COMMONWEALTH OF VIRGINIA STATE CORPORATION COMMISSION Erv'snr'rlc l' lmJRoL cEiElrrtifi AT RICHMOND, OCTOBER 1, 2012 COMMONWEALTH OF VIRGINIA, ex rel. A STATE CORPORATION COMMISSION v. WILLIAM M. SOMERINDYKE, Jr., Defendants On March 23, 2011. the State Corporation Commission ("Commissicn") entered a Rule to Show Cause ("Rule") against Williarn M. Somerindyke, Jr. ("Somerindyke"), and - --(collectively, "the Defendants") based upon allegations ofthe Division of Securities and Retail Franchising ("Division") Specifically, the Division alleged that Somerindyke and Tribble violated l3.l-502 (3) oflhe Virginia Securities Act 13.1-501 et seq. of the Code of Virginia, by engaging in transactions, acts, or practices Il'mt operated as a fraud or deceit againsl the purchasers, The Division also alleged that violated Ill-507 ofthe Acl by offering and selling unregistered, non-exempt promissory notes and equity membership interests, (2) violated 13.offering and selling securities without being registered to do so, and (3) violated 13.1--502 (2) ofthe Act by making material misrepresentations and omissions in the offer and sale of securities. Somerindyke and Tribble were principals for several affiliated companies, HotSpot Markering, LLC ("HotSpot"), Bad ideas, Ltd,' and Croesus Capital Ines ("Croesus")? Prior to Later anlton companies, Lid. forming and running these companies, Somerindyke and .Iere employed as securities agents for a Virginia--registered broker dealer} Ofthe companies, only HotSpot had business operations.' HotSpot's business was an interactive, touch-screen marketing technology with a coupon feature in computer kiosks placed in high-traffic, visual locations in a number of locations in Virginia and the Mid-Atlantic regions To provide capital for HotSpot, Somerindyke offered and sold investors equity interests and promissory notes - acting as the C00, ran HotSpot's financial operations6 In the Rule, the Commission directed the Defendants to file a responsive pleading on or before April 25, 2011, The Commission also directed the Defendants to appear at a hearing scheduled to begin on June 3, 201 l. The Rule assigned the matter to a Hearing Examiner to conduct further proceedings on behalf of the Commission and to file a final report ("Report"). On April 25, 201 l, Somerindyke and -each filed an Answer to the Rule, along with a Request for a Bill of Particulars and Denial of Allegations, and a Motion to Continue the Date ofthe Proposed Procedure Before a Hearing Examiner.' 1 See Requests for Admissions June 30, 201 l, admitted into record by Hearing Examiner's Ruling, November 10, 201 l. Somerindyke was President omeesus Tarlton, and ChiefExeeutive Oflicer of HolSpot, -vns Treasurer orCroesus and enter Operating Officer of Exs, 53 and 54. Croesus and Tarlton were formed as funding companies tor HotSpot, Transcript 'Tr. p. Exs. 24c 106C. RFA ~22, 7 52: Heuring Examiner's Report at p. 2. Following the Defendants request rind response by the Division, the Hearlng Examiner issued a Ruling on June 9,2011, gmnring tlte Defendants request for a Bill of Partrculars ~nte Division filed Bill ofParticulars on June 24, ZDI In the Interim, Defendants filed a number of motions to which the on responded. resulting in a ruling dated lune I7. 201 t. which reset the hearing date for December M, 201 l. Throughout the second halfonfll 1, both the Defendants and the Division filed and responded to procedural motions and discovery requests pursuant to the Commisslon's Rules or Practice and Procedure, 5 VAC 5-10-10 2! req ("Rules of Pmcilce"), By Heurlng Examiner's Ruling dated May 9,201]. the Defendants were granted a The evidentiary hearing in this case was convened. is noticed and scheduled, on February 22 and 23, 2012, in Virginia Beach, Virginia. John F. Kane, Esquire, appeared an behalf ofthe Defendants. Debra M. Bollinger, Esquire, and Dannie L. Kidd, Esquire, appeared on behalf the Division. During the hearing, the Division offered, and the Hearing Examiner accepted into evidence, numerous exhibits and testimony through witnesses, including: (1) witnesses who authenticated and described certain bank records associated with HotSpot (and other Companies associated with the Defendants and HotSpot), at Bank, Wells Fargo Bank, Branch Banking Trust, and REC Bank, (2) the testimony and associated documents of two (2) investor witnesses, -- and Dr. James Nottingham ("Nottingham"); (3) the testimony and associated documents ofseveral not-rinvestor witnesses, -- -d (4) the testimony, associated documents. and analysis offinancial data by the Divtslun's investigatur Tom Bayly. continuance ofthc June 3. 