Matter of DaCruz v Banking Dept. of the State of N.Y.

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Matter of DaCruz v Banking Dept. of the State of N.Y. 2012 NY Slip Op 30255(U) February 1, 2012 Supreme Court, New York County Docket Number: 106833/11 Judge: Cynthia S. Kern Republished from New York State Unified Court System's E-Courts Service. Search E-Courts (http://www.nycourts.gov/ecourts) for any additional information on this case. This opinion is uncorrected and not selected for official publication. lNED 0N 21312012 [* 1] SUPREME COURT OF THE STATE OF NEW YORK - NEW YORK PRESENT: COUNTY PART Justice INDEX NO. Index Number : 106833/2011 DACRUZ, CHARLES vs. NYS BANKING DEPARTMENT SEQUENCE NUMBER : 002 '. MOTION DATE MOTION SEQ. NO. OTHER RELIEFS MOTION CAL. NO. . The following papers, numbered 1 to were read on this motlon to/for PAPER$ YlJw BERED Notice of Motion/ Ordsr to Show Cause .. cn Answering Affidavits - Affidavits - Exhlblts ... - Exhlblta c . Y z 0 3 a Replying Affidevlta Cboss-Motion: 0 Yes 0 No Upon the foregoing papers, It is ordered that this motion is decided in accordance with the annexed decision- FILED FEE3 02 2012 NEW YORK COUNT! F R K S OFFICE J. s c. . Check one: FINAL DISPOSITION Check if appropriate: 0 DO NOT POST c SUBMIT ORDER/JUDG. ] NON-FINAL DISPOSITION 0 REFERENCE SETTLE ORDER /JUDG. [* 2] CHARLES DACRUZ, Petitioner, For an Order Pursuant to Article 78 of the Civil Practice Law and Rules, -against- BANKING DEPARTMENT OF THE STATE OF NEW YORK, RHOLDA RICKETS, DEPUTY SUPERINTENDENT OF BANKS, Index No. 106833/11 DECISION/ORDER FILED FEB 02 2012 Recitation, as required by CPLR 22 19(a), of the papers considered in the review of this motion for : Papers Notice of Motion and Affidavits Annexed.................................... Notice of Cross Motion and Answering Affidavits....................... Replying Affidavits...................................................................... Exhibits...................................................................................... Numbered I 2 3 Petitioner Charles DaCruz brought this petition pursuant to Article 78 of the Civil Practice Law and Rules C CPLR ) seeking to annul a determination made by the New York State Banking Department ( NYSBD ) dated October 4,201 1 (the Denial Letter ). In the Denial Letter, the NYSBD denied petitioner s application for a Mortgage Loan Originator ( MLO ) license under Article 12 of the Banking Law § 599-e. Respondents cross-move to dismiss the petition for failure to state a claim. For the reasons set forth below, respondents cross-motion to [* 3] dismiss the petition is granted and the petition is dismissed in its entirety. The relevant facts are as follows. Petitioner applied to the NYSBD for a license to engage in MLO activities. In early 201 1,the NYSBD s Legal Division evaluated petitioner s background pursuant to the character and fitness requirements set forth in Banking Law 6 599e( l)(c) and Superintendent sRegulations 5 420.6(d). During its evaluation, the Legal Division learned that petitioner had been involved in regulatory proceedings related to misconduct that he had engaged in between June 1998 and June 1999 while he was registered as a securities representative at a firm regulated by the National Association of Securities Dealers ( NASD ). Specifically, the Legal Division learned that following a 2004 complaint against petitioner, an NASD Hearing Panel held a six-day hearing in late 2004 and early 2005. At the hearing, petitioner testified on his own behalf, w s represented by counsel and had the a opportunity to cross-examine witnesses. In September 2005, the NASD Hearing Panel issued its Decision, finding that petitioner had violated tj 10(b) of the Securities Exchange Act of 1934, the Securities and Exchange Commission Rule 5 10b-5 and the NASD Conduct Rules 2120 and 2 110 by failing to disclose to customers compensation earned from the sale of a particular stock and by making baseless price predictions related to that stock. Petitioner received a one-year suspension and was fined $67,000. Petitioner appealed the NASD Hearing Panel s Decision. On January 3,2007, NASD s National Adjudicatory Council ( NAC )issued a Decision upholding the Hearing Panel s Decision. The NAC concluded that, by failing to disclose this compensation to his customers, as well as by making baseless predictions of the stock s price, petitioner had engaged in fraudulent misconduct. The NAC also ordered petitioner to disgorge the financial benefit from 2 [* 4] PSI misconduct as a fine to NASD in the amount of $67,000. The NAC modified the sanctions against the petitioner by extending his one-year suspension to a bar in all capacities. Furthermore, the Legal Division learned that the NAC made numerous findings regarding petitioner s egregious misconduct. Among the findings were that petitioner engaged kfraudulent sales practices over an extended period of time through which be] obtained a sizable monetary benefit ; his Lcmisconduct involves a voluminous number of transactions involving many customers ; he willingly accepted the sales incentives [and] provided the baseless predictions to customers ; and he totally ignored [his] general duty of fair dealing to his customers. Thus, the NAC Decision concluded that a bar is necessary to prevent [petitioner] from inflicting similar harm to customers i the future. The NAC stated that petitioner s n customers placed their trust and confidence in bim] to recommend stocks without secret inducements for those recommendations and without baseless predictions of future value, and that petitioner violated that trust. The NAC further stated that petitioner engaged in fraudulent sales tactics in complete disregard of...[his] obligations to...