MONEY LAUNDERING:
TAKING YOUR CAREER TO THE CLEANERS

From April 1984 until August 1992, William J. Haberman ("Haberman") worked as a registered representative and a licensed insurance agent. In late 1990 and early 1991, Haberman was operating a financial planning business as a branch office of a broker-dealer when he invested in mutual funds on behalf of Brian Hirt ("Hirt"), a college acquaintance with a history of felony convictions for narcotics trafficking. Unaware that Hirt was working as a government informant, Haberman illegally accepted funds that Hirt represented were proceeds of unlawful activity. Haberman admitted that Hirt had advised him of the illegal nature of the funds. Over the course of three meetings, Haberman accepted a total of $45,000 in cash and cashier's checks to purchase mutual funds for Hirt, and evaded federal financial reporting requirements.

On December 29, 1992, Haberman pleaded guilty in the United States District Court for the District of Minnesota to one count of money laundering and was convicted for failure to report financial transactions and accepting funds represented to be proceeds of unlawful activity. He was sentenced to a 41-month prison term, fined $7500, and ordered to complete two years of supervised release subsequent to the prison term.

Statutory Disqualification

Upon his felony conviction, pursuant to the Exchange Act and the By-Laws of the NASD, Haberman was a statutorily disqualified individual and no longer eligible to associate with an NASD member firm absent the consent of the NASD. In mid-1997Gardner Financial Services, Inc. ("Gardner") applied to the NASD for consent to become associated with Haberman. Gardner, an NASD member since 1988, sells mutual funds, variable life insurance products, and, to a lesser extent, stocks and bonds. It does not sell options or permit discretionary accounts. The firm does not accept cash payments and requires all checks to be payable to Gardner or its clearing broker. At the time of application to the NASD, Gardner had nine registered principals and its thirty-four registered representatives are located primarily in single-person offices in several states.

Larry O. Bumgardner ("Bumgardner") is the president and sole compliance officer of the Gardner. Bumgardner works in the home office with one other registered representative. As part of his compliance duties, Bumgardner makes annual or more frequent visits to the offices of the associated representatives. The record indicates that Gardner's representatives conduct many client meetings outside of the firm's offices.

On December 7, 1997, the NASD's Statutory Disqualification Committee held a hearing on Gardner's application for association with Haberman. Both Haberman and Bumgardner appeared at the hearing. Haberman had his insurance license reinstated and from September 1996 to May 1997 worked as an independent insurance agent. According to Haberman, no complaint in the securities or insurance industries has ever been lodged against him by a client

The NASD concluded that the application for association was not in the public interest because Haberman had committed an offense that was serious and securities-related and that occurred while Haberman was operating his own office of an NASD member firm. The NASD also found Gardner's proposed supervision of Haberman inadequate.

The NASD may, in its discretion, approve association with a statutorily disqualified person only if it determines that such approval is consistent with the public interest and the protection of investors. Haberman argued his conviction for money laundering was neither serious nor securities-related.

Haberman admitted that the criminal sanctions imposed were substantial and that the investment transactions occurred as described by the NASD. However, he argued that the NASD should have recognized that the sanctions imposed on him were intended by the judge not solely to punish Haberman, but also to deter the financial community. Accordingly, Haberman urged that the sentence was disproportionate to its punitive purpose and, consequently, the crime wasn't as serious as it seemed.

The SEC noted that Congress indicated that all felonies were serious when it amended Section 3(a)(39)(F) of the Exchange Act in 1990 to expand the scope of statutory disqualification to include convictions for "any other felony." The SEC particularly noted Congress' directive to "provide special scrutiny of persons who have been convicted of crimes . . . such as taking of property, assault, murder, and drug trafficking." H.R. Rep. No. 101-240, at 40 (1989).

The SEC believed that the sentence imposed on Haberman, whether intended as punishment or deterrence, indicated the seriousness of Haberman's offense. Furthermore, regardless of the criminal sanctions imposed, the SEC noted its long-standing position that convictions for money laundering and other felonies related to fraud and drug trafficking can warrant disqualification from the securities industry.