201 I hearing, and in the same ruling the Hearing Examtner granted the Dcfendams' May 5, 201 i request tor extension ot the required filing dates. On August 24. 201 I. by t-learing Examiner's Ruling, the Defendants were directed to respond to Ihe tvlsion's Motion to Compel and Motion to Requests for Admission sent on June :10. 201 1) by September 6. 201 t. On Septembei o, 201 1, the Defendants filed their opposition to the discovery and filed responses to the Division's discovery requcsts By Hearing Examiners Ruling dated September 22. 2111 1, the Hearing Examiner directed the Defendants to respond to certain RFAs. submit separate, delineated answers or obisctions to the Divisions interrogatories, and provide the documents requested by the Divislon by Oetnber 4, 20| On October 211, 201 1, the Defendants filed a Motion to Admit Late Filing of their Supplemental Responses ("Motion to Admit Late Filing." filed on October 12. 201 1) as directed by the Hearing Examiner. among other motions, including a request tor the hearing location to be moved to virginia beach, virg By Rultng dated November 3. 201 1, the Hearing Examiner granted the Defendants' request for a change ot location (necessitating a change or hearing date) and directed the Detendants to me replies to the Dlv1sinn's response to their October 21). 201 1 Motion to Admit Late Filing. Alter numerous Rulings were entered With regard to these procedural and discovery issues. the Hearing Exa canceled the December 14.201 hearing date, a Ruling dated November 22.2011. and scheduled a new hearing date orrebniary 22, zotz. in Virginia Beach. Virginia In addition, by Ruling dated November to. 201 I. the Defendants request for dismissal orthe Rule. prior to the evidentiary hearing. was denied Furthermore, by a Ruling entered on November 10. 201 I. the Hearing Examinel granted the Defendant's motion for extension otditsovcry responses. permitted the Deieodants to substihite their supplemental discovery responses tor their prior responses. and deemed as admitted VNIDUS factual alleged by the Division. EVOGIOTCT The Defendants offered numerous exhibits and testimony through their witnesses, including: a former attorney; (2) _a HotSpot investor and business colleague of the Defendants; and (3) Somerindyke. By Ruling dated April 10, 2012, simultaneous post-hearing briefs were due to be filed on June ll, 2012. A timely post-hearing briefwas filed by the Division on June 11, 2012. The Defendants did not file a post-hearing hrief.' On July 2, 2012, the Hearing Examiner issued her Report. in her Report, the Hearing Examiner found that: Somerindyke committed four (4) violations ofthe Act when he offered and sold unregistered, non-exempt securities to .nd Nottingham; (2) Somerindyke committed four (4) violations of? ill-504 A ofthe Act by offering and selling securities to_und Nottingham without being registered to do so: (3) Somerindyke committed two (2) violations of wit-502 (2) ofthe Act by making material omissions to Nottingham in the offer and sale of securities; (4) Somerindyke ant-sch committed two (2) violations of? 13.1-502 (3) ofthe Act by engaging in a course ofbusiness operating as a fraud or deceit against Nottingham; and (5) Somerindyke and-hould each be permanently enjoined fiom violating the Act in the future} The Hearing Examiner recommended that the Commission enter an order adopting the findings of her Report and dismissing the case from the Commission's docket of active cases. Cements to the Hearing Examiner's Report were due on or before July 23, 2012. On June l2, 2012. the day after the post~hearing briets were due, the Detendants filed a Motion for Extension of Time to File Post Hearing Brief 0" June 29, 2012, the Divtsicn filed a response opposing the Defendants' menu". The Hearing Examiner, tn her Repon, denied ts untimely the