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Home My WebLink About02-5199PHILADELPHIA iNDEMNITY INSURANCE COMPANY, Plaintiff VS. T.H.E. FINANCIAL GROUP LIMITED, JOHN D. COFFMAN, MARTHA C. COFFMAN, JOHN E. COFFMAN, PATRICIA A. COFFMAN, WILLIAM R. BISHOP, KATHLEEN L. BISHOP, MATTHEW J. BISHOP, PAMELA BISHOP, GEORGE H. MEENA, MARINA MEENA, SHIRLEY E. AUG, and RALPH II. GRIER Defendants IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY CIVIL ACTION - LAW NOTICE TO DEFEND You have been sued in court. If you wish to defend against the claims set forth in the following pages, you must take action within twenty (20) days after this complaint is served, by entering a written appearance personally or by attorney and filing in writing with the court your defenses or objections to the claims set forth against you. You are warned that if you fail to do so the case may proceed without you and a judgment may be entered against you by the court without further notice for any money claimed in the complaint or for any other claim or relief requested by the plaintiff. You may lose money or property or other rights important to you. YOU SHOULD TAKE THIS PAPER TO YOUR LAWYER AT ONCE. IF YOU DO NOT HAVE A LAWYER OR CANNOT AFFORD ONE, GO TO OR TELEPHONE THE OFFICE SET FORTH BELOW TO FIND WHERE YOU CAN GET LEGAL HELP. Cumberland County Bar Assn. 2 Liberty Avenue Carlisle, PA (717) 249-3166 LAWYER REFERRAL SERVICE 100 South Street Harrisburg, PA 17108 (800) 692-7375 (717) 238-6715 MARSHALL, I~Y,~d~RNER, C O BY: Eric A. Fitzgerald, Esquire Atty. I.D. #: 72590 401 Adams Avenue, Suite 400 Scranton, PA 18510 (570) 496-4604 Attorney for Plaintiff IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA PHILADELPHIA INDEMNITY INSURANCE COMPANY Plaintiff T.H.E FINANCIAL GROUP LIMITED, JOHN D. COFFMAN, MARTHA C. COFFMAN, JOHN E. COFFMAN, PATRICIA A. COFFMAN, WILLIAM R. BISHOP, KATHLEEN L. BISHOP, MATTHEW J. BISHOP, PAMELA BISHOP, GEORGE H. MEENA, MARINA MEENA, SHIRLEY E. AUG, AND RALPH H. GRIER Defendants CiVIL DiVISION NO. 2002- f/gq ~ ~..~. COMPLAINT IN CIVIL ACTION Filed on behalf of Plaintiff Counsel of Record for this Party: Eric A. Fitzgerald, Esq. PA. I.D. #72590 Marshall, Dennehey, Warner Coleman & Goggin 401 Adams Avenue Scranton, PA 18503 (570) 496-4604 COMPLAINT FOR DECLARATORY JUDGMENT And now comes the Plaintiff, Philadelphia Indemnity Insurance Company, by and through its counsel, Marshall, Dennehey, Warner, Coleman & Goggin, and brings this action for Declaratory Judgment and in support avers as follows: 1. Plaintiff, Philadelphia Indemnity Insurance Company (hereinafter, Philadelphia Indemnity) is an insurance company duly licensed to issue insurance policies in the State of Pennsylvania. 2. Upon information and belief, at all relevant times herein, Defendant, T.H.E. Financial Group, Limited (hereinafter, "T.H.E.") is a Pennsylvania Corporation with a principal place of business at 1 Casey Court, Mechanicsburg, PA. 3. Defendants, John D. Coffman, Martha C. Coffman, John E. Coffinan, Patricia A. Coffman, William R. Bishop, Kathleen L. Bishop, Matthew J. Bishop, Pamela Bishop, George H. Meena and Marina Meena are adult individuals who have brought a consolidated claim against T.H.E. under the arbitration roles of the National Association of Securities Dealers, Inc. (NASD). These defendants are named as necessary parties only who are legally bound by any determinations made herein. 4. Defendants, Shirley E. Aud and Ralph H. Grier, are adult individuals who have brought a consolidated claim against T.H.E. under the arbitration roles of the National Association of Securities Dealers, Inc. (NASD). These defendants are named as necessary parties only who are legally bound by any determinations made herein. FACTUAL AND PROCEDURAL HISTORY 5. Philadelphia Indemnity Insurance Company issued Policy No. PHSD005934 to T.H.E. Financial Group Ltd., relying on the representations of fact contained in the application, which T.H.E. warranted were tree and correct. Coverage under the Securities Brokers Dealers Policy is limited to Liability for only those claims that are first made against the Insured and reported to the Company in writing, pursuant to the terms of the policy, during the Policy Period, from April 1, 2001 to April 1, 2002 (see "Philadelphia Indemnity Insurance Policy", attached hereto as Exhibit "A"). The Policy does not cover Claims that result from Wrongful acts performed before April 1, 1997, the Retroactive Date of the policy and it excludes certain investment products, including promissory notes. -2- 6. This matter arises out of a number of consolidated NASD arbitration claims against the Defendant, T.H.E. On or about August 6, 2001, Defendants, John D. Coffman, Martha C. Coffman, John E. Coffman, Palricia A. Coffinan, William R. Bishop, Kathleen L. Bishop, Matthew J. Bishop, Pamela Bishop George H. Meena, and Marina Meena (hereinafter collectively referred to as "Coffman Claimants") filed a statement of claim against T.H.E. (hereinafter referred to as Coffman Claim" attached hereto as Exhibit "B"). 7. The Coffman claim alleges generally that the claimants all invested in fraudulent promissory notes on the advice of one Richard S. Taylor (hereinafter referred to as "Taylor"). Taylor was employed by T.H.E. from January 1993 through November 1998. On Taylor's recommendation, the claimants allegedly pumhased promissory notes in the names of two unregistered foreign companys - Rolls Royce, Ltd. and Morning Star, Ltd. 8. The Coffman claim alleges that the promissory notes issued by Rolls Royce, Ltd. and Morning Star, Ltd. were worthless investments in a Ponzi scheme prosecuted by the United States Securities Exchange Commission entitled U.S. Securities Exchange Comission v. Homa, et. al (SDNY docket no. 99~C-6895). 9. On March 28, 2001, T.H.E. submitted its application for insurance to Philadelphia Indemnity through its broker, Hess Agency. Significant disclosures and representations on the application for insurance include an affirmative response to the question whether the insured has any knowledge of any "circumstances", "allegations" or "contentions", of any incident "which might result in a claim". TFG indicated that it had received requests for information on two current representatives and one former representative from the Pennsylvania Securities Exchange Department. The T.H.E. Application was expressly incorporated into the policy and is part of the policy (see Exhibit "A"). -3- 10. On March 31, 2001, all of the Coffinan claimants except John and Martha Coffman executed Uniform Submission Agreements. The Coffmans. executed agreements on August 14, 2001. 11. On April 1, 2001, Philadelphia Indemnity Insurance Company issued the subject policy of insurance to TFG with a retroactive date of April 1, 1997. 12. On October 26, 2001, THE's independent broker, the Hess Agency, notified Philadelphia Insurance of the Coffman claim. 13. On October 29, 2001, Philadelphia forwarded correspondence to T.H.E. indicating that it would not defend or indemnify T.H.E. for the Coffman claim. The disclaimer identified the policy exclusion for claims arising out of the sale of promissory notes, as well as other applicable policy terms and conditions. The disclaimer also advised that notice to T.H.E., by any regulatory body regarding the facts and circumstances giving r/se to the Coffman claim, before inception of the policy ,would constitute additional independent grounds for denial. 14. On December 10, 2001, T.H.E. forwarded correspondence to Philadelphia requesting reconsideration of its denial of coverage. Philadelphia requested T.H.E. to forward documentation regarding the Coffman claim without waiving the terms of its October 29, 2001, disclaimer. 15. On April 19, 2002, T.H.E forwarded a new statement of claim filed against it for NASD arbitration by Shirley Aud and Ralph Grier (hereinafter referred to as the Aug and Grier Claims" attached hereto as Exhibit "C"). The new claim contained substantially the same allegations with respect to sales by Taylor and T.H.E.'s failure to supervise Taylor. The claim included a number of sales which pre-dated the retroactive date on the Philadelphia Indemnity Policy. The claim also includes the sale of a product entitled "Lifeline Program Viaticals." -4- 16. On May 14, 2002, Philadelphia acknowledged receipt of tender of the Aud and Grier claims and advised that the Grier and Aud claims were subject to the same terms as set forth in Philadelphia Indemnity's denial letter of October 29, 2001. Philadelphia Indemnity nevertheless requested documents with regard to the Grier and Aud claims, and also notified T.H.E. that the sale of the "Lifeline Program Viaticals" product was subject to the same Specified Products Exclusion Endorsement as the Rolls Royce, Ltd. and Morning Star, Ltd. promissory notes. Finally Plaintiff also notified T.H.E. that the date of sale of those products preceeded the Retroactive Date of the Philadelphia Indemnity Policy as a supplemental grounds for denial. (See May 14, 2002 letter attached hereto as Exhibit "D.") 17. Among the documents ultimately provided by T.H.E. in response to Philadelphia Indemnity's investigation was a letter dated June 12, 2000 from the State of Maryland, Office of the Attorney General, Securities Division, to Anthony Tarantino in his capacity as President of T.H.E. The letter specifically inquired into the sale by Mr. Taylor Of promissory notes of Rolls Royce Ltd. and Morning Star, Ltd. The Attorney General's Office also made specific inquiry regarding T.H.E.'s supervisory practices with regard to Mr. Taylor. (See June 12, 2000 letter attached hereto as Exhibit "E.") 18. Also among the documents provided by T.H.E. was a letter from Eric Huck, T.H.E.'s representative, dated July 31, 2000, responding to the State of Maryland letter of inquiry as aforementioned. (See July 31, 2000 letter attached hereto as Exhibit "F.") At the end of the letter, Mr. Huck refers to a telephone conversation that he had with Ms. Cardwall, Assistant Attorney General, of the State of Maryland before sending his letter of July 31, 2000. 19. On July 12, 2002, Philadelphia Indemnity forwarded correspondence to T.H.E. supplementing its denial of coverage of the Coffman, Aug and Grier claims. Philadelphia -5- Indemnity supplemented is coverage denial on the basis that T.H.E. breached policy terms and conditions in failing to advise Philadelphia Indemnity of the Maryland Attorney General investigation into T.H.E.'s supervision of Taylor. Philadelphia Indemnity also reserved its rights to rescind the policy on the basis of material misrepresentations in T.H.E.'s application for insurance. Philadelphia Indemnity requested that T.H.E. produce a principal for an examination under oath with regard to the documents produced by T.H.E. 20. By letter dated August 19, 2002, T.H.E. refused to provide a principal for an examination under oath as requested by Philadelphia. (See August 19, 2002 letter, attached hereto as Exhibit "G.") 21. This action for declaratory judgment is a actual controversy seeking a judicial declaration as to the rights and obligations of the parties set forth herein. II. THE POLICY 22. Philadelphia Indemnity Insurance Company issued a policy of insurance to T.H.E. Financial Group, Ltd., Policy No. PHSD005934, with a Policy Period of April 1, 2001 to April 1, 2002 and a Retroactive Date of April 1, 1997. Pertinent portions of the policy provide as follows: EXCLUSIONS This policy does not apply: a) 1) to any actual or alleged criminal or deliberately fraudulent Wrongful Act; or 2) to any actual or alleged violation of the Racketeer Influenced and Corrupt Organizations Act (as amended), 18 USC Sections 1961 et seq., or any rules or regulations promulgated thereunder; -6- d) e) to any claim arising out of the actual or alleged inability to make any payment by any bank or banking firm or broker or dealer in securities or commodities; to any actual or alleged Wrongful Act occurring prior to the inception date of the first Securities Broker/Dealer's Errors and Omissions policy issued to the securities broker/dealer named in Item 1. of the Declarations by the Company and continuously renewed and maintained in effect thereafter to have inception date of this policy, if on or before such date any Insured knew or could have reasonably foreseen that such Wrongful Act could lead to a claim or suit; r) s) to fines, penalties, punitive or exemplary damages, the multiplied portion of multiplied damages, or taxes; to the Insured gaining in fact any personal profit or advantage to which the Insured was not legally entitled, including but not limited to any actual or alleged commingling of funds or accounts; PENDING AND/OR PRIOR LITIGATION In consideration of the premium charged, it is hereby understood and agreed that this Policy does not apply to any claim arising out of any pending or prior litigation as of 04/01/2001, or arising out of the same or essentially the same facts as alleged in pending or prior litigation. MANUSCRIPT EXCLUSION Specified Products Exclusion - Viatical In consideration of the premium paid for this Policy, it is agreed that the Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Insured: -7- SPECIFIED PRODUCTS EXCLUSION In consideration of the premium charged, it is hereby understood and agreed that this policy does not apply to any claim arising out of the following products: 6) promissory notes, i.e. an investment whereby the maker agrees to pay to the payee a specific sum of money either on demand or at a fixed or determinable future date; 7) viatical products including viatical settlement and viatical contracts; or 8) callable certificates of deposit. COUNT I 23. Plaintiff repeats and realleges the allegations contained in paragraphs 1 through 22 of this Complaint as if set forth fully herein. 24. The allegations of damages in the underlying Coffman, Aud, and Grief Claims arise solely out of the purchase of promissory notes and viatical products. 25. The Coffrnan, Aud and Grief claims are brought against T.H.E. solely with respect to the sale of promissory notes and viatical products. 26. The allegations in the Coffman, Aud and Grier claims fall exclusively within the scope of an applicable exclusion in the policy for claims arising out of "promissory notes" and "viatrical products including viatical settlement and viatical contracts." WHEREFORE, Plaintiff, Philadelphia Indemnity Insurance Company, respectfully requests relief that this Court enter judgment against all Defendants named herein and to declare that Philadelphia Insurance has no duty to defend or indemnify THG in the underlying Coffman, Aug and Grier claims. -8- COUNT II 27. Plaintiff repeats and realleges the allegations contained in paragraphs 1 through 26 of this Complaint as if set forth fully herein. 28. The application for insurance provides, in pertinent part: 11. Does the Securities Broker/Dealer or any of its Partners, Directors, Officers, Employees or Registered Representatives have any knowledge or information of any circumstances or any allegations or contentions of any incident which might result in a claim against any of them? 12. It is agreed with respect to question #11 above, that if such knowledge or information exists any claim or action arising therefrom is excluded from proposed coverage. 29. At the time the application was executed and submitted, Defendant, T.H.E., had actual knowledge and information of circumstances, allegations and/or contentions which gave rise to the Coffrnan, Aud and Grier claims. 30. By the terms of the application for insurance, coverage is excluded for all of the claims set forth in the Coffman, Aud and Grier claims. WHEREFORE, Plaintiff, Philadelphia Indemnity Insurance Company, respectfully requests relief that this Court enter judgment and against all Defendants named herein and to declare that Philadelphia Indemnity has no duty to defend or indemnify T.H.E. in the underlying Coffman, Aug and Grier claims. COUNTIII 31. Plaintiff repeats and realleges the allegations contained in paragraphs 1 through 30 of this Complaint as if set forth fully herein. -9- 32. At the time the application was executed and submitted, Defendant, T.H.E., had actual knowledge and information of the circumstances, allegations and/or contentions which gave rise to the Coffman, Aud and Grier claims. 33. T.H.E.'s tender of the Coffman, Aud and Grier claims to Philadelphia Indemnity was in violation of the "known loss doctrine". 34. Under the "known loss doctrine", Philadelphia Indemnity has no duty to defend or indemnify Defendant, T.H.E., for the allegations set forth in the Coffmag, Aud and Grier claims. WHEREFORE, Plaintiff, Philadelphia Indemnity Insurance Company, respectfully requests relief that this Court enter judgment and against all Defendants named herein and to declare that Philadelphia Indemnity has no duty to defend or indemnify T.H.E. in the underlying Coffman, Aug and Grier claims. COUNT IV 35. Plaintiff repeats and realleges the allegations contained in paragraphs 1 through 34 of this Complaint as if set forth fully herein. 36. On March 28, 2001, Defendant, T.H.E., submitted its application for insurance to Philadelphia Indemnity through its broker, Hess Agency. 37. The application for the Philadelphia Indemnity Policy specifically asked T.H.E. to disclose whether it had any knowledge of any "circumstances," "allegations" or contentions," of any incident "which might result in a claim." 38. T.H.E. had actual knowledge of a potential claim for negligent supervision arising out of Taylor's sale of the products alleged in the Coffman, Aud & Grier claims. -10- 39. T.H.E. failed to disclose its knowledge of a potential claim for negligent supervision arising out of Taylor's sale of the products alleged in the Coffinan, Aud & Grier claims. 40. T.H.E.'s failure to disclose its knowledge of a potential claim for negligent supervision arising out of Taylor's sale of the products alleged in the Coffman, Aud & Grier claims constitutes a material misrepresentation. 41. Philadelphia Indemnity relied upon T.H.E's misrepresentations in its application for insurance to its detriment. 42. Philadelphia Indemnity is entitled to rescind the policy in full. WHEREFORE, Plaintiff, Philadelphia Indemnity Insurance Company, respectfully requests relief that this Court enter judgment and against all Defendants named herein and to declare that the Philadelphia Indemnity policy is rescinded in full and that Philadelphia Indemnity has no duty to defend or indemnify T.H.E. in the underly/ng Coffman, Aug and Grier claims. COUNT V 43. Plaintiff repeats and realleges the allegations contained in paragraphs 1 through 42 of this Complaint as if set forth fully herein. 44. The policy contains an exclusion for any alleged criminal or deliberately fraudulent Wrongful Act and/or violation of federal and state securities laws. 45. According to the terms of the policy, to the extent that any relief in the underlying Coffman, Aud, and Grier Claims is awarded against the T.H.E. which are attributable to criminal or deliberately fraudulent Wrongful Acts and/or violation of federal and state securities laws, then the Plaintiff, Philadelphia Insurance, has no duty to defend or indemnify the Defendant, T.H.E. 46. The policy also contains an exclusion for any claim arising out of the actual or alleged inability to make any payment by any bank or banking firm or broker or dealer in securities or commodities. 47. According to the terms of the policy, to the extent that any relief in the underlying Coffman, Aud, and Grier Claims is awarded against the T.H.E, which are attributable to any entity's inability to may payment on the promissory notes issued by Rolls Royce, Ltd. and Morning Star, Ltd. or other promissory notes and/or viatrical products, then the Plaintiff, Philadelphia Insurance, has no duty to defend or indemnify the Defendant, T.H.E. WHEREFORE, Plaintiff, Philadelphia Indemnity Insurance Company, respectfully requests relief that this Court enter judgment and against all Defendants named herein and to declare that Philadelphia Insurance has no duty to defend or indemnify T.H.E. in the underlying Coffman, Aug and Grier claims. COUNT VI 48. Plaintiff repeats and realleges the allegations contained in paragraphs 1 through 47 of this Complaint as if set forth fully herein. 49. The Philadelphia Indemnity Insurance Policy contains a Prior and/or Pending Litigation Endorsement, which excludes coverage for claims arising from litigation as of April 1, 2001. 50. The Philadelphia Indemnity Insurance Policy contains a Retroactive Date Endorsement, which excludes Wrongful Acts (as defined in the policy) prior to April 1, 1997. -12- 51. According to the terms of the policy, to the extent that any relief in the underlying .Coffmag., Aud, and Grier Claims is awarded against the T.H.E., which are attributable to claims arising from pending or prior litigation as of April 1, 2001 and/or Wrongful Acts (as defined in the policy) prior to April 1, 1997, then the Plaintiff, Philadelphia Indemnity, has no duty to defend or indemnify the Defendant, T.H.E. WHEREFORE, Plaintiff, Philadelphia Indemnity Insurance Company, respectfully requests relief that this Court enter judgment and against all Defendants named herein and to declare that Philadelphia Insurance has no duty to defend or indemnify T.H.E. in the underlying Coffman, Aug and Grier claims. COUNT VII 52. Plaintiff repeats and realleges the allegations contained in paragraphs 1 through 51 of this Complaint as if set forth fully herein. 53. The Philadelphia Insurance Policy contains an exclusion for fines, penalties, punitive or exemplary damages and the multiplied portion of multiplied damages. 54. According to the terms of the policy, to the extent that any relief in the underlying Coffrnan, Aud, and Grier Claims is awarded against the T.H.E. which are attributable to punitive damages, then the Plaintiff, Philadelphia Indemnity, has no duty to defend or indemnify the Defendant, T.H.E. WHEREFORE, Plaintiff, Indenmity Insurance Company, respectfully requests relief that this Court enter judgment and against all Defendants named herein and to declare that Philadelphia Insurance has no duty to defend or indemnify T.H.E. in the underlying Coffman, Aug and Grier claims. MARSHALL, DENNEHEY, WARNER, COLEMAN & GOGGIN 401 Adams Avenue Suite 400 Scranton, PA 18510 Attorney for Ph!l~dePpi~a Indemnity Insurance Comp By:. Eric A. Fitzgerald, Esquire Attorney I.D. No. 72590 -14- \10_A\LIAB\CEB~LLPG~274628kJEL\01226\00310 ATTORNEY VERIFICATION Eric A. Fitzgerald, Esquire, attorney for Plaintiff, Philadelphia Indemnity Insurance Company, verifies that the facts set forth in the attached Complaint for Declaratory Judgment are true and correct to the best of his knowledge, information and belief. This Verification of facts is based upon discussions with Plaintiff. This Attorney Verification is being submitted in lieu of a Verification by Plaintiff because Plaintiff resides out of the county in which I am located and their Verifications could not be obtained in time for filing this Complaint. If the above statements are not true, the deponent is subject to the penalties of 18 Pa.C.S. §4904 relating to unsworn falsification to authorities. ~~~._._._ Eric A. Fitzgerald, Esquire DATE: Exhibit A Philadelphia Insurance Companies ONE BALA PLAZA, SUITE 100 Bala Cynwyd, Pennsylvania 19004 Policy No. PHSD005934 THIS IS A CLAIMS-MADE POLICY -- PLEASE READ CAREFULLY NOTICE: THE LIMITS OF LIABILITY AVAILABLE TO PAY JUDGMENTS OR SETTLEMENTS SHALL BE REDUCED BY AMOUNTS INCURRED FOR LEGAL DEFENSE. FURTHER NOTE THAT AI~IOUNTS INCURRED FOR LEGAL DEFENSE SHALL BE APPLIED AGAINST THE DEDUCTIBLE AMOUNT. SECURITIES BROKER/DEALER'S ERRORS AND OMISSIONS LIABILITY INSURANCE DECLARATIONS Item 1. Insured: T.H.E. Financial Group, Ltd. Mailing Address: 1 Kacey Court, Suite 201 Mechanicsburg, PA 17055 Item Item 2. Policy Period: From: 04/01/2001 To: 04/01/2002 (12:01 A.M standard time at the address stated in Item 1) 3. Limits of Liability: $500,000 each Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts $1,000,000 Aggregate Item 4. Deductible: $0 each Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts. Item 5. Premium: $51,000.00 Item 6. Retroactive Date: 04/01/1997 Endorsements: PI-SB-011 (5~00) PI-SS-028 (5/00) PI-SB-O03 (5/00) PI-SB-O 12 (5/00) PI-SS-013 (5~00) PI-SB-018 (5/00) PI-SS-021 (5/00) PI-SB-024 (5/00) PI-SS-025 (5/00) PI-SS-031 (5/00) PI-SS-027 (5/00) PI-SB-MANU-2 (5/00) PI-SB-MANU-2 (5/00) Covered Stock Options Extension Penny Stock Exclusion Two-way Split Deductible Endorsement [Entity Insureds Deductible: 25000] [Individual Deductible: 50001 Discretionary Authority Exclusion Duty to Defend Endorsement GPLJLP Partnership Exclusion Life Producers Extension Mergers & Acquisitions Reporting Endorsement PIC Non-Stacking Exclusion Retroactive Date Endorsement [Retroactive Date: 04/01/1997] Pending and/or Prior Litigation Endorsement [Date: 04/01/2001] Manuscript Exclusion [Exclusion Name: Known Cimumstances/Persons Exclusion] Manuscript Exclusion [Exclusion Name: Specified Products Exclusion - Viaticat] By acceptance of this policy the Insured agrees that the statements in the Declarations and the Application and any attachments hereto are the Insured's agreements and representations and that this policy embodies all agreements existing between the Insured and the Company or any of its agents relating to this insurance. Countersignature Countersignature Date TWO-WAY SPLIT DEDUCTIBLE ENDORSEMENT In consideration of the premium charged, it is hereby understood and agreed that the Deductible amount stated in Item 4 of the Declarations is amended to be as follows: $25000 Entity Insured's Deductible each Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts $5000 Individual Insured's Deductible each Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts The Deductible stated above as the Ent'ty Insured s Deductible" sha app y to all Insureds under this policy when claim is made: 1) against both one or more Insureds who are natural persons ("individual Insureds") and one or more Insureds who are not natural persons ("Entity Insureds"); or 2) against Entity Insureds and not against any Individual Insureds. The Individual Insureds Deductible shall apply to the Individual Insureds when claim is made against only one or more Individual Insureds and not against any of the Entity Insureds and the Entity Insureds and the Entity Insureds and their affiliates have not indemnified and are neither permitted nor required to indemnify the Individual Insureds for the amounts they have become liable to pay. In cases where the Individual Insureds Deductible applies, it shall apply severally to each Individual Insured against whom claim is made. In no event shall the total amount of Deductibles applied to the same Wrongful Act of series of continuous, repeated or interrelated Wrongful Acts exceed the Entity Insureds Deductible amount stated above. All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 04/01/2001 PHSD005934 04/01/2002 By: Authorized Representative PI-SB-O03 (5/00) Two-way Split Deductible Endorsement Page 1 of 1 COVERED STOCK OPTIONS EXTENSION In consideration of the premium charged, it is hereby understood and agreed that EXCLUSION (o) is deleted in its entirety and replaced by the following: o) to any actual or alleged trading or failure to trade commodities, commodities futures contracts, or any type of option contract, except covered stock options. All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.HE. Financial Group, Ltd. 04/01/2001 PHSD005934 04/01/2002 By: Authorized Representative PI-SB-011 (5/00) Covered Stock Options Extension . Page 1 of 1 DISCRETIONARY AUTHORITY EXCLUSION In consideration of the premium charged, it is hereby understood and agreed that this policy does not apply to any claim arising out of the Insured's activities in exercising discretionary authority or control with regard to management or disposition of assets (whether for individuals, groups, employee benefit plans or other entities of whatever legal form or character); however, this exclusion shall not apply to the Insured's providing an asset allocation service funded solely with no-load mutual funds. All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 04/01/2001 PHSD005934 04/01/2002 By: Authorized Representative PI-SB-012 (5/00) Discretionary Authority Exclusion Page 1 of 1 DUTY TO DEFEND In consideration of the premium charged, it is hereby understood and agreed that Insuring Agreement 2 DEFENSE COSTS - INCLUDED IN THE LIMITS OF LIABILITY is amended to read as follows: With respect to any such Wrongful Act for which insurance is afforded by this policy under Insuring Agreement 1 above, the Company shall, as part of and subject to the Limits of Liability, pay Defense Costs on behalf of the Insured. The Company shall at all times have the duty to assume the defense of any claim or suit against the Insured. The Insured shall provide the Company with full cooperation. The Insured shall not admit ~iability for, or settle any claim or suit or incur any Defense Costs without, the Company's prior written consent, which consent shall not be unreasonable withheld; however, if the Insured is able to dispose of all claims which are subject to one Deductible amount for a sum not exceeding the Deductibl~ (inclusive of Defense Costs), then the Company's consent shall not be required for such claims. If the Insured refuses to consent to any settlement recommended by the Company and acceptable to the claimant, the Company may then withdraw from the defense of the Insured by tendering control of the defense to the Insured, and the Insured shall thereafter at his or her own expense negotiate or defend such claim or suit independently of the Company, and the Company's liability shall not exceed the amount of damages for which the claim or suit could have been settled, plus Defense Costs incurred by the Company, and Defense Costs incurred by the Insured with the Company's written consent, up to the date of such refusal. The Company shall not be obligated to pay any claim or judgment or to defend or continue to defend any suit after the applicable limit of the Company's liability has been exhausted by payments of judgments and/or settlements and/or other items included within the Limits of Liability. A~I other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 04/01/2001 PHSDO05934 04/01/2002 By: Authorized Representative PI-SB-013 (5~00) 'Duty to Defend Endorsement Page 1 of I GPL/LP PARTNERSHIP EXCLUSION In consideration of the premium charged, it is hereby understood and agreed that this policy does not apply to any claim or claims made against the Insureds based upon, arising out of, or in anyway involving the formation, syndication, operation or administration of, or being an Investment Adviser for, any Limited Partnership, or acting as a general partner of any Limited Partnership and/or Partnership Manager of any General Partnership. All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy,.unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 04/01/2001 PHSD005934 04/01/2002 By: Authorized Representative PI-SB-018 (5/00) GPL/LP Partnership Exclusion Page 1 of 1 LIFE PRODUCTS EXTENSION In consideration of the premium charged, it is hereby understood and agreed that DEFINITION 4, "PROFESSIONAL SERVICES", is hereby deleted in its entirety and replaced by the following: Profess onal Services means secunbes trading, investment management services, the giving of financial investment advice, the purchase and/or sale of securities, and the administration of individual retirement arrangements (IRAs) and Keough retirement plans. If done by a Registered Representative, "Professional Services" shall also include the giving of life or accident and health insurance advice and the sale of life insurance and annuities or accident and health insurance including, but not limited to life, accident, health and disability insurance sales if the Registered Representative is duly licensed to do so. All other terms and conditions of this Policy remain unchanged. This endOrsement i~ part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 0410112001 PHSD005934 04/01/2002 By: Authorized Representative PI-SB-021 (5/00) Life Producers Extension Page 1 of 1 MERGERS & ACQUISITIONS REPORTING ENDORSEMENT In consideration of the premium charged, it is hereby understood and agreed that if on or after this policy's inception date the Insured in ITEM 1 of the DECLARATIONS acquires: 1) an amount of the voting stock of another entity representing more than 50% of the voting power for the election of the board of directors of such entity; or 2) all or substantially all of the assets of another entity; or 3) all or substantially all of the business of another entity; any of the foregoing being an "Acquisition," no coverage shall be afforded by this pdlicy to any Insured hereunder for loss arising from any activities or liabilities of such Insured hereunder in connection with such other entity, whether the activities occurred before or after the Acquisition, unless and until an endorsemer~t to this policy is issued by the Company granting such coverage. All other terms and conditions of this Policy remain unchanged, This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 04/01/2001 PHSD005934 04/0112002 By: Authorized Representative PI-SB-024 (5/00) Mergers & Acquisitions Reporting Endorsement Page I of 1 PIC NON-STACKING In consideration of the premium charged, it is hereby understood and agreed that if any claim under this policy is also covered by one or more other policies issued by the Company, or by any other member of the Philadelphia Insurance Companies ("PIC"), to the person or entity named in Item I of the Declarations or to any person who controls, is controlled by, or is under common control with, said person or entity, then with respect to such claim: 1) the Company shall not be liable under this policy for a greater proportion of the loss than the applicable Limit of Liability under this policy bears to the total applicable limits of liability of all such policies, and 2) the maximum amount payable under all such policies shall not exceed the limit of liability of that policy referred to above which has the highest applicable limit of liability. Nothing contained in this endorsement shall be construed to increase the Limit of Liability of this policy or of any other PIC member company policy. All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E, Financial Group, Ltd. 0410112001 PHSD005934 0410112002 By: Authorized Representative PI-SB-025 (5~00) PIC Non-Stacking Exclusion Page 1 of I PENDING AND/OR PRIOR LITIGATION In consideration of the premium charged, it is hereby understood and agreed that this Policy does not apply to any claim arising out of any pending or prior litigation as of 04/01/2001, or arising out of the same or essentially the same facts as alleged in such pending or prior litigation. All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd, 04/01/2001 PHSDO05934 04/01/2002 By: Authorized Representative PI-SB-027 (5/00) Pending and/or Prior Litigation Endorsement Page 1 of 1 PENNY STOCK EXCLUSION In consideration of the premium charged, it is hereby understood and agreed that this policy does not apply to any claim arising out of any actual or alleged activities in connection with any equity security priced under $5.00 at the time that the Wrongful Act triggering such claim arose; however, this exclusion shall not apply if the security is: (a) registered, or approved for registration upon notice of issuance, on a national securities exchange; (b) authorized, or approved for authorization upon notice of issuance, for quotation in the NASDAQ National Market System or the NASDAQ SmalICap Market; or (c) issued by an investment company registered under the Investment Company Act of 1940 (as amended). All other terms and conditions of this Policy remain unchanged. This endorsement is pad of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 04/01/2001 PHSD005934 04/01/2002 By: Authorized Representative PI-SB-028 (5/00) Penny Stock Exclusion Page I of 1 RETROACTIVE DATE ENDORSEMENT In consideration of the premium charged, it is hereby understood and agreed that, notwithstanding anything contained in this policy to the contrary, this policy does not apply to any Wrongful Act occurring prior to the RETROACTIVE DATE stated in this endorsement. RETROACTIVE DATE: 04/01/1997 All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 04/01/2001 PHSD005934 04/01/2002 By: Authorized Representative PI-SB-031 (5~00) Retroactive Date Endorsement Page 1 of 1 MANUSCRIPT EXCLUSION Known Circumstances/Persons Exclusion In consideration of the premium paid for this Policy, it is agreed that the Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Insured: In consideration of the premium paid for the Policy, it is agreed that the Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Insured: arising out of, attributable to, or brought by George C. Schreffier and/or Cora S. Forker. All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Complete only when this endorsement is not prepared with the Policy or is not to be effective with the Policy. Company: Issued to: Effective on and after: Policy#: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 04/01/2001 PHSD005934 04/01/2002 By: Authorized Representative PI-SB-MANU-2 (5/00) Manuscript Exclusion Page 1 of 1 MANUSCRIPT EXCLUSION Specified Products Exclusion - Viatical In consideration of the premium paid for this Policy, it is agreed that the Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the insured: SPECIFIED PRODUCTS EXCLUSION In consideration of the premium charged, it is hereby understood and agreed that this policy does not apply to any claim arising out of the following products: 6) promissory notes, i.e. an investment whereby the maker agrees to pay to, the payee a specific sum of money either on demand or at fixed or determinable future date; 7) viatical products including viatical settlement and viatical contracts; or 8) callable certificates of deposit. All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of you Policy, unless another effective date is shown below~ AUTHORIZED REPRESENTATIVE All other terms and conditions of this Policy remain unchanged. This endorsement is part of your Policy and takes effect on the effective date of your Policy, unless another effective date is shown below. Complete only when this endorsement is not prepared with the Policy or is not to be effective with the Policy. Company: Issued to: Effective on and after: Policy #: Expiration Date: Philadelphia Indemnity Insurance Company T.H.E. Financial Group, Ltd. 04/01/2001 PHSD005934 04/01/2002 By: Authorized Representative PI-SB-MANU-2 (5/00) Manuscript Exclusion Page 1 of 1 PHILADELPHIA INSURANCE COMPANIES NOTICE: THIS IS A CLAIMS MADE FORM. EXCEPT TO SUCH EXTENT AS MAY OTHERWISE BE PROVIDED HEREIN, THE COVERAGE OF THIS POLICY IS LIMITED GENERALLY TO LIABILITY FOR ONLY THOSE CLAIMS THAT ARE FIRST MADE AGAINST THE INSURED AND REPORTED IN WRITING TO THE COMPANY WHILE THE POLICY IS IN FORCE. PLEASE REVIEW THE POLICY CAREFULLY AND DISCUSS THE COVERAGE THEREUNDER WITH YOUR INSURANCE AGENT OR BROKER. SECURITIES BROKERJDEALER'S ERRORS AND OMISSIONS LIABILITY INSURANCE In consideration of the payment of the premium, and in re ance upon the statemen!s in the application and Declarations attached hereto and made a part hereof, and subject to the limits of liability stated in Item 3. of the Declarations and the terms, conditions and exclusions contained herein, the Company agrees as follows: INSURING AGREEMENTS ERRORS AND OMISSIONS To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages resulting from any claim or claims first made against the Insured and reported in writing to the Company during the Policy Period for any Wrongful Act of the Insured or of any other person for whose actions the Insured is legally responsible, but only if such Wrongful Act occurs on or after the Retroactive Date and prior to the end of the Policy Period and solely in rendering or failing to render Professional Services by or on behalf of the securities broker/dealer named in Item 1. of the Declarations to a client of such securities broker/dealer. DEFENSE COSTS -- INCLUDED IN THE LIMITS OF LIABILITY With respect to any such Wrongful Act for which insurance is afforded by this policy under Insuring Agreement 1 above, the Company shall, as part of and subject to the limits of liability, pay on behalf of the Insured Defense Costs. The Company shall at all times have the right, but not the duty, to assume the defense of any claim or suit against the Insured. The Insured shall provide the Company with full cooperation. In the event the Company does not assume the defense of the Insured, the Company shall, nevertheless, have the right to effectively associate with the Insured in the defense and settlement of any claim that appears reasonably likely to involve the Company, including but not limited to effectively associating in the negotiation of a settlement. The Insured shall not admit liability for or settle any claim or suit or incur any Defense Costs without the Company's prior written consent, which consent shall not be unreasonably withheld; however, if the Insured is able to dispose of all claims which are subject to one deductible amount for an amount not exceeding the deductible amount (inclusive of Defense Costs), then the Company's consent shall not be required for such claims. If the Insured refuses to consent to any settlement recommended by the Company and acceptable to the claimant, the Company may then withdraw from the defense of the Insured (if it has assumed the Insured's defense) by tendering control of the defense to the Insured, and the insured shall thereafter at his own expense negotiate or defend such claim or suit independently of the Company, and the Company's liability shall not exceed the amount of damages for which the claim or suit could have been settled if such recommendation was consented to, plus Defense Costs incurred by the Company, and Defense Costs incurred by the Insured with the Company's written consent, up to the date of such refusat. The Company shall not be obligated to pay any claim or judgment or to defend or continue to defend any suit after the applicable limit of the Company's liability has been exhausted by payments of judgments and/or settlements and/or other items included within the limits of liability. DEFINITIONS .1. "Defense Costs" means reasonable and necessary fees (including but not limited to attorneys' fees), costs and expenses (including but not limited to premiums for any appeal bond, attachment bond or similar bond, but without any obligation to apply for or furnish any such bond), incurred by the Company or by the Insured with the written consent of the Company, and resulting solely from the investigation, adjustment, defense and appeal of any claim against the Insured, but excluding salaries of employees of any Insured and excluding loss of earnings by any Insured. "Insured" means the individual, partnership, firm or corporation named in Item 1. of the Declarations and shall include any past, present or future partner, officer, director, employee or Registered Representative thereof solely while acting within the scope of his duties as such on behalf of the securities brokeddealer named in Item 1. of the Declarations. "Policy Period" means the period from the inception date of this policy shown in Item 2. of the Declarations to the earlier of the expiration date shown in Item 2. of the Declarations or the effective date of cancellation of this policy. ~ "Professional Services" means securities trading, investmen, t management services, the giving of financial investment advice, the purchase and/or sale of securities, and the administration of individual retirement arrangements (IRA's) and Keough retirement plans. If done by a Registered Representative, "Professional Services" shall also include the giving of life insurance advice and the sale of life insurance and annuities if the Registered Representative is duly licensed to do so. "Registered Representative" means an individual who is registered with the National Association of Securities Dealers, inc. including a registered principal, and who for compensation engages in the business of rendering Professional Services on behalf of the securities broker/dealer named in Item 1. of the Declarations. "Retroactive Date" means the date designated as such in Item 6. of the Declarations. "Wrongful Act" means any negligent act, error or omission, EXCLUSIONS This policy does not apply: a) 1 ) to any actual or alleged criminal or deliberately fraudulent Wrongful Act; or 2) to any actual or alleged violation of the Racketeer Influenced and Corrupt Organizations Act (as amended), 18 USC Sections 1961 et seq., or any rules or regulations promulgated thereunder; however, if such allegations are not subsequently proven by a final judgment or other adjudication adverse to the Insured and are not admitted to by the Insured, then the Company shall reimburse the Insured for all reasonable Defense Costs which would have been collectible under this policy; b) to any actual or alleged libel, slander or defamation; c) to any actual or alleged bodily injury to or sickness, disease or death of any person, or damage to or destruction of any tangible property, including the loss of use thereof; d) to any claim arising out of the actual or alleged inability to make an y payment by any bank or banking firm or broker or dealer in securities or commodities; e) to any actual or alleged Wrongful Act occurring prior to the inception date of the first Securities BrokedDealer's Errors and Omissions policy issued to the securities brokeddealer named in Item 1. of the Declarations by the Company and continuously renewed and maintained in effect thereafter to the inception date of this policy, if on or before such date any Insured knew or could have reasonably foreseen that such Wrongful Act could lead to a claim or suit; to any claim arising out of any pension or employee benefit plan or trust sponsored by any Insured; g) to any dispute over excessive, or for the return of: fees, commissions or other charges for any Insured's services; however, if the Insured is found not liable for these by a final adjudication favorable to the Insured, then the Company shall reimburse the Insured for all reasonable Defense Costs which would have been collectible under this policy; h) to any claim brought by any Insured under this policy against another Insured; to any claim arising out of any underwriting, syndicating, or investment banking work, or associated counseling or investment activities, including, but not limited to, any aspect of any actual, attempted or threatened mergers, acquisitions, divestitures, tender offers, proxy contests, leveraged buy-outs, going private transactions, reorganizations, capital restructurings, recapitalizations, spinoffs, primary or secondary offerings of securities (regardless of whether the offering is a public offering or a private placement), other efforts to raise or furnish capital or financing for any enterprise or entity or any disclosure requirements in connection with any of the foregoing; provided, however, that this exclusion shall not apply to claims arising from sales by an Insured of securities in connection with a distribution thereof where such claims relate solely to conduct by the Insured affecting only particular clients of the securities brokeddealer named in Item 1. Of the Declarations and do Dot arise from facts or circumstances affecting the distribution generally such as, but not limited to, actual or alleged deficiencies or inaccuracies in the formal written offering materials; k) to any claim arising out of the facts alleged, or arising out of the same or related Wrongful Acts alleged or contained, in any claim which has been reported, or in any occurrence of which notice has been given, under any policy of which this policy is a renewal or replacement or which it may succeed in time; to any claim; 1) brought by or on behalf of any clearing agency, or 2) arising out of any function of any Insured as a clearing agency; to any: 1) actual or alleged use by any Insured of, or 2) actual or alleged aiding or abetting by any Insured in the use of, or 3) actual or alleged participating after the fact by any Insured in the use of, non-public information in a manner prohibited by the laws of the United States, including, but not limited to, the Insider Trading and Securities Fraud Enforcement Act of 1988 (as amended), Section 10(b) of the Securities Exchange Act of 1934 (as amended) and Rule 10b-5 thereunder, any state, commonwealth, territory or subdivision thereof, or the laws of any other jurisdiction, or any rules or regulations promulgated under any of the foregoing; m) to any claim arising out of the actual or alleged insolvency, receivership, bankruptcy or reorganization of any Insured; n) to any claim arising out of any function of any Insured as a specialist or market maker for any securities or arising out of failing to make a market for any securities; o) to any actual or atleged trading or failing to trade commodities, commodity futures contracts, or any type of option contract; p) to any actual or alleged trading or failing to trade in any market outside of the United States of America and its territories and possessions and Canada; q) to any claim arising out of any actual or alleged mechanical or electronic failure, breakdown or malfunction of machines or systems; r) to fines, penalties, punitive or exemplar,/damages, the multiplied portion of multiplied damages, or taxes; · r) s) t) u) v) w) to fines, penalties, punitive or exemplary damages, the multiplied portion of multiplied damages, or taxes; to the Insured gaining in fact any personal profit or advantage to which the Insured was not legally entitled, including but not limited to any actual or alleged commingling of funds or accounts; to any actual or alleged performance of or failure to perform services for any Insured or for any parent, affiliate or subsidiary of any Insured; to any claim brought by or on behalf of the Securities Investor Protection Corporation or any governmental authority or any self regulatory or regulatory authority regardless of the capacity it is brought in, or brought by the successors or assigns of any of the aforementioned; however, this exclusion shall not apply to a claim brought by any of the aforementioned to enforce its rights as a direct client of the securities brokeddealer named in Item 1. of the Declarations in the ordinary course of business; with respect to the giving of life insurance advice or the sale of life insurance or annuities: 1) to any claim arising out of the actual or alleged insolvency, receivership, bankruptcy, liquidation, or financial inability to pay, of any insurance company or any benefit plan; or 2) to any actual or alleged rendering of or failure to render any: i) actuarial services, or ii) services involving structured settlement annuities, or services involving any pension, welfare or other benefit plan where the funding vehicle is other than insurance or an annuity issued by an insurance company; to any actual or alleged rendering of or failure to render Professional Services to any securities broker/dealer other than a dealer who buys, sells or trades in securities exclusively as a principal for its own account. SPECIAL PROVISIONS LIMITS OF LIABILITY The limit of liability stated in the Declarations as applicable to "Each Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts" is the limit of the Company's liability for all amounts payable hereunder in settlement or satisfaction of claims, judgments or awards and Defense Costs arising out of the same Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts, without regard to the number of Insureds, claims, demands, suits or proceedings or claimants. If additional claims are subsequently made which arise out of the same Wrongful Act, or series of continuous, repeated or interrelated Wrongful acts as claims already made and reported to the Company, all such claims, whenever made, shall be considered first made within the Policy Period or the extended reporting period in which the earliest claim arising out of such Wrongful Act was first made and reported to the Company, and all such claims shall be subject to one such limit of liability. The limit of liability stated in the Declarations as "Aggregate" is, subject to the above provisions respecting "Each Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts", the limit of the Company's liability for all amounts payable hereunder in settlement or satisfaction of claims, judgments or awards and Defense Costs arising out of claims first made and reported to the Company during the Policy Period or during the extended reporting period. The aggregate limit of liability for the extended reporting period shalt be part of, and not in addition to, the aggregate limit of liability for the Policy Period. The inclusion herein of more than one Insured shall not operate to increase the limits of the Company's liability. Defense Costs, as well as amounts paid in settlement or satisfaction of claims, judgments or awards, are subject to the applicable limits of liability. All Defense Costs shall first be subtracted from the limit of liability with the remainder, if any, being the amount available to pay damages. 