Settlement Agreement between Legacy Financial Services, Inc. and the State of Wyoming

BEFORE THE SECRETARY OF STATE
STATE CAPITOL
CHEYENNE, WYOMING 82002-0020

IN THE MATTER OF                            )
                                                      )
Legacy Financial Services, Inc.             )
1179 N. McDowell Blvd.                       )
Pentaluma, CA 94954                          )          Case #02-03
A Broker-Dealer Firm, CRD# 38697         )

_____________________________________________________________

SETTLEMENT AGREEMENT
______________________________________________________________
COMES NOW the Wyoming Securities Division and states as follows: JURISDICTION

1. Wyoming Statute ("W. S.") §17-4-118 states that:
   1. This act [Wyoming’s Uniform Securities Act] shall be administered by the secretary of state.
2. As administrator of Wyoming’s Uniform Securities Act, the Secretary of State has jurisdiction over matters involving the registration and sales conduct of securities agents, broker-dealers, the securities they sell and enforcement of the Act’s anti-fraud provisions. [W. S. 17-4-101 et seq.]
3. W. S. §17-4-106 states:
   1. The secretary of state may by order deny, suspend, make conditional or probationary or revoke any registration or may impose a civil penalty, require restitution to investors, censure or reprimand, require remedial training, impose special reporting requirements or impose other conditions, which he determines to be in the public interest, against any registration or registered person if he finds:
      1. That the order is in the public interest; and
      2. That the applicant or registrant or, in the case of a broker-dealer, any partner, officer, or director, any person occupying a similar status or performing similar functions, or any person directly or indirectly controlling the broker-dealer:

      * * * * * * * * * * * * * *

      (B)Has willfully violated or willfully failed to comply with any provision of this act or a predecessor act or any rule or order under this act or a predecessor act;

      * * * * * * * * * * * * * *

      (G)Has engaged in dishonest or unethical practices in the securities business;

      * * * * * * * * * * * * * *

   2. The secretary of state may by order deny, suspend, or revoke any registration if he finds:
   1. That the order is in the public interest; and
   2. That the applicant or registrant:

(A)Has failed reasonably to supervise his agents if he is a broker-dealer[.]

4. Wyoming Secretary of State Rule Chapter 4, Section 6 (x) prohibits any broker-dealer from: Engaging in any security transaction, offer of a security, sale of a security or course of conduct which would violate any Federal Securities Act or Regulation, Rule of any National Securities Exchange or registered securities association.

W. S. §17-4-124 states:

(a) The secretary of state may from time to time make, amend, and rescind such rules, forms and orders as are necessary to carry out the provisions of this act. . .
* * * * * * * * * * * * * *
(f)

For any violation of this chapter, the secretary of state may by order entered in accordance with this subsection impose a civil penalty, assess costs, require restitution to investors or impose other conditions upon a registered person or any registrant which the secretary of state determines to be in the public interest

FINDINGS OF FACT

Legacy Financial Services, Inc. ("Legacy"), Central Registration Depository (CRD) #38697 was a broker-dealer firm located in Petaluma, California, registered to do securities business as a broker-dealer in Wyoming beginning April 7, 1997, and during all times relevant herein.[Exhibit 1]

Larry K. Mickelson, CRD #2321634, was associated with Legacy Financial Services, Inc., from February 8, 2000 to April 12, 2002. During this time he worked from a location in Loveland, Colorado. [Exhibit 2]

James A. Mickelson, CRD #2535678, was associated with Legacy Financial Services, Inc., from January 31, 2000 to July 9, 2002. During this time he maintained an office located in Sheridan, Wyoming. [Exhibit 3]

James Mickelson was registered as a securities agent in Wyoming on January 31, 2000. [Exhibit 3]

The investors stated to investigators that they had continuously resided in Wyoming since December 2000. Their initial application with Larry Mickelson, and all other correspondence between Legacy Financial Services and Jackson National Life Insurance Company and the investors, shows a mailing address at a P.O. Box in Beulah, Wyoming. [Exhibit 4]

The Colorado Securities Division performed an examination on Larry Mickelson’s Legacy office in Loveland, Colorado on July 17, 2001. [Audit Report]

The Wyoming Securities Division performed an examination on James Mickelson’s Legacy office in Sheridan, Wyoming on October 25, 2001. [Audit Report]

Unregistered Agent

Larry Mickelson is not registered as a securities agent in Wyoming nor has he ever been registered as a securities agent in Wyoming. [Exhibit 2]

Larry Mickelson caused a Mutual Fund Choice account and a Jackson National Life Insurance Company variable annuity to be purchased for the investors’ family partnership on or about January 26, 2001. [Exhibits 4, 5] Information on the annuity application indicates it was signed by one of the investors and Larry Mickelson in Loveland, Colorado on January 26, 2001. [Exhibit 5] Information on a Lincoln Benefit Life Company insurance application indicates it was signed by one of the investors and Larry Mickelson in "Capitol City," Montana on January 26, 2001.

