ALJDEC

98A-125-INS · Department of Insurance · 1998-10-21

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

On October 21, 1998, a hearing was held to determine if the Respondent had violated provisions of A.R.S. §§ 20-290, 20-291 & 20-316. Assistant Attorney General Shelby Cuevas represented the Arizona Department of Insurance (the “Department”). Attorney Michael Salcido represented the Respondent. Evidence and testimony were presented. Based upon a review of the entire record, the following Findings of Fact, Conclusions of Law and Recommended Decision are made.

FINDINGS OF FACT

1. Barry Richard Strauss (the “Respondent”) is 61 years old and is currently licensed as a life and disability insurance agent. See State’s Exhibit 1a. He has been licensed with the Department since 1982. His License No. 312380 (the “License”) is due to expire on March 31, 1999. Id. The Respondent has also been licensed in Michigan (1962 to 1967) and Massachusetts (1968 to 1973).

A. The Arizona Corporation Commission.

2. In 1994, the Respondent was a sales agent for a business called Paramount Payphones, Inc. (hereinafter "Paramount"). See State's Exhibit 2, page 2. The Respondent offered and sold interests in the Paramount program which consisted of interests in partnerships whose purpose was to own and operate pay telephones in various states other than Arizona. Id. The Arizona Corporation Commission (the “ACC”) subsequently initiated an investigation of Paramount and the Respondent.

3. On or about March 13, 1996, the ACC entered an Order to Revoke Securities Salesman Registration, Order to Cease and Desist, Order Assessing Administrative Penalty and Consent to Same Regarding Barry Strauss (hereinafter “ACC Order” or

“State’s Exhibit 2”) in In the Matter of the Offering of Securities by: Barry Strauss, et al., Docket No. S-3072-I, Decision No. 59551. See State’s Exhibit 2. In the ACC Order, the ACC found that: a. The Respondent misrepresented to offerees and investors, both in the written materials and through oral statements, that the Paramount investment was safe; b. The Respondent misrepresented to offerees and investors, in the written materials and through oral statements, that substantial tax benefits existed in the form of depreciation for investing with Paramount; however, the Respondent failed to disclose the long term effect of the touted tax benefits and did not disclose that such depreciation may potentially subject the investors to future tax liabilities; c. The Respondent misrepresented to offerees and investors in written offering materials that the investment was a guaranteed and secured note between Paramount and the investor when, in fact, the investment was a partnership; d. The Respondent misrepresented to offerees and investors in the comparison sheet that the investment was guaranteed and secured for the benefit of the investor due to a UCC registration form being filed in the state in which the equipment was located; however, according to the partnership agreement, the equipment was the property of the partnership and the investor did not have an interest in the property of the partnership. Moreover, there were no UCC filings; e. The Respondent failed to disclose to the offerees and investors any financial information about Paramount; f. The Respondent misrepresented to at least one offeree that he was a Certified Public Accountant (“CPA”) when in fact, the Respondent was not a CPA licensed in Arizona or any other state; g. The Respondent misrepresented to at least one offeree that a similar company, QCI, in which the Respondent sold investments, was doing extremely well when, in fact, the similar company was in bankruptcy and was being investigated for violations of state and federal securities laws; h. The Respondent engaged in a course of business that operated as a fraud or deceit, by completing investor financial questionnaires with false financial information. See State’s Exhibit 2, pages 4&5.

4. The ACC concluded that the Respondent offered and sold unregistered securities in violation of A.R.S. §44-1841. See State’s Exhibit 2, page 5. The ACC further concluded that the Respondent, in connection with the offer and sale of securities, violated A.R.S. §44-1991. Id. The ACC further ordered that the Respondent’s registration as a securities salesman be revoked. See State’s Exhibit 2, page 6.

5. Pursuant to the ACC Order, the Respondent agreed to cease and desist from the following: A. Offering to sell or selling securities within or from the state of Arizona unless the securities are registered with the ACC . . .; B. Offering to sell or selling securities within or from the state of Arizona unless prior registration as a dealer and/or salesman is obtained . . .; C. Offering to sell or selling securities within or from the state of Arizona in violation of A.R.S. §44-1991. See State’s Exhibit 2, page 6.

6. The ACC further ordered that pursuant A.R.S. §44-2036, the Respondent was required to pay an administrative penalty of $2,500.00. See State’s Exhibit 2, page 6. The ACC Order took effect on March 13, 1996.

