02-001284 Department Of Banking And Finance vs. Donald J. Denton And Strategic Strategies, Inc. Status: Closed Recommended Order on Wednesday, November 20, 2002.

Summary: Respondent sold viaticals as investments to his clients, all of whom were retired professionals.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BANKING AND )

FINANCE, )

)

Petitioner, )

)

vs. ) Case No. 02 - 128 4

)

DONALD J. DENTON AND STRATEGIC )

STRATEGIES, INC., )

)

Respondents. )

)

RECOMMENDED ORDER

Pursuant to notice, on August 15, 2002, a formal

administrative hearing in the above - styled case was held in

Orlando, Florida, before Fred L. Buckine, Administrative Law

Judge of the Division of Administrative Hearings.

APPEARANC ES

For Petitioner: Frederick H. Wilsen, Esquire

Department of Banking and Finance

400 West Robinson Street

Suite S - 225

Orlando, Florida 32801 - 1799

For Responden ts: Donald J. Denton, pro se

139 East Park Drive

Celebration, Florida 34747

STATEMENT OF THE ISSUES

The issues in this case are whether Respondents,

Donald J. Denton and Strategic Strategies, Inc. (hereinaf ter

"Respondents," "Denton," or "Strategic Strategies"), are guilty

of selling or offering for sale securities in Florida that were

not registered pursuant to Chapter 517, Florida Statutes, in

violation of Section 517.07(1), Florida Statutes; whether

Respo ndents are guilty of acting as unregistered dealers,

associated persons, or issuers by having sold or offered for

sale any securities from this state, in violation of Section

517.12(1), Florida Statutes; and, if so, what penalties are

appropriate and shoul d be imposed. All references to Florida

Statutes are for the years 1998 and 1999.

PRELIMINARY STATEMENT

On February 27, 2002, Petitioner, Department of Banking and

Finance (hereinafter "Department"), filed an Amended

Administrative Complaint for Entry of Final Order to Cease and

Desist, and Impose Penalties against Respondents alleging

various violations of Chapter 517, Florida Statutes.

The charges are that Respondents, while not registered in

the securities industry to perform or engage in the securities

business, sold to investors unregistered securities in the form

of investment contracts that were represented as interests in a

trust for interests in the death benefits in viaticated life

insurance policies known as viatical settlement agreements or

"via ticals."

Specifically, the Department alleged that in Florida,

Respondents induced and sold to investors, investment contracts

as interests in a trust representing interests in viatical

settlement agreements of American Benefits Services, Inc.

(hereinafter "ABS") for money paid thereby supporting violation

of Section 517.07(1), Florida Statutes (selling unregistered

securities), and violations of Section 517.12(1), Florida

Statutes (unregistered person selling securities).

Respondents' response to the Amen ded Complaint and request

for hearing was referred to the Division of Administrative

Hearings (DOAH) to conduct a hearing to resolve disputed facts.

Section 120.57(1), Florida Statutes. The final hearing was

initially scheduled for June 25, 2002, and upo n request of the

parties, an order granting a continuance and rescheduling the

final hearing for August 15 and 16, 2002, was entered on

June 19, 2002.

Respondents, in their answer to the request for admissions

and by stipulation at the hearing, agreed th at there were

26 sales by Respondent, Denton, and four sales by Respondent,

Strategic Strategies.

The Department presented the testimony of seven witnesses:

Kerry Neal; Theodore F. Hoff; Paul Richard Williamson; Samuel

Preston Martin, IV; Gilbert Princip e; Joseph C. Long; and Roger

Handley, the Department's financial investigator and an expert

in securities law. The Department offered in evidence Exhibits

P - 1 through P - 39 without objection. Respondents presented no

witnesses and offered in evidence Comp osite Exhibit R - 1,

consisting of 143 pages, without objection.

Respondents filed a Proposed Recommended Order on

September 3, 2002. The two - volume Transcript was filed on

September 18, 2002. The Department's Motion for Additional Time

to Submit Proposed Recommended Order was granted by order dated

October 3, 2002, thereby waving the time requirement for this

Recommended Order. The Department filed a Proposed Recommended

Order on October 10, 2002. Both Proposed Recommended Orders

have been considered by the undersigned in preparation of this

Recommended Order.