As to Haberman's contention that his crime did not involve the securities industry, the SEC quickly disposed of the issue by noting that he was convicted for failure to report a financial transaction during the operation of a branch office of a broker-dealer and for using funds that he believed were "dirty money" to effect securities transactions. Accordingly, the SEC deemed the conduct as securities-related.

Haberman claimed that the Exchange Act violates the Constitution when it states that a person is subject to a statutory disqualification upon conviction for "any" felony. In Smith v. Fussenich, 440 F.Supp. 1077 (D. Conn.1977), the court held that a statutory or regulatory denial of consideration for employment may be unconstitutionally broad when such denial is based on "any" felony conviction, as opposed to being based on a conviction for a felony that is relevant to the employment sought.

The SEC sidestepped this interesting argument by claiming that it has no power to invalidate a statute it has been directed by Congress to enforce. See, e.g., Milton J. Wallace, 45 S.E.C. 694,697 (1975); Walston & Co., 5 S.E.C. 112, 113 (1939). Haberman raised a worthy challenge to the SEC's "any felony" policy. Nonetheless, the SEC claimed that Haberman's felony was not just "any" felony, but was committed in the course of his association with a broker-dealer and was securities-related, and thus directly reflected on his fitness to engage again in the securities profession.

Haberman also contended that, because his criminal transaction was in accord with his client's instructions, there "was simply no basis upon which the NASD can claim that its decision is consistent with the Exchange Act's purpose of protecting investors." The SEC quickly took the moral high ground on this argument and stated the in order to protect investors and maintain investor confidence in the markets, securities professionals are obliged to maintain high standards of business ethics. Without any equivocation, the SEC reiterated the Supreme Court's holding that the primary objective of the federal securities laws is the protection of the investing public and the national economy through the promotion of a high standard of business ethics in every facet of the securities industry. The SEC clarified that although the public's protection is the primary purpose of the Exchange Act, it is not the exclusive function. Rather, Congress is cited as having attempted to secure broad remedial purposes, such as, making securities regulation and control reasonably complete and effective, insuring the maintenance of fair and honest securities markets, and upholding the integrity of the securities industry.

Haberman also argued that his application should be approved because six years had elapsed since his conviction. The SEC noted that it had held that felony convictions as recent as five years old were "relatively recent" and not "remote in time." This issue goes to several considerations, not the least of which are that the act occurred at a distant point in time, that there have been no recurrences, and that this uneventful passage of time bodes well for the rehabilitation of the applicant. Clearly, the SEC deems six years as not sufficiently distant to merit the mitigation requested. However, in fairness to Haberman, citing cases referencing five-year-old felony convictions doesn't address his six-year-old case. Either the line was drawn at five years, which it was, or the SEC is moving the goal posts.

Haberman also challenged the NASD's conclusion that Gardner's proposed supervision of Haberman was inadequate. Haberman noted that Bumgardner would monitor his correspondence, which would have been on letterhead with Gardner's telephone number, and that Haberman's clients would have been directed to forward questions or complaints to Gardner. Haberman claims that restrictions on his clients' methods of payment, as well as his location in the home office and his daily conversations and weekly meetings with Bumgardner, constituted adequate supervision.

The SEC disagreed and required more stringent supervision. Among the factors the SEC cited in disapproving of the proposed supervision were:

• Bumgardner role as the sole compliance officer for the firm.(especially in addition to his administrative responsibilities as president of Gardner)
• Bumgardner's supervision of thirty or more representatives located primarily in one-person offices in several states
• Gardner's emphasis on registered personnel's visits to clients outside of the firm's offices

FILE UNDER JUSTICE DELAYED IS JUSTICE DENIED:
It took the NASD and SEC 17 months to deny Haberman's application. Compare this with the SEC's 2 1/2 months to approve the recently proposed merger of the NASD with the American Stock Exchange.

The SEC dismissed the appeal and sustained the NASD's denial of association.

For Further Reference:

In the Matter of the Application of WILLIAM J. HABERMAN, Rel. No.34-40673, Admin. Proc. File No. 3-9554 (November 12, 1998).