Knowles v. State ex rel. Lindeen

• Decision Date: 02 December 2009
• Docket Number: No. DA 08-0016.,DA 08-0016.
• Citation: 2009 MT 415,353 Mont. 507,222 P.3d 595
• Parties: Randall G. KNOWLES, Petitioner and Appellee, v. STATE of Montana, ex rel. Monica J. LINDEEN, Montana State Auditor and Ex Officio Commissioner of Securities, Respondent and Appellant.
• Court: Montana Supreme Court

222 P.3d 595

2009 MT 415

353 Mont. 507

Randall G. KNOWLES, Petitioner and Appellee, v. STATE of Montana, ex rel. Monica J. LINDEEN, Montana State Auditor and Ex Officio Commissioner of Securities, Respondent and Appellant.

No. DA 08-0016.

Supreme Court of Montana.

Submitted on Briefs October 16, 2008.

Decided December 2, 2009.

Rehearing Denied January 13, 2010.

For Appellant: Roberta Cross Guns, Montana State Auditor's Office, Helena, Montana.

For Appellee: Stanley T. Kaleczyc, Brand G. Boyar, Browning, Kaleczyc, Berry & Hoven, P.C., Helena, Montana.

Justice JAMES C. NELSON delivered the Opinion of the Court.

¶ 1 "It requires but little appreciation . . . of what happened in this country during the 1920's and 1930's to realize how essential it is that the highest ethical standards prevail in every facet of the securities industry." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186-87, 84 S.Ct. 275, 280, 11 L.Ed.2d 237 (1963) (ellipsis in Capital Gains, internal quotation marks omitted). The Securities Act of Montana, set out in Title 30, chapter 10, parts 1 through 3 of the Montana Code Annotated, serves to achieve this goal. First enacted in 1961, the Act is a substantial adoption of the major provisions of the Uniform Securities Act promulgated by the Conference of Commissioners on Uniform State Laws, though it contains some variations, omissions, and additional matter. See Chapter Compiler's Comments, Title 30, chapter 10, MCA (Annotations 2008). Like federal securities statutes, whose "fundamental purpose . . . was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry," Capital Gains, 375 U.S. at 186, 84 S.Ct. at 280, the Securities Act of Montana is intended to protect the investor, persons engaged in securities transactions, and the public interest. See § 30-10-102(1), MCA. The Act also seeks to promote uniformity among the states and to encourage, promote, and facilitate capital investment in Montana. See § 30-10-102(2), (3), MCA.

¶ 2 The administration of the Securities Act is under the general supervision and control of the State Auditor, who is the ex officio Commissioner of Securities and Insurance. See §§ 2-15-1901, 2-15-1903, 30-10-107(1), MCA. The Commissioner is authorized to make, amend, and rescind rules and forms as necessary to carry out the Act's provisions. Section 30-10-107(1), MCA. The State Auditor's office consists of several divisions, including a Securities Department, which is headed by the Deputy Securities Commissioner. Admin. R.M. 6.1.101(1)(c). The Department is responsible for administering the Securities Act; and, to that end, the Department registers securities offered for sale in Montana, broker-dealers, salespersons, investment advisers, and investment adviser representatives. Admin. R.M. 6.1.101(2)(a). The Department also serves an enforcement function. Admin. R.M. 6.1.101(2)(a).

¶ 3 In August 2004, the Department issued a Notice of Proposed Agency Disciplinary Action and Opportunity for Hearing, alleging that Randall G. Knowles had violated various provisions of the Securities Act. The Department subsequently amended the Notice to include additional violations alleged to have occurred during the pendency of these proceedings. The Department proposed that the Commissioner impose fines for each of the violations and that Knowles' pending application for registration as a securities salesperson be denied.

¶ 4 The case proceeded to a contested case hearing in March and April 2005, and the Commissioner (John M. Morrison at the time) issued the final agency decision in May 2006. He concluded that Knowles had in fact violated §§ 30-10-201(1), -201(13)(g), and -301(1), MCA. Furthermore, the Commissioner concluded that Knowles' failure to comply with the Securities Act was "willful" under § 30-10-201(13)(b), MCA. He imposed fines totaling $20,000. Knowles then filed a petition for judicial review in the Eighth Judicial District Court, Cascade County. The District Court held a hearing and, in August 2007, issued an order reversing the Commissioner's decision. The Department now appeals. Having examined the District Court's order and the complete record, we affirm in part and reverse in part.

