Ohio Div. of Securities v. Treece

[Cite as Ohio Div. of Securities v. Treece, 2022-Ohio-3267.]
IN THE COURT OF APPEALS OF OHIO
SIXTH APPELLATE DISTRICT
LUCAS COUNTY
Ohio Division of Securities Court of Appeals No. L-21-1191
Appellee Trial Court No. CI0202003770
v.
Dock Douglas Treece, et al.
DECISION AND JUDGMENT
Appellant Decided: September 16, 2022
*****
Dave Yost, Ohio Attorney General, and Chad M. Kohler,
Senior Assistant Attorney General, for appellee.
Neil S. McElroy, for appellant.
*****
PIETRYKOWSKI, J.
{¶ 1} Appellant, Dock Douglas Treece (“Treece”), appeals from a judgment
entered by the Lucas County Court of Common Pleas, affirming an order that was issued
by appellee, the Ohio Department of Commerce, Division of Securities (“the Division”).1
For the reasons that follow, we affirm the judgment of the trial court.
1
The notice of appeal that was filed in this matter identifies Treece, Treece Investment
Advisory Corporation (“Treece Advisory”) and Treece Financial Services Corporation
Factual and Procedural Background
{¶ 2} Appellant and his two companies, Treece Financial and Treece Advisory
operate as for-profit entities. Treece Financial is a securities dealer licensed with the
Division and with the Financial Industry Regulatory Authority (FINRA). Appellant has
maintained his license as a securities salesperson through his affiliation with Treece
Financial. Treece Advisory is licensed as an investment adviser with the Division, and it
is separate and distinct from Treece Financial. Appellant is licensed as an Ohio
investment adviser representative with Treece Advisory. Appellant is the President of
both Treece Financial and Treece Advisory.
{¶ 3} According to the Division, a routine examination of appellant and the two
investment businesses that he controlled and operated led to a subsequent, in-depth
investigation, which resulted in the Division issuing a notice of hearing to Treece and to
his businesses notifying them of the Division’s intent to suspend or revoke their
respective securities licenses.
{¶ 4} The Division conducted an administrative hearing, after which the hearing
officer issued a report and recommendation recommending that the securities licenses for
(“Treece Financial”) as “Defendants-Appellants.” But the appellate brief that Treece’s
counsel filed with this court identifies only Treece as an appellant. Treece’s brief makes
no arguments on behalf of the two companies, and no additional briefs were filed by, or
on behalf of, those companies. Thus, only Treece’s arguments are before this court. The
appeals pertaining to Treece Advisory and to Treece Financial are therefore dismissed,
pursuant to 6thDist.Loc.App.R. 5(B). See 6thDist.Loc.App.R. 5(B) (“If the
appellant/cross-appellant fails to timely file the assignments of error and brief, the court
may dismiss the appeal/cross-appeal without prior notice.”).
2.
Treece and his investment businesses be revoked. Treece and his businesses filed written
objections to the report and recommendation. The Division, after considering those
objections, issued a final order concluding that Treece and his companies had violated
their suitability obligations and fiduciary duties to their customers. And on the basis of
those conclusions, the Division revoked the securities licenses belonging to Treece and to
his businesses.
{¶ 5} Appellants filed an appeal from the order in the Lucas County Common
Pleas Court. The trial court affirmed, finding that the Division’s order was supported by
reliable, probative, and substantial evidence and was made in accordance with the law.
{¶ 6} Treece and his businesses subsequently filed timely notice of appeal in this
court.
Assignments of Error
{¶ 7} Appellant asserts the following assignments of error on appeal:
I. The trial court erred in failing to address some of the due process claims raised
by the appellant on appeal.
II. The trial court erred in affirming the Commissioner’s finding that the appellant
breached his suitability obligations.
III. The trial court erred in affirming the Commissioner’s finding that the appellant
breached his fiduciary duties to his clients.
3.
IV. The trial court erred in affirming the Commissioner’s finding that appellant
lacked a good business repute.