[his] customers. In its evaluation, the Legal Division also learned that petitioner was subject to an additional state regulatory action by the New Jersey Bureau of Securities (the Bureau ). The Bureau reviewed the NAC Decision and the NASD Hearing Panel Decision and, as a result, issued a February 26,2007 Summary Revocation Order (the Order ) revoking petitioner s registration as a agent with an NASD broker-dealer. The Order stated that it was based upon n findings that revocation was in the public interest and that petitioner was the subject of an order...suspending or expelling him from a national securities or commodities exchange. Additionally, as a separate ground for revocation, the Bureau also found that the misconduct 3 [* 5] I described in the 2007 NAC Decision and the 2005 NASD Hearing Panel Decision constituted dishonest or unethical practices in the securities business, which are good cause...to revoke [petitioner s] registration as a securities agent. The Bureau also stated that the Order was necessary for the protection of investors. Additionally, the Legal Division learned of various dispute-resolution awards and settlements related to petitioner s actions as an NASD registrant. In a arbitration proceeding, n petitioner and others were found jointly and severally liable to certain claimants for approximately $56,78 1 following allegations of breach of contract, breach of fiduciary duty, misrepresentation, fraud, and violations of multiple securities laws and regulations. Further, FMRA documentation appeared to indicate that petitioner settled for $5,000 a claim that related to the events underlying the above-noted NASD case. F I N M documentation also indicated that agn a complaint was received alleging unauthorized trades, inappropriate use of m r i and lack of diversification in account. The documentation also indicated that a $20,000 settlement was paid, of which petitioner s Individual Contribution Amount was $10,000. Further, the Legal Division learned that a FINRA Brokecheck Report for petitioner indicated that a $150,000 settlement was paid, of which petitioner s Individual Contribution Amount w s $75,000, a following allegations that a client s impaired mental faculties were taken advantage of. Finally, in 2005, a customer initiated an arbitration claim against petitioner alleging breach of contract, breach of fiduciary duty and misrepresentations. An Addendum submitted as part of petitioner s MLO license application indicated that on an unspecified date, petitioner may have contributed $2,500 to a $5,000 settlement of this claim. In performing its analysis and evaluation of petitioner s application for an MLO license, 4 . .-. . . ... [* 6] the Legal Division reviewed the NASD Hearing, petitioner s appeal thereof and the subsequent NAC decision, as well as the various dispute resolution awards and settlements described above. In doing so, the Legal Division balanced the relevant factors pursuant to the character and fitness provisions of Banking Law 6 599-e(l)(c) and Superintendent sRegulations 6 420.6(d). Specifically, Banking Law 5 5 9 9 4 l)(c) provides: 1. Findings. Notwithstandingany other law, the superintendentshall not issue a mortgage loan origination license unless he or she makes, at a minimum the following findings: (c) Character and fitness. That the applicant has demonstrated financial responsibility, character, and general fitness such as to command the confidence of the community and to warrant a determination that the MLO will operate honestly, fairly, and efficiently within the purposes of this article. Superintendent s Regulations 6 420.6(d) provides: The Superintendent must deny an application unless he or she finds that the applicant possesses the general character and fitness...and other factors set forth in Section 599-e of the Banking Law. In making such determination the Superintendent may consider all relevant factors, including but not limited to, employment history; educational background; financial responsibility; history of complaints or consumer abuse relating to real estate transactions; regulatory fines and enforcement actions; revocation, suspension or denial of licenses, certifications,authorizationsor registrations in this state or any other state. Accordingly, the Legal Division made several findings concerning petitioner s prior conduct. The Legal Division found that petitioner s misconduct was closely related to the duties and responsibilities of holding an MLO license. It determined that petitioner engaged in fraudulent conduct aimed at numerous customers for his own financial benefit in complete disregard of his obligations toward these customers. The Legal Division also balanced petitioner s prior conduct wt the following factors: ih 5 [* 7] petitioner was born in 1971 and was thus fully an adult in 1998 and 1999 when he engaged in the misconduct described above. The Legal Division also noted that despite the misconduct occurring approximately twelve years ago, the NAC s decision was issued in 2007, thereby indicating that despite the passage of time, petitioner s misconduct was deemed to be so serious that petitioner s original one-year suspension was increased to a complete bar. The Legal Division also took note of the fact that following its own review of the NAC Decision, the New Jersey Bureau of Securities issued a 2007 revocation of petitioner s registration as an agent with an NASD broker-dealer which was deemed necessmy for the protection of investors. Finally, the Legal Division considered information provided by petitioner in regard to his purported good conduct and rehabilitation. Such information included, among other things, letters of recommendation from multiple customers for whom petitioner had served as a loan officer or mortgage