FINDINGS OF FACT

Based upon the observation of the witnesses and their

demeanor while testifying, the documentary evidence received in

evidence, and the entire record complied herein, the following

relevant and material facts are found:

1. The Department is the agency charged with the

enforcement and administration of the provisions of Chapter 517,

Florida Statutes, the "Securities and Investors Protection Act,"

and the rules promulgated there unde r (hereinafter the

"Securities Act"). As authorized by the Securities Act, the

Department conducted an investigation of the activities of

Respondents.

2. At no time pertinent, material, and relevant hereto

were Respondents, Denton or Strategic Strategies , licensed or

registered by the Department pursuant to the provisions of the

Securities Act in any capacity. Specifically, Respondents were

not licensed or registered in Florida as a broker/dealer,

registered representative, or investment advisor.

3. At all times pertinent, material, and relevant hereto,

Denton, whose address is 139 East Park Drive, Celebration,

Florida 34747 - 5052, was licensed as a Health Agent under license

No. AO666272 issued by the Florida Department of Insurance.

4. At all times per tinent, material and relevant hereto,

Strategic Strategies was an Ohio corporation, now dissolved,

whose company business address was Post Office Box 341470,

Columbus, Ohio 43234. Strategic Strategies was served the

Administrative Complaint via its agent in Ohio. The Department

was advised by Strategic Strategies' agent that the company

would not further respond to the charges.

5. From November 1, 1998, through July 21, 1999, Denton,

in Florida as an agent, offered and sold to investors,

investment contr acts purportedly being interests in viaticated

life insurance policies known as settlement agreements with

titles such as, "Viatical Insurance Benefits Participation

Agreement." The interests in viaticated life insurance policies

were represented to be pr ovided by Accelerated Benefits Services

(hereinafter ABS).

6. Denton engaged in sales with four Florida investors in

four transactions through Strategic Strategies during the period

of March 15, 1999, through July 27, 1999.

7. Denton engaged in 26 sales with 26 Florida investors in

26 transactions.

8. On or about January 21, 1999, Dr. Kerry L. Neal, a

Florida investor, paid $50,000 for an investment sold to him by

Denton. The investment was represented as safe, insured by the

state of Florida, and consi sting of an interest in the ABS trust

with a participation of $25,000 in two viaticated insurance

settlement agreements as a 14.2 percent fractional interest in

the insurance policies' face value.

9. A monthly income program was offered in the

participati on disclosure materials provided to Dr. Neal by

Denton. Dr. Neal was promised a guaranteed rate of return of

42 percent, with the option of getting the principal back after

36 months with a 15 percent return if the viator (the person

insured by the insur ance policy) did not die during the 36 - month

period and the policies had not matured.

10. Of his $50,000 investment, Dr. Neal has only received

approximately $8,000 as disbursements from the ABS bankruptcy

trustee resulting in Dr. Neal having suffered a present

financial loss of $42,000.

11. On or about January 3, 1999, Dr. Theodore F. Hoff, a

Florida investor, paid $200,000 for an investment sold to him by

Denton. The investment was represented as safe, insured by the

state of Florida, and consisting of an interest in the ABS trust

with fractional interests in eight viaticated life insurance

settlement agreements.

12. A monthly income program was offered in the

participation disclosure materials provided Dr. Hoff together

with a guaranteed rate of ret urn of 42 percent, with the option

of getting the principal back after 36 months with a 15 percent

return if the viator did not die during the 36 - month period and

the polices had not matured.

13. Of his $200,000 investment, Dr. Hoff has only received

a to tal of approximately 15 percent in disbursement from the ABS

bankruptcy trustee, thereby resulting in a present financial

loss to Dr. Hoff of approximately $170,000.

14. On or about March 23, 1999, Dr. Paul Richard

Williamson, a Florida investor, paid $50 ,000 for an investment

sold to him by Denton. The investment was represented as safe,

insured by the state of Florida, and consisting of an interest

in the ABS trust with fractional interests in two viaticated

life insurance settlement agreements.

15. A monthly income program was offered in the

participation disclosure materials provided to Dr. Williamson

together with a guaranteed rate of return of 42 percent, with

the option of getting the principal back after 36 months with a

15 percent return if the v iator did not die during the 36 - month

period and the polices had not matured.