Analysis
{¶ 8} “In an administrative appeal under R.C. 119.12, the common pleas court
reviews the entire record and determines whether the agency’s order is supported by
reliable, probative, and substantial evidence and is in accordance with law.” Mocznianski
v. Ohio Dept. of Job & Family Servs., 6th Dist. Lucas No. L-19-1076, 2020-Ohio-1161, ¶
21, citing Capital Care Network of Toledo v. Ohio Dept. of Health, 153 Ohio St.3d 362,
2018-Ohio-440, 106 N.E.3d 1209, ¶ 24. “‘Reliable’ evidence is dependable or
trustworthy; ‘probative’ evidence tends to prove the issue in question and is relevant to
the issue presented; and ‘substantial’ evidence carries some weight or value.” Id., citing
Ohio Civ. Rights Comm. v. Case W. Reserve Univ., 76 Ohio St.3d 168, 178, 666 N.E.2d
1376 (1996). Where the agency’s decision is “supported by sufficient evidence and the
law, the common pleas court lacks authority to review the agency’s exercise of discretion
* * *.” Mocznianski at ¶ 21, citing Capital Care Network at ¶ 25.
{¶ 9} In contrast to the common pleas court, this court’s review of a subsequent
appeal under R.C. 119.12 “is much narrower.” Mocznianski at ¶ 22. The appeals court
reviews the common pleas court’s decision only for an abuse of discretion. Id., citing
Rossford Exempted Village School Dist. Bd. of Edn. v. State Bd. of Edn., 63 Ohio St.3d
705, 707, 590 N.E.2d 1240 (1992). “Unlike the court of common pleas, a court of
4.
appeals does not determine the weight of the evidence.” Byrd v. Auditor of State, 10th
Dist. Franklin No. 10AP-560, 2011-Ohio-3306, ¶ 12. “Where, however, questions of law
are raised on appeal from an administrative agency, both the common pleas court and the
court of appeals exercise plenary powers of review.” Mocznianski at ¶ 23 (internal
citation and quotation omitted). Thus, “[a]bsent an abuse of discretion on the part of the
trial court, a court of appeals may not substitute its judgment for [that of an
administrative agency] or a trial court. Instead, the appellate court must affirm the trial
court’s judgment.” Fehrman v. Ohio Dept. of Commerce, Div. of Securities, 141 Ohio
App.3d 503, 507, 751 N.E.2d 1089 (10th Dist.2001) (brackets in original), quoting Pons
v. Ohio State Med. Bd., 66 Ohio St.3d 619, 621, 614 N.E.2d 748 (1993).
{¶ 10} “A trial court abuses its discretion where its decision is unreasonable,
arbitrary, or unconscionable.” Mocznianski at ¶ 22, citing Blakemore v. Blakemore, 5
Ohio St.3d 217, 219, 450 N.E.2d 1140 (1983). “An unreasonable decision is one that
lacks sound reasoning to support the decision.” Moczinianski at ¶ 22 (citation omitted).
“‘An arbitrary decision is one that lacks adequate determining principle and is not
governed by any fixed rules or standard.’” Id., quoting Porter, Wright, Morris & Arthur,
LLP v. Frutta del Mondo, Ltd., 10th Dist. Franklin No. 08AP-69, 2008-Ohio-3567. ¶ 11.
“And an unconscionable decision is one that affronts the sense of justice, decency, or
reasonableness.” Moczinianski at ¶ 22 (internal quotations and citations omitted).
{¶ 11} Appellant claims in his first assignment of error that the trial court erred in
failing to address certain due process claims that were raised by the appellant as part of
5.
that appeal. According to appellant, “violations” that the trial court failed to address
include: 1) “the right to a fair hearing;” 2) “the preclusion of certain documents and
testimony;” 3) “failure to consider certain evidence admitted at the hearing;” and 4) “a
failure to allow for acquisition of documents needed to defend the allegations.” Without
any additional argument explaining how the trial court may have abused its discretion
when overruling his due process objections, and without citing any legal authority
whatsoever, appellant asks this court to remand the matter to the lower court “so that the
court may fully and completely address the issues raised as part of this appeal.”