specialist and an explanatory letter, dated September 29,2010, which stated, among other things, that petitioner had during more than three years in the mortgage industry, never received a complaint from a borrower. Despite this information, however, the Legal Division concluded that these mitigating factors did not outweigh either the evidence of extensive customer abuse or the explicit concerns regarding future abuse detailed in the 2007 NAC Decision. Thus, the Legal Division concluded that there was a sufficient legal basis to deny petitioner an MLO license pursuant to the character and general fitness provisions of Banking Law $599-e(l)(c) in that he had not demonstrated the character and general fitness necessary to be issued an MLO license. By letter dated April 4 20 11, the Deputy Superintendent denied petitioner s application, which was deemed to be a final determination. In or around June 201 1, petitioner commenced this Article 78 proceeding by filing a Notice of Petition seeking an order annulling the NYSBD s April 4,201 1 denial of petitioner s 6 [* 8] application to engage in business as an MLO. Through counsel, the NYSBD subsequently requested that petitioner withdraw his petition without prejudice. On or about August 29,201 1, the petition was withdrawn by stipulation. Following withdrawal of the petition, the NYSBD performed an additional review of petitioner s MLO license application. Petitioner s application and the factors discussed above were analyzed and the NYSBD affirmed the evaluation of petitioner s character and fitness. It was again determined that petitioner had not demonstrated the requisite character and fitness pursuant to Banking Law §599-e(l)(c). Thus,by letter dated October 4,201 1, the NYSBD denied petitioner s MLO application. Petitioner then commenced this Article 78 proceeding with the filing of an Amended Notice and Petition on November 14, 201 1 challenging the NYSBD s denial of his application for an MLO license. On review of an Article 78 petition, [tlhe law is well settled that the courts may not overturn the decision of an administrative agency which has a rational basis and was not arbitrary and CapriGious. Goldstein v Lewis, 90 A.D.2d 748,749 (lBt Dep t 1982). In applying the arbitrary and capricious standard, a court inquires whether the determination under review had a rational basis. Halperin v City of New Rochelle, 24 A.D.3d 768,770 (2d Dep t 2005); see Pell v Board o Educ. o Union Free School Dist. No. I o Towns o Scarsdale & Mamaroneck, f f f f Westchester County, 34 N.Y.2d, 222,231 (1974)( [r]ationality is what is reviewed under both the substantial evidence rule and the arbitrary and capricious standard. ) The arbitrary or capricious test chiefly relates to whether a particular action should have been taken or is justified ... and whether the administrative action is without foundation in fact. Arbitrary action is without sound basis in reason and is generally taken without regard to facts. Pell, 34 N.Y.2d at 23 1 (internal citations omitted). In the instant action, the court finds that there was a rational basis for the NYSBD s 7 [* 9] decision to deny petitioner s application for a MLO license. As stated above, the NYSBD made n its determination on the ground that petitioner failed to establish the requisite character and general fitness required by Banking Law § 599-e( l)(c), which mandates that an MLO applicant demonstrate financial responsibility, character, and general fitness such as to command the confidence of the community and to warrant a determination that the MLO will operate honestly, fairly, and efficiently. The NYSBD reviewed petitioner s application while taking into consideration petitioner s NASD Hearing, petitioner s appeal thereof and the subsequent NAC Decision, as well as the various dispute resolution awards and settlements in which petitioner had to pay considerable amounts of money. It was rational for the NYSBD to determine that petitioner s conduct amounted to a showing of a lack of character and general fitness for an MLO license. While petitioner asserts that the amount of time that has elapsed between his misconduct and his application for an MLO license should mitigate, if not override, the seriousness of his actions, this argument is without merit. It was rational for the NYSBD to decide that although some time had passed between petitioner s egregious misconduct and his application for an MLO license, there remained concerns about petitioner s conduct in the future. Furthermore, while New York State adheres to a policy of fair treatment of rehabilitated offenders, it was rational for the NY SBD to determine that petitioner was unfit to receive an MLO license as the Legal Division found that there was a direct relationship between petitioner s demonstrated character and fitness and the license sought. Further, petitioner s reliance on Matter of Robert Warner v. New York State Racing and Wagering Board, 143 A.D.2d 500 (4* Dept 1988) for the proposition that the lapse of time and 8 [* 10] - * . . other evidence of rehabilitation justifies the granting of petitioner s application is misplaced as the facts of this case are distinguishable. In this case, there is evidence of extensive misconduct on the part of petitioner prior to his application for an MLO license whereas in Warner, the court found significantly less misconduct. Accordingly, petitioner s request for relief under Article 78 of the CPLR annuling the NYSBD s Determination, dated October 4,201 1, is denied and respondents cross-motion to dismiss the petition is granted. The petition is hereby dismissed in its entirety. This constitutes the decision and order of the court. Enter: J.S.C. FILED FFR 0 2 2012 9

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