BACKGROUND

Underlying Factual and Procedural Events

¶ 5 With exceptions not applicable here, it is unlawful for a person to transact business in this state as a broker-dealer, salesperson, investment adviser, or investment adviser representative unless the person is registered under the Securities Act. Section 30-10-201(1), (3), MCA. As the Department's expert explained during the contested case hearing, the registration requirement is designed to ensure that individuals who are assisting people in the management of their money have the requisite knowledge and skill and are familiar with the applicable laws. To that end, registration requires the passage of specific exams, see e.g. Admin. R.M. 6.10.501, and then ongoing compliance with the Securities Act, see e.g. § 30-10-201(13), MCA, and certain other requirements, such as continuing education. Moreover, with respect to salespersons, their registration is not effective during any period when the salesperson is not associated with a securities issuer or a registered broker-dealer specified in the registration application. See § 30-10-201(10)(a), MCA. In other words, the salesperson must be sponsored by an issuer or a broker-dealer in order to become registered. An analogous requirement applies to investment adviser representatives. See § 30-10-201(10)(b), MCA.

¶ 6 At the time the Department filed the violations against Knowles (August 2004), he had been in the securities business for about 18 years. During that time, Knowles served hundreds of clients and was an active member in various organizations, including the National Association of Insurance and Financial Advisors (NAIFA). Knowles is highly educated and served as a continuing education instructor for NAIFA for several years. He was registered as an investment adviser representative until December 31, 2003, and as a securities salesperson until June 7, 2004.

¶ 7 The Securities Act violations at issue here arose out of an ongoing arrangement Knowles had with Mark Payton. At the time, Payton was licensed to sell annuities and Knowles was a registered securities salesperson with FSC Securities Corporation (FSC). Payton would meet with prospective clients to sell annuities issued by the life insurance company Payton represented. He would carry with him securities transaction forms provided by Knowles, including confidential personal financial planning forms, change of investment objectives forms, account transfer forms, and durable power of attorney forms. These forms would be filled out and signed if securities could be liquidated to fund the purchase of an annuity from Payton. Payton then would send the completed forms to Knowles, who would use them to effectuate the securities transaction.

¶ 8 In 2002, Payton met with Grace Simmons, Emily Downey, and Doris Haaland. At the time, Simmons was 81 years old, Downey was 68, and Haaland was 71. It appears that these meetings came about because Simmons, Downey, and Haaland had each mailed in cards (circulated in magazines such as that published by AARP) requesting information about the annuity products Payton was selling. Payton met with each of the women at their respective homes. Once they expressed an interest in the annuities, Payton asked how the purchases would be funded. All three had securities investments and were considering liquidating the securities in order to purchase the annuities. Payton then contacted Knowles by telephone and, at Knowles' direction, collected financial and securities investment information from the women. Payton also obtained each woman's signature on the securities transaction forms which Knowles had provided to Payton. Payton thereafter turned the documents over to Knowles, who used the information and the signed forms to liquidate securities for Simmons and Downey. (Haaland transferred money directly to the annuity from a money market account.) Before executing the sales, however, Knowles contacted Simmons and Downey directly to obtain their consent for the sales and to recommend against liquidating certain of their investments.

¶ 9 Simmons subsequently filed a complaint with the Department concerning the liquidation of her securities by Knowles. Simmons stated that her daughter, a CPA, had reviewed the liquidations and determined that they were highly unsuitable for Simmons given her age, her cost basis, her liquidity, and her level of experience with investments. Knowles' supervisor at FSC likewise concluded that a fixed annuity product with a lengthy hold period was not appropriate for an elderly person such as Simmons. Downey and Haaland also contacted the Department with complaints and concerns about the transactions with Knowles and Payton.

¶ 10 Knowles' employment with FSC was terminated in May 2004. As a result, his registration as a securities salesperson also terminated. See § 30-10-201(10)(a), MCA. Knowles thereafter applied on August 24, 2004, for registration as a salesperson with Signal Securities, Inc. On August 30, however, the Department rejected his application and issued (1) the Notice of Proposed Agency Disciplinary Action and Opportunity for Hearing and (2) a Temporary Cease and Desist Order, and Order Denying Application. The Department alleged that Knowles had violated certain provisions of the Securities Act in the transactions involving Simmons, Downey, and Haaland, including §§ 30-10-201(13)(g) and -301(1), MCA, which prohibit dishonest, unethical, and fraudulent practices. In addition, the Department alleged that FSC had violated § 30-10-201(13)(k), MCA, by failing to reasonably supervise Knowles. The Department proposed that the Commissioner...