2. DEDUCTIBLE DEDUCTIBLE The Company shall only be liable for those amounts payable hereunder in settlement or satisfaction of claims, judgments or awards, and Defense Costs which are in excess of the deductible stated in Item 4. of the Declarations. This deductible shall apply to each Wrongful Act and shall be borne by the Insured and remain uninsured. For purposes of the deductible, claims arising out of the same Wrongful Act or out of a series of continuous, repeated or interrelated Wrongful Acts shall be considered as arising out of one Wrongful Act, and only one deductible amount shall apply thereto. LOSS PROVISIONS The Insured shall, as a condition precedent to the availability of the rights provided under this policy, give written notice to the Company as soon as practicable during the Policy Period, or during the extended reporting period, if applicable, of any claim made against the Insured. Notice given by or on behalf of the Insured to any authorized representative of the Company, with particulars sufficient to identify the insured, shall be deemed notice to the Company. If mailed, the date of mailing of such notice shall constitute the ~late that such notice was given, and p. roof of mailing shall be sufficient proof of notice. SPECIAL REPORTING CLAUSE If during the Policy Period or during the extended repoding period, if the right is exercised by the Insured in accordance with Special Provision 5, the Insured shall become aware of any occurrence which may reasonably be expected to give rise to a claim against the Insured for a Wrongful Act which occurs on or after the Retroactive Date and prior to the end of the Policy Period, and provided the Insured gives written notice to the Company during the Policy Period or the extended reporting period, if applicable, of the nature of the occurrence and specifics of the possible Wrongful Act, any claim which is subsequently made against the Insured arising out of such Wrongful Act shall be treated as a claim made during the Policy Period. If mailed, the date of mailing of such notice shall constitute the date that such notice was given, and proof of mailing shall be sufficient proof of notice. EXTENDED REPORTING PERIOD If the Company shall cancel or refuse to renew this policy, the Insured shall have the right, upon payment of an additional premium of 50% of the total annual premium, to a period of twelve (12) months following the effective date of such cancellation or non-renewal (herein referred to as the extended reporting period) in which to give written notice to the Company of claims first made against the Insured during said twelve (12) month period for any Wrongful Act occurring on or after the Retroactive Date and prior to the end of the Policy Period and otherwise covered by this policy. The rights contained in this clause shall terminate, however, unless written notice of such election together with the additional premium due is received by the Company within ten (10) days after the effective date of cancellation or non-renewal. The offer by the Company of renewal terms, conditions, limits of liability and/or premiums different from those of the expiring policy shall not constitute refusal to renew. This clause and the rights contained herein shall not apply to any cancellation resulting from non-payment of premium. GENERAL CONDITIONS This policy only applies to Wrongful Acts committed in the United States of America, its territories or possessions or Canada. All notices of claims, applications, demands or requests provided for in this policy shall be in writing addressed to William J. Benecke, Claims Department, Philadelphia Insurance Companies, One Bala Plaza, Suite 100, Bala Cynwyd, PA 19004. The Insured shall cooperate with the Company and, upon the Company's request, assist in making settlements, in the conduct of suits or proceedings, and in enforcing any right of contribution or indemnity against any person or organization who may be liable to the Insured. The Insured shall attend hearings, trials and depositions and shall assist in securing and giving evidence and obtaining the attendance of witnesses. The Insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expense. The Company shall be entitled to exercise all Insureds' rights in the choice of arbitrators and in the conduct of any 10. 11. 12. arbitration proceeding involving a claim covered by this policy. No action shall lie against the Company unless, as a condition precedent thereto, there shall have been full compliance with all terms of this policy, nor until the amount of the Insured's obligation to pay shall have been finally determined either by judgment against the Insured after actual trial or by written agreement of the Insured, the claimant and the Company. Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall thereafter be entitled to recover under this policy to the extent of the insurance afforded by this policy. No person or organization shall have any right under this policy to join the Company as a party to any action against the Insured to determine the Insured's liability nor shall the Company be impleaded by the Insured or his legal representative. If, during the Policy Period, the Insured first named in Item 1. of the Declarations shall consolidate with or merge into, or sell all substantially all of its assets to, any other person or entity or group of persons and/or entities acting in concert, or if any person or entity or group of persons and/or entities acting in concert shall acquire an amount of the outstanding securities representing more than 50% of the voting power for the election of directors of such Insured, then there shall be no coverage afforded by any provision of this p~)licy, including but not limited to Special Provision 5 "Extended Reporting Period", for any alleged Wrongful Act occurring after the effective date of such event. The Insured shall give the Insurer written notice of the event as soon as practicable, but not later than 30 days after the effective date of the event. In the event of any payment under this policy, the Company shall be subrogated to all the Insured's rights of recovery therefore, and the Insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. The Insured shall do nothing to prejudice such rights. Any amount recovered in excess of the Company's total payment shall be restored to the Insured, less the cost to the Company of recovery. Such insurance as is provided under this policy shall apply only as excess over any other valid and collectible insurance. This policy may be cancelled by the Insured by surrender of this policy to the Company or by giving written notice to the Company stating when thereafter such cancellation shall be effective. This policy may also be cancelled by the Company by mailing to the Insured by registered, certified, or other first class mail, at the Insured's address shown in Item 1. of the Declarations, written notice stating when, not less than thirty {30) days thereafter, the cancellation shall be effective. The mailing of such notice as aforesaid shall be sufficient proof of notice and this policy shall terminate at the date and hour specified in such notice. If this policy shall be cancelled by the Insured, the Company shall retain the customary short rate proportion of the premium hereon. If this policy shall be cancelled by the Company, the Company shall retain the pro rata proportion of the premium hereon. Payment or tender of any unearned premium by the Company shall not be a condition of cancellation, but such payment shall be made as soon as practicable. Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon; however, subject otherwise to the terms hereof, this policy shall cover the estate, heirs or legal representative of the Insured in the event of the Insured's death, bankruptcy, insolvency or being adjudge incompetent. Bankruptcy or insolvency of the Insured or the Insured's estate shall not relieve the Company of any obligation hereunder. Notice to any agent or knowledge possessed by any agent or by any person shall not effect a waiver or a change in any part of this policy or estop the Company from asserting any right under the terms of this policy; nor shall the terms of this policy be waived or changed, except by endorsement issued to form a part of this policy and signed by an authorized representative of the .Company. The Insured first named in Item 1. of the Declarations shall be the sole agent of all thsureds hereunder for the purpose of effecting or accepting any amendments to or cancellation of this policy, for the completing of any applications and the making of any representations, for the payment of premium and the receipt of any return premiums that may become due under this policy, and the exercising or declining to exercise any right to an extended reporting period. 13. It is agreed that in the event of failure of the Company to pay any amount claimed to be due hereunder, the Company, at the request of the Insured, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this condition constitutes or should be understood to constitute a waiver of the Company's rights to commence an action in any court of competent jurisdiction in the United States to remove an action to a United States District Court or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. It is further agreed that services of process in such suit may be made upon Philadelphia Insurance Companies, One Bala Plaza, Suite 100, Bala Cynwyd, PA, 19004, or his or her representative, and that in any suit instituted against the Company upon this contract, the Company will abide by the final decision of such court or of any appellate court in the event of any appeal. Further, pursuant to any statute of any state, territory, or district of the United States which makes provision therefore, the Company hereby designates the Superintendent, Commissioner, or Director of Insurance, other officer specified for that purpose in the statute, or his or her successor or successors in office as its true and lawful attorney upon whom may be served any lawful process in any action, suit, or proceeding instituted by or on behalf of the Insured or any beneficiary hereunder arising out of this contract of insurance, and hereby designates the above named Counsel as the person to whom the said officer is authorized to mail such process or a true copy thereof. IN WITNESS WHEREOF, the Company has caused this policy to be signed by its president and secretary and signed on the declarations page by a duly authorized representative of the Company. S~cretarv M~R-26-2001 10:54 THE HESS AGENCY Philadelphia Insurance Companies O.¢ Bale Plea. Suit: 100, Bale. Cynwyrl. gA 19004 610.617.79~0 FaT: fi10.617.7940 7176654493 P.03 .... Name 0~:'In~uranc¢ Company Io Which Appllcalion Ia Made: (herein called the Company) SECURrrlES BROKER/DEALER'S ERROR~ AND OMISSIONS LiABILITY INSURANCE APPLICATION [1:; A.POLICY tS ISSUI~D. IT WILL RE ON A. CLAIMS-MADE 0A$15 NOTICE: THE POLICY PROVIDE~ THAT 'I'HE LIMIT OF LIABILITY AVAILABLE '£O PAY JUDGEMENTS OR SETTLENIENTS SHALL gE REDUCED BY AMOUNTS INCURRED FOR LEGAL DEI::ENSE. FURTHER NOTICE THAT AMOUNTS INCURRI:J.) FOR LEGAL DEF/r2,tSE SHALLBE APPLIED ^GAINST THE DEI2,UCTISLE AJvlOUNT. PLEASE Al-tACH COP[ES OF THE FOLLOWING: *gccoritle~s Broke/Dealer's late~q audited annual rclaon, a~ well ~ later 10-K fflcd with ~ SEC (if publicly m~d); *Lat~q qu~terly F~u~ part Il m~ru as ~ wi~ regulatory *Cop~ of thc ~st ~t BD fo~ ~ed ~'ith the *L~t of ap~oved ~v~tment ~hicl~ for sale by ~urities Btok~/~aler'~ Regist~d Rew~ntativc. i~lu~og approved life insuran~ co~ani~ and their pr{~tuc~, ~, ~1 aa a~ere~e ~i~tinea: *S~ufi~ Brokcr~al~a "d~ ~i~ncc" gui~lin~ for a~ovinginv~qmenr vehicles m be mid; *C~am~ta md r~ommendali~s made by the SEC. N~D, state aee~ilies ~ any o~er ~gulato~ ~y includ[ng any self mgulm~ or~niza~ion follo~ng Broker&81~. Alto, gleam alach ~c f~'a mn~n~ lea~. (a) Name and Mailing Addre.q,, of Securitic~ Brolcor/Dealex: / (d) Nu~ of offices in USA and ~a~; (e) Nu~r of ~fic~ el;ew~re: -~ Name of Parer(s) (liM ~th Ri~iate and ~lfialam p~ntn): -1. MAR-26-200t 10:55 THE HESS AGENCY 7176654493 P.04 2. (~) Limlt of L. iability rcq ue.qed: $ ~ 1(30~ Each Wrongful Act o~ .~erie~ of continuous, repcated af Interrelated Wrongful Acts. (b) Dcductibl¢~equ~led: ~; '%S(~o 3. (a) Ha& the g¢curinca Broker .t~aler bce, n, thc,,~ubjcct ~' any iTtcrge~ and/or ~cqui~ition.~ ,luring th,: pa~t rhm yearn? Ye No ~ _ ( f y~, att~chfull dctaits) (h) Has [he Sccurltics Brnkcr/Dealcr revealed publicly ~at it ~ the ,~bject of ~y ~ing m~g~ ~m acqu[qifion~? Yes No ~ (if"Y~." at,ch fur dc~ail~) ~ Numh~ of Regarded R~rcscntattvcs: (b) Non-~ucing Exe~tiv~Managemenr: ~ (c) Olhcr Cack offiec): ~ (a) Do all Regi.~texcd Reprcscntafive~ enter into a :ilan~rd contract x~th thc Secu~kic[ Brokcr/Dealcr? Ye~ -'~ .. No (h) Doe~ thc Sccurific~ Broker/Dealer's coxnt,?.~ct wid~ its Registered Reprc::catative.~ provide t':vr indcmnifica£ion of the: Securities Brokcr/L)ealcr? Yes ~ No (c) Doc~ the Svcuritie~ B, rxOkcr/Dea]er'~ contract wit.h iL~ Regi~rcrod RepresCntativ~ cmlmin an arbitration clau~c'? Yes .No '~_._ Statc percent nf -::venues derived from th~ follow~.g .qc'~ice area.,,: (a) .... .zs Full service ~'curitia.q bn)kcrag Discount securidc~ bxokerag I-'immciaI planning (d) Murkct ~.ming $crviccs (e) Private p 'lacemca[~. (0 Marke~ maklng/~peciali~ ~cdvide~ Underwriting acdvitie~ (h) Other {plea~ des~xibe) TOTAL .2- MP~-26-2001 10:SS THE HESS AGENCY 7176654493 P.05 ~) Total a~znual con.fission revcm, e~ for al! pro. cm. including life ~a~ ~rcc~ of co~ion revcn~ whi~ ~ ~nvcd t~om ~ Listccl S~ ~ Commoditi~ C. omlm4ity Ho rur:c.5 Mu£ual Fund~; Other Limited Or Limited Liability Parmerships ~,/ Variable AnmuncS { I [0 L~hCr Annuifie~ ~ I L~ Other (1olcu.~e specify) TOTAL (c) Average daily trading volume: .... 1 OO% (d) 'l'otal nurnbc.~ Ofsucurifie.~ wade,; executed: _ per monlh/year (circle one) (¢) AvCcage dollar value l:,a' secudtic~ trade: What pctcent of all brokerag~ a¢¢o'0nt~ are m.~g/ll ao.;oun~s: (g) Wh~£ percent ~re discretionary account~: -. ,~ (h) Whatpercenrarcindivid~l: I(20 °~0 In.~tin,tional:__/ Do(:~; the Securities Broker/Dealer cie. ar it.~ own accounts'! Yes __ No ~ If "No." il',dic~l¢ na~e of clearing agent u~d. ~--2<a~r_~t/ Is t..h~.~c a bold barrel.s clause i9~he contrac~ with the clearing agent m protect the Scuuriti,"s ~ol~rlDealcr for ,mproperly executed t~-,de~? Yes ~' __ No. la) Do all cu~tomera or clients sign a standard contract'? - Y~ ~ No (b) Who approves of modifications to thc Securities Broh:rg0ealcr's ~tandard client conu'acr? (d) 1~ t~ arbi~adon c~a~lliOn~ [;1 (c) a~vc eve~ ~leted ~om the c~ent a~cement9 Ym No ........ ' ~ (If ~e$ wha*~c~ge of ~greemcn[s ~S tc&let~ ~om? ~ _.%) D~s c~urhi~ Brnkcr~e~lcr'~ cot~pliancc depan~c~t review ~1 c[e~ cnn~acm7 Y~ ~ . No -3- MAR-26-~001 10:56 THE HESS aFgENCY ?176654493 P.06 (£J D~Scr~be ibc Sc~urid~ Brnk~r/t)ealcr'~ pracedur~ for revicwlng new accounm: 10. ~ Give nu~r uf nodc~, letlcrs, arid ca~ln~n~ r~vcd ~ the p~t t~ yea~ by thc Co~]k~ Dep~men~ (b} How ~ny w~e unsc~lcd a~ ~] d~ys?. ~ (c) A~a~ t~ll dcmi~ reg~ding ~y c~es m thc l~t five yca~ involHng monet~ ~eut~ or I~w~ds ~ excc~ ut*S5.~. 1 I. L.Mcs the SCcuri£ics Bro]c~-,qge-,dcr or any of it.~ Parmcrs, DireCtors, Officer/. Employees or Regi$~rexi Reprcsenr.~dves ha, ye any knowledge ,or intt~rraa¢ion of any c rctunslanc~ or any .',l.leg:ltions or contentions of any incident which ~' -- - I, ~uc.,,~un *~ / aoovc, t~at LI s~n .lax',v, lcdgc or inf'urmari0n exists any claim or action aruqng thcrcfrarn ~ excluded from proposed co¥cragc 13. Have any of zhc Secuii6ts Brolccr/Dealcr's Registered Rc'pr~,¢ntati,,'cs ever b~en disdplincd, fined or su~pc:ndcd by file SEC, NASD, irate sOcuri~¢,s regulatory authority, state insurance departm,~n: or any tXhe. r r~ Iai, ~ gu ry y. includi~tg but I~c~ limited to those disclo.lcd within Form U-4, within thc ~,t.~v~ years? Ya~ _ '~' , No_ (It"Yes." give tull par6culnr~, on an atrachcdshrck along wi~ CoDy of Forlv. U-4) 14. (~) Previous S~,ri~.,~ htrokcz/Dcalur Errors and Omissions Insura,cc-. u[r~{s of Liabillly: ~. , PolicyTcrm: I ~200 -- ~ I C~i Prernium:$ (b) i-'las a,ny insu.,~'c rcf~j! or cua~.'elled..or.nom'cnewcq 01k tyl~ of cu',~:ragc in ff~ 'i'~t five ye..ar~9 Yc.s ,__No 7k'" (It Yes .gv¢£u dcr.-,d~0nanatlached~hee0 !~. Have any Professional Liability (F.&O) ¢t~,ims (whether or not covered by it~s~rance:) bccn mad, during the pa.lr fir years ag~.inst thc ~cunti~ iSrokcr/Dcalcr or "ny Reglster~i Represcnm6 ¥c'? Y'a.. .... No__ 'X ' (lf"Yc$". give ff~ll panicularson nn strac,-hed.,;hc¢0 16. P~e~xc ~r~vidc~ ~?m ~wi~g inf~rm~6o~ rega~ding ~thur ~n`~r-a-nce ~a~ied by the Scc~r~ie~% ~r~kcr/Dca~r: LIMIT TERM (describe) MOR-26-2001 10:58 THe HESS AGENCY 7178654493 P.O? THE UNDERSIGNED AUTHORIZED OI'FICERS OF TIIE SECURITIES BROKER/DEALER DECLARE THAT '1'1-/ ST*TEMENTS SET FORTH HFLREIN ARE TRUF_ THE UNDERSIGNED AUTHOR{ZED OFFICERS AGREE TIqAT IF THE INFORMATION SUPPLIED ON TI-LIS ,'~'~PI.ICA'I'ION CHANGF~ BETWEEN THE DA'I'P~ OF THIS APPLICATION AND -FIDE EFF~Ct'IVE DAT~ OF THE INSURANCE. IMMEDIATELY NOTIF'Y T/-~E GO/ulPAN y OF SUCH CHANGES. AND TFIE COMPANY MAY WITHDRAW OR MODIFY ANY OUTSTANDING QUOTATIONS AND/OR ALrI'F/ORIZATION OR AC~REEMENT TO ;5IND INSURANCE. SIGNING OF THIS APPLICATION DOES NOT BIND-I~-IE COMPANY TO ISSUE OR TJqE BROICER//.)EAI.ER TO B U Y THE INS URANCE, BUrl. IT IS AGREED TI IAT THIS FORM SHALL BE THE BASIS OF THE CONTI~ ACT SFIOULD A POLICY BE ISSUED AND 1T WILL BE A'I-fACHED 2'0 AND MADE PART OF T~E PO/JCT. ALL WRIT'I'~'N S'i'ATEMENT.~ AND MATERIALS FURNISHED TO THE COMP, ANY IN CONIUNc?ION Wff TIdIS APPLICATION A RE. HEREBY INCORPORA-T~D BY R.~FERENCE INTO THI~ APPLICA I'ION AND MADE PART HEREOF. NOTICE: liN SOME STATES, ANY PERSON WHO I~NOWINGLY AND WITH IN~ TO DEFRAUD ANY ]NS~NCE COMPANy OR OTH~ PE~ON ~SL~ AN AP~ICATION FOR INSUR~CE OR STAT~IF~T OF CLAIM CO~'A I~NC ANY ~2~LI.V ~tL~E ~FO~ATION, OR CONCEAi~ FOR THE PURPOSE OF MISI.~DING, INFOR~TION CONCERNING ANY FA~ MA~RIAL ~[ERETO, CO~ ITS A ~UDULEN~ INSU~NcE A~', W~C~ IS A C~M~ IN NEW YORK, A P~SON WIIO CO~tTS SUC~ C~ME SHALL ALSO BE SUB~E~ TO A CIVIL PENALTY N~ TO EXCEED ~ AND THE STATED VALUE OF TI~ CLA~ FOR EACH SUCH VIOLATION. Si~ned:~~ ~ ~ Dare: ~ ~ $ (Mu~ be Signed By ~e President. if a Coq~oration. a Genial P~rmer if a Parr~ ' IF A ~I.ICY ~ ISSUED ~ ~LICATION IS AT'I'ACH~ TO AND MADE A PART OF THE ~LICY SO 1T IS NECE$$ARy THA~' A~ QUESTIONS gE ANSWERED ~ DETAIL. (PLEASE CONTINUE TO NI~XT PAGE) -5- ~R-26-2001 10:S? THE HESS AGENCY ?176G54493 P.08 PLEAS£ READ THE FOLLOWING STATEMEb/T CAREFULLY At~D SIGN BELOW WHERE INDIC&'FEI). POLICY IS I~UED, THIS SIGNED STATEMENT WILL BE ATTAC~ TO T~E POLICY. The h~ur~ hereby a~ledge~ that ~shc~t i.~ aw~c ~a( t~ )i~t of/i2hilitycon~in~ in ~is poficy ~ha]l M reduced. at~ may ~ c~lpletcly exh:msred, by the ct*~ts Of legal defmtse a~, in auch event, ~e Company ~all n~ c(~ts of lcfii dcfe~ ~ f~ the amount of ~nyjbdgem~t or ~lCment ~o thc extant th~ such cx~ ~c J~it of t~ po~cy. mUrecl hereby thr~her acknowledges the he-/she/it i.s aware that legal dcfcn.~ cc~,t.~ tha~ arc incurred .sha,~l he applied the retention ~nOUnt. lie Signed hy ff~e Presid¢];t if a Co~r~tion, ~n~l P~n~ if a P~n~hlp) Exhibit B ARBITRATION TRIBUNALS OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. In the Matter of the Arbitration Between: JOHN D. COFFMAN, MARTHA C. COFFMAN, JOHN E. COFFMAN, PATRICIA A. COFFMAN, WILLIAM R. BISHOP, KATHLEEN L. BISHOP, MATTHEW J. BISHOP, PAMELA BISHOP, GEORGE H. MEENA and MARINA MEENA, CLAIMANTS, VS. T.H.E. FINANCIAL GROUP, LTD., RESPONDENT. Case STATEMENT OF CLAIM CLAIMANTS, JOHN D. COFFMAN (hereinafter referred to as "J. COFFMAN"), MARTHA C. COFFMAN (hereinafter referred to as "M. COFFMAN"), JOHN E. COFFMAN (hereinafter referred to as "JE COFFMAN'), PATRICIA A. COFFMAN (hereinafter refe.rred to as "P. COFFMAN"), WIIJ JAM R. BISHOP (hereinafter referred to as "W. BISHOP"), KATHLEEN L. BISHOP (hereinafter referred to as "K. BISHOP"), MATFHEW J. BISHOP (hereinafter referred to as "M. BISHOP"), PAMELA BISHOP (hereinafter referred to as "P. BISHOP"), GEORGE H. MEENA (hereinafter referred to as "G. MEENA") and MARINA MEENA (hereinafter referred to as "M. MEENA") (hereinafter collectively referred to as "CLAIMANTS"), sue T.H.E. FINANCIAL GROUP, LTD. (hereinafter referred to as "TFG' or "RESPONDENT"), and allege the following: JURISDICTIONAL ^I.I.EGATION 1. The jurisdiction of this Tribunal is invoked under the Federal Arbitration Act and pursuant to the Arbitration clauses contained in (a) the Licensing Agreement that RESPONDENT has with the National Association of Securities Dealers, Inc. ("NASD"), by which the firm individually and collectively agreed to submit all disputes and/or complaints (i) with customers and/or (ii) arising out of or in connection with its business and/or (iii) arising out of the employment or termination of employment of its associated persons to arbitration, and Co) the NASD Code Of Arbitration Procedure, and (c) the Form U-4 of Richard S. Taylor. See, ~_~g~, Spear. Leeds & Kellogg v. Central Life Assur. C9,, 85 F.3d 21 (2d Cir. 1996); Oppenheimer & Co.. Inc. v. Neidhard~; 56 F.3d 352 (2d Cir. 1995); ~ Certified Reporting Co.. et al., 939 F. Supp. 1333 (N.D. Ill. 1996); Miller v. Flume, 139 F.3d 1130 (7th Cir. 1998). GENERAL ALLEGATIONS 2. At all times relevant hereto, the COFFMANS resided in College Park, Maryland. Both of the COFFMANS are retired and sixty-nine (69) years old. 3. At all times relevant hereto, JE COFFMAN and P. COFFMAN resided in Laurel, Maryland. JE COFFMAN is J. COFFMAN'S and M. COFFMAN'S son. He is forty- three (43) years old and has worked for Washington Gas & Light Company for twenty-six (26) years. JE COFFMAN is in charge of regulating gas pressure at Washington Gas & Light Company. He and his wife, P. COFFMAN, only have high school educations. P. COFFMAN is forty-one (41) years old and does clerical work for the nutrition department at the National Institute of Health ("NIH"). Page 2 of 105 4. At all times relevant hereto, W. BISHOP and K. BISHOP resided in Jessup, Maryland. lC BISHOP is J. COFFMAN'S and M. COFFMAN'S daughter. She is forty-seven (47) years old and works as a Registered Nurse ("RN"). Her husband, W. BISHOP is fifty-two (52) years old and works in the auto loan department at SunTrust Bank. 5. At all times relevant hereto, M. BISHOP and P. BISHOP resided in Jessup, Maryland. M. BISHOP and P. BISHOP are W. BISHOP'S and K. BISHOP'S son and daughter respectively, and are both now twenty one (21) years old. 6. At all times relevant hereto, G. MEENA is eighty-one (81) years old and M. MEENA is seventy-six (76) years old. CLAIMANTS are retired and reside in Silver Springs, Maryland. 7. In 1997, 1998 and 1999, TFG had thousands of representatives who worked out of their house or other off-site locations scattered around the country. Most of these representatives had limited industry experience and operated other businesses in addition to their securities business through TFG. 8. In 1986, the NASD specifically warned TFG and other firms with such off-site working arrangements that the "conduct of off-site representatives most frequently resulting in violations of NASD rules involves unauthorized private securities transactions, or 'selling away.'". The NASD emphasized that "firms employing off-site representatives are responsible for establishing and carrying out procedures that will subject these individuals to effective supervision designed to monitor their securities-related activities and to detect and prevent regulatory and compliance problems." The NASD made a number of specific recommendations that would assist firms such as TFG in preventing "selling away" transactions Page 3 of 105 by their registered representatives, such as annual, unannounced inspections of the offices of their registered representatives and the review of incoming and outgoing correspondence and sales literature. The NASD specifically cautioned that "to fulfill these obligations, a firm should consider whether the number and location of its registered principals provides the capability to supervise its off-site representatives effectively." (See attached Exhibit "A.") 9. The SEC has also made clea.r on numerous occasions that surprise inspections of off-site locations are required, that these unannounced examinations must be conducted at least twice yearly, and that customer flies must be examined during these inspections. See In the Matter of Royal Alliance Assoc.. Inc.~ Exchange Act Release No. 38174, 63 SEC Docket 1643 (January 15, 1997) (broker-dealer's practice of conducting a pre-announced compliance examination of its off-site registered representatives only once a year was inadequate to satisfy its supervisory obligations); In the Matter of Consolidated Investment Services, Exchange Act Release No. 36687, 61 SEC Docket 20 (January 5, 1996) (broker-dealer's supervision of a small office run by a single registered representative inadequate without surprise inspections, and annual compliance questionnaires inadequate substitute for on-site inspections); In the Matter 9~2~LLJ,~e~g,f~llI~, Exchange Act Release No. 40459, Admin. Proc. File No. 3-9712 (September 23, 1998) (broker-dealer's reliance on supervisory interviews of registered representatives and annual inspections of branch office by regional compliance personnel without examining any customer files was inadequate to prevent and detect registered representative's violations). 10. TFG ignored these specific warnings by the NASD and directives by the SEC and failed to comply with its supervisory obligations over Taylor. TFG never inspected Page 4 of 105 Taylor's office, let alone subject his off-site location to the annual, unannounced inspections advised by the NASD. Further, TFG failed to establish any procedures for the review of incoming and outgoing correspondence and sales literature used by Taylor, and simply relied upon him to forward these materials to the finn. TFG never monitored any of Taylor's sales presentations, never reviewed on-site customer account documentation and other books and records, and never met with Taylor to discuss the products he was selling and his sale methods. 11. While Taylor was registered with TFG, TFG allowed Taylor to operate other businesses. The SEC has stated that "allowing a registered representative to engage in outside business activities involves the risk that the representative will use his outside business to carry out or conceal violations of the securities laws." Broker-dealers must "require independent verification of such matters as the nature and extent of outside business activities and a representative's outside sources of income." See Prospera Financial Inc,, Exchange Act Rel. No. 43352 (September 26, 2000); PFS Investments. Inc., Exchange Act Rel. No. 40269 (July 28, 1998). 12. RESPONDENT TFG'S procedures and compliance system were deficient because the firm did not take any steps to review Taylor's outside business activities and confirm that Taylor was not using his outside businesses to sell unregistered securities. By not requesting, inspecting and independently verifying documentation from Taylor concerning his outside businesses, RESPONDENT TFG failed to properly supervise Taylor. "Allowing a registered representative to engage in outside business activities involves the risk that the representative will use his outside business to carry out or conceal violations of the securities laws. Although [the broker/dealer] required that representatives obtain permission before engaging in outside business activities, the [broker/dealer] had no procedures for reviewing, analyzing, or following Page 5 of 105 up on the information representatives provided concerning their outside activities. [The broker/dealer's] procedures were deficient for failing to require inspections of its off-site offices that were not registered as branches with the NASD or to require independent verification of such matters as the nature and extent of outside business activities and a representative's outside sources of income." Signal Securities. Inc., Exchange Act Rel. No. 43350 (September 26, 2000); Walnut Street Securities. Inc., Exchange Act Rel. No. 35975 (July 17, 1995). ~ 13. Taylor may have been an independent contractor with RESPONDENT. However, the NASD and the State of Map/land have made clear on numerous occasions that broker/dealers may not avoid their supervisory obligations by entering into independent contractor relationships with their agents. In Notice to Members 86-65 (9/12/86), the NASD specifically noted that: Irrespective of an individual's location or compensation arrangements, all associated person are considered to be employees of the firm with which they are registered for purposes of compliance with NASD rules governing the conduct of registered persons and the supervisory responsibilities of the member. The fact that an associated person conducts business at a separate location or is compensated as an independent contractor does not alter the obligations of the individual and the firm to comply fully with all applicable regulatory requirements. (See Exhibit "A." pp. 1-2.) 14. During all periods material hereto, RESPONDENT TFG was licensed and authorized to do business in the State of Map/land and did business in Maryland through Richard S. Taylor, a registered representative of TFG. TFG is a registered securities broker/dealer with the State of Map/land and the Securities and Exchange Commission ("SEC") and is a member of the National Association of Securities Dealers, Inc. ("NASD"). Page 6 of 105 15. Richard S. Taylor (hereinafter referred to as "Taylor"), at all times relevant to the transactions alleged herein, was a registered representative, employee, and agent of RESPONDENT TFG. At all times relevant hereto, Taylor was the individual account executive responsible for the handling of transactions with CLAIMANTS at TFG and was acting within the scope of his position of employment and/or agency and/or apparent agency t with TFG. Also at all times material hereto, Taylor was, upon information and belief, a resident of Baltimore, Maryland. (See attached Exhibit "B.") 16. Taylor and TFG agreed and undertook to perform the duties of a securities broker, financial consultant, and brokerage firm relative to recommending and supen, ising the recommendation of transactions with CLAIMANTS. 17. The acts committed by Taylor and RESPONDENT TFG, as alleged herein, were done by the fawn personally through the use of the mails or other instrumentalities of interstate commerce. The acts of RESPONDENT TFG and each employee, agent, and representative of RESPONDENT TFG are deemed to be the acts of and are chargeable to and binding upon RESPONDENT TFG under principles of agency law, licensing, and controlling person and the doctrine of respondeat superior.. I. JOHN D. COFFMAN AND MARTHA C. COFFMAN 18. J. COFFMAN only has a high school education and worked in the appliance service department for Washington Gas & Light Company for forty (40) years. His wife, M. COFFMAN, likewise only has a high school education. She worked as a homemaker until 1969, at which time she began doing clerical work for a local eye doctor. Page 7 of 105 19. The COFFMANS are members of a local public service organization, The Loyal Order of the Moose. They socialize with another couple, Ralph Grier and Shirley Aud, who are also members of this organization. Grier and Aud informed the COFFMANS that they had a financial advisor, Richard S. Taylor, with whom they were very happy. 20. The COFFMANS had accumulated a significant amount of monies in their respective 401(k) plans. These monies constituted most of their life savings. They decided that they needed professional investment advice concerning how to manage these monies. They did not know whether they should make withdrawals from their 401(k) plan accounts prior to the mandatory withdrawal period and, if so, how should they invest such proceeds. Accordingly, they turned to Taylor for investment advice. 21. Taylor gave the COFFMANS a business card identifying him as a Registered Investment Representative and President of RESPONDENT TFG, and also presented the COFFMANS with an Asset Management Program. (See attached Exhibit "C.") II. JOHN E. COFFMAN AND PATRICIA A. COFFMAN 22. JE COFFMAN and P. COFFMAN were referred to Taylor by P. COFFMAN'S mother. Taylor identified himself to the COFFMANS as a licensed broker with RESPONDENT TFG. Taylor prepared an investment plan for JE COFFMAN and P. COFFMAN and JE COFFMAN rolled over his IRA monies into an account with RESPONDENT TFG. (See attached Exhibit "D.") 23. The COFFMANS were very frugal and had completely paid off their home. Taylor recommended that the COFFMANS obtain a mortgage on their home and invest the loan proceeds in a Rolls Royce, Ltd. promissory note. Page 8 of 105 III. WILLIAM R. BISHOP. KATHLEEN L BISHOP. MATTHEW J. BISHOP AND PAMELA B. ABRAHMS 24. W. BISHOP and K. BISHOP were referred to Taylor by K. BISHOP'S mother. Taylor identified himself to the BISHOPS as a licensed broker with RESPONDENT TFO. Taylor prepared a financial plan for thc BISHOPS and recommended that K. BISHOP open an IRA account with RESPONDENT TFG and invest in IDEX mutual funds. (See attached Exhibit "E.") IV. GEORGE H. MEENA AND MARINA MEENA 25. G. MEENA worked a shoe salesman at Hahn Shoes for thirty-one (31) years and is now retired. He receives a pension in the amount of approximately $400/month. M. MEENA formerly worked as a secretary for the PanAmcrican Health Organization and is also retired. 26. The MEENAS met Taylor in late 1997 or January 1998. Taylor identified himself as a registered investment representative with RESPONDENT TFG and gave CLAIMANTS his TFG business card. (See attached Exhibit "F.") 27. RESPONDENT TFG, acting through Taylor, recommended that CT~MANTS invest in the following unregistered, fraudulent promissory notes: CLAIMANT DATE INVESTMENT AMOUNT Selling Agent J. COFFMAN & : 8/11/97 Rolls Royce, Ltd. $ 306,000 Taylor M. COFFMAN Promissory Note J. COFFMAN & 10/13/97 Rolls Royce, Ltd. $ 40,000 ! Taylor M. COFFMAN Promissory Note J. COFFMAN 5/28/99 Morning Star, Ltd. $ 481,864.48 Taylor Promissory Note Page 9 of 105 CLAIMANT DATE INVESTMENT AMOUNT Selling Agent M. COFFMAN 6/1/99 Morning Star, Ltd. $ 185,782.74 Taylor Promissory Note JE COFFMAN 12/31/97 Rolls Royce, Ltd. $ 70,000 Taylor & P. COFFMAN Promissory Note W. BISHOP & 8/7/97 Rolls Royce, Ltd. $ 16,500 Taylor IC BISHOP Promissory Note · W. BISHOP & 12/9/97 Rolls Royce, Ltd. $ 4,500 Taylor K. BISHOP Promissory Note M. BISHOP & K. 8/31/97 Rolls Royce, Ltd. $ 5,000 Taylor BISHOP Promissory Note P. BISHOP & IC 8/31/97 Rolls Royce, Ltd. $ 5,000 Taylor B~SHOP Promissory Note G. MEENA 1/23/98 Rolls Royce, Ltd. $ 55,000 Taylor Promissory Note M. MEENA 1/23/98 Rolls Royce, Ltd. $ 40,000 Taylor Promissory Note TOTAL: $1,209,647.22 that: 28. RESPONDENT TFG, acting through Taylor, failed to disclose to CLAIMANTS 1. These Promissory Notes were not registered with the Securities and Exchange Commission in violation of Section 5 of the Securities Act of 1933. ($¢~ attached Exhibit "G.") 2. These Promissory Notes were not registered with the State of Maryland. ($~¢ attached Exhibit "H.") 29. RESPONDENT TFG, acting through Taylor, misrepresented and omitted to disclose numerous material facts to CLAIMANTS concerning these promissory notes, their operations, the risks involved in these investments, and the use of funds obtained from the sale Page 10 of 105 of these investments to CLAIMANTS. TFG, acting through Taylor, failed to provide CLAIMANTS with a prospectus, offering memorandum or other risk disclosure documents for these investments and failed to provide any financial information to CLAIMANTS concerning these investments. 30. RESPONDENT TFG, acting through Taylor, made the following additional misrepresentations of fact and failed to make the following disclosures, among others, to CLAIMANTS: RESPONDENT TFG, acting through Taylor, falsely represented that investor monies would be used to fund loans to companies engaged in the car title loan industry and the payday loan industry. RESPONDENT TFG, acting through Taylor, failed and neglected to disclose that only a small fraction of investor monies was used for its intended purpose in that the investment sponsors, after transferring investor monies to Cayman Islands accounts, used the monies to pay existing investors, commissions and expenses. RESPONDENT TFG, acting through Taylor, failed and neglected to disclose that these investments were offered pursuant to a massive Ponzi Scheme. (See attached Exhibit "G.") 31. RESPONDENT TFG, acting through Taylor, faile~ to disclose to CLAIMANTS that RESPONDENT TFG had not conducted a proper due diligence into these investments. RESPONDENT TFG, allowed Taylor to hold himself out as a licensed representative of RESPONDENT TFG and did not disclose to CLAIMANTS that the firm had not reviewed these investments and that the firm was not properly supervising Taylor. 32. It is well-settled that a brokerage firm which recommends a security has a duty to ensure that its representations have a reasonable basis: In summary, the standards...are strict. [A salesman] cannot recommend a security unless there is an adequate and reasonable basis for such Page 11 of 105 recommendation. He must disclose facts which he knows and those which are reasonably ascertainable. Bv his recommendation, he implies that a reasonable investigation has been made and that his recommendation rests on the conclusions based on such investigation. Where the salesman lacks essential information about a security, he should disclose this as well as the risks which arise from his lack of information. ]:{ikal.e..,/_x~. ~ , 415 F.2d 589, 595-97 (2nd Cir. 1969) (emphasis added).' In short, a broker-dealer must not only "know the customer", but the brokel'-dealer must also know the "security." RESPONDENT TFG and Taylor did not "know" Rolls Royce and Morning Star because they failed to conduct a reasonable investigation ("due diligence") into these investments before recommending these securities to CLAIMANTS. 33. Article III, Section 27 of the NASD Rules of Fair Practice requires that each member establish and maintain a system to supervise the activities of each registered representative that is reasonably designed to achieve compliance with applicable securities laws and regulations and with the rules of the NASD. It must include written procedures that are established, maintained, and enforced. TFG did not have an adequate system of supervision. ~ See also Mac Robbins & CO., 41 S.E.C. 116-119 (1962); Aff'd. Sub. Nom, Berk0 v, S.E.C., 316 F.2d (2d Cir. 1963) ("The making of recommendations to prospective purchasers without a reasonable basis, couched in terms of either opinion or fact, designed to induce purchases, is contrary to the basis obligation of fair dealing borne by those who engage in the sale of securities to the public."); ~, 40 S.E.C. 986-990 (1962) (A broker's recommendation must be "responsibly made on the basis of actual knowledge and careful consideration."); Securities Exchange Act Release No. 6721 (February 2, 1962) ("the making of recommendations for the purchase of a security implies that the dealer has a reasonable basis for such recommendations, which in turn, requires that, as a prerequisite, he shall have made a reasonable investigation:); Rice. Recommendations by a Broker-Dealer; the Requirement for a Reasonable Basis, 25 Mercer L. Rev. 537 (1974) (A broker that does not have a reasonable basis for recommending a particular security cannot satisfy the suitability rule, "since a broker-dealer would have difficulty contending that a recommendation was suitable for a given customer when you lack adequate information about the security involved.") Page 12 of 105 There was no system for on-site or off-site supervisory review of representations, recommendations, and actions by their registered representatives. In actuality, TFG simply relied upon their off-site salesmen to supervise themselves. 34. TFG'S failure to establish and implement adequate supervisory procedures over Taylor is inexcusable, particularly in view of the NASD's dissemination to TFG of NASD Notice to Members 86-65, dated September 12, 1986, which expressly warne.d NASD member fh'ms that the NASD had observed a pattern of rule violations and other regulatory problems stemming from the employment of registered persons who engage in securities-related activities on a full and part-time basis at locations away from the offices of the member. The NASD pointed out that these off-site representatives, often classified for compensation purposes as independent contractors, are involved in other business enterprises such as insurance, real estate sales, accounting, or tax planning, and also frequently operate as separate business entities under names other than those of the members. The NASD made the following observations concerning the regulatory responsibilities of member firms that are of particular relevance to this case: Irrespective of an individual's location or compensation arrangements, all associated persons are considered to be employees of the firm with which they are registered for purposes of compliance with NASD rules governing the conduct of registered persons and the supervisory responsibilities of the member. The fact that an associated person conducts business at a separate location or is compensated as an independent contractor does not alter the obligations of the individual and the firm to comply fully with all applicable regulatory requirements. Firms employing off-site representatives are responsible for establishing and carrying out procedures that will subject these individuals to effective supervision designed to monitor their securities-related activities and to detect and prevent regulatory compliance problems. This can include: Page 13 of 105 Educating off-site personnel regarding their obligations as registered persons to the firm and to the public, including prohibited sales practices. 2. Maintaining regular and frequent contact with such individuals. Implementing appropriate supervisory practices, such as records inspections and compliance audits at the representatives'places of employment, to ensure that their methods of business and day-to-day operations comply with applicable rules and requirements. For greatest effectiveness in preventing and detecting violations, visits should be unannounced and include, for example, a review of on- site customer account documentation and other books and records, meetings with individual representatives to discuss the products they are selling and their sales methods, and an examination of correspondence and sales literature. Firms whose off-site personnel also engage in non-securities businesses should remind these individuals that correspondence pertaining to such businesses, unless submitted for review, may not include material related to securities transactions. If a member has designated an individual responsible for reviewing the activities of other registered persons within the firm, the office of that individual must be inspected annually, regardless of whether such person is compensated as an employee or as an independent contractor. The actions of an associated person in dealing with ~ustomers and customer account, regardless of whether he or she is compensated as an employee or an independent contractor, are actions on behalf of the firm. The firm is responsible for supervising in a manner designed to detect and prevent violations of Section 2 [the NASD suitability rule]. Members should take affirmative steps to ensure that off-site personnel understand and abide by NASD and firm policies regarding dealings with customers, customer account and customer funds. (See Exhibit "A" attached hereto.) (Emphasis added.) 35. NASD Notice to Members 86-65 expressly urged each member to duplicate the Notice and distribute it individually to all associated persons, and indicated that the NASD, Page 14 of 105 in the course of its member examinations, would make inquiry to ascertain that this Notice had been provided to all appropriate personnel. (See Exhibit "A.") 36. Upon information and belief, TFG never gave a copy of NASD Notice to Members 86-65 to Taylor and failed to properly educate Taylor concerning his obligation as a registered person, including prohibited sales practices. 37. NASD Notice to Members 86-65 indicates it is not the first admonition by the NASD on this subject. As early as 1982 the NASD circulated to all member firms an SEC Notice Concerning Independent Contractors dated June 18, 1982, which indicated that "to the extent that a firm forms a relationship with an independent contractor, that firm would be responsible for either (1) ensuring that the independent contractor was registered as a broker- dealer or (2) assuming the supervisory responsibilities attendant to a relationship with an associated person." The NASD noted that "it would be advisable if [this SEC Notice] were distributed to all registered and compliance personnel in your firm, including branch office personnel." ($e~ Exhibit "I" attached hereto.) 38. RESPONDENT committed numerous violations of the NASD Rules of Fair Y Practice in handling these transactions with CLAIMANTS, including: A. Article III, Sections 1, 2, 18 and 19, by engaging in conduct inconsistent with high standards of commercial honor and just and equitable principles of trade, recommending unsuitable transactions, engaging in deceptive or other fraudulent devices or contrivances, making material misrepresentations, failing to make material disclosures, and guaranteeing CLAIMANTS against loss in connection with their investments in Rolls Royce and Morning Star; B. Article III, Section 27, by failing to establish and enforce a proper supervisory system over the activities of registered representatives that was reasonably designed to achieve compliance with applicable securities Page 15 of 105 laws, rules, regulations, and statements of policy and procedure promulgated thereunder. 39. RESPONDENT'S violation of NASD rules constitutes negligence. As the Fifth Circuit observed in Miley v. Oppenheimer & Co.. Inc., 637 F.2d 318, 333 (5th Cir. 1981), the "NYSE and NASD rules are excellent tools against which to assess in part the reasonableness or excessiveness of a broker's handling of an investor's account," and the lower court properly included a reference to these rules in its jury charge. See Mihara v. Dean Witter & Company. Inc., 619 F.2d 814, 824 (9th Cir. 1980) ("Appellants contend that the admission of testimony regarding the New York Stock Exchange and NASD rules served to dignify those rules and regulations to some sort of standard. The admission of testimony relating to those rules was proper precisely because the rules reflect the standard to which all brokers are held."). See al~o Dean Witter Reynolds. Inc. v. Hammock: 489 So.2d 761,767 (1986) ("Case law is clear that evidence of violation of industry standards is admissible as non-conclusive evidence of negligence"); St. Louis-San Francisco R.R. Co. v, White, 369 So.2d 1007 (Fla. 1st D.C.A. 1979); St. Louis-San Francisco R.R. Co. v. Burlison, 262 So.2d 280 (Fla. 1st D.C.A. 1972); Clements v. Boca Aviation. Inc., 444 So.2d 597 (Fla. 4th D.C.A2' 1984); ~ Stores. In¢,, 436 So.2d 1075 (Fla. 3rd D.C.A. 1983); Reese v. Seaboard Coastline R.R. CO., 360 So.2d 27 (Fla. 4th D.C.A. 1978). 