ADMINISTRATIVE PROCEEDING BEFORE THE SECURITIES COMMISSIONER OF MARYLAND IN THE MATTER OF: * JOSEPH F. RINALDI * AND * Securities Docket No. 2004-0368 QUANTUM FINANCIAL * ADVISORS, INC. * Respondents * * * * * * * * * * * * * * Consent Order WHEREAS, the Securities Division of the Office of the Maryland Attorney General (the Division ), pursuant to the authority granted in section 11-701 of the Maryland Securities Act, Corporations and Associations Article, Title 11, Annotated Code of Maryland (1999 Repl. Vol. & Supp. 2005) (the Act ), conducted an investigation of the investment advisory activities of Joseph Rinaldi ( Rinaldi ) and Quantum Financial Advisors, Inc. ( QFA ) (collectively, Respondents ); and WHEREAS, Section 11-401 of the Act requires registration of an investment adviser with a place of business in Maryland or no place or business in Maryland and more then five clients; and WHEREAS, Section 11-405 of the Act requires the filing of a notice of registration of a federally covered investment adviser with a place of business in Maryland or no place or business in Maryland and more then five clients; and WHEREAS, Section 11-402 of the Act requires registration of investment adviser representatives; and
WHEREAS, section 11-302(f) of the Act provides that it is unlawful for any investment adviser to take or have custody of any securities or funds of any clients if: (1) [t]he Commissioner by rule prohibits custody; or (2) [i]n the absence of a rule, the investment adviser fails to notify the Commissioner that he has or may have custody; and WHEREAS, Regulation.04(A)(1) of Code of Maryland Regulations ( COMAR ) 02.02.05 provides that it is unlawful for an investment adviser to take or have custody of securities or funds of any client unless the investment adviser notifies the Commissioner in writing that the investment adviser has or may have custody; and WHEREAS, Regulation.04(A)(6) of COMAR 02.02.05 provides that it is unlawful for an investment adviser to take or have custody of any securities or funds of any client unless at least once each calendar year, an independent certified public accountant or public accountant verifies all client funds and securities by a surprise examination; and WHEREAS, Section 11-302 of the Securities Act makes it unlawful for any person who acts as an investment adviser or representative under Section 11-101(h) or (i) of the Act to engage in dishonest or unethical practices as the Commissioner may define by rule or to make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and WHEREAS, Section 11-501 of the Act makes it unlawful for any person to offer or sell a security in this State unless the security is registered, exempt from registration under Subtitle 6 of the Act, or qualifies as a federal covered security; and WHEREAS, on the basis of that investigation the Maryland Securities Commissioner (the 2
Commissioner ) has found grounds to determine that the Respondents have engaged in acts or practices constituting violations of Sections 11-302, 11-401, 11-402, 11-405 and 11-501 of the Act and Regulation.04 of COMAR.02.02.05; and WHEREAS, without holding a hearing, without trial or adjudication of any issue of fact or law, and prior to the initiation of any formal proceeding, the Commissioner and Respondents reached an interim order on June 23, 2004 (the Interim Order ) pending the outcome of the Commissioner s investigation; and WHEREAS, this Order replaces the Interim Order; and WHEREAS, without holding a hearing, without trial or adjudication of any issue of fact or law, and prior to the initiation of any formal proceeding, the Commissioner and Respondents have reached this Consent Order; and WHEREAS, Respondents, consent to the entry of this Consent Order without admitting or denying any findings of fact or conclusions of law, except that Respondents expressly consent to the Commissioner s jurisdiction in this proceeding pursuant to Section 11-701.1 of the Act; and WHEREAS, the Commissioner has determined that it is in the public interest to issue this Consent Order. NOW, THEREFORE THE COMMISSIONER FINDS: II. RESPONDENTS 1. QFA is a Delaware corporation with offices located at 1534 16 th Street NW, Suite 100, Washington DC. 2. Rinaldi resides in Rockville, Maryland. Rinaldi is the sole shareholder, president, and senior managing director of QFA. 3
III. FINDINGS OF FACT Failure to Register 3. QFA was registered as an investment adviser with the Securities and Exchange Commission ( SEC ) from April 15, 1996 through May 27, 2004. On October 28, 2001, QFA entered into a Consent Agreement with the District of Columbia for failing to file a notice of registration and simultaneously filed a notice of registration. On January 9, 2003, QFA registered with the District of Columbia because its assets under management fell below $25 million. Although, QFA has had more than 5 investment advisory clients in Maryland since at least 1998 and moved its offices to Maryland in December 2003, it did not apply to register as an investment adviser in Maryland until March 11, 2004. QFA has never been registered as an investment adviser in Maryland and has never filed a notice of registration as an investment adviser in Maryland. 4. Rinaldi is not registered and has never been registered as an investment adviser or an investment adviser representative in Maryland. Since at least 1998, Rinaldi has been providing investment advice to more than 5 Maryland residents. 5. Because they did not register, Respondents have not paid the $300 firm or the $50 investment adviser representative registration fees. Internal Controls 6. In January 2002, the SEC Staff sent Respondents a deficiency letter describing violations the SEC Staff noted during an on-site examination of Respondents advisory activities. The SEC Staff expressed concern that there was a serious lack of internal controls. Respondents attempted to address the SEC Staff s comments by letter and in several conversations with the SEC Staff, but did not retain counsel contemporaneously to review the SEC Staff s letter. The lack of 4
