should be imposed. Id.§§ 16102(1), 16412, 16601(1). A broker-dealer, agent, investment advisor, or investment advisor representative may be disciplined for, within the previous ten years, “engag [ing] in unlawful, dishonest or unethical practices in the securities, commodities, investment, franchise, banking, finance or insurance business” or failing to reasonably supervise a person under its supervision. Id. § 16412(4)(I), (M).

[¶ 3] “If the administrator finds that the order is in the public interest and subsection 4 authorizes the action, an order issued under [the Maine Uniform Securities Act] may revoke, suspend, condition or limit the license of a licensee.” Id. § 16412(2). Before entering such a disciplinary order, the Administrator must provide [a]ppropriate notice to the applicant or licensee,” afford an [o]pportunity for hearing,” and reach [f]indings of fact and conclusions of law in a record in accordance with Title 5, chapter 375 [the Maine Administrative Procedure Act].” Id. § 16412(7); see also5 M.R.S. §§ 9051–9064 (2013) (governing administrative agencies' adjudicatory proceedings).

A. Broker–Dealer and Broker–Dealer Agent

[¶ 4] North Atlantic was licensed as a broker-dealer and Dell'Olio as a broker-dealer agent at all relevant times. See32 M.R.S. § 16102(2), (4). The rules adopted by the Administrator pursuant to 32 M.R.S. § 16605 (2013) and in effect at the relevant times required broker-dealers and their agents to “observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business” and to “give particular consideration to any conflicts of interest that may arise or exist.” 6 C.M.R. 02 032 504–5 § 8 (2006). This rule included a list of practices deemed to be unethical but stated clearly, “This section is not intended to be all inclusive, and thus practices not enumerated herein may also be deemed dishonest or unethical.” Id. Relevant here, the rule provided:

A person may be deemed to have engaged in “dishonest or unethical practices” under Section 16412(4)(M) of the Act if the person has engaged in practices including but not limited to one or more of the following:

...

36. As an agent, lending money or securities to, or borrowing money or securities from, a customer, or acting as a custodian for money, securities or an executed stock power of a customer, unless:

A. The broker-dealer has written procedures allowing such an arrangement; and

B. The customer is:

(1) a member of the agent's immediate family or another person whom the agent supports, directly or indirectly, to a material extent.

6 C.M.R. 02 032 504–5, –7 § 8 (2006, 2009).

[¶ 5] The Financial Industry Regulatory Authority (FINRA), the independent federal regulator responsible for overseeing securities firms including North Atlantic, also has a set of rules that imposes responsibilities similar to those of the Maine statutes and regulations. Pursuant to FINRA rules, a securities firm “in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” FINRARule 2010 (2013).7

[¶ 6] Both the FINRA Rules in effect in 2006 and the current rules prohibit regulated persons and entities from borrowing money from or lending money to customers, except in defined circumstances, such as when the firm “has written procedures allowing the borrowing and lending of money between such registered persons and customers of the member,” and “the customer is a member of such person's immediate family,” which is defined to include a mother-in-law. FINRA Rule 2370(a), (c) (effective Feb. 18, 2004), repealed and replaced by FINRA Rule 3240(a), (c) (2013) (effective June 14, 2010) (replacing former Rule 2370 without any change in the language at issue here). The written procedures to which this rule refers are written supervisory procedures that a member must annually certify it has in place; the procedures must be “reasonably designed to achieve compliance with applicable FINRA rules, MSRB [Municipal Securities Rulemaking Board] rules and federal securities laws and regulations.” FINRA Rule 3130(b) (2013).

B. Investment Adviser and Investment Adviser Representative

[¶ 7] Michael J. Dell'Olio & Associates is an investment adviser, see32 M.R.S. § 16102(15), and Dell'Olio individually is an investment adviser representative, see id. § 16102(16). The applicable rules adopted by the Administrator provided, “Investment advisers and investment adviser representatives are fiduciaries and have a duty to act for the benefit of their clients.” 6 C.M.R. 02 032 515–15 § 14 (2009). The rule prohibited an investment adviser or investment adviser representative from “engag[ing] in dishonest or unethical business practices,” and listed “examples of practices that may constitute grounds for discipline as ‘dishonest or unethical practices' under Section 16412 of the Act.” Id. One listed example is [b]orrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds.” 6 C.M.R. 02 032 515–15 § 14(6) (2009).8 As with the rule governing the conduct of broker-dealers and their agents, [t]his section is not intended to be all inclusive, and thus practices not enumerated herein may also be deemed dishonest or unethical.” Id. § 14.

II. CASE HISTORY

[¶ 8] In 2002, Michael J. Dell'Olio & Associates became a licensed investment adviser with the Office of Securities. North Atlantic became licensed as a broker-dealer with the Office in 2003 and later shared a business location with Michael J. Dell'Olio & Associates. Dell'Olio individually was an agent of North Atlantic, an investment adviser representative of Michael J. Dell'Olio & Associates, and an owner exercising control in both firms.

[¶ 9] In June 2006, Dell'Olio borrowed $20,000 from his mother-in-law. She had been a brokerage and investment advisory client of Dell'Olio and his firms since 2003. Dell'Olio borrowed the money in part to help North Atlantic meet its obligations. However, he retained $8,250 from the loan to pay for work he performed in renovating a house owned by his wife.

[¶ 10] Dell'Olio created a payment schedule and made seven monthly payments of $631. He then stopped paying, leaving a balance of $15,583.

[¶ 11] At the time of these transactions, the written supervisory procedures that North Atlantic had in place provided:

Financial Relationships With Clients

Under no circumstances may a RR [Registered Representative] engage personally in any type of financial relationship or arrangement outside of the established the Firm structure. Prohibited practices include, but are not limited to: (a) Pooling funds for investment purposes with a client; (b) Lending to or borrowing from a client; (C) Participating in the profits or losses in a client's account or agreeing to repurchase a client's security or contract; (E) Acting as agent for a client in arranging a bank loan or any other transaction not directly part of the Firm's business; (F) Engaging in private securities transactions; and (G) Agreeing to rebate or share any portion of RR compensation with any other person or organization.

(Emphasis added.)

[¶ 12] In April 2008, when she was still a client of North Atlantic, Dell'Olio persuaded his mother-in-law to lend his son $150,000 for the purchase of a building where Dell'Olio's firms could do business. He established a non-purpose loan account in his mother-in-law's name with North Atlantic's clearing firm, Pershing, secured by the value of her securities. His mother-in-law borrowed $150,000 using the Pershing loan account and wired the money to a bank account held by Delmore Associates, LLC, whose sole member was Dell'Olio's son.

[¶ 13] Dell'Olio's son, using $94,000 of the money Dell'Olio received from his mother-in-law ...

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