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A New York City broker-dealer fined $30,000 by the Connecticut Department of Banking claims the agency overstepped its jurisdictional reach by launching an unprovoked investigation of the securities brokerage firm without proof that it had received a single complaint by a Connecticut customer. If successful, First Providence Financial Group’s Jan. 8 appeal could strike a “substantial blow” to Banking Commissioner John P. Burke’s ability to police broker-dealers based outside the state’s borders, maintained Hartford, Conn., commercial litigator David J. Elliott, who is representing the Manhattan firm in the dispute. Co-founded four years ago by its chief executive officer, Kenneth M. Klein, First Providence, according to Elliott, is registered in all 50 states and employs roughly 20 brokers. That’s down from about 35 brokers in September 1999 when the Connecticut Department of Banking’s securities division targeted it as part of an “unannounced sweep” of New York City broker-dealers, said Elliott, a partner at Day, Berry & Howard. (The reduction in brokers is unrelated to the state’s investigation of the company, Elliott noted.) In addition to the $30,000 fine, the banking department has moved to revoke First Providence’s registration under the Connecticut Uniform Securities Act. Among other charges, the state alleges the brokerage firm employed at least two unregistered “cold callers” who illegally pre-qualified customers as to their financial status and investment history. DELETED FILES Filed in New Britain, Conn., Superior Court, the company’s administrative appeal of Burke’s Nov. 27 “Corrected Final Decision” calling for the fine claims that it was subject to the 1999 probe despite the lack of a single complaint lodged against it by Connecticut securities customers. Rather, the banking department targeted First Providence and a handful of other broker-dealers it merely suspected of conducting “boiler room” operations or other “illegal or nefarious” securities activities, the company claims. Elliott said state investigators initially accused Klein of concealing material information from them by deleting files from his computer during their examination of company records. Those charges, however, were later dismissed and a summary suspension of Klein’s Connecticut registration was lifted. The deleted items, according to Elliott, included old templates and other immaterial documents that had been left behind on the company’s computer system by a predecessor brokerage firm. But “spurred on” by its initial investigation and “presuming the further guilt of First Providence,” the department’s securities division conducted no less than three additional examinations of the company during an “unprecedented” eight-month probe between September 1999 and April 2000, the brokerage firm alleges in its appeal. Agency officials initially sought to level a $60,000 fine against First Providence, but Burke, in his final decision, cut the fine in half, Elliott said. Burke, Elliott added, also threw out three of six recommended charges against First Providence. In finding against the broker-dealer, Burke, in his Nov. 27 decision, ruled it had: � engaged in dishonest or unethical practices by employing cold callers not registered with the National Association of Securities Dealers; � blatantly disregarded the banking department’s authority by failing to furnish certain documents the department had requested; and � committed supervisory lapses by allowing firm representatives to use “rude and abusive language in pressured sales calls.” Elliott denied the latter charge. In addition, he said the cold callers in question did not engage in activities that required them to be registered. First Providence also did not refuse to furnish documents, he maintained. Rather, it was extraordinarily busy due to the “unprecedented volatility” of the stock market at the time, and unsuccessfully sought an extension of time to carry out the banking department’s request, he said. REQUISITE JURISDICTIONAL NEXUS? Though it has previously done a small amount of business in Connecticut, First Providence, according to Elliott, was doing “virtually none” at the time of the state’s investigation. And none of those customers, he emphasized, were in any way related to the allegations brought against the company. “It is undisputed,” the broker-dealer asserted in its Jan. 8 memorandum supporting its application for a stay of Burke’s final decision, “that the Commissioner offered not a shred of evidence that the conduct relating to the Banking Department’s ‘sales practices’ charges had any connection to Connecticut or a Connecticut securities transaction.” In his final decision, Burke, however, maintained that, in ascertaining whether First Providence engaged in dishonest or unethical practices, it was not necessary for the alleged misconduct to have occurred in Connecticut. Rather, the company’s Connecticut registration “established the requisite jurisdictional nexus,” he wrote. “We don’t believe there is anything particularly novel or challenging about the legal or factual issues here as far as jurisdiction is concerned,” added Attorney General Richard Blumenthal, whose office is handling the appeal for the agency. Still, Elliott said he is encouraged by a 1998 state Supreme Court decision in which it unanimously ruled that Springfield, Mass.-based Ticketworld did not violate Connecticut’s anti-ticket scalping law because all the law-triggering events occurred in Massachusetts. That same legal reasoning, Elliott insisted, should apply to his client as well.

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