16. Of his $50,000 investment, Dr. Williamson has only

received $8,253.68 in disbursement from the ABS bankruptcy

trustee, thereby resulting in a present financial loss to

Dr. Williamson of approximately $41,746.32.

17. On or about January 4, 1999, Dr. Samuel Preston

Martin, a Florida investor, paid $100,000 for an investment sold

to him by Denton. The investment was represented as safe,

insured by the state of Florida, and c onsisting of an interest

in the ABS trust with fractional interests in two viaticated

life insurance settlement agreements.

18. A monthly income program was offered in the

participation disclosure materials provided to Dr. Martin

together with a guarantee d rate of return of 42 percent, with

the option of getting the principal back after 36 months with a

15 percent return if the viator did not die during the 36 - month

period and the polices had not matured.

19. Of his $100,000 investment, Dr. Martin has onl y

received $16,000 in disbursements from the ABS bankruptcy

trustee, thereby resulting in a present financial loss to

Dr. Martin of approximately $84,000.

20. On or about November 10, 1999, Dr. Gilbert Principe, a

Florida investor, paid $125,000 for an i nvestment sold to him by

Denton. The investment was represented as safe, insured by the

state of Florida, and consisting of an interest in the ABS trust

with fractional interests in two viaticated life insurance

settlement agreements.

21. A monthly incom e program was offered in the

participation disclosure materials provided Dr. Principe

together with a guaranteed rate of return of 42 percent, with

the option of getting the principal back after 36 months with a

15 percent return if the viator did not die during the 36 - month

period and the polices have not matured.

22. Of his $125,000 investment, Dr. Principe has only

received approximately $20,000 (16 percent) in disbursement from

the ABS bankruptcy trustee, thereby resulting in a present

financial loss t o Dr. Principe of $105,000.

23. The above investors, Drs. Neal, Hoff, Williamson,

Martin and Principe, were clients of Denton who held himself out

as a financial advisor. By special and private invitations from

Denton, they were invited twice yearly to a ttend investment

seminars conducted by Denton.

24. Denton directly or indirectly represented that the

viatical investment would make money for the above named

investors; he represented to each investor that the return could

be 9.86 percent per year for t hree (3) years paid monthly as a

income program.

25. The above - named investors lost their money as victims

of a Ponzi scheme run by principals of ABS involving the sale of

viatical agreements in Florida. Ray Levy was the owner of ABS,

a viatical settleme nt brokerage company that raised funds for

the purchase of viatical settlements. Jeffery Pains, Esquire,

was the escrow agent for ABS. Levy, Paine and others were

convicted in federal court of fraud since approximately

90 percent of the $208 million obt ained from thousands of

investors solicited nationwide was used for the purchase of real

estate and items for personal use. 1

26. ABS offered and sold its viaticals to thousands of

investors in Florida and in other states. There were

approximately a total of 7,000 ABS transactions. The Department

filed charges against ABS and Ray Levy that resulted in a Final

Order adopting a stipulated settlement. ABS and Ray Levy agreed

to comply with Florida law, stop offering the income program,

return $900,000 to ce rtain investors, and pay $60,000 to the

Department for costs. Other agents (insurance, financial

advisors, etc.) that sold the interests in the ABS viaticals

have been charged with violations of the Securities Act by the

Department, resulting in cease and desist orders being issued

and fines being imposed.

27. Denton offered the following defenses to his conduct:

sales were exempt securities; sales were insurance policies;

investors were wealthy and experienced; his reliance upon ABS's

printed literature absolved him from personal liability; and the

Department had an obligation to communicate to him personally

any knowledge of problems with business practices of ABS, all of

which are without merit.

28. The undisputed evidence of record, clearly and

convi ncingly supports that: First, Respondent, Denton, while

not registered in the securities business, intentionally or

knowingly, solicited and sold unregistered securities; and

second, Respondent, Strategic Strategies, had four sales and

Denton has 26 sales .

CONCLUSIONS OF LAW

29. The Division of Administrative Hearings has

jurisdiction over the parties to and the subject matter of this

proceeding. Sections 120.57 and 120.569, and Chapter 517,

Florida Statutes. This case involves Respondents, unregistered

dealers or associated persons, selling unregistered securities

in Florida.