40. Further, the contracts between RESPONDENT TFG and CL~MANTS include not only securities industry rules and regulations, but also the internal rules and regulations established to govern the conduct of TFG'S own employees (Taylor), such as the internal supervisory procedures and compliance manuals. (See. ~.., Mill v mit a Fed. Sec. L. Rpts. CCH ¶ 92,498 (1986) at 93,031.) For example, in Thropp v. Bache Halsey Stuart Page 16 of 105 Shields. Inc.. 650 F.2d 817 (6th Cir. 1981), the Sixth Circuit rejected Prudential-Bache Securities Inc.'s argument that the District Court should not have relied on Bache's internal rules, as codified in its Standard Practice Instructions Manual, as evidence of the proper standard of care: When a defendant has disregarded rules that it has established to govern the conduct of its own employees, evidence of those rules may be used against the defendant to establish the correct standard of care. The content of such rules may also indicate knowledge of the risks involved and the precautions that may be necessary to prevent the risks. Montgomery v. Balt& Ohio R.R., 22 F.2d 359 (6th Cir. 1927). See also Prosser, The Law of Torts § 33 (4th Ed. 1971). The District Court correctly measured Bache's conduct by the standard of prudence it has established for its own employees. Id. at 820. 41. RESPONDENT'S violations of the Maryland Administrative Code constitute negligence per se because these rules were enacted for the protection of investors such as CLAIMANTS. See, e._~., Palmer v. Shearson Lehman Hutton. Inc., 622 So.2d 1085 (Fla. 1st DCA 1993); Twiss v. Kury, 25 F.3d 1551 (11th Cir. 1994). 42. RESPONDENT violated numerous TFG policies in connection with their Rolls Royce and Morning Star recommendations to CLAIMANTS. ? 43. The acts committed by RESPONDENT TFG and their employees, agents, and representatives, as alleged herein, were done by them personally through the use of the mails or other instrumentality of interstate commerce. The acts of RESPONDENT TFG and their employees, agents, or representatives as alleged herein are deemed to be the acts of and are chargeable to and binding upon TFG. 44. RESPONDENT TFG is liable for CLAIMANTS' transactions with Taylor even if RESPONDENT TFG properly supervised Taylor, even if RESPONDENT were not aware D~-~ 17 of 105 of these recommendations by its stockbroker, even if RESPONDENT TFG did not approve of these recommendations by the firm's stockbroker, and even if CLAIMANTS' Rolls Royce and Morning Star transactions were not processed through RESPONDENT TFG. The Fifth Circuit Court of Appeals had the following to say on this precise issue in the case of Lewis v. Walston & Co. 487 F.2d 617, 623-24 (5th Cir. 1973): Walston argues that [the broker] was acting beyond the scope of her employment. For example, Walston did not deal in unregistered securities. Moreover, [the broker] and the brokerage house did not perform their usual role as brokers; that is, the transaction did not involve the broker's placing an order through the house's New York office, which was then executed by the central office. In this regard, they note that Walston never stood to receive, and never did receive, any commission or other financial benefit from the direct and essentially private exchange [the broker] arranged .... Id. at 623-24. None of these superficially supportive bases for Walston's argument precludes the conclusion that [the broker's] actions were within the scope of her employment. That Walston did not deal in unregistered securities addresses only the question whether [the broker's] conduct was authorized;.., however, conduct may be within the scope of employment even if it is unauthorized, if it is sufficiently similar to authorized conduct. That the transactions did not involve the execution of an order through the brokerage house also does not necessarily mean that [the broker's] acts were without the scope of her employment. Brokers may and do take many actions in the course of their dealings with customers that do not relate directly to transactions executed through the brokerage house; these actions are not for that reason necessarily beyond the scope of the broker's employment. That Walston did not receive any financial benefit from the transaction is not of controlling importance. If a particular act is authorized, or sufficiently similar to an authorized act, finding that act to be within the scope of employment doe~ not require that the act has conferred any particular benefit, financial or otherwise, on the employer. Id. at 624. 45. Likewise, the Sixth Circuit Court of Appeals opined in the case of Holloway v, Howerdd. 536 F.2d 690, 695-96 (6th Cir. 1976): Page 18 of 105 [TSI, the broker-dealer, contends] "that it had no knowledge of nor reasonable grounds to believe in the existence of [the broker's] activity in publicly selling unregistered stock." Id. at 695. However, those persons who knew of [the broker's] status with TSI and who were without knowledge that he was acting separately from TSI were [correctly] permitted to recover. The liability of TSI is premised on the theory that "if one appoints an agent to conduct a series of transactions over a period of time, it is fair that he should bear losses which are incurred when such an agent, although without authority to do so, does something which is usually done in connection with the transactions he is employed to conduct." There was no proof that TSI "usually" engaged in the sale of unregistered stock. TSI, however, had an affirmative obligation to prevent use of the prestige of its firm to defraud the investing public. When its agents are dealing individually in thc sale of securities TSI must be clearly disassociated from those transactions, as otherwise it will incur liability on the basis of respondeat superior for the fraudulent representations of its agents. IT]he District Judge correctly.., held TSI liable to those plaintiffs who were without knowledge of limitations on the agent's authority. Id. at 696.2 46. RESPONDENT TFG is liable because they Participated in, aided, and/or supervised all of the transactions heretofore mentioned. RESPONDENT TFG is also liable under the doctrines of respondeat superior, licensing, controlling person, and agency principles for the negligent actions and breaches of duty by Taylor while in the scope of his employment/apparent authority with TFG. Henricksen v. Henricksen and Smith Barney, 640 F.2d 880, 887 (7th Cir. 1980) ("Under common law principles, a principal is liable for the deceit of its agent committed in the very business he was appointed to carry out. This is true even though the latter's specific conduct was carried on without knowledge of the principal.") Page 19 of 105 RESPONDENT TFG'S FAILURE TO INFORM CLAIMANTS OF TAYLOR'S TERMINATION 47. At the time of the later (e.g., post-October 1998) investments, Taylor was no longer licensed with RESPONDENT TFG. CLAIMANTS continued to .believe that Taylor was still an agent of RESPONDENT TFG because Taylor did not informed them that he left RESPONDENT TFG. 48. I~ESPONDENT TFG is liable for these CLAIMANTS' post-October 1998 transactions. Restatement of Agency (Second) § § 127 and 136 make clear that TFG was required to notify CLAIMANTS that Taylor was no longer its agent in order to terminate Taylor's apparent authority to act on behalf of TFG. As a federal district court in New York observed in Johnson v. Nationwide General Insurance Company, 971 F. Supp. 725 (N.D.N.Y. August 1, 1997): Apparent authority may continue after actual authority has been revoked. It lasts until a third party has actual notice of an agent's termination or until the third party has enough information to put that individual on inquiry .... Furthermore, if the principal does not take "appropriate affirmative steps" to destroy the former agent's apparent authority and "reasonable action" to inform third parties, the princi[~al may be held liable for an apparent agent's actions. ·.. Nationwide made no attempts to notify Donnelly's previous customers and the public of his termination. Nationwide failed to send any letters notifying his former clients that he was terminated and was no longer permitted to sell any Nationwide products. Finally, Nationwide did not give public notice in any local newspapers or media. As a result of these omissions, Donnelly's former clients and the general public were uninformed about the status of Donnelly's authority. Page 20 of 105 49. In Frank Mastolini & Sons. Inc. v. U.S. Postal Service, 546 F. Supp. 415 (S.D.N.Y. 1982), the federal court held that though the agent's authority had been directly terminated, the principal must, nonetheless, take "appropriate affirmative steps to destroy [the agent's] apparent authority in order to defeat its own liability." Id. at 420. The court held as follows: The general rule is that the acts of an agent, within the apparent scope of his authority, are binding bn the principal as against one who had formerly dealt with him through the agent and who had no notice of the revocation, because such a person is_Justified in assuming the continuance of the agency relationship, l~l, at 421 (emphasis supplied). The court concluded as follows: If an employer does not take reasonable action to inform third parties that its agent lacks any authority to act on its behalf, the principal is legally and equitably bound by the agent's action. Id. at 421. 50. These federal cases are consistent with state law on this subject. In Seiders v, Hefner, 747 P.2d 1003 (Or. App. 1987), for example, the Oregon Court of Appeals held as follows: [A]n agency continues in existence as to a third person until that person has notice or knowledge of its termination .... [W]hen Hefner [the agent] delivered the check to plaintiff, he was acting within the scope of his agency in advising plaintiff how to invest the proceeds .... IT]he jury could have found that it was investment advice and that it was within Hefner's apparent authority to give it.... Hefner was the agent of defendant, with express authority to deliver the check to plaintiff, and that he was acting with the apparent, but not the actual, authority of USLIFE when he gave financial advice to plaintiff, resulting in his obtaining a loan from her. Hefner was an agent of USLIFE when he wrote the policies and that relationship continued as to plaintiff, because she did not have notice or knowledge that Hefner no longer represented USLIFE. Whether Hefner was Page 21 of 105 acting with the actual authority or the apparent authority of USLIFE is immaterial. A principal is liable for injury to a third person resulting from the acts of an agent that are within the apparent authority of the agent when the third person has acted in reliance on the apparent authority. Id. at 1006-7 (citation omitted). 51. CLAIMANTS have been greatly damaged as a result of RESPONDENT'S misconduct. Instead of receiving safety and income, CLAIMANTS were saddled with unregistered and fraudulent investments. CLAIMANTS seek the recovery of damages in the amount of $1,209,647.22, not including interest at the legal rate, reasonable attorney's fees, benefit of the bargain damages, lost opportunity costs, model portfolio damages, and prejudgment interest from RESPONDENT. See Nordyne v. Florida Mobile Home Supply, 625 So. 2d 1283 (Fla. 1st DCA 1993) (wherein the Florida Court of Appeals held that "evidence of profits that [the victim] would have realized in the ensuing.., years was relevant because it tended to prove the position that the [victim] would have been in but for [the] wrongful acts." 52. It is also well-settled that pre-judgment interes~ is an automatic element of damages which is mathematically computed as of the date of the wrongdoing (purchase). Argonaut Insurance Co. v. May Plumbing Co., 474 So. 2d 212 (Fla. 1985), wherein the court stated that: Plaintiff is to be made whole from the date of the loss once a finder of fact has determined the amount of damages and defendant's liability therefor.... Computation of prejudgment interest is merely a mathematical computation. There is no 'finding of fact' needed. Thus it is a purely ministerial duty of the trial judge or clerk of the court to add the appropriate amount of interest to the principal amount of the damages awarded in the verdict .... Furthermore, just as the loss theory forecloses discretion in the award of prejudgment interest, there is no discretion in the rate of that interest. The legislature has Page 22 of 105 established a statutory interest rate [12%] which controls prejudgment interest. §687.01, Fla. Stat. Id, at 214-215. See also Wickham Contracting v. Local Union No, 3, 955 F.2d 831, 836 (2d Cir. 1992). 53. RESPONDENTS failure to conduct a proper due diligence, misrepresentations, omissions and unsuitable recommendations to CLAIMANTS were egregious, as were RESPONDENT TFG'S supervisory omissions. These acts by RESPONDENT TFG and its agents constitute independent torts for which CLAIMANTS seek recovery. In addition, these acts were done with wanton, reckless disregard of the rights and property of CLAIMANTS and CLAIMANTS are also entitled to punitive damages in an amount to be determined by the arbitration panel. 54. Punitive damages are further warranted due to RESPONDENT'S fraudulent concealment of their misconduct, which constitutes an independent tort for which CLAIMANTS seek recovery. Taylor continuously assured CLAIMANTS that Rolls Royce and Morning Star were safe investments and that their principal was not in danger. RESPONDENT failed to disclose the inaccurate and incomplete nature of Taylor's representations, failed to conduct proper due diligence, and'~ailed to disclose that these securities were unregistered and a fraud. 55. RESPONDENT'S failure to disclose the inaccurate and incomplete nature of Taylor's representations, its lack of due diligence, and the fact that Rolls Royce and Morning Star were unregistered and fraudulent, not only warrant punitive damages but toll all statute of limitations periods in view of RESPONDENT'S fiduciary relationship with CLAIMANTS and constitute independent torts for which CLAIMANTS seek recovery. The Southern Page 23 of 105 District of Florida made the following statement on the issue of fraudulent concealment in a fiduciary relationship: ...[T]he law of fraud 'does not require that an aggrieved party have proceeded from the outset as though he were dealing with thieves.' First Federal Savings & Loan Assoc. v. Dade Federal Savings & Loan Assoc., 403 So.2d 1097, 1100 (Sth DCA 1981). The existence of a fiduciavj relationship between the Plaintiff and the Defendant, and silence on the part of the Defendant when there is a duty to disclose facts, can constitute a fraudulent withholding of facts. Less than full disclosure on the part of a Defendant in a fiduciary relationship lawsuit, can be sufficient to establish fraudulent concealment. Wilder v. Meyer, 779 F. Supp. 164, 168-69 (S.D. Fla. 1991). In short, where a fiduciary relationship exists, acts of omission (failure to disclose material facts) can constitute fraudulent concealment. 56. This can also be seen in Vucinich v. PaineWebber Jackson & Curtis. Inc. et al, 803 F.2d 454 (9th Cir. 1986), where the court held that the fiduciary relationship that exists between a broker and his customer imposes upon the broker the duty to monitor the customer's account and affirmatively advise the client as to any changed circumstances. The Court found that the broker's representations regarding monitoring of a customer's account tolled the running of the statute of limitations [e.g., the prescription period] until such time as the broker fulfilled his obligation to advise the customer regarding matters relevant to possible misrepresentations. (Citing Twomey v. Mitchum. Jones. & Templeton. Inc., 262 Cal. App. 2d 690 727-729, 69 Cal. Rptr. 222 (1968). Further, the fraudulent concealment cannot be mitigated by the mere forwarding of a prospectus containing information that contradicts material representations made orally to investors. Luksch et al. v. Lathalrl, 675 F. Supp. 1168 (N.D. Cal. 1987). See also In Re Robert A. Foster. Sec. Ex. Rel. No. 34408 (July 20, Page 24 of 105 1994)("broker/dealers and their registered representatives 'owe a special duty of fair dealing to their clients.' The making of misrepresentations runs directly contrary to those fiduciary duties" and can render a broker/dealer liable in private actions "even where the investor has access to a prospectus providing full disclosure"). 57. Both the Florida courts and the Eleventh Circuit have made clear that a broker owes a fiduciary duty to a customer. In Gochnauer v. A.G. Edwards & Sons. Inc., 810 F.2d 1042 (llth Cir. 1987), the Eleventh Circuit made clear that a broker's fiduciary duty included "a duty to only recommend stocks which he has sufficiently investigated," "a duty to inform its customer of the risks involved in purchasing or selling particular securities," "a duty to refrain from self-dealing or refusing to disclose any personal interest in any particular transaction," and "a duty not to misrepresent any material fact." See also Thompson v. Smith Barney. Harris Upham & Co.. Inc., 709 F.2d 1413, 1418 (llth Cir. 1983) ("The law is clear that a broker owes a fiduciary duty of care and loyalty to a securities investor.") 58. Numerous courts around the country have recognized the fiduciary duty that stockbrokers owe to their clients. See Mansbach v. Prescott. Ball & Turben, 598 F.2d 1017 (6th Cir. 1979) (a securities broker dealer is a fiduciary who owes its customer a high degree of care in transacting business); Roll v. Blyth. Eastman Dillon & q/Q,, 570 F.2d 38 (2nd Cir. 1978) (registered representative, as broker for investor, owed investor a fiduciary duty); Moholt v. Dean Witter Re_molds. Inc., 478 F. Supp. 451 (D.D.C. 1979) (stockbrokers are in a position of quasi-fiduciaries and are held to high degree of trustworthiness and fair dealing); Pachter v. Merrill Lynch. Pierce. Fenner & Smith. Inc., 444 F.Supp. 417 (E.D.N.Y. 1978) (brokerage firm and the account executive assigned to service plaintiff's account were hound, as plaintiff's Page25of 105 agents, to exercise "the utmost good faith" toward him); Thropp v. Bache Halsey Stuart Shields. Inc., 650 F.2d 817 (6th Cir. 1981) (as fiduciary, stockbroker, under Florida law, stands in special relationship to client and owes him duty to use reasonable care and to act in good faith); Leboce. S.A.v. Merrill Lynch. Pierce. Fenner & Smith. Inc., 709 F.2d 605 (9th Cir. 1983) (California law imposes fiduciary obligations on broker where broker, for all practical purposes, controls the account); Saksich v. Thomson McKinnon Securities, Inc,, 582 F.Supp.. 485 (S.D.N.Y. 1984) (under New York law, securities brokers maintain fiduciary duties to their customers, and relationship between the two parties is one of principal and agent); Utah State Universi _ty of Agriculture and Applied Science v. Sutro & Co., 646 P.2d 715 (Utah 1982) (stock brokers have an especially high degree of care to ascertain the authority of a trustee dealing with public funds); E.F. Hutton & Co. v. Weeks, 166 Ga.App. 443, 304 S.E.2d 420 (1983) (broker's duty to account to its customer is fiduciary in nature, resulting in obligation to exercise the utmost good faith). 59. All limitations periods are tolled under the legal doctrines of accrual, continuous treatment, continuous representation, and continuing wrong? See. e._~., Keller v. Reed. 603 So.2d 717, 719 (Fla. 2d DCA 1992) (accrual); Hall v. Steiner. 543 N.Y.S.2d 190 (N.Y. App. Div. 1989) (continuous treatment); Wilder v. Meyer, 779 F. Supp. 164 (S.D. Fla. 1991) (continuous representation); and Newport Largo. Inc. v. Monroe Coun .ty, 706 F. Supp. 1507 (S.D. Fla. 1988) (continuing wrong). Further, all limitations periods are tolled under the doctrine of"blameless ignorance" or "contra non valentum agere nulla currit prescription." This doctrine stops the running of the limitations period when the cause of action is not known or 3Statutes of limitation of course only apply in civil actions, not arbitration proceedings. Page 26 of 105 reasonably knowable by CLAIMANTS even if their ignorance was not induced by RESPONDENT. Stated simply, CLAIMANTS did not comprehend that they had been sold unregistered and fraudulent investments and that their legal rights had thus been violated. CLAIMANTS did not discover the fraud until 1999 at the earliest. 60. In Miley v. Oppenheimer & Co.. Inc., 637 F.2d 318, 332 (5th Cir. 1981), the Fifth Circuit cited the following passage from Goldberg's book entitled Fraudulent-DealerPractices in support of awarding punitive damages that is very appropriate in this case: Most courts in the past have seen fit, when they find the broker-dealer's hand in the till, to simply request the removal of the offending appendage. And when the till is empty, and the broker-dealer's fingerprints are all that remain where the money once lay, all the courts do is to require the crook to replace the booty. If ever there was a situation where crime pays it is in such circumstances; heads the dishonest broker-dealer wins and tails everyone breaks even. No wonder one commentator saw fit to term the average recovery in trading cases as creating for the broker-dealer a "low risk larceny." ... [T]he only sure way of deterring such conduct in the future is to take the profit away from the wrongdoers and slap on an additional amount as punitive damages: an award equal to treble damages would be fair, reasonable, and well within the public interest. COUNT I 61. VIOLATION OF MARYLAND SECURITIES ACT CLAIMANTS reallege, reaffirm and reincorporate paragraphs 1 through 60 above, as if fully contained herein. FAILURE TO REGISTER ROLLS ROYCE AND MORNING STAR IN 62. Section 11-501 of the Maryland Securities Act states that it is unlawful to offer or sell any security in Maryland unless the security is registered under the Act. 63. Section I1-703(a)(1)(i) and Section 11-703(b)(1)(i) of the Maryland Securities Act state that every sale made in violation of Section 11-501 may be rescinded at the election Page 27 of 105 of the purchaser. Pursuant to such rescission, the purchaser is entitled to recover the consideration paid for the security, plus interest at the legal rate from the date of purchase as well as a reasonable attorney's fees. 64. Given the lack of registration of Rolls Royce and Morning Star in Maryland, CLAIMANTS are entitled to rescission of their investments as well as legal interest and attorney's fees. B. UNSUITABLE RECOMMENDATIONS. MISREPRESENTATIONS. OMISSION OF MATERIAL FACT. AND GUARANTEE AGAINST LOSS 65. Sections 11-703(a)(1)(ii) and 11-703(b)(1)(i) also state that a purchaser is entitled to rescission, along with legal interest and attorney's fees, from a brokerage firm that offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading. 66. RESPONDENT TFG, acting through Taylor, made numerous false and misleading statements to CLAIMANTS concerning Rolls Royce and Morning Star and failed to disclose numerous material facts to. CLAIMANTS concerning Rolls Royce and Morning Star, all as more fully stated above. CLAIMANTS accordingly are entitled to rescission of their Rolls Royce and Morning Star transactions pursuant to Section 11-703 of the Maryland Securities Act. 67. RESPONDENT TFG is liable under the doctrine of respondeat superior for Taylor's violations of the Maryland Securities Act. In addition, TFG is liable under the Maryland Securities Act, Section 11-703(c), as the controlling person over Taylor's activities. Page 28 of 105 Maryland has adopted the Uniform Blue Sky Act which makes not only the perpetrator liable but also every broker/dealer or agent who directly or indirectly controls a person whose activities constitute violations of the Act. That is to say, if a CLAIMANTS can show that the statute was violated, the victim is automatically entitled to the mandated recovery. WHEREFORE, CLAIMANTS pray for compensatory damages under the Maryland Securities Act, interest at the legal rate, reasonable attorney's fees under the Maryland Securities Act, and punitive damages. COUNT II VIOLATIONS OF FEDERAL SECURITIES LAWS 68. CLAIMANTS reallege, reaffirm, and reincorporate paragraphs 1 through 67 above, as if fully contained herein. 69. The investments sold to CLAIMANTS and described in paragraphs 1 through 68 above were securities as defined in Section 2(1) of the Securities Act, 15 U.S.C. § 77b(1), and Section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. § 78c(a)(10). 70. Under Section 15 of the Securities Act, 15 U.S.C. § 770, and Section 20 of the Securities Exchange Act, 15 U.S.C. § 78t, RESPONDENT TFG was a controlling person over the conduct described in paragraphs 1 through 69 above. A. Offer and Sale of Unregistered Securities 71. RESPONDENT, by engaging in the conduct described in paragraphs 1 though 70 above, directly, indirectly, or through persons that it controlled, through use of the means or instruments of transportation or communication in interstate commerce or of the mails, offered to sell or sold securities, or, directly or indirectly, carried or caused such securities to Page 29 of 105 be carried through the mails or in interstate commerce for the purpose of sale or delivery after sale. 72. No registration statement was filed with the Securities and Exchange Commission or was in effect with respect to the securities offered by Rolls Royce and Morning Star during its offering of the securities sold to CLAIMANTS. 73. By reason of the foregoing, RESPONDENT directly, indirectly, or t.hrough persons it controlled, violated Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. 8§ 77e(a), 77e(c), and is subject to liability under Sections 12(1) and 15 of the Securities Act, 15 U.S.C. 88 77/(1), 770. B. Fraud in Offer or Sale of Securities 74. RESPONDENT, by engaging in the conduct described in paragraphs 1 through 73 above, directly, indirectly, or through persons it controlled, offered to sell or sold securities, by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, and by means of a prospectus or oral communication which included an untrue statement of a material fact or omitted to state a material fact necessa~ in order to make the statements, in the light of the circumstances under which they were made, not misleading. 75. By reason of the foregoing, RESPONDENT directly, indirectly, or through persons it controlled, violated and is subject to liability under Sections 12(2) and 15 of the Securities Act, 15 U.S.C. 88 77/(2), 770. Page 30 of 105 C. Fraud in Connection With the Purchase or Sale of Securities 76. RESPONDENT, by engaging in the conduct described in paragraphs 1 through 75 above, directly, indirectly, or through persons it controlled, in connection with the purchase or sale of securities, by use of means or instrumentalities of interstate commerce, or of the mails, with scienter: a. Employed devices, schemes, or artifices to defraud; b. Made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or c. Engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon other persons. 77. By reason of the foregoing, RESPONDENT directly, indirectly, or through persons it controlled, violated and is subject to liability under Sections 10(b) and 20 of the Securities Exchange Act, 15 U.S.C. §§ 78j(b), 78t, and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. WHEREFORE, CLAIMANTS request this panel to enter an award for actual damages and rescission together with benefit of the bargain damages, lbst opportunity costs, model portfolio damages, prejudgment interest, costs, attorney's fees, punitive damages, and such other relief as is deemed proper and necessary. COUNT III BREACH OF CONTRACT 78. CLAIMANTS reallege, reaffirm and reincorporate paragraphs 1 through 77 above as if fully contained herein. Page 31 of 105 79. The contractual relationships which were entered into between CLAIMANTS and TFG incorporate by reference a brokerage house's duty to comply with all laws, rules, and regulations governing the transactions between RESPONDENT and CLAIMANTS. It must be emphasized that RESPONDENT fraudulently induced CLAIMANTS to enter into this contractual relationship by, among other things, the false representations and non-disclosures of material facts by Taylor that are itemized in this Statement of Claim. 80. RESPONDENT violated, among others, the following rules of the NASD Rules of Fair Practice in handling thesd Rolls Royce and Morning Star transactions with CLAIMANTS, including: A. Article III, Sections 1, 2, 18 and 19, by engaging in conduct inconsistent with high standards of commercial honor and just and equitable principles of trade, recommending unsuitable transactions, engaging in deceptive or other fraudulent devices or contrivances, making material misrepresentations, failing to make material disclosures, and guaranteeing CLAIMANTS against loss in connection with their Rolls Royce and Morning Star transactions; and B. Article III, Section 27, by failing to establish and enforce a proper supervisory system over the activities of registered representatives that was reasonably designed to achieve compliance with applicable securities laws, rules, regulations, and statements of Pbiicy and procedure promulgated thereunder. 81. RESPONDENT'S violation of the Maryland Administrative Code constitutes negligence per se because these rules were enacted for the protection of investors such as CLAIMANTS. See, ._e~g~, Palmer v. Shearson Lehman Hutton. Inc., 622 So.2d 1085 (Fla. 1st DCA 1993); Twiss v. Kury, 25 F.3d 1551 (11th Cir. 1994). 82. These infractions breached the contractual relationship between CLAIMANTS and RESPONDENT, which incorporated a brokerage firm's duty to comply with the industry Page 32 of 105 rules, customs and procedures governing the transactions with CLAIMANTS. "[W]e note a number of cases in which customers of stockbrokers are deemed to have contemplated and authorized a course of dealing in accordance with rules and customs of the stock exchanges. Thus, the exchange rules are deemed incorporated into any agreement between customer and broker." Brnmm v. McDonald & Co. S¢c., 603 N.E.2d 1141, 1147 (Ohio Ct. App. 1992) ¢ (citations omitted); Iowa Grain v. Farmers Grain and Feed, 293 N.W.2d 22 (Iowa 1980); White v. Merrill Lynch. Pierce. Fenner & Smith, 218 A.2d 655 (N.J. Super. Ct. 1966). See also Midwest Television v. Scott. Lancaster. M/lls & Atba 252 Cal. Rptr. 573, 579 (Cal. Ct. App. 1988) ("The industry practice becomes a part of the contract, and the evidence of such custom is admissible ...."). 83. The contracts between RESPONDENT TFG and CLAIMANTS are further defined by the internal rules and regulations established to govern the conduct of RESPONDENT'S own employees, such as internal supervisory procedures and compliance manuals. ($¢e, e.g., h~l]~, Fed. Sec. L. Rpts. CCH ¶92,498 (1986) at 93,031.) ("The relations between [brokerage firm and customer] were not:defined solely in terms of the joint account agreement, but also.., by the internal rules and regulations' established to 'govern the conduct of [the firm's] own employees"). For example, in Thropp v. Bache Halsey ~:~L~tifdgi,s,~, 650 F. 2d 817 (6th Ch'. 1981), the S/xth Circuit rejected Prudential-Bache Securities Inc.'s argument that the District Court should not have relied on Bache's internal rules, as codified in its Standard Practice Instructions Manual, as evidence of the proper standard of care: When a defendant has disregarded rules that it has established to govern the conduct of its own employees, evidence of those rules may be used against the Page 33 of 105 defendant to establish the correct standard of care. The content of such rules may also indicate knowledge of the risks involved and the precautions that may be necessary to prevent the risks. Montgomery v. Balt & Ohio R.R., 22 F.2d 359 (6th Cir. 1927). See al~o Prosser, The Law of Tort~ {}33 (4th ed. 1971). The District Court correctly measured Bache's conduct by the standard of prudence it has established for its own employees. Id. at 820. 84. RESPONDENT violated many of its own internal rules and procedures in handling these transactions with CLAIMANTS. 85. RESPONDENT also violated the duty of commercial reasonableness, fair dealing, and good faith, required of all parties to a contract. "Hornbook Law implies a covenant of good faith and fair dealing into the performance and enforcement of every contract .... [G]ood faith is part of every contract .... "First Texas Say. Ass'n v. Comprop Inv. Properties, 752 F. Supp. 1568, 1573 (M.D. Fla. 1990); Burger King Corp.. v. Austill, 805 F. Supp. 1007 (S.D. Fla. 1992). This covenant of fair dealing is particularly demanding for stockbrokers and brokerage firms, who are expert fiduciaries of their customers, who obtain their commissions only after advising and inducing customer investments, and who are thereby subject to an inherent conflict of interest. [P]etitioner acted simultaneously in the dual capacity of investment advisor and of broker and dealer. In such capacity, conflicting interests must necessarily arise. When they arise, the law has consistently stepped in to provide safeguards in the form of prescribed and stringent standards of conduct on the part of the fiduciary. ~, 174 F.2d 969 (D.C. Cir. 1949). 86. The covenant of good faith and fair dealing required RESPONDENT to do what the contract presupposed would be done to accomplish its purpose and to protect the contracting parties' reasonable expectations. It presupposed that RESPONDENT would Page 34 of 105 comply with applicable industry and governmental rules, provide all necessary information to CLAIMANTS, and act reasonably and in good faith to recommend suitable investments for CLAIMANTS in light of CLAIMANTS' financial circumstances and needs. RESPONDENT violated this covenant by putting their own interests first, not complying with industry rules, recommending wholly unsuitable investments to CLAIMANTS, and misrepresenting, concealing and not supplying material information. CLAIMANTS suffered damages from these breaches of covenant and are entitled to recompense. 87. RESPONDENT'S infractions breached its written contract with the NASD to follow securities laws and NASD rules. As a condition of RESPONDENT'S NASD membership application pursuant to Article III, Section 1 of the NASD By-Laws, RESPONDENT contracted with the NASD to comply with all NASD rules, federal securities laws, and federal securities rules and regulations in the handling of customer accounts. 88. Defrauded customers such as CLAIMANTS are intended third-party beneficiaries of RESPONDENT'S agreement with the NASD to comply with securities laws and regulations and NASD rules. CLAIMANTS are entitled to redress for RESPONDENT'S breaches of these contracts. Oppenheimer & Co. v. Neidhardt, [Current Binder] Fed. Sec. L. Rep. (CCH) ¶98,224 (S.D.N.Y. May 4, 1994) (customers are third-party beneficiaries of brokerage firm's obligation to follow NASD rules); Scobee Funeral Home v. E.F. HuttQrl & Co., 711 F. Supp. 605, 607 (S.D. Fla. 1989) (customers are third-party beneficiaries of NASD requirements); Creative Sec. v. Bear Stearns & Co., 671 F. Supp. 961, 966 (S.D.N.Y. 1987) ("Many courts recognize that securities exchange members are contractually bound by the regulations of their organizations."); Axelrod & Co. v. Kordich. Victor & Neufeld, 451 F.2d Page 35 of 105 828, 841 (2d Cir. 1971) ("Each member firm, by virtue of its admission, agrees to be governed by the Exchange's conStitution and rules. When a transaction of purchase and sale of any security is effected, the contract is subject to all the provisions of the Exchange's constitution and rules .... These provisions are binding on exchange members.") 89. The RESPONDENT'S failure to comply with the contracts between the parties t and with the laws, rules, and regulations governing the contracts between the parties, was intentional or reckless and was done in willful and wanton disregard of CLAIMANTS' rights. All of RESPONDENTS actions and omissions were done solely for the purpose of generating commissions, and as such is conduct for which the RESPONDENT should be punished. WHEREFORE, CLAIMANTS request this panel to enter an award for actual and rescissionary damages together with benefit of the bargain damages, lost opportunity costs, model portfolio damages, prejudgment interest~ costs, attorney's fees, punitive damages in an amount to be determined by the arbitrators, and such other relief as is deemed proper and necessary. COUNT IV COMMON LAW FRAUD 90. CLAIMANTS reallege, reaffirm and reincorporate paragraphs 1 through 89 above, as if fully contained herein. 91. All of the misrepresentations and omissions of RESPONDENT were done with the intent to mislead CLAIMANTS and with the specific intent to have CLAIMANTS rely on said misrepresentations and omissions. At a minimum, the misrepresentations were done Page 36 of 105 recklessly, without knowledge of their truth or falsity. CLAIMANTS did rely thereon and made investments to their detriment causing substantial losses. 92. Further, RESPONDENT'S misrepresentations and omissions constitute constructive fraud, which entails the use of a confidential or fiduciary relationship to take advantage of another. 93. The fraud, the misrepresentations, and the omissions claims are quasi- contractual in nature and arose from and are implied from the contractual relationship between CLAIMANTS and RESPONDENT. These claims also arose independently from the contractual relationship between CLAIMANTS and RESPONDENT. WHEREFORE, CLAIMANTS request this panel to enter an award for actual damages and rescission together with benefit of the bargain damages, lost opportunity costs, model portfolio damages, prejudgment interest, costs, attorney's fees, punitive damages in an amount to be determined by the arbitrators, and such other relief as is deemed proper and necessary. COUNT V BREACH OF FIDUCIARY DUTY 94. CLAIMANTS reallege, reaffirm and reincorporate paragraphs 1 through 93 above, as if fully contained herein. 95. At all times relevant hereto there existed between the RESPONDENT and CLAIMANTS a fiduciary relationship by reason that: A. The RESPONDENT at all times possessed superior knowledge, judgment, skill, and experience in the securities market in contrast to CLAIMANTS' lack of meaningful knowledge and understanding in that CLAIMANTS could not fully appreciate the substantial risk to which their monies were exposed; and Page 37 of 105 B. The RESPONDENT at all times had access to the books, records, and other sources of information concerning the financial and operating condition, rules, and policies of the RESPONDENT, the NASD, and the State Statutes and Administrative Codes. This information was not readily accessible to CLAIMANTS; and C. Taylor at all times while handling CLAIMANTS' monies was an experienced and skilled account executive acting within the scope of his employment and authority and apparent authority with TFG. 96. This fiduciary duty arose from and is implied from the cont.ractual relationship between CLAIMANTS and RESPONDENT. This fiduciary duty also arose independently from the contractual relationship between CLAIMANTS and RESPONDENT. 97. Because of the RESPONDENT'S superior knowledge, skill, judgment, and experience in the securities market, the RESPONDENT owed to CLAIMANTS a duty to recommend suitable investments, to disclose all material facts, and to refrain from misleading CLAIMANTS. Further, the RESPONDENT owed this fiduciary duty to protect and further CLAIMANTS' interests over and above their desire to generate commissions through transactions with CLAIMANTS and to promote their own interests. TFG specifically had a duty by virtue of this fiduciary relationship with CLAIMAN~..~S to conduct a proper due diligence, to supervise Taylor's recommendations and representations, and to disclose to CLAIMANTS that the Rolls Royce and Morning Star securities were unregistered, high-risk investments, that Rolls Royce and Morning Star were frauds, that Taylor's representations to CLAIMANTS concerning their Roils Royce and Morning Star investments were incomplete and inaccurate, and that RESPONDENT TFG was not properly supervising Taylor. 98. Both the Florida courts and the Eleventh Circuit have made clear that a broker owes a fiduciary duty to a customer. In Gochnauer v. A.G. Edwards & Sons. Inc,, 810 F.2d Page 38 of 105 1042 (llth Cir. 1987), the Eleventh Circuit made clear that a broker's fiduciary duty included "a duty to only recommend stocks which he has sufficiently investigated," "a duty to inform his customer of the risks involved in purchasing or selling particular securities," "a duty to refrain from self-dealing or refusing to disclose any personal interest in any particular transaction," and "a duty not to misrepresent any material fact." See also Thompson v. Smith Barney, Anderson Upham & Co.. Inc., 709 F.2d 1413, 1418 (11th Cir. 1983) ("The law is clear that a broker owes a fiduciary duty of care and loyalty to a securities investor.") 99. Numerous courts around the country have recognized the fiduciary duty that stockbrokers owe to their clients. See Mansbach v. Prescott. Ball & Turben, 598 F.2d 1017 (6th Cir. 1979) (a securities broker dealer is a fiduciary who owes his customer a high degree of care in transacting business); Roll v. Blyth. Eastman Dillon & (~0., 570 F.2d 38 (2nd Cir. 1978) (registered representative, as broker for investor, owed investor a fiduciary duty); Mohol~; v, Dean Witter Reynolds. Inc., 478 F.Supp. 451 (D.D.C. 1979) (stockbrokers are in a position of quasi-fiduciaries and are held to high degree of trustworthiness and fair dealing); Pachter v. Merrill l~vnch. Pierce. Fenner & Smith. Inc., 444 F.Supp. 417 (E.D.N.Y. 1978) (brokerage firm and the account executive assigned to service plaintiff's account were bound, as plaintiff's agents, to exercise "the utmost good faith" toward him); Thropp v. Bache Halsey Stuart ~, 650 F.2d 817 (6th Cir. 1981) (as fiduciary, stockbroker, under Florida law, stands in special relationship to client and owes him duty to use reasonable care and to act in good faith); Leboce. S.A.v. Merrill Lynch. Pierce. Fenner & Smith. Inc., 709 F.2d 605 (9th Cir. 1983) (California law imposes fiduciary obligations on broker where broker, for all practical purposes, controls the account); Jaksich v. Thomson McKinnon Securities. Inc,, 582 F.Supp. Page 39 of 105 485 (S.D.N.Y. 1984) (under New York law, securities brokers maintain fiduciary duties to their customers, and relationship between the two parties is one of principal and agent); Utah State Universi _ty of A~iculture and Applied Science v. Sutro & Co., 646 P.2d 715 (Utah 1982) (stock brokers have an especially high degree of care to ascertain the authority of a trustee dealing with public funds); E.F. Hutton & C9. v. Weeks, 166 Ga. App. 443, 304 S.E.2d 420 (1983) (broker's duty to account to its customer is fiduciary in nature, resulting in obligation to exercise the utmost good faith). 100. Because of the fiduciary relationship between CLAIMANTS and the RESPONDENT, CLAIMANTS reasonably relied to their detriment on the RESPONDENT'S superior knowledge, skill, judgment, and experience in handling their monies. 101. RESPONDENT knowingly and deliber~ately breached its fiduciary duty to CLAIMANTS by making material misrepresentations, failing to conduct a proper due diligence investigation, failing to make material disclosures, and investing in unsuitable securities in total disregard for CLAIMANTS' best interest, solely for the purpose of enriching and protecting the RESPONDENT, and concealing the unsuitable nature of the transactions by not making the requisite disclosures to CLAIMANTS. The RESPONDENT'S disregard and violation of the rules of the SEC and NASD governing its conduct and the conduct of its agents and employees constitutes a breach of fiduciary duty to CLAIMANTS. 102. RESPONDENT also breached its fiduciary duty by failing to ensure compliance with all applicable State statutes and rules, including those relating to misrepresentations and omissions in the sale of securities, suitability, and registration. Page 40 of 105 103. RESPONDENT is jointly and severally liable because it participated in, supervised, or approved the previously noted transaction. In addition, TFG is jointly and severally liable under the principles of agency, licensing, controlling person, and respondeat superior for the damage caused to CLAIMANTS by the breach of their fiduciary duty. 104. The acts committed by RESPONDENT, as alleged herein, were done by them personally through the use of the mails or other instrumentality of interstate commerce. The acts of TFG, and each employee, agent, or representative of TFG, including Taylor, are deemed to be the acts of and are chargeable to and binding upon TFG. 105. It is well-settled law that "an employer is vicariously liable for compensatory damages resulting from the negligent acts of employees committed within the scope of their employment even if the employer is without fault." See, ._e&, Mercury. Motors E~. ress. Inc. v. Smith. 393 So. 2d 545, 549 (Fla. 1981). 106. RESPONDENT'S breach of its fiduciary duty to CLAIMANTS constitute conduct for which the RESPONDENT deserves to be punished to deter RESPONDENT from engaging in the same or similar conduct in the future. WHEREFORE, CLAIMANTS request this panel to enter an award for actual damages together with benefit of the bargain damages, rescissionary damages, lost opportunity costs, model portfolio damages, prejudgment interest, costs, attorney's fees, punitive damages in an amount to be determined by the arbitrators, and such other relief as is deemed proper and necessary. Page 41 of 105 COUNT VI NEGLIGENCE AND GROSS NEGLIGENCE 107. CLAIMANTS reallege, reaffirm and reincorporate paragraphs 1 through 106 above, as if fully contained herein. 108. RESPONDENT, by virtue of their position as CLAIMANTS' broker-dealer, their professional skill and ability, the level of confidence and care imposed upon other broker dealers in similar positions, and its fiduciary obligations owed CLAIMANTS due care. The industry standard of care is set forth by the NASD, the SEC rules, the Maryland Act and Administrative Code, and the firm's own internal guidelines. 109. RESPONDENT'S violation of NASD Rules constitute negligence. As the Fifth Circuit observed in Miley v. Oppenheimer & Co.. Inc., 637 F.2d 318, 333 (5th Cir. 1981), the "NYSE and NASD rules are excellent tools against which to assess in part the reasonableness or excessiveness of a broker's handling of an investor's account," and the lower court properly included a reference to these rules in its jury charge. See Mihara v. Dean Witter & Company. Inc., 619 F.2d 814, 824 (9th Cir. 1980) ("Appellants contend that the admission of testimony regarding the New York Stock Exchange and NASD rules served to dignify those rules and regulations to some sort of standard. The admission of testimony relating to those rules was proper precisely because the rules reflect the standard to which all brokers are held.") See also Dean Witter Reynolds. Inc. v. Hammock, 489 So.2d 761,767 (1986) ("Case law is clear that evidence of violation of industry standards is admissible as non-conclusive evidence of negligence"); St. Louis-San Francisco R.R. CO, v, White, 369 So.2d 1007 (Fla. 1st D.C.A. 1979); St. Louis-San Francisco R.R. Co. v. Burlison, 262 So.2d 280 (Fla. 1st D.C.A. 1972); Page 42 of 105 Clements v. Boca Aviation. Inc., ~.~ So.2d 597 (Fla. 4th D.C.A. 1984); ~vg~;g~li~]~ Stores. Inc., 436 So.2d 1075 (Fla. 3rd D.C.A. 1983); Reese v. Seaboard Coastline R.R. Co., 360 So.2d 27 (Fla. 4th D.C.A. 1978). 110. RESPONDENT'S violations of the Maryland Administrative Code constitute negligence per se because these rules were enacted for the protection of investors such as CLAIMANTS. See, e._~, Palmer v. Shearson Lehman Hutton. Inc,, 622 So.2d 1085 (Fla. 1st DCA 1993); Twiss v. Kury, 25 F.3d 1551 (11th Cir. 1994). 111. TFG had supervisory duties over Taylor and failed to diligently and properly supervise their officers, employees, and agents. 112. Taylor was at all times material hereto acting within the scope/apparent scope of his employment with TFG and TFG is also liable under principles ofrespondeat superior, licensing, controlling person and agency. 113. RESPONDENT'S conduct, as set forth in previous Counts, is a breach of its duty to CLAIMANTS. 114. RESPONDENT breached its duty to CLAIMS by failing to provide sufficient control and supervision over their officers, employees, agents, and registered representatives and in not ensuring compliance with the applicable federal and state securities laws, rules, regulations, policies, self-regulatory organization policies, and procedures. 115. The RESPONDENT'S actions as set fortla above constitute both negligence and gross negligence. 