B. The Application.

7. On or about January 27, 1997, the Respondent filed an application (the “Application”) to renew his License with the Department. See State’s Exhibit 1.

8. Part V, Question C of the Application states in part:

“C. Have you had any professional, vocational, business license or certification refused, denied, suspended, revoked or restricted or a fine imposed by any public authority that has not previously been disclosed by you to this agency in a license application?”

See State’s Exhibit 1, page 2.

9. Part V, Question E of the Application states in part: “E. Have you had any judgment, order or other determination been (sic) issued or made against you in any criminal, civil, administrative or other judicial or quasi-judicial proceeding of any kind in any jurisdiction that has not previously been disclosed by you to this agency in a license application based on any of the following:

. . . . 3. Dishonesty in business or financial matters? 4. Fraud or misrepresentation? . . . . 6. Any other reason? . . . . “

See State’s Exhibit 1, page 2.

10. The Respondent answered “No” to the aforementioned questions in Part V, Questions C & E of the Application. See State’s Exhibit 1, page 2. On January 27, 1997, the Respondent signed and dated the Application, certifying that the information recorded on the Application was true and correct to the best of his knowledge. Id.

11. The Respondent failed to disclose on his Application the ACC Order revoking his insurance securities salesman registration. See State’s Exhibit 1 (Part V, Question C). The Respondent testified that he understood that his securities license had been revoked. However, the Respondent testified that he misread and misunderstood the full weight of Part V, Question C of the Application.

12. The Respondent also failed to disclose the ACC Order when he answered Part V, Question E on his Application. See State’s Exhibit 1 (Part V, Question E).

C. The Respondent’s Testimony.

13. The Respondent testified that (in early 1996) he attended a meeting with Wendy Coy, an attorney for the ACC. The Respondent was not represented by counsel at this meeting. The Respondent testified that Attorney Wendy Coy advised him to consent to the ACC Order and waive his right to a hearing. The Respondent testified that Attorney Coy told him that the ACC Order (1) would not be a public record and (2) would not have to be disclosed or reported to the Arizona Department of Insurance if he did the following:

A. Waive his right to a hearing and consent to the ACC Order; B. Have his securities salesman registration revoked; C. Pay a $2500.00 fine; and D. Cease and desist from certain securities offers and sales.

14. The Respondent testified that he consented to the ACC Order based upon Attorney Coy’s advice. However, the Respondent testified that he never admitted or denied the ACC Order's Findings of Facts or Conclusions of Law. See State’s Exhibit 2, page 8. The Respondent testified that he never would have consented to the ACC Order if he had known that the ACC Order could be used against him by another agency (i.e. the Arizona Department of Insurance). The Respondent testified that he was promised that the ACC Order would never become a public record and that it would not affect his insurance license.

15. Attorney Wendy Coy was never subpoenaed to testify as a witness in this hearing. Furthermore, Attorney Coy’s promise to keep the ACC Order "off the record" was never put in writing. In fact, the Respondent signed a Consent to Entry of Order by the Commission and Waiver of Hearing that states in part:

Barry Strauss acknowledges that he has been fully advised of his right to a hearing to present evidence and call witnesses. Strauss waives all hearing procedures and right to appeal . . . Strauss states that his entry into this Consent to Entry of Order is a voluntary act and that no promise was made nor coercion used to induce him to enter into it. Strauss understands that this Consent to Entry of Order does not preclude the Commission or any other agency . . . from instituting other civil or criminal proceedings now or in the future.

See State's Exhibit 2, page 8 (emphasis added).

16. Robert Steven Tryon shared an office with the Respondent and was the Respondent's partner in the Paramount venture. Mr. Tryon was also a named Respondent in the ACC investigation concerning Paramount. Mr. Tryon was not able to attend the meeting with ACC attorney Wendy Coy because of an illness in his family. Mr. Tryon testified that the Respondent called him shortly after the meeting stating that the Respondent had made a deal with Attorney Coy. Mr. Tryon testified that the Respondent told him that they would have to pay a civil fine and have their securities licenses revoked in exchange for the not having to “admit guilt.” Furthermore, Mr. Tryon testified that the ACC Order would be “unreportable” and “off the record.”