{¶ 12} App.R. 12 (A)(2) states that an appellate court “may disregard an
assignment of error presented for review if the party raising it fails to identify in the
record the error on which the assignment of error is based or fails to argue the assignment
separately in the brief, as required under App.R. 16(A).” At most, appellant refers this
court generally to pages 50-59 of the brief that he submitted to the trial court. However,
“[i]t is well-established that ‘the Rules of Appellate Procedure do not permit parties to
“incorporate by reference” arguments from other sources.’” Ebbing v. Lawhorn, 12th
Dist. Butler No. CA2011-07-125, 2012-Ohio-3200, ¶ 3. Moreover, “[i]t is not the duty of
an appellate court to search the record for evidence to support an appellant’s argument as
to an alleged error.” Id., citing Cireddu v. Cireddu, 8th Dist. Cuyahoga No. 76784, 2000
WL 1281253, *9 (Sept. 7, 2000).
{¶ 13} Similarly, App.R. 16(A)(7) requires an appellant’s brief to include “[a]n
argument containing the contentions of the appellant with respect to each assignment of
6.
error presented for review and the reasons in support of the contentions, with citations to
the authorities, statutes, and parts of the record on which appellant relies.” As indicated
above, appellant does not cite any legal authority in support of his first assignment of
error – not a single case, statute, or rule. “According to App.R. 12(A)(2) [an appellate
court] may disregard an assignment of error if an appellant fails to cite to any legal
authority in support of an argument a required by App.R. 16(A)(7),” Huffer v. Brown,
10th Dist. Franklin No. 12AP-1086, 2013-Ohio-4384, ¶ 12 (citations omitted).
{¶ 14} On these grounds, alone, appellant’s first assignment of error is properly
dismissed.
{¶ 15} Even if we were to consider appellant’s first assignment of error, we find
that his request for remand is misplaced. This court recognizes that “[generally], if [a]
trial court fails to rule on a motion or objection, an appellate court will presume that the
objection or motion was overruled.” Syslo v. Syslo, 6th Dist. Lucas Nos. L-06-1016, L-
06-1122, 2006-Ohio-6053, ¶ 30. The inquiry then turns to whether the trial court abused
its discretion in overruling the objection. See, e.g., id. at ¶ 30-35 (presuming for purposes
of review that an objection to the introduction of certain evidence was overruled, and
then holding that the trial court did not abuse its discretion in denying the objection).
Accordingly, remand is not an appropriate remedy here.
{¶ 16} Assuming, arguendo, that appellant’s due process claims are properly
before this court, we find no abuse of discretion on the part of the trial court in overruling
the due process objections that appellant raised below.
7.
{¶ 17} We begin with appellant’s suggestion that the trial court abused its
discretion in affirming the hearing officer’s exclusion of certain exhibits that appellant
attempted to introduce at the hearing. Under R.C. 119.09, state agencies “shall pass on
the admissibility of evidence” presented at hearing. The Ohio Supreme Court has held
that administrative agencies “must have at least some minimal authority to control those
hearings, subject to a duty to maintain fairness and impartiality.” Clayton v. Ohio Bd. of
Nursing, 147 Ohio St.3d 114, 2016-Ohio-643, 62 N.E.3d 132, ¶ 34. “Generally speaking,
a hearing officer has broad discretion in conducting administrative hearings.”
Holzhauser v. State Med. Bd., 10th Dist. Franklin No. 06AP-1031, 2007-Ohio-5003, ¶ 17.
The hearing officer has the discretion to determine the admissibility of evidence, and a
court’s review is limited to whether the administrative tribunal abused its discretion. In
re Waste Technologies Industries, 132 Ohio App.3d 145, 152, 724 N.E.2d 819 (10th
Dist.1998). Notably, “[s]trict and technical rules of criminal or civil judicial hearings do
not apply to [administrative hearings].” Clayton at ¶ 34.
{¶ 18} Specifically, appellant argued to the trial court that the hearing officer
improperly excluded Exhibits H, I, X, and OO from evidence.
{¶ 19} Exhibit H is a blank “form” document, titled “Account Update Form,”
which bears on its face the Treece Advisory logo. Appellant attempted to introduce
Exhibit H by showing it to Attorney Analiese Hinchcliffe during cross-examination.