116. As a result of the RESPONDENT'S conduct as set forth above, CLAIMANTS iaave suffered damages. Page 43 of 105 117. The RESPONDENT'S conduct as set forth above proximately caused CLAIMANTS' damages. WHEREFORE, CLAIMANTS request actual damages, together with benefit of the bargain damages, lost opportunity costs, rescissionary damages, model portfolio damages, prejudgment interest, costs, attorney's fees, punitive damages in an amount to be determined by the arbitrators, and such other relief as is deemed necessary and proper. Respectfully Submitted Kalju Nekvasil, Esq. Stephen Krosschell, Esq. 14020 Roosevelt Blvd., Suite 808 P.O. Box 17709 Clearwater, Florida 33762 TELEPHONE: (727) 524-8486 FACSIMILE: (727) 524-8786 Attorney for CLAIMANTS Dated: August 6, 2001 Page44of105 Exhibit "A" Exhibit "B" Exhibit "C" Exhibit "D" Exhibit "E" Exhibit "F" Exhibit "G" Exhibit "H" INDEX OF EXHIBITS NASD Notice to Members 86-65 (dated September 12, 1986) "Compliance with the NASD Rules of Fair Practice in the Employment and Supervision of Off-Site Personnel" Richard S. Taylor's Registration Histo~t Asset Management Program Given to J. COFFMAN and M. COFFMAN Investment Plan Prepared by Taylor for JE COFFMAN and P. COFFMAN K. BISHOP Account Statement · 'S Richard S. Taylor Business Card Given to the Meenas SEC v, Charles Richard Homa et al., U.S. District Court for the Southern District of New York, Civil Action No. 99-Civ-10557 (S.D. N.Y. October 15, 1999) ,~ Certificate of Non-Registration of Rolls Royce, Ltd. Promissory Notes in Maryland Certificate of Non-Registration of Momin~ Star, Ltd. Promissory Notes in Maryland Exhibit "I" NASD Memorandum concerning "Important SEC Notice Concerning Independent Contractors" F:\Wp DATA\Use r02~Coffman J -TH E~Coffma r*-s~ Page 45 of 105 TO: BE: f September 12, 1986 Ail NASD Members, Associated Persons and Other Interested Persons Compliance with the NASD Rules of Fair practice in the Employment and ~_~pervision of Off-Site personnel Eyre CUTIVE SUMMARY NASD rules and policies consider associated persons of a member to be. employees of the member, regardless of their IDeations or compensation arrangements- The notice addresses regulatory issues that relate to off-site employment of registered persons, including supervisory procedures, private securities transactions, fair dealings with customers and communications with the public. Because of the significance of the issues discussed in this notice, the NASD atrongly urges that it be distributed to all associated ~ersons and recommends that it I~e included in the compliance manual of all fLrms employing elf-site personnel INTRODUCTION A significant number of NASD members employ registered persons who engage in securities-related activities, on a full- or part-time basis, at locations away from the offices of the members. These off-site representatives, often classified for compensation purposes as independent contractors, may /dso be involved in other business enterprises such as insurance, real estate sales, account- ing or tax planning. They may also operate as separate business entities under names other than those of the members. The NASD, ~n the course of its disciplin- ary proceedings, has observed a pattern of rule violations and other regulator, y problems stemming from factors inherent in these arrangements and the manner m which they are effectuated. Irrespective of an individual's location or compensation arrangementS, all asaoeiated persons are considered to be employees of the firm with which the}' are registered for purposes of eompl/snee with NASD rules governing the conduct of registered persons and the supervi~ry responsibilities of the mem~ -2- that an associated person conducts business at a separate location or is compen- sated as an independent contractor does not alter the obligations of the individual and the firm to comply fully with all applicable regulatory requirements. To provide guidance to the membership in meeting these obligations, this notice discusses certain regulatory issues that frequently arise in the context of off-site employment. Because of the importance of these issues, the NASD urges each member to duplicate this notice and distribute it individually to all associated persons. In addition, it is suggested that this notice be included in the compliance manual of firms employing off-site representatives. Thee NASD,/n the course of its member exam/nations, w/ll make inquiries to ascertain that this notice has been provided to all appropriate personnel Article I~, Section 27, NASD lh~les of Fair Practice: Supervision Section 27(a) sets forth the basic duty of a member firm to: "...establish, maintain and'enforce written procedures which will enable it to supervise properly the activities of each registered representative and associated person to assure compliance with applicable securities laws, rules, regulations and statements of policy promulgated thereunder and with the rules of this Association." Although the rule does not prescribe specific supervisory procedures to be followed by all firms, it clearly mandates that the adopted procedures enable a firm to supervise properly the activities of each associated person to assure compli- ance. Thus, firms employing off-site representatives are responsible for establish- ~ng and cm-rying out procedures that will subject these individuals to effective supervision designed to monitor their securities-related activities and to detect and prevent regulatory and compliance problems. This can include: 1. Educating off-site personnel regarding their obligations as registered persons to the firm and to the public, including prohibited sales practices. 2. Maintaining regular and frequent ~ontact with such individuals. 3. Implementing appropriate supervisory practices, such as records inspections and compliance audits at the representatives' places of employment, to ensure that their methods of business and day-to-day operations comply with appli- cable rules and requirements. For greatest effectiveness in preventing and detecting violations, visits should be unannounced and include, for example, a review of on-site customer account documentation and other books and records, meetings with individual representatives to discuss the products they are selling and their sales methods, and an examination of correspondence and sales literature. -3- To fulfill these obligations, a firm should consider whether the number and location of its registered principals provides the capability to supervise its off- site representatives effectively. Section 27(c) includes the requirement that a member: "...review and endorse in writing, on an internal record, all transactions and all correspondence of its registered representa- tives pertaining to the solicitation or execution of any securities transaction." This requirement applies equally in the case of off-site representatives. Firms whose off-site personnel also engage in non-securities businesses should remind these individuals that correspondence pertaining to such businesses, unless submitted for review, may not include material related to securities transactions. Section 27(d) imposes upon a member the obligation to: % . .review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities and abuses and at least an annual inspection of each office of supervisory jurisdiction." An office of supervisory jurisdiction (OSJ) is defined in Section 27(0 as: "...any office designated as directly responsible for the review of the activities of registered representatives or associated persons in such office and/or in other offices of the member." If a member has designated an individual as responsible for reviewing the activities of other registered persons within the firm, the office of that individual must be inspected annually, regardless of whether such person is compensated as an employee or as an independent contractor. Article 11I, Section 40, NASD Rules of Fair Practice: Private Securities Transactions Past experience of'the NASD in examining members indicates that the conduct of off-site representatives most frequently resulting in violations of NASD rules involves unauthorized private securities transactions, or "selling away." The NASD expects that the promulgation of Section 40 and the clarification of the obligations of members and associated persons in such transactions will reduce the instances of selling away among all associated persons, including off-site represent- atives. Several 'aspects of Section 40, and certain related issues, merit, emphasis in the context of off-site personnel. Section 4/) cannot aecompILsh its objectives unless member firms commun/cate the substance of the rule to their associated pei'sofl~ and take affirmative steps to ensure that the~e requirements are under- stood and observed. This is especially true in the case of off-site representatives whose day-to-day access to compliance personnel and individuals experienced in the securities industry may be limited and whose participation in non-private securities transactions may be infrequent and restricted in scope. -4- Because of their location and other circumstances of their employment, off-site personnel have a greater opportunity than on-site personnel to engage in undetected selling away. Consequently, firms that employ such persons are re- sponsible for monitoring their activities in a manner reasonably intended to detect violations. Further, the obligations imposed upon the firm and the associated person under the rule are neither altered nor lessened in any way by the fact that the individual is compensated as an independent contractor. The rule requires a member that approves an associated person's involve- ment in private securities transactions for compensation to record the transactions on its books and records and supervise the individual's partlcipation "as if the trans- actions were executed on behalf of the member." Although the rule does not speci- fy the manner of recordation, the firm may wish to maintain records that provide information regarding: · The individual and the security involved; · The amount and source of compensation; vestments; The names of the investors and the amounts and dates of the in- · The issuer, syndicator or any other broker-dealer involved; and · The manner in which the firm undertook to supervise the associated person's participation. These records should be in a form that would permit the NASD to ascer- tain, upon examination, all relevant information regarding the participation of associated persons in private securities transactions. Several issues arise in connection with supervising the involvement of off- site representatives in private securities transactions. The NASD has observed that some firms permit such persons to form and sell interests in limited partnerships for which they serve as general partners. While this is not an impermissible aoti- vity, members and registered persons are reminded that such transactions are a~:urities transactions, and therefore subject to Section 40 and all other rules and regulations governing such transactions. Thus, the member is responsible for ensur- ing that the formation of these partnerships and th,e solicitation and sale of inter- ests therein are conducted in compliance with all applicable requirements, including those pertaining to documentation, due diligence, disclosure, suitability determina- tions, and the handling of customer funds. There have been instances in which associated persons have engaged in private securities transactions without notifying the firm, due to the belief or the advice of third parties that the product involved was not a security. Under federal securities laws, the definition of a security includes the commonly understood products, such as stocks and bonds, as well as other investment products, such as an "investment contract" in which one or more individuals invest in a common venture with the expectation of receiving a monetary return on their investment from or through the efforts of a third party. Because questions frequently arise as to whether a particular investment instrument is a security, a registered person should not sell any product offered by -5- an entity outside the firm without consulting the member to determine the pro- duct's status as a security. Article III, Section 2, NASD Rules of Fair Practice: Recommendations to, and Fair De~llng~ with, Customers Article III, Section 2 of the NASD Rules of Fair Practice requires that: "[~n recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by the customer as to his other security holdings and as to his financial situation and needs." The policy of the NASD Board of Governors pertaining to Section 2 sets forth specific guidelines in the areas of recommending speculative, low-priced securities, excessive trading activity, trading in mutual fund shares, fraudulent activity, and recommending purchases beyond the customer's capability. The actions of an associated person in dealing with customers and cus- tomer accounts, regardless of whether he or she is compensated as an employee or an independent contractor, are actions on behalf of the firm. The firm is respons- ible for supervising in a manner designed to detect and prevent violations of Section 2. Members should take affirmative steps to ensure that off-site personnel under- stand and abide by NASD and firm policies regarding dealings with customers, customer accounts and customer funds. Article ~I, Section 10, Rules of Fair Practice: Influefleing or Rewarding Employees of. Others Article III, Section 10 of the NASD Rules of Fair Practice prohibits mem- bers and associated persons from giving: "...anything of value, including gratuities, in excess of fifty dollars per individual per year to any person...where such pay- ment or gratuity is in relation to the business of the employer of the recipient of th~ payment or gratuity" unless such payments or gratuities are pursuant to a written agreement between the payor and the recipient to which the recipient's employer has consented. It is, therefore, a violation of Section 10 for a member to compensate an associated person of another member in connection with securities transactions without the employer firm's consent. A member's obligations under Section i0 are not affected by .the fact that the recipient is compensated by his or her NASD employer member as an independent contractor. Article I~ Section 35, Rules of Fair Practiee: Communications with the Public Article III, Section 35(b) of the NASD Rules of Fair Practice requires that every item of advertising and sales literature, as defined in Section 35(a): -8- ~...be approved by signature or initial, prior to use, by a regi- stered principal (or his des{ghee) of the member." Paragraph (2) of Section 35(b) requires further that a separate file of such items be maintained for a period of three years. This rule applies to all materials originated or distributed by off-site representatives that meet the definition of "advertisement" or "sales literature," including those prepared or used by persons compensated as independent contrac- tors. In particular, firms must approve any materiais referencing that securities are sold by the off-site representative through the member, even though such materials may be intended to promote the non-securities businesses of the off-site personnel. Article III, Section 35(d)(2)(A) further requires that aU advertisements and sales literature contain the name of the member, as well as certain other informa- tion under specified circumstances. The fact that an associated person may oper- ate under a business name other than that of the member does not alter this re- quirement. The NASD has received inquiries regarding the need to include the name of the me,nber in promotional materia~ that do not include references to the associated person's securities-related activities. Particular materials should be considered individually, preferably by the firm's compliance department, to deter- mine whether they fall within the scope of Section 35. Unregistered Broker-Dealers The Securities and Exchange Commission has taken the position that an individual who operates as an independent contractor must be registered as a bro- ker-dealer unless he or she is under the control of a registered broker-dealer. _.1/ The question of "control" must be evaluated in light of the facts and circumstances of each situation and is not susceptible to a test of general application. There are, however, circumstances inherent in off-site employment and independent con- tractor compensation arrangements that may give rise to potential liability for operating as unregistered broker-dealers. Thus, registered persons and member firms may want to consider registering of off-site locations as broker-dealers. Any questions regarding this notice should be directed to either Dennis C. Heasley, NASD Vice President and Deputy General Counsel, at (202) 728-8245, or Jacqueline D. Whelan, Attorney, NASD Office of the General Counsel, at (202) 728- 8270. Sincerely, ^ Executive ¥iee President and General Counsel 1.._/ Refer to the statement by the SEC Division of Market Regulation, dated June 18, 1982, forwarded to all NASD members on August 25, 1982. Oocument Title :~'ii~File for: CRD# 1558263 RICHARD SCOTT TAYLOR Page 1 of Data Current as of: 08/02/2001 ALL CURRENT EMPLOYMENTS Employing Firm: Firm CRD Number: Office of Employment Address: This section provides the name of the NASD member firm that currently employs this broker, the firm's CRD number, the location of the office ' where the broker is employed, and the broker's start date. For your convenience you can click on the links below to view information on the firm where your broker is currently employed. INVESTORS CAPITAL CORP. 30613 711 BESTGATE ROAD SUITE #204 ANNAPOLIS MD USA 21401 Start Date: End Date: Employing Firm: Firm CRD Number: Office of Employment Address: Start Date: End Date: Employing Firm: Firm CRD Number: Office of Employment Address: 10/31/2000 to present FINANCIAL RESOURCE PLANNING MITCHELLVILLE MD 01/0!/1991 to present CONSUMER BENEFIT SERVICES BALTIMORE MD Start Date: End Date: 01/01/1991 to present Other Business iud._ ACCENT MARKI:ItNG - 1998 TO PRESENT, 711 BESTGATE ROAD, SUITE #204L, ANNAPOLIS, MD. NOT INVSETMENT-RELATED. REP FOR USCITYL.NET A WEB-BASED BUSINESS DIRECTLRY. PROVIDE SALES Document Title ~ it Page 2 of AND DESIGN OF WEB PAGES. WILL NOW BE PART TIME 5-10 HOURS/WEEK Document Title Page 1 ~ 1 i~File for: CRD# 1558263 RICHARD SCO'I-F TAYLOR Data Current as of: 08/02/2001 PREVIOUS EMPLOYMENT This section provides 10 years of an individual's employment history. If the individual is currently registered with the NASD, employment history will be displayed for the previous 10 years. If the individual is not currently registered with the NASD, employment history will be displayed for the 10 years prior to termination of the registration. For employers that are or were an NASD member firm, the firm's CRD number, the location of the office where the broker was employed, and the dates of employment will be displayed. Employing Firm: Firm CRD Number: Office of Employment Address: Start Date: End Date: T.H.E. ~NANCIAL GROUP, LTD MECHANICSBURG PA 01/12/1993 11/01/1998 Document Title '~?, File for: CRD# 1558263 RICHARD SCOTT TAYLOR Page 1 of 1 Data Current as of: 08/02/2001 Registrations This section provides the jurisdictions with which the broker is currently registered or licensed to do business, the category of each registration, and the date on which the registration approval was granted. Employer: INVESTORS CAPITAL CORP. -lurisdiction/SRO Category Status MD Agent Approved Invest. Co and NASD Variable Approved Contracts Status AS Of Date 11/01/2000 10/31/2000 Document Title Page I of 1 :c-~File for: CRD# ].558263 Ri'CHARD SCOTT TAYLOR Data Current as of: 08/02/2001 Disclosure Events No disclosure information exists for this broker. Disclosure Events: Information that is required to be reported to the NASD by brokers via Form U-4 (Uniform Application for Securities Industry Registration or Transfer) and firms via Form BD (Uniform Application for Broker-Dealer Registration). Some disclosure events may have multiple reporting sources. For example, some information required to be reported by a broker via Form U-4 may also be reported on the broker's record by a firm via Form U~5 (Uniform Termination Notice for Securities Industry Registration) and/or by a regulator via Form U-6 (Uniform Disciplinary Action Reporting Form). If a disclosure event is reported by multiple sources, all versions of the reported event will be disclosed on the broker's public disclosure report. Similarly, some information required to be reported by a broker-dealer firm via Form BD may also be reported on the firm's record via Form U-6. If a disclosure event is reported by multiple sources, all versions of the reported event will be disclosed on the firm's disclosure report. Types of Disclosure information include, but are not limited to: · criminal events (e.g., felony convictions, certain misdemeanor charges and convictions, such as theft of money, bribery, etc.) · financial disclosure events (e.g., bankruptcies, unsatisfied judgments and liens), · regulatory actions (e.g., suspensions, bars), · customer complaints, and · civil jud. icial events (e.g., injunctions). *,lf FINANCIAL RESOURCE PLANNING THE. Financial Group. Ltd. / NASD & SIP(; 5010 Riller Rd. · ~le. 119 · Mcchanicsburg, PA 17055 · (717) 766-9297 Richard S. Taylor, President Registe~d investment Representative 15804 Appleton Tetxace Mitchellville, MD 20716 Phone (301) 390-7016 Wats (800) 466- [ 142 Fax (301) 390-7017 Pager (800) 430-1436 2.¸ A personalized process for succes~q] investing. ~e llve in a world ripe with investment oppor~nities, offering a myriad of investment avenues to pursue. W~e each may promise the potential for reward, a singular and narrowly defined investment approach may be limit- ing. Sdecting the right combination of these opportunities is the challenge. Achieving financial success is complex and corffusing to even the most experienced investo; one [hat requires a significant amount of t~ne, know~edge and resources. Many affluent investors demand a different invest- ment approach, one that will elevate their portfolio beyond one-dimensional produc~ strategies and leverages the e,~er~ise of highly skilled professional investment managers. Our firm offers just this kind of approach. Our services are designed to protect and increase your wealth by delivering th~ potential for snperlor after-tax re,ms with an tmprecedented level of personalized service and exper- tlse. It is offered exc]uslvely through a select group of investment professionals who are e~erienced in understanding the unique needs of affluent investor and in formulating prudent inv~tment strategies to help them achieve financial SUCCESS. · What distinguishes our program is its personal emphasis. It is budt around you -- your goals, your ~krne f/'ame, and your tolerance for r~k. As your needs change, our ongoing r~anagement process ensures that your inv~- ment por~follo evolves ~th you. It [s not a get-rich-quick strategy or a "hot-tip" investment produa. Instead, we employ a disciplined process that sophisticated institutional {nvestors have fo[lowed for decades in managing their investments. · Broa~ diversification by asset class an~ style to manage risk and provide the poten6a[ for above average, · Highest degree of persona]- ize~ service provided i~ a confidentla] atmosph .... · A personal investment strate~ b~ilt around you -- your goals, your time frame and your roi .... for market risk. · Access to na~.ona[ly promi- nent, top performing money · Continuous monitoring of your portfolio by multiple professional organizations. · Detailed account statements and performance reports to kccp you informed of the status of your portfolio. Historical Illustration August 20, 1997 Prepared For John Coffman Prepared By Rick Taylor Financial Resource Planning 15804 Appleton Terr. Mitchellville, MD 20716 Phone: 3010390-7016 Fax: 301~390-7017 T.H.E. Financial Group, Ltd. 3 Kacey Ct, Suite 201 Mechanicsburg, PA 17055 This report is not complete unless all pages, as noted below, are included. Please read the information in "Important Disclosures" found at the end of this report Page 1 of 13 Copyright (C) ~.993-1997 by CDA/WiesenberEer P. O. Box 9015 Clearwater, Florida 34618-9015 Page: 1 of 4 IDEX CUSTOMER SERVfCE $ -888-233-4339 [DENT. NO. OR SOC. SEC. NO. Z17-72-2106 IDEX VALUE EQUITY PORTFOLIO CLASS C INV FIDUCIARY TRUST CO CUST IRA A/C JOHN E COFFMAN 10405 ROSEMONT DR LAUREL MD 20723- 1273 I,,hllh,,h,,h,hh,lh,,,Ih,hlh,,h,lhlh,,,hhh,hl l, Fund#Inve tor I Rep. 319 TAYLOR ' T,H.E. FINANCIAL GROUP LTD 3 KACEY CT STE 201 MECHANICSBURG PA 17055-5596 Dear Shareholder: Thank you for establishing an Individual Retirement Account (IRA) with IDEX Mutual Funds. By establishing an IRA you have taken an important step toward planning for the kind of retirement you deserve. A welcome letter and shareholder guide are enclosed with this confirmation; they have been designed to help you understand your investment. Please take a moment to review them, as they may answer many of your investment questions. This confirmation statement should serve as your record for your IRA investment. It details your investment together with the privileges and options you elected on your application. It is essential that your account be established correctly. Please notify Customer Service immediately if any of the information is incorrect at 1-888-233~4339. Because we value your investment with us, we wanted to remind you that once the assets in an IDEX IRA reach $50,000 or more-regardless of the number of portfolios-we will waive the annual custodial fee. This is one way we thank you for choosing the IDEX Mutual Funds'as part of your retirement savings program. We appreciate the confidence that you have placed in IDEX and look forward to serving your investment needs for many years to come. InterSecuritJes, Inc., Principal Undelwvfiter ID00187-10/96 02/04 02/04 EMPLOYEE ASSET TRANSFER 02/04 02/04 EMPLOYEE ASSET TRANSFER 10,587.71 11.82 895.745 895.745 9,054.72 11.82 766.051 1,661.796 IDEX VALUE EQUITY PORTFOLIO CLASS C III] INV FIDUCIARy TRUST CO CUST -~' IRA A/C JOHN E COFFMAN P~E(~;; ( OF IC~''~ 10405 ROSEMONT DR LAUREL MD 20723-1273 To Invest By Mail: Forpurchasesin otb saccount, return [his stub and your check made payable to idex Funds in the enclosed envelope. Shares purchased by check will be availableforredemp on 5daysafter IDEK IDEX MUTUAL FUNDS P.O. BOX 9010 CLEARWATER FL 34618-9010 h,ll,,l,,hlh,,,,llh,l,hh,II ...... IIIh.h,l,I IDENT. NO. OR SOC, SEC. NO. Z17-72-2106 Rep. 319 TAYLOR 246 99708399 Rollover Amount Contributions: 1996 Shareowner $. 1997 Shareowner SIJHTRIjfST ~t iK2 ~31I free a! I~TMENT N~S A~D UPDATES ..... , .ID~ Mutual Fund~ls~a$~io-m~lroduce your new P~0n~l tnve~ment Summ~ry Reoort', degto~ad-I0 -' '[ ";~ 2..} ;' .. ~.:~[ · --lbo e~ie~fo~ you:torr~andme~e'.c~0~]zed ID your mnd~vidusl ~nv~tmen1 mnfo~ma~on. Momtormg :'(he:chagrin tbe~iO~o~'~i~in~asimenmwilI be. sim~lm if. you o~ more then two IDEX ' ..' "' - '. .'-- .. _ . - Po~lolios, yod. can u~e't'he Per~'~al'/~-lk3cafion Guide to determine how your investment choices ere .. o;.. allocated and if lhey~hould~ ~ rc~alanced. We.hope you will' find this how repor~ inform~t!ve :,uSeftJI. :.~- ' ' ..~'" -I' .' ' ' ' ' ' ' . i ,- ;-:?..,7.-.~. i"- ~changes within the same fun~ ~lll_b~.'refl~ted: in' PERSONAL ALLOCATION GUIDE . " -' A3sot. allocat~on' ~s.a tool mat ma:y,,e(p-of~.~ you: Clos~r-~e'.yo~r' u ==ir eu .,m,~nci~ ~ . : .; ............ :: ASs~t.~ii~cation is b~e~ on the theory thaf a~et typ~ ?espand differently to. cnang~ ~n economic ' - "and m~rket c6~itions.- To help reduce market:vola~lJly, ,y~ur inves~e~m s~u[d be =11o~ - ~or more infatuation an;~ab sh hg yodr Pe~al Nl6cat on Gb d~ or. o re~f~e a free DEX A loewi on W0rksh'eet m help yo~ 'dote[mine,the ~e~,ih~s~ant~foR you 'C~? ~ Cu~omer . , . EXHIBIT D. ef~ud~Is. : CIVIL ACTION NO.. : '[~' ' :-.:" SUIVlM~.Y ~ ora ~-~cl ~ng sch~ ~ wM~ Bef~ ~10ausc obeying ~r ~s for ~.iby c~g~ ~ia~ ~th Homa and Z Six offu~g~.~ve ~ ~d~ ~ou~ &F~ Bellwether Holding, LLC ('~ Holdi~s'), ~t:aold~s. LLC ('~u~co~'9, R & E Ltd. st~hre he ~ tMt incl~ d~d~ C~es Ed~ Di~on ~c. ~AS~, ~d Voh~ ~s, L~ (?Volstead, ~ve ~d appro~ly LLC"~and R. Ellcnbutg;~LC ¢;RE-LLC"), hava ~ a~roximately g25 m~llion ism~td~ugh ~ 12. D~t~t Bill J- Sho~, II, ~u~ BilCiu ~te~es, ~c. (co~ctlv~y ~e~d to ~ "9~n"), hu ~sed approximguly $483,000 ~ou~ ~e sale ~fiti~S ~ ~y ~on~l,;~afe~bor, thc s~c of ~o no~ ,~ ~uds ~ · comply tl~ ~ ~pi~ to ~p~es ~g~ ~m~ag c~ fi~l~ 1~ ~d ~k c~ ~d ad~ loans. Oa~ *~d Ho~ l~ug b~e~. ~u only comfy id~fied by I~ D~F~nd~ ~ ~i~ inv~or ~&s is daf~d~ C4T M~u~ Inc. C'C4~, a com~ o~ ~d ope~ b~in~s op~s ~il~ly ~ a ~'.~va bad ~t si~:n~ &m }n~ ~ate of ~/w~n 22% - funds. C~ F~aI~, ~h ~'o~cd ~d opted by Hn~ and~ ~fles a~oum in~. H~ma con~la ~ ~a~ F~ b~ ~e~t ~ough whic~ mosl 8. Hom~ 0~, 8up~ F~i~. C4T. T~ F~, the ~=r Dd~danm about to ~e, ~ violggo~ of Section I 7(a) of ~ S~fi~ Act of 1933 ~S~ties A~'3, 15 U.S.C. {77q(a], ~fl $~on I O~) of~ Rc~fics Bxu~i~ Act of ~ng~g=, M vio~o~ of Sec~o~ lS(a~l) ~d 15(c](I) of~a ~I~ ~ 15 U.S.C. ~ ~ l~sucr Dci%nd~ ~d ~= M~ter Ddtcn~m w~ con~ ~o ~e ~ ~ lO. ~t~ Dcf~ from ~t~ vi~lafions.of~ f~! ~c~cs ~wa. ~c Con~i~ion a~o sv~r-- t~m Def~d~ ~gorgcm~ of ~ll-go~ $~m pl~ p~j~nL imere~ ~ ~ct ~. ~a ofo~ fi,nd~ ~ ~ U~ an ~o'~ ~ o~ pm~bi~ng ~c ~c~on of~o~ md ~ ~ ~e Commi~ou mc~ civil ~fi~ p~t m 8~ 20(d) of~ ~c~ Ac~ I fi U.$.C. ~ ~d). ~ Set, on 21(a) of~ ~g= a~ 15 U.8.C. ~ 7au(d). com..~u~icado~ iu, or d~ insr!~aenlalities ot; unt,ca-ta'to cou-gnutc~., or of tho maiI_~ in copm~-tkm with ~ tr~-:sacti~s, acts, practices a~d courses of business alle6~ in this 1.2. The tran~t¢~o~, s, acta, pra~.¢~a ~nd courses of busin~s~ ¢on~ng the violations herein have occurred witl~t tho jur~diction oflhe ,qOUthcm District or'New York and D ,~'~NDANTi{ 13. Mich~cl Gso~ ls a r~id=n': of Ft. ~ud~d~ ~ofi~ Oa~z is top l~el of a'mul~Ll~l:~ pw~ ~r~ ~ve~r ~ds for C4T. · ~ thc ~an~ef or,ds ~[sed b~ ~c ~t~ Def~ ~u~ v~o~ U.S. o'~ih~ b~k ac~. 14. ~a~ ~ Horns, age 50, ~ a r~d=~ ofAtl~. Oeor~ ~e o~ of C4T and i~ ~t~g ~lia~, ~ co~ of S~ Ft~t~. Homa ~ola C4T, a~t F~a~, ~d T~ Finding. Homa'is ~o ~e ~ ~d ~o,C~b~. tS. C4T Ma~en~ Iu~ ~ a FIoN~ ~mg~y in~t~ 1995. ~T m~aSes ~e,~p~xi~Y i 50 s~o~ ~nt [~ o~afio~ ~at ~da ~r ~d~ lo~s to cous~m~ ~dcr~e n~e Ca~ 4 Titles. 6 ~cp~ed i~ 1998. S~ ~l~i~ ~ e~b~shed m pro~d~ ~ C4T, to*ha Cas~ 4 T[fl~ opc~fln~ ~lia~s. H~a co~s 5~ Fi~anci~ 1999. 'l~ Funding ~ c~I~d to ~e loans to comp~s [~ ~o ~ ~e ~d ~ist~md ~ent:for ~T an~S~ Fln~ T~ Fu~nt sh~ ~c ~c ~d~ ~ C~' ~fl 1S. ~t~en ~e Nlehe~ ~d S~f~h~o~ Afl~se~ I~: ~c~oI~ ago 4~ i~ · r~id~ ~ ~o~ Colo~do. Hichols is ~ ~ ~lor of Beilw~cr ~o1~, LLC ~'B~lt~, 5ou~w~t~:Hold~ L~C ("So~w~m"), and H~ldi'~a~, ~C (~'ifl~ Heldinss~, ~d the ~y.o~'offi~ ~d ~r S~'~,,~r ~ Inc. ("Safc~9 is a Colo~'c~m~ og~lly ~cc~m~d ~ S~, ~c. in'I~ 1996. S~i~Er o~.2~4 of BaD--e, 9.0~4 of ~e~m ~ 10% of Title Hol~nim ~e~ot h~'~v~ ~t I~ ~650,7fi2 tn ~bttt com~n~on ~om Bcilw~ ~d it 1~ ~112,699 fioa~ Nichols ~d ~f~ are ~t m~ ~ ~e C~sion ~ hmk~ or d~ 19, ~h~p A. Sharon, PA~ ~% and P~ Hold~, Inc.: Sh~to~ 57, i~ a m~dem of ~e Mou~m Oeo~a. P~, I~c. (~?~"). · ~o~ ~s lo,cd In ~r 1999 by 5h~ton. P~ is a 20% agmer of Bellwe~er. PAS :}lq0Min~; Inc.: ("f~ASH") h ~:O,:o~is, co~om~on f~ k~ Au~ t 998 by :}P~SH ow~ 9.09%.of~ou~wc~cm ~d 10%:Sf~Ti~:~aldin~s. P~H mc~ived .... :'"'~: PAS ~ P~H ;$I35. ,600 ~.m~gcon~nsafion~m So¢~'~. 20. Charle*g~a~ Diction ~n~V~,[~t~r ~n~m~, 1,~ ~ ....... ' .' ?5'5 ~. . ~:;'".$ ,:Vql~r.~ ~t r~d ~Sth ~c Conmg{~ ~: ~a or ';" 21. J~ ~'R~f ~d Jimmy Bi ~o~,~C: R~f, ag~ 61. ~sid~ ~W~'Cal~bi~.' ' $o~ah.C~li~ ~-LLC i~ a'~'~li~i~ ~mpnuy o~=d by R~f . t~m~ mon~y f~ ~m~amos m ~ ce ~ l¢~i ~f ~4 ~R-LLC ~ nat :~... ~ . ~-~C m not mgi~ ~ the Co~l~o~ ~ or d~ers. jj., .'..~': :j m~nt ofM~o I~. FioHd~ ~ o~ 14.2~?, of'Oulf~o~ ~u~ ~ comply, · ~0fi~.m¢om~ion~t~ fo~ iaAug~t:l;9~8. 9h~BaCin~ ~ Th~ l~uer D~i'~ndan~ 24. Bellw~r Hoiding~ ~C ia a ~to~o {i~d Habili~ ~mpmiy fiy~'B~llw~iher owners. c~g ~d ~m la~*. Nioho~ ia .~ M~a~ng D~cm, of Title SIx oft~ o~e~.of So~st~'.~c.~ o~ of ~fl~ Hol~g~ money rot com~a~c~ in.ffi~ ~ tkl~ l~t~ int~, 28, R'~& E L~.. ~a ~::~of Gad ~o~t~ ~'~ ~o~ is a N~'ada ~i~'li~biBty.~mp~y omcd ~J~my B. RooL ~ ~f~ n c~ of~ ~1. ~;~g ~ ~d by K~f m ~o mon~ ~or ~omp~tcs ~ ~c c~ fiQ~ l~din~ F~cial w~ ~m~ by Ell~b~.~ m~y ~or comp~ in thc ~ title Icnd~g 30, JS.Roo~ and ~ Elle~u~, LLC (~ ~ ~ a Sou:h C~o~ l~i~ R~f m~d Eilm~g m ~se m~c~;~, com~ in ~ ~ fitlo ~d ~ c~i~ and ~ted-~M~1999. Sho~.~BQC~s14~O%ofG~f~ Gulf~ ~i~ea ~ads ~ uee ~ ~'c~ afle 10~ ~ ch~k~ug ~d advice h~c~. 10 . ~t~-~ ~ Of~o~ ~ nt 1~ ] 36 ~1~ in 17 s~tes. B~w~ said 270~y ~u~, ~e 9~g' flo~ent ~d a& [deng~ ~e Comply to ~[~h ~e~r ~ wo~d b~ 1o~ at'l~t s~ of~e B=aw~ o~ ~ew ~ ~ mo~- ~d io to C4T. la cern [~r~ B~w~r ~ ~g~ ~r ~ inves~ to m~t ~ H~= to;!~ ~ ~c ~ ~tle loan ~nd~ ~d how ~e ~s ~$ed in ~e iqye~o~ ~.m~n~) to a B~ ofBe~a a~eount at Cifib~ in New Y~rk Ci~ for ~ $ou~hwe~t~ own:rs'I-ave directed inve. a'tor proceeds ~*ora a bank acc~lnt at Norwcet Bank (located/n DcnYer. Coloracto3 to 12 39. ~d~ De~m~ 199~ S ~'°t a~Ut May or l~e1999, ~e Hol~ be~ a l l O m~li~ ~:d In ~dI~ ~= ~tlc Holdin~ ' ' " g d°~ts ~so ~ate ' :' : ,~ ~rec~vable ofthc comply ? · , .. . ~: · . . . : · .. 14 m~p~t of investor ~ 46. Oaum. mid Ell~ m d~ ~ ~rn ~s offe~g ~u~ a ba~ tn ~ow. York Ci~.fm ~h~ c~t m C~ym~ Isled ~oun~ in ~a ~ mt~ a~ leag S5~ ~lioa [R ~[s off~g~ ~i o~ is ~n~y ~ing. ~'s~ ~.pr~ ~m ~c o~lag ~t[~ ~rw~ m a co~y which will, .~. mrn;.loan ~v~}or..'pcm~ m corem eu~g~ in ~ car ~1~ loa~ ~ h~' 9h~U~'~.s~t~ in~ in ~ ~omtl. r~ivablo of ~e eomp~ly to ~h ~v~tor ~di~ll'b?loa~ ~ ~ exhort ta.~e off, ag ~m~t investor pr~S ~m ~ RE ~ Offering ~ T~ F~. T/P Fo,alng e~t~ a ~ecm'i~ ag~m~l ~d UCC-I ~m ~m ~ ~2 ple~glng aR of i~ sc~ums rcc~ivabto to ~ ~2 ~ coital for · pro~s~ Rog in &e m~ximm ~oang of $50 million. ~-ll~abugg tra~af~rt~f ~he $5 3 m~l;on ra. Lsed '.m:.th, R~ $2 CRTodlal! to T/P Fur~Ling. Roof and Ellm~burg. ',fi~t ~r~:tcd that';~ha fimds Im .tr~e~ ~o · Dain Rmu.schef ha~lc ~ccotmt thc. ftmda d~po~l~ ia th~ :Bmo.'i:.~aribe sacurih~s ace.~.mmt M credited m TIP Ftmding. 50. N the any car title or ch~k c~,nd advance:busii~, ~U~r New Yo~ Ci~ rifle ~ check I~9 ~coaif~ ~I~.~,000 in Mv~r'~ds, Io~ money to. a com~y:~t ~II, M ~ 1~ ~o~ey t~ com~,s in t~ ~ titl~ I0~. F~thcr, Gul'fco~t'a a~ty int~t ~ lom~ ~d · ' · ...... ~'~:~:. ' · =xecuf~d m s~cudty ~m=nt and, UCC-I form ~v~or ~ m ~ F~id's a~Omt at Fire U~ion B~. ~t Fln~ei~ ' :.?..:. '! ~th (~% ~r y~ S~ tol~ iu~e~ in ~* 5~iay off~g fl~at ~ve~r proc~ ~d ~ di~ t~ ~ title le~ng ~d~, 8uajay ~d Ibm ~s it ~s~ to a ~ Co~i~, ~:.O.[~ ~c[~l m ~l~d to 5eaja~ inv~tors. -' T~ PONZI'S~ ~y c~ ~fl~ to~ co~ flint Oa~ md Ho~ hay, told M~r ~d I~ . D*f~m~ w~ r~ ~smt p,oc~, C4T rec~iv~ o~y ~md ~t miltio~ 17 ~dmg ~mg.~ ~me 56. ~.~a~ goofily d~t mo~y ~ C~y~ IsL~ b~ ~cco~ t~u~'ce~in' ban~a.~ N~ Yorg Ci~.. ~m t~ ~ m~e, a~ ~c ~ire~o~ of thc Det~ t~aN~ yo~ CiW b~, tn N~ York.Ci~. .gp~alciy $1' m~Jli0n ~ C4T, ~d .~ay~ to ~w~, $outkwc~m, TMe Hot'is ~d GMfco~ inv~to~ ~d to ~ay ~m~a~on ~ M~er De~ta. ~8, 5p~lly, ~m Ma7 199g ~e& ap~y $63 milli~ ~f~% whl~ ~ ~ to pay ~t~ million rata ~ to pay I-toma'~ ~umet F;,~ucial, T/P Fuading or C4T and :' te~dtcI ~8e~em'ate 1~ ~qcam bctw Mmy 1998 - ~ ~ e ~ ~e ~y ~ ~ pay int~ ou ~vcs~r no~s 61, Ho~, ~, S~t FinelY. C4T, T~ F~g. ~ Dcfe~m'.~ ~e.~;D:fen~m ~ve ~de ~ coatiuu* m ~e mi~s~o~ ~ omimd~ of ~ ro invc~m~ in co~ectlon v~rh ~* offs, :.. "$o~w~t~'~flo Hol~g~, ~ ~, ~ Oulfm~ bon~. "{ ~ I~o~. ~u~ him, S~r F~al ~d ~T ~o ma~ ~d }:~' ;9a~ue..tp.~e ~cntafl~ a~ut ~ u~ ofinv~t~ p~cecds. In p~onal ;~" m~*~gs'.~"~ ~d by plcd~g S~t~t F~c~'a ac~ ~civahla ~d ~e~g a ~mis~ no~c 'to ~ thc So~t~t~, ~[fm~t and ~tle ~ol~n~s '~., Off.s, Homa ~pr~ac~ ~n~ in~ator ~0 ~v~uid b. ~d by C4T flam~,~ iu operating ~flrlli~tus ~o mok~ ~ title loans In c0~umer~. In amuality, I-[oram, fiun~l 63. ;' H~,.~d}~ugh ~, S~t'F~dal ~ ~T ha~ and-c~ to ~m~'~ ~n ~C4T, or ~ .~ ~ 1~ bm~, ~ ~* ~o~m of fm~ hr .: .... ... ;. ' ' ' · ~ ~C4T ~ ~ ~. .H~, ~ ~' ~m, S~ Fma~ , h~ve m c~d . .5. .. · .:~. .~. . - . . . ~ohfin~ m ~ mi~rcpm~o~ ~ul ~ s~m~cy or S~L F~ial'~ acmm~s ., . .. ~ .b~ou .1~ [9~.o~u~h ~ ~ ~- ~rmvcr. Sm~ Fmcid ~s not i~vc thc ... ~: ~ n~et~to p~ pm~ no~ 8ivm m Sou~w~t~m, ~ifm~t md Tide l-loidin~. u~.~'~o~s,'~d. ~s failed to:i~o~ Inves~ ~'~e pmmissot7 notes ~v~ ~d ~cU~tm:~k~ble*pl~d~by S~e[ Fm~l~[ w~c ~ ~C~y for ~e ' g~g.g ~lllo~.~cd'm [~by ~ou~ ~ac ad,al.ss ~a O~rcoaa. 65. '.T~F~dI~g ~s madrid c~t~ueS t~ m~ mi~n~fiona ~out ~c 2O T/P Yuu .d~ ha~ rm accounut ~ce~v'abl~ b~ ~ tU ~:. . ..~ . .. fnvgsto~.~[ ~ p~i~ no~s;~n ~:~uoun~'~c~ivabla pl~l~ ~ T~ l}undin~ did noi ~d m m~ ~ym~ to'~ 67. '~e~ ~pa ~s~ of the ~t~a ~d ~n~,~ d~ ei~ ob~ned mliahl~ ~m' o~.at~tiat~ ~m S~ Fi~c~ :T~ Fund~g ot C4T ~ffic~t b~s "- the promissory' n rec~iv. " ~vem~ ~ ~b~abow 71- Paratlraphs 1 ti~ou~ 70 are hereby r:~allcged and incorporated by 75. By ~on ~f~ ~vi~es ~d~ ~ P=a~p~ 71 th~u~ 74 ~ve, Oa~> 8um=t Finn}. T/P Finding, C4T, ~ ~ke~ Dcfc~ ~d ~ ~m }iav~ ~lm~ ~ ~ viola~ S~ti~ 17(a)(l) of th* 8~fi~ Act U.S.C. V~olations of S~.tion' ~ 7(.a. X2~ arid of: ~e. S~ud[i~ Act [15 U:S.C. §77q(aX.2) ~nd 77q(~)(3)l $~e,...citi¢,, ~t [15 U~$.C. §§77q(a){2) and V7q(a)(3)l. 25 o s c §78/~)l.~,',d'Rut~t0~.. . . 6:[17 C F.R.§140... ~0~4] ~l,~,,..u-,d--~. 83, 26 ~7 %',. 0 .z~,9:ianiO~.d~.~qui~Hom~,.. G~:~, ,u.~....et Financml, TIP Fun~. T, ~e . ' ': ]~::~ .~ *' -3[ .[:. . .: ~ ~t.'~e deposi~-of.~h'~nda in }d~fl~d ~ ~ ~, U~ited Sm~, ..: ~r ..; . : :~:' .. ~t~'~n~'~ I~ ~f~ ~, doc~t~ mdzcatl~ff ~j~ ~ ~ or p*=o~ pm~, ~d any V~ ~ 0~; " '-~ . .. ~ D.efend....~ts: and offer ar sal.~ of th~ notes or bond~ ,scm by th~ ; 3~ A~meys ~ S~C~ ~D EX~OE COM~SSION ~00 W~ M~o~ } 12453-7390 3t2-353-7398 World Tm~ C~ N~ y~N~ Yo~ 10048 33 J. JosFat Cum~,~, JR. CAP.~ M. S~PAPO DONNA HILL STATON TELECOPIER No. (410) 576-6532 STATE OF i~-ARYLAND OFFICE OF THE ATTORNEY GENERAL SaCUmTmS DIVISION MELANIE SENTER LUBIN Securities Commissioner Wm'rF.R's D~R~CT Dt~L NO. (City of Baltimore) (State of Maryland) AFFIDAVIT 1. I, Timothy F. Cox, am an Assistant Attorney Cmneral for the Maryland Division of Securities, Office of the Attorney General (the "Division"), and I am Custodian of Records kept by the Division pursuant to the Maryland Securities Act, Tide 1 I, Corporations & Associations Article, Annotated Code of Maryland (1999 Repl. Vol.), and ia compliance with § 10-204 of the Courts and Judicial Proceedings Article, Annotated Code of Maryland (1999 Repl. Vol.). 2. I have thoroughly reviewed the files of the Division and those records reflect that no securities registration application or notice of exemption or preemption was flied by or on behalf of Morning Star, Ltd. , or by or on behalf of"Rolls Royce, Ltd.. FURTHER AFFIANT SA1TH NOT: ~/.~..--~~ Assistant Attorney General and Custodian of Records SWORN AND SUBSCRIBED BEFO~ ,2000. NOTARY ~UBLIC ~ ' -~' / MYCOM~XPI!~: '1~/0' /ZOO> affidavit, see 200 Saint Paul PEace * Baltimore. Maryland 21202-2020 Telephone Numbers: (410) 576-6360 * E-mail: securities((!!oag.state.md.us -NAS J National A~aoolatJon ( 1735 K Streel. N.W. Washington, D.C. 2COO (202} IMPORTANT SEC NOTICE CONCERNTNG ~DEPENDENT CONTRACTORS TO: All NASD ~embers DATE: August 25, 1982 Attached is a copy of a letter from the Securities and Exchange Commission to the NASD on the question of the concept of independent contractors and the respoh- sibility of member firms for their supervision notwithstanding their designation .as such. All. members should closely review this letter. It would be advisable if it were d~tributed to all registered and compliance personnel in your firm, including branch office personnel. ~_~. Attachment EXHIBIT SECURITIF-.-S AND EXCHANGE CO~4b41SStON WASHINGTON. D.C. Z~).~49 June I8, 1982 Mr. Gordon S. Macklin President ~ National Association of Securities Dealers, 1735 K Street, N.W. Washington, D.C. 20006 Dear Mr. Macklin: The Division has become concerned over apparent misunder- standings within the broker-dealer community about the status under the Securities Exchange Act of 1934 ("Act") of securities s~lespersons designated as independent contractors. Questions have been raised as to whether these person~ are subject to the Act, whether they come within the deffnition of associated persons in Section 3(a)(18) of the Act,'and whether they are employees subject to coverage by a broker-d~a~er firm's fidelity bond. These issues have surfaced.recently because of the increas- ing number of firms denoting their salespersons as independent contractors. The Division is concerned that some securities sales- persons calling themselves independent contractors have failed . either to register with the Commission as broker-dealers or with a self-regulatory organization ("SRO") as associated persons of a registered broker-dealer. In order to forestall any regulatory problems relating to such developments, I would like to take this opp<~rtunity to restate the Commisaion's~long-standing pol%cy toward.independent contractors. The Act requires that a person selling securities he registered with' the Commission as a broke, r-dealer under Section l§(a) unless he is an associated person as defined in Section 3(a)(18) of the · .Act. These two categories encompass, t~e universe of persons engaged in the purchase or Sale of securities. The term indepen- dent contractor does not appear either in the Act's definition of asaociat_ed person in Section 3(a)(18) or elsewhere; thus, merely denoting a salesperson as an independent contractor does nothing to resolve the status under the Act of a given individuall The critical question is whether a so-cai!ed independent contractor's activities are s~bjec~ to control by a broker-dealer within the scope of Section'3(a)(18) of the Act. Without that control relation- ship, the salesperson must be registered individually as a broker- dealer. Confusion concerning the issue of 'control" seems to be at the core of the independent contractor debate. The presumption that an independent contractor, by definition, cannot be subject to the control of an employer broker-deale~ is incorrect, pertinent Mr. Gordon S. Macklin June 18, 1982 Page 2 agency law makes it clear that an individual can be denoted properly as an independent contractor and still be-subject to the control of an employer if their relationship is one of principal and agent or master and servant. Distinguishing between the independent dontractor who acts as a principal rather than as a servant or agent is a question of fact. Each situation must be scrutinized to determine how'much control can be exercised by a broker-dealer over the a~ts of the independent contractor. It has been a long-standing policy'of the Commission that indeRendent contractors whose. ~ling %c~ivities were controlled · ~'~the'i'F'~o~He'a'l'~?' eA~'I6~°r~' ~odrd 5e'"c'K~'ct~i~-~s ...... employees for the purposes of the Act. As early as 1945, i/ prior to the introduction of the term "associated person" in the Act, t~e Commission identified "control" by ,.broker-dealer as the sole standard for determining whether a person-.was an employee for purposes of attaching liability to a broker-dealer employer under Section 15(b) of the ~ct. 2/ At that same time, the Commissioz stated that use of the term "employee" in Commission rules or releas could include free-lance, salesmen or other persons whether or not such persons would be deemed employees in some statutory contex~ otb than the federal securities laws. Neither of these Commission interpretive positions was ch%nged with the introduction of the concept.o~ 'associated person" to the Act by the Securities Acts A~endments of 1964. Indeed, the legisla- tive history of Section 3(a)(18) of the Act makes it clear that the phrase "associated person" was created "for convenience of reference" to newly adopted statutory prov'isions of the Act which authorized direct disciplinary action against individuals. ~/ There was no desire to alter the Act's applicability to persons previously held to be employees, i.e., salespersons controlled by a fi:m, including. ~those who w~re i.ndepende~' contractors. - Rather, the Commission's General counsel, now Commissioner Loomis, stated that. the purpose of the new definition was to preserve the ~ct's existing applicability to persons Controlled by a broker-dealer Securities Exchange Act Release No. 3674 (April 9, 1945). 2/ Section 15(b) of the Act authorized the Commission to deny -- or revoke the registration of any broker-dealer if it found .(1) that such action was in the public interest and (2) that such broker-dealer, or any partner, officer, director or branch manager, or any person controlling or controlled by such broker or dealer, had' been convicted within ten years or was enjoined in connection ~ith activity involving securities, or had willfully violated any provision of the Securities Act of 1933 or the Act or any rule thereunder. 32 S. Rep. No. 379, 88th Cong,, !au Sass. 1642 (!963) Mr. G6rdon S. June 18, 1982 Page 3 Macklin or controlling a broker-dealer, such as partners, officers and directors. 4/' Section 3(a)(!8) was drafted to incorporate almost · identical l~nguage to that already appearing in Section 15(b) of the Act. Thus, it is clear that the independent contractor salesperson may be deemed to be an employee and associated person under the Act if the requisite control relaticnshiu exists. Accordingly, independent contractor salespersons'who act as independent principals, in selling or' inducing the purchase or sale of securities must be registered with the Commission as broker-dealers. Likewise, .an .independent contractor salesperson, whose activiti'e~'are subject to control by a broker-dealer, whether by contract or Otherwise, must be registered With a SRO as an associated person and should be covered by th~ employer broker- dealer's fidelity bond. Broker-dealers may not shift their obligation to control or supervise the activities cf their inde- pendent contractor salespersons who are associated persons, and' Contractual terms that attempt to limit broker-dealer liability for the acts of such persons under the federal securities laws are of no effect. While we believe the SROs have consistently required theic 'members to assume appropriate supervisory responsibilities for independent contractors who are not separately registered ~s broker-dealers, we recognize' that, in certain instances, SRO rules may not have been applied to all such· independent co~- tractors. In this connection, we also believe that it is important to emphasize that a simple denial of "control" of an.independent contractor by a b~oker-dealer would not remove its responsibility for supervising that person.. To the extent that a film forms a~ relationship with an independent contractor, that firm would 6e responsible fo~ e.ither (1) ~nsuring ~hat, the independent contracto~ responsibilities attendant to a relationship with am associated person. Therefore, the Commission believes that if-a salesoerson was not registered and a broker-dealer permitted him to hol~ out 'to the public that he was acting on behalf of t-hat firm, ·such salesperson would be deemed to be an associated person of. the broker-dealer. We are advising all the SROs of cur views on this matter so that any necessary modifications in thei~ rules and enforcement procedures which presently conflict·with ~he Commission's position on the status of independent contractors under the Act can be 4--/ Part I, Investor Protection, Hearings c~ H.R. 6789, H.R. 6793, S. 1642 Before a Subcommittee of the Committee cm In~ers~a~a and Foreign Commerce, House of Representatives, 8St_h Conq., 1st Sess. 255 (1963). ~ Mr. Gordbn $. Macklin June 18, 1982 Page 4 made. It should be noted that the Commission's position does not prevent a SRO from prescribing rules for its members which are mor~ restrictive than the Act on how the relationship between a broker-dealer and its associated persons should be structured. I'hope through the clarification of this ma~ter that we are able to assure uniform application of the Act,Ge every broker-dealer. In this regard, if you have any questions concerning independent contractors, please contact Sarah Ackerson at (202) 272-2857. Douglas Scarff DirectOr. 78,116 SEC No-Action Letters Mackli,~ 10b-6 to permit each Seller: or an affiliate that acL~ 'as trustee, or investment 'ad- visor to Stock Index Funds that are based on non-discretionary mathematical formulas to make purchases of Lockheed 2-16-83 Common Stock on behalf.of such Stock Index Funds during 'the distribution of Lockheed Common Stock owned by or et- tributable to such Seller, as described herein... _. [ ~' 77,303.] ~'. Gordon S. Macklln, NASD; Charles J. Her~ry, CBOE; Robert J. Birn- · baurn, AMEX;. and John J. Phelan, NYSE .... .. ,. ,. . ...... 'Seourit[es and'Exchange ~omnll~'slon, Divlslon of M~rk~t Rcgulafion. j'une 18, 1982/ (IAv=i~ble July 19, 1982.) On SEC Signlif~nt List of November 30, 1982. Correspondence in fuji tc~t. · · · Exchange Act~Bxoker-Dealers---Indepe~dent Contrsctors.--In the opinion oE tile Division of Market Regulation, broker-d~lers re~stered under SecHon 15(a) of the Act ~n~ "~ssociated persons" defined in Section 3(a)(~8) comprise ~e "universe oE persons ~ged in the'purch~e or'sale, of-securkies". Thus, se~rk{es .sa~es~sons termed "inde- pendent contr~ctors"..most be.. s~bject to the ~mount oE control a.broker-dealer exercises Over th~; .in'one or the other o~egory. For exampl~,, ii. ~o "indepe ~dent contractor" d~ not have ~ control relat[ons.hip with ~.4~roker-de~l~r, the salesperson ~ust. re~s~er h~dividuall7 as a broker-d~ler; ~nd. if his act~vk~es are subject .to .control wkhin, the.scope oE ~ 5(~) (18);'he is a.n assod~ted person. . ' . . Sec.~21,242, "Exchange Act~De~niHons; Exchanges' ~[v~slon, ~ol~me 2 and ~25,001, "Exch~oge Act~Broker-Dc~Ier Regulation", division. Volume 3. [SEC Staff Reply ] The Division has become con'cerued 'over apparent' misunderstandings within the broker-dealer community about .the ste~s under the Securities ~xchange Act of 1934 ("Ac~") of securities s~es- persons designated ~' independen~ con- tractors. Quez~io~ have been raised to whether th~e.:pe~ons ~e sub~ec~ · e Act, whe~er ~ey come within, the definition' of' ~ociated persons in Section ~(a)(18) o~'~e Act, 'and whether they ~e employees subi~ct to coverage by a broker-de,cc ~'~ fid~ity bond. ~ese. i~ues have surfaced, recently cause of.the in~e~ing n~ber .of denoting,~eir s~esperso~ ~ indepen- dent: co~tractors. ~e Divhlon h'. con- cemed that some securifies..sdesperso~ c~ling ~emzelves independent cdn~ac- to~ have failed ei~ar to .reghter .with the Comm~ion ~ broker~e~ers or with a self-re~lato~ o~anlzafion ("SRO"). ~ ~oclated persons of a regizt~ed broker-de,er. In order to fores~l ~y re~lato~ problems relating to ~ch development, I wo~d like to take this opportunity to restate the Commi~ion's long-standing policy towed independent Th~ Act'requlres that a per, on selling securities be registered with 'the'Com- mL~ion as a broker-dealer under Section 77,303 15(a) unless he is an associated as defined in Section 3(a)(18).'of' the Act. These ~wo categories encomliasz':the universe of. person~ engaged in the ptir- chase or sale of securities. The'term independent contractor does not appear either in the Act's definition' of associ- ated person in Section 3(a)(18) or else- where; thu% merely denoting a sales- person as ~an independent · contractor does nothing to 'resolve 'the' status'under the Act of i given individual. The'criti- cal question is whether' a'so-called dependent contractor's activities ' are stibject:'to .con~rol by a broker-dealer Within 'the scope: of Section 3(s)(18) of th~ Aci.' Without t~at control relation- ., sh~p, the salesperson must be register?d indlvidually az a broker-dealer., Confusion concerning ' the issue of "c'on~rol" seems to'be at the core Of the independent contractor debate. The presumption that an independent contrac- tor, by definition, cannot be subject to the control of an employer broker'-dealer is incorrect. Pertinent agency law makes it clear thht'an individual can be dendt- ed properly as an independent contractor and still he subject to' the control of an employer if their relationship is one of principal 'and agent or master and ser- vant.. Distinguishing between the inde- penden~ contractor who ac~s as a prin- 1983, Commerce Clearing I-Iou~c; ~nc. 10C0 :~.