Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—Ohio App.: Revocation of Ohio investment adviser’s license for misrepresentations and disclosure failures upheld on appeal, (Apr 1, 2025)

By Rebecca E. Hoffman, J.D.

The Ohio Securities Division did not improperly withhold exculpatory evidence or deny due process to the appellant, the court found.

An Ohio county court did not err in upholding an order of the Ohio Department of Commerce, Division of Securities, calling for appellant investment adviser to cease and desist violations of several Ohio securities provisions, and revoking his license, the Ohio Court of Appeals, Fifth District, affirmed March 28, finding, among other matters, that the Brady doctrine, which does not apply in civil cases, cannot be applied here to entitle the appellant to interviews conducted during the Securities Division’s investigation, based on the appellant’s belief that the consequences he is facing are similar to those faced in criminal cases (Henneforth v. Seidt, No. 24 CAE 06 0040 (Ohio App. Mar. 28, 2025)).

The appellant had attempted to subpoena “Brady evidence” at the administrative hearing, but the hearing officer quashed the subpoena. The appeals court said that “many courts … have found Brady does not apply in the context of administrative hearings,” and the fact that he could have been criminally charged does not warrant application of Brady to this civil proceeding.

Promissory notes. The appellant was the president and owner of Level Partners Management, Inc. The court explained that he recruited investors from among Level’s clients purportedly to help raise capital for Hadsell Chemical Processing, LLP, which issued promissory notes to the investors. The notes were not registered securities under Ohio law. The appellant told the investors that their money would be used to acquire tools and equipment, but did not tell them that HCP paid the appellant a salary and commissions. The appellant also controlled a business checking account in HCP’s name.

After investigating the company, the SEC found that the president and CEO of HCP “falsified HCP’s business records, forged the personal guarantees on the promissory notes, and made HCP appear operational, which it was not.” The investors’ funds were used for other purposes, the court said. HCP and its president settled with the SEC, and subsequently the Ohio Securities Division issued a notice of intent to suspend or revoke the appellant’s license. “The Notice was 127-paragraphs long and detailed the factual allegations for each count and the Revised Code or Administrative Code section allegedly violated in each count,” the court noted.

The ensuing hearing involved extensive testimony. Among those who testified were two investors, one who said they were told HCP needed equipment for projects and one who said they thought the funds were for “working capital.” The appellant claimed that he was deceived by HCP’s president and that he did not know what the investments were funding.

The hearing officer’s report ordered the appellant to cease and desist and revoked his license. “The Hearing Officer found appellant was afforded full procedural due-process rights,” the court explained, and determined that the appellant had violated Ohio securities laws by selling promissory notes expecting a commission, selling promissory notes without being licensed as a dealer, telling investors funds would be used for certain purposes when they were not, selling unregistered securities, and advising clients to invest without proper disclosures.

The appellant appealed the report to the Securities Division, but the Division “found there was reliable, probative, and substantial evidence to support” the hearing officers’ findings. The appellant then appealed to the Delaware County Court of Common Pleas, which upheld the Division’s order in a “detailed and comprehensive judgment entry.” The appellant appealed yet again.

Criminal consequences? According to the appellant, the Securities Division violated his constitutional and statutory due process rights. He first pointed to the denial of his request for portions of the investors’ interviews during the investigation “that contained impeachment or exculpatory evidence,” and argued that although this is a civil proceeding, Brady v. Maryland, 373 U.S. 83 (1963), should apply because “the consequences are similar to a criminal conviction.” The court disagreed, noting that “[m]any courts have rejected arguments similar to appellant’s.”

The appellant also argued that the withholding of exculpatory evidence prevented him from cross-examination and opportunity to be heard, but the court pointed out that he “had more than ample time from the date of the Notice to the date of the hearing to prepare for cross-examination.”

Further, the notice’s supposed lack of “precise wording of the alleged misrepresentations” and other exact details did not constitute a denial of due process. “The record demonstrates that fair notice of the charges at issue were given” along with facts and the specific statute at issue.

The appellant argued that the Division “refused to identify its potential witnesses or its exhibits until seven days prior to the hearing,” but the hearing officer had entered an order with prehearing deadlines, including when the parties must provide lists of witnesses and exhibits. “Appellant never objected to this deadline” and “at no time either before or during the hearing, did appellant or his counsel inform the Hearing Officer that he needed more time to review the exhibits,” the court observed.

Unregistered, nonexempt. The Division found that the appellant violated Ohio Rev. Code 1707.44(C)(1) by selling unregistered securities. The appellant argued that the promissory notes were exempt from registration requirements because they were not offered for sale to the public, but the exemption in the Division’s rules is limited to notes sold only to officers, directors, and management, or to those sold to only 10 or fewer people in a year. The court declined to “adopt the broader dictionary definition of the word ‘public,’” rather than that spelled out in the Ohio Administrative Code.

The appellant argued that “the Division failed to show the statements in the promissory notes were false,” but “the trial court did not rely upon the promissory notes for its determination. Rather, it based its decision on the verbal statements appellant made directly to the potential investors.” The appellant also claimed that he did not know about HCP’s CEO’s scheme, but it was not for the court on appeal to “weigh the evidence and find [the appellant’s] testimony credible,” the court concluded.

The case is No. 24 CAE 06 0040.

Judge: Popham, K.

Attorneys: Matthew L. Jalandoni (Flannery | Georgalis, LLC) for Christopher J. Henneforth. David Yost, Ohio Attorney General, for Andrea L. Seidt.

Companies: Level Partners Management, Inc.; Hadsell Chemical Processing, LLP

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