When Hinchcliffe testified that she had never seen the document before, the Division
objected to appellant asking Hinchcliffe questions about it. The hearing officer sustained
8.
the objection. Appellant never referred to this document again during his case-in-chief to
explain what it was or how it was relevant to the case.
{¶ 20} The trial court did not err in dismissing appellant’s arguments about a
document that was never properly authenticated and, thus, was properly excluded from
evidence.
{¶ 21} Exhibit I is another blank investor form that was never introduced the
hearing. At the end of the hearing, the parties discussed the admission of exhibits. In
objecting to the admission of Exhibits H and I, the Division pointed out that “they were
both brought up for [Attorney Hinchcliffe], because these were things that were objected
to and they were never reintroduced, so there was no testimony at all regarding either of
these.” As with Exhibit H, the record shows that appellant never referred to Exhibit I
during his case-in-chief in order to explain what it was or how it was relevant to the case.
{¶ 22} Again, the trial court did not err in dismissing appellant’s arguments about
a document that was never properly authenticated and, thus, was properly excluded from
evidence.
{¶ 23} Appellant represented that Exhibit X reveals a history of trades that
appellant executed for his clients from 1979 to 2018. Appellant questioned Hinchcliffe
about this exhibit, and she explained that she had not seen the exact form, but had seen a
version of the first page of that form. The Division objected to the admission of Exhibit
X on the grounds that most of the transactions that were recorded in the document were
outside the “relevant” time period of January 1, 2013 through February 12, 2018, which
9.
was the time period reflected in the notice that the Division provided to appellant when it
initially notified him of the charges against him. The trial court’s silence concerning the
exclusion of this document suggests its agreement that Exhibit X was not relevant to the
time period at issue in the case.
{¶ 24} Exhibit OO is a settlement letter sent to the Division from the counsel who
represented appellant prior to the beginning of the administrative hearing. Under Evid.
R. 408, the letter would be inadmissible as an offer of compromise. To the extent that
appellant wanted to use the exhibit “to identify mistakes in the NOI,” appellant
acknowledged at the hearing both his ability and intention to introduce the desired
evidence by alternative means.
{¶ 25} Upon our review of the record, we conclude that the trial court did not
abuse its discretion in affirming the hearing officer’s exclusion of the various exhibits
that appellant attempted to introduce at the hearing.
{¶ 26} Appellant also argued to the trial court that the hearing officer violated
appellant’s due process rights by “ignoring” certain evidence that was admitted at the
hearing. The general rule in an administrative appeal is that the trial court should not
substitute its judgment for that of the agency. “[A] common pleas court reviewing the
factual findings of an administrative agency pursuant to R.C. 119.12 should defer to the
administrative resolution of evidentiary conflicts.” Dublin Corp. v. Ohio Dept. of
Commerce, Div. of Secs., 10th Dist. Franklin No. 90AP-600, 1991 WL 38768, *3 (Mar.
19, 1991), citing Univ. of Cincinnati v. Conrad, 63 Ohio St.2d 1087, 111. “[A]n
10.
agency’s findings of fact are presumed to be correct and must be deferred to by a
reviewing court unless that court determines that the agency’s findings are internally
inconsistent, impeached by evidence of a prior inconsistent statement, rest upon improper
inferences, or are otherwise unsupportable.” Ohio Historical Soc. v. State Emp. Relations
Bd., 66 Ohio St.3d 466, 471, 613 N.E.2d 591 (1993).
{¶ 27} In the instant case, we find nothing in the record to suggest that the trial
court abused its discretion in rejecting appellant’s arguments regarding the hearing
officer’s evidentiary decisions.
{¶ 28} Finally, appellant argued to the trial court that the hearing officer violated
his due process rights by unlawfully prohibiting him from gathering evidence needed to
defend the allegations against him. Specifically, appellant complained that the hearing
officer attempted to block appellant from receiving records by way of a public records
request and through the use of subpoenas.