internal controls identified by the SEC Staff continued until Respondents hired counsel during the course of the Division s investigation. The lack of internal controls led to several violations of the Act by the Respondents including: a. Violation of the custody rules by directly deducting advisory fees from a client s account without providing the client an invoice itemizing the fee including the formula used to calculate the fee, the amount of assets under management upon which the fee is based, and the time period covered by the fee; and b. Violation of the anti-fraud rules by posting misleading or inaccurate information on Respondents website; and c. Violation of the securities registration rules by including on its website an Offering Summary that explained QFA s strategy, to its clients and others, for expanding its business through, among other ways, raising capital. 7. Respondents say that the offer did not result in the sale of any securities by them. 8. Respondents have taken steps to improve internal controls. Pursuant to the Interim Order, Respondents hired an independent accounting firm to verify performance figures and performance fees and to review client invoices. The independent accounting firm did not find any instances of performance figures or fees being misstated. Respondents hired a compliance officer who supervised Respondents advisory activities during the interim period. 9. Counsel for Respondents has helped Respondents develop a compliance and supervisory manual to ensure that in the future QFA has the appropriate internal controls. 10. Respondents removed any substantive content from their website and have agreed that they will not make any material changes to the website without review by counsel or an 5
independent consultant approved by the Commissioner. CONCLUSIONS OF LAW THE COMMISSIONER, THEREFORE, CONCLUDES AS A MATTER OF LAW: 11. Respondents violated Sections 11-401 and 11-402 of the Act by acting as an investment adviser and an investment adviser representative as defined by Sections 11-101(h) and (i) without registering with the State of Maryland. 12. Respondents violated Section 11-405 of the Act by acting as federal covered adviser without filing a notice of registration with the State of Maryland. 13. Respondents violated Section 11-302(f) and Regulation.04 of COMAR.02.02.05 by taking custody of clients assets by directly deducting fees and failing to comply with the requisite safeguards. 14. Respondents violated Section 11-501 of the Act by offering shares in QFA. The QFA shares as offered by Respondents via their website constitute a security within the definition contained in Section 11-101(r) of the Act. CONSENT TO CEASE AND DESIST AND OTHER RELIEF NOW, THEREFORE IT IS HEREBY ORDERED, and Respondents expressly consent and agree: 1. Respondents shall permanently cease and desist from offering or selling unregistered securities in violation of section 11-501 of the Act. 2. Respondents shall permanently cease and desist from violating Sections 11-401 and 11-402 of the Act by offering investment advice while they are neither registered as investment advisers or investment adviser representatives nor exempt from registration in Maryland. 6
3. Respondents shall permanently cease and desist from violating Section 11-405 of the Act by offering investment advice as a federal covered adviser without filing a notice of registration in Maryland. 4. Respondents shall permanently cease and desist from violating Section 11-302(f) of the Act and COMAR.02.02.05.04 by taking custody of client funds without complying with the Act and the regulations promulgated under the Act. 5. Respondents shall retain an Independent Consultant approved by the Commissioner (the Independent Consultant ) to examine QFA s books and records relating to their investment advisory activities to ensure compliance with the Act. No later than April 30, 2006, the Independent Consultant shall report to the Division any discrepancies or deficiencies found during its examination and report to the Division plans for correction necessary to address the discrepancies and deficiencies. 6. The Independent Consultant shall conduct semi-annual audits for the year and a half following the April 30, 2006 examination. The Independent Consultant shall report to the Division any deficiencies found during each examination, and report to the Division plans for correction necessary to address the discrepancies and deficiencies. 7. Respondents agree to implement any plans for correction devised or approved by the Independent Consultant necessary to address any discrepancies and deficiencies. 8. For the two years following the date of this Order, Respondents shall provide a written report to the Division of any customer complaints, whether written or oral, within one week of receipt of the complaint. Respondents shall provide to the Division a written summary of any oral complaint. 7
9. Respondents agree that if they make any material changes to their website they will receive approval from legal counsel or the Independent Consultant prior to making the changes. 10. In light of Respondents commitment to hire an Independent Consultant, the Division limits its fine to $3,594, representing past registration fees Respondents failed to pay from 1998 through 2003, plus interest. Respondents shall make payment of the fines to the Office of the Attorney General at the same time as the signing of this Order. 11. Respondents shall in all future activities in Maryland comply fully with the Act and the regulations promulgated under the Act. 12. Respondents applications for investment adviser and investment adviser representative registration in Maryland are effective as of January 1, 2006. If any respondent fails to comply with any term of this Consent Order, the Division may institute administrative or judicial proceedings against that respondent to enforce this Consent Order or to sanction the respondent for violating an Order of the Commissioner, and may take any other action authorized under the Act or any other applicable law, including the issuance of fines or penalties as provided by the Act. For the purpose of determining those sanctions, the Findings of Fact and violations of the Act set forth in this Consent Order shall be deemed admitted, and may be introduced into evidence against that respondent. 8
The terms of this Consent Order may be modified only by a subsequent order issued by the Commissioner. DATE OF THIS ORDER: SO ORDERED, Melanie Senter Lubin Securities Commissioner CONSENTED TO: Name: Joseph F. Rinaldi On this day of, 2006, personally appeared, signer of the foregoing Consent Order, who did duly acknowledge his signature to be his free act and deed. Notary Public My Commission Expires: Seal: 9
CONSENTED TO: Quantum Financial Adviser, Inc. By: Joseph F. Rinaldi Title: On this day of, 2006, personally appeared, signer of the foregoing Consent Order, who did duly acknowledge his signature to be his free act and deed. Notary Public My Commission Expires: Seal: 10