Detendants- motion, finding that the Defendants tailed to state good cause for in extension 9Reportatp 25. BhoflIaIZT On Jul y 20, 2012, counsel f or t he Def endant s f i l ed a r equest f or an addi t i onal t wo ( 2) weeks t o f i l e Comment s and f or per mi ssi on t o expand t he r ecor d. By Or der dat ed August 23, 2012, t he Commi ssi on gr ant ed t he Def endant s' r equest f or addi t i onal t i me and r equi r ed bot h t he Def endant s and t he Di vi si on t o f i l e comment s by August 6, 2012 . On August 6, 2012, t he Di vi si on f i l ed i t s Comment s t o t he Repor t . I n i t s Comment s, t he Di vi si on r equest ed t hat t he Commi ssi on cl ar i f y cer t ai n concl usi ons and l egal i nt er pr et at i ons di scussed by t he Hear i ng Exami ner i n t he Repor t . Speci f i cal l y, t he Di vi si on r equest ed t hat t he Commi ssi on cl ar i f y: ( 1) t he di st i nct i on bet ween omi ssi ons under § 13. 1- 502 ( 2) of t he Act and vi ol at i ons of t he r egi st r at i on pr ovi si ons of § 13 . 1- 507 of t he Act ; ( 2) whet her § 13 . 1- 502 ( 2) of t he Act i s l i mi t ed t o a ver aci t y st andar d ; and ( 3) t he st andar d f or t he mat er i al i t y t est under § 13 . 1- 502 ( 2) of t he Act . The Di vi si on f ur t her st at ed t hat t hese cl ar i f i cat i ons woul d not al t er t he Hear i ng Exami ner ' s f i ndi ngs and r ecommendat i ons . On August 17, 2012, t he Def endant s f i l ed a Renewed Mot i on t o Al l owLat e Fi l i ng ( " Renewed Mot i on" ) al ong wi t h Comment s on t he Repor t of t he Hear i ng Exami ner ; Obj ect i on t o Pr oposed Fi ndi ngs and Appeal ; and a Request f or Or al Ar gument . On August 21, 2012, t he Di vi si on f i l ed i t s obj ect i ons t o t he Def endant s' Renewed Mot i on and l at e- f i l ed Comment s. NOWT14E COMMI SSI ON, upon consi der at i on of t he mat t er , i s of t he opi ni on and f i nds t hat t he Hear i ng Exami ner ' s f i ndi ngs and r ecommendat i ons ar e r easonabl e, suppor t ed by t he evi dent i ar y r ecor d, and shoul d be adopt ed . W e do not adopt t he Hear i ng Exami ner ' s concl usi ons and i nt er pr et at i ons of l aw on t he l i mi t ed i ssues r ai sed i n t he Di vi si on' s Comment s as t hey do not af f ect t he out come of t hi s case . Good cause havi ng not been shown, we deny t he Def endant s' Jul y 20, 2012 r equest t o expand t he r ecor d, as wel l as t he Def endant s' August 17, 2012 Renewed Mot i on. 5 Accor di ngl y, I T I S ORDEREDTHAT: ( 1) The f i ndi ngs and r ecommendat i ons of t he Jul y 2, 2012, Hear i ng Exami ner ' s Repor t ar e her eby adopt ed. ( 2) I n accor dance wi t h t he Commi ssi on' s r egul at or y dut i es and power s pur suant t o § 13. 1- 521 A of t he Act , a j udgment i s ent er ed f or t he Commonweal t h agai nst t he Def endant s f or t hei r vi ol at i ons of t he Act . ( 3) As a r esul t of t hi s j udgment , t he Def endant s ar e per manent l y enj oi ned pur suant t o § 13 . 1- 519 of t he Act f r omvi ol at i ng t he Act i n t he f ut ur e . ( 4) No monet ar y penal t i es wer e i mposed pur suant t o § 13 . 1- 521 A of t he Act nor was t he cost of i nvest i gat i on assessed i n t he br i ngi ng of t hi s case pur suant t o § 13. 1- 518 of t he Act . 10 ( 5) The Def endant s' Jul y 20, 2012 r equest t o expand t he r ecor d and i t s August 17, 2012 Renewed Mot i on ar e her eby deni ed, and a document s at t ached t her et o ar e not admi t t ed i nt o t he r ecor d her ei n. AN ATTESTED COPY her eof shal l be sent by t he Cl er k of t he Commi ssi on, by CERTI FI ED MAI L, RETURN RECEI PT REQUESTED, t o: John F. Kane, Esqui r e, 1528 Tayl or Far mRoad, Vi r gi ni a Beach, Vi r gi ni a 23453 ; and a copy shal l be del i ver ed t o t he Commi ssi on' s Of f i ce of Gener al Counsel and t he Di vi si on of Secur i t i es and Ret ai l Fr anchi si ng. 10 Thi s Or der does not pr ecl ude any ci vi l act i on by a pr i vat e l i t i gant or af f ect any ci vi l l i abi l i t y ar i si ng under § 13 . 1- 522 of t he Act , whi ch al l ows a per son who has pur chased secur i t i es or i nvest ment advi ce t o pur sue a pr i vat e cause of act i on f or up t o t wo year s af t er t he t r ansact i on upon whi ch i t i s based. 6