{¶ 29} This court recognizes that “the civil rules pertaining to discovery do not
apply to proceedings conducted pursuant to R.C. Chapter 119.” Leake v. Ohio State Bd.
of Psychology, 6th Dist. Sandusky No. 5-92-32, 1993 WL 235826 (Jun. 30, 1993). Even
without discovery available to him, prior to the administrative hearing appellant obtained
copies of the Division’s investigatory files relating to him by means of a public records
request made pursuant to R.C. 149.43. While the Division ultimately produced certain
documents in response to the request, the parties were unable to come to an agreement as
to certain other documents that appellant sought. As a result, appellant filed a complaint
11.
with the Ohio Court of Claims seeking to compel the production of the remaining
documents.
{¶ 30} With the court of claims case remaining outstanding, appellant filed a
request for a postponement of the administrative hearing. The hearing officer denied the
request. Ohio law does not require a hearing to be postponed on the basis that a
respondent has not received a response to a public records request from an agency, and
appellant could point to no statute requiring the release of the Division’s investigatory
file prior to the start of an R.C. Chapter 119 hearing.
{¶ 31} Whatever error appellant may try to assign to the postponement denial was
arguably rendered moot when on April 2, 2019 – thirteen days prior to the
commencement of the administrative hearing – the court of claims special master issued
his report and recommendation finding that appellant’s remaining requests were
ambiguous and overly broad, and that R.C. 1707.12(B) prevented the release of the
Division’s investigatory file. The court of claims adopted the special master’s report and
recommendation in its entirety on April 25, 2019.
{¶ 32} Under the circumstances of this case, appellant cannot convincingly claim
that his due process rights were violated when the hearing officer denied appellant’s
postponement request for public records that were not required to be produced.
{¶ 33} Equally dubious is appellant’s argument that the hearing officer denied him
due process by quashing a subpoena that appellant served seeking the Division’s
investigatory files. The Ohio Supreme Court, in Clayton v. Ohio Bd. of Nursing, 147
12.
Ohio St.3d 114, 2016-Ohio-643, 62 N.E.3d 132, affirmed an agency’s ability to limit or
quash subpoenas requested in an R.C. Chapter 119 hearing, stating:
Without the ability to quash or limit subpoenas that seek the production of
unreasonable, privileged, or irrelevant information or witness testimony, a
hearing examiner would be powerless to control the procedure of the
adjudication hearing pursuant to R.C. 119.09. Thus, the authority to quash
or limit subpoenas flows from the authority to issue them in an adjudicative
hearing.
Accordingly, we hold that a hearing examiner has the discretion to limit or
quash subpoenas requested during adjudication hearings for the purpose of
conducting a fair and efficient hearing.
Id. at ¶ 35-36.
{¶ 34} In Clayton, the court affirmed that a hearing officer’s decision to limit or
quash a subpoena should be reviewed under an abuse of discretion standard. Id. at ¶ 37
(the question is whether the hearing examiner’s decision to limit or quash a subpoena
“was so arbitrary that it constituted an abuse of discretion or denied [the licensee] her
due-process right to the opportunity to be heard in a meaningful manner”).
{¶ 35} Appellant’s subpoena requested: (1) Division examination files relating to
appellant from 2008 to 2017; (2) Division email messages and correspondence that
referenced or mentioned appellant from 2013 to 2018; and (3) all complaints of any kind
about appellant from 2013 to 2018.
13.
{¶ 36} The Division moved to quash the subpoena on the grounds that the request
sought attorney-client privileged communications and that R.C. 1707.12 exempted the
Division’s investigatory files from disclosure.
{¶ 37} R.C. 1707.12(B) provides in relevant part:
Information obtained by the division * * * through any investigation shall
be retained by the division and shall not be available to inspection by
persons other than those having a direct economic interest in the
information or the transaction under investigation, or by law enforcement
agencies, state agencies, federal agencies, and other entities as set forth by
rules adopted by the division.
Id. (Emphasis added.) As stated by the Ohio Supreme Court in Dublin Securities, 68
Ohio St.3d 426, 627 N.E.2d 993, “it was hardly the legislative intent of R.C. 1707.12 to
place investigatory files in the hands of a subject under investigation.” Id. at ¶ 16. Thus,
R.C. 1707.12(B) completely exempts the Division’s investigatory file from disclosure,
regardless of whether it contains trial preparation material or law enforcement records.