The investors no longer lived in Capitol, Montana as of January 26, 2001 and had moved to Wyoming prior to that date. The investors were able to show that they were not in Colorado or Montana on the dates indicated on the applications. The investors were certain that the investments were purchased in their home in Wyoming, with Larry Mickelson present.

Mr. Mickelson caused the family partnership to pay $6,732.46 in "Program Fees," also referred to as "Advisory Fees," during 2001 to Legacy Financial Services for management of the Mutual Fund Choice mutual fund account. [Exhibit 7]

Larry Mickelson caused the investors to receive account confirmations and monthly statements from Legacyto the address of record, a post office box in Beulah, Wyoming. [Exhibit 4]

According to Legacy’s records, Larry Mickelson is the agent of record on the investors’ partnership account and was the only agent to receive commissions for securities sold to the investors’ partnership account. [Exhibits 4, 6]

According to James Mickelson, Larry Mickelson maintained the client file for the investors’ partnership account in his Loveland, Colorado office. [Audit Report]

Commission Sharing

Larry Mickelson paid commissions from the sale of securities to the investors directly to his brother, James Mickelson, a registered securities agent in Sheridan, Wyoming for Legacy, by check number 3941, dated February 18, 2001. "Commission- XXX [investors]", was written in the memo line on the check. [Exhibit 8]

Outside Business

The National Heritage Foundation takes care of setting up and running publicly operated foundations, and for its services it charges fees and expenses. [Exhibit 14]

James Mickelson helped set up a foundation for the Investors and is shown as a Philanthropic Development Officer on the National Heritage Foundation statement for the Investors’ foundation. [Exhibit 12]

James Mickelson stated that he and his wife have a foundation with the National Heritage Foundation. [Audit Report, Exhibits 15, 16]

James Mickelson stated that he does not earn a commission directly from the National Heritage Foundation but James Mickelson’s family foundation earns 2 1/2% of any monies deposited into the Investors’ foundation. [Exhibit 15, 16 & Audit Report]

James Mickelson did not report this outside business activity with the National Heritage Foundation to Legacy as required by Legacy and NASD Conduct Rule 3030.

Advertising

The Laramie, Wyoming 2000 telephone book revealed an advertisement for JNM Agency under Investment- Securities and another advertisement for JNM Agency under Insurance mentioning IRAs and 401ks. The advertisements do not display the Legacy name. [Exhibit 10]

James Mickelson’s branch office advertising file contained a copy of a newsletter for the Eppson Center for Seniors dated January & February 2000. On page 11 was an advertisement for JNM Securities, Insurance. The advertisement does not display the Legacy name. [Exhibit 11]

In a reply dated August 8, 2002, to questions from the Wyoming Securities Division, Legacy stated that the Eppson Center newsletter advertisement and the telephone book advertisements were not approved by Legacy Financial Services Compliance Department. [Exhibit 9]

Legacy produced documentation showing that James Mickelson returned a Registered Representative Annual Questionnaire, Year 2000, dated April 13, 2000, in which he denied using any advertising that was not pre-approved by Legacy Compliance.

Supervision

Legacy states that they conduct internal examinations on a three year cycle.

Legacy had not performed an internal examination on James Mickelson’s branch office in Sheridan, Wyoming from January 2000 to October 2001 when the Division’s examination was conducted. [Audit Report]

A letter from Legacy dated August 8, 2002 states, "Legacy Financial Services does allow Registered Representatives to share commissions on a product sold through Legacy Financial Services as long as both Representatives are registered with LFS in the state the client resides." [Exhibit 9]

Legacy does not have an outside business form for James Mickelson’s activities as a Philanthropic Development Officer with the National Heritage Foundation. [Exhibits 13, 9, Audit Report]

Legacy did not approve the newsletter advertisement or the telephone book listings referred to above. [Exhibit 9]

CONCLUSIONS OF LAW

Legacy allowed Larry Mickelson to transact business in Wyoming as a securities agent in violation of W.S. §17-4-103 which states in part:

It is unlawful for any person to transact business in this state as a broker-dealer or agent unless he is registered under this act [§17- 4-101 through §17-4-129].

It is unlawful for any broker-dealer or issuer to employ an agent unless the agent is registered.

The sales to the investors by Larry Mickelson are governed by W.S. §17-4-126(c)(ii) which states in part:

(c) For the purposes of this section, an offer to sell or to buy is made in this state, whether or not either party is then present in this state, when the offer: ***********************

(ii) Is directed by the offeror to this state and received at the place to which it is directed (or at any post office in this state in the case of a mailed offer).

(d)For the purpose of this section, an offer to buy or to sell is accepted in this state when acceptance is communicated to the offeror in this state and has not previously been communicated to the offeror, orally or in writing, outside this state; and acceptance is communicated to the offeror in this state, whether or not either party is then present in the this state, when the offeree directs it to the offeror in this state reasonably believing the offeror to be in this state and it is received at the place to which it is directed (or at any post office in this state in the case of a mailed acceptance).