-~2-- 8'~ SEC No-Action Letters cipal rather than as a servant or agent is a question of fact. Each situation must be scrutinized to determine how much control can be exercised' by a broker- dealer over the acts of the' independent contractor. · . · It has been ~/ long-standlng'pollcy of the Commission that 'independent' contrac- tors whose selling-.activities were con- trolled .by their broker-dealer employers could be characterized as employees for the purposes of-the Act. 'As early as 1945,1 prior to the introduction of the term "associated person" in the Act, the' Commission identified "control" by a broker-dealer as the sole standard'for determining whether a person was an em- ployee for purposes of attaching liability to a broker-dealer employer under Sec- tion 15(b) of the Act. Z At that $ame time, the Commlaslon stated that use of the term ."employee" in Commission rules or rel~asas could include free-lance salesmen or other persons whether or not such persons would be deemed em- ployees in some s~atutory context other than the federal securities laws. Neither of these Commission interpre- tive positions was changed with the in- troduction of the concept of "associated persbn" to the Act by the Securities Acts Amendments of 1964. Indeed, the legislative history of Section 3(a)(18) or' the Act makes it clear that the phrase "associated person" was created "for convenience of reference" to' newly adopted statutory provisions of the 'Act which . authorized direct disciplinary action against .individuals.a There was no desire-to alter the Act's applicability to persons previonsly held to be employees, i.e.,, salespersons controlled by .a.firm, including those who were independent contractors. Rather, the Commission's General Counsel, now' Commissioner Loomis, stated that the purpode of the new definition was 'to preserve the Act's existing applicability to persons con- trolled by a broker-dealer or controlling a broker-dealer, such as partners? of- (APril Federal S~ecuriffes Law Reporl-s 78,117 ricers and directors.4 Section 3(a)(18) was drafted to incorporate almost identical language, to that already ap- pearing in Section 15(b) of the Act. Thus, it. is clear that. the independent contractor salesperson may be deemed to be an employee and aasociated person under the Act if the .requisite control relationship exists. Accordingly, independent contractor salesperions who act' as independent principals, in selling or inducing the purchase or sale of securities must be registered with the Commission '. as broker-dealers. Likewise, an independent. contractor salesperson, whose activities are subject to control by a broker- dealer, whether by contract or other- wise, must be registered with a SRO as an associated person and should be cov- ered by the' employer broker-dealer's fidelity bond. Broker-dealers may not' shirt their obligation to control or su- pervise the activities of their indepen- dent contractor salespersons who are ~- sociated persons, and contractual terms that attempt to limit broker-dealer lia- bility for the acts of such persons under the federal securities laws are of no ef- fect. While we believe the SROs have con- sistently required their members to assume appropriate supervisory responsi- bilities for independent, contractors who are not :'separately registered as broker- dealers, we r~cognize that,- in certain instances, SRO rules may not have been applied to all such. independent con- tractors. In this connection, we also be- lieve that it ks important to emphasize that a simple denial of "control" of an independent contractor by a broker-deal- er would not remove its' responsibility for supervising that perdon. To the ex- tent that a fh-m forms a'~elationship with an · independent contractor, that firm would be responsible for either (1) en- suring that the independent contractor was registered as a broker-dealer or (2) assuming the supervisory responsibilities 77,303 78,118 SEC No-Action Letters Great .4merican Management and Investment Co. attendant to a relationship with an asso- ciated person. Therefore, the Commission believes that . if · a. salesperson wa~. not registered and a broker-dealer permitted him to hold out to the public that he:aves acting:, on . behalf, of that firm, .such. salesperson, would be deeme<~ to be an associated person of the broker-dealer. We are advising all the SROs of '.our views on this matter so that any neces- sery modifications in .their rules and enforcement procedures which presently conflict with the Commission's' position on the status of independent contractors under the Act-can be made. It should.be. noted that., the Commission% ~ position does not prevent a S1%O from.prescribing rules, for its members which-ere more re- strictive than the .Act on how the 'rela* tlonship 'between a broker-dealer and its associated persons should he sta~ctured~ I hope through the clarification of this matter,that we ~z_re-able to assure uni- form application, of the Act".to e~ery broker-dealer. In this ~egard, ..if you have.,any questions congerning indepen- dent contractors, please contact Sarah Aclrerson at (202) 272-2857. ina letter of inquiry in SEC of'ficfa, l files. CCH. ] .'.~ ·. '['~ ZT, 30f] Greo} ,~meri~:an Mano~,rn'~ton&Investment,' ". '' ' Inc. . . . .. .. Securities and Exchange Commission, Division. of luvestnl~ilt ~anagemcnt. August~ 27, 1982. (A~allable September 27, 1982.) On S~C Significant List of<November 30, 1982. 'COrrespondence in full text. -. Inves~e~t Company Act--Defini~on"~f Inves~e~t ~omp~--Re~ Estate Develop- ment Conce~--Mortgage Lend~K Acti~es~A re~l estate company in business to own, o~rate and develop rial'propcrty, and tba~ ell~es in mortgage lending ~ a result of pro- vidiog purchaie money financing in cohnection xvith tile sale of real estate, may couduct 'these activities ivithout ?egistration under..tbe Inv~tment Company Ac~ The positiofl of the Division of Investment Management is aochorld by a csncern.tha{ the integer in the. pr~crty securing the purcbaie money.rooftree .notes will in all cas~ be a m~rtg~ge interest ~ndpr ~pplicable state law. . ~ : ... ' "See ~ 47,aS~, "Investment Companie~Dcinitions" division, Vol=m~ 4;' · i [LetterofIoqui~] . . On behalf of Great American Man- agement-an4' Inve. s~nen~, Inc. ("Great American" or the "Company") we. are writing' regarding the:possible application of the.Investment Company Act-of 1940 (thh "1940 .Act") 'to Great American- should, the. Company effect the ploposed ' business .transactions o~tlined: herein.'- We have concluded .that..Great American would not be deemed to be an inveStment company, under the 1940 Act as a-reSult of the circumstances'set forth below· and we seek your concurrence in our view... The Comp'any ' ' Great American is incorporated under the laws..of the State of Delaware and is a real estate company engaged in'-the business of owning, operating, and developing real properties (which include hotels and motels, apartment communi~ ties, residential, development properties, and unimproved land) and in the busi- neSs of real estate mortgage lending, ~ 77,30~ including mortgage lending, res~lti~g from the C6mpany's providing purchase money financing in connection with the sale of its real estate assets .from time to time. Great American ,conducts the ma- jority .of, i~s .. business through wholly- owned :subsidiaries that have. begn in- corporated. :'in. various. Southeastern states.... · .. -. · In .. order, to reduce' ~ts, outstandmg debt and redeploy its assets into other real, eState, ~'ela~ed investments the' Com- pany may wish over a period of time to dispose of a substantial amount oi'the present .,real property assets o~ the Company. Upon disposition of these assets,. Great American's asset portfolio may consist, ~or a period m~rilT~of ·purchase money notes received as partial consideration, for the Zasset sales. To the extent that Great American does~ not. reduce outstanding indebeed- ness with the proceeds of the disposition or real estate assets, Great American intends to rise' such proceeds to make © lg82, Commerce Clearing House, Inc. Exhibit C ARBITRATION TRIBUNALS OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. In the Matter of the Arbitration Between: SHIRLEY E. AUD and RALPH It. GRIER, CLAIMANTS, - VS. T;H.E. FINANCIAL GROUP, LTD., Case No. (_~ ;q RESPONDENT. STATEMENT OF CLAIM CLAIMANTS, SHIRLEY E. AUD (hereinafter referred to as "AUD") and RALPH H. GRIER (hereinafter referred to as "GRIER") (hereinafter collectively referred to as "CLAIMANTS"), sue T.H.E. FINANCIAL GROUP, LTD. (hereinafter referred to as "TFG" or "RESPONDENT"), and allege the following: JURISDICTIONAL AI,I,I~.GATION~ 1. The jurisdiction of this Tribunal is invoked under the Federal Arbitration Act and pursuant to the Arbi.tration cla. uses contained in (a) the Licensing Agreement that RESPONDENT has with the National Association of Securities Dealers, Inc. ("NASD"), bf which the firm individually and collectively agreed to submit all disputes and/or complaints (i) with customers and/or (ii) arising out of or in connection with its business and/or (iii) arising out of the employment or ten'ninafion of employment of its associated persons to arbitration, and (h) the NASD Code Of, Arbitration Procedure, and (c) the Form U-4 of Richard S. Taylor. See~ ~ Spear. Leeds & Kellog~ v. Central Life Assur. CO,, 85 F.3d 21 (2d Cir. 1996); Oppenheimer & Co.. Inc, v. Neidhardt '56 F.3d 352 (2d Cir. 1995); ~ Certified Reporting Co., et al., 939 F. Supp. 1333 (N.D. [11. 1996); Miller v. Flume. 139 F.3d 1130 (7th Cir. 1998). GENERAL AIJ,~GATIONS 2. At all times relevant hereto, AUD resided in Silver Springs, Maryland. AUD is eighty (80) years old and retired. AUD'S husband, Edward T. Aud, passed away in 1985. AUD lives with GRIER. 3. At all times relevant hereto GRIER resided in Silver Springs, Maryland. GRIER'i~'eighty.five (85) years old and is a retired widower. GRIER lives with AUD. 4. Ir/1995, 1996, 1997 and 1998, TFG had numerous representatives who worked out of their house or other off-site locations scattered around the country. Most of these representatives had limited industry experience and operated other businesses in addition to their securities business through TFG. 5. In 1986, the NASD specifically warned TFG and other firms with such off-site working arrangements that the nduct of off-me representatives most frequently resulting in violations of NASD rules involves unauthorized private securities transactions; or 'selling away.'". The NASD emphasized that "firms employing off-site representatives are responsible for establishing and carrying out procedures that will subject these individuals to effective supervision designed to monitor their securities-related activities and to detect and prevent regulatory and compliance problems." The NASD made a number of specific recommendations that would assist firms such as TFG in preventing "selling away" transactions by their registered representatives, such as annual, unannounced inspections of the offices of their registered representatives and the review of incoming and outgoing correspondence and sales literature. The NASD specifically'cautioned that "to fulfill these obligations, a firm Page 2 of 108 should consider'whether the number and location of lis registered principals provides the capabihty to supervise its off-site representatives effectively." (See attached Exh/bit "A.") 6. The SEC has also made clear on numerous occasions that surprise inspections of off-site locations are required, that t_hese unannounced examinations must be conducted at least twice yearly, and that customer files must be examined during these inspections..See~ !..a. the Matter of Royal Alliance Assoc.. Inc., Exchange Act Release No. 38174, 63 SEC Docket 1643 (January 15, 1997) (broker-dealer's practice of Conducting a pre-announced compliance examindtion of its off-site registered representatives only once a year was ~ to satisfy its supervisory obligations); In the Matter of Consolidated Investment Serviceh, Exchange Act Release No. 36687, 61 SEC Docket 20 (January 5, 1996) (broker-dealer's supervision of a small office run by a single registered representative ~ without surprise inspections, and annual compliance questionnaires ~ substitute for on-site inspections); In the Matter of NYLife Securities, Exchange Act Release No. 40459, Admin. Proc. File No. 3-9712 (September 23, 1998) (broker-dealer's reliance on supervisory interviews of registered representatives and annual inspections of branch office by regional compliance personnel without examining any customer files was inadequate to prevent and detect registered representative's violations). 7. TFG ignored these specific warnings by the NASD and directives by the SEC and failed to comply with its supervisory obligations over Taylor. TFG never inspected Taylor's office, let alone subject his off-site location to the annual, unannounced inspections advised by the NASD. Further, TFG failed to establish any procedures for the review of incoming and outgoing correspondence and sales literature used by Taylor, and simply relied upon him to forward these materials to the firm. TFG never monitored any of Taylor's sales Page 3 of 108 presentations, never reviewed on-site customer account c~ocumentat/on and other books and records, and never met with Taylor to discuss the products he was selling and his sale methods. 8. While Taylor was registered with TFG, TFG allowed Taylor to operate other businesses. The SEC has stated that "allowing a registered representative to engage in outside business activities involves the risk that the representative *viii use his outside business to carry out or conceal violations of the securities laws." Broker-dealers must "require independent verification of such matters as the 'nature and extent of outside business activities and a re · , · · presentahve s outside sources of income." Se__~e Prospera Financial Service$, Inc., Exchange Act Rel. No. 43352 (September 26, 2000); PFS Investments. Inq, Exchange Act Rel. No. 40269 (July 28, 1998). 9. RESPONDENT TFG'S procedures and compliance system were deficient because the firm did not take any steps to review Taylor's outside business activities and confirm that Taylor was not using his outside businesses to sell unregistered securities. By not requesting, inspecting and independently verifying documentation from Taylor concerning his outside business~es, RESPONDENT TFG failed to properly supervise Taylor. . "Allowing~a registered representative to engage in outside business activities involves the risk that the representative will use his outside business to carry out or conceal violations of the securities laws. Although [the broker/dealer] required that representatives obtain permission before engaging in outside business activities, the [broker/dealer] had no procedures for reviewing, analyzing, or following up on the information representatives provided concerning their outside activities. [The broker/dealer's] procedures were deficient for failing to require inspections of its off-site offices that were not registered as branches with the NASD or to require independent verification of such matters as the nature and extent of outside business activities and a representative's outside sources of income." Page 4 of 108 ~, Exchange Act Rel. No. 43350 (S~ptember 26, 2000); Walnut Street Securities. Inc,, Exchange Act Rel. No. 35975 (July 17, 1995). 10. Taylor may have been an independent contractor with RESPONDENT. However, the NASD and the State of Maryland have made clear on numerous occasions that broker/dealers may not avoid their supervisory obligations by entering into independent contractor relationships with their agents. In Notice to Members 86-65 (9/12/86), the NASD specifically noted that: Irrespective of an individual's location or compensation arrangements, all associated person are considered to be employees of the firm with which they are registered for purposes of compliance with NASD rules governing the conduct of registered persons and the supervisory responsibilities of the member. The fact that an associated person conducts business at a separate location or is compensated as an independent contractor does not alter the obligations of the individual and the f'mn to comply fully with all applicable regulatory requirements. (See Exhibit "A." pp. 1-2.) 11. During all periods material hereto, RESPONDENT TFG was licensed and authorized to do business in the State of Maryland and did business in Maryland through Richard S. Taylor, a registered representative of TFG2 TFG is a registered securities broker/dealer with th~ State of Mas'yland and the Securities and Exchange Commi~s]on- .~ ("SEC") and is a member of the National Association of Securities Dealers, Inc. ("NASD"). 12. Richard S. Taylor (hereinafter referred to as "Taylor"), at all times relevant to the transactions alleged herein, was a registered representative, employee, and agent of RESPONDENT TFG. At all times relevant hereto, Taylor was the individual account executive responsible for the handling of transactions with CLAIMANTS at TFG and was acting within the scope of his position of e. mployment and/or agency and/or apparent agency Page 5 of 108 witti TFG. Also at all times material hereto, Taylor was, upon information and belief, a resident of Baltimore, Maryland. (See attached Exhibit "B.") 13. Taylor and TFG agreed and undertook to perform the duties of a securities broker, financial consultant, and brokerage firm relative to recommending and supervising the recommendation of transactions with CLAIMANTS. 14. The acts committed by Taylor and RESPONDENT TFG, as alleged herein, were done by the firm personally through the use of the malls or other instrumentalities of interstate commerce. The acts of RESPONDENT TFG and each employee, agent, and representative of RESPONDENT TFG are deemed to be the acts of and are chargeable to and binding upon RESPONDENT TFG under principles of agency law, licensing, and controlling person and the doctrine of respondeat superior. I. SHIRLEY E. ADD AND RALPH H. GRIER 15. GRIER is eighty-five (85) years old and worked for many years in the Washington, DC Department of Recreation. AUD is eighty (80) years old and was a homemaker, although she did work part-time as a stenographer/secretary. Both GluER and AUD lost their spouses, and have been now living together for twelve (12) y, cars 16. GluER and AUD are not sophisticated in investment matters, and met Taylor after seeing him on a television program concerning investments. Taylor prepared investment plans for AUD and GLUER. AUD and GLUER subsequently opened accounts with RESPONDENT TFG, and RESPONDENT TF(3, acting through Taylor, sold numerous investments to CLAIMANTS. (See attached Exhibit "C.") Page 6 of 108 17. RESPONDENTTFG, acting through Taylor, recommended that CLAIMANTS subsequently liquidate numerous investments that they purchased through TFG and make the following investments in fraudulent, unregistered promissory notes and viatical settlements: CLAIMANT DATE INVESTMENT AMOUNT Selling AUD 10/20/95 $ 47,000 Viaticals AUD 5/15/97 Roils Royce, Ltd. $ 15,000 Taylor ~ ..~ Promissory Note/Cash 4 Titles AUD 9/10/97 Rolls Royce,.Ltd. $ 607,000 Taylor Promissory Note/Cash 4 Titles AUD 1/7/98 Rolls Royce, Ltd. $ 40,000 Taylor Promissory Note/Cash 4 Titles GRIER 10/20/95 Lifeline Program $ 10,000 Taylor Viaticals GRIER 1/5/96 Lifeline Program $ 10,000 Viaticals GRIER 9/10/97 Rolls Royce, Ltd. $ 124,500 Taylor Promissory Note/Cash 4 Titles [GRIER 5/23/97 Rolls Royce, Ltd. $ 10,000 Taylor Promissory Note/Cash 4 'Titles TOTAL: $863,500 18. CLA/MANTS assumed that these products had been reviewed and approved by TFG. AUD, for example, received an Investment Summary from Taylor wh/ch listed her viatical settlement along with her TFG products and did not differentiate between them. (See Page 7 of 108 attached Exhibit "D.") The sales brochure that AUD received for her Rolls Royce/Cash 4 Title investment included Taylor's TFG business card. (See attached Exhibit "E.") 19. RESPONDENT TFG, acting through Taylor, failed to disclose to CLAIMANTS that: These Promissory Notes and viatical settlements were not registered with the Securities and Exchange Commission in violation of Section 5 of the Securities Act of 1933. (See attached Exhibit "F.") These Promissory Notes and viatical settlements were not registered with the State of Maryland. (See attached Exhibit 20. RESPONDENT TFG, acting through Taylor, misrepresented and omitted to disclose numerous material facts to CLAIMANTS concerning these promissory notes and viatical settlements, their operations, the risks involved in these investments, and the use of funds obtained from the sale of these investments to CLAIMANTS. TFG, acting through Taylor, failed to provide CLAIMANTS with a prospectus, offering memorandum or other risk disclosure documents for these investments and failed to provide any financial information to CLAIMANTS concerning these investments. 2i. ' RESPONDENT TFG, acting through Taylorl made ~he follo~'ing additional- misrepresentations of fact and failed to make the following disclosures, among others, to CLAIMANTS: RESPONDENT TFG, acting through Taylor, falsely represented that investor monies would be used to fund loans to companies engaged in the car title loan industry and the payday loan industry. RESPONDENT TFG, acting through Taylor, failed and neglected to 'disclose that only a small fraction of investor monies was used for its intended purpose in that the investment sponsors, after transferring Page 8 of 108 investor monies to Cayman Islands accounts, used the monies to pay existing investors, commissions and expenses. RESPONDENT TFG, acting through Taylor, failed and neglected to disclose that these investments were offered pursuant to a massive Ponzi Scheme. (See attached Exhibit "F.") 22. RESPONDENT TFG, acting through Taylor, failed to disclose to CLAIMANTS that RESPONDENT TFG had not conducted a proper due diligence into these investments. RESPONDENT TFG, allowed Taylor to hold himself out as a licensed representative of RESPONDENT TFG and did not disclose to CLAIMANTS that the finn had not reviewed these investments and that the finn was not properly supervising Taylor. 23. It is well-settled that a brokerage firm which recommends a security has a duty to ensure that its representations have a reasonable basis: In summary, the standards...are strict, lA salesman] cannot recommend a security unless there is an adequate and reasonable basis for such recommendation. He must disclose facts which he knows and those which are reasonably ascertainable. By his recommendation, he implies that a reasonable, investigation has been made and that his recommendation rests on the conclusions based on such investigation. Where the salesman lacks essential information about a security, he should disclose this as well as the risks which arise from his lack of information. Page 9 of 108 Hanl'ey v. SEC, 415 F.2d 589, 595-97 (2nd Cir. 1969) (emphasis added).~ In short, a broker-dealer must not only "know the customer", but the broker-dealer must also know the "security." RESPONDENT TFG and Taylor did not "know" Rolls Royce and Lifeline because they failed to conduct a reasonable investigation ("due diligence") into these investments before recommending these securities to CLAIMANTS. 24. Article III, Section 27 of the N~SD Rules of Fair Practice requires that each member establish and maintain a system to supervise the activities of each registered represefit'~tive that is reasonably designed to achieve compliance with applicable securities laws and regulations and with the rules of the NASD. It must include written procedures that are established, maintained, and enforced. TFG did not have an adequate system of supervision. There was no system for on-site or off-site supengsory review of representations, recommendations, and actions by their registered representatives. In actuality, TFG simply relied upon their off-site salesmen to supervise themselves. ~ See als0 Mac Robbins & Co., 41 S.E.C. 116-119 (1962), ~ Berko v, ~,~C~, 316 F.2d (2d Cir. 1963) ("The makfng of recommendations to prospective purchasers without a reasonable basis, couched in terms of either opinion or fact, designed to induce purchases, is contrary to the basis obligation of fair dealing borne by those who engage in the sale of securities to the public."); ~alll~it~!.,g~L~, 40 S.E.C. 986-990 (1962) (A broker's recommendation must be "responsibly made on the basis of actual knowledge and careful consideration."); Securities Exchange Act Release No. 6721 .(February_ 2. 1962) ("the making of recommendations for the purchase of a security implies that the dealer has a reasonable basis for such recommendations, which in turn, requires that, as a prerequisite, he shall have made a reasonable investigation:); Rice. Recommendations by a Broker-Dealer; ti)e. Requirement for a Reasonable Basis. 25 Mercer LRev. 537 (1974) (A broker that does not have a reasonable basis for recommending a particular security cannot satisfy the suitability rule, "since a broker-dealer would have difficulty contending that a recommendation was suitable for a given customer when you lack adequate information about the security involved.") Page 10 of 108 25. TFG'S failure to establish and implement adequate supervisory procedures over Taylor is inexcusable, particularly in view of the NASD's dissemination to TFG of NASD Notice to Members 86-65, dated September 12, 1986, which expressly warned NASD member firms that the NASD had observed a pattern of rule violations and other regulatory problems stemming from the employment of registered persons who engage in securities-related activities on a full and part-time basis at locations away from the offices of the member. The NASD pointed out that these off-site representatives, often classified for compensation purposes 'as independent contractors, are involved in other business enterprises such as insurance, real estate sales, accounting, or tax planning, and also frequently operate as separate business entities under names other than those of the members. The NASD made the following observations concerning the regulatory responsibilities of member firms that are of particular relevance to this case: Irrespective of an individual's location or compensation arrangements, all associated persons are considered to be employees of the firm with which they are registered for purposes of compliance with NASD rules, governing the conduct of registered persons and the supervisory responsibilities of the member. The fact that an associated person conducts business at a separate location or is compensated as an independent contractor does not alter the obligations of the indivj.'dual and the firm to comply fully with all app_licable regulatory requirements: Y..- ' : ~ 7 ' Firms employing off-site representatives are responsible for establishing and carrying out procedures that will subject these individuals to effective supervision designed to monitor their securities-related activities and to detect and prevent regulatory compliance problems. This can include: Educating off-site personnel regarding their obligations as registered persons to the finn and to the public, including prohibited sales practices. 2. Maintaining regular and frequent contact with such individuals. Page 11 of 108 Implementing appropriate supervisory practices, such as records inspections and compliance audits at the representatives'places of employment, to ensure that their methods of business and day-to-day operations comply with applicable rules and requirements. For greatest effectiveness in preventing and detecting violations, visits shouM be unannounced and include, for example, a review of on- site customer account documentation and other books and records, meetings with indivMual representatives to discuss the products they are selling and their sales methods, and an examination of correspondence and sales literature. Firms whose off-site personnel also engage in non-securities businesses should remind these individuals that correspondence pertaining to such businesses, unless submitted for review, may not include material related to securities transactions. If a member has designated an individual responsible for reviewing the activities of other registered persons within the firm, the office of that individual must be inspected annually, regardless of whether such person is compensated as an employee or as an independent contractor. The actions of an associated person in dealing with customers and customer account, regardless of whether he or she is compensated as an employee or an independent contractor, are actions on behalf of the firm. The firm is responsible for supervising in a manner designed to detect and prevent violations of Section 2 [the NASD suitability rule]. Members should take affirmative steps to ensure that off-site personnel understand and abide by NASD and firm policies regarding dealings with customers, customer account and customer funds. (gee Exhibit "A" attached hereto.) (Emphasis added.) 26. NASD Notice to Members 86-65 expressly urged each member to duplicate the Notice and distribute it individually to all associated persons, and indicated that the NASD, in the course of its member examinations, would make inquiry to ascertain that this Notice had been provided to all appropriate personnel. (See Exhibit "A.") Page 12 of108 · 27. Upon information and belief, TFG never gave a copy of NASD Notice to Members 86-65 to Taylor and failed to properly educate Taylor concerning his obligation as a registered person, including prohibited sales practices. 28. NASD Notice to Members 86-65 indicates it is not the first admonition by the NASD on this subject. As early as 1982 the NASD circulated to all member firms an SEC ~otice Concerning Independent Contractom dated June 18, 1982, which indicated that "to the extent that a firm forms a relationship with an independent contractor, that firm would be responsible for either (1) ensuring that the independent contractor was registered as a broker- dealer or (2) assuming the supervisory responsibilities attendant to a relationship with an associated person." The NASD noted that "it would be advisable if [this SEC Notice] were distributed to all registered and compliance personnel in your firm, including branch office personnel." (See Exhibit "H" attached hereto.) 29. RESPONDENT committed numerous violations of the NASD Rules of Fair Practice in handling these transactions with CLAIMANTS, including: A. Article III, Sections 1, 2, 18 and 19, by engaging in conduct inconsistent with high standards of commercial honor and just and equitable . principles of trade, recommending unsuitable transactions, engaging in deceptive or other fraudulent devices or contrivances, making material misrepresentations, failing to make material disclosures, and guaranteeing CLAIMANTS against loss in connection with their investments in Roils Royce and Lifeline; Article III, Section 27, by failing to establish and enforce a proper supervisory system over the activities of registered representatives that was reasonably designed to achieve compliance with applicable securities laws, rules, regulations, and statements of policy and procedure promulgated thereunder. 30. RESPONDENT'S violation of NASD rules constitutes negligence. As the Fifth Circuit observed in Miley v. Oppenheimei- & Co.. In¢,, 637 F.2d 318, 333 (Sth Cir. 1981), the Page 13 of108 "NYSE and NASD roles are excellent tools against which to assess in part the reasonableness or excessiveness of a broker's handling of an investor's account," and the lower court properly included a reference to these rules in its jury charge. See Mihara v. Dean Witter & Company~ Inc., 619 F.2d 814, 824 (9th Cir. 1980) ( ppellants contend that the admission of testimony ~A regarding the New York Stock Exchange and NASD rules served to dignify those rules and regulations to some sort of standard. 'i'he admission of testimony relating to those rules was proper precisely because the rules reflect the standard to which all brokers are held."). See alSO Dean 'Witter Reynolds. Inc. v. Hammock, 489 So.2d 761, 767 (1986) ("Case law is clear that evidence of violation of industry standards is admissible as non-conclusive evidence of negligence"); St. Louis-San Francisco R.R. Co. v. White, 369 So.2d 1007 (Fla. 1st D.C.A. 1979); St. Louis-San Francisco R.R. Co. v. Burlison, 262 So.2d 280 (Fla. 1st D.C.A. 1972); Clements v. Boca Aviation. Inc., ~.~.4 So.2d 597 (Fla. 4th D.C.A. 1984); Nance v. Winn Dix/e Stores. Inc., 436 So.2d 1075 (Fla. 3rd D.C.A. 1983); Reese v. Seaboard Coastline R.R. Co., 360 So.2d 27 (Fla. 4th.D.C.A. 1978). 31. Further, the contracts between RESPONDENT TFG and CLAIMANTS include not only securities industry rules and regulations, but also the internal rules and regulations . .:. established to govern the conduct of TFG'S own employees (Taylor), such as the internal ...... supervisory procedures and compliance manuals. (See, ~.., Miller v. Smith Barney~ Fed. Sec. L. Rpts. CCH ¶ 92,498 (1986) at 93,031.) For example, in Thropp v. Bache Halsey Stuart ~ 650 F.2d 817 (6th Cir. 1981), the Sixth Circuit rejected Prudential-Bache Securities Inc.'s argument that the District Court should not have relied on Bache's internal rules, as codified in its Standard Practice Instructions Manual, as evidence of the proper standard of care: Page 14 of 108 When a defendant has disregarded rules that it has established to govern the conduct of its own employees, evidence of those rules may be used against the defendant to establish the correct standard of care. The content of such rules may also indicate knOwledge of the risks involved and the precautions that may be necessary to prevent the risks. Montgomery v. Bait & Ohio R.R., 22 F.2d 359 (6th Cir. ~927). See also Prosser, The Law of Torts § 33 (4th Ed. 1971). The District Court correctly measured Bache's conduct by the standard of prudence it has estahiished for its own employees. Id. at 820. 32. RESPONDENT'S violations of the Maryland Administrative Code constitute negligence per se because these rules were enacted for the protection of investors such as CLAIMANTS. See, e._&, Palmer v. Shearson Lehman Hutton. Inc~, 622 So.2d 1085 (Fla. 1st DCA 1993); Twiss v. Kury, 25 F.3d 1551 (llth Cir. 1994). 33. RESPONDENT violated numerous TFG policies in connection with their Rolls Royce and Lifeline recommendations to CLAIMANTS. 34. The acts committed by RESPONDENT TFG and their employees, agents, and representatives, as alleged herein, were done by them personally through the use of the mails or other instrumentality of interstate commerce. The acts of RESPONDENT TFG and their employees, agents, or representatives as alleged herein are deemed to be the acts of and are chargeable to and binding upon TFG. ~ .... ~" -' -~ 35. RESPONDENT TFG is liable for CLAIMANTS' transactions with Taylor even if RESPONDENT TFG properly supervised Taylor, even if RESPONDENT were not aware of these recommendations by its stockbroker, even if RESPONDENT TFG did not approve of these recommendations by the firm's stockbroker, and even if CLAIMANTS' Rolls Royce and Lifeline transactions were not processed through RESPONDENT TFG. The Fifth Circuit Page 15 of 108 Court'of Appeals had the fol/owing to say on this precise issue in the case of Lewis v. Walstorl & Co~. 487 F.2d 617, 623-24 (5th Cir. 1973): Walston argues that [the broker] was acting beyond the scope of her employment. For example, Walston did not deal in unregistered securities. Moreover, [the broker] and the brokerage house did not perform their usual role as brokers; that is, the transaction did not involve the broker's placing an order through the house's New York office, which was then executed by the central office. In this regard, they note that Walston never stood to receive, and never did receive, any commission or other financial benefit from the direct and essentially private exchange [the broker] arranged .... Id. at 623-24. None of these superficially supportive bases for Walston's argument precludes the conclusion that [the broker's] actions were within the scope of her employment. That Walston did not deal in unregistered securities addresses only the question whether [the broker's] conduct was authorized;.., however, conduct may be within the scope of employment even if it is unauthorized, if it is sufficiently similar to authorized conduct. That the transactions did not involve the execution of an order through the brokerage house also does not necessarily mean that [the broker's] acts were without the scope of her employment. Brokers may and do take many actions in the course of their dealings with customers. that do not relate directly to transactions executed through the brokerage house; these actions are not for that reason necessarily beyond the scope of the broker's employment. That Walston did not receive any · financial benefit from the transaction is not of controlling importance. If a particular act is authorized, or sufficiently similar to an authorized act, finding that act to be within the scope of employment does not r..~quire that the act has conferred any particular benefit, financial or otherwise, on the employer. Id. at 624. ' ' -'.' 36. Likewise, the Sixth Circuit Court of Appeals opined in the case of Howerdd 536 F.2d 690, 695-96 (6th Cir. 1976): [TSI, the broker-dealer, contends] "that it had no knowledge of nor reasonable grounds to believe in the existence of [the broker's] activity in publicly selling unregistered stock." Id. at 695. However, those persons who knew of [the broker's] status with TSI and Who were without knowledge that he was acting separately from TSI. were [correctly] permitted .to recover. Page 16 of 108 The liability of TSI is premised on the theory that "if one appoints an agent to conduct a series of transactions over a period of time, it is fair that he should bear losses which are incurred when such an agent, although without authority to do so, does something which is usually done in connection with the transactions he is employed to conduct.', There was no proof that TSI "usually" engaged in the sale of unregistered stock. - TSI, however, had an affirmative obligation to prevent use of the prestige of its firm to defraud the investing public. When its agents are dealing individually in the sale of securities TSI must be clearly disassociated from those transactions~ as otherwise it will incur liability on the basis of respondeat superior for the fraudulent representations of its agents. [T]he District Judge correctly.., held TSI liable to those plaintiffs who were without knowledge of limitations on the agent's authority. Id. at 696.2 -- 37. RESPONDENT TFG is liable because they participated in, .aided, and/or supervised all of the transactions heretofore mentioned. RESPONDENT TFG is also liable under the doctrines of respondeat superior, licensing, controlling person, and agency principles for the negligent actions and breaches of duty by Taylor while in the ,scope of his employment/apparent authority with TFG. · 38. CLAIMANTS have been greatly damaged as a result of RESPONDENT'S... misconduct. Instead of receiving safety and income, CLAIMANTS were saddled with umegistered and fraudulent investments. CLAIMANTS seek the recovery of damages in the amount of $863,500, not including interest at the legal rate, reasonable attorney's fees, benefit of the bargain damages, lost opportunity costs, model portfolio damages, and prejudgment 2 Henricksen v. Henricksen and Smith Barney, 640 F.2d 880, 887 (7th Cir. 1980) ("Under common law principles, a principal is liable for the deceit of its agent committed in the very business he was appointed to carry out. This is true even though the latter's specific conduct was carried on without ~ of the principal.") Page 17 of 108 interest from RESPONDENT. See Nordvne v. Florida Mobile Home Supply, 625 So. 2d 1283 (Fla. 1st DCA 1993) (wherein the Florida Court of Appeals held that "evidence of profits that [the victim] would have realized in the ensuing.., years was relevant because it tended to prove the position that the [victim] would have been in but for [the] wron~ul acts." 39. It is also well-settled that pre-judgment interest is an automatic element of damages which is mathematically computed as of the date of the wrongdoing (purchase). Argonaut Insurance CO, v, May Plumbing (7o., 474 So. 2d 212 (Fla. 1985), wherein the court stated that: Plaintiff is to be made whole from the date of the loss once a finder of fact has determined the amount of damages and defendant's liability therefor .... Computation of prejudgment interest is merely a mathematical computation. There is no 'finding of fact' needed. Thus it is a purely ministerial duty of the trial judge or clerk of thc court to add the appropriate amount of interest to the principal amount Of thc damages awarded in the verdict .... Furthermore, just as the loss theory forecloses discretion in the award of prejudgment interest, there is no discretion in the rate of that interest. The legislature has established a statutory interest rate [12%] which controls prejudgment interest. §687.01, Fla. Stat. I.~ at 214-215. See also Wickham'Contracting v. Local Union No. 3, 955 F.2d 831,836 (2d Cir. 1992). 40. RESPONDENT'S failure to conduct a proper due diligence, misrepresentations, omissions and unsuitable recommendations to cLAIMANTS were egregious, as Were'' RESPONDENT TFG'S supervisory omissions. These acts by RESPONDENT TFG and its agents constitute independent torts for which CLAIMANTS seek recovel~. In addition, these acts were done with wanton, reckless disregard of the fights and property of CLAIMANTS and CLAIMANTS are also entitled to punitive damages in an amount to be determined by the arbitration panel. Page 18 of 108 41. Punitive damages are further warranted due to RESPONDENT'S fraudulent concealment of their misconduct, which constitutes an independent tort for which CLAIMANTS seek recovery. Taylor continuously assured CLAIMANTS that Rolls Royce and Lifeline were safe investments and that their principal was not in danger. RESPONDENT failed to disclose the inaccurate and incomplete nature of Taylor's representations, failed to conduct proper due diligence, and failed to disclose that these securities were unregistered and afraud. 42:, RESPONDENT'S failure to disclose the inaccurate and incomplete nature of Taylor's representations, its lack of due diligence, and the fact that Rolls Royce and Lifeline were unregistered and fraudulent, not only warrant punitive damages but toll all statute of limitations periods in view of RESPONDENT'S fiduciary relationship with ~MANTS and constitute independent torts for which CLAIMANTS seek recovery. The Southern District of Florida made the following statement on the issue of fraudulent concealment in a fiduciary relationship: ...IT]he law of fraud 'does not require that an aggrieved party have proceeded from the outset as though he were dealing with thieves.' First Federal Savines & Loan Assoc. v. Dade Federal Savings & Loan Assoc.~ ~03 So.2d 1097, 1100 (5th fiCA 1981). The existence of a fiduciary relationship between the Plaintiff and the'Defendant, and silence on the part of the Defendant when there is a duty to disclose facts, can constitute a fraudulent withholding of facts. Less than full disclosure on the part of a Defendant in a fiduciary relationship lawsuit, can be sufficient to establish fraudulent concealment. 3~YJlfi~Y2~g~r, 779 F. Supp. 164, 168-69 (S.D. Fla. 1991). In short, where a fiduciary relationship exists, acts of omission (failure to disclose material facts) can constitute fraudulent concealment. Page 19 of 108 143. This can also be seen in Vucinich v. PaineWegber Jackson& Curtis. Inc. et al, 803 F.2d 454 (9th Cir. 1986), where the court held that the fiduciary relationship that exists between a broker and his customer imposes upon the broker the duty to monitor the customer's account and affirmatively advise the client as .to any changed circumstances. The Court found that the broker's representations regarding monitoring of a customer's account tolled the running of the statute of limitations [e.g., the prescription period] until such time as the broker fulfilled his obligation to advise the customer regarding matters relevant to possible misrepresentations. (Citing Twomey v. Mitchum. Jones, & Templeton. Inc., 262 Cal. App. 2d 690 727~729, 69 Cal. Rptr. 222 (1968). Further, the fraudulent concealment cannot be mitigated by the mere forwarding of a prospectus containing information that contradicts material representations made orally to investors. Luksch et al. v. Latham, 675 F. Supp. 1168 (N.D. Cal. 1987). See also In Re Robert A. Foster, Sec. Ex. Rel. No. 34408 (July 20, 1994)("broker/dealers and their registered representatives 'owe a special duty of fair dealing to their clients.' The making of misrepresentations runs directly contrary to those fiduciary duties" and can render a broker/dealer liable in private actions "even where the investor has access t_o.a prospectus.providing full disclosure"). 44. Both the Florida courts and the Eleventh Circuit have made clear that a broker owes a fiduciary duty to a customer. In Gochnauer v. A.G. Edwards & Sons. Inc., 810 F.2d 1042 (llth Cir. 1987), the Eleventh Circuit made clear that a broker's fiduciary duty included "a duty to only recommend stocks which he has sufficiently investigated," "a duty to inform its customer of the risks involved in purchasing or selling particular securities," "a duty to refrain from self-dealing or refusing to disclose any personal interest in any particular transaction," and "a duty not to misrepresent any material fact." See al~o Thompson v. Smith Barney Page 20 of 108 Harris Upham & Co.. Inc., 709 F.2d 1413, 1418 (llth Ci[. 1983) ("The law is clear that a broker owes a fiduciary duty of care and loyalty to a securities investor.") 45. Numerous courts around the country have recognized the fiduciary duty that stockbrokers owe to their clients. See Mansbach?. Prescott. Ball & Turben~, 598 F.2d 1017 (6th Cir. 1979) (a securities broker dealer is a fiduciary who owes its customer a high degree of care in transacting business); Roll v. Blyth. Eastman Dillon & Co., 570 F.2d 38 (2nd Cir. 1978) (registered representative, as broker for investor, owed investor a fiduciary duty); Moholt v. Dean Wi~¥er Reynolds. Inc., 478 F. Supp. 451 (D.D.C. 1979) (stockbrokers are in a position of quasi-fiduciaries and are held to high degree of trustworthiness and fair dealing); Pachter V. Merrill Lynch. Pierce. Fenner & Smith. Inc., 444 F. Supp. 417 (E.D.N.Y. 1978) (brokerage firm and the account executive assigned to service plaintiff's account were bound,, as plaintiff's agents, to exercise "the utmost good faith" toward him); Thropp v. Bache Halsey Smart Shields. Inc,, 650 F.2d 817 (6th Cir. 1981) (as fiduciary, stockbroker, under Florida law, stands in special relationship to client and owes him duty to use reasonable care and to act in good faith); Leboce. S.A.v. Merrill Lynch. Pierce. Fenner & Smith. Inc., 709 F.2d 605 (gth Cir. !983) (California law imposes fiduciary obligations on broker where broker, for all practical purposes, controls the account); Jaksich v. Thomson McKinnon Securities. Inc., 582 F.Supp. 485 (S.D.N.Y. 1984) (under New York law, securities brokers maintain fiduciary duties to their customers, and relationship between the two parties is one of principal and agent); Universi _ty of Agriculture and Applied Science v. Sutro & Co,, 646 P.2d 715 (Utah 1982) (stock brokers have an especially high degree of care to ascertain the authority of a trustee dealing with public funds); E.F. Hutton & Co, v. Weeks, 166 Ga.App. 443,' 304 S.E.2d 420 (1983) Page 21 of 108 (broker's duty to account to its customer is fiduciary in n~ture, resulting in obligation to exercise the utmost good faith). 46. All limitations periods are tolled under the legal doctrines of accrual, continuous treatment, continuous representation? and continuing wrong.3 See~, ~ Keller v. Reed.. 603 So.2d 717, 719 (Fla. 2d DCA 1992) (accrual); Hall v. Steiner, 543 N.Y.S.2d 190 (N.Y. App. Div. 1989) (continu6hs treatment); Wilder v. Meyer, 779 F. Supp. 164 (S.D. Fla. 1991) (continuous representation); and Newport Largo. inc. v. Monroe County, 706 F. Supp. 1507 (S.D. FI~' 1988) (continuing wrong). Further, all limitations periods are tolled under the doctrine of"blameless ignorance" or "contra non valentum agere nulla curritprescffpt~'on." This doctrine stops the running of the limitations period when the cause of action is not known or reasonably knOWable by CLAIMANTS even if their ignorance was not induced by RESPONDENT. Stated simply, CLAIMANTS did not comprehend that they had been sold unregistered and fraudulent investments and that their legal rights had thus been violated. CLAIMANTS did not discover the fraud until 1999 at the earliest. 47. In Miley v. Oppenheimer & Co.. In% 637 F.2d 318, 332 (5th Cir. 1981), the Fifth · Circuitc.itedthe.f~wingpassagefr~mG~dberg~sb~kentit~edFraudulent-Dealer~Prac~c~e$ ...... in support of awarding punitive damages that is very appropriate in this case: Most courts in the past have seen fit, when they find the broker-dealer's hand in the till, to simply request the removal of the offending appendage. And when the till is empty, and the broker-dealer's fingerprints are all that remain where the money once lay, all the courts do is to require the crook to replace the booty. If ever there was a situation where crime pays it is in such circumstances; heads the dishonest broker-dealer wins and tails everyone breaks even. No wonder one commentator saw fit to term the average recovery in trading cases as creating for the broker-dealer a "low risk larceny." 