30. Section 517.07(1), Florida Statutes, addressing

persons selling unregistered securities, provides:

(1) It is unlawful and a violation of

this chapter for any person to sell or offer

to sell a security within this state unless

the security is exempt under s. 517.051, is

sold in a transaction exempt under s.

517.061, is a federal covered security, or

is registered pursuant to this chapter.

31. Section 517.12(1), Florida Stat utes, addressing a

dealer or associated person selling securities, provides:

(1) No dealer, associated person, or

issuer of securities shall sell or offer for

sale any securities in or from offices in

this state, or sell securities to persons in

this st ate from offices outside this state,

by mail or otherwise, unless the person has

been registered with the department pursuant

to the provisions of this section. The

department shall not register any person as

an associated person of a dealer unless the

dea ler with which the applicant seeks

registration is lawfully registered with the

department pursuant to this chapter.

32. Section 517.221(1) and (3), Florida Statues,

addressing cease and desist orders and administrative fines that

may be imposed, provide s:

(1) The department may issue and serve

upon a person a cease and desist order

whenever the department has reason to

believe that such person is violating, has

violated, or is about to violate any

provision of this chapter, any rule or order

promulgat ed by the department, or any

written agreement entered into with the

department.

* * *

(3) The department may impose and collect

an administrative fine against any person

found to have violated any provision of this

chapter, any rule or order promulgated by

the department, or any written agreement

entered into with the department in an

amount not to exceed $5,000 for each such

violation. All fines collected hereunder

shall be deposited as received in the Anti -

Fraud Trust Fund.

33. To impose administrative fines against unlicensed or

unregistered persons the Department has the burden and must

prove by clear and convincing evidence the material allegations

contained in its Administrative Complaint, to wit:

that in Florida, Respondents (Donald J .

Denton, 26 sales and Strategic Strategies,

Inc., 4 sales) induced and sold to investors

investment contracts being interests in a

trust representing interests in viatical

settlement agreements of American Benefits

Services, Inc. (hereinafter "ABS") for m oney

paid thereby supporting violation of Section

517.07(1), Florida Statutes (selling

unregistered securities) and violations of

Section 517.12(1), Florida Statutes

(unregistered person selling securities).

See Department of Banking and Finance v. Osborn e Stern Company,

Inc. , 670 So. 2d 932 (Fla. 1996). In the case at bar, the

Department has proven by clear and convincing evidence the

specific allegations hereinabove.

34. Section 517.171, Florida Statutes, however, imposes

the burden upon Respondents, D enton and Strategic Strategies, if

they are claiming the benefit of an exemption from registration

before engaging in the sale or offering securities for sale.

Burden of proof. –

It shall not be necessary to negate any of

the exemptions provided in thi s chapter in

any complaint, information, indictment, or

other writ or proceedings brought under this

chapter; and the burden of establishing the

right to any exemption shall be upon

the party claiming the benefit of such

exemption.

35. The evidence of record does not support any contention

by Respondents that the investments that are determined herein

to be securities or the transactions by which purchasers

acquired the investments are subject to exemptions or are, in

fact, exempted from the provisions of Chapter 517, Florida

Statutes.

36. Neither Section 517.07(1) nor Section 517.12(1),

Florida Statutes, requires guilty knowledge or " scienter "

associated with securities fraud cases. See State v.

Houghtaling , 181 So. 2d 636 (Fla. 1966). Therefore, the "state

of mind" of Respondents is irrelevant for purposes of

determining whether they sold unregistered securities in

violation of Section 517.07(1), Florida Statutes, or whether

they failed to register as dealers or associated persons prior

to selling se curities in violation of Section 517.12(1), Florida

Statutes.

37. No definition of a security can be given to fit all

cases, but the thing sold 2 will in each case be examined to

determine if it falls within the purview of the statute. See

McElfresh v. St ate , 151 Fla. 140, 9 So. 2d 277 (1942).