See Clayton, 147 Ohio St.3d 114, 2016-Ohio-643, 62 N.E.3d 132, at ¶ 19 (finding that
because R.C. 1707.12(B) exempted the entire investigatory file from disclosure,
alternative arguments regarding trial preparation material and law enforcement records
did not need to be addressed).
{¶ 38} In the instant case, the hearing officer properly exercised his discretion by
following the plain language of R.C. 1707.12(B) and Ohio Supreme Court precedent in
14.
quashing appellant’s subpoena, and the trial court did not abuse its discretion when it
affirmed the Division’s action.
{¶ 39} For all of the foregoing reasons, appellant’s first assignment of error is
found not well-taken.
{¶ 40} Appellant argues in his second assignment of error that the trial court erred
in affirming the Divisions’ determination that appellant breached his suitability
obligations. Under Ohio law, securities salespersons are required to make a reasonable
inquiry into clients’ “investment objectives, financial situation and needs, and any other
relevant information known to the dealer or salesperson” prior to recommending or
executing any securities sales or purchases. Ohio Adm.Code 1301:6-3-19(A)(5).
{¶ 41} Similarly, under FINRA Rule 2111(a), promulgated by the Financial
Industry Regulatory Authority:
[A FINRA-regulated broker] must have a reasonable basis to believe that a
recommended transaction or investment strategy involving a security or
securities is suitable for the customer, based on the information obtained
through the reasonable diligence of the [broker] to ascertain the customer’s
investment profile.
Id. Appellant, as an employee of a FINRA-member firm, was required under R.C.
1707.142(A) to comply with all FINRA rules, including FINRA Rule 2111(a).
{¶ 42} In its review, the trial court properly observed that “[t]here is little evidence
of record that is disputed as far as Treece’s intake or onboarding of clients, including that
15.
the prospective investor form used by Treece and Treece Financial did not include data
concerning liquidity needs, assets, other investments, and investment experience.”
Indeed, the evidence before the trial court showed that appellant maintained very little
written documentation about his clients’ investment profiles. Aside from some very
limited and basic information regarding client’s liquid assets maintained on two single-
page investor forms, appellant testified that while he might ask clients about liquid assets,
he does not normally memorialize that information. Appellant also admitted that he did
not make efforts to personally remember most other client information.
{¶ 43} The trial court also observed that “[t]here was nothing in the record with
regard to management of clients’ ongoing situations, or their needs as investors * * *
after they became appellant’s clients.” It is undisputed that after clients invested with
appellant, they rarely heard from him or met with him again, except through his monthly
newsletter, which contained his views and opinions of the economy as a whole.
Appellant never offered personalized investment advice on an annual basis to his clients.
He did not hold annual meetings with clients and he did not have annual personal contact
with them. Neither did he set clients up on a schedule to call them on a specific
timeframe, such as on a six-month or a yearly schedule. Instead, he would invite his
clients annually, through his newsletter, simply to update their mailing address, their
contact information, and their employment information.
{¶ 44} As to his clients’ individual holdings, the record before the trial court
showed that appellant used a “one-size-fits-all” approach, regardless of each client’s
16.
unique investment profile. Nearly every single client was invested in the same two
mutual funds, and in identical proportions. The trial court reasonably observed that,
“[g]iven Treece’s aforementioned lack of memorialization as evidenced by the Division’s
investigation, along with omitted investment profile factors, it is unlikely and illogical
that the exact same investment strategy is suitable for all of [Treece’s] clients.”
{¶ 45} Several of appellant’s clients testified at the administrative hearing. Their
testimony showed that appellant’s clients had vastly different investment goals and
varying levels of investment sophistication and experience. For example, one client, who
was a school teacher, had very different liquidity needs from another client, who owned a
Mercedes dealership and had various accounts with other financial advisors. According
to the trial court, the client testimony “demonstrates the diverse needs of the clients (all of
which were kept in the same investment portfolio) as well as [the] clients’ lack of
understanding of Treece’s business model and the overall investment strategy.”