3Statutes of limitation of course only apply in civil actions, not arbitration proceedings. Page 22 of 108 ~.. IT]he only sure way of deterring such conduct in the future is to take the profit away from the wrongdoers and slap on an additional amount as punitive damages: an award equal to treble damages would be fair, reasonable, and well within the public interest. 48. CLAIMANTS has suffered mental anguish, emotional d/stress, humiliation and inconvenience from the loss _of use of their property. CLAIMANTS seek recovery for these non-economic injuries. COUNT I VIOLATION OF MARYLAND SECURITIES ACT .49:. CLAIMANTS reallege, reaffirm and reincorporate paragraphs 1 through 48 above, as ff fully contained herein. A. FAILURE TO REGISTER ROLLS ROYCE AND LIFELINE IN 50. Section 11-501 of the Maryland Securities Act states that it is unlawful to offer or sell any security in Maryland unless the security is registered under the Act. 51. Section 11-703(a)(1)(i) and Section 11-703(b)(1)(i) of the Maryland Securities Act state that every sale made in violation of Section 11-501 may be rescinded at the election of the purchaser. Pursuant to such rescission, the purchaser is entitled to recover the consideration pa/d for ihe security, plus interest at tile legal rate from the date o~pU-rchase -a-s ...... well as a reasonable a ' ttorney s fees. 52. Given the lack of registration of Rolls Royce and lifeline in Maryland, CLAIMANTS are entitled to rescission of their investments as well as legal interest and attorney's fees. Page 23 of 108 UNSUITABLE RECOMMENDATIOr~S, MiSREpRESENTATiONS, OMISSION OF MATERIAL FACT, AND GUARANTEE AGAINS[ LOSS 53. Sections ll-703(a)(1)(ii) and 11-703(b)(1)(i) also state that a purchaser is entitled to rescission, along with legal interest and attorney's fees, from a brokerage firm that offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading. 54:' RESPONDENT TFG, acting through Taylor, made numerous false and misleading statements to CLAIMANTS concerning Rolls Royce and Lifeline and failed to disclose numerous material facts to CLAIMANTS concerning Rolls Royce and Lifeline, all as more fully stated above. CLAIMANTS accordingly are entitled to rescission of their Rolls Royce and Lifeline transactions pursuant to Section 11-703 of the Maryland Securities Act. 55. RESPONDENT TFG is liable under the doctrine of respondeat suj~erior for Taylor's violations of the Maryland Securities Act. In addition, TFG is liable under the Maryland Securities Act, Section 11-703(c), as the controlling person over Taylor's activities. Maryland has adopted the Uniform Blue SkYAct which makes not only the perpetrator liable but also every broker/dealer or agent who directly or indirectly controls a Pe;~on Whine - activities constitute violations of the Act. That is to say, if a CLAIMANTS can show that the statute was violated, the v/ctim is automatically entitled to the mandated recovery. WItEREFORE, CLAIMANTS pray for compensatory damages under the Maryland Securities Act, interest at the legal rate, reasonable attorney's fees under the Maryland Securities Act, and punitive damages. Page 24 of 108 COUNTI! BREACH OF CONTRACT 56. CLAIMANTS reallege, reaffirm and reincorporate paragraphs 1 through 55 above as ff fully contained herein. 57. The contractual relationships which were entered into between CLAIMANTS and TFG incorporate by reference a brokerage house's duty to comply with all laws, rules, and regulations governing the transactions between RESPONDENT and CLAIMANTS. It must be emphasized that RESPONDENT fraudulently induced CLAIMANTS to enter into this contractual relationship by, among other things, the false representations and non-disclosures of material facts by Taylor that are itemized in this Statement of Claim. 58. RESPONDENT violated, among others, the following rules of the .NASD Rules of Fair Practice in handling these Roils Royce and Lifeline transactions with CLAIMANTS, including: Article III, Sections 1, 2, 18 and 19, by engaging in conduct inconsistent with high standards of commercial honor and just and equitable principles of trade, recommending unsuitable transactions, engaging in deceptive or other fraudulent devices or contrivances, making material misrepresentations, failing to make material disclosures, ~and guarm~teeing CLAI/vlANTS against loss in connection with their Rolis Royce and Lifeline transactions; and Article III, Section 27, by failing to establish and enforce a proper supervisory system over the activities of registered representatives that was reasonably designed to achieve compliance with applicable securities laws, rules, regulations, and statements of policy and procedure promulgated thereunder. 59. RESPONDENT'S violation of the Maryland Administrative Code constitutes negligence per se because these rules were enacted for the protection of investors such as Page 25 of 108 CLAIMANTs. See, e.g., Palmer v. Shearson Lehman Hutton, Inc., 622 So.2d 1085 (Fla. 1st DCA 1993); Twiss v. Kury, 25 F.3d 1551 (llth Cir. 1994). 60. These infractions breached the contractual relationsh/p between CLAIMANTS and RESPONDENT, which incorporated a brokerage firm's duty to comply with the industry rules, customs and procedures governing the transactions with CLAIMANTS. "[W]e note a number of cases in which customers of stockbrokers are deemed to have contemplated and authorized a course of dealing in accordance with rules and customs of the stock exchanges. Thus, the-exchange rules are deemed incorporated into any agreement between customer and broker." Brumm v. McDonald & Co. Sec., 603 N.E.2d 1141, 1147 (Ohio Ct. App. 1992) (citations omitted); Iowa Grain v. Farmers Grain and Feed, 293 N.W.2d 22 (Iowa 1980); White_ v. Merrill Lynch. Pierce. Fenner & Smith, 218 A.2d 655 (N.J. Super. Ct. 1966). See also Midwest Television v. Scott. Lancaster. Mills & Atb~, 252 Cal. Rptr. 573, 579 (Cal. Ct. App. 1988) ("The industry practice becomes a part of the contract, and the exSdence of such custom is admissible .... "). 61. The contracts between RESPONDENT TFG and CLAIMANTS are further defined by the internal rules and regulations established to govern the conduct of ESPONDENT S own employees, such as internal supervisory procedures and compliance manuals. (See, e.g.. ' v~!i]l~r~i!kt~t~l~, Fed. Sec. L. Rpts. CCH '1192,498 (1986) at 93,031.) ("The relat/ons between [brokerage firm and customer] were not defined solely in terms of the joint account agreement, but also.., by the internal rules and regulations established to 'govern the conduct of [the firm's] own employees"). For example, in Throw v. Bache Halsey s~,~gJ~Ijl~ 650 F. 2d 817 (6th Cir. 1981), the Sixth Circuit rejected Prudential-Bache Securities Inc.'s argument that the DistriCt Court should not have relied on Bache's internal Page 26 of 108 rules, as codified in its Standard Practice Instructions Manual, as evidence of the proper standard of care: When a defendant has disregarded rules that it has established to govern the conduct of its own employees, evidence of those rules may be used against the defendant to establish the correct standard of care. The content of such rules may also indicate knowledge of the risks involved and the precautions that may be necessary to prevent the risks. Montgomery_ v. Bait & Ohio R.R., 22 F.2d 359 (6th Cir. 1927)..See also Prosser, ~ {}33 (4th ed. 1971). The District Court correctly measured Bache's conduct by the standard of prudence it has established for its own employees. Id. at 820. 62. RESPONDENT violated many of its own internal rules and procedures in handling these transactions with CLAIMANTS. 63. RESPONDENT also violated the duty of commercial reasonableness, fair dealing, and good faith, required of all parties to a contract. "Hornbook Law implies a covenant of good faith and fair dealing into the performance and enforcement of every contract .... [G]ood faith is part of every contract .... "First Texas Say. Ass'n v. Comprop Inv. Properties, 752 F. Supp. 1568, 1573 (M.D. Fla. 1990); Burger King Corp.. v. Austin. 805 F. Supp. 1007 (S.D. Fla. 1992). This covenant of fair dealing is particularly demanding for stockbrokers and brokerage firms, who are expert fiduciaries of their customers, who obtain their commissions only after advising and inducing customer investments, and who are thereby subject to an inherent conflict of interest. [P]etitioner acted simultaneously in the dual capacity of investment advisor and of broker and dealer. In such capacity, conflicting interests must necessarily arise. When they arise, the law has consistently stepped in to provide safeguards in the form of prescribed and stringent standards of conduct on the part of the fiduciary. 174 F.2d 969 (D.C. Cir. 1.949). Page 27 of 108 6~. The - · . .' · covenant of good falth and fmr dealing reqmred RESPONDENT to do what the contract presupposed would be done to accomplish its purpose and to protect the contracting parties' reasonable expectations. It presupposed that RESPONDENT would comply with applicable industry and governmental rules, provide all necessary information to CLAIMANTS, and act reasonably and in good faith to recommend suitable investments for CLAIMANTS in light of CLAIMANTS' financial circumstances and needs. RESPONDENT violated this covenant by putting their own interests first, not complying with industry rules, recomn!.ending wholly unsuitable investments to CLAIMANTS, and misrepresenting, concealing and not supplying material information. CLAIMANTS suffered damages from these breaches of covenant and are entitled to recompense. 65. RESPONDENT'S infractions breached its written contract with the NASD to follow securities laws and NASD rules. As a condition of RESPONDENT'S NASD membership application pursuant to Article III, Section 1 of the NASD By-Laws, RESPONDENT contracted with the NASD to comply with all NASD rules, federal securities laws, and federal securities rules and regulations in the handling of customer accounts. 66. Defrauded customers such as CLAIMANTS are intended third-party beneficiaries of RESPONDENT'S agreement with the NASD to comply with securities laws and regulations and NASD rules. CLAIMANTS are entitled to redress for KESPONDENT'S breaches of these contracts. Oppenheimer & Co. v. Neidhardt, [Current Binder] Fed. Sec. L. Rep. (CCH) ¶98,224 (S.D.N.Y. May 4, 1994) (customers are third-party beneficiaries of brokerage firm's obligation to follow NASD rules); Scobee Funeral Home v. E.F. Hutton & Co., 711 F Supp. 605, 607 (S.D. Fla. 1989) (customers are third-party beneficiaries of NASD requirements); Creative Sec. v. Bear Ste&rns & Co., 671 F. Supp. 961, 966 (S.D.N.y. 1987) Page 28 of 108 ("Many ~ourts recognize that securities exchange members 'are contractually bound by the regulations of their organizations."); Axelrod & Co. v. Kordich, Victor & Neufeld.~ 451 F.2d 828, 841 (2d Cir. 1971) ("Each member firm, by virtue of its admission, agrees to be governed bY the Exchange's constitution and rules. When a transaction of purchase and sale of any security is effected, the contract is subject to all the provisions of the Exchange's constitution and rules .... These provisions are binding on exchange members.") 67. The RESPONDENT'S failure to comply with the contracts between the parties and wit. l'}.the laws, rules, and regulations governing the contracts between the parties, was intentional or reckless and was done in willful and wanton disregard of CLAIMANTS' rights. All of RESPONDENTS actions and omissions were done solely for the purpose of generating commissions, and as such is conduct for which the RESPONDENT should be punished. WHEREFORE, CLAIMANTS request this panel to enter an award for actual and rescissionary damages together with benefit of the bargain damages, lost opportunity costs, model portfolio damages, prejudgment interest, costs, non-economic damages, attorney's fees, punitive damages in an amount to be determined by the arbitrators, and such other relief as is deerr/ed proper and necessary. COUNT III COMMON LAW FRAUD 68. CLAIMANTS reallege, reaffirm and rein¢orporate paragraphs 1 through 67 above, as ff fully contained herein. 69. All of the misrepresentations and omissions of RESPONDENT were done with .the intent to mislead CLAIMANTS and with the specific intent to have CLAIMANTS rely on said misrepresentations and omissions. ~At a minimum, the misrepresentations were done Page 29 of 108 recklessly, without knowledge of their truth or falsity. CLAIMANTS did rely thereon and made investments to their detriment causing substantial losses. 70. Further, RESPONDENT'S misrepresentations and omissions constitute constructive fraud, which entails the use of a confidential or fiduciary relationship to take advantage of another. 71. The fraud, the misrepresentations, and the omissions claims are quasi- contractual in nature and arose from and are implied from the contractual relationship betwee.n. C~MANTS and RESPONDENT. These claims also arose independently from the contractual relationship between CLAIMANTS and RESPONDENT. WI-IEREFORE, CI-AIMANTS request this panel to enter an award for actual damages and rescission together with benefit of the bargain damages, lost opportunity costs, model portfolio damages, prejudgment interest, costs, non-economic damages, attorney's fees, punitive damages in an amount to be determined by the arbitrators, and such other relief as is deemed proper and necessary. COUNT 1V BREACH OF FIDUCIARY DUTX 72. CLAIMANTS reallege, reaffirm and reincorporate paragraphs I through 71 above, as if fully contained herein. 73. At all times relevant hereto there existed between the RESPONDENT and CLAIMANTS a fiduciary relationship by reason that: The RESPONDENT at all times possessed superior knowledge, judgment, skill, and experience in the securities market in contrast to CLAIMANTS' lack of meaningful knowledge and understanding in that CLAIMANTS could not fully appreciate the substantial risk to which their monies were exposed;' and Page 30 of 108 B. The RESPONDENT at all times had access to the books, records, and other sources of information concerning the financial and operating condition, rules, and policies of the RESPONDENT, the NASD, and the State Statutes and Administrative Codes. This information was not readily accessible to CLAIMANTS; and C, Taylor at all times while handling CLAIMANTS' monies was an experienced and skilled account executive acting within the scope of his employment and authority and apparent authority with TFG. 74. This fiduciary duty arose from and is implied from the contractual relationship b.etween CLAIMANTS and RESPONDENT. This fiduciary duty also arose independently from th.e-contractual relationship between CLAIMANTS and RESPONDENT. 75. Because of the RESPONDENT'S superior knowledge, skill, judgment, and experience in the securities market, the RESPONDENT owed to CLAIMANTS a duty to recommend suitable investments, to disclose all material facts, and to refrain from. misleading CLAIMANTS. Further, the RESPONDENT owed this fiduciary duty to protect and further CLAIMANTS' interests over and above their desire to generate commissions through transactions with CLAIMANTS and to promote their own interests. TFG specifically had a duty by virtue of this fiduciary relationship with CLAIMANTS to conduct a proper due diligence, to supervise Taylor's recommendations and representations, and to disclose' to CLAIMANTS that the Rolls Royce and Lifeline securities were unregistered, high-risk investments, that Rolls Royce and Lifeline were frauds, that Taylor's representations to CLAIMANTS concerning their Rolls Royce and Lifeline investments were incomplete and inaccurate, and that RESPONDENT TFG was not properly supervising Taylor. 76. Both the Florida courts and the Eleventh Circuit have made clear that a broker owes a fiduciary duty to a customer. In Gochnauer v. A.G. Edwards & Sons. Inc~., 810 F.2d 1042 (llth Cir. 1987), the Eleventh Circuii made clear that a broker's fiduciary duty included Page 31 of 108 "a duty tl only recommend stocks which he has sufficiently investigated," "a duty to inform his customer of the risks involved in purchasing or selling particular securities," "a duty to refrain from self-dealing or refusing to disclose any personal interest in any particular transaction," and "a duty not to misrepresent any material fact." .~ee .also) Thompson v. Smith Barney, Anderson Upham & Co., Inc., 709 F.2d 1413, 1418 (llth Cir. 1983) ("The law is clear that a broker owes a fiduciary duty of care and loyalty to a securities investor.") 77. Numerous courts around the country have recognized the fiduciary duty that stockbrokers owe to their clients. See Mansbach v. Prescott. Ball & Turben, 598 F.2d 1017 (6th Cir. 1979) (a securities broker dealer is a fiduciary who owes his customer a high degree of care in transacting business); Rolf v. Blyth. Eastman Dillon & Co~., 570 F.2d 38 (2nd Cir. 1978) (registered representative, as broker for investor, owed investor a fiduciary duty); Moholt v, Dearl Witter Reynolds. Inc., 478 F.Supp. 451 (D.D.C. 1979) (stockbrokers are in a position of quasi-fiduciaries and are held to high degree of trustworthiness and fair dealing); Pachter v, Merrill Lynch, Pierce. Fenner & Smith. Inc., 4,14 F.Supp. 417 (E.D.N.Y. 1978) (brokerage fn-m and the account executive assigned to service plaintiff's account were bound, as plaintiff's ~gents, to exercise "the utmost good faith" toward him); Thropp v. Bache Halsey Stuart: ~, 650 F.2d 817 (6th Cir. 1981) (as fiduciary, stockbroker, under Florida law, stands in special relationship to client and owes him duty to use reasonable care and to act in good faith); Leboce, S.A.v. Merrill Lynch. Pierce. Fenner & Smith. Inc.~, 709 F.2d 605 (9th Cir. 1983) (California law imposes fiduciary obligations on broker where broker, for all practical purposes, controls the account); Jaksich v. Thomson McKinnon Securities. Inc., 582 F. Supp. 485 (S.D.N.Y. 1984) (under New York law, securities brokers maintain fiduciary duties to their customers, and relationship between the t~vo parties is one of princlpal and agent); ~ Page 32 of 108 Universi .ty of A~culture and Applied Science v. Sutr0 & Co., 646 P.2d 715 (Utah 1982) (stock brokers have an especially high degree of care to ascertain the authority of a trustee dealing with public funds); E.F. Hutton & Co. v. Weeks, 166 Ga. App. 443, 304 S.E.2d 420 (~983) (broker's duty to account to its customer is fiduciary in nature, resulting in obligation to exercise the utmost good faith). 78. Because' of the fiduciary relationship between CLAIMANTS and the RESPONDENT, CLAIMANTS reasonably rehed t0their detriment on the RESPONDENT'S superior l~nowledge, skill, judgment, and experience in handling their monies. 79. RESPONDENT knowingly and deliberately breached its fiduciary duty to CLAIMANTS by making material misrepresentations, failing to conduct a proper due diligence investigation, failing to make material disclosures, and investing in .unsuitable securities in total disregard for CLAIMANTS' best interest, solely for the purpose of enriching and protecting the RESPONDENT, and concealing the unsuitable nature of the transactions by not making the requisite disclosures to CLAIMANTS. The RESPONDENT'S disregard and violation of the rules of the SEC and NASD governing its conduct and the conduct of its agents and employees constitutes a breach of fiduciary duty to CLAIMANTS. ~ ..... ........ 80. RESPONDENT also breached its fiduciary duty by failing to ensure compliance with all applicable State statutes and rules, including those relating to misrepresentations and omissions in the sale of securities, suitability, and registration. 81. RESPONDENT is jointly and severally liable because it participated in, supervised, or approved the previously noted transaction. In addition, TFG is jointly and severally liable under the principles of agency, licensing, controlling person, and respondeat superior for the damage caused to CI.A/MANTS by the breach of their fiduciary duty. Page 33 of 108 82. The acts committed by RESPONDENT, as alleged herein, were done by them personally through the use of the mails or other instrumentality of interstate commerce. The acts of TFG, and each employee, agent, or representative of TFG, including Taylor, are deemed to be the acts of and are chargeable to and binding upon TFG. 83. It is well-settled law that "an employer is vicariously liable for compensatory damages resulting from the negligent acts of employees committed within the scope of their employment even if the employer is without fault.'" See, e.g~, Mercury_ Motors Express. Inc~ v. Smith; 393 So. 2d 545, 549 (Fla. 1981). 84. RESPONDENT'S breach of its fiduciary duty to CLAIMANTS constitute conduct for which the RESPONDENT deserves to be punished to deter RESPONDENT from engaging in the same or similar conduct in the future. WHEREFORE, CLAIMANTS request this panel to enter an award for actual damages together with benefit of the bargain damages, rescissionary damages, lost opportunity costs, model portfolio damages, prejudgment interest, costs, non-economic damages, attorney's fees, punitive damages in an amount to be determined by the arbitrators, and such other relief as is deemed proper and necessary ....... COUNT V NEGLIGENCE AND GROSS NEGLIGENCE 85. CLAIMANTS reallege, reaffirm and reincorporate paragraphs I through 84 above, as if fully contained herein. 86. RESPONDENT, by virtue of their position as CLAIMANTS' broker-dealer, their professional skill and ability, the level of confidence and care imposed upon other broker dealers in similar positions, and its fiducihry obligations owed CLAIMANTS due care. The Page 34 of 108 industry standard of care is set forth by the NASD, the sEC rules, the Maryland Act and Administrative Code, and the firm's own internal guidehnes. 87. RESPONDENT'S violation of NASD Rules constitute negligence. As the Fifth Circuit observed in Miley v. Oppenheimer & Co.. Inc,, 637 F.2d 318, 333 (5th Cir. 1981), the "NYSE and NASD rules are excellent tools against which to assess in part the reasonableness or excessiveness of a broker's handling of an investor's account," and the lower court properly included a reference to these rules in its jury charge.' See Mihara v. Dean Witter & Company, Inc., 619 -F.2d 814, 824 (gth Cir. 1980) ("Appellants contend that the admission of testimony regarding the New York Stock Exchange and NASD rules served to dignify those rules and regulations to some sort of standard. The admission of testimony relating to those rules was proper precisely because the rules reflect the standard to which all brokers are held.~') ~ Dean Witter Reynolds. Inc. v. Hammock, 489 So.2d 761, 767 (1986) ("Case law is clear that evidence of violation of industry standards is admissible as non-conclusive evidence of negligence"); St. Louis-San Francisco R.R. Co. v. White, 369 So.2d 100'~ (Fla. 1st D.C.A. 1979); St. Louis-San Francisco R.R. Co. v. Burlison, 262 So.2d 280 (Fla. 1st D.C.A. 1972); Clements v. Boca Aviation. Inc~, 44~ So.2d 597 (Fla. 4th D.C.A. 1984); Nance x;. Winn Dixie Stores. Inc., 436 So:2d 1075 (Fla. 3rd D.C.A. 1983); Reese v. Seaboard Coastline R.R. Co., 360 So.2d 27 (Fla. 4th D.C.A. 1978). 88. RESPONDENT'S violations of the Maryland Administrative Code constitute negligence per se because these rules were enacted for the protection of investors such as CLAIMANTS. ~ee, e.g., Palmer v. Shearson Lehman Hutton. Inc., 622 So.2d 1085 (Fla. 1st DCA 1993); Twiss v. Kury, 25 F.3d 1551 (llth Cir. 1994). Page 35 of 108 89J TFG had supervisory duties over Taylor and failed to diligently and properly supervise their officers, employees, and agents. 90. Taylor was at all times material hereto acting within the scope/apparent scope of his employment with TFG and TFG is also liable under principles of respondeat.quperior, licensing, controlling person and agency. 91. RESPONDENT'S conduct, as set forth in previous Counts, is a breach of its duty to CLAIMANTS. 9.2~, RESPONDENT breached its duty to CLAIMANTS by failing to provide sufficient control and supervision over their officers, employees, agents, and registered representatives and in not enstaSng compliance with the applicable federal and state securities laws, rules, regulations, policies, self-regulatory organization policies, and procedures. 93. The RESPONDENT;S actions as set forth above constitute both negligence and gross negligence. 94. As a result of the RESPONDENT'S conduct as set forth above, CLAIMANTS have suffered damages. 95 .... The RESPONDENT'S conduct as.~ set forth above .proximately ·caused_ CLAIMANTS' damages. WHEREFORE, CLAIMANTS request actual damages, together with benefit of the bargain damages, lost opportunity costs, rescissionary damages, model portfolio damages, prejudgment interest, costs, non-economic damages, attorney's fees, punitive damages in an amount to be determined by the arbitrators, and such other relief as is deemed necessary and proper. Page 36 of 108 Respectfully Submitted GOODMAN & NEKW'ASIL, P.A. Kalju lqekv'asil, Esq' Stephen Krosschell, Esq. 14020 Roosevelt Blvd., Suite 808 P.O. Box 17709 Clearwater, Florida 33762 TELEPHONE: (727) 524-8486 FACSIMILE: (727) 524-8786 AttOrney for CLAIMANTS Dated: January 24, 2002 Page 37 of 108 INDEX OF EXHIBITS Exhibit "A" Exhibit "B" NASD Notice to Members 86-65 (dated September 12, 1986) Compliance with the NASD Rules of Fmr Practice in the Employmen and Supervision of Off-Site Personnel" Richard S. Taylor's Registration History Exhibit "C" Mutual Fund Statements Exhibit '~D;' Investment Summary Exhibit "E" Roils Royce/Cash 4 Title Brochure Exhibit "F" SEC v.. Charles Richard Homa et al., U.S. District Court for the Southern District of New York, Civil Action No. 99-Civ~10557 (S.D. N.Y. October 15, 1999) Exhibit "G" Certificate of Non-Registration of Rolls Royce, Ltd. Promissory Notes in Maryland Exhibit "H" NASD Memorandum concerning "Important SEC Notice Concerning Independent Contractors" Page 38 of 108 TO: RE: September 12, 1986 Ail NASD Members, Associated Persons and Other Interested Persons Compliance with the NASD Rules of Fair Practice in the Employment and S_upervision of Off-Site Personnel ExeCUTIVE SUM/WARy NASD rules and policies consider associated persons of a member to be. employees of the member, regardless of their locations or compensation arrangements. The notice addresses regulatory issues that relate to off-site employment of registered persons, including supervisory procedures, private securities transactions, fair dealings with customers and communications with the public. Because of the significance of the /ssue~ d/scussed /n th/s notice, the NASD strongly urges that it be d/str/buted to all "~ociated pe.r~ns and recomm~nd~ that it be included in the e~mpliance manual of all firms employing off-site personnel INTRODUCTION A significant number of NASD members employ registered persons who engage in securities-related activities, oa a full- or part-time basis, at locations away from the offices of the members. These off-site representatives, often classified for compensation purposes es independent contractors, may also be involved in other business enterprises such as insurance, real estate sales, account- ing or tax planning. They may also operate as separate business entities under names other than those of the members. The NASD, in the course of its disciplin- arY proceedings, has observed a pattern of rule violations and other regulatory problems stemming from factors inherent in these arrangements and the manner in which they are effectuated. Irrespective of an individual'~ location or compensation arrangements, ali ~ssociated per~ons are co~xidered to be employees of the F~rm with which they are regi~ered foe purposes of compliance with NA~SD rules governing the conduct of regi.~ered persons and the supervi.s~-y responsibilities of the membe~_ PAGE.~ / OF -2- that an associated person conducts business at a separate location or is compen- sated as an independent contractor does not alter the obligations of the individual and the firm to comply fully with all applicable regulatory requirements. To provide guidance to the membership in meeting these obligations, this notice discusses certain reg~latery issues that frequently arise in the context of off-site employment. Because of the importance of these issues, the NASD urges~ each member to duplicate this notice- and distribute it individually to all associated persons. In addition, it is suggested that this notice be included in the compliance manual of firms employing off-site representatives. The NAMD,/n the course of its member exam/nation~, w/Il make /nqulrie~ to ascertain that th/s notice has been prov/ded to all appropriate personnel Article l~ Section 27, NASD l~fles of Fab- Practice: Supervision Section 27(a) sets forth the basic duty of a member firm to: '...establish, maintain and enforce written procedures which will enable it to supervise properly the activities of each registered representative and associated person to assure compliance with applicable securities laws, rules, regulations and statements of policy promulgated'thereunder and with the rules of this Association.,, Although the rule does not prescribe specific supervisory procedures tO be followed by all firms, it clearly mandates that the adopted procedures enable a firm to supervise properly the activities of each associated person to assure compli- ance. Thus, firms employing off-site representatives are responsible for establish- ing and carry/rig out procedures that will subject these individuals to effective supervision designed to monitor their securities-related activities and to detect and prevent regulatory and compliance problems. This Can include: 1. Educating off-site personnel regarding their obl/gations as registered persons to the firm and to the public, including prohibited sales practices. 2. Maintaining regular and frequent contact with such indiriduah. 3. Implemanting appropriate supervisory practices, such as records inspections and compliance audits at the representatives, places of employment, to ensure that their methods of business and day-to-day operations comply with appli- cable rules and requirements. For greatest effectiveness in preventing and detecting violations, visits should be unannounced and include, for example, a review of on-site customer account documentation and other books and records, meetings with individual representatives to discuss the products they are selling and their sales methods, and an examination of correspondence and sales literature. PAGE ~/{~ OF -3- To fulfill these obligations, a firm should consider whether the number and location of its registered DrincipaLs provides the capability to supervise its off- site representatives effectively. Section 27(c) includes the requirement that a member: ". · .review and endorse in writing, on an internal record, all transactions and all ~orrespondence of its registered representa- tives pertaining to the solicitation or execution of any securities transaction., This requirement applies equally in the ease of off-site representatives. Firms whose off-site personnel also engage in non-securities businesses should remind these individuals that correspondence pertaining to such businesses, unless submitted for review, may not include material related to securities transactions. Section 27(d) imposes upon a member the obligation to: ". · .review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities and abuses and at least an annual inspection of each office of supervisory jurisdiction.,, An office of supervisory jurisdiction (OSJ) is defined in Section 27(f) as: "- · .any office designated as directly responsible for the review of the. activities of registered representatives or associated persons in such office and/or in other offices of the member.,, If a member has designated an individual as responsible for reviewing the activities of other registered persons within the firm, the office of that individual must be inspected annually, regardless of whether such person is compensated as an employee or as an independent contractor. Article 1~ Section 40, NASD Rules of Fair ~ractioe: Private Securities Transactions Past experience of"the NASD in examining members indicates that the conduct of off-site representatives most frequently resulting in violations of NASD rules involves unauthorized private securities transactions, or "selling away., The NASD expects that the promulgation of Section 40 and the clarification of the obligations of members and associated persons in such transactions will reduce the instances of selling away among all associated persons, including off-site represent- atives. Several aspects of Section 40, and certain related issues, merit, emphasis in the context of off--site personnel. Section 40 cannot accomplish its objectives unles~ membe~ i-~rms communicate the substance of the rule to their associated pe~soos and take ~ffirmative steps to e~sure that these requirements are Under- ~tood and observed. This is especially true in the case of off-site representatives whose day-to-day access to compliance personnel and individuals experienced in the securities industry may be limited and whose participation in non-private securities transactions may be infrequent and restricted in scope. pAGE ~L[/ OF/~<~/ -4- Because of their location and other circumstances of their employment, off-site personnel have a greater opportunity than on-site personnel to engage in undetected selling away. Consequently, firms that employ such persons are re- sponsible for monitoring their activities in a manner reasonably intended to detect violations. Further, the obligations imposed upon the firm and the associated person under the rule are neither altered nor lessened in any way by the fact that the individual is compensated as an independent contractor. The rule requires a member that approves an associated person's involve- ment in private securities transactions for compensation to record the transactions on its books and records and supervise the individual,s participation "as if the trane- actions were executed on behalf of the member." Although the rule does not speci- fy the manner of recordation, the firm may wish to maintain records that provide information regarding: vestments; The individual and the security involved; The amount and source of compensation; The names of the investors end the amounts and dates of the in- The issuer, syndicator or any other broker-deaIar involved; and $ The manner in which the firm undertook to supervise the associated person's participation. These records should be in a form that would permit the NASD to ascer- tain, upon examination, all relevant information regarding the participation of associated persons in private securities transactions. Several issues arise in connection with supervising the involvement of off- site representatives in private securities transactions. The NASD has observed that some firing permit such persons to form and sell interests in limited partnerships for which they serve as general partners. While this is not an impermissible a(~lii- vity, members and registered- persons-are reminded that such transactions are sec~u'ities transactions, and therefore subject to Section 40 and all other rules and regulations governing such transactions. Thus, the member is responsible for ensur- ing that the formation of the}e partnerships and the solicitation and sale of inter- ests therein are conducted in compliance with all applicable requirements, including those pertaining to documentation, due diligence, disclosure, suitability determina- tions, and the handling of customer funds. There have been instances in which associated persons have engaged in private securities transactions without notifying the firm, due to the belief or the advice of third parties that the product involved was not a security. Under federal securities laws, the definition of a security includes the commonly understood products, such as stocks and bonds, as well as other investment products, such as an "investment contract" in which one or more individuals invest in a common venture with the expectation of receiving a monetary return on their investment from or through the efforts of a third party. Because questions frequently arise as to whether a particular investment iastrument is a security, a registered person should not sell any product offered by -5- an entity outside the firm without consulting the member to determine the pro- duct's status as a security. Article l~ Section 2, NASD Rules of Fair Practice: Recommendations to, and Fair Dealing~ with, Customers A~'ticie Il[, Section 2 of the NASD Rules of Pair Praeti~ requires that: "[~n recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by the customer as to his other security holdings and as to his financial situation and needs." The poiiey of the NASD Board of Governors pertaining to Section g sets forth specific guidelines in the areas of recommending speculative, low-priced securities, excessive trading activity, trading in mutual fund shares, frandulent activity, and recommending purchases beyond the eustomer,s capability. The actions of an associated person in dealing with customers and cus- tomer aeeotmts, regardless of whether he or she is compensated as ..an employee or' an independent contractor, are actions on behalf of the firm. The firm is respons- ible for supervising in a manner designed to detect and prevent violations of Section 2. Members should take affirmative steps to ensure that off-site Personnel under- stand and abide by NASD and firm policias regarding dealings with customers, customer accounts and customer funds. Article I~ Section 10, Rule~ of Fair Practice: Influeno.~ng or- Reward~ Employee~ of Ot. her,J Article iR, Section I0 of the NASD Ru~es of Pair Practice prohibits mem- bers and associated persons from giving: ". · ;anything of-'valUe~'; iheIudihg ~g~atuities, in excess of fifty dollars per individual per year to any person...where such pay- merit or gratuity is in relation to the business of the employer of the recipient of th~ payment or gratuity,, unless such payments or gratuities are pursuant to a written agreement between the payor and the recipient to which the reoipiant,s employer has consented. It is, therefore, a violation of Section l0 for a member to compensate an associated person of another member in e~)nneetion with securities transactions without the employer firm's consent. A member's obligations under Section 10 are not affected by the fact that the recipient is compensated by his or her NASD employer member as an independent contractor. Article l~ Section 35, Rules of Fair Practice: COmmtmi~ations with the Public Article III, Section 35(b) of the NASD Rulas of Fair Practice requires that every item of advertising and sales literature, as defined in Section -0- "...be approved by signature or initial, prior to use, by a regi- stered principal (or his designee) of the member.,, Paragraph (2) of Section 35(b) requires further that a separate file of such items be maintained for a period of three years. This rule applies to all materials originated or distributed by off-site representatives that meet the definition of "advertisement,, or "sales literature,, including those prepared or used by persons compenSated-as independent contrac- tors. In particular, firms must approve any materials referencing that securities are sold by the off-site representative through the member, even though such materials may be intended to promote the non-securities businesses of the off-site personnel - Article UI, Sect/on 35(d)(2)(A) furthei- requires that all advertisements and sales literature contain the name of the member, as well as certain other informa- tio.n .under specified circumstances. The fact that an associated person may oper- ate under s. business name other than that of the member does not alter this re- quirement. The NASD has received inquiries regarding the need to include the name of the member in promotional materials that do not include references to the associated pers. on's securities-related activities. Particular materials should be considered individually, preferably by the firm's compliance department, to deter- mine whether they fall within the scope of Section 35. l~nr egist ered Broker-Dealers The Securities and Exchange Commission has taken the position that an individual who operates as an independent contractor must be registered as a br~ ker-dealer unless he or she is under the control of a registered broker-dealer. _ The question of "control" must be evaluated in light of the facts and circumstances of each situation and is not susceptible to a test of general application. There are, however, circumstances inherent in off-site employment and independent con- tractor compensation arrangements that may give rise to potential liability for operating as unregistered broker-dealers. Thus, registered persons and member firms may want to consider registering of off-site locations as broker-dealers. A-ny.-quesMons regarding this notice should be directed to either Dennis C. Hensley, NASD Vice President and Deputy General Counsel, at (202) 728-8245, or Jacqueline D. Whelan, Attorney, NASD Office of the General Counsel, at (202) 728- 8270. Sincerely, ^ Executive Vice President and General Counsel !/ Refer to the statement by the SEC Division of Market Regulation, dated June 18, 1982, forwarded to all NASD members on August 25, 1982. Central Regi~tration Depository - Current As Of 08/12/2001 06=01 PM Individual Snapshot for Individual= 1558263 - TAYLOR, RI(LgARD SCOTT Web CRD Report provided to: Florida Reguest Submitted: 08/13/2001 . Page 18 Administrative Information: .......... -Composite Information: Full Legal Name: TAYLOR, RICHARD SCOTT Date of Birth: 10/20/1951 State of Residence: MD Office of Hmployment Address: INVESTORS CAPITAL CORP. 711 BESTGAT~ RO~D SUITE #204 ;~NNAPOLIS MD, USA 21401 Reportable Disclosures? No Statutorily Disqualification? Personal Information: Individual CRD#: 1558263 Other Names Known By: Date of Birth: 10/20/1951 Sex: M Hair Color: · BROWN <<No Other Names found for this Individual.>> State/Country of Birth: CA USA Height: 6 ft 2 in Weight: 235 lbs Eye Color: BLUE Registrations with Current Employer(s): Prom 10/31/2000 To Present: INVESTORS CAPITAL CO~P. (30613) RegUlatory Registration Status Registration Approval. Authority Category Date Status Date NASD IR 11/02/2000 APPROVED 10/31/2000 MD AG 11/01/2000 APPROVRD 11/01/2000 Registrations with Previous Employer(s): Web ~RD~ Report -- See notice regarding CRD Data on cover l m age. Central Registration Depository - Current AS Of 08/12/2001 06:01 PM Individual Snapshot for Individual: 1558263 - TAYLOR, RIC~ SCOTT Web CRD Report provided to: Florida Req~/est Subm/tted: 08/13/2001 Page 19 Administrative Information: ................... Registrations with Previous E~loymr(s) (cont): From 01/12/1993 To 11/01/1998 T.H.E. FINANCIAL GROU~, LTD(14720} Reason for Termination: Voluntary Termination Comment: Voluntary Regulatory Registration Status Registration Authority Category Date Status MD AG 11/09/1998 TERmeD ~FASD IR 11/09/1998 VA AG 11/09/1998 TERMED From 08/06/1986 To 02/20/1991 Reason for Termination: Voluntary Termination Comment: Voluntary FIRST AMERICANNATiON~/~ SECURITIES, INC. (10111) Regulatory Registration Status Authority Category Date DC AG 02/26/1991 MD AG 02/26/1991 NASD IR 02/26/1991 %5% AG 02/26/1991 ~mployment Hlstory= Approval Date o27o~/~993 01/22/1993 oz/2~/~99~ Prom 10/2000 To Present: From 01/1993 To 11/1998 From 01/1991 To Present: Registration Approval Status Date TmU~D ~ 12/o~/19o6 TERMED o2/12/1987 Name= *IN%~STORS CAPITAL CORPORATiON . Location: LYNNPI~LD, MA USA Position: REGISTERED REPR~S~TATI~rE Investment Related= Yes Na~e: T.H.~. FINANCIA~ GROUP, LTD Location= M~CT~tN~CSBUR~, PA Po~ition: UN~CONV Investment Related: Yes Name~ FINANCIAL RESODRCE PLANNING Location: MITCH~LSVILLE, MD Position: OTHER - SALES-OWNER Investment Related: No Web CRD~ Report -- See no=ice regarding CRD Data on cover page. Central Registration Depository - Currenu As of 08/12/2001 05:01 PM Individual Snapshot for Individual: 15S8263 - TAYLOR, RICHARD SCOTT Web CRD Report provided to= Florida Request submitted: 08/13/2001 Page 20 Adm/nistrative Information: ' Employment History From 01/1991 TO Present: From 06/1989 To 01/1991 From 05/1988 To 06/1989 Location= Position: Investment CONSUMER BENEFIT SERVICES BALTIMORe, MD SALES - SALES Related: No Name: A.L. WILLIAMS Location: BALTIMORE, MD Position: OTHER - SALES RUP Investment Related: No Name: C~AFT STONE INC. Location: W~RF, MD Position: O%~R - PR~SIDENNT Znvestment Rela~ed: No From 08/1986 To 02/1991 Name: Position: Investment office of Employment Histo1-y: From 10/2000 TO Present: Name: Location: Location: Location: From 08/1996 To 02/1991 Other Business: FIRST AMER/CA~NATIONALSECURiTiES, INC. DULUTH, GA UNKNCONV Related: Yes INVESTORS CAPITAL CORP. 711 BRSTGAT~ ROAD SUITE *ANNAPOLIS, MD USA 21401 T.H.E. FINANCIAL GROUP, LTO 3 KAthy CT. ST~ 201 M~CHA~ICSBURG, PA 17055 FIRST AM~RICANNATIONAL SECurITIES, IN~. 3120 BRECKINRIDGE BLVD. DIlLOn, OA 30199-0001 ACCENT MARKETIN~ . 1998 TO PP, ES~NT, 711 BBST~ATE ROAD, SUITE #204L, ;UNNAPOLIS, MD. NOT INVSBTM~]qT-RELAT~D. p,~p FOR USCITYL.NET A WEB-BASeD BUSINESS DIP, ECTLRy. PROVIDE SALES AND D~SIGN OF PAGEs. WILL NOW B~ PART TIME ~-10 ~OURs/w~K Web CRD~ Report -- See notice regard/ng CRD Data on cover Dage. o /OF Central Registration Depository - Current As Of 08/12/2001 06:01 PM Individual Snapshot for Individual: 1558263 - TAYLOR, RICHARD SCOTT Web C-RD Report provided to: Florida Request Submitted: 08/13/~001 Page 21 Administrative Information: Examination Information: Exam Status S6 OFFICIAL_RESULT 11/18/1986 S63 OFFICIAL_R~SULT 02/10/1987 S63 PJfPIR~D 11/25/1986 CE Regulatory Element Status: Curren~"C~ Status: CE Base Date: Status Date Exam Date Zl/Zs/z~86 02/10/1987 GRADUATED 12/04/1986 Grade Score PASSED 75 PASSED 80 0 Current CE <<No Current CE Session ~ound 7> Next CE <<No Next CE Pound for this Individual.>> CE Directed Sequence History <<No CE Directed Sequence ~letory Found for this Individual.>~ Inactive CE History Dates <<NO Inactive CE ~istory Fotutd for this Individual.>~ Pre~"lous CE Requirement Status Previous Window 12~04/1996-04/02/19~7 12/04/1996-04/02/1997 Requirement Typo Status · - Annfv~rsary . GRADUATED Anniversary Filing History: Filing Date PormTyps Fllin~ 10/31/2000 U4 INITIA~ Window Dates Session Status Date Result 101 02/04/1997 02/0~/1997- 101 02/04/1997 '02/04/1997- CMPLT Org CRD~ 30613 INIFgSTORS CAPITA~COPdP. Re~ort -- See notice rega~diu~ C~D Data on cover Central Registration Depository - Current As Of 08/12/1001 06:01 PM Individual Snapshot for Individual: 15582~3 - TAYLOR, RICHARD SCOTT Web CRDReport provided to: Florida Request Submitted: 08/13/2001 Pa~e 22 Adm/nletra=ive Information: Filing Eistory (cont): Filing Date Form Type Filing Type 07/05/1989 U4 CONVERSION 07/0S/1999 U4 C0~S~ON 07/05/1999 US CON--SION 07/0S/~9~9 US C~SION Source Org CRD~ 10111 PFS IN~/ESTME~TS INC. Org CRD# 16720 T.~.~. FINANCIAL GROUP, LTD Org CRD~ 10111 PFS INVESTMENTS INC. Org (/RD# 14720 T.H.E. FINANCIAL GROUP, LTD Web CRD~ Repot= ~. See no=ice rega~ding C~D Data on cover page. Central Registration Depository _ Current As Of 08/12/2001 06:01 PM Individual Snapshot for Individual: 1558263 - TAYLOR, RICHARD SCOTT Web CRD Report provided to: Florida Request Submitted: 08/13/2001 Page 23 Administrative Information: Number of Reportable Events: <¢ No Reportable Events found for this Individual. Web CRD~ Report -- See notice rega~ding CRD Data on cover page. Central Registration Depository . Current As Of 08/12/2001 06:01 PM Individual Snapshot for Individual= 1558263 - TAYLOR, RICHARD SCOTT Web CRD Report provided to: Florida Request Submitted: 08/15/2001 Page 24 Reportable Events: ~ No Reportable Events found for this Individual. web CRDs~ Report -- See notice regarding CRD Data on cover page. Central Registration Depository - Current As Of 08/12/2001 06:01 ~M Individual Snapshoc for Individual: 1558263 - TAYLOR, RICF~%RD SCOTT Web CRD Report provided to: Florida Reql/esC Submitted: 08/13/2001 ......................... Page 25 Regulator;trchive and Z Records: << No Regulator ;%rchive and Z Records found for th/s Individual. >> Web CRDs. Re~ort -- See notice reg~rdingCRDData on cover page. ' .............. ~iew I n t:HvJdu.-,,I Legacy ;Information 8ack To Previous Legacy Disclosure Occurrence Details e, lenu Legacy Residential ~[~dividual CRD#; 1~58263 ~dividual Na~: TAYL~ ~D Znformati. n · Legacy Employment History Legacy Dlsclosur. Legacy Regi.s.,tration$ Le~a~--y F~lJn~ HiStory It O, cCu~Tence Oetail~ - #1 [ridden! ~ling Updated ~0/20/~g86 [. ~t[ons: g2L 2. Updatet No ~. ~ni~ated by: U.S. ~KRUPT~ COURT ~EL~ ROAD~ 4YA~L~ MD 20~2 L ~pe of ~en~Pr~e~lng: OEBTOR AP~,~r ~980 5. Date Initialed: ~L~D'~R PE~ON~ ' 2979 ~,D~ke~Case~: ~E 7. AIl~aUons: DEBT OF ~b. S~ps ~te: ~L 9r 19~ ~C. R~ul~: D~CH~GED COM~L~, ). Summa~: N0t ~ded L0, ~achme~: N~ ~pIl~ble " J4 - 3ENIES t0-20~6-~'D ~ENDED ~.3 R~D ~0~ [0/20/198~ ~ A~E~N NA~O~L L979~ TA~R ~L~ . ~KRU~ CO~ IN HYAena, MAR~D (~E NO.* 7~11~2) A D:~RGE W~ G~D BY ~E COURT ~,AP~L 9r 8~c~. to Top Page2 t0/20/~.98~ D4RAHLAG ~ L C~uesttons: 22L ~. Update: No $. [niUated by: U.S. BANKRuPTcY' COURT 6525 I~ELC~ ROADr HYATFSV~LL~r MD 20782 ~,. Type o/' Event/Pmceeelng: DEBTOR .APRIL gr Z~80 5. Date [nitiatecl: F~LED ~R PE~ - ~N~ NOV. aa. ~nt S~t~: D~CHARR~D. ~L 9r [980 ~cr R~ul~: OG~EO COM[~Ly ).Summa~: Rot P~ded Back TO Previous He~..u I Legacy ResldefltiaJ ln~ormatlon I Legacy Employmen: History ~ Legacy, D~sdosure$ I Legacy Registrations I Legacy' R,~lr~g Hise,.ory Regulation, [nc. All PJgh~s R~-served. Legacy ~lfOrmat]on ~ ~ Eac~ To Pre,ieu= Legacy Filing Hi~o~ · ~e~U ' Lega~ Residential ~nd~ C~: ~S8263 ~ndividu~l Na~: TA~O~ ~ S ! Znforma~on Lesa~ Employment Hi:~tory · Legacy Disclosure Legacy Regl'St rations I~Jstory n; ReCNV,~a iql~ng -'~,,,,IqiJng Type ' Eie~trenk: Iqrm Ni~ ~a~ D~ T~e FiJi~ ~ ~]/06/1~8 1~0g/1998 U5 ~ ~N~L ~R~r L~ GROUP; L~ 08/2~/~9~7 )8/29/1997 U4 PAGE 20~cY N ~NAN~ SR~P, ~24/1997 0~6~9g: U4 ~AGE 1 ONLY; ~ ~AN~L SROUP~ L~ )Z/14/1993 3~18/1992 J4 ~LL ~ F.H.E. 22L - ~N~L GROUP~ L~ D2/2WZ~l 03/0~991 US PAR~L N ~T NA~O~L ~C. NME~N ~/0~1988 ~ :ONVE~ION N. ~ RHE~N ~O~L [NC. 3a/25/L9~ J5 )~ ~ ~ME~ ~A~ON~ ~NCr ~19/1987 0~/~1987 U4 PAGE ~ ONLY N ~E~ ~ONAL ~CMEDU~ ~E~N 'FRO M ~ONAL ~q) INC. '~0~[98e L2/03/~98 ~4 PAGE 4 ONLY ; CRDt',,'-.a.b Pat~ Back to Top Pag~ 2 HA'r]ONAL [NC. 10/13/1~6 10/16/198~' ~4 >AGE 3 ONLY '~ ~rt.,~-~-' ZZL - ~ONAL INC. 08/2~I986 )8/~/1986 U4 [N~ N ~ ~ ~ ~ES, Y lrlfocrnaL~or J Legacy Ernp;,_-.