38. Section 517.021(18) and (19), Florida Statutes,

defines "security" as the thing sold, and to include any of the

following:

(18) "Sale" or "sell" means any contract

of sale or disposition of any investment,

se curity, or interest in a security, for

value. With respect to a security or

interest in a security, the term defined in

this subsection does not include preliminary

negotiations or agreements between an issuer

or any person on whose behalf an offering is

to be made and any underwriter or among

underwriters who are or are to be in privity

of contract with an issuer. Any security

given or delivered with, or as a bonus on

account of, any purchase of securities or

any other thing shall be conclusively

presume d to constitute a part of the subject

of such purchase and to have been offered

and sold for value. Every sale or offer of

a warrant or right to purchase or subscribe

to another security of the same or another

issuer, as well as every sale or offer of a

s ecurity which gives the holder a present or

future right or privilege to convert into

another security or another issuer, is

considered to include an offer of the other

security.

(19) "Security" includes any of the

following:

(a) A note.

(b) A stock.

(c) A treasury stock.

(d) A bond.

(e) A debenture.

(f) An evidence of indebtedness.

(g) A certificate of deposit.

(h) A certificate of deposit for a

security.

(i) A certificate of interest or

participation.

(j) A whis key warehouse receipt or other

commodity warehouse receipt.

(k) A certificate of interest in a

profit - sharing agreement or the right to

participate therein.

(l) A certificate of interest in an oil,

gas, petroleum, mineral, or mining title or

lease or the right to participate therein.

(m) A collateral trust certificate.

(n) A reorganization certificate.

(o) A preorganization subscription.

(p) Any transferable share.

(q) An investment contract.

(r) A beneficial interest in titl e to

property, profits, or earnings.

(s) An interest in or under a profit -

sharing or participation agreement or

scheme.

(t) Any option contract which entitles

the holder to purchase or sell a given

amount of the underlying security at a fixed

price within a specified period of time.

(u) Any other instrument commonly known

as a security, including an interim or

temporary bond, debenture, note, or

certificate.

(v) Any receipt for a security, or for

subscription to a security, or any right to

su bscribe to or purchase any security.

39. Florida courts have continuously looked to the whole

transaction(s) and to the content of the document in determining

whether a document is a security 3 requiring registration under

the sales of securities law and whether seller or dealer thereof

was required to register. Bookhardt v. State , 710 So. 2d 700

(Fla. 5th DCA 1998). Also see O'Neill v. State , 336 So. 2d 699

(Fla. 4th DCA 1976).

40. In the case at bar, Section 517.021(19)(q), Florida

Statutes, defining an "investment contract" is applicable. In

Florida, the test of an "investment contract" is whether the

scheme involves the investment of money in a common enterprise

with profits to come solely from efforts of others. Yeomans v.

State Department of Ban king and Finance, Division of Securities ,

452 So. 2d 1011 (Fla. 3rd DCA 1984), petition for review denied

461 So. 2d 114. Therefore, the question is whether the sales

transactions in the case at bar constitute the sale of an

"investment contract," under S ection 517.021(19)(q), Florida

Statutes.

41. The case law definition of "investment contacts" is

found in Securities and Exchange Commission v. W. J. Howey Co. ,

328 U.S. 293, 66 S. Ct. 1100, 90 L.Ed 1244 (1946). The Howey

three - prong test for determining whether a transaction

constitutes an "investment contract" for purpose of federal

securities laws, applies under Florida's Securities Act. Rudd

v. State , 386 So. 2d 1216, 1218 (Fla. 5th DCA 1980), review

denied 392 So. 2d 1380.

42. Under Howey , an inves tment contract constitutes any

contract, transaction, or scheme in which a person: (1) invests

money; (2) in a common enterprise; and (3) expects profiting

solely from the efforts of other persons. 328 U.S. at 298 - 299.

In 1976, the Supreme Court in Unit ed Housing Foundation, Inc.,

v. Forman , 421 U.S. 837, 95 S. Ct. 2051, 44 L.Ed. 2d 2621 (1975)

eased the third prong requirement hereinabove by restating it as

expecting profits "from the entrepreneurial or managerial

efforts of others." 421 U.S. at 852, 9 5 S. Ct. at 2060.

43. The case at bar satisfies the first prong of the Howey

and Forman definition of an investment contract because the

investors invested money. Focus now must be given to the second

and third prongs of the definition of investment con tracts.

