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In re Petition of Everest Investment Advisors, Inc.

Court of Special Appeals of Maryland

October 31, 2019

IN THE MATTER OF THE PETITION OF EVEREST INVESTMENT ADVISORS, INC., ET AL.

          Circuit Court for Baltimore City Case No. 24-C-17-001711

          Meredith, Berger, Zarnoch, Robert A. (Senior Judge, Specially Assigned), JJ. [*]

          OPINION

          MEREDITH, J.

         After the Maryland Securities Commissioner (the "Commissioner"), appellee, imposed sanctions against Philip Rousseaux, appellant, and two companies he owned- Everest Investment Advisors, Inc. ("EIA"), and Everest Wealth Management, Inc. ("EWM")-Mr. Rousseaux and his two companies filed a petition for judicial review in the Circuit Court for Baltimore City. In that court, Mr. Rousseaux and his companies did not contest any of the Commissioner's findings that they had committed over a thousand violations of Maryland securities law, but they argued that the disciplinary sanctions imposed by the Commissioner were arbitrary and capricious because of their severity despite being authorized by Maryland Code (1975, 2014 Repl. Vol.), Corporations and Associations Article ("CA"), §11-701.1[1]

         The circuit court upheld the Commissioner's disciplinary rulings, and Mr. Rousseaux alone filed a notice of appeal.

         QUESTION PRESENTED

         Mr. Rousseaux's brief states that the single issue presented in this appeal is the question posed at the end of this paragraph:

The sanctions ordered against Mr. Rousseaux-revocation of his investment adviser representative registration, permanent bar from the Maryland securities and investment advisory industry, and a $255, 000 fine-are unprecedented and disproportionately harsh given the misconduct at issue. Accordingly, Mr. Rousseaux lacked notice that his compliance errors could result in the severe sanctions imposed. Does the unprecedented and disproportionately harsh nature of the sanctions and resulting lack of notice, and thus lack of due process, render the sanctions imposed against Mr. Rousseaux arbitrary and capricious?

         The answer to the question is that there was no lack of notice, no lack of due process, and no imposition of arbitrary or capricious sanctions. Accordingly, we shall affirm the judgment of the Circuit Court for Baltimore City.

         FACTS AND PROCEDURAL BACKGROUND

         The "Maryland Securities Act" ("the Act") is Title 11 of the Corporations and Associations Article. See CA § 11-805. It provides the statutory framework for the regulation of the securities and investment advisory businesses in Maryland. Section 11-201 establishes, within the Office of the Attorney General of Maryland, a Division of Securities (the "Division"), which administers the Maryland Securities Act. The Division is headed by the Securities Commissioner.

         CA § 11-701 vests enforcement authority, including subpoena power, in the Commissioner. As noted above, CA § 11-701.1(b) authorizes the Commissioner to order a broad range of disciplinary actions after determining that "a violation" of the Maryland Securities Act has occurred, including barring the violator from engaging in the securities business or investment advisory business in this State.

         On June 17, 2015, the Division served an order to show cause upon counsel for Mr. Rousseaux and his companies (EIA and EWM), alleging a long list of securities act violations dating back to 2004, and ordering that

Respondents EIA and Rousseaux each show cause why each Respondent's registration as an investment adviser or investment adviser representative, respectively, should not be revoked; why Respondents EIA, EWM, and Rousseaux should not be barred permanently from engaging in the securities and investment advisory business in Maryland; and why a statutory penalty of up to $5, 000 per violation should not be entered against each Respondent[.]

         The show cause order alleged a large number of violations of the Act by Mr. Rousseaux and his companies. Because Mr. Rousseaux does not dispute in this appeal any of the factual or legal findings made by the Commissioner other than the sanctions, we will quote extensively from findings made by the Commissioner. [2]

         Violations

         The main areas of focus were the following.

         Misrepresentations related to unauthorized use of MetLife Medallion Signature Guarantee stamps

         In order to appreciate the significance of Rousseaux's misconduct with respect to his use of misappropriated pre-stamped MetLife Medallion Signature Guarantee forms, it is necessary to understand how the Medallion stamps are normally utilized in connection with transferring securities. The following description is provided on the website of the United States Securities and Exchange Commission ("SEC") at https://www.sec.gov/fast-answers/answers-sigguarhtm.html (last visited 10/29/2019):

Signature Guarantees: Preventing the Unauthorized Transfer of Securities
If you hold securities in physical certificate form and want to transfer or sell them, you will need to sign the certificates or securities powers. You will probably need to get your signature "guaranteed" before a transfer agent will accept the transaction. Although it's an inconvenience to get your signature guaranteed, the process protects you by making it harder for people to take your money by forging your signature on your securities certificates or related documents. Transfer agents insist on signature guarantees because they limit their liability and losses if a signature turns out to be forged. One way to avoid having to get your signature guaranteed is to have your securities held in street name, meaning that your securities are held in the name of your brokerage firm instead of your name.
An investor can obtain a signature guarantee from a financial institution - such as a commercial bank, savings bank, credit union, or broker dealer - that participates in one of the Medallion signature guarantee programs. The three Medallion signature guarantee programs are the:
• Securities Transfer Agents Medallion Program (STAMP) whose participants include more than 7, 000 U.S. and Canadian financial institutions.
• Stock Exchanges Medallion Program (SEMP) whose participants include the regional stock exchange member firms, and clearing and trust companies.
• New York Stock Exchange Medallion Signature Program (MSP) whose participants include NYSE member firms.
If a financial institution is not a member of a recognized Medallion Signature Guarantee Program, it would not be able to provide signature guarantees. Also, if you are not a customer of a participating financial institution, it is likely the financial institution will not guarantee your signature. Therefore, the best source of a Medallion Guarantee would be a bank, savings and loan association, brokerage firm, or credit union with which you do business.
A Medallion imprint or stamp indicates that the financial institution is a member of a Medallion signature guarantee program and is an acceptable signature guarantor. By participating in the program, financial institutions can guarantee customer signatures with the assurance that their guarantees will be immediately accepted for processing by transfer agents.
Transfer agents can refuse to accept a signature guarantee from an institution that does not participate in the Medallion program or that is not recognized by the transfer agent. While guarantor firms can charge a fee for their services, they often don't and offer them as part of their customer services.
If you have general questions about Medallion signature guarantees or how the Medallion program works, you can send an email to Kemark Financial Services, Inc., the program administrator for STAMP and SEMP, at contactkfs@kemark.com. The SEC provides Kemark's email address for information purposes only. We cannot endorse any commercial entity, and we do not endorse or recommend any of its products or services. For specific questions about a security, the Shareholder Services Department of the company whose shares you own or its respective transfer agent may be best suited to assist you.

(Emphasis added.)

         The website for Kemark Financial Services, Inc., the program administrator of the Securities Transfer Agents Medallion Program (STAMP), provides this additional information about the use of Medallion signature guarantees at http://kemarkfinancial.com/programs.html (last visited 10/29/2019):

For over one hundred years, Issuers of Securities and Transfer Agents have relied upon the signature guarantee process for the transfer of securities. This process, codified in the Uniform Commercial Code (UCC), makes the Transfer Agent liable for improper securities registration. To register or re-register a security, the Transfer Agent or Issuer relies upon the warranties made by a Medallion Guarantor when placing a Medallion Guarantee Stamp on a security, namely, that the signature is genuine, the signer is an appropriate person to endorse, and the signer had the legal capacity to sign.

(Emphasis added.)

         A financial institution that provides a Medallion signature guarantee pursuant to the STAMP program agrees to indemnify and hold harmless issuers of securities and transfer agents against all claims and losses arising out of the transfer, exchange, or delivery of securities in reliance upon the Medallion guarantee. See http://kemarkfinancial.com/assets/stampindemnityagreement.pdf (last visited 10/29/2019).

         Rousseaux worked for MetLife Securities, Inc. and Metropolitan Life Insurance Company, Inc., from January 2003 to October 2004. When Rousseaux ended his affiliation with MetLife, he took with him a large quantity of forms intended to authorize the transfer of a customer's assets. These forms had been pre-stamped with MetLife's Medallion Signature Guarantee stamp in blank. In other words, these fill-in-the-blank forms to facilitate the transfer of financial assets bore a MetLife Medallion stamp purporting to guarantee the signature of the transferring party even though the forms had not been signed by anyone. The presence of the MetLife Medallion stamp on the forms represented that MetLife had verified the identity of the signor and would indemnify a transferee who detrimentally relied upon the signature.

         After Rousseaux left MetLife, while affiliated with USAllianz Securities, Inc., he used at least 58 client authorization pages of asset transfer forms that had been pre-stamped with the MetLife Medallion Signature Guarantee stamp to facilitate the transfer of financial assets. Rousseaux also used at least 33 of the pre-stamped forms containing a MetLife Signature Guarantee Medallion stamp in connection with the transfer of client assets to Conseco.

         The Commissioner found that "Respondent Rousseaux violated sections 11-301(2) and (3) of the Act by obtaining and using, without authorization, blank ATA [Asset Transfer Authorization] forms pre-stamped with the MetLife Medallion Signature Guarantee Stamp, signed by him or by persons whose identity is unknown, in connection with the sale of clients' securities to invest in non-MetLife insurance products, which thereby misrepresented that MetLife had verified the clients' identities."

Section 11-301(2) and (3) of the Act provide:
It is unlawful for any person, in connection with the offer, sale, or purchase of any security directly or indirectly to:
* * *
(2) Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
(3) Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit on any person.

         As noted above, Mr. Rousseaux has not challenged on appeal the Commissioner's finding that he committed 91 violations of CA § 11-301(2) and (3) relative to his unauthorized use of the pre-stamped MetLife Medallion Signature Guarantee forms. Misrepresentations regarding EIA's "Wrap Fee Program"

         In 2013, EIA began promoting a new investment program for its clients. Rousseaux and EIA wanted to describe the program as a "wrap fee program." The SEC requires specific disclosures for a "wrap fee program," which is a relationship in which "an investment advisory client pays a flat fee for investment advisory services, and is not charged separate brokerage commissions or transaction charges." EIA and Rousseaux filed brochures with the Division that stated that EIA was offering a wrap fee program, pursuant to which "clients pay a single annualized fee of 200 basis points (2.00%) on the assets being managed under the Program, which covers both investment management fees and securities transaction charges." But, despite promoting the program as a wrap fee program that provided EIA's "clients with the ability to trade in certain investment products without incurring separate brokerage commissions or transactions charges," EIA's participating investors were still charged transaction fees on transactions conducted in their Charles Schwab accounts. At least 85 clients invested in the program that was improperly promoted as a wrap fee program.

         The Commissioner found that Rousseaux's "knowing or reckless disregard of the discrepancy between the wrap fee disclosure language and the actual operation of the [program at EIA] caused investors in the [program] to be misled[, ] and led to false and misleading filings with the Commissioner." The misleading statements violated CA § 11-303, which states:

It is unlawful for any person to make or cause to be made, in any document filed with the Commissioner or in any proceeding under this title, any statement which is, at the time and in the light of the circumstances under which it is made, false or misleading in any material respect.

         Misrepresentations regarding past performance results

         A proprietary investment program that EIA began promoting in 2013 was called the Everest Dynamic Growth Model Portfolio (also sometimes referred to by the acronym "EDGM"). Promotional material EIA provided to prospective investors included representations that the "5 and 10 years long term performance/growth of the [EDGM] as of 1/1/2014" would have been 8.92% and 8.64%, respectively. But the performance figures were not based upon analyses of actual performance. The Commissioner found: "These performance figures were false." Rousseaux subsequently sent a letter to clients admitting that the performance data "was incorrect." And, although at least two clients were told that the model portfolio would have outperformed the Standard & Poor's 500 Index by 37%, EIA was unable to provide the Division documentation to support that claim.

         Misrepresentations as to minimum account balance for the EDGM program

         For marketing purposes, Rousseaux wanted to pitch the EDGM program as an exclusive investment opportunity, and, to that end, EIA stated in a brochure for prospective clients that there was a minimum investment requirement of $100, 000 to participate in the EDGM program. But, despite the representations regarding a "minimum investment," EIA waived the minimum so frequently that "[a]pproximately half of the clients who entered the EDGM program invested less than $100, 000." According to some EIA employees, the account minimum was actually just $10, 000.

         Misrepresentation of the amount of assets under management by EIA

         One of the criteria for being listed in trade magazines such as Barron's and Worth is the amount of a financial advisor's "Assets Under Management" or "AUM." In an effort to appear to have a greater amount of Assets Under Management than Rousseaux's companies actually had, Rousseaux intentionally counted among his companies' Assets Under Management certain assets of clients that were, in reality, being managed by others.

         Use of a fictitious "Investment Committee" for ...


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