~: ..... Hi$COry I Legacy Disclosures; Legacy RegistraUons Legacy FDi~g HiStory ~ l~gg-2OO0o H,q$O I~egula~Jon, Inc. Afl Rignl~. ReS~rven. GT Global htarterly Statement ~' A Member of Liechtenstein Global Trust March 31, 1997 We me plea~ed to armotmce a new- add/uon to our fanfily of funds - The GT Global Floating Rate Fund The Fund continuously offered closed-end.fund that invests in senior secured and floating r-ate loans that tTpically pay interest at a marg~ above widely recognized interes: rate benchmarks, Your investment adviser can provide you with information on this dynamic new Fund. · _ _ FUND NO. ACCOUNT NO. ACCOUNT REPRESENTATIVE: 515 00069974766-4 ~r~ogz6 FP 2 8 1450 46481 *~3DGT ~R:ALPH'H-GRIER TTEE RALPH H GRIER REVOCABLE TRUST U/A DTD-6/4/94 2833 LEMAR ST SILVER SPRING MD 20904-1869 0043351 003 310 RICK TAYLOR PHONE: (717) 766-4551 r H E FINANCIAL GROUP LTD - MD/VA 5010 HITTER RD STE 119 MECHANICSBUHG PA 17055-4828 - TAX I.D. 577-10-4874 See reverse to make an additional inves~nent or to indicate c]la~ge of addr~. ~ ~ -- -- ~ '' G~.~lob~ T~eco~m~i~ ~d'~ B . . $ 31,678.44 000 b 747 DA~ D~C~ON .... Year-to-Date 01~01/97 Balance Forward 01/27/97 SHARES PURCI~ALSED -ACH 02/25/97 SHARES PURCHASED -ACH 03/25/97 SHARES PUKCHASED -ACH 03/31/97 Ending Balance 1,913.86 $ 1,287.63 $ 15.92 ' 8d~88 $ 1,287,63 $ 15.61 '82.48 $ 1,287.63 $ 14.87 86.50 $ 31,678.44 $ 14.64 2,163~82 ~iccouht' Sumraary ;, TOTAL PURGHASES Current Year-to-Date $ 3.862.89. $ 3,862.89 TOTAL EXCHANGES Current Year-to-Date TOTAL REDEM~iiONS Current Year,to_Dare 0.0o $ 0.00 $ 0.00 $ .0.{ Page 1 Of 2 AIM The AIM Family of Funds'* AIM CHARTER FUND- CLASS A (010) TRANSACTION SUMMARY ACCOUNT #402779~J238 ~,:¢~~EMENT DATE: MARCH 25, 1997 THE RALPH H GRZER REVOCABLE TRUST' DTD 06-04-94 RALPH H GRIER TTEE 2833 LEMAR ST SILVER SPRING 04 T.H.E. FINANCIAL GROUP LTD 3 KACEY COURT STE 201 MECHANICSBURG PA 17055 RICHARD TAYLOR 032550 000009999 000000319 'Branch Phone # 717-766~4551 01/24/97 01/24/97 Automatic Investment 02/25197 02/25/97 Automatic Investment 03/25/97 03/25/97 Automatic Investment GT Global Member of Liechtenstein Global Trust Account &tmma 3darch 31, 1998 Rccendy, you received one or more proxy statements ask/ng you to vote on a number of proposals with regard to your Fund (s) as a result of the pending acquisition of GT Global and its sister institutions by AMVE.SCAP PLG. We encourage you to read the statement(s) carefully, then complete and mail the proxy card(s) to us today. If you have any questions, please contact GT Global at 1-800-223-2138. SHIRLEY E AUO TTEE SHIRLEY E AUD REVOCABLE TRUST U/A DTD 6/4/94 2833 LEMAR ST SILVER SPRING MD 20904-i869 ACCOUNTREPRESENTATiVE: 43351 003 319 RICK TAYLOR PHONE: (717) 766-4551 T N E FINANCIAL GROUP LTD - MD/VA 1 ~ACEY CT STE 201 MEEHANICSBURO PA 17055-5596 See rever~e to make an additional investme.~.._nt or to indic, at TAX I.D. 577-24-7370 e of address. GT Global A Member of Liechtenstein Global Trust uarterly Statement March 31, 1998 Recently, you received one or more proxy statements ~king you to vote on a number of proposais with regard to your Fund (s) as a result of the pending acquisition of GT Global and its sister institutions by AMVESCAP PLC. We enco~trage you to read the statement(s) carefully, then complete and mail the proxy card(s) to us today. If you have any questions, please contact GT Global at 1-800-223-2138. FUND NO. 015 ACCOUNTNO. 00069974703-3 SHIRLEY E AUD TTEE - SHIRLEY E AUD REVOCABLE TRUST U/A DTD 6/4/g4 2833 LEMAR ST SILVER SPRING MO ZOgO4-i86g ACCOUNT REPRESENTATIVE: 43351 003 319 RICK TAYLOR PHONE: (717) 766-4551 T H E FINANCIAL GROUP LTD - MD/VA I KACEY CT STE 201 MECHANICSBURG PA 17055-5596 TAX I.D. 577-24-7370 See reverse to makeanadditionalEnvestment ortoi~dicate change ofaddress. L5 ............. 00069974703~3 ;6 . $t~943;75 .... $19:9i ................................ (ST (sIobal A Member of Liechtenstein Global Trust Q. arterly Statement March 31, 1998 Recently, you received one or more proxy statements asking you to vote on a ntunber of proposals with regard to your Fund(s) as a result of the pending acquisition of GT Global aad its sister institutions by AMVESCAP PLC. We encourage you to read the statement(s) carefully, then complete and mail the proxy card(s) to us today. If you have any questions, please contact GT Global at 1-800-223~2138. FUNTDNO. 515 ACCOUNTNO. 00069974703-3 SHIRLEY E AUD TTEE SHIRLEY E AUD REVOCABLE TRUST U/A DTD 6/4/94 2833 LEMAR ST SILVER SPRING MD 20904-1869 ACCOUNT REPRESENTATIVe: 43251 003 319 RICK TAYLOR PHONE: (717) 766-4551 T H E FINANCIAL OROUP LTD - HD/YA I KACEY CT gTE 201 MECHANICSSURG PA 17055-5596 TAX I.D. 577-24-7370 See reverse to make an additional investment or to indicate change of address. .......................................... ........................................... 1;349038 o~/~/gs-SI-IAR~S PL~RC~ :~ ............. ~ "::': ........... : ........................................ , ;120 ;249 $''612~62 $i9;47 3t';'465 The AIM Family of Funds® AIM GLOBAL T~,LECOMMUNI(,.AT!ONS F~JND. CLASS B (679) TRANSACTIONSUMMARY V/ ACCOUNT #7003165596 STATEMENT DATE: NOVEMBER 25, 1998 SHIRLEY E AUD TTEE SHIRLEY E AUD REVOCABLE TRUST U/A DTD 6/4/94 2833 LEMAR ST SILVER SPRING MD 20904~1869 T.H.E. FINANCIAL GROUP LTD 1KACEY COURT STE 201 MECHANICSBURG PA 17055 RICK TAYLOR 032550 000009999 319 Branch Phone # 717-766-4551 0t/26/98 O2/25/98 03/25/98 04/27/98 05/26/98 06/25/98 07/27/98 08/25/98 09/25/98 10129/98 11/25/98 03/25/98 04/27/98 05/26/98 06/25/98 07127/98 08/25/98 09/25/98 10/26/98 11/25]98 Automatic Investment Automatic Investment Automat/c Investment Automatic Investment Automatic Investment Automatic Investment Automatic Investmcnt Automatic Luvestmeut Automatic Investment Automatic Investment Automatic Investment 39.120 1,388.15 612.6 17.31 35.249 1,423.407 612.6 31.465 1,454.872 61Z6 18.72 3Z725 1,487.597 612.6 18.83 32.534 1,520.131 19.32 31.709 1,551.840 612.6: 19.78 30.972 1,582.812 17.67 34.670 1,617.482 612.6~ 15.11 40.544 1,658.026 61Z62 15.53 39.448 1,697.474 612.62 16.88 1,733.767 INVESTMENT SUMMARY for Shirley Aud ,Aegon I Bankem United Life Assurance Co. - Phone 800-934-1004 Annuities. Non Qualified: Policy ~EI120561 Policy ~r~120971 10,338.89 Policy ~121034 151,299.71 Policy ~122267 142,860.38 Policy f~126264 128,734.18 Policy ~127262 94,176.93 Policy ~137736 -. 30,850.14 190,313.64 $ 748,S73.82 ,,,Life USA - Annuities - Non Qualified Policy ~2655007 Policy ~2655020 AIM Mutual Funds - Phone 800-959-42,46. Non Qualified Acc ft4027/u5220 Shares Shares Pdce Cc~steflatio~ $615.0(~Mo. 373.956 $ 26.69 Charter $615.00/Mo. 1,328.559 $ 11.21 Opened 7/7/93 Opened 7/20/93 Opened 7/2O/93 Opened 9/8/93 Opened 12/21/93 Opened 1/29/94 Opened 5/22./95 81,690.33 Opened 6/2/93 81,596.37 Opefled 6l?J93 103,186.70 8,880.89 *Opened :3/24,~ 14,893.16 *Opened 1/2~95 $ 24,874.03 Page & Associates ~ Viatical Settlement - Phone 954-568-3658 - Non Qualified ,S~t~ ,=,i V~Jue A~ount 0- 24 Month Pm~iflon $ 65,800.00 47,000.00 $ G.T. Global Mutual Funds -Telecommunications -Phone 800-223-2138 -Non Qualified Acc f~69974703 Shme~ Sha~ Pdce $612.62/Mo. 83.596 $ 17.02 $ 1,422.80 *Opened 4/17,~'5 $ 1,422.80 ,.SEI MUtual Funds - Phone 301-390-7016 - Non Qualified: ~ E~- ~00 - 7-/ H-~'~ ~ 7 [/, 7,126.22 Large Cap Value ' ~X~ 6,775.56 7,126.22 *Opened 6/30~6 s.~capG..~ ~ 1~9.m 0,778.88 'o~ned ~al,.c. apvalu. .......... ~ ?;~'~ ~ 1.289.o2 'Op~d c~,,,c~ ' q~,~15.~_.T.~ 8t,,18.0, 'ope,ed ; Co*'p,Oally Income 10.037.02 10,037.02 *Opened 6/30/86 Prime Obligadon 590.56 690.56 '~ 6/33'96 $ -' 58,903,30 G-and Total: 47,000.00 *Opened 1,r-~96 47,000.00 983,860.68 *SupIxvted by statements h by: Financial Resource Planning ~,5~a/96 AUOSTM2.XLS / ~/' ;~ Po~l'olk) MIX · ~ eACH TITLE i Hassle Free Loans A "PRIVATE PLACEMENT" OPPORTUNITY Prepared by: William Daniels (T) ' D & D !1 Trust - Agent for CASH 4 TITLES D & D II TRUST 3020 Pickett Road · Suite 213-750 · Durham, NC 27705 (919) 419-2440 · Fax (919) 419-2441 FINANCIAL RESOURCE PLANNING 15804 Appleton Ter. MitchellviHe, MD 20716 Phone (301) 390-7016 Wats (800) 446-1142 Fax (301) 390-7017 Richard S. Taylor, President T.H.E. Firumcisl Group, Ltd. / NASD & SIPC 5010 Ritter Rd. · Ste. 119 · Meclm~csburg, PA 17055 * (717) 766-9297 .COMP.L. ~J~4T : CIVIL ACTION NO.. 1. As d~rr~ecl in ~haii ~.low, lhe defmxi~ta have engag,d in a $314 mi'llim Fo~.'~cheme hx which, d~ng the ~ 15 mmtM¢ ~y ~ve ~iae~ m le~t $~5 million ~m ov~ 50~ tnvesm~ t~ d{'off~ngs o'fna~es ~ ban~. ~e D,fen~u pm ora mul~-l~cl ~k~l ~chm,, ~ whiO Cef~dmts ~1 O~ ("Oau~") ~ ~l~d aoma ~Homa ) m a~e rap, w~ ~ m~,n ufthe na~s ~ honda cba[n~nt ~v~amr p~s ~r u~.~hy ~nfiti~ ~aI~ ~th Homa a~d Gnu~. 2. 5ix off~gs.~vo ~on ~ ~ugh ~fcn~a Bellwether Holdin~ LLC ¢'Bell~r'9. 8o~}Hol~ng~ LLC ("So~h~m'), Tiflo Holding, LLC ('~flu Hold{~P'), ~f~mt:Hold~s, LL~ ('~u~o~'9, R & ~ Ltd. A~iaI~, Lt~ ~a ~ ~d ~'~g ~C {"~ Yl) a~ 1. Roof ~d R. LLC C'~ ~2') {c~,~ly~, "hsu= Duf~u~"). mt~hre he ~re~ that incl~ d~d~ts ~e~ Ed~ Di~mon bu. ~'P~, ~d Voider ~s, L~. ¢NolmleerD, have ~ed approx~ly $19 ~on t~h fha m~*uf B~w~h~ ao~ ~ 8ou~w~ ~d 'l'ifl~ lloldings bon~ ~fund~ J~y B. Roo[.("Roof9 ~d'~b~.C. Ell~nb~8 ("Ell~uh~g'), ~, co~m,u dofoud~ts ~uy emb?sh~ ~d co~i, Jimmy B. R~t; LI.C LLC'~and I% l~]lcnb~r~; I~LC C'RE-LLC")~ h~v~ :~ approxim.tel¥ ~2~ (coll~ctlv~y ~fex~d m ~ "SMm'}, has aised appr~mm~ly iigl,00~ ~ou~ thc of GuMcoat'bon~. Nic~ols, $~un, Di~oa, R0of, Ellcnburg, She,, ~d ~~ ~fles ~t ~y ccn~l,.~afc~hor, P~, P~ Voluu~r,'~BR. LLC, RE.~C, ~om th~ sal~ of~o no~ ~8 ~nds ~ · comply tlmt ~i~s ~pi~ t~ h~vo ~t to~th~' ~ t~ Marker D~n~ ~d invsstors m explain ~ c~ title ]~ng b~e~. ~e only comfy id~flfled b}, Oaus~ ~t Hereto th~ M~ke~ [t~ Dcfend~ ~ ~c~i~g invoker ~&s is def~d~ C4I' ~ent, Inc. {"C4~9. a com~y o~ ~d 0pcmt~d ~ Itomi, which ~s ~r titl~ loans in~ rote of~w~n 22~ - 2f~ mom~y. U~ zcp~m~t o~ ~ Io~ ~r ~ tiflc h r~mmed to ~. ~o crick c~ng ~d ~dv~ Io~ comply ~ ~n ohc~ c~.~hiug ~nd advmc~ bu~in¢~..M par~ of ~h~ s~hcm¢ to d~fmud, invcstar money Ms bo~ p~sed through tho b~nk a~counta of d=f~dant~ Sm~t Finm¢ial S~rvi¢os, LLC. ("Stm~et Fiaan~sl~), which i~'ov~cd and operated by Home, an4 t~e ~rifle~ acaauat afB~e Caribc for medit to T~P FundiI!.g 9~,vio~s, I~. (~1'~ con~allc~ ~ H~a. S~t ~t~cial ~d T~ F~ng ar~ m~t~ ~ d~f~dnnt C4T. & H0ma ~d Game ~ ~:c~n~[ schwa. Ga~ h~ given M~ investor proceeds, incl,a;,~g directing Mark~u~r ~fm~ m s~d investor p~o~ to ~co~ in ~ Ca~ Islan~ ~d a~ l~t s~me ~ ~ M~k~ Do~n~ ~t ~u~e is responsible f~ ~ec~ invoker ~ds into th~ c~ rifle [~dl~ in~. Home con~Is ~ S~set F~ b~ ~e~t ~u~ which mint i~v~stor ftmd,s am paascd, 7. V~r.little ofth~ m. andy misc'd baa b~ u'~,nsfen'¢~ m C4T a~d used in i~ Islands and used, in:classic P~mi sehm:a¢ ~hion, tn p&y in~erest on lhe note~ and' bonds of e~tlier investor, mud to pay ~ pcrsoual uxpensus of Homa and f~,u,e, and 8. Homa, ~, ltu~s~t Fi~oial. C4T. T/P Fkndi~. lhe l~sucr D~,'fandan~s and tho Marketar Dufundau~: directly or indirectly, have ~n'g~gnd, ara cn~inli, ~d n~e about to ens~sge, in viohuto~ of Section 17(a) ofth~ Secmities Act of I ~33 ("Securities Act"), 15 U.S.C. §77q(~), an.d Section I fi(b) oft lin Securities Exehaulto Act of 1934 (the 4 .. --,York and elsewh~rc. 13, Michael Gau~ Is top I~el of a'muld:l~el:m~ · r~ thc ~sfe~ or.ds o'ffih~o b~k ac~tm~. 14. Cha~ ~e o~ of C4T and i~ the.C~ibbe~. tS. C4T Man~e~ent, lu~ ~ a Flo~ ~mp~Y in~t~ ~ S~bcr 1995. ~T m~ages ~e.~p~x~mat~y i~0 gila ]o~s to ~a~m~ ~dct ~e n~e Ca~ t Titlus. 17. . T~ ~undln~'Sa~c~, Iam ia:a FIoH~-cqmp~y ~n~a in July 1999. T~ Fundiag ~ c~:cd to ~= lo~a to camp~a In ~e ~ 6¢c aaa c~ck i~ a r~ld~t of A'~ Colo~do. Nichols Is ~= ~ ~or of B~llw~er Hol~, LLC ~'B~Itw~, 50u~w~t~:Hold~ LLC ("SO~w=~m"), ~d Titte 57, [~ a resident of S~e Mou~m G~o~a. PAS, I~c. (4~-), ~ ~ BI ~ a~'" ..... ~ · 7 ...: ' ~gitmm~ ~' ~a'm~mtlon fom~ m Jaguar..[ 98. Vol~ o~m 2~A of . .... .. .. .. y,.',;.:.. :;' 21,. J~ ,'R~f ~dJ~mmyB;~of~C: Roo[ag~6t,~id~sin :,Wm .. ~ ,' ......~, .. ~ Colu~b~. Sore .C~II~ ~-LLC t~ · ~m;~0~hab:~ mm~ny o~ by R~f ' ~ ~i ...... . ' - .9 t,,t'~ ....... , . : '~ Ellcnb~g'to ~e mog~ for. comp~ ~ ~ c~'~tl~di~ iu~s~. ~l~b~g ~nd ~-~C~no~mgi~the ' ' ' :'"' , Co~:s~on' ~ro~ or de~ors. c~ /c)g 24. ... . 2& com~es.~t Holdings. Si~ 29. J.,&' 1R Financial .% ,.r~l~s, Ltd. (".JR Flnnneisla) h a NavoR~ limited ' . li~iR~ ~mp~y o~'by F.. =I w~ cm by Ell~b~:~¢mn m~ey for comp~:~ in thu ~ title ]~nding li~flk~comp~yi~pt~ln~l~99 ~f ~ EReub~, through lheir R00f m~d Eliding ~ ~se m~e~ comp~!a! in ~ ~ gtle ~d ch~k c~hing and 31. p~ted in M~ 1999. ~o~ ~g~adCm, m~s 14~ nfG~n~ Gulf~. {0 aot~/~l~h:~' a~at of 2.25% per:mo~t (2~Z p~ y~). 33. ~ellwe~i~a o:ffe~g d~6nl;'~p~aented ~ in~a~ts ~t the ~ to C4T. ~ ce~[n [nst~c~, ~e~w~¢r m~m~s ~g~ for ~ investors to m~t ~e~0~ ~.m{n~) to a ~ of Bertha aceeunt at Cifib~ i~ New Y~rk CiVy for E~reat ~ ~e B.~t~ o~e~ ha~ ~ved at 1~ ~.4 miUi~ in comp~on. It a~d Vol'ume~ im~ ~te~i~cd ~ lea~t $372,540. 36. ~ ht'De~e~h~ l~.~g, So~we~ beg~ o'S10 million do~ offering whieh, ~ou~ J~ 19~9, h~ ~sed at le~t $~ mHHon. Soutbw~t~ h~ sold bond~ 'to at l~t 86 inve~t~ in a~ 1~ 13 ~mt~ Ac~M~ng m the Sou~ off~ng ~c~ ~ on ~h~Scuthwe~t~ a~-ye~ bon~ ~ d~ed by thc ~o~t of~c pflaei'p~ ~nve~t ~d r~g. ~e~ I.~5% - 2.2~% p~ mon~ (15% - 27% ~lly). to lo~ m~ey. taa' com~y ~at ~11, in ~; l~d thu mon~ ~ com~i~ in th~ car doeumenm ind~a~.,~:in3e~or m~ ~ ~ 0en~t~d by ear fitl. 1o~ ~ ch~ ~hfu8 a~ adieu Joan~ ~er, 80~ ..... . So~st~ h~ obta~a ~ec~W ~t~t in ~o acco~ ~civ~}a of ~e e~p~y ~eivabl~ to Sou~We~~ ~ eolla~ ~z a nro~s{o .... .- :_ .. ~ · .~ uut~ m mc ~O~t alS10 38. T¥ 8outhwaitcrn owners'have dkcetcd invc~tor pmce~a~ fimm a South~-~ U.S'~ bmmk accqunt at Nonv~t Bank (located in Denver. Colorado) to }2 OF/0 ~er c~f~,to b~ ~ccn~ts · .~: ~ bnnk.~ ~.w ~ark Ci~ for Acco ' Y~.~n~8. acco~ing ~ t2~ Title }loldi~ls offer~ doc~ m ., . Io Io~ mone~,to a q~p~y amt ~11, ~ turn, lct~ ~ mon~ to C~p~es in ~ car. which ~or ~ ~lJ ~ I~ed ~d ~ ~e ac..~o~ r~dvabJe ortho con~y 13 ~ told by Siah~'mat m~n~ r~d by Ti~I* ~oldi~8~ would bc lo.ed ta C4T. :' credfl to b~ ~coun~*ln ~ Ca~ Islnn~. ~ld 27~7 pr~ ~at~ ~tch pmvi~ f~r a ri~ of m 1% ~d ~% ~r Offing; From~1997-~ Febm~ I~9, Roo l~urg rms~ at 1~ $/l mflli~ cun~d"Ro9~ and ~bu~ abo~ ~c 4& ~us~ ~ld Ell~b~g ~o dlrm~ p~ ~n ~m offing t~u~ tn New. York Ci~'fm ~e :~t ~ Caym~ Isl~d ~nun~ in ~m ~m ot'~O 47. in July ~9. Roofed Ellmh~.b,~ m~ ~-y~ hon~ that mt~ at l~ast $~ ~liun lu ~ls o~gl ~i offing is ~nUY o~iug. lCvem~rm ~t.pr~ ~m ~ o~iug ~1[~ ~ ~ a co~y w~ch will, .~,mmLloaU ~v~or..pr~e,~ ~ comp~ eupg~ in i~ cat ~tle ~a~ h~' ob~jn~'a.s~ in,st in ~ ~co~t~ ~ivabl, u f ~e e~p~ly to ~ich ~{ng,~.~'~fpieut ~f~m ~. ~l~bu~ ~ficd ~ Oaumc ~M him ~ Investor pr~m ~m ~ RE ~ Off~rinff ~T~ F~. TIP F~ng *~ted ~ ~2 ~ coth~l ~r ~ pro~m~ no~ }n the m~ximm ~o~ of $50 million. and Ellenburg.~t dircctexl ~hat"~ F~nl uric ~ check c~g ~d ~v~.~ ~s~. ~-y~ bot~ [o~ money ~.a com~y:~t ~II, in ~m lca4 ~n~oy to compa~cs i~ the c~ title ~c~ ~at ~s ~11 ~ Rc~t~ by car O~lc lo~ ~d ~ m~g ~d ~v~ce Iom~ F~thcr, O~fco~t~s ~ty Int~t in 16 to ~r F!~c~ s a¢count ar Fire U~lon B~. 8~sat Flu~ei~ :.;::2 ': ~.~d ~ t~[ a ~6~ or ~v~mr pm~'~ugh ~ ~ f~ N~ York C~, w ~ ..:.. ,E.: qold ~ I~t $4,0,00~'[~ 0~ uama. ~* ~ p~d inwsm~ t 35% ln~ pg month (~% ~r ye~j.:S~ told inve~m in ~e S~{ay offal ~at iave~r ~oc~ds wo~d ~ di~ t~ ~ title lu~ng ind~. 8~ajmy ~md *h. ~s It r~m~ to a ;. T~ PoNzrs~ . 55. ~ D'~ ~ op~a~ng a P~ ~h~. ~ have ~aed at ~e~t. .".;~ ~5 ,~ll}on ~ ~:~c~ ~ 1997 ~ J~* 1999. ~oug~ C4T is the ~y c~ rifle lorn co~p~ ~at O~e ~d H~ have, told M~r md D~fe~u~ w~ t~ ~Yesmt precis, C4T mc~iwd ody ~md $1 million ~d~ ' ' ~ ' '{~o~t. Sillily, ~h~n mon~ ~d t~ou~h in ~w Yotk.Ci~. 57. ~m~y l~gg ~ouih I~ 19~,. ~ppmxi~ely $ 102 ~Ili~ p~sed ~ 5~ g~'s U.S. b~ ~coun~ Non, of the $102 million c~ from C4T. .~ppm~aJoJy $1' m!}li~n ~ C4T, ~d .~ay~ to B~Hw~. $outkwc~. Ttfl~ Hol~n~ ~d ~co~ in~s~, ~d to ~ay ~mpe~a~on ~er Dead,ts. ~$. Spcc~lly, ~m May 1995 tl=o~ l~c 1999, S~ F~cial ~e~od' appmxi~y $6.5 milti~ ~ ~ellwe~, 5o~; Title Hal~n~ ~d ~f~ whl~ ~ u~d to pay ~[~ ~ ~llton afW~Ch.~ ~e~ ~ pty m~ compc~on to Nichols, Sha~ln~ .f $9. . Fur~h~, approxlmai~[y' $2<. miiflon ~ ,,,ecl tu pay ~oma's ~p~me~ ~d b~i~es, ~m}~ t0 S~t Fi~cia}, T~ F~din~ or C4T ~d its 60. . Mo~y~. ~om May 1998'~u~'J~u 1999, C~T nev~ ~sF~ ~y ~s~ Suns? F~cm[, ~d ~am co~d not havu ~n t~ so~ o~ .[P~u~sL on.inVestor ~otum ~ bo~, F~cr, C4T's ~nk ~or~ ~bllsh ~t.~um. co~'no~ ~ve g~d ~e ~y used m pay [nt~ IVy. EP I,~--~EIgFAT] ONE: .A ND ONUfSSIONS T~ IN~STO~: BY'T~:DEFENDA~S 61, Homa, ~ S~m~ Fi~cial, C4T~ T~ Oef~'~d:~e'hs~D~f~n~ ~w ~de ~ ~outiuu~ m m.~e ~vemt ~p~s~liq~ ~ o~isai~ o~f~ to inws~ In co~ection ~tl% ~u o~, ' p~h~m.~d:'~e o~ ~tlw~t~r, ~ "~ou~we~er~'~e Holdings, ~ ~, ~-. Ho~ a~di:.fi~uugh him, S~t F~al ~d ~cu~u~..to'~k- mis~pt~enta~o~ a~ut m[=~gs'.~l~'~v~ ~d by ~{~dg~g 5mt~t Fi~ci~'s ~c~ mcciv~lu ~d ~t~ u[p~mis~ nqt~ to sec~u the Soml~w~t~, Ouif~t ~d ~'tle galdings O~gs, Roma mprua~cd ~at tnv~tor ~ds w~uld b~ m~ed by C4T tl~t~ its o~ta~ng a~iat~ to ~nke c~ title 1o~ :. 63. '~.' 'go~,.md)~ough ~m, fimm~ 'Fi~c~al ~nd C4T ha~ and.e~nfinue to ~t,.Ib..imp&~i~n,~[~C4T, or ~e .c~ title le~ng bm~eas, ia ~ ~om~ of fm~ For ~. ~, ~{ ~ug['Mm, Suna,t Finan~ co[tiu~ m ~ ~tcp~s~n~om ~t ~ ~uffi~cy Offcrmg~ S~gFtn~c~[ b~s nobasme~ oth~ t~lending money .. ~'~qgW~m~6 ~s f~ed m.i~o~ lnvev~ ~'~e pt~missot th~'~c~ugt~:~[~lemp~edged.by S~et Fin~ial wcrc mill o~.~cd ~ tbby Sou~ Tide Holdings 65, .T/P.F~dIQg has mad~ ~d c~ueS 0uffict~cy o~t~ya ~o~t~ mcetv~lo pledged am s~lty for tk~ ~ ~20~:'ln~ 'r~ 2O : ~ifl~-l~ndin~'indus~ry. Ac.~ordi~ly'i T/P i;'~ .OJ0g h~3 ~ acc. otmt.* t~'e~iv~l~ ba~cd m~ ~m~ actc.~ven to ~ ~2;. ~, T/P F~'~aws ~d h~ ~l~ m ~undin~ did nat ~quat*~ *~ tJl~ ~ ~2'~g,. · ( : .. .. Ca' opcm~g.~t~tlat~ ~m S~t fii~c~ :T~ Funding ot C4T ~ ~ ~ ~e t~mmt b~ ~ ~11 m ~r{ t~ ~e ~o~s o'ft~e notes ~d bo~ w-o~d ~ ~ to ~d o~ fl'U~ loans ~d chct:g c~Nng ~d ~vnucc Io~ ~ ~ ~a loa~ wa~d 2t · vmd'/l(' Ftqanc{~l no~:a.~d Southw~e~'a. TR1~ Flold:iu~s, RE ~ ami Chlfeoast bond* to 69. T~ Mado~' Der~ts m~v~ cqmp~aaton ~ ~u fo~ of 71. Paragraphs ) through 7{} axe hereby r.,P.~[Icged and. [ncorl~uttt'd by .: rat'amn~a h~da. 72.. Arth~ tim? aLl~g:d Inthis Complaint. Homa, Osu~e, Sun,et FinanchL T/P Fund~/C4T, Ihe M~rk:tcr D~feM~m ~d ~ I~uer Defcn&nts, iu ~ ofi~ md s~l~ of~e~fee, ln fl~c fo~ of ~otes ~d ~, by ~ u~ ~f~ m~ ~d ~m~mt~ d~tly, and [ndi~fly, My~ ~mploy~ ~d ~ emplo~g d~g~, ~h:m~s ~ ~m~eda~.~.soume ofiu~c~r ~tem~ pay~a~, ~d the ~oi~cy of~c ~co~t ~ei~bles'pl~ged m~ p~s~o~ ~o~ ~i~a by S~t Fi~clfl ~ T~ F~hag ~ ~e~ for ~a aff~, u ~ ~Y d~d in Pam~ 1 ~u~ 70 ~ve. cim~st~c~ dc~d ~ P~p~ 71 ~u~ 73 tls U.S.C. 1~1 m kt'~flm~ ~eg~:~ ~ Complain, Hom% Oau~, Suaset ~.. .:..::' .:' .; ~ · ~d. ' ' ' c'- " 7~:" ' "BY m~°n ~ ~ ~v~e~ d~b~ i~ P~bs 76 mid 77 ~0~," Secu~ttes A=t Il 5 UiS.C. § §77q(a)(2) and Wq(a)(3)]. 4 f 26 8a~h~ 68:t~u~'90 ~va. ~0, ~ ~ ~mc~ ~eB~ In ~s Complaint, ~o M~ Dofon~t~ ~n8 as means of mauipulative, deqep~vo' and Cm,,d~d= .nt.' devi~ and cooOi~,'anc~, a~ mor~ ~ly d~crlbed'lu Paragraphs 1 ~hrough 70 above. 9 l. ~a M~k~ Do~ts ~aW~r ~r~ ~ in not ~o~, of ~ 92. By rc~O~ dfC. ~vlfl~'~:~d ~ ~ SS ~m~h 91 ~V=, - M~ Dcfcnd~ v~tcd'~d ~ ~'iolm~ 8ectioa l S(o) of~ ~oh~$o Act U.8.C. ~78o(0)1 ~d Rule i5cl-2 ~uad~ [17 C.F.~ 240.15ol-2]. I~n, ~ fo~ ~t ~i& R~m 65(0] of ~ F~ Ral~ of Civil ~, l T ~-~ 2~I 0~~ A~iflonaily, G~ a Tc~po~ ~inin~O~ and 0~ of~tim~ Cl¢i} Pm~u~ ~ ~d'~oinhg th~M~t De~a~, ~eir !9 · ~ · .'.: : ~' :~ , :.: ,:: .:A. ' "' ' ' ' ' t, .[ · ~ ..'~ ~, doc~nts lnd~catl~g ~ to m~ or pmo~ pm~, · :.::. .~ o~er fndi*~ ofo~hlp or ~t~?tn ~ of ~y of ~a ~fendants, wgI~ of~hlp or i~t~ ~ ~w in ~ D~f~' aemfl or ~. · ~a~p~ "'~ .... produce to ~ ~r~ fo~ days of ~o tm mmmg ~{~11 ~o ~o~ ~d o~ daoum~B ~a Ho~a, Oau~ S~et:~;~clfl, T~ Funding, ~T, L :-2 M~rk~ D~end~ ~ the I~r:;~*~end~m' act~l or co~va l~fi~ ~ ~e'mc~ .m'~lch:~ hv~r ~a ~m put m~d thc ~~of ~y ~ * ~}n{ ~t~ o ft~ Da~ ~ ~ e,'r [ u carlo pm.v~d, ~w~, t~f,t ~ng in ~= ~dmr ~h,ll bc mulatto ~q~ ~t~.D~nd~ ~4"~ Ias~O~u ~ d{sgo~e any md ~l iU~o~n PAGE ~ ~ OF~ Res?.clfiiRY submitted, OF COUNSt!L lano Il. ~¢ho loh~ I. 8ikota D~ I. A~ys fo~ Pl~n~ SBC~8 ~D EX~NGE COM~SSION 500 Wc~ M~a;s°~ S~t 8~'uritias'and E~hanf~ Commission · 7 World Tmd~ C~ N~ Y~ N~ Yo~ 10048 D~te~t: Octobeg~f~lg99 J. Jos~a Ctn~,u% J~. Ailomcy Gen~rM Careen M. S~mP.~D DONNA HILL STATON Depu/y Attomcy~ General TELECOPIER lqO, (410) 576-6532 STATE OF MARYLAND OFFICE OF THE ATTORNEY GENERAL -. SECURITIES DIVISION MELANIE SENTER LUBIN WKITF~'S DIRECT DIAL NO. · (City of B~ltimore) (State of Maryland) SS2 AFFIDAVIT 1. I, Timothy F. Cox, am an Assistant Attorney General for the Maryland Division of Securities, Office of the Attorney General (the !'Division"), and I am Custodian of Records kept by the Division pursuant to the MmTland Securities Act, Title 11, Corporations & Associations Article, Annotated Code of Maryland (1999 Repl. Vol.), and in compliance With § 10-204 of the Courts and Judicial Proceedings Article, Annotated Code of Maryland (1999 Repl. Vol.). 2. I have thoroughly reviewed the files of the Division and those records reflect that no securities, registration application or notice of exemption or preemption was filed by or on behalf of "Morning Star, Ltd.", or by or on behalfof"Rolls Royce, Ltd.". FUKTHER AFFIANT SAITH NOT:" ~~AL) ~ssi~t~t~a°~o~ey General and Custodian of Records .SWORN AND SUBSCRIBED BEFOP~M~ ~l~~ ~/~~) , 2000 ._,~~ aflidavit.sce NO-T'-i Yttm',lC % ' · MY COM~XPI~.P.~: 200 Saint Paul Place * Baltimore. Man/land 21202-2020 Telephone Numbers: (410) 576-6360 · E-mail: securities(Ooag,state.md.us TO: FROM: DATE: IMPORTAI~T . SEC NOT/CE CONCERNTNG INDEPENDENT CONTRACTORS All NASD Members Frank Z. August 25, 1982 Attached is a copy of a letter from the SecUrities and Exchange Commission to the NASD on the question of the concept of independent contractors and the respoh- sibility of member firms for their supervision notwithstanding their designation .as such. Ail, members should closely review this letter. It would be advisable if it were distributed to all registered and compliance personnel in your flrm, including branch o.ffice personnel. Attachment EXHIBIT ~ECURITIE. S AND EXCHANGE COM~4IS$10N · ~une 18, 1982 Mr. Gordon S. Macklin President National AssociatiOn .of Securities Dealers, 1735 K Street, N.W. Washington, D.C. 20006 Inc. Dear Mr. Macklin: The Division has become concerned over apparent misunder- standings within the broker-dealer community about the status under the Securities Exchange Act of 1934 ("Act") of Securities s~lespersons designated as independent contractors. Questions have been raised as to whether these persqn~ are subject to the Act, whether they come within the definition cf associated persons in Section 3(a)(18) of the Act,'and whether th'ey are employees subject to coverage by a broker-de'aier firm's fidelity bond. These issues ·have surfaced recently because of the increas- ing number of firms denoting their salespersons as independent contractors. The Division is concerned that some securities sales- persons calling themselves independent contractors have failed . either to register with the Commission as broker-dealer, s or with a self-regulatory organization ("SRO") as associated persons of a registered broker-dealer. 'In order to forestall any regulatory problems relating to such developments, I would'like to take this opportunity to restate the Commission's tOward.independent contractors, long-s~andin~ pol%cy The Act requires that a Person-Yelling'securities be registered with' the Commission as a broke, r-dealer under. Section l§(a) unless he is an associated person as defined i'n Section 3(a)(18) of the. .Act. These two categories encompass the universe of persons engaged in the purchase or Sale of securities. The term indepen- dent contractor does not appear either in the Act's definition of associated person in S~otion 3(a)(18) or elsewhere; thus, merely 'deqoting a salesperson as an independent Contractor does nothing to resolve the status under the Act of a given individual.i The critical question is whether a so-calZed independent contractor's activities are subject' to control by a broker-dealer within the scope of Section'3(a)(18) of the Act. Without that control relation- ship, the salesperson must be registered individually as a broker- dealer. Confusion concernin~ the issue of "control' seems to be at the core of the independent contractor debate. The presumption that an independent contractor, by definition, cannot be subject to the control of an employer broker-dealer is ncorrecc. Pertinent Mr. Gdrdon S. June 18, 1982 Page 2 Marklin '. . 'agency law makes it clear that an individual can be denoted properi as an independent contractor and still be. subject to the control of an employer if their relationship is one of principal and agent or master and servant. Distinguishing between the independent dontractor who acts as a principal rather ghan as a servant or agent is a question of fact. Each situation must be scrutinized to determine how much control can be exercised by a broker-dealer over the a~ts of the independent contractor. It has been a long-standiBg policy· of the Commission that independent contractors whos~ selling activities were controlled employees for the purposes of the Act. As early as 1945, 1/ prior to the introduction of the term "associated person" in the Act,. ~he Commission identified "control" by a.broker-dealer as the sole standard for determining whether a person..was an employee for purposes of attaching liability to a broker-dealer employer under Section 15(b) of the Kct. 2/ At that same time, the Commissio stated that use of the term "employee" in Commission rules or relea could include free-lance, salesmen or other persons whether or not such persons would be deemed employees in some statutory contex~ than the federal securities laws. " Neither of these Commission interpretive positions was changed with the introduction of the. concept.of "associated person" to the Act by the Securities Acts Amendments of 1964. Indeed, the legisla tire history of Section 3(a)(18) of the Act makes it clear that the phrase "associated person" was created "for convenience of reference" to newly adopted statutory provisions of the Act which authorized direct disciplinary action against individuals. ~/ There was no desire to alter the Act's applicability to persons previously· held to b~-empLoyee.s,, i.e., salespersons controlled by a firm, includin~ ~those who w~re independen~, contractors. · Rather, the Commission's General Couhsel, now Commissioner Loomis, stated that. the purpose of the new definition was to preserve the ~ct's existing applicability to persons controlled by a broker-dealer Securities Exchange Act Release No. 3674 (April 9, 1945). Section 15(b) ~f the Act authorized the Commission to deny or revoke the registration of any broker-dealer if it found ~(1) that such action was in the public interest and (2) that such broker-dealer, or any partner, officer, director or branch manager, or any person controlling or controlled by such broker or de~ler, had' been convicted within ten years or was enjoined in connection ~ith activity involving securities, or had willfully violated any provision of the Securities Act of 1933 or the Act or any rule thereunder. S. Rep. No. 379, 88th Cong., 1st Sess. 1642 (1963) Mr. G6rdon S. June 18, 1982 Page 3 tdackl in or controlling a broker-dealer, such as partners, officers and directors. 4/' Section 3(a)(18) was drafted to incorPorate almost -identical l~nguage to that already appearing in Section 15(b) of the Act. Thus, it is clear that the independent contractor salesperson may be deemed to be an employee and associated person under the Act if the requisite· control re%ationshf~ exists. Accordingly, independent contracto~ salespersons who act as independent principals, in selling or' inducing the purchase ..~er sale of securities must be registered with the Commission as broker-dealers. Likewise, .an .independent contractor salesperson, whose activiti'e~'are subject to control by a broker-dealer, whether by contract or ~therwise, must be registered With a 'SRO as an associated person and should be covered by th~ employer broker- dealer's fidelity bond. Broker-dealers may not shift their obligation to control or supervise the activities of their pendent'contractor salespersons who are associated persons,inde- and. contractual terms that attempt to limit broker-dealer liability for the acts of such persons under the federal securities laws are of no effect. While we believe the SROs have consistently required theic 'members to assume appropriate supervisory responsibilities for independent contractors who are not se arat · broker-dealers, w~ ~ .... ~--' .... P ~ly registered as · .... ~ ~na~, in certain instances, SRO rules may not have been applied to all such independent con- tractors. In this connection, we also believe that it is ~mportant to emphasize that a simple denial of "control" of an-independent contractor by a broker-dealer would no~ remove its .responsibility for Super~isin? ~tha~ person.. To the extent that a fi'fm for~s a~ relationship wlth an independent contractor, that firm would Se responsible fo~ e.ither (1) ensurin tha~ the independent co was'-register%d- sum~ng ~l~e supervisory responsibilities attendant to a relationship with am associated person. Therefore, the Commission believes that if-a salesperson was not registered and a broker-dealer permitted him to hold out · to the public that he was acting on behalf of that firm, .such salesperson would be deemed to be an associated person cf. the broker-dealer. We are advising all the SROs of our views on this matter so that any necessary modifications in thei~ rules and enforcement procedures which presently conflict.with the Commission's .position on the status cf independent contractors under the Act can be 4--/ Part I, Investor Protection~'~earings on ~.R. 6789, ~.R. S. 1642 Before a Subcorunittee of the Committee cn Inters 6793, tare and Foreign Commerce, ~OUae of Representatives, 8~t_h Conq., 1st Sess. 255 (1963). ~ Mr. Gordon S. Macklia June 18, 1982 Page 4 made. It should be noted that the Commission's position does not pre~ent a SRO from prescribing rules for its members which are more restrictive than the Act on how the relationship Between a broker-dealer and its associated persons should be structured. I'hope through the clarification of this matter that we are able to assure uniform application of the Act te avery broker-dealer. In this regard, if you have any questions concerning independent contractors, please contact Sarah Ackerson at (202) 272-2857. .Douglas .Scarff Director. 7 8, 1 1 6 SEC No-Actbn Lettbrs ~r 2*z~-~ '-- lob-6 to permit each Seller:or an affiliate Common Stock on behalf.of such Stock that acts 'az trustee, or investment ~d- Index Funds during 'the distribution of visor to Stock Index Funds that are Lockheed Common Stock owned by or baaed on non-dlscretionary mathematica/ tributable to such Seller, as described formulas to make purchases of Lockheed herein. -. [ ] 77,30:t] i'· Gordon 5. Mocklln, NASD; Charles J. He~ry, CBOE; Roberi' J. Bfrn. · bnum, AMEX; and John J. Phelon, NYSe. · Secur~tles and'Exchange Commi~'sbc. Division of .M~rket Regulatloa; J'une 18, 1982. (I.R. vaffa.hle j'uly 19, 1'982.) On SEC S~gn~ficant List of Novsmber 30. 1982. Correspondence h~ i~a/l te~t. . · Exchange Aei:~Bxoker-Dealera--.]Indepe~cient Cnntractors.--In the opinion of Division of Market Rcgu arian, broker-dealers registered under Section 15 a) o~ the Act · ~g the'purchase or'sale· of-secar~ties . Th,',s, sec~Gitles s~ies~'sons tcrmed "inde pendent contractors"..must he..sobject to the 0,'mount or' control a.broker-dealer cxerclses dyer ~l~em; -in'one or the other category. For ex~mple',, if. an 'ndependcat contractor" does not have a control rcla6onLshlp with a..4>roker-deaI~r, tl~e sa]caperson ~nust. reglsier individually' as a broker-dealer; and. if h~s activities are subject .to .control wlth~n, the.scope o[~ § 3,(a)(18)," he is a.n ~s~odated persoa. Sce.~'21,242, "Exchange Act--I)cflnltlons; Exchdnges" c]iv~sioe, ~"ol~me 2 ~2~,001, "Exchange Act--Broker-De,let Regulation"', division, Volume 3. ' [SECStaff~ep~y] ~5(a) unle~ he ~ an a~oclated ~e Di~sion h~ become con~emed ~ defined in Section 3(a)(~8).'o~' the ' over app~ent- mbunderstandings within Act. ~ese two categories encomia:the the broker-de,er community about .the unive~e of. persons engaged in'~e status under the Securities Exchange Act ch~e or s~e o~ 'secu~ties. The' of 1934 ("Act") of se~uritles s~es- independent contractor does not appe~ persons designated ~' independent con- either in the Act's de~nlt[on'of ~oci- tractors. Questio~ have been raised ~ ated person in Section 3(a)(18) or else- to whether th~e.'persons ~e subject ~o where; thus~ merely denoting a s~es- the Act, ~he~er they come ~thin the per~n ~ ~ independent'contractor definition' of' ~ociated person~" in does nothing to ·resolve '~e' status'~nde: Section ~(a)(18) of'the Act, 'and whether the Act Of a given individual. The'crifi, they ~e employees subject to coverage c~ question is ~hether"a'so-c~]ed by a broker-de,er fi~'s .fidelity bond. dependent con,actor's activities '~e ~ese. i~ues have surfaced, recently be-. sdbject: 'to pongrol by a broker-de,er cause of,the incre~in~ n~ber .of fi~s' ~ithin 'the scope: of Section 3(a)(18) denoting ~ ~a/r s~espe~o~ ~ indepen- th~ Ac~.' Without ~at control ra/ation- dent: coht:actors. ~e Div~ion b'.con- ~i~, the ~aapersoa must be registered ceded that some zecu:it~es..s~ezpe~o~ indlvidu~y ~ a broker-de,er., ' c~ling ~emselves independent c~ntrac- '; :..- . .' to~ have 'f~ed either to .reg~ter .wi~ 'Confusion conceding 'the ~ue of the Comm~ion ~ broker-de,ers or wi~ "dontrol" seems ~'be at ~e core a s~-re~lato~ o~anlzation ("SRO"). ~e independent contractor debar. ~e ~ ~oclated perso~ of a registered presumption that ~ independent contrac- broker-de,er. In order ~ forest~l ~y tot, by definition, c~not be subject to re~Jato~ problems relating to such the control of an employer broker-de,er development, I would like to take this ~s inco~t. Pertinent agency law makes opportunity to restate the Commi~ion's it cle~ th~t'~ individu~ c~ be den6t- long-standing policy towed independent ed properly ~ an independent con,actor contractor. '. ~d still be subject to' the consol of ~ ~ A ' ' employer ii th&ir relationship is one ct requires that a pe~oh selling p~ncip~ '~d agent or m~ter' and set- secu~ti~ be regis~red wlth 'the' Com- cant.. Dist~n~bhlng ~tween' the tnde- m~ion ~ a broker-de,er under ~ctlon pendent contractor who ac~ ~ a pr~n- ~ 1983, Commerce Clearing ~ouac~ Acc. SEC No-Act[on Letters cipal rather than aa a servant or agent b a question of fact. Each situation must be scrutinized to determine how much control can be exercised' by a broker- dealer over· the acts of the' independent contractor. .: 'It has been a long-standing'policy of the Commission that ·independent· contrac- tors whose selling' .activities were con- trolled .by their broker-dealer employers could be characterized az employees the puzposes of the Act. 'As early ms 1945,1 prior to the introduction of the term "associated person" in the Act, the' Commission identified "control" by a broker-d~aler as the sole standard'for determining whether a person was an em- ployee for purposes of attaching liability to a broker-dealer employer under Sec- tion 15(b) of the Act.2 At that ~ame time, the Commission stated that use of the term ."employee" in Commission rules or rel~asee could include free-lance salesmen or other persons whether or not such persons would be deemed em- ployees in some statutory context other than the federal securities laws. Neither of these Commission interpre- tive positions was changed with the in- troduction of the concept of "associated persbn" to the Act by. the Securities Acts Amendments of 1964. Indeed, the legislative history of Section 3(a)(18) of the Act makes it clear that the phrase "associated person" was created "for · convenience of reference" to' newly adopted statutory provisions of the'Act · which . authorized direct disciplinary action against :individuals.a These was no "deske' to alter the Act's applicability to parso~ previously held to be employees, i.e.,, salespersons controlled by .a-firm, including those who were independent contractors. Rather, the Commission's General Counsel, now' Commissioner Loomis, stated that the purpose of the new definition was 'to preserve the Act's existing applicability to persons con- trolled by a broker-dealer or controlling a broker-dealer, such as partners? of- · (AlSril 9, 1945). 2. Section 15('0)' ol the A~t autholized Federal Securities Law Reports 78,117 fleers and directors.4 Section 3(a)(18) was drafted ' to incorporate almost identical language, to that already ap- pearing in Section 15(b) of the Act. Thus, it. is clear that. the independent contractor salesperson may be deemed to be an employee and associated person under the Act ff the .requisite control. relationship exists. Accordingly, independent co~tractor salesperions' who act, az independent principals, in selling or inducing the purchase or sale of securities must be registered with the Commission '. aa broker-dealers. Likewise, an indepe!~dent. contractor salesperson, whose activities are subjedt to control by a broker- dealer, whether by-contract or other- wise, must be registered with a SRO aa an associated person and should be coy- ered by the' employer broker-dealer's fidelity bond. Broker-dealers may not' shift their obligation to control or su~ pervise the activities of their indepen- dent contractor salespersons who are az- sociated persons, and contractual .terms that attempt to limit broker-dealer lia- bility for the acts of such persons under the federal securities laws are of no ef- fect. While we believe the SE. Os have con- sistently required their member~ to assume appropriate supervisory responsi- bilities for independent, contractors who are not separately registered az broker- dealers, we recognize that,· in certain instances, SRO rules may not have been applied to all such~ independent- con- tractors.. In this 'connection, we also be- l/eve' that 'it is hnportant to emphaaiZi ........ that a simple denial of "control" of an independent contractor by a broker-deal- er would not remove its' responsibility for Supervising that person.. To the ex- 'tent that a Cmn forms a'~elationshlp with an - independent contractor, that finn would be responsible for either (1) en- suring that the independent contractor was registered aa a broker-deale~: or (2) assuming the supervisory responsibilities Involving securities, or had wfl~ully ~olated ' any provtxion of the Securities Act of 1933 or 1642 (1963) 77,303 78,'118 SEC No-Action Letters Grec~ ~4tnerlcen M~nagernent and [a~e:tment ~o. attendant to a relationship with an asso- ciated person. Therefore, the Commission believes that. if · a. salesperson was. not registered and a broker-dealer permitted him to hold out to the public that he,was acting:, on .behalf. of that firm, 'such salesperson, would be deemed to be an associated person of the broker:dealer. We are advising all the SROs of 'our views on this matter so that any ne~es- saw modifications in .their rules and enforcement procedures which presently conflict with the Commission's' position on the status of independent contractors under the Act--can be made. It should.hq noted that., the Commission's: position does not prevent a 8KO from.prescribing rules for its members which .are more strictlve than the .Act on how the 'rela- tionship 'between a broker-dealer and i~ associated persons should be structured: I hope through the clarification of this matter,that we ~are .able to assure uni- form application, of the Act...to every'-. broker-dealer. In this ~egard, ,. if you have.,any questiens concerning indepen- dent contractorl, pleas~ contact Sarah Ackerson at (202) 272-2857. [No. lett'~r o! inquiry in $~ O~eial files. CCH. ] .... .. . [~ 77,30f] Grea} ,~rneri~:an M~:na~ernent and.lnve~trnent~ lnc ..... . .. Securities and Exchaage Commission, Divlsion. o[ Investn~ht Management. August' 27, 1982. (Available September 27, 1982.) On S~C Significant List o[':November 30, 1982. 'Correspondeoce in full text. - . .. Investment Company Act--DeHni~on"~[ ~ ' ' ' ' · Inves~ent Company--Real Estate Develop- ment Concem--~ortgage Lendin~ Acti~ffes.~A real estate company in business to own, operate and develop rial'property, and that ellg~ge5 in mcrt~e lendi~g as a result of pro- riding purchase money fil~aaclng in co'meet/on ~vkh the sale of real estate,' may conduct 'these activities Without ~e~st~tion under the Investment Company Ac~ The positiofi of the Dividon of h~vestment. Manag~ment"is anchored bra cbncern.thai the inte~st ?e. property securing the purchase rnonsy.mortgage notes will in all eases be a mortgdg= mterest ~nd3r ~pplicable state law. . . "See g 47,355, "Investment Companle~Definitlous- division, Volum~ . On beh~f of Great ~eric~ Man- from the Company's providing purina agement .and' Investment, Inc. ("Great: Americah" ~ the "Company") we. are wxRing' regarding :the.possible app ication of the.Investment Company Act. of 1940 (th~ "1940 .Act") ~o Great Amer/can- should the. Company effect the proposed ' business .transactions outlined, herein~. We have concluded .that.'·Grea~ American would not be deemed to be an investment company, under the ~940 Act as a.result of the circumstances'set forth below· and we seek your concurrence in our view... The Company " Great American is incorporated under the laws.,.of the State of Delaware and is a real estate company e~?gag~d in'.the business o£ owning, operating, and developing real properties (which inclu~le hotels and morals, apartment communi; ties, residential, development propertiea~ and unimproved lane) and in the' busi- ness of real estate mortgage lending, Il 77,304 including mortgage lending, resulti'ng money financing in connection with the sale of its real estate assets-from time .to time. Grea~ Amer/can ,conducts the ma-.- jority , of, its ..business through wholly ..... owned :subsidiaries that have.bee, n in- corporatsd. :'in. 'vazious . Southeestern states... ., , In , order to reduce' its' outstanding debt and redeploy .its assets into ~ther real~ estate. 'related investments ~he' Com- pany may wish over a period of time to dispose Of a substantial amount of,the present .,real property assets o~ the Company. Upon disposition of these assets,. Great American's asset portfolio may consist, ~or a period of.~time,..pri- m~rillriof 'purchase money notes received as partial consideration for the 'asset sales. To the extent that'Great American does~ n6t. reduce outstanding indebted- ness with the proceeds of the disposition or real estate assets, Great American intends to use' such proceeds to make ~) 1982, Commerce Clearing House, Inq. ~t available. pickup and the service ~vailable on ~Ve shall not ting but not coverage is ~s, including ervice Guide integrity of mnel and to Consult the Express. within the 48 Contiguous United States For Pickup or Customer Service call: ~ 1-800-AIRBORNE (1-800-247-2676). FLIGHT READY LETTER EXPRESS ,41RBORNE - EXPRE55. ROM 717-761-4551 T.H.E. FINANCIAL GROUP STE 201 1 KACEY CT SENTS~ MECHANICSBURG PA 17055 3141 603 8415 SHIPMENT NUMBER !3141 603 8415 ~3~1 603 8~'~5 17_')/,7/.% #703 I':RLXE [I/97') WF ~ Exhibit A REGIONAL DEFENSE LITIGATION LAW [IRM [ MAICSI ,% DF e r_I 'Y, WARNER, Goc m ] 1845 Walnut Street, Philadelphia~ PA 19103~717 (215) 575-2600. Fax (215) 575-0865 Direct Dial: 215-575-2679 Email:adavitt~mdwcg. com May 14, 2002 VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED AND REGULAR MAIL Eric A. Huck T.H.E. Financial Group, Ltd. 1 Kacey Court, Suite 201 Mechanicsburg, PA 17055 Re: Shirley E. And and Ralph H. Grief v T.H.E. Financial Group, Ltd. Our File No.: 16169-00197 Dear Mr. Huck: As you are aware, the undersigned are counsel to Philadelphia Insurance Companies with respect to the above-referenced matter. We are in receipt of a copy of your correspondence to Philadelphia Insurance Companies forwarding the "Statement of Claim" by claimants Shirley E. Aud and Ralph H. Grier. We have been requested to respond to you. Our review of the Statement of Claim indicates that this matter involves the same (or substantially similar facts and circumstances) as set forth in the arbitration matter entitled John D. Coffman, et. al. v T.H.E. Financial Group, Ltd. which was also forwarded by yom- company to Philadelphia Insurance Companies for consideration. As you are aware, Philadelphia Indemnity Insurance Company denied defense and indemnity in the Coffman, et. al, matter in correspondence dated October 29, 2001. The terms of Philadelphia Indemnity correspondence are incorporated herein as if set forth in full. Please be advised that the same terms of denial apply to the Shirley Aud and Ralph Grier claims. Further, with respect to the Aud and Grier claims, please note that the Statement of Claim includes allegations of sales of products taking place prior to the retroactive date of the Philadelphia Indemnity policy. Accordingly, Philadelphia Indemnity supplements the terms of its denial set forth in its October 29, 2001, letter in this respect. We also note that certain sales of products in some or all of the claims took place after the termination of Robert Taylor's employment. Also, the Aud and Grier Statement of Claim includes the alleged sale of a product entitled Lifeline Program Viaticals. In this regard, the policy provides, in pertinent part: May 14, 2002 Page 2 MANUSCRIPT EXCLUSION Specified Products Exclusion - Viatical In consideration of the premium paid for this Policy, it is agreed that the Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Insured: SPECIFIED PRODUCTS EXCLUSION In consideration of the premium charged, it is hereby understood and agreed that this policy does not apply to any claim arising out of the following products: 6) promissory notes, i.e. an investment whereby the maker agrees to pay to the payee a specific sum of money either on demand or at a fixed or determinable future date; 7) viafical products including viatical settlement and viatical contracts; or 8) callable certificates of deposit. Philadelphia Indemnity maintains its denial of coverage on all grounds set forth in its letter of October 29, 2001, which terms are incorporated herein. Philadelphia Indemnity supplements these grounds with reference to the Aud and Grier claims as set forth herein. We are also in receipt of correspondence from T.H.E. Financial Group, Ltd., forwarded to Philadelphia Insurance Companies on December 10, 2001, contesting the grounds of the Philadelphia Indemnity coverage disclaimer dated October 29, 2001. In this regard, our office has forwarded written requests in order to further evaluate T.H.E.'s request for reconsideration. We have not received any responses to those requests. T.H.E.'s failure to comply with those outstanding requests precludes Philadelphia Indemnity from reconsidering its disclaimer of coverage as requested by T.H.E. Accordingly, please forward a complete response at your earliest convenience to the attention of the undersigned. Please also forward a complete responses to the enclosed written request for information with respect to the Aud and Grier claims. Upon receipt of full responses to the same our offices will contact you. In addition, please provide current contact information for Robert Taylor. Philadelphia Indemnity fully reserves its rights with respect to any matters not set forth in its disclaimer of coverage dated October 29, 2001, or herein. Thank you for your cooperation in this matter. ~y~.s, ~~ ANDREW W. DAV1TT AWD/rma Enclosure REQUESTED DOCUMENTS 1. Please provide a copy of the broker/dealer's policies and procedures pertaining to outside business activities as well as "selling away" during the period of 1997 through 2002; 2. Please provide a complete copy of the Registered Representative's personnel file and/or licensing and registration file including, but not limited to, outside business disclosure forms, "selling away" memos and the like; 3. Please provide all audit review and office review files pertaining to review of the broker's office locations in Maryland and Pennsylvania; 4. Are any of the Claimants in the NASD Arbitration public customers of the broker/dealer? If so, please identify each of them; 5. If the Claimants named in the Shirly E. Aud and Ralph E. Grier action were customers of T.H.E. Financial, please provide copies of New Account forms, investment account statements and any other materials relevant to each of these individuals; Has the broker/dealer received any other complaints as to the Registered Representative, other than the above-referenced Claimants in the NASD Arbitration, which pertain to not only the Products/Promissory Notes at issue but also any other investment complaints? If the answer is in the affirmative, please identify the complaints and provide all documents related to each such matter; Please identify how and when the broker/dealer first became aware that this individual Registered Representative was engaged in the sale of Promissory Notes. Please provide any documents related to such notification and the broker/dealer's investigation thereof; 8. Please advise whether or not the broker/dealer was aware of or approved of the sale of the complained of product; 9. Please advise whether or not the Registered Representative ever brought this product to the broker/dealer's attention for any reason including but not limited to seeking approval for solicitation purposes; 10. Please advise whether or not the offices where the Registered Representative was working at were designated as "branch" versus a "non-branch" locations; 11. Please. identify whether or not this Registered Representative was serving in a supervisory capacity within the broker/dealer. If, in fact, he served in supervisory capacity, identify if there are any other individuals whom he supervised or who supervised him that were involved in the solicitation and/or sale of the same product; 12. Please provide a copy of the broker/dealer investigatory file in relation to that matter; 13. Please provide ail Form U-4's and Form U-5's, and each amendments to the Form U-4's and Form U-5's in relation to the Registered Representative at issue in this proceeding inchiding a current printout of the Registered Representative's CRD record; 14. Please provide all regulatory inquiries and responses thereto in relation to the product at issue and the Registered Representative; 15. Please advise whether or not the broker/dealer terminated the Registered Representative as a result of those transaction(s); 16. Please confirm whether or not, as a result of this incident or notification thereof, you have reviewed the books and records and/or performed an audit of the Registered Representative's facilities. If you have done so, please provide any non-privileged communications including, but not limited to, the audit review check list; 17. If any audit was performed in the audit cycle between the period of 1996 and 2001, please identify the date and locations of the audit and the documents referring to the Registered Representative's office audit; 18. Please provide any copies of any documents including, but not limited to, offering materiais and lawsuit/pleadings pertaining to the Promissory Notes at issue; 19. Please identify if you had any prior problems with any Registered Representative (prior to this incident) regarding selling away, private securities transactions or matters involving Promissory Notes that were not offered by nor approved through your broker/dealer; 20. Please identify any other Registered Representative(s) who sold this particular type of product(s). If the answer is in the affirmative, please identify by name any Registered Representative and any affiliation or association with this particular Registered Representative. Exhibit E $. JOSEPH CURRAN, JR. Attorney Genial C~'~t~N M S~PA~D DONNA HILL STATON (410) $76-6S32 ~'~ \~ STATE OF MARYLAND OFFICE OF THE ATTORNEY GENERAL SECt~TmS DtXqStON 1V~LANIE SEhrrER LUBIN Securities Commissioner (410) 576-633%°' June 12, 200'0' President ~ ~?