44. The second prong, common enterprise, has spawned

different schools of thought among the several lower federal

courts and many state courts with two main avenues of

"horizontal commonality" and "vertical commonality." These

courts have conside red "horizontal commonality," as the stricter

test requiring a pooling of all the investors funds so that they

are treated alike, and "vertical commonality," as the more

liberal test and requiring only that the investors' economic

return be based on the es sential managerial efforts of other

persons.

45. In Farag v. National Databank Subscriptions, Inc. , 448

So. 2d 1098 (Fla. 2nd DCA 1984), the court rejected the defense

based on horizontal commonality and appeared to have adopted an

approach consistent wit h vertical commonality, at least where

the promoter obtains a "number of investors." With more than

one or two investors involved, Florida courts have not

distinguished from investment contracts those programs in which

promoters segregate each investor's funds.

46. The ABS viatical program clearly satisfies the

vertical commonality test hereinabove. Notwithstanding ABS's

structure of its viatical program, in terms of the maintenance

of each investor's funds, the Ponzi feature of early investors

being pai d with the funds of later investors betrays the true

arrangement, which satisfies the horizontal commonality test.

47. Whether or not the sale of viatical was a securities

transaction was at issue in the federal case Securities &

Exchange Commission v. Li fe Partners, Inc. , 87 F.3d 536 (D.C.

Cir.), reh'g denied, 102 F.3d 587 (D.C. Cir. 1996). The Life

Partners case is distinguishable from the case at bar because in

Life Partners the investors had a direct contractual

relationship with the insurance compani es and the scheme did not

include an offer of monthly payments or a guaranteed return if a

policy did not mature.

48. The emerging trend in state courts is to reject Life

Partners . For instance, in Colorado, Joseph v. Viatical

Management,LLC , 55 P.3d 264 (Colo. App. 2002); in Maryland,

First Penn - Pacific Life Insurance Company v. William Evans,

Chartered , 200 F.R.D. 532 (D. Md. 2001); in Arizona, Siporin v.

Carrington , 23 P.3d 92 (Ariz. App. Div. 1 2001). These courts

have found that the sale of interest s in a trust for interests

in viaticated life insurance policies amounts to the sale of

investment contracts and thus a securities transaction regulated

by state laws.

49. The third prong definition found in Howey and Forman ,

"expectation of profits from the entrepreneurial or managerial

efforts of other persons," is of great importance in the ABS

viatical program because of the ABS form of the transactions, to

wit: involves the investors purchasing an interest in a trust,

which purchases interests in ABS viatical settlement agreements.

The investors' funds are aggregated or pooled to acquire

indirect interests in one or more viatical settlements.

50. In the Life Partners investment vehicles, the viatical

transactions involved the investors having a dire ct interest in

a viatical settlement even though the promoter was listed as the

policy owner in the insurance company records for the

convenience of the insurance company. This form of transaction

differs from the case at bar and is contrary to Respondent s'

argument; Life Partners is not controlling in the case at bar.

51. In the case at bar the investors took no part in the

selection, managing or overseeing the investments. Investors

relied entirely on ABS's investigation, analysis, selection of

the via tors and the policies to be acquired, and negotiations of

the terms of the acquisitions, all of which were post

investment, or at least not identified to the investor at the

time of the investment. The estimation of the viators' life

expectancy, the most significant impact on profit to be made, if

any, was made by ABS and others and not by the investors.

Therefore, the total success or complete failure of the

enterprise rested with ABS and others, and not with those whose

monies were at risk, the investor s themselves.

52. Respondents have failed to show entitlement to an

exemption from the registration requirements of Section 517.07,

Florida Statutes, as provided in Section 517.051, Florida

Statutes. Respondents were not selling insurance policies; the y

were selling an investment contract represented as an interest

in a trust that was to have acquired an interest in a viaticated

life insurance policy to be secured and provided by ABS. The

investors were not buying insurance.

53. Likewise, Respondents have failed to show entitlement

to an exemption for the transactions from the registration

requirements of Section 517.07, Florida Statutes, as provided

for in Section 517.061, Florida Statutes. ABS sold to thousands

of purchasers via general solicitatio ns and advertisements; and

Respondents, while not registered, were paid a commission or

otherwise compensated for the sales. These transactions could

not and did not qualify as an exempt transaction. Section

517.061(11)(a), Florida Statutes.

54. Chapter 626, Florida Statutes, Part X, known as the

"Viatical Settlement Act" is not controlling of the issues in

the case at bar. The Viatical Settlement Act generally provides

that the Department of Insurance regulates the business that

creates the viatical se ttlement purchase agreements. The

Department does not regulate the resale of interests in a trust

that represents that it holds an interest in a viatical, as in

the case at bar. Further, the act pertains to an economic

benefit being realized when a viati cated life insurance policy

matures and the insurance company pays the face value of the

life insurance policy pursuant to a claim having been filed.

55. Section 626.9911(10), Florida Statutes, defines

accredited investors as:

(10) "Viatical settlement purchaser"

means a person, other than a licensee under

this part, an accredited investor as defined

in Rule 501, Regulation D of the Securities

Act Rules, or a qualified institutional

buyer as defined by Rule 144(a) of the

Federal Securities Act, or a spe cial purpose

entity which is created solely to act as a

financing source for the viatical settlement

provider, who gives a sum of money as

consideration for a life insurance policy or

an interest in the death benefits of a life

insurance policy which has b een or will be

the subject of a viatical settlement

contract, for the purpose of deriving an

economic benefit. The above references to

Rule 501, Regulation D and Rule 144(a) of

the Federal Securities Act are used strictly

for defining purposes and shall n ot be

interpreted in any other manner.

The ABS viatical program became a securities transaction

regulated by the Department at the point Respondents offered to

investors via an investment contract in a trust that offered

monthly interest payments and the offering contained a

guaranteed 15 percent interest payment to the investors if the

viator did not die within 36 months. Respondent failed to prove

that any investor was deemed an accredited investor. No

investor was found to have signed an affidavit tha t he or she

was an accredited investor as required by Section 626.991(10),

Florida Statutes. Respondents also failed to prove that any

investor was deemed an accredited investor as defined by

Rule 501, Regulation D of the Securities Act Rules, establishi ng

joint net income, individually or jointly, at time of purchase

in excess of $1,000,000; individual income in each of the

preceding two years in excess of $200,000 or joint income in

excess of $300,000 in each of those years and has a reasonable

expectat ion of reaching the same income level in the current

year.

56. Having proved the sale of securities in the case at

bar, the Department must prove that Respondents sold or offered

to sell the ABS viaticals. Section 517.021(14), Florida

Statutes, defines " sell or offer to sell" as "any attempt or

offer to dispose of, or solicitation of an offer to buy, a

security or interest in a security, or an investment or interest

in an investment, for value."

57. The testimony and documents received in evidence in

the record proves sale by both Respondents; Denton admitted that

he made 26 sales and Strategic Strategies had four sales.

58. Section 517.021(6)(a)(1), Florida Statutes, defines a

dealer as:

Any person, other than an associated

person registered under thi s chapter, who

engages, either for all or part of her or

his time, directly or indirectly, as broker

or principal in the business of offering,

buying, selling, or otherwise dealing or

trading in securities issued by another

person.

59. Rule 3E - 200.001(7) (a), Florida Administrative Code,

defines an "associated person" as:

any person who for compensation refers,

solicits, offers, or negotiates for the

purchase or sale of securities and/or of

investment advisory services. A person

whose activities fall with in this definition

is required to register with the Department

as an associated person pursuant to Sections

517.12(1) or (4), F.S.

60. Respondents directly or indirectly offered and sold

the securities. In doing so, they served as "brokers" in these

tra nsactions. Thus, the Department proved Respondents, by their

activities and conduct, were dealers. Likewise, the Department

proved that Respondents were associated persons, who -- for

compensation -- referred, solicited, offered, or negotiated the

sale of se curities.

61. Violations of Section 517.07(1) and Section 517.12(1),

Florida Statutes, are distinct and separate violations from each

other. The facts in the record needed to establish the above

violations may overlap; however, each provision requires pr oof

of an important element not required to establish the violation

of the other provision. Regarding the case at bar, the gist of

the Section 517.07(1), Florida Statutes, violation is the

presence of an unregistered security; the gist of the Section

517. 12(1), Florida Statutes, is the presence of an unregistered

dealer or associated person. Respondents presented no evidence

to refute, rebut, or mitigate the charges brought by the

Department, which were proven by clear and convincing evidence

of record.

6 2. The Department has proven that Respondents' dealing in

investment contracts of interest in a trust for interests in

death benefits in viatical settlement agreements constitutes

four violations of Section 517.07(1), Florida Statutes, and four

violations of Section 517.12(1), Florida Statutes, as to

Respondent, Strategic Strategies, Inc.

63. The Department has proven that Respondents' dealing in

investment contracts of interest in a trust for interests in

death benefits in viatical settlement agreements constitutes

26 violations of Section 517.07(1), Florida Statutes, and

26 violations of Section 517.12(1), Florida Statutes, as to

Respondent, Donald J. Denton.

64. The statutory fine of $5,000 per violation, times

eight separate violations, equals an ad ministrative fine of

$40,000 as to Respondent, Strategic Strategies, Inc.

65. The statutory fine of $5,000 per violation, times 52

separate violations, equals an administrative fine of $260,000

as to Respondent, Donald J. Denton.

66. These fines are fai r for the enormity of the harm

caused by Respondents. 4

PENALTY

67. Personal accountability for the violations of several

sections of the Florida Statutes provides the basis for

Respondents' penalty. Under Chapter 517, Florida Statutes,

specific acts tha t violate one section also violate several

other sections thereof. Considering the totality of

circumstances involved in the case at bar with appropriate

weight to the aggravating factors and there being no mitigating

factors present, the appropriate pena lty for Respondents'

violations is imposition of the maximum fines allowed by law.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that

The Department of Banking and Finance enter its final order

finding Re spondents guilty of violations of Sections 517.07(1)

and 517.12(1), Florida Statutes; it is further

RECOMMENDED that

The Department of Banking and Finance order Respondent to

cease and desist from engaging in any transaction constituting

the sale of secur ities in Florida; it is further

RECOMMENDED that

The Department of Banking and Finance order Respondent,

Strategic Strategies, Inc., be fined in the amount of $40,000;

and, it is finally

RECOMMENDED that

The Department of Banking and Finance order Respo ndent,

Donald J. Denton, be fined in the amount of $260,000.

DONE AND ENTERED this 20th day of November, 2002, in

Tallahassee, Leon County, Florida.

___________________________________

FRED L. BUCKINE

Administrative Law Judge

Division of Administrative Hea rings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 20th day of November, 20 02.

ENDNOTES

1/ See Recommended Order dated November 8, 2000, in Dept. of

Insurance v. James R. Stiffer , DOAH Case No. 00 - 3242PL, adopted

in toto as its final order by the Department of Insurance on

December 28, 2000.

2/ In this situation, insight c an be found in the expression,

"if it walks like a security, wobbles like a security and acts

like a security, it must be a security."

3/ The term "security" in the Florida Statutes concerning sale

of unregistered securities, and sale of securities by

un registered dealers, has a specialized legal meaning, and

testimony from two expert witnesses was beneficial to the

understanding of the term. Therefore, the testimony of

Professor Joseph C. Long and Roger Handley, on whether the

investment offered constit uted securities in the case at bar is

not objectionable because it includes the ultimate issue to be

decided. See Bookhardt v. State , 710 So. 2d 700 (Fla. 5th DCA

1998), rehearing denied, review denied 719 So. 2d 892.

4/ For the five witnesses who testi fied, their total loss was

not less than $443,000.

COPIES FURNISHED :

Donald J. Denton

139 East Park Drive

Celebration, Florida 34747

Frederick H. Wilsen, Esquire

Department of Banking and Finance

400 West Robinson Street

Suite S - 225

Orlando, Florida 32801 - 1799

Robert Beitler, General Counsel

Department of Banking and Finance

Fletcher Building, Suite 526

101 East Gaines Street

Tallahassee, Florida 32399 - 0350

Honorable Robert F. Milligan

Department of Banking and Finance

Office of the Comptroller

The Capitol, Plaza Level 09

Tallahassee, Florida 32399 - 0350

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order shou ld be filed with the agency that

will issue the Final Order in this case.