PUBLIC INTEREST AND PROTECTION

The Wyoming Securities Division entered a Petition for Sanctions and Order to Cease and Desist Violations of Wyoming’s Uniform Securities Act against Legacy on October 15, 2002, in the public interest consistent with the purposes of the Wyoming Uniform Securities Act, which Petition is hereby incorporated and attached.

Legacy has cooperated fully with the Secretary of State in its investigation of this matter.

Sufficient evidence as alleged in the Petition support this Order.

The Securities Division believes that Legacy has violated the provisions found in W. S. §17-4- 103 and §17-4-106 of the Wyoming Uniform Securities Act. The Wyoming Securities Division believes that a Cease & Desist Order and other sanctions are in necessary and appropriate, are in the public interest and are consistent with the purposes of the Wyoming Uniform Securities Act.

NOW THEREFORE, based on the Findings of Fact and Legacy’s waiver of the right to a hearing and appeal under the Wyoming Securities Act and Wyoming’s Administrative Procedure Act, and Legacy’s admission of jurisdiction of the Secretary of State over this matter, the Secretary of State finds that Legacy, for the sole purpose of settling this proceeding and without admitting or denying the listed allegations, has agreed to stipulate to the entry of this Order and has further agreed to certain undertakings pursuant to the Order. This is an agreement and stipulation only with Legacy and is not intended to be an agreement and stipulation with any other registered person or entity.

THEREFORE, IT IS ORDERED that:

1. Legacy Financial Services, Inc. cease and desist from further violations of the Wyoming Securities Act.
2. Legacy will undertake a plan to improve internal examination procedures to prevent violation of state and self regulatory organizations’ conduct rules to include a one year cycle for onsite inspections of all branch locations doing business in Wyoming, and all business locations in Wyoming as required by NASD Rule 3010 (c) which states that:

   Each member shall conduct a review, at least annually, of the businesses in which it engages, which review shall be reasonably designed to assist in detecting and preventing violations of and achieving compliance with applicable securities laws and regulations, and with the Rules of this Association. Each member shall review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities or abuses and at least an annual inspection of each office of supervisory jurisdiction. Each branch office of the member shall be inspected according to a cycle which shall be set forth in the firm’s written supervisory and inspection procedures. In establishing such cycle, the firm shall give consideration to the nature and complexity of the securities activities for which the location is responsible, the volume of business done, and the number of associated persons assigned to the location. Each member shall retain a written record of the dates upon which each review and inspection is conducted.

3. Legacy will update its policy manual to reflect the changes in the internal examination procedures.
4. A fine of $250.00 be assessed against Legacy, to be paid to the Wyoming Division of Securities and be deposited into the General Fund of the State of Wyoming as an administrative penalty.
5. Costs of examination in the amount of $711.92 be assessed against Legacy, to be paid to the Wyoming Division of Securities and be deposited into the General Fund of the State of Wyoming.

FURTHER IT IS ORDERED that this represents the complete and final resolution of, and discharge with respect to, all claims, demands, actions and causes of action by the Secretary of State against Legacy for violations arising as a result of or in connection with the allegations contained herein and is in lieu of further civil or administrative proceedings.

FURTHER IT IS ORDERED that this represents the complete and final resolution of, and discharge with respect to, all claims, demands, actions and causes of action by Legacy against the Secretary of State and the State of Wyoming arising as a result of or in connection with any aspect of the allegations contained herein and is in lieu of further civil or administrative proceedings.

FURTHER IT IS ORDERED that the Secretary of State in no fashion waives the right to sovereign immunity of the State of Wyoming by signing this Order and asserts all privileges afforded the State regarding immunity.

IT IS FURTHER ORDERED that this Order shall become effective immediately upon signing.

Dated this 13th day of February, 2003.         FOR THE STATE OF WYOMING

Approved as to form:                                SECRETARY OF STATE’S OFFICE

_________/s/____________                        ____________/s/_____________

BARBARA BOYER                                         JOSEPH B. MEYER
Senior Assistant Attorney General                  Secretary of State

STIPULATION TO ENTRY OF ORDER AND UNDERTAKING
BY LEGACY FINANCIAL SERVICES, INC.

Legacy Financial Services, Inc. hereby acknowledges that it has been served with a copy of this Order, has read the foregoing, is aware of his right to a hearing and appeal in this matter, and has waived same.

Legacy Financial Services, Inc. admits the jurisdiction of the Secretary of State, neither admits nor denies the allegations contained in the Order, and stipulates to entry of this Order by the Secretary of State as settlement of the issues contained in this Order.

Legacy Financial Services, Inc. states that no promise of any kind or nature whatsoever was made to it to induce it to enter into this Order and that it has entered into this Order voluntarily.

DATED THIS 30th DAY OF January, 2003.

______________/s/________________
For Legacy Financial Services, Inc. CRD#38697