17. The Assistant Attorney General requested that the Respondent’s License be revoked. The Assistant Attorney General did not request a civil penalty. The Respondent requested that this matter be dismissed or that only a 10 day suspension be imposed. The Respondent argued that the Department should be estopped from disciplining the Respondent’s license because the Respondent relied on Attorney Coy’s representations that the ACC Order was “off the record” and would not affect the Respondent’s insurance license.

18. The undersigned Administrative Law Judge finds that the ACC Order was an order made against the Respondent in an administrative proceeding. The undersigned Administrative Law Judge further finds that the Respondent willfully failed to disclose the revocation of the securities registration in Part V, Question C of the Application. The undersigned Administrative Law Judge further finds that it is inconceivable that the Respondent could not understand Part V, Question C of the Application.

19. The undersigned Administrative Law Judge finds that the ACC Order is a record of dishonesty in business or financial matters.

20. The undersigned Administrative Law Judge finds that the Respondent probably did not fully understand the ramifications of consenting to the ACC Order. However, the undersigned Administrative Law Judge finds that the Respondent still should have answered “Yes” to the above referenced questions in Part V, Question E of the Application. The ACC Order was an administrative order based on dishonesty, fraud and misrepresentation that should have been disclosed to the Department. It is irrelevant that the Respondent did not agree with the ACC Order’s Findings of Facts and Conclusions of Law. CONCLUSIONS OF LAW

1. The Department has the burden of proof, 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. The Director is entitled to consider the Respondent’s conduct in securities transactions as bearing upon the question of the Respondent’s record for honesty or dishonesty in business and financial matters. See Herzberg v. State ex rel. Humphrey, 20 Ariz.App 428, 429-30 (1973).

3. The undersigned Administrative Law Judge rejects the Respondent’s estoppel argument because insufficient proof was provided that the ACC’s attorney misled or misinformed the Respondent. In fact, the written proof (i.e. the Consent to Entry of Order) suggests that no promise was ever made to the Respondent that the ACC Order would not be used in a subsequent proceeding against the Respondent. The undersigned Administrative Law Judge further finds that Valencia Energy Company v. Arizona Department of Revenue is distinguishable because the taxpayer in that case relied on written erroneous advice from the Department of Revenue. Furthermore, Attorney Coy did not have the authority to speak for the Department of Insurance in this matter.

4. The Respondent’s failure to disclose the ACC Order on Part V, Questions C of the Application constitutes the willful misrepresentation of a fact to be disclosed in an application within the meaning of A.R.S. §20-291(G).

5. The Respondent’s failure to disclose the ACC Order on Part V, Questions C & E of the Application constitutes the existence of a misrepresentation in obtaining an insurance license within the meaning of A.R.S. §20- 316(A)(3).

6. The Respondent’s failure to disclose the ACC Order on Part V, Questions C & E of the Application is a cause for which the renewal of a license could have been refused within the meaning of A.R.S. §20-316(A)(1).

7. The Order is a record of dishonesty in business or financial matters. Accordingly, the Respondent has a record of dishonesty in business or financial matters within the meaning of A.R.S. §20-290(B)(2).

8. The Respondent’s aforementioned conduct constitutes the willful violation of, or the willful noncompliance with, any provision of this title, or any lawful rule, regulation or order of the Director within the meaning of A.R.S. §20-316(A)(2).

9. The undersigned Administrative Law Judge finds that grounds exist to revoke or suspend the Respondent’s License pursuant to A.R.S. §20-316(A). The Director may also impose a civil penalty on the holder of a license in the amount no greater than $250.00 per violation pursuant to A.R.S. §20- 316(C). In this matter, grounds exist to impose a civil penalty against the Respondent. In mitigation, the undersigned Administrative Law Judge concludes that the Director should consider the following: a. The Respondent has had a clean record since 1982 with the Department of Insurance; b. No evidence was presented that a member of the public was financially injured by the Respondent’s involvement with Paramount; c. The Respondent is 61 years old and derives 75 to 85 percent of his income from his insurance business; d. The Respondent was not represented by counsel in consenting to the ACC Order. RECOMMENDED DECISION

Based upon the foregoing, the undersigned ALJ recommends that the Respondent's License 312380 be suspended for a period of 270 days with a civil penalty of $250.00.

Done this day, November 3, 1998.

_________________________________ Casey J. Newcomb Administrative Law Judge

Original transmitted by mail this ____ day of November, 1998, to:

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

By _______________________________ -----------------------

Office of Administrative Hearings 1700 West Washington, Suite 602 Phoenix, Arizona 85007 (602) 542-9826