¥~' ~,~ / T.H.E. Financial Group, Ltd. Mech~icsburg, PA 17055-5596 " ........ ..-.' ', ~ _il_- q,O ~ ', ] ~aseNos. 2000-0601 ~ t ~ ' ' / Dear ~. T~antino. ~'~ ~ ~/~ I understand that Mr. Taylor was a registered agent for T.H.E. Financial Group, Ltd. We are loo~ng at his activities in co~ection with the sale of promisso~ notes by Rolls Royce Ltd. and Morning St~ Ltd. C~ you please provide me ~e following info~ation by July 3, 2000: 1. ~y due diligence files on Rolls Royce Ltd. ~d Morning St~ Ltd. e~ ] ~ 2. ~y records showing that ~. Taylor requested pe~ission to sell, and T.H.E. Financial Group au~ofized for sale, promisso~ notes issued by Rolls Royce Ltd. and Morning Star Ltd. o A list of all clients, with names and addresses, of Mr. Taylor who purchased promissory notes through him. T.H.E. Financial Group's policy governing "selling away." Any records ofMr. Taylor's outside business activity..~ C~f ~ T.H.E. Financial Group's policy governing outside business activity by its agents. Any records showing that T.H.E. Financial Group took steps to implement those policies referred to in '~¶4 and 6, including records of any audits of Mr. Taylor's office, any deficiencies noted and follow-up of the audits, and records showing whether the audits 200 Saint Paol Place * Baltimore. Man, land 21202-2020 Telephone Numbers: (41o) 576436(} · E-ma/l: ~ecufitics(fi!oagshqlemd.us Tclephone for Deaf: (410) 576-6372 THE 00137 Anthony Tarantino T.H.E. Financial Group, Ltd. June 12, 2000 Page 2 were announced or unannounced. Copies of any complaints concerning Mr. Taylor. fi./ Mr. Taylor's employment file and any compliance records relating to Mr. Taylor. 10. T.H.E. Financial Group's policies regarding announced and unannounced audits of ~ Offices of Supervisory Jurisdiction and other blanch or offsite offices. II. An explanation of the supervisory structure a T.H.E. Financial Group, with the names of specific supervisors for Taylor and an explanation whether his office was an Office of Supervisory Jurisdiction. 12. A list of all T.H.E: Financial Group's agents supervised by Taylor, with their addresses and current status with T.H.E. Financial Group. 13.. T.H.E. Financial Group's policies regarding audits by T.H.E. Financial Group's compliance department and by the OSJ of branch or offsite offices. O&Production reports for Taylor. This could be in the form /~ of monthly commission statements. If you need this request in the form of a subpoena, please let me know. Thank you for your attention. I look forward to heating from you. Very truly yours, Lucy A. Cardwell Assistant Attorney General THE 00138 Exhibit F Group ltd. July 3 I, 2000 Lucy A. Caldwell Assistant Attorney General 200 Saint Paul Place Baltimore, MD 21202-2020 Dear Ms. Cardwell, As per your request for information dated lune 12, 2000, the following responses correspond to your numbered questions: T.H.E. F!nancial Group, Ltd. (THE) had no prior knowledge of. Rolls Royce Ltd. or Morningstar Star Ltd., therefore THE has no due diligence, or any other flies on these companies. Mr. Taylor never requested permission fi.om THE to sell for these companies. We have no knowledge of any specific individuals who have bought promissory notes. It is NASD regulation, and therefore THE policy that registered representatives 01R) that are NASD licensed with THE must receive approval fi.om THE prior to the soliciting for any investment company not on TIIE's approved list. None reported to THE Reps must disclose and receive prior approval before soliciting for any companies not on THE's approved list. See pages 8, and 12 fi.om TilE's compliance manual. These are the policies that were in place during Mr. Taylor's tenure..THE instituted a mandatov/annual office compliance inspection for all RR starting in 1999. lVlr. Taylor was no longer a RR when the program commenced There were no complaints reported to THE against Mr. Taylor. See enclosed information. THE 00140 10. 11. 12. 13. 14. TH~ instituted a mandatory annual office compliance inspection program for all RR starting in 1999. Mr. Taylor was no longer a RR of THE when the annual compliance audit program commenced. At the time Rick Taylor was licensed with THE, his supentisor was Anthony Tarantino. His office was not an OSI. Mr. Taylor had no supervisory responsibilities when contracted with THE. THE instituted a mandato~j annual office compliance audit program for all RR staffing in 1999. It is TilE's policy that ifRR's office or client files does not pass compliance scrutiny, the RR will be required to correct the deficiency. Depending on the severity of the deficiency, the RR could be terminated. Please see the enclosed a checklists of information that is used when auditing a RR's office and selected client files See the enclosed production (commission) reports. If you have any other questions concerning this matter, please do not hesitate contacting me. Sincerely, Eric A. Huck, CFP THE 00141 TAYLOR Commission Statement Client Name Type Security Amount Submit Trade Pay Date Allow, AIM TRAIL MF TRAIL 246.75 04/01/98 06/30/98 07/30/98 1 0o.000/o AIM TRAIL MF TRAIL 286.08 07/01/98 09/30198 10/15/98 1 0O.00% AM SKANDIA TRAIL VA TRAIL 431.06 07101/98 09/30/98 10/30/98 10O.0O% AM SKANDIA VA TRAIL VA TRAIL 440.79 04/01/98 06/30/98 07/30/98 100.000/o AUD, SHIRE MF CHTRX 615.00 07124/98 07/24198 08/I 5/98 4.00% AUD, SHIRE MF CSTGX 615.00 07/27/98 07/27/98 08/15/98 4.00% AUD, SHIRE MF CHTRX 615.00 08/25/98 08/25/98 09/15/98 4.0O% AUD, SHIRE MF CSTGX 615.0O 08125/98 08125/98 09/15/98 4.00% AUD, SIIIRLEY MF AGWFX 612.62 06/25/98 06/25/98 07/30/98 4.00% AUD, SHIRLEY MF GTTBX 612.62 07/27/98 07/27/98 08/15/98 4.00°/0 AUD, SHIRLEY MF G'I-rBx 612.62 08/25/98 08/25/98 09/15/98 4.00% CROSS, BETT MF CHTRX 166.66 06/10/98 06/10/98 07/30/98 4.500/', CROSS, BEI~ MF CHTRX (I 66.66) 06/10/98 06/10/98 08/15/98 4.50% CROSS, BE'Ir MF CHTRX 166.66 07/10/98 07/10/98 07/30/98 4.500/0 CROSS, BETT MF CHTRX 166.66 08/10/98 08/10/98 09/15/98 4.500/0 CROSS, BETT MF CHTRX 166.66 09/10/98 09/10/98 09/30/98 4.50% CROSS, CHAR MF GTTBX 166.66 08/25/98 08/25/98 09/15/98 4.00% CROSS, CHARL MF AGWFX 166.66 06/25/98 06/25/98 07/30/98 4/00% CROSS, CHARL MF GTI~X 166.66 07/27/98 07/27/98 08/15/98 4.00°/,, FRANKLIN TRAIL MF TRAIL 5.37 05/01/98 07/31/98 09/15/98 100.000/, GRIER, RALPH MF AGWFX 1,287.63 06/25/98 06/25/98 07/30/98 4.00% GRIER, R~LPH MF GI~BX 1,287.63 07/27/98 07/27/98 08/15/98 4.000/0 GRIER, RALPH MF CHTRX 1,300.00 07127198 07/27198 08115/98 3.00*/0 GRIER, RALPH MF CSTGX 1,300.00 07/27198 07/27198 08/15/98 3.0O0/,, GRIER, RALPH MF rj I ltfX 1,287.63 01~25/98 08/25198 09/15198 4.000/, GRIER, RALPH MF CHTRX 1,300.00 08/25/98 08/25/98 09/15/98 3.0O% GRIER, RALPH MF CSTGX 1,300.0O 08/25/98 08/25/98 09115/98 3.00% IDEX TKAIL MF 'fRAIL 245.96 04/01/98 06/30/98 07/30/98 100.00% IDEXTRA[L MF TRAIL 277.52 ' 07/01/98 09/30/98 10/30/98 100.00% SELIGMAN FDS TRAIL MF TRAIL 53.98 04J01/98 06/30/98 07/30/98 100.00'/0 SELIGMAN TRAIL MF TRAIL 4.53 07/01/98 09/30/98 10/30/98 100.0O% WOODS, RONA MF CSTGX 50.00 06/10/98 06/10/98 07/30/98 4.76% WOODS, RONA MF CSTGX (50.0O) 06/10/98 06'10/98 08115/98 4.76% WOODS, RONA MF CSTGX S0.0O 07/10/98 07/10/98 07/30/98 4.76% WOODS, RONA MF CSTGX 50.00 08/10/98 08/10/98 09/I 5/98 4.76% WOODS, RONA MF CSTGX 50.00 O9/10/98 09/I 0/98 09/30/98 4.76% $16,502.75 07/30/19 Pai'd Corem Outstanding 246.75 0.00 286.08 0.00 431.06 0.00 440.79 0.00 24.60 0.00 24.60 0.00 24.60 0.00 24.60 0.0O 24.50 0.00 24.50 0.00 24.50 0.00 7.50 0.00 (7.50) 0.00 7.50 0.00 7,50 0.00 7.50 0.0O 6.67 0.00 6.67 (0.01) 6.67 0.00 5.37 0.00 51.51 0.00 51.51 0.09 39.00 0.00 39.00 0.0O 39.0O 0.0O 39.0O 0.0O 245.96 0.00 277.52 0.0O 53.98 0.0O 4.53 0.0O 2.38 0.0O (2.38) 0.0O 2.38 0.00 2.38 0.0O 2.38 0.00 S2,524.12 ($0.01) I x DO = Monday, July 24, 2000 COMM98C Page 1 THE 00145 '1 TAYLOR Commission Statement Client Name Type Security' Amount Submit Trade Pay Date Allow. AUD, SHIR MF CHTILX 615.00 09/25/95 09/25/98 10/15/98 AUD, SHIR MF CSTGX 6t5.00 09/25/98 09/25/98 10/15/98 AUD, SHIRE MF CHTRX 615.00 10/26/98 10/26/98 l 1/15/98 AUD, SHIRE MF CSTGX 615.00 10/26/98 10/26/98 11115/98 AUD, SHIRLEY MF AHYBX 612.62 09/25/95 09/25/98 10/15/98 AUD, SHIRLEY MF GTTBX 612.62 10/26/98 10/26/98 I I/t5/98 CROSS, BETT MF CHTICX 166.66 I0/12/98 10/12/98 10/30/98 CROSS, CHAR MF G'I'rBX 166.66 10/29/98 10/29/98 11115/98 CROSS, CHAKL MF AHYBX 166.66 09/25/98 09/25/98 10/15/98 GRIER, RALPH MF CHTRX 1,300.00 09/25/98 09/25/98 t0/15/98 GRIER, RALPH MF CSTGX 1,300.00 09/25/98 09/25/98 10/15/98 GPd ER, RALPH MF AHYBX 1,287.63 09/25/98 09/25/98 10/15/98 GRIER, RALPH MF CHTP, X 1,300.00 10/26/98: 10/26/98 I I/15/98 GRIER, RALPH MF CSTGX 1,300.00 10/26/98 10/26/98 11/15/98 GRIER, KALPI~ MF GTTBX 1,287.63 10/26/98 10/26/98 11/15/98 OVERH, CHILI MF ABBCX 250.00 09/23/98 09/23/98 [0/15/98 OVER//. CHRI MF ABLCX 50.00 10/20/98 10/20/98 ll/15/98 WOODS, RONA MF CSTGX 50.00 10/12/98 10/12/98 10/30/98 r $12,310.48 10/15/19 Paid Corem Outstanding 4,00% 24.60 0,00 4.00% 24.60 0.00 4.00% 24.60 0.00 4.00% 24.60 0.00 4.00% 24.50 0.00 4.00% 24.50 0.00 4.50% 7,50 0.00 4.00°/0 6.67 0.00 4.00% 6.67 0.00 3.00% 39.00 0.00 3.00% 39.00 0.00 4.00% 5L51 0.00 3.00% 39.00 0.00 3.00% 39.00 0.00 4.00% 51.51 0.00 1.00% 2.50 0,00 1.00% 0.50 0.00 4.76% 2.38 $432.64 $0.00 COMM98D Monday, July 24, 2000 Page THE 00146 T. H.E. F I N A N C I A L G R O U P , L t d . C 0 M M I S S I 0 H S T A T E M E ~ T Page -1- ~presentative: TAYLOR 07/25/20 [ient Hame Inv Invest. Amount submit Trade Comm. Re- Anticipated Paid Outstanding Type Name Invested Date Date Date Arrow. Ca, mission Conmission Commission 4ER. SKANDIA TRAIL VA TRAIL 346.~3 01/01/97 03/31/97 04/30/97 1.000 346.73 346.?3 JO, SHIR MF CHTRX 615.00 05/27/97 05/27/97 06/15/97 .0450 27.68 27.68 JO, SHIR MF CSTGX 615.00 05/27/97 05/27/97 06/15/97 .0450 27.68 27.68 JD, SHIRE MF CHTRX 615.00 03/25/97 03/25/97 04/15/97 .0450 27.68 27.68 JO, SHIRE HF CSTGX 615.00 03/25/97 03/25/97 04/15/97 .0450 27.68 27.68 JO, SHIRE MF CHTRX 615.00 04/25/97 06/25/97 05/15/97 .0450 27.68 2r.68 JO, SHIRE MF CSTGX 615.00 06/25/97 06/25/97 05/15/97 .0450 27.68 27.68 JO, SHIRLEY HF GTTBX 612.62 03/25/97 03/25/97 04/15/97 .0400 2&.50 24.50 JO, SHIRLEY NF GTTBX 612.62 06/25/97 06/25/97 05/15/97 .0400 26.50 24.50 ~, SHIRLEY ME GTTBX 612.62 05/27/97 05/27/97 06/15/97 .0400 26.50 24.50 .AUV, GAIL MF ABLBX 166.66 03/25/97 03/25/97 04/15/97 .0400 6.67 6.67 .AUV, GAIL MF AOLBX 166.66 06/25/97 04/25/9? 05/15/97 .0400 6.67 6.67 .AUV, GAIL MF A~LBX 166.66 05/27/97 05/27/9? 06/15/97 .0400 6.67 6.67 .AUV~LT, PE. MF GITBX 16~.66 03/25/97 03/25/97 04/15/97 .0400 6.67 6.67 .AUVELT, PE. MF GTTBX 166.66 04/25/97 04/25/97 05/15/97 .0400 6.67 6.67 .AUVELT, PE. MF G7TBX 166.66 05/27/97 05/27/97 06/15/97 .0400 6.67 6.67 [OS~, BETT MF CHTRX 166.66 04/10/97 04/1~/97 04/30/97 .0475 7.92 7.92 lOSS, BETT HF CHTRX 166.66 05/09/97 05/09/97 06/15/97 .0450 7.50 7.50 ~OSS, BETT HF CXTRX 166.66 06/10/97 06/10/97 07/15/97 .0450 7.50 7.50 lOSS, CHAR MF GTTBX 166.66 04/25/97 06/25/97 05/15/97 .0400 6.67 6.67 ~055, CHAR HF GTTOX 166.66 05/27/97 05/27/97 06/15/97 .0600 6.6? 6.67 ~oss, CHARL ~F GTTGX 166.66 03/25/97 03/25/97 04/15/97 .0400 6.67 6.67 .T. GLOBAL TRAIL MF TRAIL 67.31 01/01/97 03/31/97 04/15/9T 1.000 67.31 67.31 ~RVE, EDGA HF CHTRX 250.00 05/27/~7 05/27/97 06/15/97 .0300 7.50 7.50 ~RVE, EDGA MF CSTGX 250.00 05/27/97 05/27/97 06/15/97 .0300 7.50 7.50 ~RVE, EDGA MF AAGFX 250.00 05/27/97 05/27/97 06/15/97 .0300 7.50 7.50 HER, RALPH NF CSTGX 1,300.00 03/25/97 03/25/97 04/15/97 .0400 52.00 52.00 HER~ RALPH MF CHTRX 1,~00.00 03/25/97 03/25/97 06/15/97 .0400 52.00 52.00 IIER, RALPH MF' GTTBX 1,287.63 03/25/97 03/25/97 04/15/97 .0400 51.51 51.51 IIER, RALPH ~F CHTRX 1,300.00 04/25/97 04/25/97 05/15/97 .0400 52.00 52.00 ILEA, RALPH NF CSTGX 1,300.00 04/25/97 04/25/97 05/15/97 .0400 52.00 52.00 IIER, RALPH ME GTTBX 1,287.63 04/25/97 04/25/97 05/15/97 .0600 51.51 51.51 HER, RALPH ~F CHTRX 1,300.00 05/27/97 05/27/97 06/15/97 .0400 52.00 52.00 HER, RALPH NF CSTGX 1,300.00 05/27/97 05/27/97 06/15/97 .0600 52.00 52.00 ILEA, RALPH MF GTTHX 1,287.63 05/27/97 O5/27/97 06/15/97 .0400 51.51 51.51 !ACOCK, EL ~F GTTCX 100.00 05/27/97 05/27/97 06/15/97 .0425 4.25 6.25 ~ACOCK, EL MF GTTCX -100.00 05/27/97 05/27/97 07/15/97 .0425 -4.25 -6.25 ~LIGMAN TRAIL MF TRAIL 92.67 01/01/97 03/31/97 04/30/97 1.000 92.67 92.67 ~BST, TIHO HF AVLFX 83.33 04/10/97 06/10/97 04/30/97 .0475 3.96 3.96 ?BST, T]MO HF CSTGX 83.33 06/10/97 06/10/97 06/30/97 .0475 3.96 3.96 ~OST, T[MO HF AVLFX 83.33 05/09/97 05/09/97 06/15/92 .0475 3.96 3.96 ~OST, TIMO MF CSTGX 83.33 05/09/97 05/09/97 06/15/97 .0475 3.96 3.96 ~OOS, RONA MF CSTGX 50.00 06/10/97 04/10/97 04/30/9? .0676 2.38 2.38 ~OOSo RONA MF CSTGX 50.00 05/09/97 05/09/97 06/15/97 .0476 2.38 2.38 ~ODS, RC~A MF CSTGX 50.00 06/10/97 06/10/97 07/15/97 .0476 2.38 2.38 -.00 -.00 -.00 -.00 -.00 -.00 .00 .00 .00 .00 '.00 .00 .00 .00 .00 -.00 -.00 -.00 -.00 -.00 -.00 -.00 o.00 -.00 - .00 -.00 -.00 THE 00149 Exhibit G l, F~UL~ ;~ 0 LUUL i :il Bv STEVENS & LEE ,~ PROFESSIONAL GORDORATiON 111 North Sixth Street P. O. Box 679 Reading, PA 19603-0679 (610) 478-2000 Fax (6]0) 376-5610 www.stevenslee.com August 19, 2002 Direct Dial: (610) 478-2020 Email: wp~stevenslee.com Direct Fax: (610) 988-0813 Andrew W. Davitt, Esquire ,.at ...... , ~,,-vmehe3, Warner, Co!em&n 8: Gogg,n 1845 Walnut Street Philadelphia PA 19103-4717 Re: Coffman v. T.H.E. Financial Group, Ltd. Philadelphia Indemnity Insurance Company Policy No. PHSD005934 Claim No.: PHCL01100073236-E; Your File No.: 16169-00197 Dear Mr. Davitt: This letter responds to yonr letters dated July 12, 2002 and August 13, 2002. I note initially that you stated in your July 12, 2002 letter that there was earlier correspondence from 3'our client, Philadelphia Indemnity Insurance Corporation ("PIIC"), attached to such letter, however, no such correspondence was attached. In addition, I wanted to correct your misstatement that we had only responded to 18 of your 20 categories of requested information in our earlier correspondence. To the contrary, our correspondence of June 28, 2002 completed our response to all categories of information requested by you. Our client, T.H.E. Financial Group, Ltd. ( THE Financial ), continues to be amazed at PIIC's attempt to deny coverage for the NASD claims captioned Coffman, et al v. THE Financial, NASD Case Number 01-04198, and Aud, et al v. THE-Financial, NASD Case Number 02-00461. Specifically, we do not view the new, additional alleged "exclusion" to coverage, namely exclusion (e), as a good faith basis to deny coverage. As THE Financial had no knowledge ol; or information concerning, the alleged sale by Mr. Taylor of promissory notes, THE Financial did not ~know whether a Wrongful Act (as defined in the policy) had occurred. In fact, to this da3, THE Financial has not received any documentary evidence (other than third-party allegations) · Cherry Hill · Harrisburg · Reading · Scranton SLI 286325vl/62140.006 · Lancaster · Lehigh Valley · Valley Forge · Wilkes-Barre · Philadelphia · Wilmington~ STEVENS & LEE Andrew M. Davitt, Esquire August 19, 2002 Page 2 that Mr. Taylor sold the alleged promissory notes. Accordingly, there is no way that THE "knew or could have reasonably foreseen that such Wrongful Act (of which THE Financial still has no knowledge other than third party allegations) could lead to a claim or suit." In addition, your attempt to call a regulator's request for information as indicative of "knowledge of a Wrongful Act that could lead to a claim or suit" is akin to bad faith. Ifa regulator provides a request for information to a broker-dealer, it does not become incumbent on the broker-dealer to assume whatever the request concerns is tantamount to the filing of a third- party customer claim against the broker-dealer. PIIC's logic in this regard is misplaced. Finally, PIIC apparently fails to comprehend the fact that the Coffman and Aud claims are _supervisory claims. None of the exclusions or exceptions to coverage which you have cited in your earlier correspondence address the fact that THE had no knowledge of the alleged conduct (if it occurred) and, for that reason, the alleged basis of liability against THE involves solely supervisory obligations. There is no way that THE Financial could have foreseen such a claim when it received a regulator's inquiry in June 2000 and responded with information in July 2000. Accordingly, THE Financial has instructed me to inform you that it reserves all rights to prosecute a claim against PIIC for bad faith denial of benefits. Please accept this letter as THE Financial's final request for coverage from PIIC. We wholly disagree with any allegation by PIIC that THE Financial has failed to provide any information requested and we are confused by your request in your July 12, 2002 letter to provide PIIC with "written material." Also, we do not view subjecting Messrs. Huck and Tarantino to a deposition as indicative of good faith investigation into coverage issues. If you want to take "deposition testimony" from THE personnel, then it can be done in a declaratory judgment or bad faith action alongside similar deposition testimony from individuals associated with PIIC. If you need information to complete your "insurance coverage investigation" then please request such information in writing and we will be happy to produce any information not already provided. If you view any portion of the applicable policy as requiring Messrs. Huck and Tarantino to make themselves available to provide sworn testimony on issues relating to the existence of coverage, please inform me of such alleged provisions. We would appreciate a prompt communication of PIIC's "final" position concerning coverage as THE Financial continues to suffer damages as a result of PIIC's bad faith denial to date. SL1 286325vl/62140006 STEVENS & LEE A PROFESSiONAl_ CORPORA]ION Andrew M. Davitt, Esquire August 19, 2002 Page 3 WPT:lmb On a personal note, I hope your hip surgery went well and your recovery is speedy. Very truly yours, STEVENS & LEE William P. Thornton, Jr. SLI 286325vl/62140.006 IN THE COURT OF COMMON PLEAS CUMBERLAND COUNTY, PENNSYLVANIA PHILADELPHIA INDEMNITY INSURANCE COMPANY, Plaintiff, T.H.E. FINANCIAL GROUP LIMITED, : JOHN D. COFFMAN, : MARTHA C. COFFMAN, : JOHN E. COFFMAN, : PATRICIA A. COFFMAN, : WILLIAM R. BISHOP, : KATHLEEN L. BISHOP, : MATTHEW J. BISHOP, : PAMELA BISHOP, : GEORGE H. MEENA, : MARINA MEENA, SHIRLEY E. AUD, : AND RALPH H. GRIER : Defendants. : · CIVIL ACTION - LAW · NO. 02-5199 T.H.E. FINANCIAL GROUP LIMITED'S ANSWER, NEW MATTER AND COUNTERCLAIM FOR DECLARATORY JUDGMENT T.H.E. Financial Group Ltd. ("THE Financial") sets forth the following answer, new matter and counterclaim for declaratory judgment in response to the complaint for declaratory judgment of Philadelphia Indemnity Insurance Company CPIIC"). 1. Denied. After reasonable investigation, THE Financial is without knowledge or information sufficient to form a belief as to the troth of the zdlegations in this paragraph and such allegations are therefore denied. admitted. required. 2. Admitted. 3. Admitted in part and denied in part. The first sentence of paragraph 3 is The remaining allegations are denied as conclusions of law to which no response is SL1 334225vl/62140.008 4. Admitted in part and denied in part. The first sentence of paragraph 4 is admitted. The remaining allegations are denied as conclusions of law to which no response is required. 5. Admitted in part and denied in part. It is ad~nitted that PIIC issued Policy No. PHSD005934 to THE Financial. The remaining allegations in paragraph 5 are all denied as conclusions of law to which no response is required. To the extent that any of the allegations of paragraph 5 are not conclusions of law, THE Financial specific~dly denies such allegations and strict proof at trial is demanded. As to any allegations involving PIIC, after reasonable investigation, THE Financial is without knowledge or information sufficient to form a belief as to the truth of the allegations and such allegations are therefore denied. 6. Admitted. 7. Denied. The allegations in this paragraph are all denied as conclusions of law to which no response is required. To the extent a response may be deemed required, the allegations are all specifically denied as stated. To the contrary, the Coffman claim alleges that THE Financial is liable for its alleged failure to supervise the activities of Richard S. Taylor ("Taylor"). By way of further answer, the Coffman Claim is a document which speaks for itself and any characterization of such document is specifically denied. 8. Denied. The allegations in this paragraph are all denied as conclusions of law to which no response is required. By way of further answer, the Coffman Claim is a document which speaks for itself and any characterization of such document is specifically denied. In addition, THE Financial incorporates its response to paragraph 7. 9. Denied. After reasonable investigation, TIlE Financial is without knowledge or information sufficient to form a belief as to the date it submitted information to Hess Agency. The remaining allegations in paragraph 9 are denied as conclusions of law to which no response 2 SLI 334225vl/62140.008 is required. By way of further answer, the information submitted by THE Financial is a document which speaks for itself and any characterization of such document is specifically denied. 10. After reasonable investigation, THE Financial is without knowledge or information sufficient to form a belief as to the truth of the allegations in this paragraph and such allegations are therefore denied. 11. After reasonable investigation, THE Financial is without knowledge or information sufficient to form a belief as to the troth of the allegations in this paragraph and such allegations are therefore denied. 12. After reasonable investigation, THE Financial is without knowledge or information sufficient to form a belief as to the truth of the allegations in this paragraph and such allegations are therefore denied. 13. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, PIIC's October 29, 2001 correspondence is a document which speaks for itself and any characterization of such document is specifically denied. 14. The allegations in this paragraph are specifically denied as stated. To the contrary, THE Financial, through counsel, forwarded correspondence on or about December 10, 2001 which informed PIIC that it was erroneous in its conclusions concerning coverage. 15. Admitted in part and denied in part. The first sentence of paragraph 15 is admitted. It is also admitted that the Aud claim alleged THE's failure to supervise Taylor. The remaining allegations are all specifically denied as stated and strict proof at trial is demanded. To the contrary, the Aud Claim alleges facts and circumstances giving rise to PIIC's obligations SLI 334225vl/62140.008 3 to defend and indemnify THE Financial with respect to its obligations under an insurance policy issued by PIIC to THE. 16. The allegations in this paragraph are all specifically denied as stated. To the contrary, PIIC's May 14, 2002 letter is a document which speaks for itself and any characterization of such document is specifically denied. 17. Admitted in part and denied in part. It is admitted that THE Financial provided a June 12, 2000 letter to PIIC. The remaining allegations in this paragraph are all specifically denied as stated. To the contrary, the June 12, 2000 letter is a document which speaks for itself and any characterization of such document is specifically denied. In addition, it is specifically denied that the June 12, 2000 letter makes specific inquiry regarding THE Financial's supervisory practices with regard to Mr. Taylor. To the contrary, no such inquiry is contained in the June 12, 2000 letter. 18. Admitted in part and denied in part. It is admitted that THE Financial provided a July 31, 2000 letter to PIIC. The remaining allegations in this paragraph are all specifically denied as stated. To the contrary, the July 31, 2000 letter is a document which speaks for itself and any characterization of such document is specifically denied. 19. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, PIIC's July 12, 2002 correspondence is a document which speaks for itself and any characterization of such document is specifically denied. 20. The allegations in this paragraph are specifically denied as stated. To the contrary, THE Financial's August 19, 2002 letter is a document which speaks for itself and any characterization of such document is specifically denied. SL1 334225vl/62140.008 4 21. The allegations in this paragraph are denied as conclusions of law to which no response is required. 22. The allegations in this paragraph are denied as conclusions of law to which no response is required. COUNT I 23. THE Financial incorporates its responses in paragraphs 1-22 of this answer as if set forth at length herein. 24. The allegations in this paragraph are denied as conclusions of law to which no response is required. To the extent a response may be deemed required, it is specifically denied that the allegations of damages in the Aud and Coffman Claims arise solely with respect to the sale of promissory notes and viatical products. To the contrary, the Aud and Coffman claims allege a failure to supervise by THE Financial concerning Taylor. 25. The allegations in this paragraph are denied as conclusions of law to which no response is required. To the extent a response may be deemed required, it is specifically denied that the allegations in the Aud and Coffman Claims are brought against THE Financial solely with respect to the sale of promissory notes and viatical products. To the contrary, the Aud and Coffman claims allege a failure to supervise by THE Financial conceming Taylor. 26. The allegations in this paragraph are denied as conclusions of law to which no response is required. WHEREFORE, THE Financial respectfully requests that this Court enter judgment against Philadelphia Indemnity Insurance Company, and declare that Philadelphia Indemnity Insurance Company has a duty to defend and indemnify THE Financial in the underlying Coffman, Aud and Grier Claims. 5 SL1 334225vl/62140.008 COUNT II 27. THE Financial incorporates its responses in paragraphs 1-26 of this answer as if set forth at length herein. 28. The allegations in this paragraph are denied as conclusions of law to which no response is required. 29. The allegations in this paragraph are denied as conclusions of law to which no response is required. To the extent a response may be deemed required, it is specifically denied that at the time any information was executed and submitted, THE Financial had actual knowledge and information of circumstances, allegations and or contentions which gave rise to the Coffman, Aud and Grier claims. To the contrary, THE Financial had no such knowledge. 30. The allegations in this paragraph are denied as conclusions of law to which no response is required. WHEREFORE, THE Financial respectfully requests that this Court enter judgment against Philadelphia Indemnity Insurance Company, and declare that Philadelphia Indemnity Insurance Company has a duty to defend and indermfify THE Financial in the underlying Coffman, Aud and Grier Claims. COUNT III 31. THE Financial incorporates its responses in paragraphs 1-30 of this answer as if set forth at length herein. 32. The allegations in this paragraph are denied as conclusions of law to which no response is required. To the extent a response may be deemed required, it is specifically denied that at the time any information was executed and submitted, THE Financial had actual knowledge and information of circumstances, allegations and or contentions which gave rise to the Coffman Aud and Grier claims. To the contrary, THE Financial had no such knowledge. 6 SLI 334225vl/62140.008 33. The allegations in this paragraph are denied as conclusions of law to which no response is required. 34. The allegations in this paragraph are denied as conclusions of law to which no response is required. WHEREFORE, THE Financial respectfully requests that this Court enter judgment against Philadelphia Indemnity Insurance Company, and declare that Philadelphia Indemnity Insurance Company has a duty to defend and indemnify THE Financial in the underlying Coffman, Aud and Grier Claims. COUNT IV 35. THE Financial incorporates its responses in paragraphs 1-34 of this answer as if set forth at length herein. 36. Denied. After reasonable investigation, THE Financial is without knowledge or information sufficient to form a belief as to the date it submitted information to Hess Agency. The remaining allegations in paragraph 9 are denied as conclusions of law to which no response is required. By way of further answer, the information submitted by THE Financial is a document which speaks for itself and any characterization of such document is specifically denied. 37. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the information submitted by THE Financial to PIIC is a document which speaks for itself and any characterization of such document is specifically denied. 38. The allegations in this paragraph are denied as conclusions of law to which no response is required. To the extent a response may be deemed required, the allegations in this paragraph are specifically denied. THE Financial specifically denies that it had any knowledge 7 SLI 334225vl/62140.008 of a potential claim for negligent supervision, in any manner, prior to its receipt of the Aud, Coffrnan and Grier Claims. To the contrary, THE Financial had no such knowledge. 39. The allegations in this paragraph are denied as conclusions of law to which no response is required. To the extent a response may be deemed required, the allegations in this paragraph are specifically denied. THE Financial specifically denies that it failed to disclose any knowledge of a potential claim for negligent supervision. To the contrary, THE Financial made all disclosures required of it in its submission of information to PIIC. 40. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, THE Financial incorporates its responses to paragraphs 38 and 39. 41. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, THE Financial incorporates its responses to paragraphs 38 and 39. 42. The allegations in this paragraph are denied as conclusions of law to which no response is required. WHEREFORE, THE Financial respectfully requests that this Court enter judgment against Philadelphia Indemnity Insurance Company, and declare that Philadelphia Indemnity Insurance Company has a duty to defend and indemnify THE Financial in the underlying Coffman, Aud and Grier Claims. COUNT V 43. THE Financial incorporates its responses in paragraphs 1-42 of this answer as if set forth at length herein. SLI 334225vl/62140.008 8 44. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the policy is a document which speaks for itself and any characterization of such document is specifically denied. 45. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the policy is a document which speaks for itself and any characterization of such document is specifically denied. 46. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the policy is a document which speaks for itself and any characterization of such document is specifically denied. 47. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the policy is a document which speaks for itself and any characterization of such document is specifically denied. WHEREFORE, THE Financial respectfully requests that this Court enter judgment against Philadelphia Indemnity Insurance Company, and declare that Philadelphia Indemnity Insurance Company has a duty to defend and indemnify THE Financial in the underlying Coffman, Aud and Grier Claims. COUNT VI 48. THE Financial incorporates its responses in paragraphs 1-47 of this answer as if set forth at length herein. 49. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the policy is a document which speaks for itself and any characterization of such document is specifically denied. SL1 334225vl/62140.008 9 50. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the policy is a document which speaks for itself and any characterization of such document is specifically denied. 51. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the policy is a document which speaks for itself and any characterization of such document is specifically denied. WHEREFORE, THE Financial respectfully requests that this Court enter judgment against Philadelphia Indemnity Insurance Company, and declare that Philadelphia Indemnity Insurance Company has a duty to defend and indemnify THE Financial in the underlying Coffman, Aud and Grier Claims. COUNT VII $2. THE Financial incorporates its responses in paragraphs 1-$1 of this answer as if set forth at length herein. 53. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the policy is a document which speaks for itself and any characterization of such document is specifically denied. 54. The allegations in this paragraph are denied as conclusions of law to which no response is required. By way of further answer, the policy is a document which speaks for itself and any characterization of such document is specifically denied. WHEREFORE, THE Financial respectfully requests that this Court enter judgment against Philadelphia Indemnity Insurance Company, and declare that Philadelphia Indemnity Insurance Company has a duty to defend and indemnify THE Financial in the underlying Coffman, Aud and Grief Claims. SL1 334225vl/62140.008 10 NEW MATTER 55. THE Financial specifically incorporates its responses in paragraphs 1 through 54 as if set forth at length. 56. THE Financial specifically incorporates the provisions set forth in Policy No. PHSD005934 and states that such policy provides coverage for THE Financial relating to the duty of PIIC to defend and indemnify THE Financial in connection with various claims, including the Coffman, Aud and Grier claims. 57. Paragraph 1 of the insuring agreement entitled "Errors and Omissions" provides for. coverage for THE Financial with respect to "all sums which the Insured shall become legally obligated to pay as damages resulting from any claim or claims first made against the insured and reported in writing to the company during the policy period for any wrongful act of the insured or of any other person for whose actions the insured is legally responsible, but only if such Wrongful Act occurs on or after the retroactive date and prior to the end of the policy period and solely in rendering or failing to render professional services by or on behalf of the securities broker/dealer named in Item 1. of the Declaration to a client of such securities broker/dealer." (hereinafter referred to as the "Errors and Omissions Coverage"). 58. In addition, Paragraph 2 of the Insuring Agreement sets forth that "defense costs" shall be included within the limits of liability and, pursuant to Paragraph 2, shall be the responsibility of the insurer, namely PIIC (hereinafter referred to as the "Defense Cost Obligation"). 59. Pursuant to its obligations under the Errors and Omissions Coverage and Defense Cost Obligation as well as additional provisions of the Policy, including any and all representations made to THE Financial by PIIC and/or its agents, PIIC is obligated to defend THE Financial and indemnify THE Financial with respect to the Coffman, Aud, Grier, and any other related claims. SLI 334225vl/62140.008 11 60. PIIC's claim for declaratory judgment is barred by the defense of accord and satisfaction. justification. 61. PIIC's claim for declaratory judgment is barred by the doctrine of consent. 62. PIIC's claim for declaratory judgment is barred by the doctrine of estoppel. 63. PIIC's claim for declaratory judgment is barred by the doctrine of fraud. 64. PIIC's claim for declaratory judgment is barred by the doctrine of illegality. 65. PIIC's claim for declaratory judgment is barred by the doctrine of 66. PIIC's claim for declaratory judgment is barred by the doctrine of latches. 67. PIIC's claim for declaratory judgment is barred by the doctrine of payment. 68. PIIC's claim for declaratory judgment is bm:red by the doctrine of privilege. 69. PIIC's claim for declaratory judgment is barred by the doctrine of release. 70. PIIC's claim for declaratory judgment should be dismissed because no claim can be stated under the policy language. 71. PIIC has acted in bad faith in denying the claim of THE Financial relating to the duty of PIIC to defend and indemnify THE Financial in connection with the Coffman, .Aud, and _Grier Claims. WHEREFORE, THE Financial respectfully requests that this Court enter judgment against Philadelphia Indemnity Insurance Company, and declare that Philadelphia Indemnity Insurance Company has a duty to defend and indemnify THE Financial in the underlying Coffman, Aud and Grier Claims. SLI 334225vl/62140.008 12 COUNTERCLAIM FOR DECLARATORY JUDGMENT 72. THE Financial specifically incorporates Paragraphs 1 through 71 as if set forth at length herein. 73. On or about April 1, 2000, PIIC agreed to provide insurance coverage to THE Financial in accord with Policy No. PHSD005934 (the "Policy"). 74. Pursuant to the terms of the Policy, including any and all representations made to THE Financial by PIIC and/or its agents, PIIC is obligated to defend THE Financial and indemnify THE Financial in connection with the Coffman, .Aud_, and Grief claims in accord with the Error and Omissions Coverage and the Defense Costs Obligation. 75. PIIC's obligation to defend and indemnify THE Financial arises out of the fact that the Coffman, .Aud and Grief claims all allege negligent supervision by THE Financial over its agents. 76. Under the Policy, PIIC is obligated to defend and indemnify THE Financial in connection with any claim for negligent supervision. WHEREFORE, THE Financial respectfully requests that this Court enter judgment in its favor in order that Philadelphia Indemnity Insurance Company is obligated to defend and pay defense costs incurred by THE Financial in connection with the Coffman, Aud and Grief Claims, in addition to providing indemnity to THE Financial in connection with such claims. Dated: March ___~_, 2003 STEVEN~ William P. hornton, )r. ~ Attorney I.D. No. 624~i~ 111 North Sixth Stro~ P.O. Box 679 Reading, Pennsylvania 19603 (610) 478-2000 Attorneys for Defendant, T.H.E. Financial Group Limited SLI 334225vl/62140.008 13 VEi~ICATION I, Anthony Tarantino, President ofT.H.B. Finaucial Group, verify th.at I am a defendant in the within action; that the attached Answer, New Matter and Counterclaim are based upon facts of which I have personal knowledge or information furnished to me by counsel; that the la~).guag¢ of the docum~m is that of counsel and not m.y own; and that the facts set forth in the foregoing document are true and correct to the best of'my knowledge, information and belief. I understand that thc statements herein arc made subject to thc penalties of 18 Pa. C.S.A. §4904 relating to unsworn falsification, to authorJfi, es. Date: March ~ ,2003 Anthony T~'~txino .,CERTIFICATE OF SERVICE I, William P. Thornton, Jr., Esquire, certify that on this date, I served a certified true and correct copy of the foregoing Answer, New Matter and Counterclaim for Declaratory Judgment upon the following counsel of record, by depositing the same in the United States mail, postage prepaid, addressed as follows: Date: March Eric A. Fitzgerald, Esquire Marshall, Dennehey, Warner, Coleman & Goggin 401 Adams Avenue, Suite 400 Scranton, PA 18510 __j~, 2003 [am P. Thomton, Jr. SL1 334225vl/62140.008 14 IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA PHILADELPHIA INDEMNITY INSURANCE COMPANY Plaintiff T.H.E FINANCIAL GROUP LIMITED, JOHN D. COFFMAN, MARTHA C. COFFMAN, JOHN E. COFFMAN, PATRICIA A. COFFMAN, WILLIAM R. BISHOP, KATHLEEN L. BISHOP, MATTHEW J. BISHOP, PAMELA BISHOP, GEORGE H. MEENA, MARINA MEENA, SHIRLEY E. AUD, AND RALPH H. GRIER Defendants NO. 02-5199 Civil COMPLAINT IN CIVIL ACTION. Filed on behalf of Plaintiff Counsel of Record for this Party: Eric A. Fitzgerald, Esq. PA. I.D. #72590 Mm:shall, Dennehey, Warner Coleman & Goggin 401 Adams Avenue Scranton, PA 18503 (570) 496-4604 ACCEPTANCE OF SERVICE I accept service of the Complaint for Declaratory Judgment on behalf of Defendants, John D. Coffman, Martha C. Coffman, John E. Coffman, Patricia A. Coffman, William R. Bishop, Kathleen L. Bishop, Matthew J. B~shop, Pamela Bishop, George H. Meena, Marina Meena, Shirley E. Aud and Ralph H. Grier and certify that I am authorized to do so. II] 'L'~]~ ~ - Name of Authorized Agent Date -1- IN THE COURT OF'COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA PHILADELPHIA INDEMNITY INSURANCE COMPANY Plaintiff Vo T.H.E FINANCIAL GROUP LIMITED, JOHN D. COFFMAN, MARTHA C. COFFMAN, JOHN E. COFFMAN, PATRICIA A. COFFMAN, WILLIAM R. BISHOP, KATHLEEN L. BISHOP, MATTHEW J. BISHOP, PAMELA BISHOP, GEORGE H. MEENA, MARINA MEENA, SHIRLEY E. AUG, AND RALPH H. GRIER Defendants CIVIL DIVISION NO. 2002 - fi/79 COMPLAINT IN CIVIL ACTION Filed on behalf of Plaintiff Counsel of Record for this Party: Eric A. Fitzgerald, Esq. PA. I.D. #72590 Marshall, Dennehey, Warner Coleman & Goggin 401 Adams Avenue Scranton, PA 18503 (570) 496-4604 PHILADELPHIA INDEMNITY INSURANCE COMPANY'S ANSWER TO THE FINANCIAL GROUP LIMITED'S NEW MATTER AND COUNTERCLAIM FOR DECLARATORY JUDGMENT And now comes the Plaintiff, Philadelphia Indemnity Insurance Company ("Philadelphia Indemnity"), by and through its counsel, Marshall, Dennehey, Wamer, Coleman & Goggin, and sets forth the following answer to the New Matter and Counterclaim of T.H.E. Financial Group Limited (hereinafter "T.H.E."). NEW MATTER 55. Philadelphia Indemnity specifically incorporates the averments in Paragraphs 1 through 54 of its Complaint, as if set forth herein at length. 56. Denied. as a conclusion of law to which no response .is required. By way of further answer, it is specifically denied that Philadelphia Indemnity had a duty to defend and/or indemnify T.H.E. for the allegations set forth in the Coffman, Aud, and Grier claims based on the clear terms of the policy, and T.H.E.'s breaches of conditions as set forth more fully in Philadelphia Indemnity's Complaint. 57. Denied. The subject policy, no. PHSD005934, is a writing which speaks for itself, and all contrary characterizations are denied. 58. Denied. The subject policy, no. PHSD005934, is a writing which speaks for itself, and all contrary characterizations are denied. 59. Denied as a conclusion of law to which no response is required. By way of further answer, it is specifically denied that Philadelphia Indemnity had a duty to defend and/or indemnify T.H.E. for the allegations set forth in the Coffman, Aud, and Grier claims based on the clear terms of the policy, and T.H.E.'s breaches of conditions as set forth more fully in Philadelphia Indemnity's Complaint. 60. Denied as a conclusion of law to which no response is required. Strict Proof is demanded at trial. 61. Denied as a conclusion of law to which no response is required. Strict Proof is demanded at trial. 62. Denied as a conclusion of law to which no response is required. Strict Proof is demanded at trial. 63. Denied as a conclusion of law to which no response is required. Strict Proof is demanded at trial. 64. Denied' as a conclusion of law to which no response demanded at trial. 65. Denied as a conclusion of law to which no response demanded at trial. 66. Denied as a conclusion of law to which no response demanded at trial. 67. Denied as a conclusion of law to which no response demanded at trial. 68. Denied as a conclusion of law to which no response is required. Strict Proof ~s demanded at trial. 69. Denied as a conclusion of law to which no response ~s required. Strict Proof ~s demanded at trial. 70. Denied as a conclusion of law to which no response is required. Strict Proof ~s demanded at trial. 71. Denied as a conclusion of law to which no response ~s required. Strict Proof is demanded at trial. By way of further answer, Philadelphia Indemnity has at all times acted reasonably and in good faith under the circumstances. COUNTERCLAIM FOR DECLARATORY JUDGMENT 72. Philadelphia Indemnity specifically incorporates the averments in Paragraphs 1 through 54 of its Complaint and Paragraphs 55 through 71 of its Answer to T.H.E.'s New Matter as if set forth herein at length. ~.s required. Strict Proof ~s is required. Strict Proof is is required. Strict Proof is ~s required. Strict Proof is 73. insurance to T.H.E., policy no. PHSD005934. and all contrary characterizations are denied. 74. Denied as a conclusion of law to which no response is required. Admitted and' Denied. Admitted that Philadelphia Indemnity, issued a policy of Said policy is a writing which speaks for itself, By way of further answer, it is specifically denied that Philadelphia Indemnity had a duty to defend and/or indemnify T.H.E. for the allegations set forth in the Coffrnan, AUD and Grier claims based on the clear terms of the policy, and T.H.E.'s breaches of conditions as set forth more fully in Philadelphia Indemnity's Complaint 75. Denied as a conclusion of law to which no response is required. By way of further answer, it is specifically denied that Philadelphia Indemnity had a duty to defend and/or indemnify T.H.E. for the allegations set forth in the Coffman, AUD and Grier claims based on the clear terms of the policy, and T.H.E.'s breaches of conditions as set forth more fully in Philadelphia Indemnity's Complaint. 76. Denied as a conclusion of law to which no response is required. By way of further answer, it is specifically denied that Philadelphia Indemnity had a duty to defend and/or indemnify T.H.E. for the allegations set forth in the Coffman, AUD and Grier claims based on the clear terms of the policy, and T.H.E.'s breaches of conditions as set forth more fully in Philadelphia Indemnity's Complaint Wherefore, the Plaintiff, Philadelphia Indemnity Insurance respectfully requests that this Court enter judgment in its favor and against the Defendant. ,Respectfully submitted, MARSHA~R,By: ERIC A. FITZGIgRAZD, EEi~UIRE 401 Adams Avenue - SuiteI~l 00 Scranton, PA 18510 (570)496-4604. Attorney ID No.: 72590 Attomey for Plaintiff COLEMAN & GOGGIN Date: VERIFICATION I, Eric A. Fitzgerald, Esquire, am counsel for Defendant, and I hereby verify that the facts set forth in the foregoing Answer to Defendant's New Mater and Counterclaim are true and correct to the best of my knowledge, information, and belief. This verification is made by me pursuant to Pa.R.C.P. 1024(c) because the verification cannot be obtained within the time allowed for the filing of this pleading. This verification is made subject to 18 Pa.C.S. §4904 which provides for certain penalties for making false statements. ERIC A. ESQUIRE Date: CERTIFICATE OF SERVICE I, Eric A. Fitzgerald, Esquire, hereby certify that on % [ q ] 0._~.?~ true and correct copy of the Answer to Defendant, T.H.E. Financial Group's, New Matter and Counterclaim to Plaintiff' s Complaint was forwarded by U.S. Mail, First Class to: William P. Thornton, Jr. 111 North Sixth Street PO Box 679 Reading, PA 19603 Respectfully submitted, MARSHALL~HEY, WARNER, Eric A. ~itzgerald, ~squire 401 Adams Avenue - Suite 400 Scranton, PA 18510 570-496-4604 Attorney ID No.: 72590 Attorney for Plaintiff 1N THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA PHILADELPHIA INDEMNITY INSURANCE COMPANY Plaintiff T.H.E FINANCIAL GROUP LIMITED, JOHN D. COFFMAN, MARTHA C. COFFMAN, JOHN E. COFFMAN, PATRICIA A. COFFMAN, WILLIAM R. BISHOP, KATHLEEN L. BISHOP, MATTHEW J. BISHOP, PAMELA BISHOP, GEORGE H. MEENA, MARINA MEENA, SHIRLEY E. AUD, AND RALPH H. GRIER NO. 02-5199 Civil Counsel of Record for this Party: Eric A. Fitzgerald, Esq. PA. I.D. #72590 Marshall, Dennehey, Warner Coleman & Goggin 401 Adams Avenue Scranton, PA 18503 (570) 496-4604 Defendants : PRAECIPE TO DISCONTINUE WITItOUT PREJUDICE TO THE PROTHONOTARY: Kindly mark the above-captioned matter settled, ended and discontinued without prejudice as to Defendants John D. Coffman; Martha C. Coffman, John E. Coffman, Patricia A. Coffman, William R. Bishop, Kathleen L. Bishop, Matthew J. Bishop, Pamela Bishop, George H. Meena, Marina Meena, Shirley E. Aud and Ralph~'~/n~ Eric Fitzgera d, $tuire Dated:~t~ .~ Marshall, Dennehey, Warner, Coleman & Goggin 401 Adams Avenue, Ste. 400 Scranton, PA 18510 ORDER OF DISCONTINUANCE AND NOW this ]ff'4l~day of ._~..~"'J'- , 2003 upon Praecipe for Discontinuance, the above-captioned action is hereby ended and discontinued without prejudice. PROTHONOTARY: