ALJDEC

01A-270-INS · Department of Insurance · 2002-02-06

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: January 18, 2002. APPEARANCES: Shelby Cuevas, Assistant Attorney General, appeared on behalf of the Department of Insurance. Charles R. Berry appeared on behalf of the Respondent, Philip Michael Scafetta. ADMINISTRATIVE LAW JUDGE: Gregory L. Hanchett _____________________________________________________________________ In this contested agency action, the Department of Insurance (hereinafter Department ) seeks to revoke the life and disability insurance producer license, No. 801402, of Philip Michael Scafetta(hereinafter Scafetta). Based on the evidence adduced at the hearing, the following findings of fact, conclusions of law, and recommended decision are made. FINDINGS OF FACT 1. At all times material to this matter, Scafetta has held a life and disability insurance producer license issued by the Department. 2. On July 23, 2001, Scafetta applied for a renewal of that license with the Department. Among other things, the questionnaire which accompanied the license renewal specifically asked Scafetta whether there were any “civil, administrative, other judicial or quasi-judicial proceedings of any kind, . . . currently pending against you in any jurisdiction based on any of the following: 1) Misappropriation, conversion or the withholding of moneys?, 2) Incompetence or a source of injury and/or loss to anyone?, 3) Dishonesty in business or financial matters, 4) Fraud or misrepresentation?, 5) Any cause arising out of an insurance transaction?” Scafetta answered “no” to each of these questions. Furthermore, Scafetta acknowledged by signing the renewal application that each of the answers to the above questions was true and correct to the best of his knowledge. 3. In fact, on October 17, 2000, the Arizona Corporation Commission issued a “Notice for Opportunity for Hearing Regarding Proposed Order to Cease and Desist in Docket number S-03354A-00-0000. As a result of this matter before the Arizona Corporation Commission, on July 23, 2001, the same date as the filing for the renewal of the license application at issue in this case, an order to cease and desist, order of restitution, order for administrative penalties, and consent order. Scafetta consented to the entry of the order by the Corporation Commission, though Scafetta did not admit or deny the findings of fact contained in that order. As a result of that order, Scafetta agreed to cease and desist from violating the Securities Act, agreed to pay restitution and agreed to pay a civil penalty. 4. The order itself (which was admitted as Exhibit 3 without objection at the hearing in this matter) describes in detail Scafeta’s involvement with four elderly investors between 1995 and 1998. The consent order is rife with instances of Scafetta’s incompetence, untrustworthiness or financial irresponsibility in the conduct of business in this state. The conduct outlined in the consent order demonstrates that Scafetta’s conduct resulted in substantial losses to three of the four investors involved. The fourth investor’s money was spared not due to any action on the part of Scafetta, but rather due early intervention on the part of a conservator who had been appointed to protect the assets of the investor. Furthermore, the findings of the order indicate that Scafetta engaged in misrepresentation, deception, and exploitation of vulnerable adults. This conduct constitutes fraudulent, coercive, or dishonest practices. 6. At the hearing in this matter, Scafetta was given the opportunity to challenge the findings in the consent order. He indicated that a Department of Insurance investigator had already investigated these matters prior to the corporation Commission’s undertaking and had found “no wrong doing.” a hearing had been earlier held through the Department of Insurance into these matters and that no wrong doing had been found. He further asserted that, in essence, the investors involved had neither been defrauded or mislead and that the investors in these cases were desirous of participating in the investments. 7. Scafetta further indicated that he did not disclose on his insurance license renewal the pendency of the Corporation Commission’s investigation or the resultant consent order of July, 2001 because he felt that he had in essence disclosed each of these incidents to the Department of Insurance during on his 1999 application for renewal to the Department of Insurance. Scafetta also testified that he did not disclose the Corporation Commission investigation and order because he did not know that the Corporation Commission and the Department of Insurance were separate entities. 8. The undersigned finds the descriptions of the events contained in the Corporation Commission’s consent order to be credible. CONCLUSONS OF LAW 1. The Department has the burden of proof in this matter, and the standard of proof on all issues is by a preponderance of the evidence. Culpepper v. State, 187 Ariz. 431, 930 P.2d 508 (App. 1996). A "preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not." Morris K. Udall, Arizona Law of Evidence, §5 (1960). It "is evidence which is of greater weight or more convincing than the evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not." Black's Law Dictionary, 1182 (6th ed. 1990). 2. Arizona Revised Statutes § 20-295 (A) states in pertinent part that the director may deny, suspend for not more than twelve months, revoke or refuse to renew an insurance producer’s license or may impose a civil penalty . . . for any one or more of the following causes: 1. Providing incorrect, misleading, incomplete, or materially untrue information in the license application. 2. Violating any provision of this title or any rule , subpoena or order of the director. 3. Obtaining or attempting to obtain a license through misrepresentation or fraud. * * * 8. Using fraudulent, coercive or dishonest practices, or demonstrating incompetence, untrustworthiness or financial responsibility in the conduct of business in this state or elsewhere.

3. The Department has shown that grounds exist to demonstrate a violation of A.R.S. § 20-295(A)(1). Complainant’s assertion that he felt he did not need to disclose the pendency of the Corporation Commission ‘s case against him in his license renewal application is not tenable. The language of the application is clear: an applicant seeking renewal must disclose any pending “civil, administrative, other judicial or quasi- judicial” proceedings pending against him. His failure to do so violates constitutes a violation of A.R.S. § 20-295(A)(1). 4. The Department has shown that grounds exist to demonstrate a violation of A.R.S. § 20-295(A)(8). The conduct outlined in the Corporation Commission’s consent order is the very type of conduct this statute is designed to guard against. 5. Having found that Scafetta violated A.R.S. § 20-295(A)(1) and A.R.S. § 20-295(A)(8), a violation of A.R.S. § 20-295(A)(2) necessarily ensues. 6. The Department has not shown that grounds exist to demonstrate a violation of A.R.S. § 20-295(A)(3). 7. The Department seeks revocation in this matter. The conduct described in the consent order provides a rationale basis for the sanction of revocation. This is particularly true for the position of insurance producer, where a person so employed must maintain the highest fiduciary standards and not take advantage of the position of trust that he or she holds with clients. Nevertheless, certain factors mitigate against revocation in this matter. First, there has been no indication that the conduct has reoccurred since 1998, a period of at least three years. During that time, Scafetta has been a licensed insurance producer yet the undersigned has not been made aware of any complaints having been lodged against him. Secondly, Scafetta testified , without contradiction from the Department, that the Department had investigated the facts outlined in the Corporation Commission’s consent order and had at that time taken no action. Third, Scafetta had produced letters form various individuals attesting to his honesty and integrity. In light of these factors, outright revocation does not appear to be warranted. However, suspension for a period of six months is warranted due to the very serious allegations of the corporation commission’s findings of fact. RECOMMENDED DECISION Based on the foregoing the undersigned recommends to the Director of the Department of Insurance that Respondent’s license number 801402 should be suspended for period of six months commencing on the effective date of the final order entered in this matter. Done this day, February 6, 2002.

______________________________________ Gregory L. Hanchett Administrative Law Judge Original transmitted by mail this ____ day of ____________, 2002, to:

Department of Insurance Charles R. Cohen ATTN: Curvey Burton 2910 North 44th Street, Ste. 210 Phoenix, AZ 85018

By ___________________________ -----------------------

Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826