{¶ 46} Based on the record that was before it, we find that the trial court did not
abuse its discretion when affirming the Division’s order. Accordingly, appellant’s
second assignment of error is found not well-taken.
{¶ 47} Appellant argues in his third assignment of error that the trial court erred in
affirming the Division’s determination that appellant breached his fiduciary duties to his
clients. The relationship between a financial advisor and his or her clients is clearly
fiduciary in nature. S.E.C. v. Capital Gains Research Bur., Inc., 375 U.S. 180, 194, 84
S.Ct. 275, 11 L.Ed.2d 237 (1963); see also, Mathias v. Rosser, 10th Dist. Franklin No.
17.
01AP-768, 2002-Oiho-2772, ¶ 28, citing Byrley v. Nationwide Life Ins. Co., 94 Ohio
App.3d 1, 18, 640 N.E.2d 187 (6th Dist.1994). A fiduciary relationship is “a relationship
in which one party to the relationship places a special confidence and trust in the integrity
and fidelity of the other party to the relationship, and there is a resulting position of
superiority or influence, acquired by virtue of the special trust.” Mathias at ¶ 28.
“Courts have imposed on a fiduciary an affirmative duty of ‘utmost good faith, and full
and fair disclosure of all material facts,’ as well as an affirmative obligation ‘to employ
reasonable care to avoid misleading his clients.’” Capital Gains Research Bur. at 194.
In Ohio, it is unlawful for an investment adviser and investment adviser representative to
“engage, or attempt to engage, in any act or practice constituting a breach of fiduciary
duty.” Ohio Adm.Code 1301:6-3-44(E)(1)(f). It is undisputed that appellant, as an
investment adviser, acted as a fiduciary and therefore owed these heightened duties to his
clients as a matter of law.
{¶ 48} The evidence in the record established that appellant breached his fiduciary
duties to his clients in several ways, including: (1) charging investment advisory fees for
services that were not rendered (also known as “reverse churning”); and (2) failing to
properly and adequately disclose certain inherent conflicts of interest to his clients.
{¶ 49} “Reverse churning” is “based on the theory that – by charging expensive,
asset-based fees for investments with low trading activity and no need for ongoing
monitoring or advice – the fiduciaries [are] able to limit the time they spent on customer
service and investment advice and focus on recruiting additional customers.” Pizzaro v.
18.
The Home Depot, Inc., N.D.Ga. No. 1:18-CV-01566-WMR, 2019 WL 11288656, at *1
(Sep. 20, 2019).
{¶ 50} In written disclosures that appellant provided to his clients, appellant stated
that his firm’s advisory services were “designed, among other things, to assist the client
in determining which mutual fund or funds are most appropriate to each client’s financial
condition and objectives.” For these services, appellant billed his clients as much as 2%
annually for managing their investments. Between January 1, 2013 and September 30,
2017, appellant billed his clients at least $2,539,504.44 in investment advisory fees.
{¶ 51} Despite this significant compensation, the evidence before the trial court
established that appellant did not manage his clients’ investments in any meaningful way.
As discussed above, appellant put his clients in the same two mutual funds, in the same
percentages, and rarely made changes to these allocations. And he seldom, if ever,
communicated with his clients individually, on a personalized basis.
{¶ 52} The trial court concluded in its summation of the evidence before it that
“based on the number of clients and the utter lack of activity within these accounts as
evidenced by the Divisions’ investigation, it would seem that [Treece ] collected high
fees for little service over the course of six years.” The trial court’s conclusion was
reasonable and in no way constituted an abuse of discretion.
{¶ 53} Next, we address the additional determination by the trial court that
appellant failed to disclose certain inherent conflicts of interest to his clients. As
indicated previously, appellant recommended that all of his clients invest in the same two
19.
mutual funds and, further, all of the mutual fund purchases were made through Treece
Financial, the broker-dealer that appellant operated. The evidence in the record
additionally showed that appellant’s clients were charged both upfront sales charges of
5.75% on the mutual fund purchases and ongoing 12b-1 fees of 0.25%.
{¶ 54} At the hearing, Attorney Hinchcliffe testified that appellant’s clients could
have avoided paying all of these charges and fees if the investments had been purchased
outside of Treece Financial. Hinchcliffe also testified that appellant did not adequately
disclose this inherent conflict of interest to his clients.
{¶ 55} Notably, none of the five clients who testified at the hearing understood
that Treece Advisory and Treece Financial were separate companies.
{¶ 56} The trial court concluded that “[t]he Division established an intentional
funneling of investments through Treece Financial without benefit or justification to
clients,” and “[t]here is reliable, probative and substantive evidence that the disclosure
does not adequately notify clients” of the “clear conflict of interest[s]” at issue. We find
that the trial court did not abuse its discretion in reaching this conclusion.
{¶ 57} Appellant’s third assignment of error is found not well-taken.
{¶ 58} Finally, appellant argues in his fourth assignment of error that the trial
court erred in its determination that appellant lacked good business repute. Under R.C.
1707.19(A)(1), the Division may suspend or revoke the license of a dealer, salesperson,
investment adviser, or investment adviser representative if it finds that the licensee is “not
of good business repute.” Fehrman v. Ohio Dept. of Commerce, 141 Ohio App.3d 503,
20.
507, 751 N.E.2d 1089 (10th Dist.2001). Although the definition of “good business
repute” is not provided in the statute, R.C. 1707.20(A) authorizes the Division to adopt
rules defining terms, as long as the definitions are not inconsistent with R.C. 1707.01 to
1707.50. See id. (citing a former version of R.C. 1707.20(A)). In determining “good
business repute,” Ohio Adm. Code 1301:6-3-19(D)(8) states that the Division shall
consider whether the licensee “has violated any provision of Chapter 1707. of the
Revised Code or any rule promulgated thereunder.” (Emphasis added.)
{¶ 59} Thus, the Division has the authority to find that a licensee lacks good
business repute if the Division also finds that the licensee has violated provisions of R.C.
1707. Here, the division found that appellant breached his suitability obligations in
violation of R.C. 1707.142(A) and Ohio Adm.Code 1301:6-3-19(A)(5), and that
appellant breached his fiduciary duties, in violation of Ohio Adm.Code 1301:6-3-
44(E)(1)(f). Standing alone, each of these two breaches is a violation of R.C. Chapter
1707 and, therefore, each subjects the licensee to a finding that the licensee is not of good
business repute.
{¶ 60} As the trial court noted, because it upheld the Division’s findings as to both
suitability obligations and fiduciary duties, it was compelled to affirm the finding of a
lack of good business repute, inasmuch as a violation of R.C. Chapter 1707 constitutes
prima facie proof of a lack of good business repute, and because the Division’s sanction –
to wit, the revocation of appellant’s licenses and the issuance of a cease and desist order -
- is authorized under R.C. 1707.19 and R.C. 1707.23. Accordingly, the trial court did not
21.
abuse its discretion in affirming the Division’s finding of a lack of good business repute.
Appellant’s fourth assignment of error is therefore found not well-taken.
{¶ 61} For all of the foregoing reasons, the trial court did not abuse its discretion
when it found that the Division’s order was supported by reliable, probative, and
substantial evidence, and was made in accordance with the law. The judgment of the
Lucas County Court of Common Pleas is affirmed. Appellant is ordered to pay the costs
of this appeal pursuant to App.R. 24.
Judgment affirmed.
A certified copy of this entry shall constitute the mandate pursuant to App.R. 27.
See also 6th Dist.Loc.App.R. 4.
Mark L. Pietrykowski, J. ____________________________
JUDGE
Gene A. Zmuda, J.
____________________________
Myron C. Duhart, P.J. JUDGE
CONCUR.
____________________________
JUDGE
This decision is subject to further editing by the Supreme Court of
Ohio’s Reporter of Decisions. Parties interested in viewing the final reported
version are advised to visit the Ohio Supreme Court’s web site at:
http://www.supremecourt.ohio.gov/ROD/docs/.
22.